~**s O J. J^>-Ci AMI CC w y. \ \ ■ i©V ^=;> S&Aavaan-i^ 1(^1 re JJldJ'- ■ ;fifj> ANCElfj> %I3AINIHV\V ^•lIBRARYQr ^UIBRA; ^OF-CAUFOR^ Jul | *lni y F ^OFCALIFO ^WEUNIVERJ/^ ^ojiivj i tyoi\m - _> -r 1 o^VOSAN ^Sa3AINH 3\W N ^UIBRARYQr >i ^ N 1(71 |i ^OECALII *■ ?T ^ — '• ^ ? , \\\l -L'NIVFRS//, ^5. ^^ --. -< v r Y^C «$UIBRARY0/^ SUITS -%! 1.1 !WV N W i) L22or- 39) Wt. 4356;"-:!9 3000 4'20 H. St. <:.:(!. A 2 iv ORT OF THE ROYAL COMMISSION ON THE INCOME TAX. Mackinder; William McLintock; Edward Manville; Geoffrey Marks; Henry John May; Arthur Cecil Pigou and Nicholas Joseph Synnott to be Our Commissioners for the purposes of the said inquiry. And for the better effecting the purposes of this Our Commission, We do by these Presents give and grant unto you, or any five or more of you, full power to call before you such persons as you shall judge' likely to afford you any information upon the subject of this Our Commission; to call for information in writing: and also to call for, have access to and examine all such books, documents, registers and records as may afford you the fullest information on the subject, and to inquire of and concerning the premises by all other lawful ways and means whatsoever. And We do by these Presents authorize and empower you, or any of you, to visit and personally inspect such places as you may deem it expedient so to inspect for the more effectual carrying out of the purposes aforesaid. And We do by these Presents will and ordain that this Our Commission shall continue in full force and virtue, and that you, Our said Commissioners, or any five or more of you, may from time to time proceed in the execution thereof, and of eveiy matter and thing therein contained, although the same be not continued from time to time by adjournment. And We do further ordain that you, or any five or more of you, have liberty to report your proceedings under this Our Commission from time to time, if you shall judge it expedient so to do. And Our further will and pleasure is that you do, with as little delay as possible, report to Us under your hands and seals, or under the hands and seals of any five or more of you, your opinion upon the matter herein submitted for your consideration. Given at Our Court at Saint James's, the Fourth Day of April, One Thousand Nine Hundred and Nineteen, in the Ninth Year of Our Reign. By His Majesty's Command, EDWARD SHORTT. Royal Commission on the Income Tax. GEORGE R.I. George the Fifth, by the Grace of God, of the United Kingdom of Great Britain and Ireland and of the British Dominions beyond the Seas King, Defender of the Faith, to Our Trusty and Well-beloved James Walker Clark, Esquire, Justice of the Peace, Greeting ! Know Ye, that We, reposing great trust and confidence in your knowledge and ability, do by those Presents appoint you, the said James Walker Clark, to be an additional Member of the Income Tax Commission. Given at Our Court at Windsor, the First day of May, One Thousand Nine Hundred and Nineteen, in the Ninth Year of Our Reign. By His Majesty's Command, EDWARD SHORTT James Walker Clark, Esquire, J. P., To be an additional Member of the Income Tax Commission. ROYAL WARRANTS GEORGE R.I. George the Fifth, by the Grace of God, of the United Kingdom of Great Britain and Ireland, and of the British Dominions beyond the Seas King. Defender of the Faith, to Our Trusty and Well-beloved Josiah Charles Stamp, Esquire, Commander of Our Most Excellent Order of the British Empire, Doctor of Science of the University of London, Greeting ! Know Ye, that We, reposing great trust and confidence in your knowledge and ability, do by these Presents appoint you, the said Josiah Charles Stamp, to be an additional Member of the Royal Commission on the Income Tax. Given at Our Court at Balmoral, the Thirtieth day of August, One Thousand Nine Hundred and Nineteen, in the Tenth Year of Our Reign. By His Majesty's Command. EDWARD SHORTT Josiah Charles Stamp, Esquire, C.B.E., D.Sc. (London), To be an additional Member of the Royal Com- mission on the Income Tax. GEORGE R.I. George the Fifth, by the Grace of God, of the United Kingdom of Great Britain and Ireland and of the British Dominions beyond the Seas King, Defender of the Faith, to Our Trusty and Well-beloved Henry Alexander Trotter, Esquire, Barrister-at-Law, one of the Commissioners of Lieutenancy of the City of London, a Director of the Bank of England, Greeting ! Know Ye, that We, reposing great trust and confidence in }our knowledge and ability, do by these Presents appoint you, the said Henry Alexander Trotter, to be a Member of the Royal Commission on the Income Tax in the room of Arthur Hill. Esquire, resigned. Given at Our Court at Saint James's, the Thirty-first day of October, One Thousand Nine Hundred and Nineteen, in the Tenth Year of our Reism. By His Majesty's Command. E. SHORTT. Henry Alexander Trotter, Esquire, To be a Member of the Royal Commission on the Income Tax. & ;; VI TABLE OF CONTENTS. INTRODUCTION PART I.-The scope of the tax Section I. Persons residing in the United Kingdom. Income arising abroad, other than from trade ... II. Persons residing in the United Kingdom. Income arising abroad from trading operations ... III. Non-residents. Income arising in the United Kingdom, other than from trade ...' IV. Non-residents. Income arising from trade in the United Kingdom, including trade through agents ... ... ... ... . . V. Non-residents. Reliefs dependent upon total income ... VI. Double Income Tax within the British Empire VII. Double Income Tax : Foreign countries VIII. Casual profits ... IX. Miscellaneous sundry receipts X. Receipts not in money Page. 1 10 10 14 15 18 19 21 PART II.— Rates and incidence of the tax Section I. Differentiation II. Graduation III. Taxation at the source IV. The rate at which, tax should be deducted... V. Dividends and remuneration paid " free of tax " ... PART III.— Allowances and reliefs Section 1. Wasting assets ... II. Depreciation of plant and machinery III. Depreciation of buildings IV. Repairs to property V. Expenses ami deductions VI. The exemption limit ... VII. The assessment of married persons ... VIII. The family basis IX. Wife allowance ami allowance for a housekeeper... X. Children allowance XI. Allowance for dependent relatives ... XII. The allowance for Life Insurance premiums XIII. Friendly Societies XIV. Charities XV. Savings Banks ... XVI. Superannuation Funds, Provident ami Thrift Funds, &c. XVII. Trade Associations 21 24 28 36 38 39 11 n •18 50 51 ;->:; 54 56 5'.) 61 62 63 64 67 67 68 6'.) 71 PART IV— Administration Section I. The Hoard of Inland lit venue 11. Tic General Commissioners ... 111. The Additional Commissioners IN'. The Special Commissioners ... V. The Clerks to the Commissioners VI. Inspectors of Ta \> ; VII. Assessors VIII. Collectors IX. Areas of administration X. reconstruction of (he Act- ... XI. Administration : Miscellaneous 73 74 75 78 79 82 8;; 85 86 87 89 90 vii PART V.— Assessment, appeal, and collection Section I. Returns for assessment II. Making of assessments III. Schedule A IV. The valuation of property V. The occupation of land VI. Woodlands and sporting rights VII. Basis for assessment under Schedule D VIII. Weekly wage-earners ... IX. Schedule E X. Life Assurance companies .. XI. Local Authorities XII. Co-operative Societies... XIII. Super-tax XIV. Appeals XV. The collection of tax ... XVI. Discount on prepayment of Income Tax XVII. Repayments XVIII. Assessment, appeal, and collection : Miscellaneous PART VI.— The prevention of evasion CONCLUSION Page. 92 92 94 96 97 99 101 104 107 110 111 116 118 123 127 130 131 132 134 135 139 RESERVATIONS. I. Reservation to Parts I and II II. III. IV. V. VI. VII. VIII. IX. Part I, Section VIII ; Part III, Sections VI and XVI ; anc Part V, Section X Part II, Section I Part II, Sections I and II, and Part III, Section VI ... Part III, Sections VI to XI Part V, Section IV Part V, Section XII Part V, Section XII Part V, Section XII 142 144 147 150 151 161 163 165 166 APPENDICES. Appendix I. Report of the Sub-Committee pn the subject of Double Income Tax within the Empire 168 Appendix II. Tables (Nos. 1 to 6) showing the tax payable and the effective rates of tax chargeable on earned and investment incomes of selected amounts in various circumstances ... 174 Appendix III. Graphs (Nos. I to VIA) showing the tax payable and the effective rates of tax chargeable on earned and investment incomes (not exceeding £20,000) in various circumstances. Appendix IV. (a) List of witnesses ., ... ... ... ... ... ... ... 179 (b) List of bodies represented ... ... ... ... ... ... ... ... ... 183 27U25 A 1 VTH ALPHABETICAL TABLE OF CONTENTS. Subject. J'ayt. Additional Commissioners, The ... ... ... 78 Administration ... ... ... ... ... 73 „ Miscellaneous ... ... ... 90 Allowance for children ... ... ... ... 62 ,, ,, dependent relatives ... ... ... 63 „ „ Life Insurance premiums ... ... 64 „ ,, wife, and allowance for a house- keeper ... ... ... ... 61 Allowances and reliefs ... ... ... ... 41 Appeals 127 „ Miscellaneous ... ... ... ... K!4 Appendices — 1 168 II 174 III ... ... ... ... ... (Graphs IV 179 Areas of administration ... ... ... ... 87 Assessment, appeal, and collection ... ... ... y2 ,, .. ,, „ Miscellaneous 134 „ Basis for, under Schedule D ... ... 104 „ of married persons, The ... ... 56 „ Returns for ... ... ... ... 92 Assessments, Making of ... ... ... ... 94 Assessors ... ... ... ... ... ... 85 Basis for assessment under Schedule I) ... ... 104 Board of Inland Revenue, The ... ... ... 74 Casual profits ... ... ... ... ... 19 Charities ... ... ... ... ... ... 67 Children allowance ... ... ... ... ... 62 Clerks to the Commissioners, The ... ... ... 82 Collection of tax, The ... ... ... ... 130 „ Miscellaneous ... ... ... ... 134 Collectors ... ... ... ... ... ... 86 Commissioners, The Additional ... ... ... 78 „ The General 75 The Special 79 Conclusion ... ... ... ... ... ... 139 Control (see Residents in the United Kingdom). Co-operative Societies ... ... ... ... [\x Dependent relatives, Allowance for ... ... 63 Depreciation — Of buildings ... ... ... ... ... 50 Of plant and machinery ... ... ... 18 Differentiation ... ... ... ... ... 24 Discount on prepayment of Income Tax ... ... 13] Dividends and remuneration paid " free of tax " ... 39 Don I ile Income Tax — Foreign countries ... ... ... ... 18 Within the British Empire ... ... ... 15 Exemption limit, The ... ... ... ... 54 Evasion, The prevention of ... ... ... ... 135 i ml deductions ... ... ... ... 53 Family basis, The i9 I ' uei f on-liesidents). Foreign in o Residents in the United Kingdom I. " Ftei oi tax, Dividends and remuneration paid 39 Friendlj 3oci< ties ... 67 ! .. ueral Commi - i The Graduation 28 : tors ol Taxes ... ... ... ... ... 83 Introduction ... ... ... ... ... ... i Subject. fo-gt- Life Assurance companies ... ... ... ... Ill ,. Insurance premiums. Allowance for ... ... 64 Local Authorities ... ... ... ... ... 116 Making of assessments ... ... ... ... 94 Married persons, The assessment of ... ... 56 Miscellaneous — Administration ... ... ... ... ... 90 Assessment, appeal and collection ... ... 134 Sundry receipts ... ... ... ... ... 21 Non-Residents — Income arising in the United Kingdom, other than from trade ... ... ... ... HI Income arising from trade in the United Kingdom, including trade through agents ... 10 Reliefs dependent upon total income ... ... 14 Occupation of laud, The ... ... ... ... 99 Persons residing in the United Kingdom (see Resi- dents in the United Kingdom). Prevention of evasion, The ... ... ... ... 135 Provident and Thrift Funds, Superannuation Funds, etc 69 Rate at which tax should be deducted, The ... 38 Rates and incidence of the tax ... ... ... 24 Receipts — Miscellaneous sundry ... ... ... 21 not in money ... ... ... ... 22 Reconstruction of the Act ... ... ... ... 89 Repairs to property ... ... ... ... ... 51 Repayments ... ... ... ... ... ... 132 Reservations — 1 142 II 144 111 147 IV 150 V. ... / 151 VI 161 VII 163 VIII 165 IX 166 Eti di uis in the United Kingdom — Income arising abroad, other than from trade 5 Income arising abroad from trading operations —(Control) 7 i Returns for assessment ... ... ... ... 92 i Savings Banks... ... ... ... ... ... 68 Schedule A 96 „ B (see Occupation of land). „ D, Basis for assessment under ... ... 104 B 110 Scope of the tax, The ... ... ... ... 4 Special Commissioners, The ... ... ... ... 79 Superannuation Funds, Provident and Thrift Funds, etc. ... ... ... ... ... ... 69 Super-tax 123 Surveyors of Taxes (see Inspectors of Taxes). Taxation at the source ... ... ... ... 36 Thrift Funds. Superannuation Funds, etc., Prov- ident and ,.. ... ... ... ... ... 69 Trade Associations 71 Valuation of property, The ... ... ... ... 97 Wasting assets ... ... ... ... ... 41 Weekly wage-earners ... ... ... ... 107 Wife allowance and allowance for a housekeeper 61 Woodlands and sporting rights ... ... ... mi KOYAL COMMISSION ON THE INCOME TAX. REPORT. TO THE KING'S MOST EXCELLENT MAJESTY. May it please Your Majesty, We, the Commissioners appointed " To inquire into the Income Tax (including Super-tax) of the United Kingdom in all its aspects, including the scope, rates, and incidence of the tax; allowances and reliefs; administration, assessment, appeal and collec- tion; and prevention of evasion; and to report what alterations of law and practice are necessary or desirable and what effect they would have on rates of tax if it were necessary to maintain the total yield,' - humbly beg leave to report as follows : — 2. We have held 50 sittings; we have examined 187 witnesses, including 21 official witnesses, and we have considered a large number of letters which have been addressed to us on the subject of our inquiry. Many of the witnesses who appeared before us represented important bodies of manufacturers, traders, professional men, manual workers, and others to whom we had issued invita- tions to give evidence. Only a very small portion of the evidence offered to us have we been obliged to refuse, and that solely on the ground of irrelevancy or redun- dancy. The evidence we have heard and the information put at our disposal have been voluminous and fairly exhaustive, for we believe that we have been in touch with most of the important sources of knowledge and of informed criticism on the subject with which we were called upon to deal. After we had concluded the taking of evidence we held many meetings, both in committee and in full session, for the purpose of discussing the evidence, and we caused abstracts to be made of that evidence and of all suggestions made to us by letter in regard to each Section of our inquiry, with a summary of the arguments for and against each suggestion, in order to assist us in reaching our conclusions. 3. We regret to report that when we had made considerable progress in our inquiry, but before we had reached the stage of deliberating upon our conclusions, death suddenly deprived us of one of our most eminent colleagues, Sir Thomas Whittaker, M.P. We had already lost the services of Mr. Arthur Hill, who was compelled to resign from the Commission on the ground of ill-health, and died shortly after. Mr. Henry Alexander Trotter succeeded Mr. Hill on the Commis- sion. Sir Halford Mackinder was appointed High Commissioner for South Russia and in consequence resigned from the Commission. During the later stages of our investigation we had the very valuable assistance of Dr. Stamp, who, after he had given evidence before us, was added to the Commission. In February. 1920, Mr. Armitage-Smith left England to take up an official appointment in Persia; his name, therefore, will not be found among the signatories to our Report. 4. We feel it right that we should acknowledge at the outset how greatly our task has been lightened by the recent consolidation of the whole of the Income Tax legislation into one comprehensive Statute, the Income Tax Act of 1918. Had we been obliged to have recourse to the tangled mass of legislation which that Act superseded and repealed our position would have been much more difficult and uncertain. Elsewhere in our Report we refer to the necessity that in our opinion exists for considerable alterations in the law, but out appreciation of the work done in consolidating the old Statutes is in no way diminished by the necessity we were under of recommending these changes. ."). No one who is at all familiar with the existing system of income taxation will have any doubt as to the difficulty of the task that confronted us on our appoint- 2 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. ment. This difficulty is due in a large measure to the complexity which must in- evitably be present in any system devised for the purpose of dealing effectively with an almost infinite variety of taxable capacity on the part of individual taxpayers, a variety which is sure to be found in any modern commercial and industrial commu- nity. This complexity is reflected both in the extent and volume of the evidence we have been compelled to take, and in the length of our Report. 6. If there are those who expect us to provide a panacea for all the grievances caused by the existence of an Income Tax, we would remind them of the earlier efforts made to reform the tax, or to make it less burdensome and more popular. The re- sult of the first inquiry was not encouraging. The Select Committee of the House of Commons appointed in 1851 and reappointed in 1852 — " to inquire into the pre- sent Mode of Assessing and Collecting the Income and Property Tax, and whether any other Mode of Levying the same, so as to render the Tax more equitable, can be adopted " — agreed to report to the House of Commons the evidence they had taken, but agreed upon nothing else. 7. Another Select Committee with similar terms of reference was appointed in 1861 with no better result. The Committee's Report was very brief ; it merely set out the proposals that had been put before the Committee, and added the three following sentences : — ' Your Committee . . . after full consideration, have arrived at the con- clusion that the plan proposed by their Chairman does not afford a basis for a practicable and equitable re-adjustment of the Income Tax ; and they feel so strongly the dangers and ill consequences to be apprehended from an attempt to unsettle the present basis of the tax, without a clear perception of the mode in which it is to be reconstructed, that they are not prepared to offer to Your Honourable House any suggestions for its amendment. ' This tax having now been made the subject of investigation before two Committees, and no proposal for its amendment having been found satisfac- tory, Your Committee are brought to the conclusion that the objections which are urged against it, are objections to its nature and essence rather than to the particular shape which has been given to it. ' Your Committee also feel that it would be unjust to make any altera- tion in the present incidence of the Income Tax without, at the same time, taking into consideration the pressure of other taxation upon the various in terests of the country, some of it imposed by recent legislation, and in one case especially, that of the succession duty, to some extent by way of compensa- tion." 8. The reform of the Income Tax was not again the subject of formal inquiry until 1904. when a Departmental Committee was appointed to make recommenda- tions in regard to six specified subjects : — (a) the prevention of fraud and evasion ; (b) the treatment of income derived from copyrights, patent rights, and ter- minable annuities; (c) the allowances made in respect of the depreciation of assets charged to capital account; (d) the system of computing profits assessable under Schedule D on the aver- age of the profits actually realized in the three years preceding the year of assessment ; (e) the rules and regulations governing the recovery by taxpavers of over- payments of Income Tax; (/) whether Co-operative Societies enjoy under the present law any undue exemption from liability to Income Tax. 9. This Departmental Committee, which issued a detailed report in 1905, was followed in 1906 by a Select Committee of the House of Commons appointed to in- quire into ami report upon the practicability of graduating the Income Tax, and of differentiating for the purpose of the tax between permanent and precarious in- comes. The reports of these two Committees were followed, in 1907 and subsequent years, by a series of legislative changes that have profoundly modified the old and simple outlines of the tax. It is from 1907 that the modern Income Tax counts the years of its life. 10. Even before the war it was plainly desirable that yet another and a more comprehensive inquiry should be held, and a Commission was, we understand, INTRODUCTION on the point of being established when war broke out, Inevitably postponed so long- as the war lasted, it was promised that as soon as the war was over the inquiry should begin. The present Royal Commission is the result. Pressing as was the need fo? reform before the war it is even more imperative now. Taxation has so greatly increased since 1914 that it is more than desirable, it is vital to our country's future, that now, when the national burden is at its heaviest, it shall be fairly dis- tributed, and the individual share fitted with sympathy and with discrimination to the back that will for many years have to bear it. That burden is the monetary cost of preserving inviolate the national freedom. 11. We are grateful for the assistance afforded us by the witnesses who gave evidence on behalf of the public and of associations and corporate bodies, as well as by those who appeared in a purely private capacity. We wish to bear testimony to the fact that the public bodies and associations which either voluntarily or at our re- quest put their views before our Commission took considerable trouble in preparing that evidence, and that the witnesses who gave evidence in their private capacity did so with due regard to the importance of the matter at issue. 12. The Board of Inland Revenue gave us invaluable help at every stage of our inquiry. The evidence of the official witnesses and the numerous official memo- randa were ably and carefully prepared and presented, and the historical notes printed in Appendix 7 to the Minutes of Evidence have enabled us, and twill enable future inquirers, to understand clearly what had taken place prior to our inquiry in reference to the various problems we have attempted to solve. 13. We have thought it expedient to divide our Report into Parts, in the order suggested by our Terms of Reference, sub-dividing the various Parts into Sections where necessary to facilitate reference. 14. Our recommendations, though numerous and far-reaching, do not amount to a suggestion for any fundamental change in the nature of the tax. As it was in 1842 so in its essential features it should remain. The tax has proved its worth as a part of the fiscal system in all times of stress, especially in the last five years, and it is by its results that it must be judged. We recognize, and we think the public will recognize, that an old-established system that has entered into the thoughts and the business of the people of this country for several generations should be judged, not by a theoretical standard of possible excellence, but by the results which it has achieved. In its present form the Income Tax is the outcome of more than a century's growth. Many of its imperfections have been corrected, many of its deficiences made good as time has gone on. With its main features the public is perfectly familiar, and even to some of its defects the taxpayer has by this time fairly well accommodated himself. We have made many recommendations for the alteration of the tax and, as we hope, for its improvement; but we have made no attempt whatever to overturn the whole framework of the tax and set up in its place something else bearing the same name. 15. We shall be satisfied if by our labours we have contributed to the natural development of the tax on sound and politic lines, if we have devised a remedy for the more serious blemishes that still disfigure it, and if we have shown how the pressure of the tax can be distributed more fairly over the whole laxpaying community. REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. PART I. THE SCOPE OP THE TAX. 16. In this first part of our Report we consider questions concerning the nature of the income to which the tax should apply. As is generally known, the present scheme of the tax, as set out in the Income Tax Act, 1916, is based upon a division of income into five classes or " Schedules." called A, B, C, D, and E, and the plan adopted has been, not to attempt a general covering definition of income, but to define the income that falls under each of these five divisions. If there is any class of income that does not fall within the words that impose the charge in any one of the Schedules, that class of income is not within the scope of the Income Tax. 17. The words that impose the charge under each of the Schedules are given below : — Schedule A. Tax under Schedule A shall be charged in respect of the property in all lands, tenements, hereditaments, and heritages in the United Kingdom, for every twenty shillings of the annual value thereof." Schedule B. " Tax under Schedule B shall be charged in respect of the occupation of all lands, tenements, hereditaments, and heritages in the United Kingdom for every twenty shillings of the assessable value thereof estimated in accordance with the rules of this Schedule." Schedule C. ' Tax under Schedule C shall be charged in respect of all profits arising from interest, annuities, dividends, and shares of annuities payable out of any public revenue, for every twenty shillings of the annual amount thereof." Schedule D. " Tax under this Schedule shall be charged in respect of — (a) The annual profits or gains arising or accruing — (i) to any person residing in the United Kingdom from any kind of property whatever, whether situate in the United Kingdom or elsewhere; and (ii) to any person residing in the United Kingdom from any trade, profession, employment, or vocation, whether the same be respectively carried on in the United Kingdom or elsewhere; and (iii) to any person, whether a British subject or not, although not resident in the United Kingdom, from any property what- ever in the United Kingdom, or from any trade, profession, employment, or vocation exercised within the United Kingdom ; and (b) All interest of money, annuities, and other annual profits or gains not charged under Schedule A, B, C or E, and not specially exempted from tax , in ea.ch case for every twenty shillings of the annual amount of the profits or gains." Schedule E. Tax under Schedule E shall be charged in respect of every public office or employment of profit, and in respect of every annuity, pension, or stipend payable by the Crown or out of the public revenue of the United Kingdom, other than annuities charged under Schedule C, for every twenty shillings of the annual amount thereof." 18. We propose to deal first of all with the problems that arise in connection with (a) income which has its origin abroad but belongs to residents in the United Kingdom, and (6) income which arises in this country, but belongs to persons resident abroad. These problems involve the consideration of the difficult question generally spoken of as " Double [ncome Tax." which we treat first as it mutualh affects this PART I.— THE SCOPE <>F THE TAX. country and the Dominions, and secondly as it affects this country and foreigx. countries. We then examine certain forms of profit which at present are outside the terms of the charging words of the Act, with a view to the possibility of extending the scope of the tax so as to admit of their inclusion. 1 9. In connection with this aspect of the subject we have had many suggestions made to us which, in the main, amount to a claim that particular items of profit or receipts for services rendered should be regarded as outside the scope of the tax, either because their amount is small, or because there is some obligation more or less imperative on the recipient to dispose of the income in a certain way. 20. The Income Tax affects several million persons, and there is naturally at endeavour by particular sections of the community to restrict its scope so that it may be more favourable to their several conditions of life. Although in regard to many of these suggestions revenue considerations are not of importance, we have been unable to endorse them, not merely because we consider them to be in themselves inequitable to the general body of taxpayers, but because we realize the necessity for jealously guarding the main principles of the tax and the danger of opening channels through which an increasing amount of taxable revenue might ultimately run to waste. SECTION I. PERSONS RESIDING IN THE UNITED KINGDOM. INCOME ARISING ABROAD, OTHER THAN FROM TRADE. 21. The question whether a person is or is not, for the purposes of Income Tax, a " person residing in the United Kingdom," is not always easily determinable, and the Courts have ruled that in the case of corporate bodies a detailed examina- tion of the facts relating to each case is necessary in order to determine the point. We shall therefore state the present position only in sufficient detail to enable it to be seen clearly to what extent we recommend that the law should be amended. 22. As regards individuals, the position under the existing law is, speaking broadly, that for the purposes of Income Tax an individual is considered to be resident in the United Kingdom who, (a) whether or not a British subject, resides continuously in the United Kingdom for six months or more in the year of assessment; (b) being a British subject, usually resides in the United Kingdom, but happens to be abroad temporarily; (c) whether or not a British subject, maintains a residence in the United Kingdom — unless he is abroad for the whole year of assessment. The special difficulties involved in determining the residence of a British registered company, in lu ag the consideration of the doctrine of ''control," will he dealt with in the next Section. 23. We are agreed that the law on this subject requires amendment in two respects : — (a) any person who continuously resides for six months within the United Kingdom, whether that six months' residence falls within one or two Income fax years, should be liable to be assessed as a British resident for a complete year — apportioned if necessary between two years of assessment ; (b) a person permanently employed abroad who, by reason of the conditions of his employment, happens to be in the United Kingdom for a period exceeding six months, should not. in consequence of the length of his stay in this country, bo deemed to be a British resident for the purpose of rendering him liable to tax on the whole of his remunera- tion. In respect of his earned income he should be liable to he taxed on remittances only. REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. We desire that it should be clearly understood that the first of these suggested amendments is not intended to modify the existing rule that a person who is domiciled abroad (or who, being a British subject, is not ordinarily resident in the United Kingdom) is liable to be charged, in respect of his foreign income, on remittances only. The second amendment suggested is intended to apply whether or not the person maintains a permanent residence in this country, and no alteration of the present position with regard to any income other than earned income is proposed. It is intended to cover the case of a person resident abroad, whose conditions of employment enable him to " accumulate " his annual leave, and have an occasional extended stay in this country. 24. The income which arises abroad to a British resident (exclusive of income from trading operations) may be classified as follows : — (a) income from an employment exercised abroad (i) under a British employer, (ii) under a foreign employer; (b) income arising from foreign or colonial securities; (c) income arising from foreign or colonial stocks, shares, rents, or other possessions ; (d) income derived from a sleeping partnership in a business carried on and controlled abroad. 25. In regard to income from an employment exercised abroad by a British resident under a British employer, we recommend that if the employee's absence from this country does not extend over a continuous period of twelve months, or if his employment cannot be shown to be in the nature of a permanent employment abroad, he should be deemed to be exercising his employment in the United Kingdom, whether or not he technically maintains a residence in this country, and liability to tax should extend to the whole of his remuneration. If on the other hand, the employee is abroad for a continuous period of more than twelve months, or if his employment can be shown from the first to be permanently abroad, only that portion of his remuneration which is remitted to this country should be liable to taxation here. We have in mind as an example of permanence a representative of a British house who goes abroad under a three or five years' agreement. It is to be understood that in saying this we do not desire to change in any way the existing rule that certain servants of the State are deemed to exercise their employments within the United Kingdom, and so are liable to United Kingdom Income Tax on their full remuneration. 26. When the employment is exercised abroad under a foreign employer we feel that further considerations must be taken into account.^ In this case the employ- ment is away from this country, the employee and the employer are both away, and the right to tax will depend solely on the ground of residence. It would be a distinct hardship to tax a British subject on the whole of his remuneration earned abroad under a foreign employer, merely because he maintains a residence in this country for his wife. We therefore recommend that income from an employ- ment exercised abroad under a foreign employer should be liable to tax only to the extent that remittances are made to this country. 27. To deal now with the income mentioned in (b) and (e) of paragraph 24. Except in the cases mentioned in paragraph 2:5 income arising abroad from securities, stocks, shares, and rents is assessable on (lie lull amount of the income, whether or not it is remitted to this country; but this provision applies only to income from the four enumerated sources, securities, stocks, shares, and rents; it does not apply to other foreign or colonial possessions. We are of opinion that the full income arising abroad from all foreign and colonial securities or possessions (not being trading undertakings) should be assessable, except when they belong to a person domiciled abroad or to a British subject not ordinarily resident in the United Kingdom. 28. In connection with remittances the point arises whether income remitted from abroad to residents in this country should be assessable PART I.— THE SCOPE OF THE TAX. irrespective of the source of the remittances or the persons to whom they are made. In our opinion the existing law draws an unwarranted distinction between different remittances from a husband abroad to a wife resident in this country. If it arises out of property the remittance is assessable, but if out of the husband's earned income it is not assessable. Further, the son of a wealthy foreigner may be resident in this country and may receive large allowances annually from his father, but if the allowances are voluntary they are not chargeable because technically they are not the income of the recipient. We recommend that all remittances from a husband abroad to his wife in this country, whether they are made from earned or unearned income, should be chargeable; and, as regards all other remittances of a regular character (whether regular in amount or not), made to, or on behalf of, a resident in the United Kingdom (whether of full age or not), that the sums remitted from abroad, from whatever source they may be derived, should be treated as the income of the recipient and be chargeable to Income Tax. This recommendation is subject to the proviso that the remittances in question should be directly taxable only to the extent to which they are made from funds not already taxed in this country. 29. The word " remittance " as used throughout this Section of the Report is intended to include not only sums sent to the United Kingdom but also sums brought to, and sums received in. this country. We recommend that all necessary powers should be given to the Board of Inland Revenue to impose an effective check in regard to the sums returned under the head of remittances. SECTION II. PERSONS RESIDING IN THE UNITED KINGDOM. INCOME ARISING ABROAD FROM TRADING OPERATIONS. 30. A resident in the United Kingdom, whether an individual or a company, is liable to be assessed on the whole of his profits arising from trade, whether the trading operations extend abroad or are confined to the United Kingdom. In the preceding Section we have dealt with the factors that constitute residence in the United Kingdom in the case of an individual. The residence of a company is not so easy to determine. 31. It will be remembered that limited liability companies are legal persons created by a law passed some years after the re-imposition of the Income Tax in 1842. It has therefore become necessary to apply Income Tax law to a set of com- mercial conditions not contemplated when the Act of 1842 was framed. As a result of decisions in the Courts on questions connected with the place of residence of a company, there has emerged what is generally spoken of as the doctrine of " con- trol." This doctrine is not embodied in any set form of words, nor do we desire to attempt so to embody it. Briefly it may be stated that a company, wherever it may be incorporated, is deemed to reside at the place from which the effective control of its operations is exercised. Where its seat of control is within the United Kingdom the company, in the same way as any other British resident, is liable to be assessed to Income Tax on the profits of the whole of its trading operations, whether they are carried on within the United Kingdom or elsewhere. 32. We are fully aware of the very important national and commercial interests involved in the suggestions that have been made to us on this subject. On the plea that British-controlled concerns trading in a foreign country should be put on the same level as their foreign competitors, it has been suggested, for example, that such a far-reaching alteration should be made as to restrict their liability to the profits earned in this country, plus the amounts remitted here out of profits earned abroad. While we should be very reluctant to recommend the continuance of any provision that would in any way prejudice the conduct and extent of our foreign trade, we cannot recommend that a burden should be lifted from any particular class of tax- payers unless we are satisfied that the effect of that relief, considered in conjunction with the heavier burden consequently to be placed on all the remaining taxpayers, will result in a fairer distribution of the total burden to be borne. REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 33. In view of the present demand for capital to develop home industries, should we be justified in recommending differential taxation which will become more and more favourable to the British resident as he employs more and more of his capital abroad? Presumably capital is attracted to foreign countries owing to the higher rate of profit it can earn abroad. If we acknowledge, as we do, the principle of " ability to pay," could we say that two traders residing here with equal incomes, one derived from foreign trading (after deducting all foreign taxes) and the other from trading within. the United Kingdom, should pay very unequal amounts of tax? We feel we cannot answer these questions in the affirmative. Moreover, we should be reluctant, in our present national circumstances, to suggest any measure that could possibly be interpreted as a suggestion that a bonus should be given on the export af capital. 34. We do not consider it necessary to pass in review all the suggestions made to us for lightening the tax upon profits earned wholly or partly abroad, nor to set out in detail the many practical difficulties that would follow any attempt to carry those suggestions into a workable scheme of Income Tax. The suggestion, however, that relief given to the foreign shareholder of a British -controlled company would attract foreign capital to those companies merits examination. It might be argued that although it would be inadvisable to give a bonus on British capital to the extent that it is employed abroad, there could be no objection to a bonus given for the purpose of attracting capital to British-controlled enterprises, particularly when those enterprises are mainly carried on abroad. It may further be said for this suggestion that, if Income Tax be regarded as theoreti- cally divisible into two parts, one part being a payment for the specific protection of the source of income (sometimes called the " origin tax ") and the other a payment for the privilege of residence, then the foreign non-resident shareholder cannot justifiably be asked to pay both parts of the tax. 35. The first of these arguments is based on the practical consideration that any relief given to the foreign shareholder would be more than compensated by the advantages resulting from the inflow of foreign capital to British undertakings. That the lightening of the tax burden on the foreign shareholder would tend to increase the inflow of foreign capital to British enterprises may be admitted; but the extent to which additional foreign capital would be attracted, especially in present circumstances, is a matter of conjecture. The particular methods of taxation resorted to by foreign States will be an important factor in this matter, and the settlement of the world-wide financial problems consequent upon the war has not reached a stage when the effect of this factor can be justly appreciated. In any case, we do not feel justified in proposing that Income Tax should be used as a medium for the distri- bution of indirect bounties designed to influence the international movements of capital. 36. Regarded from a practical point of view it might be argued that any relief given to the foreign shareholder of an English company should not be dependent on the particular country in which the capital borrowed from him is employed — whether, for example, a British-controlled company employs the capital borrowed from an American in working a cotton mill in Lancashire or a silver mine in America. If it be designed as a bonus to attract foreign capital, the relief should be the same in either case, since the advantages derived from the use of foreign capital are present whether that capital is employed within the United Kingdom or abroad. On other grounds, however, it is suggested that when a British-controlled company derives its profits from an enterprise in a foreign country, the claim of the foreign shareholder to relief becomes stronger, that is to say, the claim of the x\merican shareholder in the illustration we have just given is more difficult to refuse when his capital is employed in his own country. It is argued that when the income is derived from the mill in Lan there i 1 - at least due from the foreigner the " origin " part of the tax, as a payment forthe protection of the mill; and that this "origin tax " is not justifiable, or not so fully and clearly justifiable, when the income is derived from a mine situated in America, especially if the output of the mine is sold abroad. 37. When the argument (a) that the foreigner should get relief because of his non-residence and hecause of the desirability of attracting foreign capital, is con- sidered together with the argument (b) that the foreign profits of a British resident aid gel relief because those profits should be subject only to what remains of the Tncome Tax after the " origin tax " element has been eliminated, it will be seen that PART I.— THE SCOPE OF THE TAX. we have been asked in effect to recommend both a bonus on the import of foreign capital and a bonus on the export of British capital. If both these suggestions were accepted it would tend to encourage a distribution of capital which would ultimately cause a very serious loss of revenue. 38. A careful consideration of the arguments has not enabled us to make any general recommendation, either (a) that the foreign profits of the British-controlled companies should be taxed at a lower rate than profits earned wholly within the United Kingdom, or (b) that British-controlled companies should be taxed at a lower rate on that portion of their profits (whether earned in England or abroad) which is distributed to non-resident foreign shareholders. 39. Hitherto we have disregarded all considerations as to what taxation there may be in countries other than the United Kingdom, and for what purposes that taxation may be raised. These considerations will arise presently when we deal with Double Income Tax, and such relief as we feel justified in recommending in that connection will be dealt with under the Sections headed Double Income Tax. Except for the specific reliefs there proposed, we recommend that there should be no change in the present law which renders British resident persons or companies liable to be assessed on the whole of their trading profits irrespective of what proportion of their profits arises abroad, and irrespective (in the case of companies) of the nationality or residence of their shareholders. If we had felt that there was any necessity to recommend a change, then out of the forms of relief that might possibly be adopted we should have inclined to choose that indicated in the preceding paragraph at (b) as the one to which recourse should first be had. 40. We have taken a good deal of evidence on the question of " control " referred to in the second paragraph of this Section, and, having given it very careful consideration, we are of opinion that the present well-established doctrine in regard to control should not be weakened. Further, we think, that even where the trading operations of British-registered companies are carried on abroad by a foreign board of directors or by means of a subsidiary company abroad, the company (and its subsidiary) should still be deemed to be controlled from within the United Kingdom, if the majority of the voting power of the company can be exercised in this country. In other words, our suggestion is that no distinction should be drawn between provable active control and complete potential control. In our opinion, potential control may be completely effective, although evidence of its active influence on policy may be wanting. If some such amendment of the existing Statutes is not adopted we foresee the possibility of a very heavy loss of revenue. Small technicalities of procedure, easily effected by an alteration of the Articles of Association, will enable many companies which are now chargeable on their whole profits to reduce their liability very greatly although their methods of conducting business may in all essentials remain unchanged. 41. A difficulty similar to that encountered in regard to limited companies arises in the case of partnerships. There is no specific provision in the Income Tax Acts to enable the residence of a firm to be decided. A partnership which can be said to be resident in the United Kingdom, in the sense that complete control is exercised here by the partners residing in this country, is assessable on the total profits of the partnership wherever made, and we recommend that where a business is owned by a resident or by residents in this country it should be regarded as controlled in the United Kingdom and therefore resident in the United Kingdom. In the case of a partnership not so resident the liability is at present restricted to the profits made in this country plus that portion of the profits made abroad which is actually remitted to the partners resident here. We recommend that in these cases the assessment should include (a) the profits made in this country, and (b) the shares of the profits arising abroad which belong to any partners resident here. In other words the portion of the foreign profits chargeable to tax should not be determined by the amount that happens to be remitted to this country. Where it is impossible to decide (because of the equal standing of the partners) whether the business is controlled here or abroad it would probably be equkable to treat the business as if it were controlled abroad. 27925 b 10 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 42. In this connection we understand that there is at present some diversity of practice in assessing the income of a British resident who is a sleeping partner in a foreign firm controlled and carrying on business entirely abroad. In our opinion no distinction should be drawn between a sleeping partner in these circumstances and a British shareholder in a foreign company, and we consider that the partner should pay tax upon the full amount of his share in his firm's profits. If the law does not impose liability to this extent we recommend that the necessary- alteration should be made. SECTION III. NON-RESIDENTS. INCOME ARISING IN THE UNITED KINGDOM, OTHER THAN FROM TRADE. 43. Income (other than income from trading operations) which arises in the United Kingdom and is receivable by non-residents may be roughly classified as follows : — (a) income from employments exercised wholly or partly here (e.g., fees as director of a British company, the remuneration of a foreign actor or singer performing in this country, etc.) ; (6) income from United Kingdom securities ; (c) income arising from stocks, shares, rents, or other possessions in the United Kingdom; (d) income derived by a sleeping partner from a firm controlled in the United Kingdom. 44. We are of opinion that all income from an employment or vocation exercised within the United Kingdom should remain liable to Income Tax, as at present, irrespective of whether the person employed is or is not technically resident in the United Kingdom. Under the present law, if the residence is abroad, liability attaches only to the earnings in this country, and we consider that this limited degree of liability should remain unchanged. 45. With the exception of certain British securities issued during the war, under express conditions as to the exemption of the interest in specified circum- stances, income of the kind mentioned in (V), (c) and (d) above is liable to Income Tax, either by deduction at the source, or by inclusion (in the case of (d) ) in the assessment on the firm. This exception must, of course, stand, but subject to this we consider that the income of a non-resident arising in this country other than from trade should remain within the scope of the tax. SECTION IV. NON-RESIDENTS. INCOME ARISING FROM TRADE IN THE UNITED KINGDOM, INCLUDING TRADE THROUGH AGENTS. 46. When the Income Tax Act of 1842 was enacted, provision was made for the assessment, in the name of his agent, of any non-resident trading within the United Kingdom. This provision was contained in section 41 which laid down the genera] procedure to be followed in assessing the profits of any person on whom the necessary notices could not be served. When, owing to non-residence, the required notices could not be served on any person who was carrying on a trade within the United Kingdom, it was provided that he should be chargeable in the name of any agenl or other person who was actually in receipt of any of his trading profits. No definition of what constituted trading within the United Kingdom was given ; but by a series of cases decided in the Courts it was determined that the essen- tial factors were (a) whether the contract of sale was made in the United Kingdom, and (6) whether delivery of the goods took place here. The question as to whether the assessment had been correctly raised on the agent turned upon whether he PART I.— THE SCOPE OE THE TAX. 11 was or was not in lawful receipt of the profits of the trade. From these decisions the anomalous result followed that two non-residents might through their agents occupy adjoining offices in the United Kingdom, sell the same class of goods, take equal advantage of the home market, and yet, owing to technical differences in their trading methods, the one would be held to be trading within the United Kingdom while the other would not. The difference between present-day international trading conditions and those prevailing in 1842 may be gauged by the fact that it was not until nearly forty years after the passing of the Act of 1842 that the first of these non-resident trading cases was decided by the Courts. Since the first of these decisions (in 1881) international trade has increased vastly both in volume and in intricacy, and agencies of many kinds have been established within the United Kingdom by non-residents. These agencies in many cases act in direct competition with the British resident trader and enjoy equally with him all the advantages of the home market. 47. We shall not attempt to define in any set form of words what constitutes trading within the United Kingdom as distinct from trading with the United Kingdom. It would be difficult to evolve any reasonably short definition which could be used as a touchstone to determine in every particular instance whether a series of transactions falls within the one category or the other. We are, however, agreed that the position of the law with regard to the non-resident trader prior to the passing of section 31 of the Finance (No. 2) Act, 1915, was very unsatisfactory. The provisions of the 1915 enactment are now embodied in Rules 5 to 11 of the General Rules of the Income Tax Act, 1918 ; and they appear to have been enacted in order to prevent avoidance of Income Tax by non-residents who, while in effect trading within the United Kingdom through resident agents, were enabled to escape payment of Income Tax owing to technicalities such as the particular manner in which the contracts of sale were made. We feel strongly that the resident British trader should not be handicapped by unfavourable differential taxation, and that if a non-resident is trading within the United Kingdom he should pay a contribution to the Exchequer equivalent to that borne by a home trader making the same profits. The test as to whether trading is actually being carried on within the United Kingdom should not, in our opinion, depend upon small technicalities, but upon a broad consideration of the question whether the non-resident either in person or by his agent is in substance conducting a profit-making business in this country. 48. Whether the provisions of 1915 to which we have just referred have had what seems to have been their intended effect or not, we cannot be sure. We understand from official witnesses that the conditions of the last five years have afforded no real test of the practical effect of those provisions, because owing to shortage of staff, and to the exceptional conditions attaching to foreign imports during that period, it has been found impossible to put the provisions of the Act fully into operation. 49. A high rate of Income Tax creates a tendency for non-residents, as soon as any particular method of trading is brought within the scope of the charging sections, to resort to other methods of trading not yet brought within" the charge; and it has been represented to us that the effect of that provision of the Act of 1915 which makes liable, on behalf of the non-resident, a resident agent who is not in receipt of the profits of his principal, is that the tax will fall upon the agent rather than on the foreigner, or alternatively that the non-resident will dismiss his agent and employ travellers, or will trade solely through brokers or general commission agents. We have been told, too, that the feeling of uncertainty as to whether liability attaches to a particular form of trading is check- ing the importing business. All these suggestions must be largely matters of surmise, as the effect of the legislation of 1915 is not yet fully manifest. It mav be assumed that the non-resident trading; within this country is at present receiving a satisfactory rate of profit on his capital so emploved; and that unless Income Tax reduces the net return on his capital to a point so low that a larger return is obtain- able elsewhere he will continue to trade within the United Kingdom. For this purpose a regular agency, both as a means of obtaining new business and as the cheapest mode of selling goods, is so superior to other trading methods, that the non-resident is likely to prefer the regular agency with a large turnover, even at a rate of profit decreased by Income Tax. to an alternative method which gives him. possibly, a higher net rate of profit (because not subject 27923 ' B 2 12 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. to Income Tax) on a reduced turnover. We are not convinced that liability to taxation will lead to a general closing down of British agencies, for we believe that the advantages of a regular resident agent (despite the liability to Income Tax) will outweigh the temptation to use other methods of doing business, such as the employment of commercial travellers. If, however, it is found that non-resident firms now trading through resident agents shut down their agencies, and endeavour to avoid the tax by operating through commercial travellers or adopting other alternative methods, the facts should be carefully watched, with a view to securing an adequate contribution to the Exchequer in respect of such trading. In general we approve of the changes effected or intended to be effected by section 31 of the Finance (No. 2) Act, 1915, and recommend that the liability thereby sought to be imposed should not be diminished. We can only regret that opportunity has been lacking for giving its provisions a more extended trial. 50.' As to the particular method of arriving at the amount of profits made by a non-resident trading in the United Kingdom, we cannot suggest any invariable rule. Where, in default of any other method of calculating' profits, it is necessary to make an estimate of profits based on turnover, the percentage adopted should be fixed by reference to the results shown by British resident traders in the same class of business. Although the computation of actual profit may be difficult, we consider that non- resident traders will be able to devise ways and means of producing to the assessing or appeal authorities a satisfactory system of accounting if in any case the assumed rate of profit on turnover should be fixed too high. 51. There is one small alteration which we recommend should be made in Rule 10 of the General Rules of the Income Tax Act, 1918. This Rule appears to lay down the principle that a broker cannot possibly be a resident agent so as to bring him within the scope of the tax. We do not suggest that every broker should be charge- able on behalf of his non-resident principals ; but we recommend that the existing' law with regard to regular resident agents should be extended so as not to exclude the case of a broker who is really acting as a regular agent. The object of this recommendation is to ensure that a regular agent shall not escape merely by reason of the fact that he may be entitled to call himself a broker. 52. We desire to restrict the application of our recommendations so as to ensure that the entrepot trade of the United Kingdom is not endangered. The circumstances attendant on the conduct of that trade are not, we consider, such as to constitute trading within the United Kingdom. Consignments of goods are made to this country for sale in the open market, and this is done because England chances to be the country in which the international market for many classes of goods is situate. This class of trade is clearly distin- guishable from the trade conducted by the non-resident whose profits were intended to be brought within the Income Tax charge by the Act of 1915. 53. When an assessment is raised in the name of a British resident agent on the profits made by his foreign principal who sends manufactured goods to his agent for sale in this country, the non-resident may (under the provisions of Rule 12 of the oral Rules, Income Tax Act, 1918) make application that only the merchanting profit shall be assessed. We approve of the principle of a division of the profit into manufacturing profit and merchanting profit, and we consider that the converse of this Rule should apply to the British resident agent of a foreigner who purchases goods in this country, subjects them here to processes akin to the processes of manu- facture, and eventually sends them to his principal abroad. It would then be possible for the foreign principal to make application that the profits assessed in this country should be the manufacturing profit as distinct from the merchanting profit which he makes by selling the goods abroad. 54. We recommend : — (a) that where a British resident agent purchases goods in this country for a foreign principal and exports those goods to his principal abroad, ondition in which they were purchased, no taxable profit should be deemed to have arisen from the transaction of mere purchase con- ducted in this country; PART I.— THE SCOPE OF THE TAX. 13 (b) that where a British resident agent having- purchased goods in this country subjects those goods to processes akin to the processes of manufacture, or substantially alters the condition of the goods from the state in which they were purchased, a taxable profit should be deemed to have arisen ; and the foreign principal should be taxed in the name of his agent on the basis of the profits which might reasonably be expected to have been earned by a British resident who subjected the goods to the particular processes applied to those goods between the stages of first purchase and export ; (c) that where the conditions are as in recommendation (b) but the resident agent has not himself subjected the purchased goods to any processes akin to the processes of manufacture, but has sent the goods to a British resident, or to a number of British residents, for the purpose of such processes, we consider that a taxable profit has arisen which is not necessarily measured by the sum total of the profits of the British residents who have subjected the goods to various processes of manufacture. In this case also we recommend that the foreign principal should be taxed in the name of his agent on the basis of the profits which might reasonably be expected to have been earned by a British resident who supervised and directed the particular processes which have been applied to those goods between the stages of first purchase and export. 55. Our object in making the second and third recommendations in the preced- ing paragraph is to differentiate between the foreigner who maintains a mere buying agent in this country and the foreigner who by means of an agent is really conducting trading operations in this country from which he derives a manufacturing profit. The real profit made is the difference between the price at which the manufactured or semi-manufactured goods would be sold by a manufacturer and what the agent has paid for the original goods and for the various processes to which the goods have been subjected. We feel strongly that this profit should not escape taxation in this country. 56. Although the third recommendation in paragraph 54 may have the effect of rendering liable to British Income Tax profits considerably less in amount than the profits brought within the charge by the second recommendation, we consider that the foreigner who, by means of an agent, directs and co-ordinates various manu- facturing processes carried out by British manufacturers in this country, is doing something more than mere buying. He has purchased goods and he has purchased the services of one or more manufacturers for the purpose of altering the nature of those goods. The real profit can be measured as shown in the preceding paragraph, and we think that this profit should be subjected to British Income Tax. 57. We consider also that some steps are necessary to protect from unfair competition the British resident who owns and controls a business of export from this country. He is liable to be taxed on his full profits, and we are desirous that no foreigner who conducts in the United Kingdom a precisely similar business should escape taxation by some legal technicality. If a foreigner maintains a salaried resident agent in this country for the purpose of merely buying goods and exporting them to his principal, we are agreed that ordinarily the only taxable profit emerging from this arrangement is the remuneration of the agent. The responsibility of buying goods for a large export business is, however, so important that we consider it probable that in many cases the resident agent may have an undisclosed interest in the profit of the business. Particularly may this be so when the British resident agent is a close relative or business connection of his principal, and where this is the case, and also where the resident agent is a limited liability company, we consider that exhaustive investigation of the circumstances of trading should be made. 58. There is the further case (mentioned in paragraph 54) where the agent, in addition to buying goods for his principal, either subjects them to processes of manufacture himself, or sends them to various British manufacturers to be worked up into a condition for export. So far as the manufacturing profit of the principal is assessed in this country, the remuneration of the agent would be an 27925 B 3 14 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. allowable deduction ; and if the gross profits were correctly estimated, and the agent's declared remuneration deducted, there would be no loss of tax. But we feel that a case of this kind should be specially investigated to discover whether the agent who is entrusted with these important matters has not a proprietary interest in the business which ostensibly he conducts wholly on behalf of a foreign principal. In all such cases we recommend that the Board of Inland Revenue should be given the fullest powers of investigation necessary for them to arrive at the facts; and that, where they have reason to suspect that collusive arrangements exist for the purpose of concealing the true remuneration of the agent, power should be given to assess the agent on an estimate which has regard to the importance of the functions fulfilled by him in this country. 59. Hitherto we have dealt with the position only when the British resident is the openly-avowed agent of his foreign principal; but there may well be cases in which the British resident'may represent himself to be an independent trader engaged in the conduct of his own export business, although the conduct of that business may be so arranged that little or no profit accrues to the British resident. The methods of conducting business on these lines are no doubt numerous ; one of the simplest is for the British resident to invoice goods which he has manufactured in this country to an unacknowledged principal, or partner, or allied company, at a price which leaves either no profit or only that amount of profit which for various reasons is desired. We consider that this case is sufficiently met by the provisions of Rules 7 to 12 of the General Rules of the Income Tax Act, 1918, if it is understood that a profit liable to tax may emerge from any manufacturing or trading activities extending beyond mere buying, and if it is made clear that these Rules apply not only to sales by a non-resident person, but also to other trading activities entered into with British residents. It should not be possible, for example, for a foreigner to acquire a British coal mine, work it through a subsidiary company in the United Kingdom, and avoid tax by arranging that the coal shall be exported to him or to his agents at a price which will result in little or no profit being shown from the working of the mine. To cases such as this we consider Rules 7 and 12 of the General Rules of the Income Tax Act, 1918, should be applied. 60. In paragraph 53 of this Section, we have recommended that the converse of Rule 12 should be applied to the foreigner purchasing goods in this country and subjecting them to a process of manufacture here. This suggested new Rule would be of value when, by reason of his selling manufactured goods to an undeclared foreign principal at less than market price, a resident British manufacturer was assessed as an agent of his foreign principal. SECTION V. NON-RESIDENTS. RELIEFS DEPENDENT UPON TOTAL INCOME. 61. The reliefs dependent upon total income include total exemption, the statu- tory abatements, reduction of rate in the case of small incomes, the allowance for Life Insurance premiums, wife allowance, children allowance, etc. Prior to 1909 all reliefs dependent upon total income were granted to every individual, wherever resident, whose total income chargeable to United Kingdom Income Tax fell within the specified limits — notwithstanding that in the case of a foreigner the total amount of his income liable to United Kingdom Income Tax might form only a small part of his real total income. 62. The Departmental Committee of 1905 recommended that these reliefs should no longer be granted to nun residents. They added the following reservation : ' If it be thought well to make an exception for British subjects residing abroad, relief should be granted only on a certificate from a British Consular officer (or, in a British colony, from the colonial fiscal authorities) that the claimant has produced proper e\ idence showing thai his income from all sources is within the limits." By the Finance (1909-10) Act, 1910, the Committee's re< onimendation was acted upon and non-residents were excluded from the benefit of the reliefs; no action was taken on the Committee's reservation — British subjects residing abroad and foreigners being equally excluded from exemption. PART I.— THE SCOPE OF THE TAX. 15 63. The present position is that no relief which depends on the amount of the rotal income is given to any persons resident outside the United Kingdom unless they are (a) resident abroad for reasons of health; (b) servants or ex-servants of the Crown; (c) missionaries; (d) widows of Crown officials; (e) resident in the Isle of Man or the Channel Islands. In these exceptional cases relief is granted but is made dependent on the real total income, that is, both the income liable to the United Kingdom Income Tax and the income not so liable. 64. We have reviewed this position as it affects (a) foreigners resident abroad, and (b) British subjects resident abroad. As regards foreigners resident abroad we recommend that they should continue to be liable on their British income at the full standard rate without allowances or reliefs. 65. As regards British subjects we have considered whether any distinction should be drawn between those who reside within the Empire and those who reside in foreign States. Although satisfactory proof of total income may be more difficult to obtain from a British subject resident, for example, in Russia, than from a British subject resident in a Dominion, we consider that all British subjects resident abroad should be treated alike in this matter, and we accordingly recommend that any relief that would be granted to a British subject resident in the United Kingdom should equally be granted to a British subject residing abroad. The relief should be calculated by relation to real total income (including foreign and colonial income), any relief given being in the proportion that the income subject to United Kingdom Income Tax bears to the total income; that is to say, that portion of the income which is subject to United Kingdom Income Tax should bear tax at the effective rate that would be charged if the total income (including income not subject to United Kingdom Income Tax, but computed as far as possible as it would be if it were so subject), were assessable in this country. 66. In view of the fact that this recommendation applies to non-resident British subjects in all parts of the world we refrain from specific recommendations as to the nature of the proof of total income to be given, but we suggest that in all cases proof should be furnished to the satisfaction of the Board of Inland Revenue, with a right of appeal to the Special Commissioners. SECTION VI. DOUBLE INCOME TAX WITHIN THE BRITISH EMPIRE. 67. The grievance of Double Income Tax within the British Empire has been prominently before the public for several years. It is unnecessary for us to explain in detail how the hardship has arisen, it will be sufficient if we say that some incomes arising within the Empire are being charged to Income Tax both here and in a Dominion, and are therefore taxed twice over for purposes which are very largely the purposes of the Empire as a whole. The heavy taxation conse- quent upon the war made the grievance so acute that remedial measures were pro- vided by the Finance Acts of 1916 and 1918, but the expedients adopted were admittedly temporary, and a full consideration of the question was promised as soon as practicable after the war. We received a great deal of evidence on the subject, and considered the various suggestions placed before us. It appeared to us that any solution proposed would be unsatisfactory unless it (a) received the approval of the Dominions ; and (b) contained an element of permanency. 68. We therefore deputed a Sub-Committee of our members to confer with representatives of the self-governing Dominions, and we invited the Board of Inland Revenue to send a representative to the conferences. The result of these conferences is set forth in the Report of our Sub-Committee which is issued as Appendix I. to this Report. We tender our thanks to the various Dominions and to their repre- sentatives for the help afforded to the Sub-Committee at these conferences in finding a solution of a very difficult and troublesome problem. We also thank the Board of Inland Revenue, whose representative furnished information and suggestions which were of great assistance. 27925 B i 16 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 69. We are of opinion that any sound solution of this problem should have regard to the following principles : — {a) that where Income Tax is charged on the same income both in the United Kingdom and in a Dominion the total relief to be given should be equivalent to the tax at the lower of the two rates of tax imposed ; (b) that there should be no interference either by this country or by a Dominion with the basis of assessment adopted by any other part of the Empire, and further that the settlement should be independent of increases and decreases in rate of tax, and alterations in the bases of assessment, whether here or in the Dominions; (c) that so far as may be practicable, relief should be given before payment of tax; (d) that so far as is possible, the adjustment should be made in the country where the taxpayer resides; (e) that there should be no interpayments of tax between the Government of the United Kingdom and the Governments of the respective Dominions. We are satisfied that the recommendations of our Sub-Committee are consonant with these principles, and we have no hesitation in accepting with full unanimity their Report, and adopting it as the recommendation of this Commission. 70. It is unnecessary to reproduce here any portion of the Sub-Committee's Report other than their proposed solution of the main problem. The settlement suggested is contained in paragraph 27 of their Report and is as follows : — Firstly, that in respect of income taxed both in the United Kingdom and in a Dominion, in substitution for the existing partial reliefs there should be deducted from the appropriate rate of the United Kingdom Income Tax (including Super- tax) the whole of the rate of the Dominion Income Tax charged in respect of the same income, subject to the limita- tion that in no case should the maximum rate of relief given by the United Kingdom exceed one-half of the rate of the United Kingdom Income Tax (including Super-tax) to which the individual taxpayer might be liable ; and Secondly, that any further relief necessary in order to confer on the taxpayer relief amounting in all to the lower of the two taxes (United Kingdom and Dominion), should be given by the Dominion concerned. 71. It will be seen from paragraph 28 of the Sub- Committee's Report that the adjustment of the relief was proposed to be made by reference to the nominal rate of United Kingdom Income Tax. Paragraph 31 of the same Report indicates the method of dealing with the shareholders of a company whose profits are subject to the double tax ; and it may be noted also that the income to be considered is the gross amount, and not that amount less the Dominion tax. This is clearly necessary if relief is to be granted upon the principle that only the higher tax should ultimately be paid upon the same source of income. 72. We feel that if our recommendation is adopted the British Government will have acted generously, and that the Governments of the various Dominions will afford to the taxpayer any balance of the total relief which is necessary in order to ensure that no person shall pay in all at a rate of tax in excess of the higher of the two rates (United Kingdom and Dominion). 73. The administrative difficulties of giving effect to our recommendations will be considerable, but we believe that these difficulties will be overcome. No useful purpose would, we think, be served by reviewing questions which are matters of administrative detail, and we content ourselves with indicating by a few examples the broad lines on which the proposed relief would be effected. 74. Example 1. A, a British resident, derives a fluctuating unearned income directly from a Dominion whose rate of tax applied to that income is Is. 6c?. in the PART I.— THE SCOPE OF THE TAX. 17 £. A has no other income, and his rate of tax in the United Kingdom varies according to the amount of his income. The following figures illustrate the position : — 1st Year Tax before relief Relief Tax after relief 2nd Year Tax before relief Relief Tax after relief United Kingdom. £1,000 at 3s. % realization of a true investment involves inquiry into and determination of motive, and we recognize the difficulties that are likely to arise in any such case. We accordingly confine ourselves, on this point, to recommending PART I.— THE SCOPE OF THE TAX. 21 that future profits of this nature should, where the asset sold or in- sured is replaced, be taken into account in determining- capital values for the purpose of calculating future Income Tax allowances for depreciation. 94. There remains the question of the treatment of losses incurred in that class of enterprises which, when they result in profit, we consider should be brought within the area of taxation. In countries where profits of this nature are taxed, allowance (if any) for losses is generally granted only against profits of the same character. For example, a loss of this description incurred by a salaried person is not set off against the assessment on his salary. So long as it is provided that the loss can be set off against profits arising from similar sources, there is, we think, sufficient reason for this limitation; we consider, for example, that losses from speculation in investments should not be set off against ordinary trading profits, salary, or dividends, but only against subsequent profits from such speculation. When we come to deal with the basis for assessing profits under Schedule D it will be found that we suggest the carrying forward of a trading loss for a period of six years. As any casual profits of the kind we are considering will fall to be assessed under Schedule D, that recommendation as to the period for carrying forward losses will naturally apply to these cases. SECTION IX. MISCELLANEOUS SUNDRY RECEIPTS. 95. In this Section of our Report we deal with two classes of payments which would ordinarily be regarded as the income of the recipients but which have been represented to us as proper subjects for relief from taxation, and in regard to the taxation of which we believe that a considerable amount of feeling exists — we refer to Easter offerings and payments for overtime. 96. In regard to the first of these classes, while it is no doubt true that the amount of the Easter offerings in any particular parish may depend in part upon the personal circumstances or the personal popularity of the clergyman, yet it is in our opinion impossible to ignore the plain sense of the position, which is that Easter offerings are paid to a clergyman because he is a clergyman and only so long as he remains a clergyman. Of two incumbents with emoluments and incomes otherwise equal, one of whom receives £100 from Easter offerings and the other nothing, to pretend that the taxable ability of the first is not greater than that of the second is to shut one's eyes to realities and to give undue weight to a natural sentiment. 97. Similar considerations arise when it is pleaded that overtime payments, the reward of exceptional and it may be even of excessive labour, should be given specially favourable treatment for Income Tax purposes. In our opinion it is just that pay- ments for overtime should be assessed in the same way as any other earned income; we say this with the full knowledge that the overtime work may be fatiguing, and may encroach upon what should be the leisure hours of the worker, who may even be working to his physical detriment; but considerations such as these are not in point. Neither the conditions of employment, nor the proper remuneration for overtime work are in question. Remuneration having once been determined and received must be subject to the ordinary taxing Statutes, which should apply equally to the worker whose day is six hours, and to him whose employment necessitates a longer working day. How else could a taxing Act be administered? No one supposes that it would be possible to deal with a trader or with a man working on his own account on any basis except that of the amount of his income. 98. Income that is earned by personal exertion already receives consideration by being charged at a lower rate than other income; and this differentiation is justifiable in theory, and is practical. A further differentiation between various groupsof earned income classified according to the difficulty of earning it, or the time occupied in earning it, or the particular manner in which the remuneration is paid, would be not only very doubtful in principle but quite impossible to administer. One man can do as much work and earn as much income in seven hours as another in ten; one may be rewarded for long hours of work by a specific payment for overtime, 22 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. another by promotion or by an increase in salary ; many a professional man works abnormally long hours and so earns a larger income than he would if he restricted his hours or employed an assistant ; it would not be possible for the taxing authorities to deal equitably with all these taxpayers according to a scale that measured the amount of the tax by some standard, either of the time normal to the business or the employment, or of the energy expended in earning the income. 99. On a consideration of both these cases, Easter offerings and overtime pay- ments, we are satisfied that any attempt to measure taxable capacity by a system that is not based upon the amount of the income— by a system that looks to the way in which an income is earned, to the circumstances in which it is received, to the hours of labour, or to the conditions under which the work is performed— would cause great injustice as between one taxpayer and another and would lead to indefensible results. SECTION X. RECEIPTS NOT IN MONEY. 100. We propose to deal at this point with two classes of receipts not consisting of money : — (a) remuneration in kind (e.g., the value of board and lodging provided by an employer, or the annual value of a residence occupied by right of an office), (b) dividends or interest paid by means of a distribution of bonds, shares, notes or other securities. 101. Remuneration in kind is not charged under the present law unless it is capable of being turned into money. The anomaly exists, therefore, that one em- ployee A may have to pay Income Tax on the salary which constitutes his sole remuneration, while his fellow employee B, who receives board and lodging or the free use of a residence in addition to the same salary, pays only the same amount of tax. From the point of view of ability to pay there is no doubt that B is capable of paying more tax than A. 102. There is obviously much to be said on the grounds of equity for the suggestion that the total benefits which accrue to an employee should be taken into consideration for Income Tax purposes, both for the purpose of fixing the net amount of his assessable income, and for determining the rate of tax at which he is liable. We recognize that there may be considerable administrative difficulties in carrying this principle into effect, but, unless those difficulties are greater than we believe them to be, we think that an attempt should be made to charge Income Tax on the true remuneration of employment, including subsidiary benefits arising out of the employment, although these may not be capable of being turned into money. 103. Dividends and interest paid otherwise than in cash are taxable under the present law, but in certain circumstances the tax is not readily recoverable. No ous difficulty in regard to Income Tax arises in connection with the payment otherwise than in cash of dividends or interest by a company resident in the United Kingdom. The company should be assessed upon its full profits, without any deduction for dividends or interest paid, and when tin's is done, the Revenue, having received tax on the fund available for distribution, is not directly concerned with any arrangemenl the company makes with its shareholders and the recipients of interest in regard to the deduction of tax. A distinct difficulty arises, however, in the case of interesl or dividends paid in securities by foreign or colonial companies, because these companies are not assessable to the United Kingdom Income Tax on their whole profits; it is only when their dividends, &c, are paid to persons resident in the United Kingdom that liability arises. Tn the case of a distribution in cash the "Revenue looks for the appropriate fax to the paying agent through whom PART I.— THE SCOPE OF THE TAX. 23 the dividend is distributed, and it is only in exceptional cases that recourse is had to direct assessment on the recipient. Where there is a distribution of securities, a similar endeavour is made to obtain satisfaction of the liability through the paying agent, either by the transfer to the Revenue of a proportionate amount of the securities, or by a cash payment based upon a valuation of the securities distributed. Failing this, an endeavour is made to obtain a list of the persons to whom the distribution is made, with a view to a settlement of the liability by direct assessment. In order to avoid possible loss of revenue, and to legalize the present practice, we suggest that the provisions at present in force for the taxation of income from foreign and colonial dividends should Tbe made expressly applicable to dividends paid in any form other than cash, and that the paying agent should be required either to transfer the appropriate proportion of distributable securities to the Revenue or, at his option, to make a cash payment based on a valuation of the securities distributed ; and that further, he should, if required by the Revenue, and in any case if the foregoing options are impracticable, furnish a list of the names and addresses of the recipients. 24 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. PART II. RATES AND INCIDENCE OF THE TAX. 104. We have interpreted the words " incidence of the tax" as used in our Terms of Reference to connote matters relating to the way in which the tax is to fall upon the taxpayer, such matters, for example, as whether he should bear it by direct assessment or by deduction from his income, whether it should fall at an equal pound rate on incomes of all sizes or according to a graduated scale, and whether or not it should fall with the same weight on all kinds of income. 105. We deal in the Sections that follow with three fundamental questions : — (a) Differentiation, which is the generally accepted word for the principle of distin- guishing between one kind of income and another by means of different rates of tax ; (b) Graduation, that is to say, the principle of increasing the rate of the tax as the income increases; and (c) Taxation at the Source, or taxation by deduction from income, and the matters that arise under that system. SECTION I. DIFFERENTIATION. 106. Differentiation is the term used to express the discrimination that is made for Income Tax purposes between incomes that are earned by personal exertion and incomes that are not so earned. We are satisfied that some such discrimination is desirable and just. Although recognition of the principle was a long time in coming, the demand for it is practically as old as the tax itself. We have not had much evidence advanced against the principle of differentiation, and we are convinced that to do away with the advantage which since 1907 has been granted (within certain limits) to incomes earned by personal exertion would be a distinctly retrograde step, and would ignore the deeply- rooted conviction which undoubtedly exists in the public mind that there is a real difference in taxable ability between the two classes of income in question. 107. Whilst we are of opinion that the principle should be retained, there are two points of detail to be considered in connection with the allowance : — (a) the relation that ought to exist between the tax charged on earned and unearned incomes of the same amount; and (b) whether the relation so determined should be limited in its application to incomes of less than a certain size and, if so, what limitation should be imposed. 108. At the present time differentiation is effected by charging earned income at %d. in the £ less than the rate charged upon other income, where the total income does not exceed £2,500. The proportion of the unearned rate that is allowed on the ground of differentiation varies, in the case of incomes falling between the different statutory limits, as illustrated by the following statement : — Where the total income falls \ ££££££££££ bet-ween the limits of ...J 130—500 501—1.000 1,001—1,500 1,501— 2,000 2,001—2,500 the rate applicable to an- i ., nj .. ,, , . c , , ., , - n , , . rr „ • \ os. Drf. 3s. 9a. 4s. M. 5.9. M. o.s. Oa. earneil income is ... J and the differentiation ofS '.''/. in the £ is in propor- I i i i l l tion to the unearned rate j ' •'• ' as J It will be observed that the differentiation is a much larger fraction of the unearned rate of tax in the case of the smaller incomes than it is in the case of the larger incomes. 109. It was represented to us that this scale of differential relief operates too harshly against the smaller unearned incomes, especially as these are very frequently PART II.-RATES AND INCIDENCE OF THE PAX. 25 derived from the investment of savings out of earned income, and the suggestion in its broadest form was that income derived from the investment of savings should be treated in all respects as if it were earned. We cannot accept this principle, because earning in the sense used for taxation means active agency in the part- nership between capital and labour in producing income, whereas in the case where interest is received, some other person is the active agent to whom, on his share, the lower rate would be granted. Moreover, we believe that it would be unworkable in practice to attempt to decide how far income derived by a taxpayer from investments is in fact income derived from the saved portion of his earned income, and how far the income is derived from capital which was obtained from some other source, such as a speculation, a bequest, or the profit on an investment; but after weighing the various considerations, we have come to the conclusion that the present differentiation against small unearned incomes is too great, and should be materially diminished. 110. We have reviewed the amount of the differential relief applied to the earned portion of the larger incomes in the light of the increase and extension of the family allowances we propose, and also -of the increased Estate and Succession Duties which are now operative and tell in favour of earned income as against income derived from invested capital, and we have formed the opinion that there is good reason for diminishing the present differentiation in the case of larger incomes, though not to so great an extent as in the case of the smaller incomes. 111. There is one further point in regard to the relation that ought to obtain between the tax charged on earned and on unearned incomes of the same amount. An anomaly at present exists owing to the fact that the earned rate of tax is applied only to that portion of the earned income which remains after deducting there- from any abatement or family allowances. The existence of this anomaly will be made clear on a consideration of the case of an income of £240 derived (a) wholly from earned income; (b) wholly from unearned income; and (c) half from earned income and half from unearned income. From each of these incomes the statutory abatement of £120 is deducted, and the differential relief is by law allowable only in respect of the balance of earned income which remains after deducting this £120. The result is that in case (a) the lia- bility of an unmarried person is on £120 at 2s. 3d., and in cases (b) and (c) on £120 at 3s. Od. Whilst there is some justification for the difference between cases (a) and (6), there is clearly no reason why liability in case (c) should also be on £120 at 3s. 0d. as at present, 'it might be argued that the Act is illogical in pro- viding that allowances should be made in the first place out of earned income, and that the proper method of giving any allowance would be to apportion it in accord- ance with the amount of earned and unearned income respectively included in the total income. This course would, however, be very difficult to follow in practice, and we have come to the conclusion that the only way of calculating the relief that is both fair and practicable is to make the allowances in every case either wholly at the earned rate of tax, or wholly at the unearned rate of tax, both methods yielding similar comparative results. We recommend that as a means of carry- ing out this decision in practice earned income should be diminished by a certain fraction thereof for the purposes of assessment, and the income so diminished should be charged at the rate of tax applicable to unearned income. The fraction we propose is one-tenth, which would diminish the present differentiation against small unearned incomes to what wo consider to be more reasonable proportions, and yet would not too greatly benefit the larger unearned incomes. This method not only removes the anomaly mentioned in the earlier part of this paragraph, but also results in a great simplification of the rates of tax. 112. The allowances for personal abatement, for wife, children, and for dependants, as will be seen in the respective Sections dealing with those allowances, we have fixed in terms of earned income, i.e., so far as earned income is concerned, the exemption limit is £150 for an unmarried person, £250 for a married couple without children, and £350 for a married couple with three children; but if the earned income is under our proposal reduced for taxation purposes by one-tenth, these figures will naturally be correspondingly adjusted. The position will be made clear by the examples we give in paragraphs 114. 115 and 116. 37925 c 26 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 113. In regard to the upward limit, if any, to the amount which should be allowed for differentiation, it will be borne in mind that under the existing law there is an absolute cessation of any allowance for differentiation at a particular point in the scale of incomes — namely, £2,500. An income of £2,400, of which only £400 is earned, is allowed the differential relief in respect of that £400; but an income exceeding £2,500, even if it be wholly earned, derives no benefit from the recognition of the principle of differentiation. There is, of course, no com- pletely logical reason for this limitation, but in the larger earned incomes derived from business there is considered to be usually an element of the reward of capital. We have considered the practicability of distinguish- ing this capital element in the larger earned incomes, but we have de- cided that practical difficulties prohibit our recommending any attempt to discriminate between that portion of a business income which is the reward of capital and that which is the reward of personal exertion. Some upward limitation of the relief is, we think, necessary ; but, in our opinion, the present limitation is anomalous and arbitrary, and should be replaced by a limitation of the amount of earned income which should rank for differential relief, whatever the total income of its possessor. We have fixed that amount at £2,000. We recommend (a) that, however large the earned income, not more than £2,000 earned income should rank for differential relief, and (b) that the relief should apply, with that limitation, to incomes of all sizes, but for the purposes of Income Tax only, not for Super-tax purposes. The maximum" deduction from any income in respect of differential relief would consequently be £200. In the following paragraphs we illustrate the effect of our proposals in this connection. 114. X earns £5 per week. He is a single man and he has no other income. £ X's actual income is . . . ... ... ... ... ... 260 Deduct 1 /10th because it is earned ... ... ... ... 26 His income for taxation purposes is reckoned to be ... 234 The personal allowance is £150 of earned income £150 ] Deduct l/10th of £150 because the income is > 135 reduced by l/10th £15 J Tax is chargeable on ... ... ... 99 In a case such as this it makes no difference whether the full personal allowance of £150 is deducted from the actual income and the balance reduced by l/10th. or whether the calculation is set out as above. For instance £ X's actual income is ... ... ... ... ... ... 260 Deduct personal allowance ... ... ... ... ... 150 Balance 110 Deduct l/10tli because we are dealing with earned income 11 Tax is chargeable on .. . ... ... ... ... ... 99 a 115. Y is a (I on £300 in respect of his business and on £100 in respect of his investment income. Tic is a married man without children. £ Y's total : " ■ ■ is ... ... ... ... ... ... 400 Deduct l/10.th of E300 because the B300 is earned 30 His i i a rion purposes is The al] married couple is £250 of eai ae ... Deduct 1/lOtli iuse the income is reduced by 1 /10th Tax is chargeable on .. . 370 £250 £25 1 1 225 145 PART II.— RATES AND INCIDENCE OF THE TAX. 27 116. Z is employed at a remuneration of £3,000 per annum. He receives also I' 1,000 per annum from dividends on investments. He is a single man. £ Z's actual income is ... ... ... ... ... ••• 4,000 Deduct £200, being l/10th of £2,000, the maximum differential allowance ... ... ... ... ... 200 His income for Income Tax purposes is ... ... ... 3,800 Z is entitled to the personal allowance of £150 of earned income ... ... ... ... £150 ] Deduct l/10th of £150 because the £150 is 135 ex pressed in terms of earned income ... ... £15 ) Income Tax is chargeable on ... ... ... 3,665 117. We have given some thought to the question whether any better phrases can be found to express the desired antithesis than " earned income " and " unearned income." We admit that these words do not completely include all the ideas that ought to be included, nor exclude all the ideas that ought to be excluded. The term ;: unearned income " is objected to by many people both when applied to incomes derived from the investment of savings made out of earned income, and when applied to income which, although well earned, does not by reason of the taxpayer's total income rank for differential relief. It is even at times supposed to have implications of an ethical kind. Many other pairs of words have been used from time to time to point the distinction — "permanent and precarious"; "industrial and sponta- neous "; " industrious and lazy "; " personal effort and investment." In view of the public objection to the expression " unearned income," it would, we think, be an improvement if in future the terms " earned income " and " investment income " were used instead of " earned income " and " unearned income." 118. In connection with the subject of differentiation, it has been represented to us as a hardship that, although royalties received by an author are treated as earned income, royalties paid for the user of a patent are treated as investment income and not as earned income. 119. Both the author and the patentee have, speaking generally, the choice of disposing of their creations in one of two ways, either by outright sale for a lump sum, or on a royalty basis, and the difference in the treatment which they respec- tively experience when they choose the royalty system, is the natural result of the difference in the treatment that is accorded to them if they elect to sell outright for a lump sum. The Committee of 1905 dealt clearly in paragraphs 43 to 55 of their Report (Cd. 2575) with the position of the author and of the inventor in this matter. The difference is, that the author is assessed to Income Tax, not only on his royalties, but on the lump sums which he receives for the out-and-out sale of his copyrights, while the patentee pays Income Tax only on his royalties and not on any lump sums paid to him for the sale of his patents — these latter payments being regarded as capital, both in the hands of the inventor and in those of the purchaser. 120. We agree that a lump sum received for the sale of a patent should not be directly subject to Income Tax, because it will be covered indirectly by our proposals as regards Wasting Assets; but it seems to follow that so long as this lump sum is so treated, the royalty — which is in effect the capital sum converted into an annuity — is properly charged to Income Tax at the rate that applies to any other annuity created by the sinking of a capital sum, that is, at the unearned rate. We see no reason, therefore, to suggest any change in the method of assessment of the royalties in question. 121. Our attention was directed in the course of evidence to the fact that Civil List Pensions are not regarded under the existing law as earned income. We con- sider that the definition of earned income should be amended so as to include these pensions. 27923 C 2 28 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. SECTION II. GRADUATION. 122. We are not concerned in this Section with the nature of the taxpayer's income, but with its amount and with the demands made upon the income by reason of the taxpayer's marital, family and other responsibilities. In its widest sense graduation includes the question of the exemption limit, but we have devoted a later Section to that matter, and we shall confine our attention in this Section to those incomes which we have decided are capable of bearing some portion of the burden of taxation. 123. From 1842 to 1853 the tax was charged at a uniform rate on all incomes sufficiently large to be liable; even until ten years ago an exception from this rule was made only in the case of the smaller incomes, and then not by varying the rate of tax but by granting abatements which had the effect of decreasing the tax payable and thereby the real effective rate of tax charged upon the income. The method of graduation by abatement is still employed as a part of the existing system, the abatements at present in force being as follows : — £120 when the total income exceeds £130 but does not exceed £400, £100 „ „ „ „ ,, £400 „ „ „ „ £600, £70 „ „ „ „ „ £600 „ „ „ „ £700. 124. If we classify incomes according to their amount we find at one end of the scale hundreds of thousands of persons of small means whose contributions to the Exchequer are individually small, though in the aggregate they form an important part of the revenue. The higher we go up the scale the smaller is the number of incomes, until at the top of the scale we find only a few persons whose incomes are very large. It is evident that there is a limit to the amount of Income Tax that can be raised under a system graduated by abatement alone, since if a high rate of tax were charged on large incomes, it would in the circumstances assumed apply also to much smaller ones, and would cause great hardship unless the abatements were increased, in which case no tax at all would be obtained from incomes smaller than the increased abatement. 125. This difficulty was overcome in 1909 by the introduction of direct gradua tion in the rates of tax, by imposing on large incomes a Super-tax, in addition to the ordinarv Income Tax; and by charging small earned incomes at a lower rate than larger earned incomes. Direct graduation thus became a permanent feature of the Income Tax. In the same year an allowance was given to taxpayers with young children, an allowance which was the forerunner of the present allowances to all married taxpayers and to others whose family responsibilities entitle them to special consideration. 126. As the result of the five-fold increase in the standard rate of tax during the war it became necessary to extend direct graduation to all incomes, but the method employed operates so unfairly between one taxpayer and another that the removal of the resulting inequities has been one of the most important subjects of our inquiry. 127. The scheme at present in force is as follows : — Where the total income the rate applicable to the earned por- tion of the total income is and the rate applic- able to the invest- ment portion of the total income is exceeds ( JK'.o but does not exceed £500 £500 „ „ „ £1,000 „ £1,000 „ „ „ £1,500 „ £1,500 „ „ „ £2,000 „ £2,000 .. „ „ £2,500 „ £2,500 S. d. 2 3 3 3 9 4 6 5 3 I 6 1 ( plus Super-tax. / S. (/. 3 3 9 4 6 5 3 c, o f 6 \ plus Super-tax. PART II.— RATES AND INCIDENCE OF THE TAX. 29 The allowances shown below are made from the income, and the rate of Income Tax appropriate to the total income is charged on that part of the income which remains after deduction of those allowances : — (a) where the income does not exceed £700, an abatement is allowed, as set forth in paragraph 123; (b) where the income does not exceed £800, allowances are made for wife, children and dependants; (c) where the income although exceeding £800 does not exceed £1,000 the allowance for children is given, but it is restricted to the number of children in excess of two; (d) allowance is made for the payment of Life Assurance premiums subject to certain restrictions. We show graphically in Appendix III. the tax payable on incomes not exceeding £2,000 received by (a) a single person, (b) a married couple without children, and (c) a married couple with three young children, both when the income is wholly earned income and wholly investment income. 128. We do not feel called upon to defend with arguments the principle of graduation of the Income Tax. Direct graduation of the tax was bitterly opposed for many years, but it is now almost universally admitted to be as sound in principle as it is imperatively necessary in practice. We are therefore concerned more with the practical than with the theoretical aspect of the subject — not so much with the principle as the means by which that principle can be translated into practice. 129. In the following paragraphs we shall describe the objections to the present system of graduation. One is the presence of a series of diminishing abate- ments. We have described how abatements, once the sole means of gradua- tion, were supplemented by varying the rate of tax itself. It might be asked why abatements were not entirely abolished when the system of increasing rates was extended to all incomes. The reason was the necessity for making a deduction from incomes slightly in excess of the exemption limit before imposing tax upon them. It would otherwise have been necessary to charge tax on the whole of an income immediately the exemption limit was exceeded. If such a small income were assessed at a very low nominal rate of tax and it were desired to raise a large revenue, it would be necessary to increase that rate as regards incomes which, whilst they were somewhat in excess of the exemption limit, were still comparatively small, and to increase it again as regards somewhat larger incomes, and so on. That course was considered to be administratively impracticable, and we have found no means whereby it might be rendered practicable. So long therefore as it is necessary to depend on the Income Tax for a great part of the revenue, and so long as there is an exempt margin of income, an abatement appears to be essential. That being so, we have the choice (a) of giving to all incomes the abatement necessary in the case of smaller ones, and of effecting further graduation by other means; or (b) of complicat- ing the system by diminishing the abatements at certain limits of income and finally extinguishing them as is done at present. Further, we can have (a) an abatement somewhat less in amount than the exemption limit, a course which is administratively convenient; or (b) an abatement equal to the exemption limit, an arrangement which prevents inequities with regard to incomes slightly in excess of the exemption limit. On a consideration of the whole matter we have decided to recommend that from all incomes (for the purposes of Income Tax as distinct from Super-tax) there should be deducted a personal abatement equal to the exemption limit, and that graduation by reference to the size of an income should be effected solely by a variation of the real effective rate of tax chargeable on that income. 130. Another defect of the present system is that all family allowances cease when the income is greater than £1,000. It may be that the amount of allowable relief is trivial when compared with the total liability in the case of the largest incomes; but a family allowance of £50 or £60 tax from the £750 tax otherwise pay- able on an income of£2,500 by a married man with children would, we think, be regarded by him as a welcome recognition of his family responsibilities, and the ability to pay of the married person and the unmarried person will never lie quite equal, however large the income. For these reasons we consider that in all ranges of income some regard should be had to the taxpayer's marital and family responsibilities. 27t>25 C 3 30 REPORT OF THE ROYAL COMMISSION ON THE INCOME TaX. 131 We shall next consider a difficulty inherent in the present graduation, a difficulty which arises from the fact that the rate of tax chargeable on the whole income increases when the income exceeds a stated amount. For instance, an investment income of £1,500 is liable at 4s. Qd. in the £, but an investment income . of £1,501 is liable at 55. 3d. in the £. Were it not for a special provision to meet these cases the absurdity would be produced that the spending capacity of a taxpayer with a nominal income of £1,500 would be £1,162 10s., while that of a taxpayer with £1,501 would be only £1,106 19s. M.; or, in other words, the possession of £1 more income would reduce his spending capacity by £55 10s. 3d In order that the tax- payer with £1,501 shall not be in a worse position after payment of his tax than the one with £1,500, the Act provides that the liability of a taxpayer (whose total income slightly exceeds one of the statutory limits) shall not exceed the tax payable on an amount equal to that limit plus the whole of his income in excess of that limit. It is not until a taxpayer whose (wholly investment) income exceeds £1,500 has increased his income to £1,576 5s. bd. that any further spending power is conferred upon him. Similar anomalies are met with at every point where the rate of tax is increased or where an abatement or allowance ceases. The sudden increase in the tax payable by incomes somewhat in excess of these points in the scale is illustrated by the "jumps" in the lines representing the tax payable under the present system on incomes not exceeding £2,000 (see Appendix III). 132. It was generally recognized by both official and non-official witnesses that tiie state of affairs we have described is indefensible, but whereas the non-official witnesses were mostly anxious to demonstrate to us the advantages to be derived from the employment of ingenious mathematical formulas, the official witnesses warned us that the practical difficulties attendant on the proposed solutions of the problem were immense, and that it might be found in the end that theoretical per- fection must give way to practical expediency. Our own view is, that so long as cause of anomalies such as we have described in the preceding paragraphs is removed, the public desires nothing more than that graduation should be a practical working success. We venture to quote, with approval, the opinions of two witnesses rrho have appeared before us : — " The one essential feature that emerges from the whole subject is that when all the mathematical elegancies have been satisfied, it is still impossible to say which of the \arious curves truly represents that principle of equality of sacrifice they purport to embody. One may be as right as another for all we can say. The linal decision as to whether two points of income on a curve are psychologically or subjectively in right relation to each other still rests upon the common sense and instinctive judgment of the people, and on practical tests. There is absolutely no common agreement among economists that a certain type of curve or formula is economically the most correct. If there were, then great sacrifices might be made to attain it in practice." " A formula method of graduation, whether applied to the rate of tax or to the income, has ... no advantages in the least degree comparable to the advantages of the alternative practical methods. It would try the temper all taxpayers; it would not fit in with taxation at the source; it would involve loss of duty, and would increase inordinately the work of the Depart- ment and the cost of administering the tax." 133. The necessity of determining the exact total income of the taxpayer is a i serious and almost insuperable objection to any general scheme of graduation svhich expresses the tax as a proportion of the total income, or deals with small successive "layers" of income by different rates — a method which is quite practicable in the higher ranges of income dealt with by Super-tax. This difficulty is not due to shortcomings on the part of the officials or of the taxpayer; it is i .', in a great measure, to (he necessitj of local assessment and to the impossibility of determining, in regard to incomes which almost always vary in some respect in the course of a year, the exact total income of the year of assessment until after the end of that year. 131. It might In suggested that a simple solution of the latter difficulty would be to calculate the taxpayer's total income on the basis of his actual income in the preceding year; but that woidd be to escape one difficulty and to become involved in PART II.— RATES AND INCIDENCE OF THE TAX. 31 a greater owing to the effects of the system of taxation at the source. For if this suggestion were adopted the taxpayer would need to regard tax deducted from his income in the year of assessment as having nothing whatever to do with tax payable for that year, but as tax paid on account of the following year's liability. This would, we think, be too much to expect from him. 135. We are indebted to our witnesses for a number of suggestions for the improvement of graduation, and it may be well if we state specifically the tests which we applied to each in our examination of its merits. These tests were (a) practicability, especially so far as the conditions under which total income may be calculated are concerned ; (b) equity, that is to say, the necessity for increasing the rate of tax steadily as the total income increases, and not (as at present) steadily for a time, then suddenly, then less rapidly and again suddenly, and so on until the full rate of Income Tax is reached and Super- tax begins to operate; (c) simplicity in explanation and ease in comprehension. 136. It was suggested to us by one witness that the hardship caused by the present system, where an income is somewhat in excess of a point at which the rate is increased, might be alleviated by taking as tax only a proportion instead of the whole of a taxpayer's income in excess of the limit. To take the case mentioned in para- graph 131. It could, of course, be enacted that the taxpayer with £1,501 should be better off to the extent of 10s. than the taxpayer with £1,500. and that an income of £1,576 should pay not the tax on £1,500 plus £76, but the tax on £1,500 plus one-half of £76. But the practical effect of this suggestion would be to extend this marginal relief to such a large number of taxpayers, whose exact total income it would be necessary to ascertain, that in the end it would be found that the difficulties raised by this method of giving relief would be almost as great as those consequent on other suggestions already referred to which, though they would produce equity, cannot be applied in practice. 137. A modification of the suggestion referred to in the last paragraph was that the hardship could be relieved to some extent by increasing the rate of tax more frequently and by smaller amounts than at present, but this suggestion, in addition to increasing the difficulties of administration, would alleviate existing individual hardships only by inflicting the same hardship in a less degree upon a larger number of persons, and we decided that a solution of the problem of gradua- tion was not to be found on these lines. 138. A proposal for overcoming the inequities arising at the existing marginal points by granting larger abatements to incomes liable at the increased rate we felt compelled to reject for several reasons, one of which was the difficulty that would be experienced in convincing people with small incomes that taxpayers with large incomes might properly receive larger abatements than are allowed to small incomes. 139. The scheme which we have finally decided to recommend is as follows. From the assessable income (which, as explained in the previous Section, is the actual investment income, or the earned income reduced by one-tenth) should be deducted the allowances for the taxpayer himself, his wife, children, dependent relatives, &c. in order to arrive at the taxable income. This taxable income where it does not exceed £225 should be charged at half the standard rate of tax. If the taxable income exceeds £225. the first .£225 should be charged at half the standard rate of tax, and the excess over £225 at the full standard rate of tax. Owing to the deductions made for earned income, and for personal, marital, and family allowances, £225 of taxable income is equivalent to £400 of earned income in the case of a bachelor, to £500 of earned income in the case of a married couple without children, and to £600 of earned income in the case of a married couple with three children. The reason for reducing the earned income by one-tenth is explained in the preceding Section of our Report. 27U25 C i 32 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 140. Our proposals will have the following results : — No wholly earned income will pay tax if it does not exceed £150 in the case of a Bachelor ; £250 „ „ „ Married couple without children ; £350 „ „ „ Married couple with three children* . No wholly earned income will be charged at more than half the standard rate of tax if it does not exceed £400 in the case of a Bachelor ; £500 „ „ „ Married couple without children ; £600 „ „ „ Married couple with three children*. No wholly investment income will pay tax if it does not exceed £135 in the case of a Bachelor ; £225 „ „ „ Married couple without children ; £315 ., „ „ Married couple with three children ■■■. No wholly investment income will be charged at more than half the standard rate of tax if it does not exceed £360 in the case of a Bachelor ; £450 „ „ „ Married couple without children ; £540 „ „ „ Married couple with three children*. We give in the paragraphs that follow a few examples of the practical operation of our recommendations. The standard rate is assumed to be 6s. in the £. 141 A is a bachelor who earns £4 a week. He has no other income. £ s. d. A's actual income is ... ... ... ... ... 208 Deduct 1 /10th because it is earned His assessable income is Deduct personal allowance His taxable income is ... 20 16 187 4 135 52 4 7 16 7 Half -tax thereon The real effective rate of tax equals about 9c/. on each £ of actual income. Had A been a married man he would have paid no tax at all. 142. B makes profits amounting to £350 a year. He is married, but has no children. He has no other income. B's actual income is Deduct 1/lOth because it is earned His assessable income is Deduct marriage allowance His taxable income is ... £ s. d. 350 35 315 225 90 13 10 Half-tax thereon The real effective rate of tax equals about r .)\/l. on each £ of actual income, and if B had three children under 10 or at school, he would not have been called upon to pay any tax. 143. C is a ma tried man with a family nf three young children. He is emploj ed at a salary of £500 and has no other source of income. C's actual income is Deduct ! 10th because it is earned ... I [is assessable income is Deduct marriage allowance £225, and allowance foi three children £90 ! I i taxable income is ... Halt' tax f hereon £ s. d. 500 50 450 315 135 20 5 The real effi 'ate of tax equals about 9ftf. on each £ of actual income. In reaped <>t whom the proposed allowances for children can be claimed. PART II.— RATES AND INCIDENCE OF THE TAX. 33 144. D has a salary of £600. He owns £2,000 War Loan, the interest on which .i mounts to £100 per annum paid without deduction of tax. He is a single man. £ s. d. D's actual total income is 700 Deduct l/10th of £600 because the £600 is earned income ... ... ... ... ... ••• 60 1 1 is assessable income is Deduct personal allowance His taxable income is ... Half -tax on £225 is ... Full-tax on £280 is ... The tax on his taxable income of £505 is therefore ... 117 15 The real effective rate of tax equals about 3s. ^\d. on each £ of actual income. [f D's income had been wholly earned the tax payable by him would have been 6114 15s. Od. 145. E lives in Derbyshire, and derives his income from investments which j uld him £1,000 per annum, and from a director's fee of £100 from a London oom- pany. His wife has an annuity of £200. E's children are grown-up. £ s. The actual income of husband and wife is ... ... 1,300 640 135 505 33 84 15 Deduct l/10th of £100 because the £100 is income The assessable income is Deduct marriage allowance The taxable income is ... Half-tax on £225 is ... Full-tax on £840 is ... earned d. 10 1,290 225 1,065 33 15 252 The tax on the taxable income of £1,065 is therefore 285 15 The real effective rate of tax equals about 4s. 4|rf. on each £ of actual income. The assessment on the director's fee of £100 would be made in London, and supposing E's other income to have been received less tax, he would have been entitled to repayment calculated as follows : — * Assessment on fees £90 less £90 marriage allowance. No tax payable. Allowances clue by repayment : — Balance of marriage allowance £135 at full-tax £ s. d. equals 40 10 £225 at half -tax equals 33 15 Amount to be repaid 74 5 Full-tax deducted from dividends and annuity ... 360 Net amount payable by E as above ... ... ... 285 15 146. F is a manager at £1,500 per annum. He owns his residence, the net -sinent on which is £56, and he pays a ground rent of £6 per annum. He has £250 taxed dividends. F is entitled to the marriage allowance, and to an allowance in respect of three children. F's actual income is — £ s. d. Salan £1,500 House ... ... 56 Dividends 250 I ess ground rent £1,806 6 on which he will pay full tax and deduct same on pay- ment of ground rent. 1 16 Total actual income £1,800 U REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. Deduct l/10th of 1,500, £ s. d. because the £1,500 is earned ... ... 150 His assessable income is £1,650 Deduct marriage allow- ance, £225, and allow- ance for three children, £90 315 His taxable income is ... £1,335 Half-tax on £225 is 33 15 Full-tax on £1,110 is 333 The tax on the taxable income of £1,335, plus £1 16s. deductible from ground rent, is therefore ... ... ... ... ... 368 11 The real effective rate of tax equals about 4s. Id. on each £ of actual income. It should be noted that F does not bear the £1 16s. in respect of the ground rent himself. He is merely collecting it for the Government from the ground landlord. 147. We show by graphs in Appendix III. the effect of our suggested method of graduation on incomes not exceeding £2,000 in the cases of both wholly earned and wholly investment income accruing to (a) a single person; (6) a married couple without children ; (c) a married couple entitled to the allowance tor three children. It will be observed that the " jumps " in the line representing tax payable under the existing system (the cause of which is explained in paragraph 131) do not occur in the line representing the tax payable under the new system. 148. In Appendix II. to our Report we give tables showing the real effective rates of tax, and the amount of tax payable, on specified incomes in various circum- stances under the existing method and the proposed new method of graduation. It will be seen that the general form of the proposed scale does not differ seriously from that of the existing scale. We consider it essential that the taxpayer should under- stand clearly the effect of the various reliefs on the real rate of tax payable on his income, and we recommend that a statement of real effective rates of tax and of tax payable on specified incomes in various circumstances should form part of or accompany all Income Tax notices, including notices to pay. If this be done, we feel confident that our scheme would prove acceptable to the public, especially as it would give appreciable relief to the married man with a young family, as compared with the bachelor. In formulating our plan we have paid great attention to the administrative aspect of the matter, and we are not aware of any insuperable obstacle to the application of our suggested rules for calculating the tax. We believe that taxpayers would speedily become accustomed to the new method of calculating liability, and that in the long run it would be found to be less complicated than any mere modification of the existing scheme. 149. It should not be assumed that because we found it necessary to describe our proposed scheme of graduation by relation to certain rates of tax and other figures, that the adoption of these figures is at all necessary to the successful working of the scheme. At the same time, it should not be overlooked that we have endeavoured to establish a due and equitable proportion between the figures we have used and that to that extent they have a positive value. But in its general form our proposal is as follows : — Charge the taxable income at a certain rate of tax, x shillings in the £, if it does not exceed a certain limit £1. If the taxable income exceeds that limit, charge the whole taxable sum at x shillings in the £, and the balance of taxable income, after deducting U, at y shillings in the <:. Any values may lie given to the factors x, y and / without in any way impairing the practicability of the scheme, hut, in order that due relation may be preserved with the exemption limit, we consider thai / should be given a value of net less than £225 of assessable income. Our suggestion of a " half-tax " and " full tax " is by QO means essential to the scheme of graduation we propose, but we consider that there is PART II.— RATES AND INCIDENCE OF THE TAX. :j5 much to be said in favour of so dividing the standard rate of tax. More- over, the exemption limit, the allowances, and the ratio of the value (for Income Tax purposes) of earned to investment income are mere factors in our scheme of graduation, and may be varied as circumstances require without affecting in the least the working of the graduation scheme we have devised. 150. While we are firmly of opinion that our proposed scheme of graduation is, on the whole, a just one. we do not pretend that, if the great practical difficulties with which the subject is surrounded did not exist, a more perfect expression of the principle of graduation could not have been evolved. At the same time, the rules we have laid down for the calculation of the tax are by no means arbitrary. Underlying them is the conception of having one rate of tax applicable to the whole of the income, and another rate of tax applicable to the upper part of the income above a certain figure, a conception that has points of affinity with the existing system of graduation in the range of incomes liable to Super-tax. 151. So far we have dealt only with incomes not exceeding £2,000. We consider that graduation on incomes exceeding £2,000 can best be effected by means of Super-tax in addition to the ordinary Income Tax. 152. We have received no complaints of inequities caused by the present method of graduating the Super-tax. We consider that that tax should continue in its present form, a tax graduated solely by reference to the amount of the income without other considerations. After taking account of the loss of revenue to be expected from our recommendations concerning the exemption limit and allowances, we find that the cost of them is substantially balanced by gains resulting from our other recommendations, particularly from the change proposed in the basis of assessment for Schedule D. We are not. therefore, called upon to recommend any increase in the high taxation that is now borne by Super-tax payers as a whole. We suggest that, so long as the standard rate of tax remains unchanged, the class of incomes of more than £2,000 should, however the burden may be redistributed among different individuals, in the aggregate pay approximately the amount of Income Tax and Super-tax they pay now, provided that the effective rate of tax on incomes up to, say, £8,000 should not be increased. Although from this point the effective rate of tax might be more steeply graduated, in view of the national disadvantages of progressively high rates of tax, there cannot safely be any substantial increase in rates until the highest incomes are reached. We give par- ticulars in Appendices II. and III. of a scheme of graduation which would have the effect indicated. The present Super-tax rates and those used in the Appendices are as follows : — Present rate. Assumed rate. On the lirsi £2,000 oi the total income Nil Nil On the next *£500 (to £2,500) 1 1 6 £500 (to £3.000) 1 6 2 .. £1,000 (to £4,000) 2 2 b" ., £1,000 (to £5,000) 2 6 3 £1,000 (io £6,000) 3 3 6 „ £1,000 (to £7,000) 3 6 4 ., £1,000 (to £8,000) 3 6 4 6 ,. £1,000 (to £9,000) 4 ;> ,. £1,000 (to £10,00o) -I .) .. £ io 000 (to £20,000) 4 i'i 5 (>:, the remainder (above £20,000) i 6 5 6 " Under the existing scheme uo tux i> charged on this £500 unless the total income exceeds C2,500. 153. We would like to add, in dismissing this part of our subject, that a new line of graduation, once fixed, should not be liable to constant or partial alteration, hut should remain unchanged in its main characteristics, so long as the aggregate amount of revenue to be raised from Income Tax and Super-tax does not become very largely different from what it is now. 36 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. SECTION III. TAXATION AT THE SOURCE. 154. Taxation by deduction at the source is of paramount importance, lying as it does at the very root of our Income Tax system. Many witnesses have referred to it in the course of evidence, and most of them have expressed an emphatic opinion that if the efficiency of the Income Tax is to be maintained, the system of taxation at the source, under which at least 70 per cent, of the present yield of the tax is collected at the point at which the income arises, through persons who are not directly interested in the payment, must on no account be abandoned. We agree with this opinion, although we recognize that some advantages, not the least being that of simplicity, would ensue were it prac- ticable and safe to abandon this system and substitute one under which an individual return of income from all sources should form the basis of each person's assessment. But before we could recommend any such vital change it would be necessary for us to be satisfied that some other plan was capable of producing the financial effects achieved by the present system, and of this possibility we have had no sufficient evidence. 155. Those who advocated a change did so mainly with the idea of preventing taxpayers who are not liable at the full rate from being deprived for a time of the use of money which in the end the Crown has to refund. We shall deal with this aspect of the matter under the heading of Repayments, and we think it is possible to ensure that a taxpayer entitled to repayment, though temporarily deprived of too large a part of his income, should not lose the use of the amount overcharged for an undue length of time. 156. It is true that, without directly suggesting any change, some witnesses have propounded schemes of graduation which would involve the abrogation of the system of taxation at the source, but any such plans, if they offer merely theoretical advantages, must give way to the practical benefit of the certainty in yield guaranteed by the present method of collecting the tax. The Committees of 1905 and 1906 both expressed a strong opinion in favour of maintaining taxation at the source, and we agree with them in thinking that the security which this system gives to the Revenue outweighs every other consideration. Whether or not it is possible, as we suggest, to expedite repayments, and whether or not changes are made in the scheme of graduation, we are confident that it would be impossible at the present time to abandon a long-established and well-accepted system which, in the field of its opera- tion, is the only sure safeguard against evasion of duty, whether by the ca i eless or the fraudulent. We are convinced that to abandon taxation at the source now would involve an enormous loss of revenue, and would throw upon scrupulous, honest, and careful taxpayers an unfair share of the burden imposed by the taxation neces- sary for the country's needs. We are not satisfied that any system of " information at the source " would be a practical and efficient substitute for the present system, and it would be a source of trouble and irritation to the community in general. 157. But whilst we are confirmed in our conviction that, as a principle, taxation at the source must be maintained, there are certain inconveniences incidental to the system which we think can be minimized by special devices. Thus we would suggest a greater recourse to a met hod already adopted in the case of exempt persons drawing annuities and pensions, and would place in the hands of shareholders and debenture-holders who are exempt or liable only at half the standard rate, but who now suffer deduction of tax at the lull rate, the power to have dividends and interest either exempted or subjected to deduct ion of tax at " half standard rate." (See para- graph 139). I nless there are difficulties of which we are not aware, anv company should be at liberty to make arrangements with the Board of Inland Revenue under which a shareholder or debenture-holder entitled to exemption or liable to be charged at " halt-standard rate," and whose circumstances are unlikely to be subject to any material change in the near future, should be able, if he so desires, to obtain from the Inspector of Taxes a certificate to that effect, and on furnishing it, to the company, Ik- entitled to receive any dividends or interest either without deduction of tax if he be exempt, or subject to deduction of tax at " half- standard rate " if certified to be so chargeable. It would be at the discretion of the PART [I.— RATES AND INCIDENCE OF THE TAX. 37 Inland Revenue to decide in each case how frequently such a person should be asked to make a further statement of total income for a renewal of his exemption. The company would, when accounting for its liability, produce the lists of the two classes of persons in respect of whom vouchers had been received, in order to obtain a proper reduction of the direct charge made upon it. The company would return any certificate, with an advice to the proper Inspector, upon registering any transfer of shares affected. We need not add that any such system should be properly safe- guarded to provide against evasion of tax by beneficial owners placing shares in the names of persons not liable to the full rate of duty. 158. It may be argued that any system of this kind would place an undue burden upon the Revenue on the one hand, and on companies on the other. We tli ink that the initial work given to the Revenue would ultimately be repaid by the restriction of claims to exemption and relief; the work thrown upon companies would be work done on behalf of their own shareholders for whose convenience alone our suggestion is put forward, and we think that if this were explained the system would be welcomed by the taxpayers concerned. It would be a great gain if by a ny such means that unpopularity of the tax which is due to the fact of excessive de- duction were removed. It might even be found possible ultimately, after the necessary experience with companies, to extend the principle to other classes of persons who make payments under deduction of tax. 159. In the course of our sittings we were asked by the Treasury to express our views upon the expediency of issuing local Housing Bonds the interest upon which should be paid without deduction of Income Tax, and we replied that in our opinion it was inexpedient for the Government to set any further example of departure from the principle of taxation at the source. We now confirm that expression of opinion, and, subject to the application of the principle outlined in the two preceding paragraphs, we recommend that all British Government and Municipal loans should in future be made subject to deduction of Income Tax on payment of the interest. We observe that when these loans are issued in an untaxed form, it is open to foreigners to exchange their hold- ings of taxable British securities for securities of this type held by Englishmen, and that in this there is an opening for substantial loss to the Revenue. 160. We have had placed before us a suggestion that taxation by deduction should extend to copyright and dramatic royalties, and shares of profits and lump sums paid in lieu of copyright and dramatic royalties. While we are not disposed to alter the present practice in so far as payments of this kind are made to persons resident in this country, we recommend that where these payments are made to non-residents they should be made subject to deduction of tax if they are of such a nature as would render them assessable in the hands of a recipient resident in the United Kingdom. 161. We make the following minor recommendations in connection with deduction of tax :— (a) that dividends, etc., payable by agents in the United Kingdom to residents in this country on behalf of companies which, though registered here, are controlled abroad, should be taxed in the hands of the paying agent, who should be entitled to deduct tax on payment of the dividends, etc. ; (b) that where insufficient tax has been deducted from foreign and colonial dividends paid before the fixing of the rate of Income Tax for any year, power should be given to deduct the deficiency from the next dividend. 162. On the assumption that mines would still be assessable on an average of five years we were asked to propose that the assessment on a person working a mine should be made in two parts : (a) for the mineral rents and royalties payable in the year of assessment from which the lessee is entitled to deduct Income Tax, and (b) for the average profits remaining to him. It will be found that when we come to deal with the Basis for Assessment under Schedule D we recommend the abolition of the average system, and in these circumstances we do not think it neces- sary to make special provision for the separate assessment of mineral rents and royalties. 163. Our attention has been directed to the fact that Ministers of the Church of Scotland are subjected to deduction of tax on the stipends payable by heritors. A similar grievance existed in regard to the incomes derived by clergymen of the 38 REPORT OF THE ROYAL COMMISSION ON' THE INCOME TAX. Church of England from tithe rent charge. This. was remedied by section 32 of the Income Tax Act of 1853, which provided for the direct assessment of the owner of the tithe rent charge, and we suggest that a similar provision should be made in regard to the stipends of Ministers of the Church of Scotland which are paid by heritors. SECTION IV. THE RATE AT WHICH TAX SHOULD BE DEDUCTED. 164. In connection with the subject of taxation at the source we have been made aware of a minor difficulty that exists as to the rate at which deduction of tax should be made. Speaking in general terms, if a payment subject to deduction of tax is made out of income that has already borne tax, the deduction is made at the rate or rates in force for the period during which the payment was accruing due. Thus interest for the six months to the 5th July 1918, paid out of taxed income, was subject to deduction at the rate of 5s. dd. in the £, because the rate in force during the three months to 5th April 1918 was 5s., and for the three months to 5th July 1918 was 6s. in the £. Where on the other hand such a payment is not made out of taxed income, but, for example, out of capital, or out of the profits of a foreign company through a paying agent in this country, tax is deducted at the rate in force at the time of payment. The difficulties which arise from having these two rates of deduction — which we may call the " accruing rate " and the " time of payment rate " — are naturally most apparent when there is a change in the rate of tax. 165. We have been told by an official witness that the co-existence of these two rates gives rise from time to time to a certain amount of complaint on the part of taxpayers, who are puzzled by the results of the two methods working side by side, and naturally call for uniformity. This is particularly true in the case of interest paid by municipalities, for it suffers tax at the " accruing rate " if there are sufficient taxed profits to cover the interest, but at the " time of payment rate " if it is paid out of the rales — circumstances which are not very material so far as the recipient of the interest is concerned. We have been at some pains to see whether anything can be done to simplify the position, and we find that uniformity in this matter cannot be reached without the creation of evils greater than those we tire seeking to remedy. 166. Deduction at the " accruing rate " is the mode that has most to recommend it logically. If the gross amount of a fund has been diminished by taxation for ;i certain period at a certain rate, it seems reasonable that any charges upon that fund for the same period should be diminished in like proportion, as happens when the owner of a mortgaged house who has paid the Income Tax assessed on its annual value for a certain period, deducts part of the amount so paid from the interest for that period. But in the case of deduction of tax from a dividend paid on behalf of a foreign company by a paying agent in this country, or of deduction of tax on the encashment of a coupon payable abroad, different conditions apply. These deductions cannot always be made at the " accruing rate " because the payer may have no means of knowing what the period of accrual is. 167. While we are conscious that the existence of two rates for deduction of tax is open to a certain amount of criticism, we feel that the difficulty is one to which the public has become tolerably well accustomed, and therefore we refrain from recommending a change that would produce uniformity but would at the same time bring with it a train of attendant evils; but we do suggest that the " accruing" rate " should apply to all payments which have a known period, ot accrual, and that the "time of payment rate' - should apply only when the accruing" period is unknown. 168. We also recommend that income taxed by deduction should, for the purposes of any statement of total income, be treated as the income of the year in which it is receivable, subject to the power being given to the assessing authorities to assign an item of taxed income to another year in any ease where treating it as income of the year in which it was receivable would have the effeel of including more (ban one year's income from the same source in a statement of total income. PART II.— RATES AND INCIDENCE OF THE TAX. 39 SECTION V. DIVIDENDS AND REMUNERATION PAID "FREE OF TAX." 169. In accordance with the system of charging Income Tax at the source a limited company is assessed on the full amount of its profits before the payment of any dividend, and is entitled, on paying a dividend, " to deduct the tax appropriate thereto." 170. Deduction of tax from a dividend is not compulsory, and, although in general a specific deduction of tax is made, a company may choose to treat Income Tax as one of its ordinary working expenses, and to make its distribution to share- holders out of the net taxed balance of its income in the form of a dividend which it describes as " free of tax." That is to say, instead of declaring a dividend of £10, less a specific deduction of £3 for Income Tax, it declares a dividend of £7 " free of tax." 171. Many witnesses have contended before us that the payment of these " free of tax " dividends should be made illegal. They have argued that this method of declaration has the effect of disguising the actual amount of the dividend; and that, moreover, it is misleading to say that such payments are " free of tax," seeing that the shareholder has, through the company, contributed his full quota of Income Tax. It has also been urged that the system leads to confusion in the taxpayer's mind, because it is frequently difficult to convince him that in making a return of his total income (e.g., for Super-tax purposes) the amount he must show as his income from a " free of tax " dividend is more than the actual net amount he has received. In the case of the example given in the preceding paragraph he is apt to consider £7 as his income, when in fact it is £10. It is alleged that this confusion and uncertainty must lead inevitably to loss of revenue. 172. On the other hand, it has been suggested to us that to prohibit this form of payment would be prejudicial to the interests of certain taxpayers, e.g., com- panies with foreign shareholders or companies seeking to attract foreign capital, because payment of dividends " free of tax " enables the foreign investor to con- centrate his mind on the net yield of his investment, and does not draw his attention to the high rate of Income Tax which he is in fact bearing. It may also, in some cases, render less obvious the rate of profit made by British companies trading in foreign countries. 173. We are of opinion that the means by which a company passes on to its shareholders the Income Tax which it has paid on their behalf, is one with which the Revenue — so long as it is satisfied that the full liability of the company has been met — is not directly concerned, but there is no doubt that in general it would be a great convenience both to the taxpayer and to the Revenue, and would prevent misunderstandings and possible loss of revenue, if all dividend warrants showed clearly (a) the gross amount of the distribution, (b) the Income Tax applicable thereto, and (c) the net amount payable by the company to the shareholder. We accord- ingly recommend that these particulars should be required to be shown on all dividend warrants. It would also be of considerable advantage to taxpayers, and would save departmental time and labour, if general information in regard to the means of obtaining repayment were required to be given on dividend warrants, or on an accompanying enclosure. 174. In connection with this matter our attention has been directed to the practice of some employers, mainly companies, who pay the Income Tax (and some- times the Super-tax) on the remuneration of their directors and other employees. In such cases the employer, under an expressed or implied agreement, undertakes to pay the charge, in effect as an increase in the employee's remuneration, and for this reason the remuneration is frequently spoken of as " free of tax," though in fact the employee remains personally assessable and liable to Income Tax. 175. The objections which have been urged against this practice are : — (a) that the accounts of the employer may not show the true payments either for salaries or for Income Tax — because they may show as Income Tax what is in fact a payment for services rendered ; (b) that the social and political effects of direct taxation are interfered with if the employee is not concerned with the amount of the taxation which is nominally laid upon him; 40 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. (c) that the true remuneration may be strikingly different from the nominal remuneration, and that owing to the graduation of the tax, especially where the Super-tax as well as the Income Tax is borne by the employer, there may be a great differentiation made (on account of purely personal circumstances) between two persons doing the same work for the same nominal reward; (d) that workpeople and employees who bear their own Income Tax may be aggrieved at payments being made to managing employees under this system. 176. It has been pointed out that, although the employer is required on his official return of salaries to distinguish cases where remuneration is laid " tree of tax." there is a possible risk that the net amount instead of the gross amount (including the tax) may be returned and assessed, with a consequent loss of revenue. If there is any loss of revenue in this connection it is not sufficiently serious to ju us in recommending that such payments should be made illegal — a course which n ight be considered as an interference with freedom of contract between employer and employed. The Company Law Amendment Committee which reported in 1918, (Cd. 9138 of 1918), recommended that payment of directors' fees free of Income Tax and Super-tax should be forbidden by law ; if any legislative action is con- sidered, desirable we think it should be taken on that Report, and not as an Income Tax measure. We suggest, however, that where a fee or remuneration is paid " free of tax " the Income Tax assessment should be based on the gross sum which is represented by the net payment actually made. PART III.— ALLOWANCES AND RELIEFS. 41 PART III. ALLOWANCES AND RELIEFS. 177. We have now to take into consideration the deductions that are to be made from gross receipts in computing assessable profits, and the allowances that are to be made from income on account of the special circumstances of certain classes of taxpayers. It will be seen from the Sections that follow that some of the most important and difficult problems we have had to face arise in this part of our subject. 178. We propose to deal first with the highly controversial and much debated question of wasting assets, and the allied subjects of depreciation of plant and machinery, depreciation of buildings, and the appropriate allowance to be made for repairs and maintenance of property. We shall then give the results of our deliberations on the amount proper to be fixed as the limit of exemption, and on the various family and other allowances which have the result of extending so greatly the effective limits of exemption. The remainder of our Report under this Part is concerned with the claims to special treatment of Friendly Societies, Charities, Savings Banks, Superannuation Funds, and other organisations specially situated with regard to Income Tax. 179. It has been brought to our notice that there are certain exemptions from Income Tax conferred by private Acts, generally of old standing and granted in peculiar or anomalous circumstances. We recommend that all exemptions from Income Tax other than those conferred by Income Tax Acts should be abolished, without prejudice, however, to any claims for compensation that may arise in respect of existing rights. SECTION I. WASTING ASSETS. 180. For Income Tax purposes, speaking in general terms, income is the surplus of receipts over the current expenditure necessary to earn those receipts, regard- less of the appropriation of any part of the receipts or surplus for the purpose of writing off or amortising the capital value of any assets that waste in the process of producing the income. The only wasting assets for which an Income Tax allowance is now made are plant and machinery, and certain buildings that contain plant and machinery. The primary reason for this exceptional treatment of plant and machinery appears to be that an allowance for the wastage of these particular assets is merely equivalent to that allowance for renewals and replacement of tools and implements, used for the purpose of a trade, which has from the first been recognized as a necessary expense under the Income Tax Acts. With depreciation of plant and machinery, and with the claim that the allowance for depreciation should be extended to all buildings, we deal separately in later Sections of our Report. 181. If we were to accept all the suggestions that have been made to us for allowances in respect of wasting assets, we should have to modify seriously the fundamental meaning of the word " income " as that word is used for Income Tax purposes. In our opinion there is no economic necessity for so far-reaching a change, and practical difficulties would render the task suggested an impossible one even if it were economically desirable. Moreover to attempt such a change would, we consider, lead to grave inequalities as between different classes of income. 182. If in assessing an income we are to take into consideration, in every indi- vidual instance, the wastage of the source of the income, then it will be impossible for us to ignore the human element in income production. If the proprietor of a mine that produces an income of £5,000 a year is to be granted an allowance sufficient to enable him to replace his capital when the mine is exhausted, it would be inequitable to refuse an analogous allowance in respect of the initial capital invested in the education and training of a lawyer or surgeon or workman whose earning-power is possibly of shorter duration than the life of the mine. The varying circumstances 27925 • P 42 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. and the unequal duration of the profit-earning lives of human beings make it impossible to devise any practicable method of giving to all classes of incomes an allowance equivalent to the depreciation allowance we have been asked to give to the possessor of any and every inherently wasting asset. 183. On a theoretically perfect basis of assessment it is possible that regard should be had not only to the wastage of the material asset whence the income emerges, but also to changes in its value occurring during its use. Extraneous causes such as the progress of invention or a change in social habits may cause both a fall in the capital value of an asset and a decline in the income which it produces. For example, a dwelling-house containing " cellar kitchens," or a theatre constructed on inconvenient lines, may, owing to changing ideas, decline both in capital value and in income-producing capacity. Similarly, a change in polit : al conditions might influence favourably" or unfavourably the value of freehold 1; ad regarded either as a capital asset or as an investment for the purpose of produc ug income. 184. We think that, in that practical world which alone can be considered for the purposes of taxation,' the income which represents the taxable faculty is not i mathematical abstraction but that net receipt which, in the hands of its possessor, is usually regarded as income, that is to say, as a receipt out of which current expe; ture may be met, subject possibly to some general saving, but not (either in theory ir practice) subject to any specific appropriation for the replacement of the capital which is used in earning the income, and which over a long period of years nw waste in such use. Even if it were possible to eliminate by any fair and just method every element of capital from the income, it by no means follows that a tax assessed on such a basis would necessarily be redistributed more in accordance with rea: ability to bear the burden. While in some cases the owner of an income doubtle- does attempt to provide a sinking fund for the wastage of his capital, the normal man judges his ability to pay tax in any year not by actuarial calculations of the amount of his " pure " income, after every trace of capital has been removed, but by the amount of actual " spendable " income he receives. We are of opinion there- fore that the Income Tax should have regard to the actual income enjoyed by any individual during the Income Tax year, rather than to an amount deduced from that income by a mathematical computation that must rest on very uncertain and variable data. In other words we consider that for taxation purposes the conception of income hitherto adopted by the Income Tax Acts should be retained, subject only to the exceptions which we set out below. 185. We have found it impossible, therefore, to make any general recommendation that from the income produced by any asset an allowance should be made for the amortisation of its capital value. 186. It may be convenient to specify those principles which we think should be followed, and which have guided us in deciding whether any, and if so what, allow- ance should be made from the income arising from a wasting asset. The first of these principles is that as all material assets waste, and as no income emerges from a source which is so permanent as not to be subject to the possibility of wastage in capital value, there shall be a time limit to the recognition of wastage. In fixing this time limit regard should be paid, we think, only to that wastage which is important when considered in relation to human life and human expectation. If a man has an income which will apparently last for 60 years it is to him practically a permanent income. Contingencies happening after the lapse of a period of time exceeding 35 years appeal very little to the mind of the average individual; for example, it is only when the period of deferment is something less than 35 years that reversionary interests begin to have any appreciable value. Moreover the longer the life of the asset the greater the difficulty of estimating it with any reasonable approach to accuracy. These considerations, amongst others, have led us to recommend that no allowance should be made when the life of the wasting asset is estimated to be 35 years or longer. This is no doubt an arbitrary time limit without any special or intrinsic merit, but if some period of time beyond which wastage will not be recognized is not fixed the number of minute adjustments in every class of income will become so great that it will almost disintegrate the administration of the tax. We think that a period of time which approximately covers a generation is a fair time limit to impose, PART III.— ALLOWANCES AND RELIEFS. 43 187. If assets with a life of 35 years or longer are to receive no allowance for wastage, it follows that assets with a shorter life should receive an allow- ance dependent on the time by which their life falls short of 35 years. It would not be equitable to grant a full allowance for all wastage of capital in the case of an asset with a life of 34 years, if no allowance whatever were given in the case of an asset with a life of 36 years. On any equitable basis there can be no sudden break of this kind ; all allowances given must be duly proportioned to the standard of 35 years, or whatever other standard life is adopted. 188. We have considered the various methods of granting an allowance for wastage of capital and are of opinion that the balance of advantage lies with the sinking fund method as commonly used in the commercial world. When from the income arising from a wasting asset an allowance is to be made for wastage of capital we recommend that the allowance shall be the sinking- fund pay- ment necessary to amortise the capital cost of the asset over its agreed life less that sinking fund payment which would be necessary to amortise the capital cost if the life of the asset were 35 years. The expression " sinking fund payment " here means that annual sum which, if set aside at interest for a term of years equal to the life of the asset, would produce an amount equal to the capital cost of the asset. 189. As to the rate of interest on which the calculation should be made, if it were the universal practice of the proprietors of wasting assets to amortise their assets by payments to insurance companies, we should have no difficulty in recommending that the terms granted by insurance companies should be adopted. As, however, this method of amortisation is by no means universal, we recommend that the annual amortisation payment or allowance shall be deemed to accumulate at a net rate of interest of 3J per cent. We have assumed 3J per cent, to be the minimum rate of interest, after deduction of Income Tax, which a prudent investor will receive if he invests his sinking fund in trustee securities. Many traders invest their sinking funds in their own commercial undertakings, and by so doing frequently earn a much higher rate of interest than that obtainable on trustee securities; but since the allowance for the wasting asset would become less as the assumed rate of interest became more, the adoption of 3J per cent., which represents a minimum net rate obtainable, can in no case be unfair to the taxpayer. 190. An example will show clearly the extent to which we recommend, in the case of certain wasting assets, that an allowance should be made. Suppose the agreed life of the asset which cost £10,000 is 20 years, then if an annual allowance is to be given it will be : — ■ £354 the sum which at 3|% interest will accumulate to £10,000 in 20 years. Less £150 do. do. do. in 35 years. £204 annual allowance to be made. 191. The second and main principle we have followed is that, subject to the exceptions in paragraphs 194 and 195, no allowance should be granted to any asset other than an inherently wasting material asset which has been created by the expenditure of capital. The allowance must not be granted in respect of a right to the income derived from any asset ; it is the asset itself, and not the fact of its possession by any particular proprietor, that should be considered when the allowance is in question. If this limitation were not adhered to, the loss to the Revenue might become very serious. We will illustrate what we mean by an example. No depreciation is, under the present law, allowed on dwelling-houses, nor do we recommend that any allowance should be extended to that class of asset. If, however, the capital expended in acquiring the right to an income were recognized as a wasting asset to which an allowance should be given, enormous sums would have to be allowed annually for the depreciation of leaseholds, and the only manner in which this loss of revenue could be recouped would be to render liable to Income Tax the capital sum passing on the granting of a lease. Apart from the grave objections which might be raised to the charging of Income Tax on large sums of capital, the administrative difficulties of calculating and deducting the appropriate allowances would be well nigh insuperable, and there appears to be no reason why any change in the existing system should be 27925 D 2 44 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. made. When a man buys for £1,000 a 15 years' lease of premises of a rental value of £100 he knows that he has bought the right to an income of £100 which is subject to tax without allowance for wastage in each of the 15 years during which he hopes to receive it. In theory, at least, he pays less than he would have paid if the part of the income which represents wastage of capital were not subject to tax; but whether he does or does not succeed in passing on the whole of the tax to the seller of the lease, it is clear that the State must obtain in one form or another the tax on the £100 per annum, and we do not consider that the Revenue should be involved in the serious administrative difficulties that would follow if an amount of tax equivalent to the tax on the depreciation allowance for each of the 15 years had to be allowed to the leaseholder and recovered from the seller of the lease. 192. If leaseholds are excluded from the allowance, and no deduction is made for the dwindling capital value of any particular proprietor's interest in the material asset which is leased, it follows that no allowance should be given in respect of any capital expended by the leaseholder in permanent improvements to the leased premises. At the termination of the lease the assets created by this expenditure of capital will pass to another owner, but the improvements remain. It is only another particular instance of change of proprietorship, which cannot, we consider, be recognized as creating a right to an allowance. Where, however, expenditure has been incurred by a leaseholder in order to adapt the leased premises to the requirements of a particular business (e.g., the erection of a shop front suitable for a particular class of trade) and the asset created by the expendi- ture is not of permanent utility, it may be truly said that the capital value of the alterations will have entirely wasted away at the date when the lease terminates. We recommend, therefore, that the life of assets of this particular nature should be assumed to be not longer than the life of the lease, and that such special expenditure should be treated as a wasting asset for which an allowance should be granted subject to the general limitations set out in this Section of our Report. 193. Similar considerations apply to purchased annuities. _ The demand for an allowance for wastage of the capital expended in acquiring this particular form of income was specially considered by the 1905 Committee. That Committee definitely decided against any allowance being given, and we see no sufficient reason for reversing that decision. Since the report of the 1905 Committee was issued, important reliefs have been given to small incomes, and we are of opinion that these concessions to the owners of small incomes go a very long way towards the removal of any hardship felt by annuitants. We have also taken into consideration the fact that when annual payments for a deferred annuity are made to a Life Assurance company, a special allowance of Income Tax is made for that particular method of saving. 194. The general rule that the purchase of a right to an income shall not create an asset on which a depreciation allowance can be made, should, we think, be subject to one important exception. We desire to differentiate between the purchase of the right to an income which, before purchase, was subject to tax, and the purchase of the right to an income which, before purchase, was not so subject. In the latter case it may be said that, although only the right to an income has been purchased, for all practical taxing purposes an asset has been created by the expenditure of capital. If, for example, A, a British resident, purchases from B, a foreigner resident in Colombia, the right to work a mine in Colombia, then it can be said with truth that A, by the expenditure of capital, has created a material asset the income from which becomes taxable. Unless and until A, or some other British resident, purchases the Colombian mine, the mine does not exist as an income-producing asset within the scope of British Income Tax. When the right to future profits has been purchased from a vendor who is entirely outside the scope of British Income Tax (as, for instance, when a British company purchases from a foreign resident the right to work a foreign mine) we consider that, subject to the limitations of paragraphs 186 to 188 an allowance should be made for the amortisation of the capital sunk in the purchase. The capital on which the amortisation allowance should be calculated is the price paid by the first British purchaser to the foreign owner. We are of opinion that administrative PART III.— ALLOWANCES AND RELIEFS. 45 regulations should be carefully framed to prevent the allowance being based on any cost greater than the first cost to a British resident or to a British-controlled company. In mining claims particularly there are frequently several transfers of the mining rights from one purchaser to another. Any transaction bona fide made between foreigners (not being the nominees or the agents of any person or company liable to British Income Tax) may be ignored. If, however, the rights are sold to a British resident, resold to a foreigner, and then purchased by a British company which works the mine, the allowance should be granted only on the net cost to the first purchaser who was liable to British Income Tax. It should be understood also that where the asset was paid for otherwise than by a cash payment, the capital sum qualifying for an allowance should be deemed to be the cash value of the purchase consideration at the time when the purchase was effected. 195. For the same reasons, and subject to the same safeguards, the allowance should, we consider, extend to the capital cost of leaseholds, copyrights, patent rights, goodwill, and trade marks in every case where the purchaser is subject to the jurisdiction of the United Kingdom and the vendor is not so subject. 196. In accordance with the principle stated in paragraph 191, we are of opinion that no allowance should be granted to incomes arising from wasting assets which consist of the proprietorship of natural resources in this country. These assets have not in any sense been created by the expenditure of capital, the income derived from them has always been subject to British Income Tax, and indeed by the imposition of Mineral Rights Duty has been regarded as a particularly suitable subject for special taxation rather than for special exemption. We therefore find no sufficient reasons for recommending that when they take a form peculiarly subject to wastage (e.g., a body of minerals) an allowance for the waste of their substance should be made. Any such allowance would necessarily have to be extended to all royalties of which the life was co-terminous with the life of a particular body of minerals, and we do not recommend any such reversal of the generally accepted taxing practice. Where the ownership proceeds from the purchase of the natural resources, the mere change in proprietor- ship cannot he allowed to substantiate a claim for an allowance where no claim would otherwise be recognized.. In the case of concerns carrying on cemeteries or crematoria" we are of opinion that, subject to the general limitations explained in this Section, an allowance should be made for the gradual wastage of those assets which were created by the expenditure of capital. 197. A further application of the principle stated in paragraph 191 leads us to the consideration of immaterial assets such as copyrights, patent rights, goodwill, and trade marks. In this class the asset itself is immaterial, and if the principle were strictly applied no allowance would be made. These assets are, however, frequently created by, or with the aid of, the expenditure of capital; and although their life, generally speaking, either exceeds 35 years (when no allowance should, we think, be made) or is so indeterminate that it cannot be taken into account in a practical scheme of Income Tax, in the ease of one of them (viz.. patents) the life is definite and short. On this ground we recommend that patent rights should be separately considered. Our general recommendation is that where copyrights, patent rights, goodwill, and trade marks are in the hands of the original owner, no allowance for depreciation should be made, nor should any allowance be given to the purchaser of any assets of this nature if the vendor is within the scope of the United Kingdom Income Tax. We do, however, recommend that an allowance calculated in accordance with paragraphs 186 to 188 should be made to the patentee in respect of the proved costs of experimenting and patenting, whether (a) he works the patent himself, or (b) lets it on royalty. If the patent is sold outright the allowance should be granted to the purchaser. 198. In considering the subject of wasting assets we have found that the source of all incomes is subject to a process more or less akin to waste, and that no source of income could be regarded as perpetual. Considerations of administrative practicability, and other reasons which we have detailed, have led us to the belief that no attempt should or indeed could be made to eliminate from every income every element of capital, and we have set forth in the preceding paragraphs the principles which have guided us in our deliberations. As the sources of income 27925 D 3 46 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. are so many and so varied it is a matter of great difficulty to lay down any general principle which must on all occasions and in every set of circumstances be followed, and therefore Ave have not proceeded by first laying down general principles from which we could not allow ourselves to deviate in any circumstances. Our procedure has been rather to consider principles in conjunction with many typical classes of wasting assets, having regard all the time to the equitable administration of a scheme of taxation that above all must be practicable. Fine-drawn distinctions and involved mathematical computations, though interesting and instructive to the theorist, are not always capable of being embodied in a practicable scheme of Income Tax; and we have directed ourselves to the obtaining of a sound practical solution of the problem of what allowances should be made for wasting assets. 199. In the preceding paragraphs we have for the most part confined ourselves to stating the various limitations which should in our view be imposed on the granting of an allowance; we have hitherto indicated the cases in which allowances should be granted, only where the grant of an allowance might otherwise have been considered to have been ruled out by the limitations we have recommended. Before passing on to the large class of inherently wasting material assets to which we think an allowance, dependent on the time by which their life falls short of 35 years, should be given, it may be convenient to recapitulate those exceptional classes of assets to which we have already recommended that the allowance should apply. They are as follows : — expenditure of temporary utility made by the leaseholder on leasehold premises (paragraph 192), the first cost of foreign terminable concessions, or foreign natural resources such as oil and nitrate fields (paragraph 194), capital expended in creating certain assets by concerns carry- ing on cemeteries and crematoria (paragraph 196). and the cost of experimenting on and patenting inventions (paragraph 197). In every case the allowances granted should be subject to the general limitations stated in paragraphs 186 to 188. 200. We come now to the general or main class of wasting assets to which we recommend that a depreciation allowance should be extended. Subject always to the limitation that their life falls short of 35 years, we recommend that an allowance shall be given in respect of all inherently wasting- material assets which have been created by the expenditure of capital, such as building's and foundations, surface works, permanent way and equipment of railways and tramways, docks and shaft-sinkings, and initial work on development. In every case the allowance should be calculated by reference not to the absolute but to the relative liability to waste. The method of cal- culating the allowance has already been sufficientlv indicated in paragraphs L86 to 190. 201. The enumeration of specific material assets which inherently waste, and which have been created by an expenditure of capital, given in the foregoing paragraph, is not of course intended to be exhaustive; its purpose is merely to indicate the kind of asset for which a depreciation allowance should be given. Buildings and foundations and surface works include any structures (excluding dwelling-houses and cottages) whose utility is co-terminous with the duration of the commercial undertaking to which they belong. The " initial work on develop- ment " relates exclusively to actual physical work performed, such as preliminary boring or driving of roadways, and does not include preliminary expenditure on the formation or financing of the concern. 202. In estimating the life of any wasting asset for which depreciation allowance is given for the first time under these recommendations, regard should he paid, we think, to the life of the whole undertaking, for example, in the case of shafts sunk to reach a body of minerals, the life of those shafts would be con- sidered to be co-terminous with the duration of the process of extracting the minerals. It would not he equitable to differentiate Let ween one concern that owned one -hall which lasted tor twenty years and was then abandoned because the mineral was worked out, and another concern that owned a body of minerals and worked it by five shallow shafts, each of which lasted four years and was then abandoned. If the cos1 of the one deep shaft equalled the cost of the five shallow shafts, the allowance for depreciation of shafts should be the same in each case. Similarly, where the purchase price of a uumber of mining claims situated abroad and purchased from a foreign resident is treated as an asset on which PART III.— ALLOWANCES AND RELIEFS. 47 an allowance is to be made, the life to be considered should be the life of the concern treated as a whole, i.e., if a company acquires options of a large block of claims but purchases outright only a few and takes up the option of additional mining claims from time to time, the life on which the allowance should be calculated should not be that of the property acquired under each option, but that of the concern as a whole. 203. It is not, of course, possible in very many instances to make an accurate estimate of the life of a wasting asset. It is necessary, for example, to make revised estimates of the life of a mine at frequent intervals. We therefore recommend that all necessary legal powers should be given to the assessing authorities to ensure that re-computations of the life of an asset shall be made from time to time as often as. in their opinion, shall be necessary. We consider it essential that there should be adequate legal and administrative safeguards to provide for rectification of wrong estimates, and that when, on revision, the original estimate of life is shown to have been incorrect, powers should be given to recover tax overallowed or to repay tax overcharged as the case may require. 204. We have considered carefully whether the allowance should be made dependent upon due provision being made by the owner of the income for amortisation of his capital either by a sinking fund or by a general reserve, and though there are some grounds for withholding the allowance when the owner of the income does not himself make provision for the amortisation of his capital, there would be considerable difficulty in enforcing such a limitation without resultant injustice. In the case of a mining company, for example, the directors may possibly consider that each individual shareholder does or should create his own reserve. We have decided that tlie allowances should be given irrespective of the manner in which the asset is treated by its proprietor in his own accounts. 205. In the Section devoted to Depreciation of Buildings, we have suggested that the allowance now given to mills, factories, and similar premises should only be continued subject to the general conditions governing all allowances for wasting assets. We are unable to find justification for the allowance in its present form, since no account is taken of the nature of the structure, nor of the nature of the plant and machinery it contains, nor of the quantity of the plant and machinery relative to the size and stability of the building. To take a fixed proportion of the annual value as the measure oi the depreciation must inevitably lead to great inequalities as between concerns employing different classes and different relative quantities of machinery, or buildings on sites which differ greatly in value. For this reason we recommend that a mill or factory should be dealt with exactly in the same manner as any other wasting asset for which an allowance is made, that is to say, having regard to the particular factory, or to the particular class to which the factory belongs, an attempt should be made to estimate its life, and the allowance should be granted in accordance with the conditions laid down in paragraphs 186 to 190. We are of opinion that to base the calculation of an annual depreciation allowance on the capital cost of the asset is for many reasons a more accurate method than to allow a fraction of the annual value of the premises. 206. We have already stated that depreciation of plant and machinery is dealt with on special lines. The separate and distinctive treatment of this particular class of wasting assets may be justified theoretically by the fact that unlike the majority of the wasting assets dealt with in this Section, the amortisation allow- ances given to plant and machinery not only can be, but normally are, devoted to actual renewals. On practical grounds we see no reason to disturb a method of allowing depreciation that has became embedded in the existing scheme of Income Tax. 207. If the recommendations we have made in this Section of our Report are followed, we think that special administrative provisions will be required. We have recommended that allowances for depreciation shall be given to a class of assets the life of which is in many cases so difficult to determine that it may become necessary to deal with those assets in groups rather than individually. "However this may be, we consider it a matter of importance that steps should be taken to 6ecure uniformity of treatment from the outset, and, with this end in view, we 27925 D i 48 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. propose that questions of this kind should not be left to the Local Commissioners, because cases would inevitably arise of similar assets receiving very dissimilar treat- ment. For this reason we recommend (a) that regulations should be drawn up detailing the method of granting depreciation allowances on wasting assets other than plant and machinery in accordance with the main principles contained in our suggestions ; (b) that such allowances should, in the first instance, be fixed by the Board of Inland Revenue ; and (c) that an appeal should lie from the decision of that Board either to the Board of Referees in regard to allowances for classes of assets or classes of undertakings, or to the Special Commissioners in regard to allowances in an individual case. SECTION II. DEPRECIATION OE PLANT AND MACHINERY. 208. Although the Act of 1842 was regarded as authorizing a deduction from profits for the cost of renewing industrial plant and machinery, no specific provision was made for the allowance of depreciation, understood in the ordinary commercial sense as an annual writing-off against revenue of a percentage of the value of the asset. When the Income Tax was young it was invariably thought of as a temporary visitation, and on that footing it was natural that a short range view should be taken of what constituted income. When the tax was considered liable to disappear at any moment long range considerations — considerations that involved looking before and after the year of assessment — were ignored in favour of a view that confined itself narrowly to the year of assessment and refused to look at what might happen in a future in which Income Tax might bear no part; but when it began to be realized that the Income Tax was likely to endure, the absence of an allowance for depreciation became a serious grievance to the users of machinery. As a result of this altered view, some bodies of Commissioners began to grant unauthorized allowances, whilst others adhered to the legal position, with a resulting want of uniformity that was a cause of natural vexation to the taxpayer. 209. In 1878 Parliament stepped in and authorized annual allowances in respect of the diminished value of plant and machinery by reason of wear and tear during the year of assessment. The power of granting the allowances, and full discretion as to their amount, were placed in the hands of the Local Commissioners. The allowances were not to be treated as working expenses of the years that entered into the average on which the assessment was based, but were to be deducted from the average when arrived at. Later, in 1907, it was provided that where the allowance for depreciation was greater than the assessment for the year, the unexhausted balance of the allowance might be carried forward against future averages. 210. Divergent views as to the proper rates of depreciation to be allowed on various classes of plant and machinery are sometimes taken by different bodies of Commissioners, and the percentages allowed on similar plant in the same industry have in consequence varied in different parts of the Kingdom ; but for some time there has been a growing tendency on the part of traders to combine for the purpose of negotiating with the Board of Inland Revenue and agreeing upon standard rates of depreciation for particular classes of machinery. This has been done in the case of many important trades, and a White Paper (Cd. 9134) issued in 1918, and printed as Enclosure B to Appendix No. 7 (i) to the Minutes of Evidence, contains a schedule of rates so agreed. Since the issue of that White Paper further progress has been made in this direction. We think that this course is an excellent one, likely to be followed more and more as time goes on and as traders see the advantages that arise from it. In 1918, the right was granted to any con- siderable body of persons engaged in the same trade, who were dissatisfied with the PART III.— ALLOWANCES AND RELIEFS. 49 rates of depreciation allowed by the Local Commissioners, to approach the Board of Referees which had been set up in connection with the Excess Profits Duty, and those Referees were given power to fix future rates. We understand that this provision has not yet been taken advantage of to any great extent, probably because if any body of traders have had a real grievance on this point they have been able to arrange agreed rates with the Board of Inland Revenue and so save themselves the trouble of appearing before the Board of Referees. 211. Suggestions were made to us for further safeguarding the rights of the taxpayer in regard to depreciation allowances, but we believe that if in any trade the allowances are insufficient, complete provision already exists for their rectification by the tribunals to which appeals may now be made. The individual trader can appeal either to the General Commissioners or to the Special Commissioners; and an industry as a whole may either agree rates with the Board of Inland Revenue or may carry their case to an entirely independent body, the Board of Referees. 212. The depreciation allowance is calculated in one of two ways, either by allowing a percentage of the original cost of the plant, which gives an equal allow- ance year by year during the life of the asset; or, and this is the more usual method, by allowing a percentage on the cost price as diminished year by year by the amount of previous depreciation allowances. This latter method is generally spoken of as an allowance on the " written-down " or " diminishing " value. 213. Some witnesses were of opinion that the allowance should always be calcu- lated by a percentage on the original cost, on the ground that this is theoretically the correct method. While we see no reason why taxpayers who desire it, and choose to put themselves to the trouble of the book-keeping that this system entails, should be debarred from an allowance based on the original cost, we are convinced that as a general rule neither the taxpayer nor the Revenue authorities should be saddled with the burden of keeping the elaborate records that would be essential if depreciation allowances were normally to be calculated on the original cost of the plant. To allow depreciation on the written-down value is perfectly fair to the taxpayer and to the Revenue, and we recommend that this method should continue, the right being reserved to any taxpayer who has the necessary records to have his depreciation calculated by reference to the original cost of the asset. 214. There is one defect in connection with this allowance which we think calls for a remedy. It is at present confined to traders and manufacturers ; it does not apply to professional men. A business man is allowed a deduction for the deprecia- tion of the motor car employed in his business, but a doctor whose practice may equally necessitate the use of a car is not entitled in law to any such deduction. We recommend that the allowance should no longer be restricted to traders. 215. If, owing to obsolescence, a certain machine is thrown out and replaced by a more modern machine before the aggregate allowances for depreciation have reduced its original cost to scrap value, a further allowance is granted amounting to the difference between (a) the value to which it has been written down for Income Tax purposes and (b) its scrap value. This allowance for obsolescence was in practice given as far back as 1897 but did not receive formal legislative authority until 1918. At present the obsolescence allowance can be granted only when the obsolete plant or machinery is replaced, but we recommend that it should, be given in the case of machinery or plant disused for any reason, whether replaced or not, except where the disuse is the result of the discontinuance of a business, when it cannot properly be distinguished from the general capital loss entailed by cessation. 216. As we have already said, the ordinary allowance for depreciation is deducted from the average profits when ascertained, and not treated as an ordinary business expense in each year entering into the average. The obsolescence allowance, on the other hand, is allowed as a trade expense of the year in which replacement takes place. Further, any unexhausted depreciation allowance is carried forward for an indefinite period as a deduction from the average profits assessable, but obsolescence allowance is not. We recommend that in future any ordinary depreciation allowance and any obsolescence allowance shall be regarded as trade expenses of the year whose profits are being calculated. If they are so treated the necessity for carrying forward 50 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. unexhausted depreciation allowances will no longer exist, as a trading loss caused by the allowance of depreciation will be treated for Income Tax purposes in the same way as any other trading loss.' 217. We may point out that if a taxpayer, instead of claiming a depreciation allowance, prefers to deduct the cost of renewals as and when they occur, it is now open to him to do so; in our opinion this right should remain to him. We had some divergence of testimony as to the correct method of calculating the allowance for such renewals, some witnesses stating that the allowance should have reference to the cost of the machinery replaced, while others held that it should be calculated on the cost of the new machinery. We consider that the allow- ance for renewals should be calculated by reference to the cost price of the machinery replaced. This puts it in the same position as the allowance for depreciation — which is the alternative to the allowance of renewals — for deprecia- tion is necessarily calculated on the cost of the existing machinery. SECTION III. DEPRECIATION OF BUILDINGS. 218. Several witnesses have expressed the opinion that the allowance for depreciation of plant and machinery should be extended to buildings. If we consider the one-sixth allowance granted by the Finance Act, 1894, as being an allowance covering only ordinary current repairs, no deduction for depreciation of buildings of any kind was allowed until 1918, but in that year a provision was passed which had the effect of allowing depreciation in the case of certain mills, factories, and similar premises. This allowance was made in a rather round- about manner. It is not expressly described as an allowance for depreciation of buildings, and the Rule under which it is made is a Rule of Schedule D, and not, as would naturally be expected, a Rule of Schedule A. The effect is produced in the following manner. 219. In computing his liability under Schedule D a trader who owns his business premises is entitled to treat as an expense the annual value of the premises so occupied. When the annual value under Schedule A was reduced for the purposes of collection, by the allowance of one-sixth for repairs, it became necessary to make it clear that the annual value to be deducted in calculating Schedule D liability was the net Schedule A assessment on which tax was charged and collected, and not the gross annual value assessed. A trader's premises were assessed under Schedule A, for example, at £600 gross, less £100 for repairs, and the net amount chargeable to tax was £500. It was this £500 that he was allowed to deduct in making up his Schedule D return, i.e., he was allowed to deduct for the purposes of Schedule D the amount on which he actually paid tax under Schedule A. This rule was modified by the Finance Act, 1918, to the extent that in the case of a mill or factory or other similar building the trader is now allowed to deduct from his trading profits the gross assessment under Schedule A on the premises he owns and occupies, although he has paid tax only on the net assessment. This frees from taxation an amount equal to one-sixth of the Schedule A assessment, and this amount is regarded as a provision for the depreciation of his premises. 220. We have been asked to recommend that all business premises, and even private houses, should receive an allowance in respect of the gradual deterioration they suffer by reason of natural decay. Whether the reasons which led to the allowance we have spoken of in the case of mills and factories were sound or not, we have been quite unable to find convincing reasons for extending the scope of the allowance to buildings that are not mainly used to house machinery and are there- fore not exposed to the additional wear and tear caused by vibration. 221. There are many houses in the neighbourhood in which we sit which have been in continuous occupation for 200 years and are to-day worth much more than they originally cost. Even where the original fabric has disappeared, either by decay or because it has suited the owner to rebuild the house for other uses, for example, as offices or business premises, the present value of the mere site is in many cases vastly greater than the cost of the site and building together when the house was first erected. What possible method or percentage of allowance for PART III.— ALLOWANCES AND RELIEFS. 51 depreciation of buildings could do justice to cases such as these — and they must be the rule rather than the exception in all old-established areas of urban occupa- tion ? When the question of depreciation of buildings is under consideration the possibility of the simultaneous appreciation of the site on which those buildings stand cannot in fairness be disregarded. Nor, we think, can we ignore the gradual increase in the capital value of the buildings themselves that flows from the development or the growing prosperity of certain districts. 222. In view of the insuperable difficulties that would attend any attempt to deal fairly in this matter between house and house, and having regard to the decision we have come to that the process of natural decay extending over a long period of time should be disregarded in arriving at assessable income, we are opposed to the extension to other classes of buildings of the allowance for depreciation of mills and factories. Further, we consider that the allowance made in respect of that particular kind of building' should be subject to the general conditions governing all allowances for wasting assets, and should not take the form of a fixed percentage of the annual value. SECTION IV. REPAIRS TO PROPERTY. 223. The question of the adequacy of the present allowance for repairs and maintenance of property has been raised by a number of witnesses, some of whom, however, gave their evidence before the Finance Act of 1919 became law. 224. An allowance for repairs was contained in the Income Tax Acts of 1799, 1803, and 1805, but it ceased in 1806 and found no place in the Act of 1842. The question of reviving the allowance was considered by the Committees of 1851-52 and 1861, but it was not until 1894 that an allowance was actually made by deducting from the assessment one-eighth of the annual value of lands and one-sixth of the annual value of houses. From 1909, although the flat rate allowances were not dis- turbed, further relief was granted where the average expenditure incurred for maintenance, repairs, insurance and management exceeded the one-eighth or one- sixth. This further relief was confined to lands (including farmhouses and farm buildings) and to houses not exceeding £8 in annual value, and the total relief (including the original one-eighth and one-sixth) was not to exceed one-fourth of the annual value. The restriction to one-fourth was removed in 1914, when houses not exceeding £12 in annual value were brought within the scope of the additional relief. By the Finance Act of 1919 a further extension was granted so as to cover houses of an annual value not exceeding £70 in the Metropolitan Police District, including the City of London, £60 in Scotland, and £52 elsewhere in the United Kingdom. 225. So far, therefore, as land (including farmhouses and farm buildings) and the smaller classes of house property are concerned, it will be seen that the cost of repairs, &c, is fully provided for. 226. No convincing figures have been placed before us to show that over a series of years the present flat allowances are generally inadequate for properties of varied construction and value. One witness admitted that on examining the figures for properties with which he was concerned he was surprised to find that on the average of the past three years the existing allowance was sufficient. At the moment, no doubt, one sixth of the annual value assessed upon buildings is insuffi- cient in many cases to cover the cost, because accumulated repairs are being done, and the increase in the rentals of property has not kept pace with the increase in the cost of repairs; but it must be recollected that the statutory allowance was continued throughout the war period, notwithstanding that it was then impossible to carry out full normal repairs; and that the present assessment of property is based upon 1910 rental values, increases of rent since that date for the most part not having yet been brought into assessment. On balance therefore, it is not unreasonable to assume that many owners have in hand, so far as Income Tax is concerned, a credit towards the repairs now being effected. 52 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 227. There are certain classes of property which even now may be considered to have a sufficient allowance, for example, highly rented shops and offices, and centrally situated urban property where the value of the site is high ; but there are other classes of property in respect of which the allowance of one-sixth is in our opinion inadequate. 228. The suggestions that have been made to us have mostly taken one of the following forms : — (a) that the flat allowances of one-sixth and one-eighth should be abolished, and that the actual expenditure on repairs, &c, should be allowed in all cases ; (b) that the allowances should remain flat allowances, but that the proportion of the annual value allowed should be increased; (c) that the allowance should be graduated according to the character or class of the property. 229. With respect to the first of these alternative suggestions, we think it would not be practicable, having regard to the very large number of properties involved, to make an allowance year by year for all properties of the actual cost of repairs during the year of assessment. Under the present system, if the repairs in any year to a house cost less than the one-sixth the owner gets an excessive allowance, but if the repairs are such that the owner wishes to prove (in respect of a house of less than the prescribed value) that he is entitled to a larger allowance than one-sixth, he has to give particulars of the average cost of repairs during the pre- ceding five years. Although this safeguard may be desirable and even necessary, yet it throws upon the owner of such property the burden of proving facts which in some cases it is difficult for him to ascertain. We feel some doubt whether the relief granted by the recent Statute will in practice prove of any great utility to owners of small houses owing to their lack of information about past expenditure. 230. In regard to the second alternative we think that there are objections to a flat rate for all classes of property. One of our witnesses criticized such a flat rate as being "unfair." Indeed it was the inherent injustice of applying . a flat rate to properties of varying structure, age and rental, which led to the abandonment of the proposals made to the Committee of 1861. 231. We are, therefore, inclined to think it would be equitable to adopt the third suggestion and attempt to classify properties in some such way as is done for rating purposes under the Third Schedule of the Valuation of Property (Metropolis) Act, 1869. 232. We therefore recommend : — (a) that the present allowances of one-sixth and one-eighth of the annual value should be retained as the normal flat rates ; (b) that the present restrictions as to value (£70 in the Metropolis, ,£60 in Scotland and £52 elsewhere) contained in section 19 of the Finance Act, 1919, should be removed, subject to a provision that im- provements should not be treated as repairs or maintenance ; (c) that for a period of five years an allowance of one-fourth should be made for houses not exceeding £20 in annual value, and one-fifth for houses not exceeding £40 in annual value, such increased allow- ances to be withheld if it is proved to the satisfaction of the Commis- sioners that proper repairs have not been effected. We suggest that these increased allowances should be granted only for a limited number of years and should then cease, because during that period an owner who has not hitherto kept accounts (and therefore cannot claim the full benefit of the existing provisions) will have an opportunity of accumulating the proof necessary for obtaining the allowance of the full amount of the repairs on the average of five years ; (d) that at some time in the future, as soon as conditions both as to rental and as to the cost of repairs have become stabilized, a Depart- mental inquiry should be made with the object of finding what are the appropriate flat rates which should be granted in equity for different classes of property. The value of the site, the locality, and the character or the property, as well as its annual value, appear to us to PART III.— ALLOWANCES AND RELIEFS. 53 be matters which should be considered in determining equitable rates for the various classes of property ; (e) that Rule 8 (2) of No. V of Schedule A, Income Tax Act, 1918, should be amended by the substitution of the words " existing rent or annual value " for the words " existing- rent." 233. The question whether, in addition to the allowance for repairs and main- tenance, a deduction should be made in respect of the Depreciation of Buildings, we have considered in the preceding Section. SECTION V. EXPENSES AND DEDUCTIONS. 234. During the course of our inquiry we have received many suggestions that certain items of expenditure should be allowed for Income Tax purposes which at present are not allowable. These proposed allowances fall generally into two classes : — (a) amounts to be allowed as deductions in calculating business profits for taxation under Schedule D, and (b) allowances for expenses under Schedule E. We have considered each suggestion and make the following recommenda- tions. Where a claim has been put forward to which we make no reference it may be assumed that we have not been able to recommend any change in the present practice. Deductions in calculating profits for Schedule D purposes. 235. (a) Removal expenses. — The cost of removing plant as well as stock should be allowed as a trade expense. (b) Weekly wage-earners. — The present practice by which flat rate allowances for tools, clothing, and other expenses are made by arrangement with the Board of Inland Revenue to weekly wage-earners in particular trades, should be continued. (c) Self-insurance. — Any trade losses incurred by the owner of a business who accepts the risk of loss in lieu of insuring should, as at present, be allowed as a deduction. (d) Property-owning Companies. — These companies should be granted an allowance for their management expenses to the same extent as financial companies. (e) Minerals or mineral rights. — The owner of minerals or mineral rights should be allowed the expenses of management or supervision. (/) Allowance for the annual value of business premises used partly for residence. — The general limitation to a sum not exceeding two-thirds of the annual value or rent should be retained, but the Commissioners should be empowered to grant a larger allowance in special circumstances where the application of the general rule would result in hardship. (g) Expenses falling on a trader as owner of business premises. — Expenses such as those dealt with in the case of Strong v. Woodifield (1906. A.C. 448.) should be allowed as trade expenses. (h) Bad and doubtful debts. — The present allowance for bad and doubtful debts is, in our opinion, satisfactory, but we consider that where an amount is recovered in excess of the amount to which a bad debt has been written down, the taxpayer should account for the excess. (i) Contributions to Research Associations. — The present system by which allowances are made to manufacturers in respect of their contributions to Research Associations should be continued, but should not be extended. (j) Houses built for workpeople. — We have been asked to recommend that an allowance should be made of the difference between the cost and the economic value of houses built by commercial undertakings for their workpeople; we are of the opinion that this is a question which involves considerations outside the scope of our inquiry, and we do not consider that the Income Tax should be used as a vehicle for dealing with any loss that may arise in this connection. 54 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. (k) Brewers. — In computing the liability of a brewer, no allowance should be made for the difference between the gross Schedule A assessment and the rent paid by the tenant in the case of tied houses. Allowances for expenses (Schedule E.). 236. (a) Schoolmasters and other teachers. — Allowance should be made (a) to the extent of the tax on £10 (as a maximum) for scholastic agents' fees paid; and (&) to the extent of the tax on £20 (as a maximum) for the cost of necessary books. (6) Clergymen. — The annual instalments repayable to Queen Anne's Bounty in respect of loans granted to an incumbent's predecessor for the purpose of the repair or the restoration of the incumbent's dwelling-house should be allowed. Pay- ments made to lay assistants and certified by the Bishop of the Diocese as necessarily incurred by an incumbent in carrying out the duties of his office should be allowed as deductions. (c) Travelling expenses. — Travelling expenses incurred by a taxpayer in going from his place of residence to his business should not, in our view, be allowed. The question of travelling expenses is one which reacts on other private expenses, such as the expenditure for rent and rates. It is more truly an expenditure or disposal of income than an expense essentially necessary to earn the income. We are of opinion that a genernl allowance for travelling expenses would result in very grave inequity. (d) Bishops. — We are unable to agree with the proposal that the expenses of Bishops of the Church of England on necessary hospitality, organisation, charity, etc., should be allowed as a deduction in arriving at assessable income. We recog- nize the great disproportion between the normal income at present liable to Income Tax and Super-tax and the personal income which remains for the use of a Bishop after payment of his official expenses ; but we think that the remedy for this griev- ance lies not in a remission of tax. but in the division of the income of a Bishop in such a way that that part of it which is necessarily and customarily applied to the expenses of the office is clearly indicated. We understand that this would require legislation, but we think that any legislative step in this direction should be taken directly by the persons or bodies of persons concerned, and not indirectly in a taxing Statute. If the amount paid to the Bishops in respect of expenses were once determined by Statute the Income Tax grievance would automatically be removed. 237. We have been asked to recommend allowances for expenses arising out of illness or disability, such as the travelling exj^enses of attendants of disabled persons ; or to give compassionate rebate to persons who are compelled to maintain and pay personal attendants; or special relief to disabled persons in view of their decreased earning capacity. These claims, while differing; in degree, all arise out of the personal or domestic circumstances of the taxpayer, and although we are conscious that in particular cases the operation of the general rule may result in individual hardship, wo feel that we cannot advise any general relaxation of the principles on which the tax is levied. SECTION VI. THE EXEMPTION LIMIT. 238. The question of the point in the scales of incomes below which Income Tax should not apply has received iur most careful consideration : it has been dealt with specifically and at length by several witnesses, and has also been referred to by many correspondents. It has been variously suggested to us that the present exemption limit of £130 should be raised to £150, to £160, to £200, and to ':250. 239. Out of a total number of [ncome Tax payers estimated at 3,406,000 tor 1918 19, 900,000 had incomes exceeding £130 (the present limit, of exemption) and not exceeding £160 (the exemption limit in 15)14); 820,000 had incomes exceeding £160 and not exceeding £200: and 443,000 had incomes exceeding £200 and not exceeding £250 a year. There are, therefore, 2,103.000 taxpayers who would be entirely exempted it' £250 were fixed upon as the limit of exemption. PART III.— ALLOWANCES AND RELIEFS. 55 240. The reasons which have been given to us for raising the exemption limit are (a) that the cost of living has greatly increased since the present limit was fixed; (b) that there should be no taxation on an income so small that it is only sufficient to satisfy ordinary human needs ; (c) that existing indirect taxation lays upon a person with a small income the full share of the State burden which he ought to be called upon to bear. 241. On the other hand, the proposal has been made to us that the limit of exemption should be lowered, this suggestion being coupled with a claim that the burden of indirect taxation resting on persons with small incomes should be light- ened. It was advocated by one witness that every income, however small, should be liable to Income Tax, not primarily for the sake of the revenue to be obtained in this way, but as a means of effecting other political ends; and several witnesses have deprecated the establishment or the continuance of a position that would absolve the majority of the voters of the country from any direct payment towards the country's expenses, especially in the present condition of the national purse. 242. We think that the wide variety in the suggestions made to us as to the proper limit of exemption arises in the main from different ideas in the minds of witnesses as to when real taxable capacity begins. It may be argued that taxable capacity arises after provision of (a) an actual minimum income, i.e., an income sufficient for bare subsistence; or (b) an income not merely sufficient for bare subsistence but large enough to equip and sustain a healthy and efficient citizen; or (c) an income sufficient not only for a healthy existence, but for the provision of conventional comforts and luxuries usually enjoyed by what are commonly called the " working classes." 243. This last conception is obviously that of the many witnesses and correspon- dents who have invited a comparison between the exemption limit of £160 existing before the war and the present limit of £130, and who, making the assumption that £160 was a minimum carefully calculated according to the conditions of 1914, point to the rise in prices since that date and seem astonished at their own moderation in asking for a new limit of £250. We think that some of these witnesses have not fully appreciated the position as it existed when the limit was fixed at £160, nor the change that has taken place since then in the condition of the country. Nor have they, in our opinion, sufficiently considered the development that has taken place in regard to family allowances — for wife, children, and dependants — since the limit of exemption stood at £160. 244. The pre-war exemption limit of £160 is not the right starting point in this inquiry. That figure was not arrived at by scientific methods, but as a result of all the financial and political considerations existing in 1894 when the limit was raised to that figure, and one of those considerations would certainly be that the Chancellor of the Exchequer of the period found himself in a position to afford the reduction of revenue involved. The truth is that the exemption limit has never in this country been based on a figure consciously related to any kind of minimum of subsistence, and that if our financial condition had warranted it the exemption limit in 1914 might quite possibly have stood at £200 or £300 instead of £160. Further, the £160 limit, when it was fixed in 1894, was applicable not merely to an individual without dependants, as the exemption limit now is, but to all taxpayers, however large their family responsibilities. Any comparison, therefore, with 1914, which imputes any sanctity to the figure at which the exemption limit happened to stand in that year, seems to us to be quite valueless. 245. Having carefully considered the evidence placed before us we have come to the conclusion that it is most desirable to specify separately the exemption which should be allowed to a bachelor and the exemption which should be allowed to a married couple. In other words, we think the present wife allowance should be merged in the exemption allowance, and that it should be specifically enacted that the exempted income of a bachelor shall be one sum and the exempted income of a married couple with no children a larger sum. 56 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. The allowances for children will, naturally, have the effect of exempting a married couple with children on a still larger sum, increasing with the number of their children. The effect produced by this method will be exactly similar to the effect of allowing an abatement of the same amount as the exemption limit, plus allowances for family obligations, on the present system; but we consider it would be well to emphasize the fact, not always brought home clearly to the taxpayer, that a married couple with an income within the appointed limit are definitely exempt from the tax, although their income is above the exemption limit of a bachelor. We think that on the forms and elsewhere an effort should be made to bring these effective exemp- tion limits plainly to the mind of the taxpayer so that he may have an opportunity of understanding the real position. 246. We find it impossible at the present time to justify the raising of the exemption limit for the bachelor beyond .£150, and for a married couple with no children beyond .£250. These figures relate to amounts of earned income and as we have explained more fully in paragraph 111 we propose that earned income should be subject to a deduction of one-tenth in order to arrive at assessable income. If the whole income is " unearned " or " investment " income, a corresponding reduction will, therefore, be necessary in the allowances. The margins of exemption will in that case be £135 and £225 respectively (nine-tenths of £150 and £250), but this does not interfere with the effect which we aim at producing, which is to exempt from taxation earnings not exceeding, in the case of the unmarried person £150, and in the case of a married couple with no children £250. In recommending these figures we have had regard to ability to pay and to the cost involved in collecting small sums of Income Tax, and we have also borne in mind that no tax can be successfully administered that is contrary to the general sense of justice in the community. In regard to the exemp- tion limit that we propose for a bachelor we are not convinced that an unmarried man or woman earning more than £150 a year, and with no dependants, is unable to contribute to the State" something in the way of direct taxation. 247. While the limits we have suggested have not been arrived at merely as representing the minimum of subsistence for the persons to be maintained out of the income, we recognize that in some measure the cost of living has a practical connec- tion with the possible taxable capacity; but we also recognize the necessity for having a fairly fixed and constant point at which Income Tax should first attach, and we accordingly recommend that the limits we have suggested should be main- tained until there is a substantial change in the cost of living, and that they should not fluctuate from year to year, but should be altered only at considerable intervals of time. SECTION VII. THE ASSESSMENT OF MARRIED PERSONS. 248. The correct method of assessing married persons has received a great deal of public attention both before and since the appointment of this Commission. The matter has been freely ventilated in the Press and has been raised on several occasions in the House of Commons. In the course of our inquiry a considerable volume of evidence on the subject has been presented to us, and we have examined witnesses from representative women's societies; we have also received a large number of letters in connection with this part of our investigation. 249. Speaking generally, the existing position is that husband and wife are regarded as one unit for the purpose of Income Tax; the income of a married woman living with her husband being deemed to. be (for this purpose) the income of the husband, and the husband being responsible for the inclusion of his wife's income in his own return; but this general position is subject to two important modifications. (a) It is in the power of either spouse to elect to be separately assessed, and if that election is made, Income Tax is assessed, charged, and recovered on the income of the husband and on the income of the wife as if they were not married. PART III.— ALLOWANCES AND RELIEFS. 57 (b) If a married woman earns income by her own personal labour, and her husband also earns income unconnected with his wife's business or em- ployment, a separate claim of exemption or abatement can be made in respect of the wife's earned income — provided the joint income of husband and wife does not exceed £500. 250. The option of separate assessment referred to in (a) dates from 1914; it applies to married men equally with married women, but it does not appear to be very widely known; indeed, some of the witnesses seem to have been unaware of the existence of any such provision. The option is rarely taken advantage of, either because of this prevailing want of knowledge, or because its exercise is not in fact often desired. Although a married woman can make a separate return and be assessed separately from her husband, if she wishes it, the total of their separate liabilities to Income Tax, if the election is made, does not differ from the combined liability that would have arisen if the option had not been exercised. For example, if husband and wife have incomes of £2,000 and £1,000 a year respectively, and claim to be separately assessed, neither is granted exemption from Super-tax, but the liability attaching to an income of £3,000 is divided, and charged separately upon husband and wife in proportion to the size of their respective incomes. 251. This position does not satisfy the more extreme advocates of separate assessment; they say that husband and wife should be assessed as though they were separate taxable units — without any regard to the amount of their combined incomes. This contention has been urged upon us by many witnesses, and it forms the burden of the many letters we have received on this subject — mainly written by persons who would themselves benefit by the change proposed. By those who take this view it is claimed that the right to a completely separate assessment is an essential part of separate citizenship, and that the principle of absolute equality in regard to civil obligations should override any principle of taxation. The statement was also made that the present method of assessment imposes a penalty on marriage. 252. On the other hand, it has been contended by several witnesses that this proposal for separate assessment of husband and wife is not reconcilable with a just view of the principle of ability to bear taxation, and that the common menage which is our general mode of social life must be considered in any equitable system of taxation. From the point of view of ability to pay those who oppose separate treat- ment contend that it would be an anomaly if different sums of Income Tax were levied on two married couples enjoying equal incomes, merely because in one case the income belonged wholly to one spouse and in the other to both. In the case of a married man with £1,000 a year unearned income, the sacrifice involved by Income Tax, say £187 10s., may in most households be regarded as borne equally by each spouse, a sacrifice of £93 15s. each. If the husband and wife each have £500 a year there is no such difference in their taxable capacity as would justify a sacrifice of only £60 a year each, which is what would result from treating husband and wife as two separate units. 253. If we conceive a number of households where the wife has a varying amount of separate income, but where the total income (unearned) of the husband and wife is the same, the anomalies that would result from the proposed method of separate assessment will be apparent. Let the total income be assumed to be £1,000. bier If the husband has the whole income, the tax paid would be •„ „ £900 and the wife £100 £800 „ £200 £700 „ £300 £600 „ £400 £500 „ £500 The difference in the sums borne by the first and last of these households with identical incomes would thus be £67 10s., a result which appears to us not only inequitable but ridiculous under a system which aims at adjusting the tax in accord- ance with the principle of ability to pay. 254. Other witnesses referred to the fact that the income of husband and wi fe under the ordinary conditions of married life is treated as a joint one so far as 27925 E £ s. d. ... 187 10 ... 168 15 ... 162 ... 145 2 6 ... 135 15 ... 120 58 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. expenditure is concerned, and argued that it is, therefore, not unfair to make their expenditure for taxation dependent upon their total resources. Under the present law and practice if the husband and wife are living apart their incomes are treated as separate subjects for assessment. It was pointed out that if the allegation is correct that joint assessment is conducive to immorality (an allegation unproved in the course of our inquiry and characterized by one of the women witnesses as being neither reasonable nor probable), the logical, even if not the practicable, remedy is to render liable to joint assessment the income of two unmarried persons living together. 255. It has been stated by the Chancellor of the Exchequer in the House of Commons that the loss which would arise from the separate assessment of husband and wife would be £20,000,000, increasing possibly to £45,000,000 in consequence of avoidance of tax by transfer of income from the husband to the wife. To shift a burden from the shoulders of persons whose joint income is such that their ability to pay permits of its being equitably borne by them, and to place part of that burden, by means of an increased rate, upon the shoulders of other taxpayers, would be, in our opinion, entirely contrary to all principles of equitable assessment. 256. We feel that the demand of those who favour this change is in effect not so much a demand for separate assessment or separate recovery of tax — this they can have under the "existing law — as for a diminution in Income Tax liability on the ground that part of the joint income happens to belong to the wife. There are two methods of recognizing, by diminished taxation, the obligations of marriage. One is to make an allowance, a wife allowance or marriage allowance, from the joint income : this wife allowance is already granted under the present law, and we have made proposals which will in effect increase it considerably. The other method is, by a complete severance in the treatment of husband and wife for Income Tax purposes, to effect a differentiation the results of which will depend entirely on the particular manner in which a given income chances to be distributed between the two members of the household. The first method, seeing that it affects every married couple, is far more likely than the second to encourage marriage. 257. It strikes us as curious that, while ignoring the joint obligation of husband and wife for the purpose of pressing their claim to entirely separate treatment, the same witnesses have asked for increases in the wife and children allowances — which are express recognitions of the joint responsibilities created by marriage. It seems to us that it would be quite illogical, under the same system of taxa- tion, to make an allowance which recognizes the joint responsibilities of husband and wife, and at the same time to grant relief to each of the partners to the union as though they were complete strangers. If separate assessment were granted the marriage allowance should logically be abolished, and the result would be a shifting of burdens from the rich to the poor, because in the vast majority of cases the wife has either no separate income at all or a separate income less than the amount of the present marriage allowance, and far less than the allowance we suggest should be made. 258. The question involved should not be regarded as a political question, but purely as one of finance and revenue, and we are satisfied that it must be decided, not on any theoretical grounds of equality of citizenship, but in accordance with the outstanding principle of " ability to pay," which we recognize as governing all questions of taxation. In the application of this principle we must regard the social conditions of the country in which the taxation is imposed. The great majority of married persons live together and use their several incomes for common purposes, and this common manage and joint dependency is recognized, to the benefit of the wife, for other purposes of taxation, e.g., Legacy and Succession Duties payable by a widow are less than those payable by a person unrelated to the deceased. 259. The aggregation for Income Tax purposes of the income of husband and wife is not dependent upon any mediaeval conception of the subordination of women; nor is it a quesl ion of sex disability, since either partner can claim separate assess- ment and separate collection. The incomes are aggregated because the law of tax- able capacity is the supreme law in matters of taxation, and taxable capacity is, in fact, found to depend upon the amount of the income that accrues to the married pair, and not upon the way in which that income happens fortuitously to be owned by the members of tb« union. It is beyond question that in the immense majority PART III.— ALLOWANCES AND RELIEFS. 59 of cases where the wife has separate means she contributes to the common purse, either by actual merger of her income with her husband's, or by bearing expenses which in less fortunate households fall upon the husband. 260. We have given a great deal of time and attention to this subject and have considered with the utmost care all the arguments that have been put before us, and we have been forced to the conclusion that the grievance complained of is more vocal than real, in other words, that it is a grievance rather than a hardship. We therefore recommend that the aggregation of the incomes of wife and husband should continue to be the rule. 261. In Paragraph 249 (b) we referred bo the exceptional treatment allowed under the existing law to the earned income of a married woman where the joint income does not exceed £500. The effect of this provision, in a case where, for example, husband and wife each earn £250 and have no other income, is that two abatements of £120 each are allowed, as compared with the single abatement of £100 which would be allowed if the whole £500 were earned either by the husband or by the wife. The limit of £500 has been represented to us as too low in present condi- tions. We agree with this point of view, and recommend that the relief in its present form should be discontinued, and that where the wife has £50 or more of earned income the joint exemption or abatement allowance to a married couple should be increased from £250 (earned) to £300 (earned). Where the wife earns less than £50, the joint allowance for a married couple should be increased from £250 (earned) by the amount of the wife's earnings. 262. In connection with this subject, our attention has been directed to some minor details in regard to which we make the following suggestions : — (a) that the Revenue should have power of assessment, apportionment, and recovery of the tax against the spouses in respect of their separate incomes where necessary to the collection of the tax ; (b) that the notice to be given by a wife or husband requiring separate assessment should be allowed to be given at any time not later than the 30th June in the year of assessment ; and (c) that when husband and wife are separately assessed any relief in respect of their unearned or investment income should be given to the husband and to the wife in proportion to their respective assessable incomes. SECTION VIII. THE FAMILY BASIS. 263. We have been pressed by many witnesses to adopt a plan for determining liability to Income Tax which has come to be known as the " family basis." In its extreme form this plan involves the aggregation of the incomes of the members of a household or family and the division of that aggregate amount by the number of individuals maintained out of the income, the resulting quotient being regarded as the income of each individual in the group, and being treated quite separately for Income Tax purposes. Thus at the present time a household consisting of a man, his wife, and three children, with a joint income of £650, would pay no tax, because £650 divided by five gives a quotient of £130 and incomes not exceeding £130 are exempt. At a higher point in the scale of incomes, a similar family with an aggregate income of £5,000 consisting of the father's earnings would fall to be treated as five individuals, each with an earned income of £1,000, the resulting loss to the Revenue being £1,037 10s., the difference between £5,000 at 75. VSd. and £5,000 at 3s. 264. In this form the " family basis " plan is clearly unacceptable. A young child does not cost so much to maintain as an adult, nor do six children cost six times as much as one child. In the second of the examples given in the previous paragraph, £1,000 is not a reasonable part of the father's earned income to be allocated to each child, and 4s. 2d. in the £ is an over generous allowance on account mmissioners, the continuous and consistent application of the machinery of local administration provided by the Acts; they also draw the attention of the Local Com- missioners to new legislation and other matters of general significance in relation to Income Tax, and by making statutory regulations, prescribing the forms that are to be used for Income Tax purposes, and making arrangements that are applicable to the tax as a whole, they secure a general uniformity of procedure. 335. In view of the fact that a Committee has recently been charged with re- port ing upon Government Departments, and in view also of our Terms of Reference we decided that we were not required to make any direct investigation into the administration of the Board of Inland Revenue acting as a Government Department, •cially as we have received no evidence which indicated the necessity for such an i liquify; on the contrary, witnesses who have appeared before us have borne testi- mony to the general excellence of that administration. The financial position of over 0,000,000 people is brought under review annually for the purpose of determining [ncome Tax to be paid by them, and the main 'direction and control of the great machine necessary to accomplish this end devolves upon the Board. If any con- irable amount of dissatisfaction existed with the administration so controlled, if indeed that administration wore not of a high order, we conceive that it must have formed the subject of comment before such a body as this Commission. The absence of adverse criticism, and still more the opinion we have been able to form during our inquiry, compel us to endorse the testimonv of witnesses as to the general efficiency of the work carried on by the Board and bv the officials for whom thev are directly responsible. PART IV.— ADMINISTRATION. 75 336. There are one or two matters which properly relate to the Inland Revenue Department but the authority for which is now vested jointly or alternatively in the Board of Inland Revenue and the Treasury. For example, the liberation of a defaulter detained in prison under the warrant of the General Commissioners may be effected either by direction of the Treasury or of the Board of Inland Revenue; similarly, either the Board or the Treasury may mitigate or remit any fine or penalty incurred in connection with Income Tax. We recommend that these powers, which are exercised in practice by the Board of Inland Revenue, should he given exclusively to that Board, subject to the final authority of the Minister responsible to Parliament. Further we think that the limit of <£50, which is at present the highest amount the Board can award to an informer without express Treasury sanction, is unnecessary and should be withdrawn, and that any anticipated expenditure for the payment of informers should be included with other costs of administration in the Revenue estimates. 337. We also recommend that Inspectors of Taxes, who are responsible to the Board of Inland Revenue, should in future be appointed by that Board and not by the Treasury. SECTION II. THE GENERAL COMMISSIONERS. 333. The General Commissioners, or to give them their full title, the Commis- sioners for the general purposes of the Income Tax, are the body theoretically responsible, in their respective divisions, for the assessment and collection of the tax. It is true that Income Tax is by Statute put under the " care and management" of the Board of Inland Revenue, but the General Commissioners are quite independent of that Board, and have, in their own sphere, practically complete control. Broadly speaking, everything that is not specifically directed to be done by some other authority falls to be done by the General Commissioners. Section 58 of the Income Tax Act, 1918, says " All matters relating to the income tax under Schedules A, B and D, so far as they are not directed by this Act to be executed, and under Schedule E so far as they are not executed, by any other commissioners, shall be executed, as heretofore, by the commissioners for the general purposes of the income tax (in this Act referred to as general commissioners) ..." 339. Vacancies in the list of General Commissioners for any division are nor- mally filled from " a list to supply vacancies," which list is reinforced as may be necessary by the Land Tax Commissioners having jurisdiction in the division, from amongst their own number. The names on each list are generally not to exceed seven, but with the approval of the Board of Inland Revenue this number may be increased to fourteen in each case. In Scotland the " Commissioners of Supply " — the equiva- lent body in Scotland to the Land Tax Commissioners — may appoint General Com- missioners. In Ireland there are no General Commissioners, their place being taken by the Special Commissioners. 340. The duties of the Genei'al Commissioners are naturally very numerous, but the most important are as follows : — (a) they appoint the Clerk to the Commissioners ; (b) when they deem it expedient that there should be a panel of Additional Commissioners they appoint them; (c) they appoint the Assessors and frequently the Collectors, and have power to revoke the appointment of a Collector appointed by them ; (d) they receive the Assessor's assessments under Schedules A, B, and E and sign and allow those assessments, and they receive the Additional Commissioners' certificate of assessment under Schedule D, and cause notices of assessment to be given ; (e) they hear and determine appeals ; (/) they state and sign cases on points of law for the opinion of the High Court ; ,-.- 87925 F 2 76 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. (g) they issue duplicates of assessments to the Collectors, and where necessary examine Collectors as to the state of their accounts ; (h) they sign and transmit " Charge Duplicates " each year to the Board of Inland Revenue, showing the full amount of the duty charged by the assessment ; (i) they receive Schedules of Deficiencies from Collectors, and transmit Schedules of Discharge and Default to the Board of Inland Revenue showing sums unpaid; (j) they adjudicate upon claims of exemption or abatement and grant certi- ficates of repayment ; (k) they have power to impose a great variety of penalties for a great variety of offences ; (I) they may imprison a defaulting Collector; (in) they even have power to imprison, under their own warrant, a defaulting taxpayer. 341. It will be seen that their powers are very wide and their duties very com- prehensive, ranging over the whole field of the tax and calling for some step on their Eart (even if only a nominal one) at every stage of the process of administration, leaving out of consideration those things that are naturally prepared for them by their Clerk, and the numerous signings and certifyings that are comparatively formal, their most important functions are of a judicial character, and relate to the hearing of appeals and the imposition of penalties. Penalties are comparatively rare, but appeals against assessments are very common. So, too, are the claims of exemption and abatement which fall to be dealt with by the General Commissioners. If, therefore, the letter of the law were followed, and the duties laid upon the General Commissioners by the Legislature were in fact performed by them, they would be exceedingly busy men. 342. As a matter of fact the practical position in these matters differs widely from the theoretical, and differs necessarily, for an attempt by the General Commis- sioners to carry out the Income Tax Acts literally would result in a breakdown of the machinery. In an important or densely populated division the investigation of all appeals and all claims of exemption and abatement by the Commissioners themselves would necessitate their sitting almost continuously throughout the greater part of the year. Seeing that the General Commissioners are an unpaid body of men, frequently men with many other activities, it has naturally come to pass that many of the duties allotted to them are, with their sanction, performed by the Inspector of Taxes. This course is convenient not only for the Commissioners but for the taxpayers. 343. The growth that has taken place since 1842 in the complexity, not of the Statutes merely, but of the very nature of the incomes that form the subjects of assessment, has made essential the continuous presence in every district of a central and co-ordinating officer, not employed in any other capacity, properly trained in his highly technical duties, available to the public, and able to secure uniformity of practice by his close relations with the Board of Inland Revenue. This is, broadly speaking, the position that the Inspector fills, and it is therefore natural that the bulk of the work involved in the adjustment of assessments and the grant of allowances and reliefs should have fallen gradually upon him. For example, only a very small proportion of the taxpayers who appeal against their assessments appear before the Commissioners, in whom alone the law has vested the power to hear and determine appeals. The great majority of appellants settle their cases with the Inspector, and the Commissioners afterwards give some kind of formal covering authority to the settlements. We were given figures showing that in 22 divisions the number of appeals actually heard by the Commissioners was 1,263, though the total number of assessments adjusted was 67,796, the remaining 66,533 cases having been settled between the taxpayer and the Inspector of Taxes. We think that nothing is being gained by the maintenance of purely formal sanctions at different stages, which hamper speedy administration; and any idea that their re- moval may tend to an undesirable extension of official control may be dismissed as based on a misapprehension of the present fads. 344. Varying opinions have been expressed by the witnesses who have appeared before us as to the expediency of abolishing, or altering the functions of, the General Commissioners. We do not propose that their powers as an appellate body should PART IV.— ADMINISTRATION. 77 be taken away. We believe that to do this would create great opposition and would be regarded as an injustice by the taxpayer, who often looks upon the General Com- missioners as a natural safeguard interposed between himself and the Revenue autho- rities. We believe also that the General Commissioners, by the exercise of local knowledge and common-sense judgment, prove on the whole a satisfactory tribunal. Even if they are in some instances not altogether well fitted for the hearing of complicated cases involving difficult points of law or accountancy, it must be remem- bered that the taxpayer in such a case has the opportunity of appealing to the Special Commissioners instead of to the General Commissioners, and exercises this option freely in important cases. We therefore recommend that the General Commis- sioners should continue to be the tribunal for hearing appeals in normal cases. "We recommend however that they should no longer be required to hear and determine cases involving- the imposition of a penalty, but that the jurisdiction in all such cases should be transferred to the High Court or County Court. 345. It will be seen when we come to the Section dealing with the Assessors that we propose the abolition of those officers, and the general transference of their duties to the Inspectors. At present the Assessor certifies the assessments under Schedules A, B, and E, and the General Commissioners sign and allow those assessments. We think that if the Inspectors make the assessments under those Schedules the formality of their " allowance " should be dispensed with, because we consider that — as is now the case with the quarterly assessments on manual wage- earners— the General Commissioners' functions should be practically confined to hearing appeals. 346. We also recommend that the returns, assessments, and other documents relating to the tax, which at present are the property of the. General Commissioners, should in future be the property of the Board of Inland Revenue, subject to all necessary documents being available to the Commissioners for the purpose of appeals. 347. The clerical work involved in the completion of assessment books, the calculation of the duty payable, and the preparation of the Collector's duplicate of assessment, at present performed by the Clerk to the Commissioners, should, in our opinion, be transferred to the Inspector, but we deal with this subject more fully in the Section devoted to Clerks to the Commissioners. 348. While we propose that the General Commissioners should be retained in their judicial capacity we think that they should be strengthened in number and somewhat modified in character; that they should be designated Local Appeal Com- missioners; and that they should be paid all necessary travelling and subsistence expenses. The ideal body of Commissioners that we have in mind would include lawyers, accountants, business men, and representatives of the wage-earning classes. We suggest that the necessary quorum should be three, that at least two sessions for hearing appeals should be held annually, and that, in large commercial centres where there are many appeals, the Commissioners should meet much more frequently, in order that the settlement of an assessment under appeal should not have to wait for a Commissioners' meeting that might not be held for several months. We think that for each division there should be at least twelve General Commissioners, in addition to a list to supply vacancies, and that while the existing Commissioners should continue to act, future appointments should not be made as at present, but as to one- third of the Commissioners by the Crown acting through the Lord Chancellor on the nomination of the Lord Lieutenant of the County ; as to one-third by the Land Tax Commissioners (in Scotland by the Commissioners of Supply) ; and as to the remaining one-third by the County or Borough Council. The Commissioners should act only for the division in which they reside or carry on business, and should be Income Tax payers, but no property qualification should be insisted on. One Com- missioner should retire each year in rotation, and all Commissioners should retire at the age of 70. A Commissioner should be disqualified from acting if he fails to attend meetings for two years, if he ceases to reside or carry on business in the division for which he is appointed, or if he becomes bankrupt. Further, we suggest that any Commissioner should be removable from office by the Lord Chancellor on due cause being shown by his colleagues or by the Board of Inland Revenue. 349. It was suggested in the course of evidence that instructions should be issued by the Board of Inland Revenue to the Local Commissioners acquainting them 27925 F 3 78 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. with their duties and powers. As we have already stated, the Local Commissioners are quite independent of the Board of Inland Revenue, and that Board have no power to interfere with the way in which they choose to interpret their duties. But we believe the proposal is a good one, and we think that the independence of the Com- missioners would not be impaired, and their usefulness might well be increased, if they were given on appointment some guidance as to their powers and duties and the nature of the place they are intended to fill in the administrative scheme of the tax. This advice could best be given by the Board of Inland Revenue, which is the body naturally fitted by its position to deal with such matters on a uniform basis. SECTION III. THE ADDITIONAL COMMISSIONERS. 350. The Additional Commissioners are an unpaid body of persons appointed by the General Commissioners for the division. They are entirely independent of the Board of Inland Revenue. Their duties are to consider the returns made by tax- payers for assessment under Schedule D and to make the assessments under that Schedule. In some divisions no Additional Commissioners are appointed, the General Commissioners themselves acting as Additional Commissioners; but in those cases the General Commissioners who have actually made the assessments are not allowed to hear appeals against the assessments they themselves have made. The Clerk to the General Commissioners is also the Clerk to the Additional Commis- sioners, and attends their meetings. In Ireland there are no Additional Commis- sioners, their place being taken by the Inspectors of Taxes. 351. We have had evidence which shows that the way in which the Additional Commissioners interpret their duties, and the extent to which they really carry them out, vary greatly as between one division and another. In all cases the Schedule D returns are examined by the Inspector of Taxes, and where accounts are obtained from the taxpayer the computation of the liability is usually agreed between the taxpayer and the Inspector. In most divisions the Inspector (usually after consul- tation with the Assessor) enters the figures of the proposed assessments in the assessment book before the Additional Commissioners' meeting. The subsequent part taken by the Additional Commissioners varies from a real and considered attempt to assess each taxpayer on his true liability to the mere signing of the assessment book prepared by the Inspector. Between these two extremes almost every possible gradation is found. It is usual for the Clerk to the Commissioners to go through the assessment book on behalf of the Additional Commissioners in advance of their meeting, and he may mark selected cases for their personal con- sideration. Sometimes the chosen cases are selected by the Inspector, sometimes by the Additional Commissioners themselves. In some divisions there is a limit of income below which the Additional Commissioners do not concern themselves with the proposed assessments. 352. One Additional Commissioner, who preferred that his name should not be published, volunteered to give evidence before us and complained of the lack of interest displayed by the Commissioners and the meagre and haphazard fashion in which cases were chosen for the consideration of himself and the other Additional Commissioners in his division. We are satisfied that there is a good deal of sub- stance in his complaint and that there is room for great improvement throughout the country generally — with certain honourable exceptions — in the manner in which the work of the Additional Commissioners is performed. Their duty is not, as has been sometimes suggested, to stand between the taxpayer and the Revenue — that is the function of the General Commissioners, the appellate body — but to make assess- ments on the full liability of each taxpayer under Schedule D, taking advantage of all the information that is put at their disposal by the Inspector of Taxes and the Assessor, and using in addition that local knowledge of men and industries the possession of which is the real reason for their appointment. 353. Several witnesses have expressed the view that the Additional Commis- sioners are no longer necessary and that they should be abolished : they have argued that the work of assessment should be left to the Revenue, and that the sphere of PART- IV.— ADMINISTRATION. 79 Local Commissioners should be confined to hearing appeals from the assessments so made. The representative of the Board of Inland Revenue whom we examined on this subject was not disposed to take that view in its entirety. He told us that the work of the Additional Commissioners, though variable in quality and in places wholly unsatisfactory, was still of some assistance to the Revenue. Other witnesses suggested that a taxpayer should have the opportunity of electing to be assessed by the Additional Commissioners as he now has of being assessed by the Special Coni- misioners, and that in the absence of any election he should be assessed by the Inspector. 354. In the next Part of our Report it will be found that we have recommended (see paragraph 470) that employments now included under Schedule D should be transferred to Schedule E. This will narrow the field of Schedule D. On the other hand, if our recommendation as to the transference to Schedule D of the profits of farmers is carried out. there will be a large influx into Schedule D of taxpayers who now fall under Schedule B. The assessment of employees is, broadly speaking, a matter that does not call for much exercise of local knowledge, but local knowledge if properly employed ought to find a special opportunity in dealing with the new- comers into Schedule D, the farming class. 355. We are satisfied that it is of advantage to the country to have in every Income Tax Division the services of well-informed local persons of high character and standing for the purposes of assisting the officials in making correct Income Tax assessments. Although the evidence we have received shows that in some Divisions the duties assigned by law to the Additional Commissioners are not satisfactorily carried out, we think that the remedy is to be found in a different method of appoint- ment, and in the strengthening of the existing bodies of Commissioners, rather than in the substitution of some other tribunal for the Additional Commissioners. 356. We recommend (a) that the Additional Commissioners should be retained as an advisory body which may be consulted by the Inspector in the case of any Schedule D assessment, and as the authority for making" Schedule D assessments in cases where the Inspector proposes an assessment greater than (i) the amount returned for asssessment, (ii) the profits shewn by the taxpayer's accounts, and (iii) the amount of the assess- ment for the preceding year ; (b) that, except in the cases set out in (a) above, the power of making assessments under Schedule D should be trans- ferred to the Inspectors of Taxes ; (c) that there should be twelve Additional Commissioners for each division, and a list to supply vacancies also con- taining twelve names ; and (d) that, although the existing Commissioners should continue to act, future appointments should be made by the Treasury. SECTION IV. THE SPECIAL COMMISSIONERS. 357. The Special Commissioners, as their name suggests, have no general powers of supervision or direction over the Income Tax, but exist to perform certain definite duties that have been specially assigned to them by the Acts. Unlike the General Commissioners and the Additional Commissioners they are whole-time officials. Their chief duties are as follows : — (a) they make assessments under Schedule D on the request of any taxpayer who prefers not to be assessed by the Additional Commissions (b) they hear all appeals against the Schedule D assessments they have made, and, at the request of the taxpayer, against any assessment made by the Additional Commissioners; 27925 F i 80 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. (r) they administer the Super-tax both as regards assessment and collection ; (d) they assess all railways, and the officials of railway companies, in the United Kingdom ; (c) they assess and collect the Income Tax on foreign and colonial dividends, etc., paid in the United Kingdom; (/') they deal with repayments of Income Tax; (g) in Ireland, where there are no Local Commissioners, they do the work that in England is done by General Commissioners. 3.">x. Though their other work is very considerable indeed both in volume and in kind, perhaps their most important and characteristic duty is the hearing of appeals against Schedule D assessments. They become by their training and by their con- tinuous service a body specially qualified to hear appeals in which important points of law, of fact, or of accountancy are involved, and for this reason their services are constantly being called upon by taxpayers. They are a centralized body with an office in Kingsway, London, and from that office their department is controlled; but for the convenience of taxpayers they go on circuit all over the country to hear appeals, and they naturally spend a good deal of time in Ireland, where they hear all appeals. 359. We have received no adverse criticism of any kind upon the manner in which this body of public servants performs its duties. The present Special Com- missioners evidently possess in a marked degree the confidence of the public, and the recent tendency to throw upon them duties in connection with some of the more intricate provisions of modern taxing Statutes has clearly met with general approval. At the present time (excluding the members of the Board of Inland Revenue and the Solicitor of Inland Revenue for Ireland who are ex officio Special Commissioners but who take no part in the general work of the Special Commis- sioners' department) there are seven Commissioners, one of whom is Presiding Special Commissioner. The Presiding Special Commissioner was examined by us and gave us very useful evidence. 360. Suggestions have been made to us as to the proper method of the selection and appointment of Special Commissioners. They are now appointed by the Treasury, and consist partly of experienced Inland Revenue officials, and partly of men who have other training and experience, generally of a legal nature. It has been variously suggested to us in evidence that all the Special Commissioners should be practising barristers or solicitors of, say, ten years' standing; that at least otic of their number should be a chartered accountant; that they should be persons better known to the public and less attached to the civil service and the law; that they should be appointed jointly by the Treasury and by the Board of Inland Revenue ; or alternatively that tney should be appointed by the Board of Trade. The undoubted success of the present body of Special Commissioners might be urged as a reason for not altering the system under which they have been appointed. We believe that an exclusively legal body would not be best fitted for carrying on the Special ( 'ommissioners' duties, and we are of opinion that some of the Commissioners should be trained civil servants experienced in Revenue matters. We are also of opinion that it is advisable for the Commissioners to be able to exercise an experienced and independent judgment on all matters of accountancy that come before them. We recommend, therefore, that the Special Commissioners should continue to be appointed, as at present, but that new appointments should be made only from amongst practising barristers, solicitors, chartered or incorporated accountants, of not less than ten years' standing, and civil servants with considerable Inland Revenue experience ; members of the last-named class not at any time to exceed one half of the total number of Special Commissioners. 361. A-s we have already indicated, the duties of the Special Commissioners are Mh administrative and judicial. It has been proposed to us that their body should be enlarged and should undertake the hearing of all appeals throughout the country, but what we have already said under the heading of General Commissioners will make it clear tli.it we are unable to support that proposal. On the other hand, it has been urged that appeals to the Special Commissioners should be limited to those cases which involve a point of law. We cannot accept this suggestion; to divide appeals into cases which will involve and cases which will not involve points of law PART IV.— ADMINISTRATION. 81 would be a quite impracticable task, for a point of law may emerge during the hearing of any appeal. 362. It appears to us desirable to divest the Special Commissioners of the bulk of their administrative work and to restrict their activities mainly to the judicial side, that is to say, to make them an appellate tribunal and little else. It is illogical that the same body that makes Schedule D or Super-tax assessments should hear appeals against those assessments There is, moreover, an undoubted and growing tendency for the more difficult and intricate appeals to be taken to the Special Commissioners, and the appeal side of their work must therefore absorb more and more of their time and energies. 363. In order to preserve the right of a taxpayer to have his assessment either for Super-tax or for Income Tax dealt with centrally instead of by the Inspector of Taxes or the Local Commissioners, we recommend that a Central Assessing Authority should be set up, composed of senior Revenue officials nominated by the Board of Inland Revenue. This body should take over the assessing" duties of the Special Commissioners. Any appeal from an assessment made by the Central Assessing Authority should be heard by the Special Commissioners. 364. We find that where a person assessed locally under Schedule D carries his appeal to the Special Commissioners their decision is communicated to the General Commissioners who make any necessary amendment of the assessment. It is sug- gested to us that the reference to the General Commissioners in such a case is contrary to the spirit of the provision under which a taxpayer can remove his case from local jurisdiction. It is true that this removal can be effected by election to be assessed (as distinguished from merely having the appeal heard) by the Special Commissioners, and we think that in general where only the appeal is made to that body it is not made merely with the idea of securing secrecy ; but there may be cases where a reference back to the General Commissioners is contrary to the desire of the taxpayer, and generally it seems to us desirable that the Commissioners who hear an appeal should deal with any consequential adjustments of the assessment. We accordingly recommend that when the Special Commissioners hear an appeal against an assessment the adjustment of that assessment for that year should be removed entirely from the jurisdiction of the General Commissioners. 365. We recommend further (a) that the right to appeal to the Special Commissioners should not be confined, as it now is, to cases of Super-tax and assessments under Schedule D, but should extend to assess- ments under all Schedules except Schedule A, which, in our opinion, can be best dealt with locally ; (b) that the Special Commissioners should be granted the power of dealing with applications for adjustment of Schedule D assessments which are not technically classified as appeals ; and with reliefs dependent upon total income in cases where they are dealing with the assessment of a taxpayer ; (c) that decisions of the Special Commissioners on appeal on points of principle should be published (at their discretion, and without breach of secrecy) and so made available for the information of taxpayers ; (d) that where other arrangements can be made, meetings of the Special Commissioners, when they are on circuit to hear appeals, should not be held in the offices of Inspectors of Taxes ; (e) that the present practice of the Special Commissioners of notifying their decisions in certain cases by registered post should be legalized; (f) that in view of the proposed restriction of their duties, and in order to conform to the change already suggested in the name of the Local Appeal tribunal, the Special Com- missioners should in future be called Special Appeal Commissioners. 366. We deal more fully with the subject of Super-tax in a later Section of our Report. S2 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. SECTION V. THE CLERKS TO THE COMMISSIONERS. 367. Clerks to the Commissioners are appointed annually by the General Com- missioners, but their service is in practice continuous. They act as Clerks to the Additional Commissioners as well as to the General Commissioners. Their remunera- tion is paid by the Crown through the Board of Inland Revenue, but they are not in any sense full-time salaried officials, as in most cases they hold other local offices, or carry on private practice as solicitors. Their functions have been described to us as being two-fold : — (a) to act as legal advisers to the Commissioners and perform the secretarial duties connected with that office; (b) to do certain clerical work in connection with the preparation of assess- ments and the collection of the duty. 368. We have heard evidence in detail from the Clerks to the Commissioners themselves, from the Board of Inland Revenue, and from the Inspectors of Taxes, as to the work which at the present time falls upon the various administrative officers. We are satisfied from this evidence that the present statutory system of dividing the administrative and clerical functions between the various officials who are concerned in the assessment of the Income Tax has become archaic or obsolete, and out of touch with the real requirements of the administration. At the present time the prepara- tory work of assessing under Schedule D is done piecemeal. The Clerk to the Com- missioners enters in the assessment books the particulars from the returns which have been obtained by the Assessor ; the Inspector of Taxes examines the returns. While the books and returns are with the Clerk to the Commissioners, the work of the Inspector in connection with them is necessarily at a standstill, and while they are with the Inspector for examination, the work of preparing the notices of assessment cannot be proceeded with. We are clearly of opinion that the person who examines the returns should also make the entries in the assessment books, and we see no reason why the whole work of entering and examining the returns and preparing the notices should not proceed concurrently. It is inexpedient in our opinion that books of assessment should be frequently passing from one office to another, for the absence of the assessment books, sometimes for long periods, from the office of the Inspector of Taxes, causes considerable delay in making the assessments. From the point of view of the public the system is equally objectionable, seeing that while assessment books are in the office of the Clerk to the Commissioners, it is generally impossible for the Inspector to deal expeditiously with claims for adjustment of assessments or repayment of tax which in the interests of the public should be disposed of in the shortest possible time. 369. We have already suggested considerable changes in the duties to be under- taken by the Local Commissioners, and if these suggestions are adopted the necessary consequential changes would relieve the Clerk to the Commissioners of some of his clerical and administrative functions ; but even apart from these changes we think it is evident that time would be saved, and that the work as a whole would be better done, if the clerical duties which are now performed in the office of the Clerk to the Commissioners were transferred to the Inspector of Taxes, and we accordingly recommend that this transfer of duties should be made. 370. We suggest no alteration in the duties of Clerks to the Commissioners as the legal advisers of the bodies by whom they are appointed, or in their duties which are of a secretarial nature, as we recognize the necessity for an entirely independent tribunal with separate legal advice in connection with any proper system of appeals. 371. The Income Tax Acts do not prescribe any professional qualification for a Clerk to the Commissioners, but we understand that about five-sixths of the present Clerks are solicitors. We consider that all future appointments should be made from the ranks of practising barristers or solicitors, or ex-Inspectors of Taxes of at least ten years' experience, and that it should be made a condition of appointment that a Clerk to the Commissioners shall not act professionally for clients in his own division in regard to Income Tax matters. PART IV.— ADMINISTRATION. 83 372. The taking away of the clerical duties of Clerks to the Commissioners will no doubt necessitate a revision of the remuneration payable to them, and the question of compensation may possibly arise, but we conceive that any solution of this question is outside our Terms of Reference. We suggest, however, that for their remaining duties the Clerks should be paid such salaries as will constitute substantial remunera- tion for the professional work done, together with travelling and clerical expenses where necessary. We also suggest that for each division a chartered or incorporated accountant should be appointed as a consultant to sit with and advise the Commissioners on appeals whenever specifically required by them or by either party to an appeal ; such accountant to be remunerated by agreed professional fees. Both the Clerk and the Consultant Accountant should be appointed by the Local Appeal Commissioners, with the approval of the Board of Inland Revenue; and (subject to dismissal for due cause) should normally hold office for a term of five years after their appointment or re-appointment. SECTION VI. INSPECTORS OF TAXES* 373. The changes effected by time and circumstance in the administration of the Income Tax are nowhere better exemplified than in regard to the position of Inspectors of Taxes. As we said in paragraph 331 the original conception of the Income Tax system was that the assessment and collection should be undertaken by local bodies of Commissioners and the local officials appointed by them, while the officers of the Board of Inland Revenue who watched the proceedings on behalf of the Crown had only limited powers of inspection and objection. 374. Since the re-imposition of the tax in 1842 a great mass of new provisions has been added to the original scheme, the number of taxpayers has grown enormously, the complications of differentiation and graduation have been imposed on the old structure, allowances and reliefs have been multiplied, rates of duty have increased beyond all anticipation, and the Courts have formulated a great and growing body of Case law. Gradually — imperceptibly at first but in later years with increasing rapidity — the local bodies of Commissioners ceased to grapple with the ever increasing difficulties of administration, and tacitly allowed a large pro- portion of the work to be done by the Inspectors of Taxes, who, being whole-time officials, trained in Income Tax law and practice, and able to deal directly and without formality with the taxpayer, were better equipped to cope with the intricacies of the system than unco-ordinated local bodies meeting occasionally in formal session. 375. The Inspector has thus become the pivotal figure in the Income Tax administration, and is indeed the personification of the present system to the majority of taxpayers who, following the directions on the official forms, consult him in regard to their returns, the adjustment of their assessments, and the repayment of any sums to which they may be entitled. Behind the Inspector is the Board of Inland Revenue, by whose authority he acts in regard to all administrative matters, and beyond and independent of him are the General Commissioners and the Special Commissioners, the two appeal tribunals to whom taxpayers maj go if they fail to arrive at a satisfactory settlement with the Inspector. 376. When we were considering the position of the Local Commissioners and the local officials we necessarily dealt with some aspects of the position of Inspectors of Taxes, and made various recommendations; in paragraphs 345 and 356 we have recommended that some of the functions of the General and Additional Commis- sioners should be transferred to the Inspector, and in paragraph 369 that the clerical work of the Clerks to Commissioners should be handed over to him. In para- graph 386 we have proposed that the office of Assessor should be abolished and his work performed in the office of the Inspector of Taxes. In that Part of our Report which treats of the prevention of evasion, it will be found that we suggest that * These officials were until recently called Surveyors of Taxes. 84 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. increased powers should be granted to the Board of Inland Eevenue, and the execution of these powers will naturally be delegated, within safe limits, to the Inspectors of Taxes. 377. These recommendations are the result of a frank recognition of the part now played by the Inspector in the administration of the tax. They involve a considerable departure from the scheme contemplated by Peel, and by Pitt before him, but between the system as it is to be found in the Income Tax Acts and the system as we have found it actually working from day to day throughout the country, there is such a wide divergence that we can almost say that our recommendations, in the main, do little more than propose to give legal sanction to the existing practice, and concen- trate the work of local administration in the office of the Inspector, where in fact it is already largely performed. 378. It has been suggested that it would be a convenience to the public if central offices or " courts of aid " were provided where information could be obtained by the inquiring taxpayer. We are unable to believe that there is a real demand for this. As we have stated above, taxpayers do in practice go to the Inspector of Taxes for assistance as a matter of course, and he is almost invariably able to give the desired information. The suggested " courts of aid " could not do more; in fact, they would certainly do less, because they would necessarily approach their problems from a theoretical point of view, whereas the Inspector has in his possession the assessments and all relevant documents, and the eventual settlement of the case is a part of his normal work. The establishment of these information offices throughout the United Kingdom, while it would not materially relieve the work in Inspectors' offices, would require a new staff, and this staff must either be untrained, or, if trained, must necessarily be taken from the very limited skilled staff now at the disposal of the Inspectors. 379. It has been represented to us that it has hitherto been impossible to carry out certain contemplated improvements in administration owing to the shortage of adequately trained Inspectors and their clerks. This shortage has been especially felt in the period of the war, during which legislative changes have placed a greatly increased burden on all the officials concerned in the raising of Income Tax revenue. The Sub-Committee which recently inquired into the organisation and staffing of Government offices came to a favourable conclusion in regard to the efficiency oi the Inland Revenue Department, but they were inclined to advocate increase in numbers and in rates of pay. We have not taken any evidence on these points, con- ceiving that they are only indirectly connected with our Terms of Reference, but as we feel that the efficiency of the Income Tax must be largely dependent upon the provision of an adequate number of trained Inspectors and a satisfactory system for their recruitment, we venture to offer the following suggestions : — (a) that a sufficient number of Inspectors should be appointed to ensure that the interests of the Revenue are safeguarded, and that ail reasonable assistance is given to the taxpaying public; (b) that before an Assistant Inspector of Taxes receives his Commission appointing him to act as an Inspector he should pass an examination in accountancy, in economics, and in those branches of the law that have a bearing on the exercise of his duties; (c) that the remuneration attached to the office of Inspector should be such as not only to secure the recruitment of suitable entrants, but their retention in the Service after their training is completed. 380. We think it only right to put on record the fact that many witnesses have testified to the excellence of the work done by the Inspectors of Taxes. The capable exercise of the duties of these officers calls for a high degree of skill and training and judgment of men. They must have a detailed knowledge of Income Tax law and practice in all its intricacies, and a very considerable capacity for investigating complicated accounts. They have to encounter the best professional advisers, both lawyers and accountants, that the taxpayer can procure. The success of the tax must depend in a very special manner upon their tact, industry, and ability. It is evident to us that the assessment and collection of the enormous revenue now raised by the Income Tax could not possibly have taken place with so little friction and dissatisfaction if the Inspectors of Taxes had not as a body given devoted and zealous service to the State. PART IV.— ADMINISTRATION. 85 SECTION VII. ASSESSOES. 381. Assessors are appointed annually for each parish by the General Com- missioners ; and are remunerated by the Crown, through the Board of Inland Revenue. The office is a compulsory one. The chief duties which by Statute the Assessors are called upon to perform are (a) to issue forms of return for assessment under Schedules A and B ; (b) to issue return forms under Schedules D and E annually ; (c) to compile a list showing the names of all persons likely to be liable under Schedule D ; (d) to examine returns under Schedules A, B, and E when received, and to make the assessments under those Schedules ; (e) to make estimates of profits under Schedule D in cases where taxpayers fail to make returns. 382. To this general statement of their duties there are, however, important exceptions, viz. : — (a) the Inspector of Taxes is the Assessor (i) under Schedules A and B for the Metropolitan area in all years; (ii) for Schedules A and B in the rest of England and Wales in years which are not years of re-valuation; (iii) for all Schedules in Scotland in those areas where he is also Assessor under the Lands Valuation (Scotland) Act; (b) the Assessor has no part in the making of quarterly assessments upon weekly wage-earners, that duty being wholly performed by the Inspector of Taxes ; (c) in Ireland, where there are no Assessors, the Inspectors do all the work that falls to Assessors elsewhere. 383. In most parishes the Assessor also holds the office of Collector, but there are two or three large towns where the offices are kept separate and where the Assessors are whole-time officials who confine themselves to Assessors' duties. In those towns their work is adequately performed, and the Inspectors content them- selves with advising and assisting the Assessors and examining their assessments after they have been made. Owing to the increasing complexity of the Income Tax laws and of industrial conditions, the development of accountancy, the graduation of the Income Tax (which rendered it essential that the official who assesses should have a ready means of access to information from all parts of the country), and the consequently increased difficulty of making correct assessments, the more technical and important part of the work connected with returns and assessments has gradually fallen into the hands of the Inspectors. It is the Inspector, and not the Assessor, who examines the returns, prepares the assessments under Schedules A, B, and E in the vast majority of cases, estimates profits in the absence of returns, and settles with the taxpayer the amount of his Income Tax liability. 384. With few exceptions, the witnesses who have appeared before us have advocated the abolition of the office of Assessor, pointing out that the existence of that officer unnecessarily multiplies the number of officials and results in confusion to the public; and they have taken the view that if the work now inadequately dis- charged by the Assessor were clone in the Inspector's office, the change would prevent delay at various stages of the process, and give the Inspector a longer time in which to carry out the real work of making the assessments. We attach great importance to the work of assessment being in the hands of one set of officials. We find that even where the Assessor nominally performs his statutory duties the great bulk of the work of assessing is. in fact, done by the Inspector in all but the rarest cases, and that where the Inspector is by Statute appointed Assessor the system works quite satisfactorily and with less delay. 385. The principal arguments in favour of the retention of the Assessor are (a) that as he is resident in or near his parish his local knowledge is useful to the Inspector, who is an official liable to frequent removal from district to district; (b) 86 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. that he fulfils a useful function as parochial adviser to the taxpayer. We have no wish to depreciate the value of local knowledge so far as it consists of definite and ascertained facts in regard to the subjects of assessment, but as we have recommended the retention of the Collectors (who are in most cases the same persons as the Assessors), and as, moreover, much of this local knowledge is acquired in the course of the collection of the tax, such local knowledge as now exists will still be available from the Collector, even if the office of Assessor be abolished. With regard to the usefulness of the Assessor in his advisory capacity, we are satisfied that in the great majority of cases the technical knowledge and information at his command is quite insufficient to enable him to deal with the difficulties of a taxpayer except in the most elementary way, and that when a taxpayer applies to the Assessor with regard to his assessment he is usually referred to the Inspector. 386. The system, no doubt, worked well enough in the old days, but we are of opinion that it has outlived its usefulness; we accordingly recommend that the office of Assessor should be abolished and the duties assigned to that official, more especially the duties of issuing' and obtaining completed forms of return and of preparing lists and assessments, should devolve upon the Inspector of Taxes, subject to the delegation to the Collector of any of the Assessor's minor functions which could be usefully performed by him. SECTION VIII. COLLECTORS. 387. Collectors of Taxes were originally nominated annually by the Assessors for their respective parishes, and, if approved by the District Commissioners, the persons nominated were duly appointed. The office is an annual one, and its accept- ance was compulsory until 1879, when nomination by the Assessors was abolished and the right to refuse the appointment was granted. At the same time the Board of Inland Revenue were given power to appoint the Collector for any parish for which the General Commissioners had failed to make an appointment by the 31st May in any year. The position to-day is that about four-fifths of the Collectors are appointed by the General Commissioners and the remainder by the Board of Inland Revenue. The Commissioners have general control of the Collectors they themselves appoint, and even where they do not appoint and therefore cannot dismiss a Collector they still exercise a certain control ; for instance, the General Commissioners in England may whenever they think it expedient, and must whenever required by the Inspector, examine a Collector's accounts; they may also imprison a defaulting Collector under their own warrant ; and these powers they may exercise over all Collectors of Taxes, whether appointed by themselves or by the Board of Inland Revenue. All Collectors, however appointed, are remunerated by the Crown through the Board of Inland Revenue. 388. As the General Commissioners did not as a rule insist on a Collector giving security when he was appointed, any default on the part of a Collector was, prior to 1854. invariably met by a re-assessment of the parish, but in that year power was granted to the Board of Inland Revenue to require that any Collector should give security to their satisfaction. Where a Collector is appointed by the Board of Inland Revenue, or gives security to the Crown, the parish is not liable to re-assessment in case of default. In regard to Collectors appointed by the General Commissioners, the position in England and Wales at the present time is that either those Commissioners, or any two or more taxpayers, or the Board of Inland Revenue, may require security to be given; in regard to Collectors appointed by the Board of Inland Revenue (other than Collectors of quarterly assessments), the practice is that almost the whole of them are required to give security to the Crown. The Board of Inland Revenue generally require security to be given by Collectors in Scotland, who are for the most part Collectors of Customs and Excise, and by Collectors in Ireland, who are either Collectors of Customs and Excise or Collectors appointed by the Special Commissioners. PART IV.— ADMINISTRATION. 87 389. A Collector is by law required to reside in the parish for which he acts or in a neighbouring parish. There is nothing to prevent the Commissioners from appointing a person as Collector for several contiguous parishes, provided he is resident in one of them, but the position in the earlier years of " one parish one resident Collector " has not been sufficiently varied to meet modern conditions. More than half of the existing Collectors act for small and unimportant areas, with the result that, even with a fair payment for their work, they receive less than £1 a week exclusive of war bonus. This sometimes makes it difficult to find suitable persons to undertake the office. 390. We do not propose that the General Commissioners should be deprived of the powers they now possess in regard to a defaulting Collector or the examination of the accounts of a dilatory or unsatisfactory Collector, but we recommend (a) that all Collectors throughout the United Kingdom should be appointed by the Board of Inland Revenue ; (b) that the general management of the collection of the tax should be placed under the control of the Board of Inland Revenue who are answerable for the revenue imposed ; (c) that in those areas in which it is convenient, and as soon as it is administratively possible, Collectors of Taxes should become whole- time civil servants. 391. The appointment of permanent officials as Collectors would necessitate a redistribution of collecting areas, and would, we believe, result eventually in con- siderable economy in time, labour, and cost of collection. We suggest that the change should be made gradually, not only to avoid the dislocation that would otherwise result, but also in order to safeguard the legitimate claims of the existing Collectors. We have qualified the third of our recommendations because we think it will prove inexpedient to group under one Collector a number of sparsely populated parishes, for the reason that the Collector would be unable to acquire that local knowledge which is needed for the assistance of the Inspector. 392. If our recommendations are carried out some considerable saving might be effected in regard to Collectors' securities. For many years the average annual amount of guarantee premiums paid by Collectors giving security to the Crown has far exceeded the average annual amount recovered from guarantee societies in con- nection with defaulting Collectors. As the payment of the guarantee premium is a factor to be considered in fixing the remuneration of Collectors the burden of paying for the security really falls upon the State. If all Collectors were appointed by the Board of Inland Revenue there would be no need to take security, because the Department might prudently bear its own risk of loss by default; this would result not merely in saving the cost of the annual premiums, but also in eliminating the labour involved in dealing with the completion of some thousands of securities. 393. We have heard evidence suggesting that the Collectors of Inland Revenue w r ho in 1909 were transferred to the Customs and Excise Department and renamed Collectors of Customs and Excise, should be re-established under the control of the Board of Inland Revenue, and should, with the necessary staff, form the nucleus of a body for undertaking the whole of the collection of taxes in the United Kingdom. It has also been suggested that Collectors should be directly represented in the central administration. These are matters which, in our opinion, must be left to the depart- ments concerned; and w r e, therefore, make no recommendations in regard to them. It is conceivable that ultimately the collection of all revenue duties may be placed in the hands of Collectors recruited and paid as civil servants, but we believe the time is not yet ripe for any such action. SECTION IX. AREAS OF ADMINISTRATION. 394. In connection with our examination of the functions performed by the General Commissioners it became necessary for us to pay some attention to the delimitation of the areas within which each body of Commissioners exercises its 88 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. jurisdiction. Roughly speaking, these administrative areas, which are called " divi- sions " coincide with the areas into which counties were anciently divided for the purpose of the old Land Tax. We are satisfied that these administrative areas are not as convenient as could be desired, and we think that there is ample reason for their modification, as suggested by witnesses who have appeared before us. Our examination of the evidence has made it clear to us that these areas no longer bear any suitable relation either to the present means of communication or to the distribution of the population, and that as a result there is general inconvenience to the taxpayers and to the officials concerned. This leads to increased cost and difficulty in administration. 395. The representative of the Board of Inland Revenue whom we examined on this subject suggested that in any redistribution of areas regard should be had to the considerations that governed the Boundary Commissioners appointed for the purposes of the Representation of the People Act, 191&. He thought that the most convenient units of area for Income Tax administration would be, for England and Wales, the Municipal Borough, the Urban District, and the Rural District; for Scotland, the corresponding areas. No redistribution of -this kind is necessary in Ireland, as in that country there are no General Commissioners, and therefore no divisions, the areas of administration being fixed by the Board of Inland Revenue. The official witness proposed that the redistribution of the country into Income Tax divisions should be made broadly on the following lines : — (u) the City of London and each Municipal Borough, Metropolitan Borough, or Urban District in England, and the equivalent areas in Scotland, having a population of 50,000 or over, should constitute a separate Income Tax division; '(&) each administrative county (after excluding therefrom the Boroughs and those Urban Districts which become separate Income Tax divisions) should be divided on the basis of one division for each 50,000 of the population, provided that in forming these county divisions the Urban Districts and the Rural Districts should be taken as the units for aggregation ; (c) where it is found to be more convenient, an Urban District contiguous to a Borough that forms a separate Income Tax division should be included in that division instead of in one of the county divisions. 396. These proposals are, we think, open to slight criticism on two points. Firstly, the suggested minimum of 50.000 population may well prove too large for an administrative area in a sparsely-populated district; and secondly, it may not be advantageous to adhere too closely to the boundaries of the Administrative County in planning divisions. For example, we think it probable that the Rural District of Brandon, in Suffolk, would be most conveniently joined for the purposes of administration with the Borough of Thetford, in Norfolk, and for Income Tax pur- poses considered as part of the County of Norfolk ; and the Hawarden Rural District, in Flint, might be joined with parts of Cheshire, to form a division of which Chester would be the natural centre. 397. Subject to these slight modifications, we are prepared to recommend the official suggestions as a general basis for the rearrangement of the antiquated areas of administration now existing, and we propose (a) that a rearrangement of the areas of Income Tax divisions should be carried out by the Board of Inland Revenue in consultation with the Local Authorities concerned; (b) that the areas of administration of the Income Tax should be made completely independent of those of the old Land Tax ; and (c) that all powers relating- to the transfer, union, grouping-, division, and assigning of areas should be vested in the Board of Inland Revenue as the authority responsible for the general care and management of the Income Tax. PART IV.— ADMINISTRATION. M SECTION X. RECONSTRUCTION OF THE ACT. 398. We have already expressed our gratitude for the valuable work that has been accomplished in consolidating the Income Tax Statutes. That consolidation was advisable in any event, but as a preliminary step to any serious attempt to improve the general form and content of the Income Tax law it was absolutely indispensable. It has been suggested to us that we should recommend the drafting of a new Bill to take the place of the Consolidating Act and of any subsequent Income Tax legislation. We approve of this proposal, and recommend that steps should be taken in due course to prepare a Bill that shall contain the whole law on the subject in the most modern and approved form, and we put forward for favourable consideration in this connection the suggestions made to us on behalf of the General Council of the Bar as to the persons who might usefully be employed upon the drafting of such a measure as we propose. 399. The persons to whom this task may ultimately be entrusted will be in the best position to determine the general form that the Act should take, but considera- tion of the evidence before us inclines us to the opinion that a real codification should be attempted, by which we mean that the new Act should embody not merely the present statutory provisions, but all decisions of principle that have been arrived at by the Courts in interpreting those provisions. 400. It is not within our province, nor do we propose, to attempt any definitions, for the purpose of their inclusion in the new Bill, of those expressions in the old Act which have already been interpreted in the Courts. No complete or satisfactory definition of the word " income " appears to us to be practicable except by giving detailed descriptions of various classes of income, but we think that the charging words of the Statute should be enlarged so as to ensure that all classes of income which it is intended to tax should be plainly included within the scope of the tax. The various classes of taxable income should be defined, and specific details of what is or is not allowable expenditure should be given wherever practicable, the effect of the provisions being illustrated by examples. 401. While we consider it important that those portions of the Act which deal with the liability of the taxpayer should be fully set out, we are of opinion that the less important administrative matters, for example, the machinery for assessment and collection, might with advantage be dealt with in the new Act in a less particularized manner than in the old, leaving the details to be covered by statutory regulations. If these regulations were varied from time to time to meet new conditions, time and energy would be saved that otherwise might still have to be employed in complying with obsolete or old fashioned provisions which, once on the Statute book, are not easily removed. It would, we consider, be a great advantage to the taxpayer if the Act were to deal first of all with matters relating to returns, assessments, and appeals, which are to him of the most vital importance. Administrative provisions which are of less interest to him should not be intermixed with sections that concern him closely. They might even be relegated to a separate Act — an Income Tax Regu- lation Act — to which the taxpayer would seldom find it necessary to refer. 402. The most interesting parts of the Act to the taxpayer are the Rules which apply to the various Schedules under which income of different kinds is classified. In the Income Tax Act of 1918 these Rules are collected into a Schedule at the end of the Act, the least prominent and the least suitable position that could have been found for them. We are informed that this defective arrangement was considered to be necessary because technically the proper place for a Schedule is at the end of an Act and nowhere else. This may be innocuous as a general rule, but it has a very awkward effect in the Income Tax Act. If income had originally been classified under " Parts " instead of under " Schedules " we imagine that this objection would not have prevailed, and we think the present order of the Act so unfortunate in this respect that if the difficulty cannot be overcome in some other fashion the word " Part " should be substituted for the word " Schedule " so that these important Rules may find their fitting place in the bndy of the Act. S7926 Q 90 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 403. In the new codified Act to which we look forward, we are of opinion that these Schedules or Parts might be reduced in number and reconstructed on the follow- ing lines : — Part I — The present Schedule A, and that portion of the existing Schedule B which is charged upon lands from the occupation of which no profit is sought, that is to say, amenity lands or lands not used for business or agricultural purposes; Part II — The present Schedule C ; Part III — The present Schedules D and E, and that portion of Schedule B which is not included in Part I, SECTION XL ADMINISTRATION : MISCELLANEOUS. 404. Before leaving the subject of administration we think it well to deal with the suggestions that have been placed before us in connection with the date on which the Income Tax year ends, and with certain minor proposals put forward with a view to improving the present administration. 405. In regard to the year of assessment, it is perhaps hardly necessary for us to explain that the Income Tax is imposed by the annual Finance Act for a year commencing on the 6th April and ending on the following 5th April. It will be remembered that until 1751 the calendar year used to begin on Lady-day, the 25th March; the difference between the 25th March and the 6th April represents the famous eleven days that were " lost " when the calendar was reformed in 1751. It has been suggested to us that the 5th April is an inconvenient date for the end of the Income Tax year, and that it might with advantage be altered to the 31st March or even the 31st December. This Income Tax year is not to be confused with the financial year, ending on the 31st March, in respect of which the annual statement of the national finance is prepared. 406. The criticism has been partly based on the fact that many taxpayers make up their accounts to the 31st December and many to the 31st March, but that prac- tically no one chooses the 5th April as a date on which to close his books or accounts. As a matter of fact, whether an assessment is based on the profits of the preceding three years or on the profits of the preceding year the taxpayer is not obliged to reckon his year or years to the 5th April. Whether he makes up his accounts to the 30th June or the 30th September or the 31st December or the 31st March, or on any other day in the year preceding the year of assessment, it is the years ending on the date he has himself chosen for his own purposes that are taken as the basis for his assessment. At present, we are informed, about 50 per cent, of traders make up their accounts .to the end of the calendar year. To make the Income Tax year end on the 31st December might possibly be of some advantage to them but it would not help the others. It would be obviously impossible to compel taxpayers to make up their accounts to the end of the calendar year, and even if it were possible the result would be extremely inconvenient both to them and to their auditors. To be able to accept accounts made up to any date in the preceding year is an advantage to the Revenue officials, because it enables them to spread the important work of examining these accounts more fully over the year than would be possible if any plan were adopted which tended to encourage taxpayers to close their accounts upon a particular date. 407. Tf s.r in S to us to be an advantage to retain an Income Tax year which begins a considerable tine after the end of the calendar year, so that a large proportion of business men may have the opportunity of having their books closed and audited before the time comes for them to make, their Income Tax returns. We have decided that the balance of advantage is in favour of making the Income Tax year end upon the 31st March; and we suggest that if this alteration is made the year of change might, subject to suitable adjustments, be treated as a full yea r PART IV.— ADMINISTRATION. 91 408. We make the following recommendations in regard to minor questions of administration that have been the subject of evidence before us : — (a) that the appointment of officials concerned in the administration of the Act who are not permanent civil servants should be for a period of years unless revoked ; (b) that where it can be done without detriment to the public interest the general purport of the instructions issued to the Board's Inspectors, in so far as they affect taxpayers, should be made available to the public ; (c) that the Bank of England and the Bank of Ireland should no longer be assessed by Commissioners who are their own officials, but in the same way as any other company or corporate body. 409. It is perhaps needless for us to say that we have received numerous sugges- tions with regard to the administration of the Income Tax, a subject which intimately affects so many persons. A great many of these proposals we have been compelled to reject as being impracticable, not in the opinion of officials only, but in that of other persons who are brought into close contact with the realities of the task — of enormous magnitude and annual recurrence — involved in assessing and collect- ing Income Tax at a high rate from some millions of taxpayers. 27926 G 2 9? REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. PART V. ASSESSMENT, APPEAL, AND COLLECTION. 410. We have now dealt with the main structure of the administration of the tax, having deliberately confined ourselves in the immediately preceding Part of our Report to questions relating to the Commissioners and the officials who put into practice the various provisions of the Acts. We are now in a position to treat of more detailed matters, and in this Part we shall consider the various processes of assessment, appeal, and collection that take place before the taxpayer's contribution to the revenue of the United Kingdom actually finds its way into the Exchequer. 411. We begin by considering first the returns that the taxpayer has to complete, and secondly the actual making of the assessments by the assessing authorities. Then we take the five Schedules in order and deal with the particular problems that arise under each Schedule. These include questions relating to the valuation of property; the profits from the occupation of land, with the special difficulties that emerge in the case of woodlands; the profits of trades and professions and employments; and the important but exceptional cases of Life Assurance companies, Local Authorities, and Co-operative Societies. Super-tax is treated by itself in a separate Section. Then we deal with the taxpayer's right of appeal to the Commissioners and to the High Court, and subsequently with the collection of the duty charged by the assessments as confirmed either on appeal or in the absence of an appeal. At the end we devote a Section to matters connected with the repayment of any duty overpaid by the taxpayer. SECTION I. RETURNS FOR ASSESSMENT. 412. As a step preliminary to assessment the taxpayer is called upon to make a return of the income to be assessed. Forms of return are supplied by the Board of Inland Revenue, and issued by the Assessor, but if our recommendation (see paragraph 380) that the office of Assessor should be abolished is acted upon, the forms will be issued by the Inspector of Taxes. The form which is sent to the tax- payer for completion naturally varies in character with the purpose for which it is required, different forms being supplied for the different Schedules into which income is divided in the Acts, and special forms for certain special types of income. These forms for individual returns are termed " particular notices " in the Act. In addition to these, the attention of the public is drawn to the necessity for making returns by notices affixed to the doors of churches, chapels, market houses, &c. These notices are in the Act referred to as " general notices," but they are commonly spoken of as " church door notices." 413. Affixing a " general notice " is in law sufficient intimation to all persons resident in the parish (whether they have been served with " particular notices " or not) that they must make their returns by a specified date. We have been told that notices affixed to the doors of churches no longer achieve that complete publicity which it is the object of their exhibition to ensure, and that to continue to regard them as sufficient legal notice is antiquated and not in accordance with modern ideas. There is a certain amount of justice in this criticism, and we think that, instead of church door notices, public notices, drawn so as to constitute good legal notice of the general liability of all taxpayers to make Income Tax returns, should be displayed at all post offices and affixed to the official notice boards of nil Local Authorities. 414. Of the " particular notices," i.e., the forms of return issued to individual taxpayers, the most important is the return for assessment under Schedule D, Form No. 11, which, with its enclosed sheets of notes, explanations, and instructions, is printed ;i- Appendix No. 5 to the Minutes of Evidence. It is round this form that most of the erit ave heard on the aubjert has gathered. Form No. ll h. in PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 93 truth, a formidable production, though familiarity — more often we fear familiarity with its outward appearance than with its contents — has robbed it of much of its legitimate terror. Mothing could be easier than to find fault with it. Many wit- nesses have done so. Some of them have even been bold enough to draft a revised form. But it is easier to attack this document than to produce sound and defensible proposals for its improvement, and we regret that the suggestions wo have received from witnesses in this connection have not proved of much practical help to us. 415. It is a common reproach that the form and its enclosures are too compli- cated and overcrowded with information, and that the instructions to the taxpayer are often couched in obscure and technical language. The difficulty is that the word- ing of the form must inevitably be based on the wording of the Income Tax Acts. To simplify the language of the form at the expense of accuracy, though it might be harmless ami even helpful to many taxpayers, would in certain cases leave the Board of Inland Revenue open to the charge that they were giving the taxpayer garbled information, and seeking to pass off an official gloss or interpretation of the law as the law itself. No Government Department can be expected to expose itself to an attack of this kind. In the new codified Act, concerning which we have made pro- posals in a previous Section, it is possible that something could be done in the way of simplifying the language of the Statutes themselves, and if it is practicable to do anything in that direction any measure of simplicity so achieved will naturally be reflected in the language of the form of return. 416. Further, we cannot ignore the argument that the complexity of the form is largely due to the fact that we live in a complicated world. Each taxpayer cannot have a form specially designed to meet his own case; the same form therefore must be made to cover a great diversity in the circumstances of the persons who have to make returns; the mass of instructions issued with the form is partly accounted for by this reason, and partly by the numerous provisions for the relief of special classes of taxpayers that are to be found in the Statutes. If particulars of any of these reliefs were to be omitted from the forms, the critics who now lament their com- plexity would be the first to complain. 417. The Board of Inland Revenue have done something in the direction of simplifying the Schedule D return form by designing separate varieties of the form to suit the special circumstances of certain classes of people. This seems to us to be a wise departure from the old idea that the form must be capable of universal application to every possible variety of circumstances. We should welcome an extension of this system, and, if the duty of issuing return forms is in the future to form part of the work to be carried out in the office of the Inspector of Taxes, we have no doubt that more and more discrimination of this kind will, as time goes on, be able to be made. It has also been suggested, and we think there is some force in the suggestion, that the wording of the vital parts of the return should take an interrogative form, inviting definite answers to a series of direct and plainly worded questions. 418. Whatever changes are made in the operative parts of the form, it is obvious that for its proper completion a great deal of detailed instruction is neces- sary for the guidance of the ordinary taxpayer, but we think that the amount of matter now printed on the form itself is excessive, and by its very mass spoils the effect of the form as a direct request for information. Of the many suggestions which have reached us in this connection, we think the best is that a small handbook of instructions, couched in fairly simple language, should be published officially and made available to the taxpayer at a low price. In this pamphlet each of the main classes of income should be dealt with separately, and wherever possible all prin- ciples should be illustrated by examples. 419. We do not endorse the suggestion that the return form should be so con- trived as to serve also as a claim for repayment. A form of this kind would not be applicable to the vast majority of the persons to whom it was issued and the additions necessary would merely add to the complexity of a form that is complicated enough already. r 420. It has been proposed to us that where a limited company has produced its accounts and agreed upon the amount of its liability under Schedule D with the Inspector ot Taxes, the completion of the ordinary Schedule D form should not be 27925 G 3 Oi REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. r insisted on, but that a simple form of concurrence in the amount of liability agreed upon should suffice. This we do not recommend. Each taxpayer should make a return in due legal form so that he may be held completely and legally responsible for its entire accuracy to the best of his knowledge and belief. 421. We recommend that there should be an obligation on every person whose income exceeds the limit of exemption to make annually a return of the whole of his income. We think that if this requirement were insisted upon, not only for revenue purposes but also for national statistical pur- poses, it might be possible to make administrative arrangements to relieve taxpayers from their present liability to make separate returns in respect of separate sources of untaxed income. We also approve of a minor suggestion that has been made to us, namely, that a duplicate of the form, on paper of a distinctive colour, should be issued with the form, so that the taxpayer should be able for future reference to keep a copy of the return he has made. 422. It has been proposed that Income Tax returns should be made available in evidence whenever the question of a person's income becomes a subject of legal inquiry. We are firm in the conviction that the successful administration of the tax demands that secrecy should be maintained, and that the sanctity of the return should not be violated; but we think that a judge of the High Court should have power to order the production of an Income Tax return after considering any grounds of objection put forward on the part of the Revenue. SECTION II. MAKING OF ASSESSMENTS. ±2:3. We propose to consider under this heading the place at which the taxpayer is to be assessed; questions relating to additional assessments and surcharges; the various methods of assessment open to the choice of the taxpayer; and the way in which profits of partnerships should be assessed. 424. Although assessments under Schedules D and E are valid if made where the taxpayer ordinarily resides, the greater part of the income charged is in fact assessed in the parish where it arises. This course is generally convenient, but where a taxpayer has many sources of income in different parts of the country it results in his receiving several forms of return and several notices of assessment; this, in exceptional cases, may lead to confusion in his mind, and to some doubt whether he has received the whole of the allowances and reliefs to which he is entitled. In regard to that large class of income which is derived from the owner- ship of property, it is clear that if the tax is still to be collected from the occupier of the property, income of this description must be assessed where the property is situated. With regard to other classes of income, the place where the income arises is for many reasons the place where it can be most suitably assessed. 425. In our opinion it would be desirable, if it were practicable, to assess the total untaxed income of each person in one sum at the place of his business or resi- dence, but the necessity for classifying income by reference to the source from which it is derived prevents the attainment of that ideal, and we have not been convinced that any sufficient reason exists for incurring the great expenditure of time and labour thai would be caused by the aggregation of the total liability of each taxpayer and the making of one charge upon him in respect of all his untaxed income. At the same time we agree that the taxpayer should not be put to undue trouble from this cause. We have suggested in paragraph 421 the possibility of one annuaJ return being made to include all sources of income, and the utilization of that return for the purpose of notifying the Inspectors of Taxes for the districts in which the various liabilities arise; but we believe that these sources of income must still he separately assessed, and the separate assessments notified to the tax payer, if, in cases of exceptional complication, the taxpayer is unable to follow calculation of the amount he is called upon to pay, the Inspector to whom his return has been furnished should obtain for him, on request, any necessary explanation PART v.— assessment, appeal, AND COLLECTION. 95 426. The Commissioners can, under the present law, make additional assess- ments within three years of the end of the year of assessment. This interval has been variously represented to us as too long, and too short. We are certainly of opinion that the time given for remedying insufficient assessments should not be shortened ; on the contrary, we think there is good reason for lengthening it. It must not be forgotten that an under-assessment is generally the result of some error or omission on the part of the taxpayer, and that the discovery of this omission by the Revenue authorities is often a matter of time and chance,' whereas the information may be presumed to be in the hands and within the knowledge of the taxpayer all the while. It may happen that the error is not discovered until the tlwee years' limit has been passed, and then it is too late for the Commissioners to put the matter right by additional assessment. We recommend that it should be competent to make additional assessments at any time within six years after the end of the year of assessment, and that in cases of fraud there should be no time limit to the recovery of tax. In this connection we should like to make a brief reference to the proposal that was made to us that additional assess- ments should not be made except in cases where new facts are ascertained. We think it would be impossible to compose for this purpose any adequate definition of a new fact. Additional assessments are presumably not made unless there is good reason to believe that the true liability has not been covered by the existing assess- ment ; the taxpayer has always the right of appeal ; and if the previous assessment is, after investigation, found to be inadequate, we cannot see why the taxpayer should want to be excused from paying his just dues. 427. If an Inspector of Taxes discovers that a person liable to tax has not been assessed, he may raise what is known as a " surcharge " within three years after the end of the year of assessment, the person surcharged having in all cases a right of appeal to the Commissioners. Originally this power of surcharging extended both to cases where there was no previous assessment and to cases where there was merely an under-assessment, but by what we are informed was an error of consolida- tion in the Taxes Management Act, this power has, since 1880, been confined to cases where there has been no previous assessment on the source of income in question. A surcharge may, of course, be quite as necessary in the one case as in the other, and this accidental limitation should, in our opinion, be rectified. We recommend that the Inspector's powers of surcharge should apply to cases of under-assessment, as well as of non-assessment, and that the time limit for making a surcharge should be extended so as to agree with the time limit for making additional assessments. 428. A person liable under Schedule D may under the present law elect to be assessed (a) by the Local Commissioners " under a number or letter," or (b) by the Special Commissioners. If he makes no election he is assessed by the Local Commis- sioners in the ordinary manner. The number of assessments made under a number or letter is very trifling. We are satisfied that the alternative of being assessed either by the Local Commissioners or by the Special Commissioners is quite sufficient to meet all circumstances, and we recommend that assessment under a number or letter should cease. 429. We have received several complaints about the manner in which the income of partnerships is assessed. The law provides for the profits of a partnership being returned and assessed in one sum. Although the profits are charged in one sum the individual partners are not deprived of their title to their proper family and other allowances, nor of their right to be charged at the rates appropriate to their respective total incomes. The liability of the partnership is therefore an aggrega- tion of the liabilities of the individual partners. If all the partners are liable at the full rate there is usually no harm done; but where, as frequently happens, some of the partners are liable at reduced rates, the notice of assessment, which is sent to the precedent acting partner, may reveal to him information about the private affairs of his partners. This very undesirable state of things calls for a remedy. At the same time it is important to be able to secure a complete return of the partnership profits from the senior partner, and to maintain the position that the total tax payable in respect of the partnership profits shall be a liability of the partnership .is such. Wo consider that the profits of the p; hip as a whole should still be returned in one sum by the precedent acting partner, and that he should be responsible for showing how that profit is divisible among the partners, but we 27925 G i 96 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. recommend that it should be open to any partner to claim that his share of the partnership profits should be separately assessed (at the place of business) so that his private concerns may no longer be made known to his fellow partners. Any charges existing upon the firm's income, for interest, etc., should still be assessed on the firm as hitherto, and the making of any such separate assessment upon a partner should be subject to the ultimate right of the Crown to recover from a firm any tax due from an individual partner in respect of an assessment upon his share of the firm's profits. In determining the amount of a partner's share, the division of the assessment should be made as at present, according to the shares to which the partners. are respectively entitled during the year of assessment. 430. The division of the profits of a partnership among the members in defined proportions also gives rise to special problems in connection with the application of our recommendations with regard to cessation and succession (see paragraphs 484 and 485). We think that a change in the constitution of a partnership should ordinarily be treated as a succession but, if the Commissioners determine that the change amounts to the setting up of a new business, the firm as newly constituted should be entitled to be charged as for a new business from the date of change, and the firm as constituted prior to the change should be charged as for a discontinued business. 431. The question as to the correct method of calculating profits has been raised by several witnesses in the course of their evidence, but we consider that the applica- tion of the principles under which the tax is levied is a matter to be decided by an appeal to the Courts if the taxpayer and the Crown cannot reach a settlement satisfactory to both. As an instance, we had before us witnesses who objected to the method of calculating for Income Tax purposes the profits arising from selling on hire-purchase, but we found that no effort had been made to test the legality of the method adopted by the Revenue and objected to by the taxpayer. We feel that we are not in a position to make any recommendation when such an obvious course has not been taken, but we consider that we should not be exceeding our province if we were to express the view that it is generally desirable to adopt as the basis of liability the profits calculated by the method generally employed throughout a trade or industry, when that method does not contravene the principles under which the tax is levied. SECTION III. SCHEDULE A. 432. Income arising from the ownership of property in the United Kingdom is divided into three classes : — No. I, which is by far the largest class, includes all properties other than the exceptional cases dealt with under No. II and No. Ill ; No. II includes a few odd cases of profits that arise from property, e.g., certain ecclesiastical dues, profits from manors, and fines received in consideration of the demise of lands ; No. Ill deals with properties which partake of the character of commercial undertakings, and includes railways, quarries, mines, ironworks, gasworks, waterworks, docks, markets, and other concerns of a like nature. 433. The basis for assessment is in all these rases the "annual value,' - but whereas under No. I of Schedule A the annual value is the rental value, the annual value under No. II and No. Ill is based upon the profits. Thus a mine or a gasworks is not assessed on what it is worth to be let by the year, but on the full commercial profits of the undertaking. The anomalies that arise from assessing under Schedule A the profits of what are in many cases ordinary trading concerns have long been recognized. Why a railway should be assessed under Schedule A and a tramway under Schedule D, why a gasworks should be assessed under Schedule A and an electricity undertaking under Schedule D, are questions not easy to answer PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 97 with any degree of satisfaction. In 1866 it was provided that concerns described in No. Ill of Schedule A should be assessed " according to the Rules of Schedule D" ; but these concerns were not actually taken out of Schedule A, and the Rules of Schedule D were to be applied only in so far as they were consistent with the Rules of Schedule A. It seems to us that the time has come when the scope of Schedule A should be restricted to properties of the ordinary kind, and we recommend that the properties now comprised in No. II and No. Ill of Schedule A should be wholly transferred to Schedule D. This will leave in Schedule A only one class of property, that is to say, properties which are assessable on their rental value. With the method of arriving at their annual value and the question of their periodical re-assessment we propose to deal in the next Section of our Report. 434. Our attention has been called to some comparatively trifling alterations that are necessary to prevent loss of revenue under Schedule A in certain circum- stances. (a) If a house is unoccupied for a whole year no tax can be charged upon it. although the owner may still, under the provisions of a lease, be receiving his rent. There is no reason why the owner in such a case should escape tax upon that rent, and we recommend that in the case of a void property for whichj ja rent is receivable the owner should be made chargeable on the rent under Case VI of Schedule D. (b) Another case of under-assessment occurs when properties are let on rentals in excess of the Schedule A assessment. This question is one which is apt to arise especially in connection with licensed premises, and with houses in London, where fancy rents are not uncommon. Under the Valuation (Metropolis) Act, 1869, the Schedule A assessment follows the Poor Rate valuation, which is made on what is assumed to be the normal rental. We recommend that these excess rents should also be chargeable on the owner under Case VI of Schedule D. (r) Where the Crown is a rent-paying tenant of a property a difficulty is some- times encountered. Schedule A is normally chargeable on the occupier of a property, and as the Crown cannot be assessed to Income Tax, there have been instances where landlords have refused to allow deduction of Income Tax from the rents they receive from the Crown. To remedy this state of things we recommend that the owner of property rented by the Crown should be chargeable to the tax as if he were the occupier. (d) The assessing authorities should also have power to charge any property that happens not to be included in a valuation list. 435. We recommend two minor alterations in connection with the deduction of tax under this Schedule : — (a) that a tenant should be compelled to produce the Collector's receipt when deducting tax from his rent, and that, whenever required, a separate receipt for the tax paid under Schedule A should be issued for this purpose; (b) that a tenant, except a tenant under a repairing lease, should not be able to deduct from his rent an amount of tax exceeding the tax on the rent, less the appropriate deduction for repairs and less a further deduction for tithe rent charge where it is assessed directly on the tithe-owner. SEC I K)N IV. THE VALUATION OF PROPERTY. 436. In the course of our investigations we have been impressed with the anoma lies that exist in the methods of assessing property in the United Kingdom charge- able under Number I of Schedule A. The basis for assessment is the " annual value," that is. the rackrent at which the property is let if the rent has been fixed within seven vears, and if not so let, then the rackrent at which it is worth to be 98 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. let by the year; but the means adopted for ascertaining this annual value differ con- siderably in various parts of the Kingdom and are not, in our opinion, wholly satisfactory. 437. (a) In England and Wales (excluding the administrative County of London) a re-valuation is made at intervals, usually of five years ; but owing to war conditions no re-valuation has been made since 1910. (b) In the Administrative County of London the gross value in the valuation list is, by the Valuation of Property (Metropolis) Act, 1869, made conclusive for the purposes of Income Tax, Schedule A. (c) In Scotland an annual valuation roll is compiled under the provisions of the Lands Valuation (Scotland) Act, 1854. This valuation roll is conclusive for the annual value of properties, both for local rates and national taxes, in those districts where the Inspector of Taxes holds the office of Lands Valuation Assessor, and though not conclusive for the purpose of Income Tax in other districts it is only in rare cases that it is found necessary for any exception to be taken on the part of the Revenue to the annual values appearing in the valuation roll. (d) In Ireland the Poor Rate valuation is taken as the annual value for the purpose of Schedule A. 438. In any year in which there is no re-valuation the annual value of the pre- ceding year is continued ; but in practice in England and Wales (outside the Metro- polis) any decrease in annual value is followed by a downward adjustment of the assessment. On the other hand, any increase in the annual value cannot be assessed unless there has been some structural alteration or improvement, or some division of the property which in effect creates a new subject of assessment. As the last general re-valuation took place in 1910 the annual loss of revenue at the present time due to the staleness of the assessments is very considerable. 439. We have been informed by witnesses from the Board of Inland Revenue that a re-assessment of the whole country at one and the same time has in the past been an unjustifiable strain upon the Department, which is staffed with a view to cope with the normal work of a year which is not a year of re- valuation; that the result is, therefore, never entirely satisfactory; and that to attempt a complete re- valuation under present conditions would be impossible. Two alternative schemes have been suggested for getting over the difficulty : — (a) to spread the next re-valuation over a period of five years, and thereafter to re-assess one-fifth of the country, or one-fifth of each district, in each succeeding year ; and (b) to prepare a valuation roll, similar to the valuation roll in use in Scot- land, which would provide the material for a re-assessment in any year in which it was required. 440. The method of valuation adopted in Scotland makes it possible to adjust the assessments for Income Tax under Schedule A each year, and this annual correction, though it has no legal sanction, seems to be generally approved, and should, in our opinion, be legalized. We also recommend that a similar system should be set up in England and Wales (outside the Metropolis), that is to say, as part of the normal work of the Inspector of Taxes, whose staff should be augmented for the purpose, a valuation roll should be compiled and kept up to date; and the Income Tax assessments should be based on that valuation. A Revenue witness estimated that there would be a net revenue gain of £150,000 per annum if this system, which we consider would be both equitable and convenient, were adopted. Three conditions should attach to this method; (a) that every property should be re-valued at least once in six years, (b) that property in the occupation of the owner should not be re- valued more often than once in two years, and (c) that a taxpayer should have a right of appeal in respect of any re- valuation. 441. In Iceland the position differs very considerably from that in other parts of the United Kingdom. It will be remembered that the tax was not extended to Ireland until 1853, when it was provided that the existing valuation of property Imi' I 'our Rate purposes should be the basis of assessment under Schedule A. The Poor Kate valuation then taken is still in force for Schedule A purposes throughout PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 90 the whole of Ireland, excepting the County Borough of Belfast. The County Borough of Dublin has recently been re- valued for Poor Rate purposes, but the new- values have not yet become operative for Income Tax. As regards land, the old Poor Rate valuation was not based upon rent, as the Schedule A assessments in Great Britain are. but rather upon an estimate of the productive capacity of the land; and the valuation of houses and buildings corresponds in effect to the rate- able value (that is the annual value after deducting the cost of repairs) and not to the gross estimated rental of the English Poor Rate (which represents generally the annual value before such deduction is made). It follows, therefore, that the Sche- dule A assessments in Ireland are defective if measured by the standard adopted for charging Income Tax on property in Great Britain. 442. We consider that it is undesirable for a basis of assessment to exist in Ire- land differing from that in force in Great Britain. No doubt other considerations must be taken into account before definite steps are taken to bring the Irish valua- tion into line with the rest of the United Kingdom, but we suggest that a re-valu- ation for the purpose of Income Tax Schedule A should be made in Ireland at the first practicable opportunity, with a view to the assessment of all properties on their full annual value. 443. We are unable to accept the suggestion which has been made to us that every owner of property should be given the option in any year of being assessed under Schedule D in respect of his income from land and houses. This would be an entirely one-sided arrangement, as the option would obviously only be 'exercised when it was to the advantage, of the taxpayer. Moreover, in addition to the loss of duty involved, there would be a heavy increase in the cost of administration entailed by the extra labour of examining the detailed accounts that would have to be supplied in support of the claims. 444. In concluding our review of this part of the subject we may refer to the expediency of having one valuation for national and local purposes in England and Wales outside the Metropolis. We find that the system works well in the Metropolis, and though we have not taken evidence that would justify us in making a definite recommendation, we think that proposals for a joint valuation for the purposes referred to should receive serious and sympathetic consideration. SECTION V. THE OCCUPATION OF LAND. 445. From the very beginning of Income Tax in this country profits arising from the occupation of land have been treated exceptionally. A separate Schedule — Schedule B— was devoted to them, and the basis of charge under that Schedule has always been an artificial or conventional one. The statutory or taxable income under Schedule D is to a certain extent an artificial creation, but it is invariably related to actual profits. The statutory income for assessment under Schedule B. on the other hand, is not related in any way to actual income but to the annual value of the land occupied. In the early days the plan adopted was to assess the farmer "ii the rental value of his land but to charge the duty on that assessment at a tain fraction of the normal rate of tax; later the reverse method was favoured, that is to s ;i y, the normal rate of tax was imposed but it was charged only on a fraction of the annual value. In either case the underlying theory was that there was some regular correlation between the rental value of the land and the farmer's profit. 446. From 1896 to 1915 one-third of the rental value of the land was by Statute taken as the conventional measure of the occupier's profits. This basis applied to all parts oi the Kingdom and to all varieties of occupation. In 1915, owing to the growing prosperity of agriculture, the full annual value was taken as the basis instead of one-third of the annual value, and in 1918 this was increased to twice l!l( ' annual value. \t present, therefore, except where lands are not occupied for the po > of husbandry, or mainly for those purposes, the occupier of land is assumed to make as his own profits a sum equal to twice the rent or annual value of his land 100 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 4-17. The adoption of this arbitrary method of assessing profits by relation to annual value was accompanied by a provision that a farmer who in fact made no profit, or less profit than he was assumed to make, could get his assessment reduced to the amount of his actual profits on satisfying the Commissioners. This remedial provision was no doubt necessary to avoid great injustice in special cases, but the results of the system as modified by this concession are by the nature of things bound to be one-sided and unfair. Farming is essentially a business in which profits fluctuate from year to year. When a good year comes the farmer pays on his conventional Schedule B assessment though his profits may greatly exceed that amount. When a bad year comes and his profits are less than the assumed profit he invokes the remedial provision and pays only on his real income. He has, there- fore, an option which is not enjoyed by any other class, of paying for any year either on the assumed profit or on the real profit, whichever is the smaller. 448. He has the further option of electing to be assessed under Schedule D, which entitles him, for the year of election, to be assessed upon the average of the three preceding years, but in practice this option is rarely exercised. 449. It is clear that the defects we have described are inherent in any system under which an arbitrary basis is taken as the measure of profits. If the chosen basis is fair as an average over the whole industry it is too large for the unsuccessful man and too small for the successful. If the basis is fair on an average of years it is too low for good years and too high for bad years. The Legislature is in practice compelled to grant relieving provisions to meet both the case of the unsuccessful farmer and the case of the bad year, and the result is great inequality. At present the farmer who is uniformly unsuccessful need not, it is true, pay on more than he makes; but the successful farmer need not pay on more than his con- ventional assessments though these may be much less than his full profits. 450. The reason why farmers were originally given this exceptional treatment was no doubt because as a class they did not at that date keep such books of account as would have enabled them to make proper returns of their profits. The same argument has been used in recent years. If farmers at the present day do not keep books we think such a state of affairs is to be deplored, but we see no reason why specially favourable Income Tax treatment should be allowed to them as a con- sequence of that neglect. We have indeed been pressed to recommend that farmers should be compelled by law to keep accounts, and in this connection we would draw attention to that Part of our Report which deals with Prevention of Evasion. We are of opinion that the difficulties we have there indicated in the way of compelling the keeping of proper accounts apply perhaps more strongly to farmers than to any other class, but we are not on that account driven to accept the present unsatisfactory system as incapable of alteration. 451. We feel strongly that an arbitrary basis tempered by concessions should not be tolerated any longer than is absolutely necessary. Many witnesses have supported this view and have given evidence in favour of transferring the profits of agriculture to Schedule D, so that the farmer may be treated for Income Tax purposes in the same way as any other producer or trader. 452. We think that the justice of this course cannot be denied, and we recom- mend that the transfer to Schedule D should be made, but we think that reasonable notice of this change should be given in order that the persons affected may have the opportunity of keeping those records which are necessary to determine liability under Schedule D. As the additional work involved to the administration by this sugges- tion will be considerable, we think it probable that the change cannot properly be effected all at once, but that a beginning should be made by transferring to Schedule D the assessments on persons occupying farms exceeding £300 in annual value and farms used for producing special crops such as hops, or specially devoted to the breeding of pedigree stock, leaving other occupiers of agricultural land to be transferred as soon as possible. Whether or not our recommendations in regard to the assessment of agricultural land are carried into effect generally, we suggest that lands occupied for purposes ancillary to a trade or business should be dealt with as part of that trade or business. 453. We have elsewhere recommended that the basis for assessment under Schedule D should be the profits of the preceding year, and. if the assessment of PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 101 the profits of agriculture were transferred to that Schedule a farmer would be assessed for the year beginning on the 1st April, 1921, on the results shown by his accounts for, say, the year to Michaelmas, 1920, or Lady Day, 1921, according to the date on which he made up his accounts in the twelve months ending 31st March, 1921. 454. We have been asked to consider whether the annual value of a farmhouse should be included in the assessment under Schedule B upon the tenant. We con sider that so long as the lands are assessed by relation to the annual value that value must include the value of the farmhouse, whether the farmhouse is occupied by a tenant or an owner. Some consequential adjustment of the House Duty assessment may be necessary if this course is followed. 455. One further point remains to be considered in regard to the assessment of agricultural land, viz., whether a tenant should be allowed a deduction in respect of repairs undertaken by him. We do not agree that any such deduction should be made where the land is assessed on a conventional basis of profit. Indeed, the fact that the tenant undertakes obligations which usually fall upon the landlord, and so in effect pays an additional sum for the use of the land, is a reason not for diminish- ing but for increasing the conventional value upon which he is assessed. The point does not arise at the present time if the tenant is assessed on his actual profits, nor will it arise when the assessment is transferred to Schedule D, because charges for repairs will be included with other working expenses as a debit in the accounts upon which his assessment will be based. 456. With regard to land occupied for purposes other than husbandry, usually called amenity land — which in many cases produces no pecuniary profit to the occupier — different considerations apply. The assessment of land of this kind which produces no profit is an exception to the general scheme of the Income Tax which seeks to charge only the actual profit. The best reason for this charge appears to be that the lands so occupied " unprofitably " might, if used in some other way, yield a profit to the occupier, and some conventional standard of assumed profit must there- fore continue to apply to such lands. We suggest that the basis for assessing the assumed value of the occupation of such lands (under Schedule B or Schedule D as may be found most convenient) should be their annual value to a tenant if used for agricultural purposes : Schedule A being still assessed on the annual letting value of the lands in their present condition. 457. It has been represented to us that playing fields belonging to or rented by societies whose aim is to provide recreation at a small cost to the workers of the community, and without thought or desire for profit, should be exempted from liability under Schedule B. We think that this matter should be governed by the recommendations we have already made in regard to charities. 458. We have had evidence which reveals a very anomalous state of affairs in the assessments of the profits of occupiers of land in Ireland. The Irish farmer has had since 1915 the option of being assessed under Schedule B on the basis of (a) the Poor Law valuation ; (b) the judicial rent; (c) the annual interest in lieu of rent under the Land Purchase Acts ; (d) the purchase annuity under those Acts ; whichever of these four amounts may be the lowest. There is no sufficient reason for granting him this choice — which in many cases works out to quite ludicrous results — and we consider that so long as, and to the extent that, occupiers of land remain chargeable under Schedule B. this indefensible privilege should be withdrawn. SECTION VI. WOODLANDS AND SPORTING RIGHTS. 459. Our investigations have led us to the belief that there are few more difficult subjects of assessments than woodlands. The direct return from property of this kind arises when the timber is cut, and the period of maturity varies greatly and is sometimes a very long one. The difficulty of dealing with the resulting J02 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. profits under a system of taxation which has regard to profits of a more or less annual character will be obvious. 460. Prior to 1915 woodlands were assessed under Schedules A and B in the ordinary course, i.e., on the annual value for Schedule A and on one-third of the annual value for Schedule B. The Finance (No. 2) Act of 1915 increased the charge under Schedule B from one-third of the annual value to the full annual value, and at the same time extended to the occupiers of woodlands the option, already existing in the case of lands occupied for husbandry, of being assessed under Scheduled, provided that the woodlands were managed 'on a commercial basis and with a view to the realization of profits. Any election to be assessed under Schedule D was to apply to all woodlands so managed on the same estate, and was to have effect for all future years so long as there was no change of occupier. The Finance Act of 1916 provided that woodlands newly planted or replanted after the passing of that Act should be treated as a separate estate for the purpose of Schedule D assessment, if the occupier gives notice to that effect within one year of the planting or re- planting. At the same time the provisions for repayment in respect of losses were made applicable to the case of losses incurred on woodlands assessed under Schedule D. 461. So far then as concerns newly planted or replanted areas, the occupier, if he manages his woodlands on a commercial basis with a view to the realization of profits, can so arrange that he will pay upon neither more nor less than the actual profits, both the expenses of planting and the receipts from the sale of timber being treated as elements in the calculation of profit or loss. 462. We agree with the opinion expressed by witnesses that, in' the interests of the nation, the planting of woodlands should not be discouraged, and we think that the present legislation, which places persons who now plant commercially managed woodlands in the same position as any other trader carrying on business, is correct in principle. 463. There remain to be considered (a) woodlands which are not managed on a commercial basis with a view to the realization of profit, but maintained for their amenity or sporting value; and (6) woodlands, at a more or less advanced stage of maturity, which have borne tax under Schedule B for a period of years when there was inconsiderable profit or no profit from fellings, and to which the application of taxation under Schedule D on actual profits might be a hardship. 464. In paragraph 456 we have made recommendations in regard to land which is usually known as amenity land. We entirely disagree with the suggestion that lands not occupied for profit-making purposes should be assessed under Schedule D. This presupposes an intention to make profit when no such intention exists, and no profits in the ordinary sense can possibly arise. We therefore suggest that wood- lands (considered apart from the sporting rights), when they are not used with a view to the realization of profits, should be dealt with as other amenity lands. 465. In regard to woodlands managed onacommercial basis which are approach- ing maturity, and which will, in the normal course, yield profits to the occupier, the effect of changing from Schedule B to Schedule D would be to render liable to taxation the profits from the sale of timber without regard to the initial expense of planting, the cost of maintenance in past years, or the tax paid under Schedule B during the period of growth. On the other hand, if all profit-producing lands are to be brought under Schedule D as we have recommended, we do not consider that an exception should bo made in the case of lands planted with trees with a view to an eventual profit. We are clearly of opinion that in general any enterprise which is undertaken with a view to the realization of profits should be assessed upon tlic profits. The problem of providing adequate safeguards for the occupier of commercial woodlands when the change is made from Schedule B to Schedule D presents no small difficulty. A sudden transfer from the old statutory basis to that of profits might place the occupier in an unfair position, and we have carefully considered what measures are appropriate to meel the circi ■■■ ices of such a change. We understand that on many well managed estates proper records are available, and that it would be possible to give particulars of fellings, maintenance, and tax paid for past years. We suggest, therefore, that in the case of woodlands PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 103 in an advanced state of growth the transfer from Schedule B to Schedule D should be accompanied by the provision of an allowance in respect of the excess of (a) the total amount on which tax has been paid under Schedule B during the past fifteen years on those woodlands, over (6) the actual profits during those years. This excess might be spread evenly over the first six years following the transfer and allowed as a deduction in computing liability for those years under Schedule D. That is to say, suppose that during the preceding fifteen years the profits, after deducting from the receipts the cost of maintenance, replanting, etc., were £1,500, and it was shown that tax had been paid under Schedule B during that period upon assess- ments aggregating £2,400, then £900 would be allowed during the first six years of assessment under Schedule D in equal amounts of £150. 466. Our recommendations in connection with the basis of assessment under Schedule D include provision for repayment of tax when a loss is sustained, and provision for the carrying forward of losses against future profits for a period of six years. We consider that these provisions sufficiently meet the case of wood- lands, because in the case of extensive woodlands, receipts from fellings sufficient to balance any losses made in any six years are likely to occur within that period, either in one plantation or another. Where the woodland is small in extent and a loss is incurred, repayment can be claimed of the tax paid on other income up to the amount of the loss. 467. Some of the witnesses who have proposed that woodlands should be assessed under Schedule D have assumed that the three years' average would still apply. If all trades and professions are assessed on the basis of the preceding year's profits as we suggest in paragraph 479, it would be invidious to make a distinction in the case of profits from woodlands, and we recommend that woodlands managed on a commercial basis should be assessed in all respects under the Rules of Schedule D. The determination of the question whether they are or are not occupied for commercial purposes should be made with discretion — the decision should not turn, for instance, merely on the point of the extent of the woodlands. 468. While we are dealing with the question of woodlands, we think it ex- pedient to refer to the method of assessing sporting rights (including fishings). We find there is considerable diversity of practice in the methods of assessing these rights in the different parts of the Kingdom. The table given below sets out the present position. England and Wales. Scotland. Ireland. Land and sporting in f Land assessed under As in England and No assessment on sport- occupation of owner. Schedules A and B J on its full annual Wales. ing rights. Land in hand — sporting Sporting rights as- Sporting rights assessed let. value as enhanced by the sporting sessed under Sche- dule A only. under Schedule D. Land and sporting let I rights. As in England and No assessment on sport- together. Wales. ing rights. Land and sporting let Sporting rights as- Sporting rights as- Sporting rights as- separately. sessed under Sche- sessed under Sche- sessed under Sche- dule A only. dule A only. dule D. Land let — sporting re- No assessment on No assessment on No assessment on tained. sporting rights. sporting rights. sporting rights. It has been represented to us that this difference of method causes considerable anomalies, and we agree with the view of the Board of Inland Revenue that the Income Tax law should be modified so as to accord with the present rating law under which sporting rights are a separate subject of assessment. We have recommended that the assessment of land should continue to be based upon its annual value, and, in our opinion, sporting and fishing rights should normally constitute a separate subject of assessment (under Schedule A only, not under Schedule B) on the basis of their annual value, irrespective of whether they happen to be in the hands of an owner or a tenant. Where sporting or fishing rights are let, however, the owner should in addition be assessed under Schedule D upon any balance of the rent received after deducting the amount of the Schedule A assessment and the expenses incurred in earning the rent. 104 REPORT OF THE ROYAL COM MISSION ON THE INCOME TAX. 469. It is convenient to refer here also to the question of the assessment of deer forests, upon which we received evidence. In general a deer forest is stocked and maintained by the owner and either retained in hand for his own sporting purposes or let for a season or period of years with varying conditions as to the maintenance of the herd and varying responsibilities of the owner as to the payment of rates and taxes. In our opinion land used as a deer forest should normally be assessed under Schedules A and B in accordance with our recommendations in paragraph 456, and a separate assessment should be made in respect of the sporting right under Schedule A only. If the rental received when the sporting right is let exceeds the latter Schedule A assessment the balance should be assessed under Schedule D, the expenses incurred by the owner on behalf of the sporting tenant being allowed as a deduction. SECTION VII. BASIS FOR ASSESSMENT UNDER SCHEDULE D. 470. Before we proceed to discuss the proper basis lor Schedule D assessments we wish as a preliminary step to recommend that all income Irom employments now assessable under Schedule D should be transferred to Schedule E. Officers of Government departments, of municipalities, and of public companies are already assessed under Schedule E, but employees of firms and individuals have remained hitherto under Schedule D. When a firm converts its business into a limited company its officials automatically cease to be assessable under Schedule D and become liable — on a different basis — under Schedule E. We can see no sufficient reason for the continuance of this anomalous state of affairs, and we consider that both justice and commonsense demand that employees of all kinds (except manual wage-earners to whom special considerations apply) should be treated as nearly as possible on the same basis and according to the same rules. 471. We have already recommended that the sources of income now included in No. II and No. Ill of Schedule A should be transferred to Schedule D, and that profits from the occupation of land used for the purposes of husbandry, or mainly for those purposes, should also ultimately be dealt with under Schedule D. 472. In our consideration of the basis for assessment under Schedule D it will be understood that we have in mind a Schedule D modified by the additions and subtractions referred to in the two preceding paragraphs. 473. When we inquire into the existing method of computing statutory income under Schedule D we are confronted by a set of conditions extremely diversified. Income from foreign securities is assessable on the income arising in the year of assessment; the profits of a gas company or a railway are charged on the profits of the year preceding the year of assessment; the ordinary trader or professional man makes his return on the average of the three preceding years; the colliery proprietor on an average of five years ; and the owner of manorial profits on an average of seven. It is not to be wondered at that many witnesses should have regarded this variety as excessive, or that we should have been urged on all hands to try to make at least some approach to uniformity. 474. Uniformity of basis throughout the whole tax may be a desirable end, but it is difficult of achievement. The first point that must be remembered is that the income of the year of assessment is the existing basis in an enormous number of cases. All rents of property, all incomes that are taxed by deduction, all salaries now assessable under Schedule E, bear tax on this basis. So. too, do the incomes of all the manual wage earners assessed by way of quarterly assessment, and no other basis for them is practicable. If a uniform basis over the whole range of the tax is the aim. it would scorn that the income of the ye^tr of assessment is the only basis on which uniformity could in practice be attained. But is the year of assessment basis, though perfectly suitable for rents and employments and interest, a practicable basis on which to assess trades and businesses, the profits of which may be highly variable, and in any case cannot be ascertained until the end of the year of assessment ? 475. The beauty and simplicityof a system that would charge a taxpayer for the year 8 on the profits of the year s . and not upon .i figure based on the long expended PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 105 profits of any or all of the years 1 to 7— a system which moreover would charge him on that intelligible basis not in respect of some sources of his income only, but in respect of all sources however numerous and diverse in character they might be — have naturally proved very attractive to some witnesses. We agree with those who have described the year of assessment basis as the ideal basis. Its desirability is, indeed, quite obvious. It would secure tax on the income at the earliest possible moment after the income had been earned and ascertained ; it would make possible smoother graduation; it would facilitate that merging of the Super-tax with the Income Tax which has been proposed to us by so many witnesses ; it would render unnecessary many provisions for adjustment of assessments which are apparently inseparable from a system underwhich liability to taxation is basedon distant profits. 476. But there are practical difficulties in the way of its adoption at the present time. It would involve waiting until the end of the year of assessment for the tax- payer's return of income, with consequent delay in assessing. This obstacle might be bridged over by the making of provisional assessments during the year of assess- ment, with subsequent adjustments, either by additional assessments or by repayment of duty when the income for that year should have been ascertained. But there would be some administrative difficulty both in getting the assessments made or adjusted in due time, and in avoiding a serious loss of revenue in the year of change. It is certain that without a system of provisional assessment and subsequent adjust- ment, the loss of revenue in the year in which the change was carried out would be too great to be faced, at any rate in present circumstances. 477. We have given a good deal of care to this question, and we have been rather reluctantly driven to abandon any intention of recommending the year of assessment basis as the basis for all purposes. We confess it has many charms. It is not im- possible that at some future time when administrative difficulties look less forbidding and the financial position is stronger, Income Tax may yet be charged on the income of the actual year; but taking a practical view of our present task we feel unable to recommend so great a change at the present time. 478. This decision narrows our field of inquiry, and we can turn now to consider the proper basis for the assessment of profits under Schedule D. The Departmental Committee of 1905 devoted a great deal of attention to the comparative merits of the three preceding years and the preceding year as bases for this purpose. They dis- cussed the matter in paragraphs 81 to 111 of their Report, and while in the end they came down lightly on the side of the retention of the average system, they were evidently very much impressed by the arguments on the other side. They said in paragraph 104 : " we think it probable that if we were starting de novo, the system " of levying the tax on the profits of the previous year would be considered preferable " to the present system." They went on to say in the next paragraph " Such a " change could not be attempted without public opinion, and especially the support " of business men behind it, and so far the question seems never to have been seriously " considered by those principally affected. The Report of this Committee may, by " calling attention to the matter, lead to public consideration of the question; and if " the verdict were favourable, we think the change would on the whole be " advantageous." 479. It is clear to us that public opinion has moved since that Report was written, and possibly in consequence of that Report. There has been a surprising weight of evidence in favour of the profits of the preceding year (i.e., either the year to the 5th April immediately preceding the year of assessment, or the last business year completed prior to that date) being taken as the basis for Schedule D assess- ment. Hardly anyone has had a good word for the average. The chief benefits we see in taking the preceding year's profits as the basis of liability under Schedule D are (a) that it will make the amount of profits assessed correspond much more closely in point of time with the amount of profits actually being- made; (b) that it will be a very important step in the direction of uniformity and simplicity; and (c) that it seems to be almost universally desired. We have therefore no hesitation in recommending that the change be made. We would add — although this consideration has not influenced our 27925 a 106 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. decision— that the Revenue is likely to benefit by the change unless the alteration is made at a time when the national income is falling. 480. A question that naturally arises is what special provision, if any, is neces- sary in order to ensure fair assessments for the years immediately succeeding the period of change. It is possible that it may be deemed expedient not to give full effect to the change at once, but, as was suggested by one of the witnesses, to base the assessment for, say, two years after the change not on the old average profit nor on the profits of the preceding year, but on a sum which is the mean of those two amounts. On the whole, however, we are inclined to think that no inequity to the individual is involved by giving full effect to the proposed change at once, because the profits that will form the basis of the assessment for the year in which the change first takes place will be profits which have never entered into any previous average. The only person who might have a grievance is one who has paid, under the system of averages, tax on a larger sum since the commencement of his business than the profits of the business have amounted to. "We are inclined to think that in existing conditions the cases in which any hardship would arise must be rare, but whether this is so or not we are emphatic in our opinion that no general option should be given to the taxpayer to elect, when the basis is changed, which of the two systems he will be assessed under, and that any remedy provided should apply only in the case of proved hardship. 481. The true test of hardship is the one we have indicated in the preceding paragraph, but it would prove impracticable to apply this in the ordinary case. We accordingly suggest that no relief should be given unless a taxpayer can show that his profits in either of the first two of the three years immediately preceding the year of change have been abnormally low (less, for example, than the average profits of the previous six years), and that he has not already received relief on that account under any other provision. Where such a hardship is established, an equitable method of giving relief would be to continue to allow the taxpayer, during the first and second years of the new system, to elect to be assessed upon his average profits. 482. A business that makes a loss needs some consideration. Under the present law relief is granted to the trader who makes an actual loss in the year of assessment; but besides that provision, the three years' average system enables the year of loss to be set against two other years, which are normally years of profit, and the trader is able, so to speak, to spread his loss over a period of three years. If the preceding year basis is adopted without special provision for cases of loss, the trader who makes a heavy loss in one year will, it is true, escape assessment for the next year, but his loss will not affect subsequent years' assessments, although the loss may be big enough in amount to swamp several years' profits. We think, therefore, that the taxpayer might legitimately feel some grievance if under the new system he were not enabled to carry forward his loss against future profits, and we accordingly suggest that the existing provision (see section 34 of the Income Tax Act, 1918), by which repayment of tax is granted in cases of loss by reference to the aggregate income of the year, should continue in force, and that any balance of loss not so dealt with should be permitted to be carried forward (on the analogy of the Statute of Limitations) for a period of six years. Where a loss occurs in a business carried on by a partnership, we recommend that the amount of the loss should be divided in accordance with the basis of distribution of the profits during the period for which the loss was sustained, and that such losses should be separately dealt with in the case of each partner in accordance with our general recommendation in paragraph 429. Special provisions will be necessary to meet the case of loss in a year preceding a change in the constitution of a partnership, whether the change is regarded merely as a succession or is considered to have the effect of setting up a new business. 483. It will no doubt be strongly urged that, whatever measure of liability may be adopted, reliefs should be granted and reductions of assessments made by relation to the actual income <>t' the year of assessment where that income falls short of the amount assessed. If a concession of this kind were made, unaccompanied by the grant of power to the taxing authorities to increase assessments where the profits of the year of assessment exceeded the amount of the assessment, the result would be to give the taxpayer under Schedule D the option of choosing as his basis of liability either the preceding year or the year of assessment — a choice that would not be open PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 107 to taxpayers under any other Schedule. Besides, to rectify all assessments in this way by making either a reduction or an additional charge at the end of the year, would be a roundabout way of getting to the year of assessment basis which we have already decided not to recommend. We are therefore emphatically of opinion that, subject to the recommendations contained in the preceding paragraphs, the preceding year's profits, if adopted as the measure of liability, should be the real and final measure, except at the beginning and end of a business. 484. We suggest that a new business should be assessed for the first year on the profits of that year, and for the second year on the first year's profits subject to an adjustment to the actual profits of the second year at the option of the taxpayer. Where a business is discontinued or ceases in any year we suggest that it should pay on the actual profits of that year up to the date of cessation, and that the Revenue should have the option of substituting the actual profits for the assessed profits in the penultimate year. For example — assuming that a business lasts for 9^ years it will pay for the year 1 on the actual profits of the year 1 ; for the year 2 on the profits of the year 1 or the year 2 at the option of the taxpayer; for the first half of the year 10 it will pay on the actual profits of that period ; and for the year 9, the assessment, based on the profits of the year 8, will be capable of adjustment at the option of the Revenue to the profits of the year 9. 485. Where there is a succession to a business, we think that the tax payable should continue to be calculated as if there had been no succession, unless the result of the change is one which warrants the Commissioners in determining that a new business has been set up at the date of change; in that event, the old business should be treated as having been discontinued on the same date. 486. Although we think we have dealt with the main questions in connection with the choice or change of basis, we make no pretence to have covered all the points that must necessarily arise when the change is being carried out. We are aware, for instance, that safeguards may be required to prevent evasion by means of the adop- tion of irregular accounting periods, and that for a similar reason it should still be open to the taxing authorities, in the case of an appeal, to call for three or more years' accounts if necessary. But we believe that it is not our present duty to do more than point out the direction of desirable change and the chief matters to be borne in mind, leaving minor points of detail to be dealt with at the proper time by the legis- lative authority. 487. Before leaving this subject we desire to add that in our opinion the time has come when the special reliefs in respect of war conditions should be discontinued. SECTION VIII. WEEKLY WAGE-EARNERS. 488. There are special provisions in the Income Tax Acts for the assessment of weekly wage-earners employed by way of manual labour, and for the collection of the duty so assessed. Prior to 1916 weekly wage-earners were liable to assessment if their incomes exceeded the current exemption limit, and were chargeable in the same way as other employees, but the administrative difficulties in the way of assessing on a three years' average men who continually changed their employers, moved about from place to place, and were subject to recurring spells of unemploy- ment, were very great. 489. The rise in wages during the war and the reduction of the exemption limit from £160 to £130 in 1915, brought a large number of weekly wage-earners within the scope of the Income Tax for the first time, and the question how they were to be assessed became immediately a very practical one. It was felt that to charge them on a three years' average and to collect duty annually in one sum was impossible. The payment of any sum annually was quite outside the range of their ordinary habits and experience; they were paid by the week, and most of their disbursements were made weekly. Weekly assessments were admittedly impossible, and, as a com- promise, it was arranged that they should be assessed quarterly. 27925 H 2 108 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 490. The wage-earner completes a simple form of return at the end of the first quarter of the year, on which he claims any abatement or family allowances or ex- penses to which he may be entitled; and the employer at the end of each quarter makes a return to the Inspector of Taxes of the actual payments made by him to each employee during that quarter. The assessments are made quarterly by the Inspector, subject to a right of appeal to the General Commissioners; and at the end of the year, when the total liability of the year can be correctly ascertained, there is, if necessary, an adjustment of the four quarterly assessments, followed by repayment where due. whether or not the wage-earner makes a formal claim. 491. This system of assessment seems to work reasonably well, and has not given rise to much hostile criticism on the part of the witnesses who have appeared before us on behalf of the classes concerned. One of them, it is true, deprecated quarterly assessments on weekly wage-earners as an instance of class legislation, and asked that all employees should be assessed on their previous year's wages; but this criticism, it seems to us, ignores the fact that there is a real distinction between the weekly budget of the workman and the year-to-year budget of the salaried employee. It is this practical difficulty that has brought about the special treatment of the weekly wage-earner and has even made it necessary for the Legislature to permit him to pay his tax weekly by affixing stamps on a card. Besides, as we are recommending elsewhere that all employees should be assessed on the basis of their earnings in the year of assessment, to put the wage-earner back to the previous year's basis would be anomalous. 492. A great many witnesses and correspondents have proposed that the weekly wage-earner's tax should be collected by his employer by means of a deduction from wages. These proposals come mainly from persons other than wage-earners and their representatives, and they differ considerably in detail, some of the witnesses suggesting that the payment should be made by means of stamps, as in the case of contributions under the National Health Insurance scheme, another proposing that the amount deducted from the workman should be credited to an account in his name in the Post Office Savings Bank, this account being liable to be debited at the end of the year with the amount of tax which has been found to be due from him. These suggestions, however they differ as to the machinery to be employed, fall generally into two classes, (a) those which favour deduction from wages at a flat rate, with subsequent adjustment, and (b) those which favour deduction of the actual amount of tax due by the workman, with due regard to his personal circumstances and to the allowances to which he may be entitled. 493. The argument used by those who advocate deduction of tax from wages are (a) that this method would lessen the unpopularity of the tax, (b) that it would secure the revenue, and (c) that it would make payment easier for the workman. 494. In regard to the first argument, it is noticeable that, as a rule, these proposals have not come from the classes particularly affected, and it will not be forgotten that before the present system was adopted both employers and employed concurred in rejecting a scheme of deduction from wages. The employee objects to deduction at a flat rate because the sum so deducted does not represent his real liability, inasmuch as it takes no account of his individual circumstances. Equally he objects to a deduction of the true amount of his liability, calculated by reference to his personal circumstances, because this involves giving the employer information as to the employee's private income, if any, and his family relationships. Evidence given on behalf of employers indicates that they also are generally opposed to any such scheme, on the ground that it would be likely to cause friction between employer and employed. 495. It may be added that the adoption of any scheme winch involved deduction of tax at a flat rate would not be free from administrative difficulties, because it would necessarily lead to a number of adjustments and repayments at the end of the year if the tax is ultimately to be fitted to the capacity of 'the taxpayer. 496. In regard to the second argument for the proposal, viz., that it would secure the revenue, there seems to be no reason to believe that there is an v considerable evasion of tax by this class of taxpayer, [ndeed, owing to the requirement that the employer shall make a return of wages at the end of each quarter, these quarterly assessments are probably as adequate as those on any other description of income. PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 109 497. In regard to the third argument for the change it was made clear to us that there is no special difficulty in collecting this tax at the present time. The Chief Inspector of Taxes told us that the payment of tax by manual wage-earners compares favourably with that of other classes. It is true that one might gather from news- paper reports that the difficulty of recovering Income Tax from wage-earners is greater than in the case of other taxpayers, but this is due to the fact that the method of recovery is different and lends itself to greater publicity. As a matter of fact, the great bulk of the taxpayers whom we are now considering pay with reasonable promptitude ; such opposition as there is to the tax on the part of manual wage-earners is not due to the method of assessment and collection, but to the demand for a higher exemption limit, and with this demand we have already dealt in an earlier Part of our Report. The fact that the tax is now recovered without undue difficulty and with reasonable promptitude is, however, not in itself a sufficient reason for rejecting any system of deduction from wages. 498. Having regard to the very large number of taxpayers affected, and to che fact that on the whole this portion of the Income Tax is raised without exceptional friction or administrative difficulty, it would, in our opinion, be unwise to make the suggested change except on the initiative of the persons con- cerned. So long as opinion amongst the wage-earners tnemselves is strongly against the deduction of tax from wages by employers, the adoption of any such scheme would appear to be quite impracticable ; but if at some future time there should be a change in the views held on this subject by wage-earners, especially if they were inclined to adopt a system— advocated by more than one witness— which would combine the element of thrift with deduction of tax, we think that the change would be desirable and that the question should be reconsidered. 499. It may be well to remove a misconception that we have found to exist as to the cost of the collection of this portion of the tax. It was vaguely alleged by one witness that the cost amounted to 100 per cent, of the tax, or at least 50 per cent. ; and it appears to be generally believed among the wage-earners that the cost is very large. As a matter of fact the cost is estimated by the Board of Inland Revenue not to exceed 7 per cent, of the duty realized by these quarterly assessments. The general cost of administration and collection of the Income Tax as a whole is only about 1 per cent., and although 7 per cent, may seem large by comparison with that figure we consider that it is not unduly so. Even if no other considerations were involved, to obtain a considerable amount of revenue at a cost of 7 per cent, is, in our opinion, quite justified from the point of view of the Exchequer; that cost will be reduced if our subsequent recommendation in this connection be adopted. 500. We are indebted to a correspondent for a suggestion which, while retain- ing direct payment of tax by the liable wage-earner, aims at relieving the Revenue officials, the employer, and the employee himself of a considerable amount of trouble in connection with the returns which have to be made preparatory to assessment. At the present moment, while the limit of exemption is £130, the employer puts on the list that he sends to the Inspector only those employees who have earned more than £32 10s. Od. (one-fourth of £130) in the preceding quarter. As many of the employees on the list are entitled to family allowances in addition to the statutory abatement, it follows that there must be many who receive forms and are obliged to make statements of income, but who ultimately are found not to be liable to pay any tax. The suggestion to which we have referred is that the employer's list should include only those employees who in the preceding quarter have earned more than one-fourth of the total of the amount of the exemption plus the family allow- ances to which they are respectively entitled. 501. The practical method of working a scheme of this kind would be to provide a form on which claims for family allowances could be made, and to have this form issued by the employer either to all employees whose wages exceed the exemption limit, or alternatively only to those employees who ask for the form. When com- pleted, this form could be returned to the Inspector, examined and retained by him, and a notice issued to the employer showing the total allowances to which the employee is entitled, and letting the employer "know that if the employee's earnings in any quarter fall below one-fourth of the amount of these allowances his name need not be included in the employer's list. 27925 H 3 110 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 502 We appreciate that there may be obstacles in the way of carrying this suggestion into effect. We are also fully aware that no such system could be inaugurated without the full concurrence of employers and employed, and that the assent of representative bodies of employers and employees would be necessary, but we believe that the idea on which the proposal is founded is a sound one, and that with goodwill on both sides it would have the effect of saving everybody con- cerned a good deal of trouble. The employer would be relieved of the necessity of returning particulars of the earnings of a man who will in the end have no tax to pay ; the non-liable employee will be saved the trouble of making a return of his income; and the Inspector will be saved the labour of issuing and examining a great number of unprofitable returns. 503. tt may be said that this proposal is open to some of the objections that have been made against the plan of deducting tax from wages, inasmuch as it places the employer in possession of information as to the family circumstances of the employee ; but there is a difference between requiring this information for the purpose of imposing a tax, and allowing it to be given voluntarily by the employee for his own convenience if he wishes to be relieved of the necessity for making a return of his income, and this difference would, we think, be fully appreciated by the taxpayers concerned. SECTION IX. SCHEDULE E. 504. Under Schedule E is assessed income arising from public offices or employ- ments of profit, that is to say, salaries, &c, paid by the Government, by corporate bodies, and by limited companies. The basis of assessment under this Schedule is the actual income of the year of assessment, though " perquisites " attaching to the exercise of an office may be dealt with on the basis of the preceding year or of the three preceding years. Owing to the limited interpretation placed by various bodies of General Commissioners on the words " public office " many subordinate employees of limited companies are in practice assessed on an average of years, but an employee of a company holding a distinctive office remains assessable on the basis of his actual remuneration for the year of assessment. 505. We have recommended in paragraph 470 that all employments now assessed under Schedule D should be transferred to Schedule E, so that the new Schedule E we have in mind in this Section will include all employees, whether of Government Departments, public bodies, firms or individuals. 506. The question now ariseswhether the basis of assessment under the newand greatly enlarged Schedule E should be (a) the basis of the actual year which now obtains for that Schedule, or (b) the basis of the preceding three years under which the employments proposed to be transferred to Schedule E have hitherto been assessed, or (c) the basis of the preceding year which we have recommended for adoption as the new basis for trades and professions, &o, under Schedule D. 507. We have no hesitation in rejecting the three years' average as a suitable basis under Schedule E. We have already decided in favour of its abolition for Schedule D purposes and we feel that there is even less reason for its retention under Schedule E. There remain the alternatives of the preceding year and the year of assessment. The chict argument for choosing the preceding year is the advantage of uniformity; we should then have one common basis for both Schedule D and Schedule E; but there are considerations that appeal to us with greater force in favour of taking the earnings of the year of assessment as the basis for that year. We have expressed our opinion in paragraph 475 that the ideal basis for Income Tax assessment would be the profits of the year Tor which the assessment is to be made. We have not seen our way to recommend that basis for universal adoption at the present day, though we are not altogether without hope that at some future time the administrative and financial difficulties that now stand in the way of its accept- ance may be overcome. The income from real property under Schedule A is already assessed on the basis of the actual year; income from interest and dividends on PART V.— ASSESSMENT, APPEAL, AND COLLECTION. Ill investments taxed at the source are also dealt with on that basis; so that even the argument for uniformity leads us in the direction of taking the income of the year of assessment as the basis. 508. The fact, also, that it is the existing basis for Schedule E is of great weight. To put back to the preceding year basis assessments that are now founded on the income of the year of assessment seems to us both a needless and a retrograde step. It must be remembered, too, that the income of manual wage-earners is charged on the basis of the year of assessment, though for convenience it is assessed quarterly. There are already some signs that the wage -earners feel a little sore that in an era of rising wages they are assessed on their actual earnings, while many other employees are still assessed on a three years' average, which lags considerably behind their present incomes. 509. Taking all these facts into consideration, we have come to the conclusion that the basis of assessment under Schedule E— which in our opinion should embrace all incomes from employment— should be the remunera- tion of the employee for the year to which the assessment relates. This basis also greatly simplifies the method of dealing with the beginning and the cessation of an employment. SECTION X. LIFE ASSUEANCE COMPANIES. 510. Under the present law Life Assurance companies are liable to bear tax either on profits (under Case I of Schedule D) or on the interest arising from the investment of their funds, whichever is greater. This alternative basis of liability is not peculiar to Life Assurance companies; it is commoD to all trading concerns. . Indeed nowhere in the Income Tax Acts was the liability of Life Assurance com- panies to be assessed on their profits specifically mentioned until, in the Finance Act of 1915, a section was introduced to provide that in the case of these companies, and certain other businesses where the charge is made upon interest and not upon profits, repayment of tax should be made in respect of their management expenses. This concession was made subject to the proviso that the relief given should not have the effect of reducing the charge below the amount which would be charged if the assessment were made upon profits; and the result of the provision is that a Life Assurance company is always liable to be assessed in any year on a sum which may exceed but can never be less than the annual " profits " as ascertained by actuarial valuation. The same Act provided that the Life Assurance branch of a company carrying on any other business should be separately assessed. The provision authoriz- ing the repayment of tax on management expenses is the first recognition by the Legis- lature that interest arising from investments can be anything other than net assessable income. It may be mentioned that in the case of proprietary Life Assurance com- panies carrying on an " ordinary " as distinct from an " industrial " insurance business the interest in nearly every case exceeds the profits ; and that in the case of mutual Life Assurance companies — the Courts having ruled that no assessable profits can arise from mutual insurance — the interest always exceeds that portion of the " profits " which arises from business transactions with persons outside the mutuality. 511. Although the tax deducted from interest is, except in the case of industria 1 assurance companies, nearly always the effective charge, and recourse is seldom had to the alternative charge on profits, the dual basis of assessment has for very many years been a subject of complaint on the part of the companies carrying on Life Assurance business. While the views of the witnesses who represented the English and the Scottish Life Offices respectively were at variance in regard to what should be the sole basis of charge, they were agreed in requesting that Life Assurance companies should have only one clearly denned basis of Income Tax liability, and that the alternative method of assessing now open to the Revenue should be abolished. The Life Assurance companies made other claims — ■ (a) on behalf of the English offices it was submitted that a charge on profits was an equitable method of assessment; 27925 H 4 112 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. (b) on behalf of the Scottish offices it was stated that though it had been claimed in the past that the assessment should be based solely upon the actuarial surplus ascertained at periodical valuations, they were now content that interest less expenses of management should continue to be the basis of taxation ; (c) on behalf of both English and Scottish offices it was urged that the interest earned by the investment of premiums should be charged at a rate of tax less than the normal rate (4s. or 4s. §d. in lieu of 6s. in the £) because that interest finally enures (in the case of mutual companies wholly, and in the case of proprietary companies mainly) to the benefit of policyholders, the majority of whom are not liable to the full rate of tax; (d) on behalf of the British offices principally concerned in the transaction of foreign Life Assurance business it was submitted that the interest earned on their foreign funds should be exempt from British taxation. 512. The main argument advanced in support of the contention of the English companies, that profit and not interest should be the sole basis of charge, was that the major portion of the interest received did not and could not remain in the hands of the company, because it was needed to enable the company to meet its liabilities to its policyholders. It was also stated that " interest as received by the Life Office is but an item in its trading operations, and it is only the net result of the whole of such trading operations that is true profit from a commercial point of view." Briefly, the claim of the English offices is that they are carrying on a trade of unique character, and that, regardless of the effect on the amount of tax payable, the assess- ment should be based on their trading profits. After a careful consideration of these and other arguments we are unable to recommend that trading profits should be the sole basis of charge. We are in agreement with the witness representing the Scottish offices in believing that " With the allowance for expenses . . . there has been introduced a new measure of ' profit ' which . . . may be regarded as not inappropriate." 513. In a later paragraph of this Section, we refer to the effect of varying estimates upon the amount of surplus shown at any periodical valuation; and this feature alone would render the surplus or profit shown by the actuarial valuation an inequitable basis for determining Income Tax liability as between different Life Assurance companies. There is another reason which would prevent us from recom- mending the abandonment of the right of the Revenue to base the assessment upon interest. We are of opinion that no contracts entered into by a subject should be per- mitted to dispose of taxable income in such a manner that the State is deprived of tax on that income. Interest has always been regarded in the Income Tax Acts as assess- able income and we think it should continue to be so regarded. Owing to the peculiar nature of the contract between a policyholder and the company, the interest which arises on the Life Assurance fund is not, for the most part, income in the hands of the company (since it is mainly paid away to the policyholders), nor can it be identified as interest or income in the hands of the policyholder. For example, the premium for a whole-life non-participating policy of £100 is about £2 at age 29 with about 33 years' expectation of life. If a man aged 29 insured for £100 and died at 62, it would at first sight appear that his executors had received back the premiums (£66) plus interest (£34) ; but if he died after paying one premium we could not say that his executors had received the premium (£2) plus interest (£98) ; nor could we say if he died at 79 that his executors had received the premiums only (£100). The fact is that the interest on the premiums, equally with the premiums themselves, forms a fund out of which issue capital payments to the holders of matured policies; but this fact does not invalidate the right to tax that which is stated to be taxable income by the Income Tax Acts. 514. In regard to the request preferred on behalf both of the English and the Scottish offices, that there should not be alternative bases of assessment, we are unable to discover any sufficient reason why alternative bases of assessment which have always existed under the present scheme of Income Tax should now be abolished. We do consider, however, that the actuarial surplus as ascertained by periodical valuations is not a true measure of " trading profits " as that term is used in applying the Income Tax. The constituent elements of this actuarial surplus were analysed by the official witness who represented the Board of Inland Revenue on this subject, PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 113 and we agree with his statement that this surplus contains elements which cannot fairly be regarded as being within the scope of the Income Tax. We consider that the proper alternative to an assessment on interest should be an assessment based on the actual trading profit retained by the proprietary body. In the case of mutual assurance companies this profit would be the profit made on transactions other than mutual transactions ; in the case of proprietary assurance companies transacting an " ordinary " as distinct from an " industrial " business the profit would be only the profit accruing to the shareholders; in neither case is there much probability that such an alternative charge on profits would become operative ; because in regard to mutual companies the amount of outside business is relatively very small, and in regard to proprietary companies the amount of profit retained by the shareholders is only a small fraction (usually one-tenth) of the profit shown by the periodical valuations. The profit basis would, however, be operative in many instances in the assessment of industrial assurance companies, the special features of which are referred to in a later paragraph of this Section. 515. We do not suggest that the profit retained by the proprietary body is the exact equivalent of the trading profits ascertained by an ordinary commercial concern ; we agree with the representatives of the Life Offices that their business is unique in character, and that ordinary methods of computing profits are unsuitable. The processes followed in ascertaining the surplus (and thereby determining the profit retainable by the proprietary body) are not fixed and invariable; different companies may adopt different estimates in similar circumstances. Estimates have to be made of the net rate of interest that will be earned, of the mortality of policy- holders, and of the percentage of premiums needed to meet expenses; it is the aim of British offices to adopt in all these matters the most conservative estimates and the richer companies can obviously better afford to adopt the more stringent tables. The possibilities of variation in estimates are so great that it is conceivable that two companies with precisely the same funds similarly invested, the same policies current, and the same ratio of expenses to premium income, might show in the one case a loss and in the other case a profit on the actuarial valuation. These matters would need serious consideration if the actuarial surplus were ever the sole basis for assessing Life Assurance companies ; but they are of little moment when the actuarial surplus affects the Income Tax assessment only to the extent that it determines the share of the profits accruing to the proprietary body, and when this share of profits (except in the case of industrial assurance companies) can hardly ever be the basis of charge actually adopted. 516. Before we pass onto the consideration of the third request of the represen- tatives of the British Life Offices (that the interest or investment income should be charged at a lower rate than the full normal rate of tax) we desire to state that we cannot accept the submission made to us that this question should be considered quite irrespective of any benefits conferred on policyholders by the State in the form of a remission of tax on Life Insurance premiums. In our opinion it is essential that the treatment accorded to insurers by the State should be viewed as a whole, and we desire that this Section of our Report should be read in conjunction with the Section that deals with the allowance for Life Insurance premiums. When saving takes the form of payment of Life Insurance premiums it is singled out for favourable differen- tial treatment. If, for example, an endowment policy is effected for £1,000, and the premiums paid before the maturity of the policy amount to £700, the £1,000 received by the insurer on the maturity of the policy might be regarded as being £700 returned premiums and £300 interest. Though it may be true that the £300 has paid tax at the rate of Qs. in the £, it must not be forgotten that the £700 was taxable income, and that, in contrast with £700 saved by another taxpayer in another manner, tax has probably been remitted on the whole of the £700. If the State, having decided to give some measure of relief from Income Tax to taxpayers who insure their lives, offered to insurers the choice between relief from taxation on the premiums paid and reduction of tax on the interest arising from accumulating premiums, there is little doubt that the insurer would choose the relief in respect of premiums which he now enjoys. 517. Interest arising on Life Assurance funds has the peculiarity that it is not for the most part identifiable as income accruing to the company, and that although in mutual companies wholly, and in proprietary companies mainly, it enures to the benefit of the policyholder, when it reaches his hands it does so in the form of a 114 REPORT OF THE ROYAL COMMISSION ON THEJNCOME TAX. capital payment. Various suggestions were made to us as to the manner in which the amount of interest accruing to the individual policyholder might be ascertained so that the interest accruing on his premiums might be taxed at the rate which would be charged if he were actually receiving interest on an investment. In the opinion of the representatives of the Life Offices these schemes are impracticable, and they were agreed that, if relief were to be given, it should be in the form of a uniform differential rate of tax on that portion of the interest arising on the Life Insurance fund which is distributable amongst the policyholders. It was not suggested by the witnesses who appeared for the assurance companies that if a differential rate were granted the full benefit of the lower rate would enure solely to the advantage of the poorer policy- holders in consideration of whose circumstances the relief would have been granted. It was argued that the whole business of Life Insurance was a business of averaging, that the poorer policyholder would share his benefit with the richer insurer in the same manner that the richer insurer shares with the poorer the benefit of the propor- tionately less expenditure incurred in connection with his policies, and also that if the State secured the correct average rate of tax on the interest the State was not concerned with the particular arrangements entered into by policyholders. 518. On the other hand the official witness suggested that even if it were decided that the total relief now afforded to policyholders was the maximum amount the State could grant to one particular form of thrift, the actual distribution of that relief among the different classes of policyholders under present conditions produced such unequal results amongst the policyholders themselves, that it might be con- sidered desirable, while not increasing the total relief granted, to make such modifica- tions in the method of giving it as would result in a better distribution of the benefits between the different classes of insurers. We are agreed that the allowance in respect of Life Insurance premiums represents the maximum relief which the State should give to this one particular form of saving ; and we are inclined to accept the view expressed by the representative of the English Life Offices who said : " that the burden of Income Tax should be shared proportionately among them [the policyholders] without regard to the amount of their individual incomes is quite in accordance with the principle of equal treatment which is carried all through Life Assurance business." The representative of the Scottish Life Offices also expressed the opinion that the Revenue " need have no concern with the distribution of the burden over the different classes of policy- holders." 519. It was pointed out by several witnesses that if all unearned or investment income were taxed at a flat rate, no claim would have arisen that the interest on Life Assurance funds should be taxed at a rate lower than the normal rate. The hardship, if any, arose only when graduation of the rate of tax on unearned income was introduced in 1914. It follows that if any scheme of graduation were adopted under which all unearned income was charged at the full rate of tax this grievance of Life Assurance companies would vanish. In a previous Section of our Report we have recommended a scheme of graduation which, although free from all sudden jumps in the effective rate of tax charged, is so designed that, while the smaller ranges of incomes are as a whole not called upon to pay so great a proportion of the total Income Tax yield as they do at present, the amount of unearned income charge- able at the full normal rate of tax (now 6s.) is very largely increased. We have already fully explained the scheme; but it may be stated here that in the case of a bachelor all unearned income in excess of the first £400 of total income (even if this first £400 is wholly earned) is chargeable at the full normal rate of tax. In the case of a married man the full normal rate of tax is not charged until a somewhat higher range of income is reached, but the net effect of the scheme is that the range of unearned income chargeable at the full normal rate of tax is very largely extended. The grievance of the Life Assurance companies partially disappears in consequence, and we think that any inequality of burden remaining may well be averaged out among the whole body of policyholders. 520. In the claim of the Life Assurance companies for a special rate of charge lower than the present standa I'd rate, the desire In obtain a rate of tax consistent with that which should be borne by policyholders as a whole has no doubt been in the forefront. It has hern shown that this difficulty will in future be largely removed. But less prominent in the minds of some speaking on behalf of the companies has doubtless been the fact that the present high rate of tax reduces the net yield of interest on investments to a figure below that upon which the companies generally PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 115 based their calculations in making their contracts over distant periods. High taxation may have affected the financial stability of some of the companies because the possibilities of an unprecedented war and its effects on interest were not, and could not in the nature of things have been, foreseen. It is urged that Life Insurance is a unique form of business in which the making of forward contracts is seen in an altogether extreme form, and that any prejudice arising through State action should be remedied by the State. It is, however, conceivable that the stability of the relation between premiums paid and the sum assured could be affected in various otber ways, for example, a marked and secular decline in the rate of interest; a great general change in mortality rates; the effect of a change in money values upon expenses such as wages, making the loading originally provided quite inadequate. It is doubtful whether in such cases it would be suggested that a change in the rate of Income Tax was an appropriate remedy. If the stability of the contracts is affected by unforeseen circumstances, various courses would appear to be open, such as (a) application for legislation to revise the terms of contracts; (b) State aid by grants; (c) a revision of policy such as the investment of a large proportion of the funds in industrial securi- ties with a higher average yield. But the matter is one so bound up with the whole principles of insurance that we feel it is to a great extent outside our Terms of Reference, and that it would be more properly dealt with by a body specially designed to consider insurance as such. The difficulty would exist even if the standard rate were exactly correct as an expression of the average rate at which the policyholders were liable, and it is therefore not in any way really connected with the problem to which we have directed attention in the preceding paragraphs. In these circum- stances we cannot recommend that the disadvantages brought about by a high rate of tax can be exceptionally dealt with for a particular type of business. 521. As a result of our consideration of the subject we recommend (a) that Life Assurance companies should be chargeable as at present on the amount of interest received, less expenses of management ; (b) that the alternative method of charging on profits should remain, but that the chargeable profit should be deemed to be not as at present the total surplus revealed by actuarial valuation, but only that portion of the surplus which belongs to the proprietors or shareholders of the company ; (c) that the rate of tax chargeable on interest received by Life Assurance companies should remain, as at present, the full normal rate. 522. Hitherto we have considered only the position of companies transacting " ordinary " as distinct from " industrial " Life Assurance business. The dis- tinguishing feature of the industrial insurance company is that, speaking generally, the policies are for very small amounts, the premiums are personally collected at very short intervals, and each payment of premium amounts only to a few pence. Consequently the total expenses almost always exceed the interest received on the investment of accumulated premiums. It follows that in the aggregate the policy- holders cannot receive on matured policies an amount as great as the sum total of the premiums they have paid in; and any surplus on valuation must be the excess of the premiums over the amounts necessary to pay expenses and to pay the benefits attach- ing to the policies. There is also an almost entire absence of the element of mutuality which is so marked a feature of " ordinary " Life Assurance business; and, generally speaking, the relations between an industrial policyholder and his company are analogous to the relations existing between any trading concern and its customers. So far as the surplus revealed by actuarial valuation remains in the hands of the company it is analogous to ordinary trading profit. 523. Although the operations of " ordinary " and " industrial " companies are alike in the nature of the business transacted, their different methods of conducting business lead to widely divergent results. If our recommendations in paragraph 521 are adopted an " ordinary " company will rarely be chargeable on profits, but an " industrial " company will remain, as at present, usually chargeable on its profits. This will have the result that in the case of companies carrying on both " ordinary " and " industrial " Life Assurance business, the profits which accrue to the proprietary body, although true trading profits, will practically never be separately charged, because the interest received (most of which in the case of the " ordinary " branch 116 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. goes to the policyholder) will in the great majority of instances be greater than the total profit accruing to the proprietary body. In the case of a company transacting '"ordinary" business only, the profit that accrues to the proprietary body may be regarded as being part of the income which is taxed in the form of interest; but in the case of an " industrial " company this profit usually arises wholly from the untaxed premium income. After some hesitation we have decided that the present position should be left unchanged, that is to say, that a Life Assurance company carrying on a composite " ordinary " and " industrial " business should be assessed as a whole. 524. In regard to the request for exemption from British Income Tax of the interest arising from investment of the Foreign Fund we consider that the present law should remain unchanged. Any uneasiness felt by companies doing foreign business as to the possibility of the surplus on this fund being taxed when a charge on profits supersedes the charge on interest, will probably be entirely removed if our recommendation is adopted that the " profits " assessable should be deemed to be only that portion of the surplus which belongs to the proprietors of the company. In the unlikely event of a charge on such profits being operative, it seems to be indisputable that that portion of the surplus, however arising, which remains in the hands of the proprietary body is a true trading profit chargeable to Income Tax. 525. When a Life Assurance company claims repayment of Income Tax on the amount of its management expenses, the law provides that the amount received by the company from fines, fees, and profits arising from reversions shall be deducted from those expenses. It has been submitted to us on the one hand that it is unfair to take into account profits in the nature of trading profits if the basis of the assess- ment is on interest and not profit, and on the other hand that profits from the sale of annuities should also be deducted from the expenses before repayment is made. We have considered the arguments on both sides, and recommend that any profit from the sale of annuities should be deducted from the expenses. 526. It has been suggested to us that Life Assurance companies should be required to furnish lists of loans granted by them to policyholders, in order to ensure that the tax deducted by the policyholder from the interest shall be duly paid over to the Revenue, but we do not consider the matter to be of sufficient importance to lead us to recommend that a duty should be placed upon Life Assurance companies which might be felt to be an irksome burden and an unfair discrimination between them and other trading concerns. SECTION XL LOCAL AUTHORITIES. 527. The Institute of Municipal Treasurers and Accountants, representing the Association of Municipal Corporations, the London County Council and the Conven- tion of Royal Burghs of Scotland, gave evidence before us with a view to obtaining certain modifications in the Income Tax law as it affects Local Authorities; we have also heard evidence from the Corporation of the City of London and from the Board of Inland Revenue on this subject. In order that the questions raised by these witnesses and the conclusions at which we have arrived may be clearly understood, we think it well to give the following summary of the way in which Local Authori- ties are now dealt with for Income Tax purposes. 528. A corporation of a Borough which has a Borough Fund and a District Fund may be taken for our purposes as a typical case. In the affairs of such a corporation the executive authority is the Borough Council. The Borough Council acts in a dual capacity, deriving some of its powers from the Municipal Corporations Act, under which it administers the Borough Fund, and other powers from the Public Health Act, under which it administers the District Fund. The ratepayers to the two funds are generally identical, but owing to the practice of differential rating they have not always identity of interest. The Borough Council is accordingly in a position some- what similar to that of a trustee of two estates, and is regarded as a separate legal person in relation to each fund. For this reason the affairs of the two funds are usually kept distinct and separate in the accounts of the Council. PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 117 529. The trading profits of a corporation are assessed to Income Tax under the ordinary rules. The property which it owns is also ciiargeable under Schedule A, or if exemption is granted (e.g., in respect of public schools and premises occupied for the administration of justice) that exemption is not one that is peculiar to corporations. 530. A corporation is empowered, on payment of annual interest, to deduct Income Tax, and it accounts to the Revenue for the tax on the interest in so far as the interest exceeds the taxed income available for the purpose of paying the interest. There are, however, three points of difference to be observed between the case of a corporation and that of a private individual or a limited company in ascertaining the amount of taxed income which may be set-off against the interest : — (a) under the decision in the case of the Attorney-General v. The London County Council, H. of L. 1907, A.C. 131, the annual value of property which the corporation both owns and occupies and which therefore yields no actual income is not regarded as a set-off against the interest paid : (b) that part of the taxed income of a corporation which is allocated by Statute for definite purposes other than the payment of interest, e.g., for a sinking fund, is not allowed as a set-off against interest paid ; (c) the separation of the two funds already mentioned has the effect of restricting the set-off (of taxed income against interest) to the amount of taxed income which arises in the particular fund out of which the interest is paid. 531. The fundamental question whether a corporation ought to pay Income Tax at all was not pursued by the witnesses, possibly because they recognized that although the burden of the Income Tax paid by a corporation ultimately falls upon the members of the local community, the ratepayers are in many cases liable to Income Tax, and any burden of taxation removed from them as ratepayers must necessarily be thrown upon them, though not necessarily in the same proportions, in their capacity as taxpayers. It may also have been in their minds that it would not be expedient to claim exemption from Income Tax for public bodies which are actually or potentially competitors of private persons or companies carrying on similar trading undertakings. 532. But although this primary question was not raised, a number of important changes were advocated, one of which was that in assessing a corporation a distinc- tion should be drawn between those of its activities which may be regarded as under- taken for national purposes and those which are purely local. There is, in our opinion, no sufficient reason for exempting from Income Tax most of the properties which are devoted to local public purposes, but after full consideration of the arguments that have been addressed to us on the subject we have come to the conclusion that sewers and. sewer mains should be exempted from lia- bility to Income Tax assessment, not only because the present administration of the Income Tax law, following the practice of rating authorities, produces inequitable results as between different localities, but also because the provision of proper sewerage facilities may be regarded as essential to national as well as to local public health. 533. In connection with the tax charged upon interest paid by Local Authorities and the amount of taxed income to be allowed as a set-off against that interest, we have had to consider three claims : — (a) that the amount on which tax has been paid by the corporation on properties in its own occupation which produce no revenue should be allowed as a set-off; (b) that a Local Authority should be treated as one entity and not as a number of entities dependent upon the number of its separate rating funds, and that therefore the whole of the taxed income accruing to all its funds should be available as a set-off against the whole of the interest paid by the authority; (c) that the amount of taxed income available as a set-off should not be restricted by the exclusion of profits earmarked by Statute for particular purposes. IIS REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 534. The first of these claims is in conformity with the practice obtaining in the case of a private person or a company, and we therefore recommend that the law should be amended so as to allow as a set-off the annual value of properties owned and occupied by the Local Authority. We also recommend that the proposal in (b) above should be accepted, and that a Local Authority should be treated for Income Tax purposes as a single entity. We do not advise the admission of claim (c). So long as Local Authorities are required by Statute to devote profits to purposes other than the payment of interest, we think that the Income Tax liability should be governed by the restrictions so imposed. 535. We think it unnecessary to make more than a brief reference to certain other claims which were advanced on behalf of Local Authorities, especially by the witness who represented the Corporation of the City of London. These claims we are unable to regard as justifiable. 536. Summarizing our conclusions in regard to this part of our inquiry, we propose that Local Authorities (a) should be exempt from assessment in respect of sewers ; (b) should be allowed to set-off against the interest paid the annual value of properties which they own and occupy themselves, and should be treated as a single entity ; - {(•) should, in other respects, remain liable to taxation as at present unless they are affected by any changes that we propose in regard to the general taxpaying public. SECTION XII. CO-OPERATIVE SOCIETIES. 537. The amount of evidence offered before us and the number of letters which we have received on the subject of the assessment to Income Tax of Co-operative Societies and their members are greater than the importance of the subject might have led us to expect. The great and rapid growth of the co-operative movement in recent years, the number of individual trading competitors who are adversely affected by its progress, and the large section of the community which is interested in the distribution of the societies' surpluses or profits, have caused public attention to be drawn to this question in a marked degree, and we have therefore considered the matter at somewhat greater length than is warranted by its importance from an Income Tax point of view. 538. This is not the first occasion on which the liability to Income Tax of Co- operative Societies has been the subject of a public inquiry. Some years before the co-operative movement had begun its recent great advance, the apparently favoured position of these societies had excited so much comment that the Departmental Com- mittee which sat in 1905 asked that their Terms of Reference might be extended so as to embrace the question. After hearing evidence on the subject from traders' organisations, from co-operators, and from Revenue officials, the Committee reported that no case had been made out for an alteration of the law. 539. Notwithstanding the decision of the 1905 Committee, dissatisfaction with the measure of exemption extended to Co-operative Societies continued to find expression in the Press and occasionally in Parliament. Since 1905 the co-operative movement has grown rapidly, and from the mass of correspondence we have received and the nature of the evidence laid before us it is evident that this dissatisfaction (chiefly on the part of private traders) has been accentuated by the high rate of Income Tax now in force. 540. We have been made aware of a feeling among private traders that the growth of the co-operative movement has been intentionally fostered by the exemption given, and that the Legislature has wilfully disregarded the change in the position caused by the lowering of the individual exemption limit, on the one hand, and the increase in the nominal incomes of wage-earners, on the other. PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 119 541. Co-operative Societies may be divided into tour classes : — (a) retail distributive societies; (b) wholesale distributive societies; (c) productive societies; (d) agricultural societies. It is not, of course, possible to place every society exclusively in one or another of these classes—^, society may belong to both class (b) and to class (c) — but it will be convenient to examine each type of society in the order named. Retail distribu- tive societies are far more numerous than any other type, and if a detailed examination is made of the principles underlying this particular method of co- operative trading, a brief review of the principles involved in dealing with the other classes of societies will suffice. 542. The sources of income of a retail distributive society are as follows : — (a) the surplus, or " profit," calculated by deducting from sales to members the cost of the goods sold and the expenses attending the transactions ; (b) the corresponding surplus, or " profit," from sales to non-members; (c) income from the investment of reserves (i) in stocks or shares, (ii) in property; (d) a conventional income (the annual value) from property owned and occupied by the society; (e) a conventional income (usually twice the annual value) from the occupa- tion of land; (/) dividends on purchases from wholesale societies similar to those paid by retail distributive societies. 543. This income is disposed of by the society as follows : — (a) payments to members of dividends on purchases calculated on the basis of their individual purchases; (b) similar payments to non-members of dividends on purchases ; (c) dividends (or interest) on shares paid to individual shareholders; (d) deposit interest paid to individuals who have placed money on deposit with the society; (e) appropriation to reserves. 544. A Co-operative Society registered under the Industrial and Provident Societies Act of 1893 is exempt from tax in respect of income from certain sources, unless it be a society, such as the Army and Navy Stores, which has a limited number of shares and makes a practice of selling to non-members. As regards the society itself, it is liable to pay tax under Schedule A on all property owned, and under Schedule B on profits derived from the occupation of land, but it is exempt from all tax under Schedules C and D on trading profits, bank interest, and dividends on investments. There is a curious anomaly in this position, to which we will refer later. It is sufficient to observe here that if a Co-operative Society invests its surplus funds in War Loan, for example, the resultant income is exempted from tax, but if it invests those funds in acquiring property the society is liable to pay tax either on the basis of the rents received, or on the annual value of the premises if they are occupied by the society. 545. It should be clearly understood that the Income Tax liability of the individual member of a Co-operative Society is in no way different from that of any other person. As regards dividends on shares (usually called " interest on share capital ") paid to shareholders in the society, as distinct from dividends on purchases, although the total share dividend is not assessed directly on the society, each individual shareholder who is liable to Income Tax is required by the general pro- visions of the Income Tax Acts to return the amount of share dividend received and he is then directly assessed. 546. We have said that this position is considered to be unsatisfactory by many persons. The arguments of the witnesses who represented private traders were directed to convincing us that Co-operative Societies should be subject to 130 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. Income Tax in respect of the surplus arising from the whole of their transactions ; other witnesses suggested that even if the whole surplus were not taxed as an ordinary trading profit, some alternative method of assessment should be adopted which would not give the same ultimate benefits to members as they at present enjoy ; and witnesses on behalf of the societies themselves claimed that the existing direct relief to Co-operative Societies should be extended. 547. It was not contended by any witness that the surplus arising on sales by a society to non-members was other than an ordinary trading profit, but there was considerable diversity of opinion as to the proportion which sales to non-members bear to the total turnover. A number of traders' representatives expressed the opinion that a large volume of trade was done with non-members; representatives of the societies alleged that those sales were less than one-half per cent, of the total sales ; and the official witness on behalf of the Board of Inland Revenue estimated that they amounted to something less than two per cent, of the total. 548. No reason was suggested to us why the income obtained by investing reserve funds should be liable to tax if it were derived from property and exempt from tax if it were derived from stocks and shares. Apparently, the utmost that can be said for this somewhat illogical arrangement is that it! forms an integral part of the present system of dealing with Co-operative Societies, and that if the present system were altered in any detail it would be necessary to review the effect of the alteration on the position as a whole. 549. The controversy has centred around the true conception of the nature of the surplus arising from sales to members. Two diametrically opposed views as to the nature of this surplus were submitted to us. The first was that it was essentially a trading profit; the second was that it could in no sense be considered a trading profit. 550. We have weighed very carefully all the evidence as to the nature of the result of transactions between a distributive Co-operative Society and its members, and we have come to the conclusion that any part of the net proceeds which is not actually returned to members as " dividend " or " discount " is a profit which should be charged to Income Tax. 551. In making this decision we are fully aware that we are differing from the considered opinion of the 1905 Committee. We have taken the view that a registered Co-operative Society cannot be regarded merely as a group of individuals; it is as much a separate entity as any other body of persons. If the transaction of purchase and sale were complete when a purchase from the society is effected by a member, then the whole of the surplus arising on sales to members would be taxable profit. We think, however, that the transaction is not really completed until the society has decided what discount it can allow on the aggregate purchases of the member and has paid to him that discount in the form of a " dividend " on purchases. In other words, the so-called " surplus " on members' purchases is not really a surplus at all ; it is the result of a book-keeping balance made for the purpose of determining what portion of the nominal purchase price shall be returned to the shareholder. When that discount or rebate on purchase price has been returned to the purchaser, we are of opinion that the surplus remaining in the hands of the society is a true trading profit. We do not agree with the popular prejudice that dividends on purchases, or discounts, ought to be regarded as profits assessable to Income Tax simply because they are paid by a Co-operative Society. 552. But it is not sufficient to look at these discounts in the hands of the society ; we must follow them to their ultimate destination. So long as they result in the diminution of the expenditure of a private individual no liability to Income Tax can. of course, arise; but if they are in effect a reduction of the purchase price other- wise payable by a trader or a farmer in respect of business transactions, they should be treated as business receipts in any account in which the gross amount of purchases has been charged as a debit. 553. Coming now to the question of the surplus on sales to non-members, if no dividends on purchases are paid to non-members any surplus is, we think, properly to be regarded as a trading profit. Dividends on purchases allowed to non-members are not quite in the same category as dividends paid to members, because in the case of members the discount or dividend is an essential part of the bargain. A purchase PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 121 by a member is made on the distinct understanding that, if the funds of the society permit, a dividend or discount or rebate will in due course be forthcoming. Whether there is this same implied contract where a non-member purchases we do not know; but the absence of any such understanding would make the dividends paid to non-members even more truly a discount, and therefore a trading expense to the society. 554. We will now consider the income derived by a Co-operative Society from the investment of its reserve funds. We have already said that there appears to be no sound reason for differentiating between reserves invested in stocks and shares and reserves invested in property, and we recommend that the income derived from invested reserves should, irrespective of the particular mode of investment, be subject to tax. 555. We recommend, in effect, that a society should be treated exactly as a limited liability company trading" in similar circum- stances and under similar conditions, and if our proposals are acted upon it will be necessary to amend the existing law in so far as it confers special exemption on Co-operative Societies. 556. In making these recommendations we are of opinion that we are not in any way enlarging the scope of the present Income Tax. We have not sought to widen or to narrow the conception of trading profit, for we think that from the transactions of a Co-operative Society with its members and with non-members a true trading profit can and does emerge. That profit is the difference between the sale price of the goods and the cost price of the goods plus the expenses of manage- ment ; and the true sale price of the goods is not the nominal price which the society receives on making a sale to the purchaser, but the net sale price remaining in the hands of the society after it has returned to the purchaser a discount in the form of a dividend on purchases. These dividends on purchases are not a distribution of trading profit, but a return of part of the purchase price. 557. No detailed reference to wholesale distributive Co-operative Societies is necessary. These societies have been formed by the retail distributive societies for the purpose of buying in the wholesale market the goods which the members of the retail distributive societies require for their use. The nature of their income and their manner of disposing of it is practically the same as in the case of the retail societies, the only difference being that their members, instead of being individuals as in the case of retail societies, are the retail societies themselves. 558. Productive Co-operative Societies are of two classes, the majority having been formed by the retail societies for the purpose of manufacturing goods for which there is a demand among their members. The other productive societies are com- binations of workpeople with the object of eliminating manufacturing profit by co-operation and so obtaining higher wages. Productive societies have hitherto been exempted on the grounds that the majority of the members are not liable to pay tax, any possible liability having been regarded as covered by the tax paid under Schedules A and B. Tax in respect of the distributed profits (except so far as they have been distributed to hitherto exempt retail societies) has been assessed by a direct charge on the recipient. 559. We recommend that wholesale and productive societies should be treated on exactly the same basis as distributive societies. It is perhaps scarcely necessary for us to point out that dividends on purchases paid by these societies to distributive societies will, under our recommendations, be treated as expenses of the paying societies, and as taxable in the hands of the distributive societies in so tar as they are not redistributed as dividends on purchases to the members of the distributive societies. 560. A recent development of the co-operative movement is the agricultural society, a combination of farmers for the purpose of eliminating the middleman's profit from the cost of goods required for their business, or of increasing the selling price of their produce by eliminating the profits which would otherwise be made by a selling agent. The position of these societies with reference to the Income Tax is different from that of the distributive societies in that the members of an agricul- tural society are taxable trading units, and the goods which the society purchases 27925 , 122 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. for distribution among its members are not for private consumption, but for use in a business. The intention is not to reduce the cost of goods consumed, but to increase the profits of a business. Dividends on purchases paid by an agricultural society are nevertheless discounts, but trade discounts which must be taken into account in computing the profits of the members. 561. So long as a farmer is assessed on a conventional basis under Schedule B, any dividend he receives from an agricultural Co-operative Society must be taken as covered by that assessment, since it is merely a reduction of the cost of the pur- chases otherwise chargeable in an account of which the assessment is supposed to represent the balance. When, as we recommend elsewhere, farmers are assessed under Schedule D, dividends on trade purchases from Co-operative Societies will be an item to be taken into account in computing liability. 562. We recommend that agricultural Co-operative Societies should not continue to have special treatment under the Income Tax law, and that, whatever may be done as regards other Co-operative Societies, no regard should be had in the case of these societies to the fact that they are registered under the Industrial and Provident Societies' Acts. In computing the trading profits of these societies it will, of course, be necessary to treat dividends on purchases as an allowable expense. 563. It was urged by some witnesses that if Co-operative Societies did not con- tribute by way of Income Tax their fair share towards the upkeep of the country, or if the area over which their trading extends becomes so considerable as to diminish materially the Income Tax revenue, and this necessitates additional taxation, then some alternative method of taxing them would have to be devised, but in our opinion this question is not one within the province of this Commission. 564. The legal obligation to deduct Income Tax from payments such as yearly interest of money extends to Co-operative Societies, just as it extends to all other persons, and (where the payment is not made out of funds which have already borne tax) a Co-operative Society is liable to account to the Revenue for tax so deducted. Purely as a matter of administrative convenience and economy the Board of Inland Revenue have entered into an arrangement whereby a Co-operative Society may furnish a list of the names and addresses of liable depositors to whom it pays interest, and such tax as may be due is then recovered by direct assessment on the recipients of the interest. It should be understood that this administrative arrangement is not peculiar to Co-operative Societies, and it is adopted solely in order to avoid the expense and trouble involved in collecting tax and subsequently repaying it to exempt depositors. In any case the Co-operative Society would not ultimately bear any tax on this interest, for if it were directly assessed on the amount of interest paid it would recoup itself by deducting the tax on payment of the interest. 565. We have recommended in the Section dealing with Taxation at the Source that when the application of that principle produces the effects indicated in the preceding paragraph, powers should be given to the Inland Revenue authorities to modify the system and to make arrangements that would avoid the necessity for charging dividends, &c, in certain cases as they arise, and for repaying all or the greater part of the duty to exempt persons or persons liable only at half the standard rate. Arrangements made under these powers would be general in their character, and would apply to Co-operative Societies as to other bodies, and if some such general arrangement were applied by the Board <>f Inland Revenue to Co-operative Societies there could be no cause of complaint on the ground that Co-operative Societies were receiving preferential treatment in this respect. 566. We desire to conclude this Section of our Report by saying that in our opinion the changes we have recommended will not result in any great increase of revenue We believe that there will be very little difference between the liability of Co-operative Societies under our proposals and under the existing legal position that has given rise to so great an amount of feeling, and we think it should be a source of satisfaction to them that, in being treated exactly on the lines of any ordinary trading company, the financial effects of the present exemption can in substance be still retained, without recourse to any differentia] treatment provocative of hostile criticism and recrimination. PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 123 SECTION XIII. SUPER-TAX. 567. Super-tax, which is an additional duty of Income Tax, superimposed upon the tax charged at the standard rate, was first levied for the year 1909-10 upon indi- viduals whose total incomes exceeded £5,000. The tax was charged for that year at Qd. in the £ upon the amount by which their incomes exceeded £3,000. Since then the point in the scale of income at which Super-tax begins has been gradually lowered to £2,500. the tax applying only to that part of the income which is in excess of £2,000. Further, the simplicity of the Qd. rate has given place to a scale of graduated rates, on successive " slices " of income, reaching in the highest ranges of income to 4s. 6d. in the £. The effect of the Super-tax in conjunction with the ordinary Income Tax is therefore to produce a gradually rising effective rate of tax, which, starting from 6s. in the £ at £2.500, reaches 10s. in the £ at £40,000, and thereafter slowly approaches but never actually reaches 10s. Qd. in the £. 568. Taxation at the source does not apply to the Super-tax, which is levied by direct assessment upon the owners of the income; and because the original body of Super-tax payers was both small and sensitive (there were only about 11,000 in 1910) it was arranged that the administration of the tax should be completely centralized and kept absolutely out of the hands both of the Local Commissioners ami of the Inspector of Taxes. It was entrusted to the Special Commissioners whom we have already described. The Special Commissioners obtain and examine all Super-tax returns, make all assessments, hear all appeals, and collect the duty. The number of persons assessed has grown with the development of the tax from rather more than 11,000 in 1909-10 to about 48,000 in 1918-19. 569. It will be remembered that when we were dealing with the question of Graduation (see paragraph 151) we recommended that Super-tax should begin at the £2,000 point. This maybe expected to have the effect of bringing within range an additional number of Super-tax payers amounting to nearly 30,000, and the question at once arises whether the same centralized system which was suitable for dealing with 11,000 cases in 1910 will be equally well adapted for dealing with 80.000 taxpayers. The advantages of complete secrecy, of independence of all local officials, and of uniformity of treatment and practice belong to the present centralized system, but these are boons that may be preserved at too great a cost. Besides, the lowering of the Super-tax level has brought within range of the tax a great number of taxpayers, manufacturers, traders, and professional men, who are quite accustomed to deal with their local Inspector on their ordinary Income Tax matters and are not so sensitive on the subject of the amount of their total income as were the original Super-tax payers, who were to a large extent people whose incomes were derived from property or dividends and who had not before been obliged to make returns of their total income from all sources for Income Tax purposes. 570. On the whole, we have come to the conclusion that the balance of advantage points to a partial decentralization of the Super-tax. When we were dealing with the functions of the Special Commissioners, we recommended that they should be mainly an appellate body, and we then suggested that their present assessing powers should be transferred to a Central Assessing Authority, from whose assessments an appeal should lie to the Special Commissioners. In our view it should be open to any Super-tax payer who desires it, to make his return to and to be assessed by this Central Assessing Authority, but we think that the Inspector of Taxes should be the person to issue Super-tax forms, and (unless central assess- ment is desired by the taxpayer) to examine Super-tax returns, make the assess- ments, and issue notices of assessment to the taxpayer. All appeals against Super- tax assessments, whether made locally or centrally, should be heard by the Special Commissioners. We believe that this plan will give to sensitive persons all the protection they need against local acquaintance with their private affairs, and will at the same time enable taxpayers who wish to do so to deal personally with the Inspector in regard to the settlement of their Super-tax liability. 571. The amount of a taxpayer's income for Super-tax purposes for any year is. broadly speaking, the amount of the income on which he has borne ordinary Income Tax for the preceding year. The advantage of this basis is that when the 2792.- I 2 124 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. Super-tax payer is making up his return he is required merely to aggregate figures already ascertained or available. Any adjustments, on appeal or otherwise, that the taxpayer has obtained in his Income Tax liability for the year 1 are therefore reflected in his Super-tax return for the year 2, and the Super-tax return is not as a rule required to be completed until these Income Tax adjustments have been made. It has been suggested to us that in the case of business profits the amount to be returned for Super-tax should be not the Income Tax assessment for the preceding year, but the profits of the preceding year. At present, when Schedule D assessments are made on a three years' average. Super-tax figures lag a long way behind the real profits, but if our recommendation that the .average system should be abolished is approved, and business profits are in future charged on the profits of the preceding year, this defect will be greatly reduced. If the profits of the preceding year had to be inserted in the Super-tax return, that return would no longer be an aggregation of settled liabilities but would contain figures still open to adjustment, and this would, in our opinion, greatly impair the existing simplicity of the Super-tax system. We recommend therefore that the present basis of Super-tax liability should remain unaltered. 572. It follows from the general basis adopted for Super-tax that income from any source liable to the ordinary Income Tax for the year 1 is assessable to Super-tax for the year 2, although in the year 2 there may be no income arising from that particular source. We have been asked to recommend that where this is the case a Super-tax payer should have the right to exclude from his Super-tax return the income received from that source in the preceding year. We are unable to approve of this suggestion. Cases of this kind are inseparable from any system that is not based upon the actual profits of the year of assessment itself, and as it is quite impracticable to assess to Super-tax during the year 2 the income of the year 2, it is clear that some such basis as the present must be adopted. If a taxpayer were to be allowed to reopen his Super-tax assessment on the ground that an investment that produced £10 in the year of basis had yielded no return in the year of assessment, finality would in no case be reached until after the end of the year of assessment, and this would be quite fatal to the success of the tax. It would also give a one-sided option to the taxpayer which would seriously imperil the yield of the tax. 573. Some witnesses have proposed that the Income Tax and the Super-tax should be merged and assesse'd together. If taxation at the source were abolished, and if Income Tax were invariably chargeable by direct assessment on the income of the year of assessment, it would, of course, be possible to charge the taxpayer in one sum at the effective rate appropriate to his total income. So long as taxation at the source is maintained at a standard rate — less than the highest effective rate — there is no possibility of merging the ordinary Income Tax with the Super-tax. Take the case of a man who has £40,000 a year from taxed sources and no other income. Unless tax is to be deducted at the source at 10s. in the £, which is an impossible supposition, that taxpayer must continue to bear Income Tax by deduc- tion at the standard rate, and pay his Super-tax separately by way of a direct assess- ment. The suggestion that the two taxes should be completely merged and dealt with as one is plausible, and conceivably desirable in the abstract, but we are satis- fied that there must needs be a separate assessment unless the founda- tions of the Income Tax are modified in a far more radical manner than we are prepared to recommend. 574. As Super-tax is assessed upon a direct return by the taxpayers without the check that taxation at the source supplies, the possibility of evasion by means of inadequate returns is always present. However carefully the returns are examined and compared with the information at the disposal of the assessing authority, the yield of the tax will always be (tartly dependent on disclosure by the taxpayer. In Part VI of this Report we make recommendations for the prevention of fraud and evasion, and those recommendations will apply to Super-tax as well as to the ordi- nary Income Tax. But, in addition to loss of duty by the fraud or carelessness of the taxpayer, the present law provides opportunities for legal avoidance of duty in certain circumstances. Tf a man is in business for himself and is liable to Income Tax on £10,000 in the year 1, he is required to show that amount in his Super-tax return for the year 2. But if he turns his business into a limited company, the tax- payer, who may still be in complete practical control of the business and entitled PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 125 to practically the whole of the profits, is required to return only his remunera- tion, if any, as a director, and the amount that he receives by way of dividends. In other words, while the undistributed profits of a private trader or a partnership are liable to Super-tax if owned by a person who is within the range of the tax, the undistributed profits of a company are not so liable. 575. This difference of treatment offers an inducement that certain people have not been slow to take advantage of. In the case of what is known as a " one man company," where practically all the shares are held by one shareholder, it will pay that shareholder, if he can live meanwhile upon his income from other sources, to refrain from declaring a dividend and to allow all the profits of his company to remain undistributed. When this plan is adopted it is sometimes varied by the shareholder borrowing from his company the money he needs for his current ex- penditure, in which case the sums so borrowed, although used by the shareholder as income, have been held by the Special Commissioners not to be taxable income in his hands. This state of things, which can go on from year to year so long as it suits the shareholder, is one that calls for a remedy. The problem can be handled in two ways. It could be enacted that the undistributed profits of a company should be allocated among the shareholders and regarded for Super-tax purposes as their income; alternatively, the undistributed profits of a company could be made liable to a special counter-balancing tax. Any universal application of either of these solutions would be open to considerable objections, and would apply to cases where there is no reason to suppose any avoidance of Super-tax is intended. We accordingly recommend that when the assessing authorities are satisfied that the profits of a company or a portion of them are retained undistributed or are distributed as bonus shares for the purpose of avoiding- or diminishing the liability of its shareholders to Super- tax, the income of those shareholders may be treated as if the profits or a portion of them had actually been distributed as an ordinary dividend. 576. There are plain indications that Super-tax is being avoided also by the alienation of income by means of deeds under which income is applied for the education or maintenance of the infant children of the Super-tax payer. These deeds often contain a clause giving the settlor power to revoke all or any of the trusts declared by the deed. As the parent is in any case obliged to maintain his infant children it would seem unreasonable that he should be able to avoid Super- tax on part of his income in this way. We recommend that in all cases of re- vocable deeds the income so alienated should be regarded for Super-tax purposes as the income of the settlor, and that in cases of irrevocable deeds, the income of a trust fund settled by a parent for the benefit of his unmarried infant children, with or without other beneficiaries, should be treated as the income of the parent to the extent to which it is actually paid to or for the benefit of the unmarried infant children. 577. It has been pointed out to us by official witnesses that where husband and wife have separate incomes, but do not claim to be separately assessed, there is no power to require a return from the wife, and that where the husband is unable to fur- nish information regarding his wife's income that income may escape assessment. We recommend that power should be given to the assessing authorities to require Super-tax returns from the husband and wife separately, where necessary, and to make separate assessments upon them, and that where the husband is assessed in respect of the joint income, there should be power of recovery from the wife in respect of the tax on her income, so that, where the husband's means are insufficient to defray the duty, the tax on the wife's income may not have to remain uncollected. We also recommend that the power given by sub-section 2, section 8, of the Income Tax Act, 1918, to require returns for Super- tax where the husband and wife have elected to be separately assessed should be transferred from the Board of Inland Revenue to the assessing authorities, to whom that power would seem properly to belong. 578. We recommend (a) that power should be given to the assessing authorities to require detailed particulars of any income returned for Super-tax assessment ; 27825 I a 126 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. (b) that they should have power to make assessments in cases where it has been found impracticable to serve a return ; and (c) that where a contingent interest becomes a vested interest on the happening of the contingency there should be power to make assessments upon the beneficiary for all the years during which the income was accumulating ior his uenefit, on the basis of the income accruing to him in each year before the contingency happened. 579. If our proposal to take away the work of making Super-tax assessments from the Special Commissioners is not adopted, and if the Special Commissioners, who are independent of the Board of Inland Revenue, remain the assessing authority, we consider that power should be given to the Board to examine Super-tax returns and assessments, to object to assessments, and to make surcharges, in the same way as Inspectors have power to do these things in regard to Income Tax. 580. The question of the liability to Super-tax of non-residents has been raised by several witnesses. Income arising in this country to a non-resident is liable to Income Tax; it is also liable to Super-tax if it is sufficient in amount, because Super-tax is only an additional duty of Income Tax. A non-resident with £5,000 a year from investments in this country pays the ordinary Income Tax by deduction from his dividends, and is liable to Super-tax in addition, not by deduction at the source but by direct assessment. While we have some hesitation as to the maintenance of this practice in principle, in view of the fact that a foreigner resi- dent abroad has no right to any deduction from the standard rate by reason of the smallness of his income from this country, or even of his total income, and therefore there is no consistency of principle — we find that if the practice is to be maintained, the effect of residence outside the United Kingdom places such difficulties in the way of obtaining returns, serving notices, and collecting duty, that any attempt to collect Super-tax from non-residents tends from one cause or another to break down in practice, and if the tax is to be effectually imposed upon non-residents the existing machinery must be supplemented. 581. In order that the liability to Super-tax of a non-resident may be calcu- lated, it is only necessary to have details of his income derived from sources in the United Kingdom, seeing that the Super-tax is chargeable only on that income, and we consider that it would be of material advantage to the assessing authorities if they were given the right to demand from companies particulars of dividends paid by them to non-residents so that assessments might be made in the absence of returns. With the object of enabling the authorities to recover Super- tax assessed in such circumstances, we recommend that all persons through whose hands income belonging to non-residents passes, whether companies in respect of their non-resident shareholders, or resident partners in firms where any of the partners reside abroad, or any other agent of a non-resident, should be required to make a return of the amount of income payable to non-residents, and should be chargeable in respect of the Super-tax due thereon, and answerable to the Revenue for payment of the duty. 582. Two points have been raised in connection with the calculation of Super- tax liability with reference to which wo have the following recommendations to make : — (a) Super-tax should continue to be assessed on the basis of the gross income before deduction of Income Tax; (b) where interest on arrears of Estate Duty is paid by a person liable to Super-tax, a deduction should be allowed of the gross amount which after deduction of tax at the standard rate would give a net amount equal to the amount of interest actually paid. For example, when the standard rate of tax is, as at present, 6s. in the £, and the taxpayer pays £140 per annum interest on arrears of Estate Duty, he should be allowed a deducl ion for Super-tax purposes of £200. This recommen- dation is not confined to cases of Super-tax liability, but is intended to apply also to statements of total income for Income Tax purposes. PART V.— ASSESSMENT, APPEAL, AND COLLECTION. 127 SECTION XIV. APPEALS. 583. Appeals against assessments fall to be heard either by the General Com- missioners or by the Special Commissioners. In Great Britain the Special Com- missioners hear appeals against assessments made by their own body, and, at the request of the taxpayer, against assessments made by the Additional Commissioners. All other appeals in Great Britain are heard by the General Commissioners. The Special Commissioners hear all appeals in Ireland. The determination of the Commissioners is conclusive on points of fact, but an appeal from their decision may be made to the High Court on a point of law, either by the appellant or by the Inspector of Taxes who represents the Crown at the appeal. In Ireland the appellant has the additional right of requiring his appeal to be re-heard by a Recorder or County Court Judge, but if he makes this election he cannot carry his case further. 584. When a taxpayer receives a notice of assessment he is allowed a period of twenty-one days within which to lodge a notice of appeal. Witnesses have sug- gested that this time is insufficient. One proposed that the period should be three months after the date of the notice of assessment, and another that it should be the period within which the Commissioners now have power to make additional assess- ments, that is, three years. We think that, speaking generally, the time allowed is ample, seeing that in any case of doubt a notice of appeal can always be lodged as a precautionary measure even if further inquiry should show that the taxpayer has no real grounds for appeal. There may, however, be cases where omission to give notice of appeal has arisen for a sufficient cause, and we recommend that, although the present time limit should be retained, the Appeal Commissioners should have power to hear an appeal in any exceptional case where they are satisfied with the reason given for the omission to lodge notice of appeal in due time. We also recommend that the appellant should receive at least fourteen days' notice of the date fixed for the hearing of his appeal. 585. Another witness proposed that where an excessive assessment has been caused by a mere error in figures the Commissioners should have power to correct it, notwithstanding that notice of appeal was not given within the prescribed time. This is not a case of real grievance for we are informed that, as a matter of practice, adjustment is now made in such cases, and since the inclusion of any directing words in the Statute would necessitate a definition of the term " error," which might easily lead to unnecessary litigation, we think this matter may well be left where it is. 586. We recommend that it should be made clear that the Commis- sioners to whom the taxpayer has appealed should have full power to require any information and the production of any evidence which they consider to be necessary for the determination of the appeal. 587. The evidence that we have received shows that in all cases of appeal the matter in dispute is first of all investigated as far as possible by the Inspector of Taxes, and that points susceptible of agreement between the two sides are settled between them. In the great majority of cases the amount of the liability is agreed in this way, and the personal attendance of the appellant before the Commissioners in those cases is rendered unnecessary, but the Inspector of Taxes has no statutory pow T er to make any adjustment of the assessment in the absence of a formal decision by the Commissioners ; we recommend that where after notice of appeal has been given any necessary adjustment of an assessment is agreed upon between the taxpayer and the Inspector, the Inspector should have power to amend the assessment accordingly. 588. In the case of assessments made on paying agents in this country in respect of foreign and colonial dividends there exists at present no right of appeal. We think it is undesirable that this position should continue, and if the suggestion we have made in the Section dealing with Special Commissioners is adopted the persons assessed in these cases will have a right of appeal to the Special Commis- sioners. 2792fi I 4 ISS REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 589. We have been asked to recommend that a shorthand note of the proceed- ings at an appeal should be taken at the request (and expense) of the appellant or the Inspector. Such a note would be useful mainly in cases where the decision of the Commissioners is challenged in the Courts, in those cases it might often be of considerable value, and we recommend that the suggestion should be adopted, subject to the proviso that any body of Local Appeal Commissioners should have the right to refuse the request, but in case of refusal the party requiring the note should be at liberty to transfer the appeal to the Special Commissioners, which latter body should permit a shorthand note to be taken whenever due notice of the request has been given. •390. If, immediately after the determination of an appeal, either the appellant or the Inspector is dissatisfied with the decision of the Commissioners as being erroneous in point of law, he may declare his dissatisfaction to the Commissioners, and may afterwards, within twenty-one days, require the Commissioners to state a case for the opinion of the High Court. We think it unnecessary that there should be an expression of dissatisfaction at the hearing, and suggest that it should be possible to require a case to be stated merely by giving notice to that effect at any time within twenty-one days after the determination of the appeal. It will be noticed that the right of appeal to the High Court is given only in cases that involve a point of law. In this connection two opposing suggestions have been made to us, (a) that an appeal to the High Court should be allowed on questions of fact, and (b) that questions concerning the true amount of income and profits should always be regarded as questions of fact, with no right of appeal to the Courts. We do not favour either of these proposals. With regard to suggestion (a) we do not find that there is any general dissatisfaction with the present position. We consider that the Appeal Commissioners are able to deal with questions of fact that arise on Income Tax appeals more easily and more rapidly than the High Court, and we deprecate any such alarming extension of the field of litigation as the acceptance of this proposal might give rise to. The further suggestion (b) would, we think, impose an improper limitation upon matters on which the Courts now have jurisdiction. The Income Tax is a national tax, and the true amount of assessable profit must be judged by a uniform standard over the whole Kingdom. Suggestion (b) appears to us equivalent to the setting up as the criterion of assessable profit the amount that would be arrived at on certain undefined principles of accountancy. We are not aware that any uniform standard in these matters is followed by professional accountants. Moreover, every case of dispute that is not a matter of ascertainable fact must in the end resolve itself into a question of the true meaning of certain words in a Statute, and this can obviously be decided only by the judges. 591. The provision for a case to be stated for the High Court applies only to appeals against assessments, to claims for expenses of management made by a Life Assurance company, and to claims in respect of diminution of profits under Schedule D due to the war. There are several other applications that may be made to the Commissioners which are not technically appeals but upon which a determination of the Commissioners is necessary, and the limitation to which we have referred excludes the decision of the Commissioners in those cases from the purview of the Courts. The matters we have in mind are questions raised in connection with loss of profits due to cessation, death, bankruptcy, or other specific causes, questions of succession, applications for relief in respect of loss, applications where the profits from the occupation of land fall short of the assessment, and applications for relief in the case of new businesses and businesses discontinued. It is clear that a point of law is as likely to arise on one of these " applicat ions " as on an appeal against an assessment, and we recommend that all decisions of the Commissioners which involve a point of law should be subject to appeal to the High Court. 592. Witnesses on behalf of the legal profession have .suggested to us (een made to us that the banks should be obliged to allow the inspection of the accounts of their customers, and we recommend that this right of inspection should be granted only under an order of a judge of the High Court or County Court after the taxpayer lias refused or neglected to produce his bank pass-book when required by the assessing authorities, 27925 K 138 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 637. Coming now to the question of the penalties that should attach to incorrect returns, we recommend (a) that the existing time limit of three years within which pro- ceedings may be taken to recover penalties should be extended to six years ; (b) that the penalties recoverable in the High Court should be in- creased to correspond with those that can now be imposed by the Commissioners ; (c) that the penalty for a false return by a limited company should be recoverable from the company itself or from its directors or secretary, and that the penalty for a false return by a firm should be recoverable either from the partnership as a whole or from the precedent acting partner or any partner who in fact made the return ; provided that no penalty shall be recoverable personally from a person who is proved to have had no knowledge of the falsity of the return ; (d) that the offence of making an incorrect return should not be capable of being purged by the belated rendering of a correct return, if the taxpayer is not able to show that the error in the original return was due to a bona fide mistake ; (e) that the penalty for aiding and abetting should be made more severe. 638. There may be cases which are not proper cases for the imposition of a penalty, cases where no fraud has been perpetrated, but where the past assessments are shown to be inaccurate and loss of duty has resulted. If our recommendations in the Section dealing with the Making of Assessments are adopted any duty found to have been unassessed or under-assessed will be capable of recovery for a period of six years. We think that this right of recovery should be subject to a corresponding liability on the part of the Crown to repay to the taxpayer sums overpaid owing to a genuine error, as distinguished from sums which have been assessed in the ordinary course, and against which the taxpayer has failed to appeal. We have already, in paragraph 426, dealt with the duty found to have been under-assessed in cases of fraud. 639. It has been suggested to us by many witnesses — and not by accountants only — that all traders should be obliged to keep accounts. However desirable this may be in theory, we feel that it is a matter that does not lie wholly within the area of our subject, and we believe that to attempt, under cover of an Income Tax provi- sion, to attain this end might be open to misconstruction and would throw unnecessary odium upon the Inland Revenue Department. It must be borne in mind that the Revenue is not wholly without remedy in the case of a trader who keeps no accounts, and that by improved administration and methods of assessment further information on which to base estimated assessments may be obtained. In any case, we think it would be quite impossible for the law to enforce as an Income Tax measure a provision that made it compulsory on every trader in the country to keep accounts. There are traders who are quite incapable of keeping proper books, even if they have the desire to do so, and many of the smaller traders are exempt from Income Tax. 640. We have dealt elsewhere with the question of evasion of Super-tax. The recommendations we have made under that heading should be considered in connec- tion with the foregoing recommendations, to which they are in effect ancillary, but the penalty provisions should apply to offences in connection with Super-tax as well as to offences in connection with Income Tax. 641. If the recommendations we have made in this Part of our Report be adopted, the result, we believe, will be so to reduce inaccuracies in returns, whether such inaccuracies are accidental or intentional, as to produce additional revenue amounting to £7,000,000 or £8,000,000 a year. We are of opinion that an even greater amount might be immediately recovered if it were enacted that the more stringent penalties we have advocated should not become operative for some period, such as a year, after they are first embodied in a Statute. There may be persons who are anxious to set right defaults of past years, and who would do so if they were not too afraid of their legal liabilities to take any steps towards rectification. Any such suspension of proceedings as we PART VI.— THE PREVENTION OF EVASION. 139 have in mind should be made conditional on all losses, with interest, being made good to the Revenue. 642. It is, we fear, inevitable that suggestions which tend to strengthen the administration will meet with a certain amount of opposition, some of it genuine, though much of it unworthy, and proceeding from persons whose sense of citizenship is imperfectly developed. But we cannot lose sight of the fact that the Government is in effect a partner, so far as the appropriation of profits is concerned, in every business to the extent of anything up to 50 per cent., as regards Income Tax and Super-tax alone, and the powers we have suggested for the verification of returns would certainly be admitted to be reasonable for any partner in a firm who desired to ensure that a correct appropriation of profits should be made to his own personal account. Moreover, the existence of proper powers of investigation and punishment would be so deterrent in its effect as to render the exercise of those powers unnecessary in the great majority of cases. 643. In this connection we venture to quote the following passage from a memorandum recently written by the Secretary of the New Zealand Treasury for the information of the Acting Minister of Finance, and communicated to us. The extract is sufficiently striking to need no comment : — ■ " I do not think that in the Old Country there is any provision for inspecting the books of taxpayers such as there is in New Zealand. Before such a provision was introduced into New Zealand, the amount realised from Income Tax was, comparatively speaking, insignificant. After the introduc- tion of a proper system of inspection the revenue enormously increased. " It was feared when the system of inspection was first introduced in New Zealand that complaints would be made regarding its inquisitorial nature. Experience, however, proved that the effect was exactly in the opposite direction. The visits of the Income Tax Inspector came to be welcomed, especially by those persons who failed to understand thoroughly the intricate provisions of the law regarding taxation." 644. In concluding this Part of our Report, we wish to put on record the fact that the views expressed by witnesses, not connected with the Revenue, on the necessity for stringent administration in the interest of honest and scrupulous taxpayers, were even more vigorous and far-reaching than those put forward by witnesses who represented the Revenue. Indeed, the most emphatic evidence on the subject of penalties is to be found in the statement of an experienced and eminent lawyer who has been engaged against the Revenue in very numerous Income Tax cases. He said, " people must be made to understand that if they defraud the Revenue they are committing a mean and despicable offence against every one of their fellow taxpayers," an offence which he declared should be punished by imprison- ment, so that the offender " should be made to feel the ignominy and disgrace attaching to the crime he has committed." In our opinion, this expression of detestation voices a growing; feeling among the well-affected portions of the community. We think that no doubt need be entertained of the complete acceptance by the public of increased stringency in administration, provided they are satisfied that equity will be maintained ; on the contrary, we believe that their sense of justice and fair play, so far from being outraged, will be strengthened and encouraged. CONCLUSION. 645. Whenever in the course of our Report we have had occasion to make a definite recommendation of importance, we have printed the passage in large type, and we therefore think it unnecessary to retrace our steps and summarize our recommendations. We referred at the beginning of our Report to the valuable assistance rendered to us by our witnesses. Many of the suggestions which they put forward are embodied in our recommendations, many are mentioned in our Report as suggestions we were unable to accept, but there remain of course a very great number which we were unwilling to adopt but have not specifically mentioned. It has not been possible for us to state on every point and in full the reasons for our decisions; so detailed and complicated is the subject of our inquiry 27925 K 3 140 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. that to have clone so would have added greatly and unnecessarily to the length of our Report. 646. Although we have endeavoured to indicate the principles underlying our more important decisions, and the reason for any modification of those principles in a particular case, we think that our Report would not be complete without a reference to what appears to be the vital principle of the tax— the principle of " ability to pay." We have endeavoured to apply this principle to every case of hardship that has been brought to our notice. We nevertheless fear that we may incur unfavourable criticism on the part of taxpayers who feel the weight of a burden of taxation which it has seemed to us improper to remove, from them or to lighten ; we would ask these critics to bear in mind that, although well acquainted with the heaviness of their own burden, they are not always aware of the full weight of their neighbour's load, and that for this reason the individual is not always an impartial judge of the merits of the system of which he complains. 647. It has been of great advantage to us that this Commission is so repre- sentative and diversified in its composition. Although our recommendations may not be acceptable to particular taxpayers we think they should at least be regarded as the considered and unprejudiced opinions of a widely representative body on a subject which they have had exceptional opportunities of exploring. 648. In considering our decisions we have borne in mind the undesirability of restricting commercial activities or of suggesting anything that might tend to diminish that national prosperitv on which the success of the tax primarily de- pends. In our endeavour to create an effective revenue machine we have ignored all question of personal interests. The interests of the individual cannot be placed before the interests of the nation. Our main purpose in proposing adminis- trative changes was to remove anomalies and anachronisms, and to allay that irritation on the part of the taxpayer which must inevitably follow the efforts of the Revenue officials to administer a complicated system of taxation under the authority of a Statute that is not adapted to modern business requirements. With respect particularly to the increase that we have recommended in the powers of the Revenue authorities, we would like to point out that we have endeavoured to avoid the danger of setting up machinery that might hamper industry, even though it might produce a larger revenue; and we wish to emphasize the fact that the powers to which we refer are merely the powers of the general body of taxpayers delegated by them to an authority acting for the community in the common interest, and established for the purpose of securing a fairer apportionment of taxation and preventing the dishonest or the unscrupulous citizen from avoiding his just contribution. 649. We have been guided also in our deliberations by a desire that the machinery of taxation should not be made more complicated, but that it should be simplified at any point where simplification is consistent with justice and com- monsense. A plea for simplicity was made by a great number of witnesses, some of them experts in dealing with Income Tax matters on behalf of the public, but we found their suggestions generally vague and indefinite. They were either unable to give us concrete or definite proposals, or, where they did make proposals, we found that to adopt them would be to do injustice to taxpayers whose peculiar circum- stances would not have been recognized, or to expose the Revenue unnecessarily to the risk of loss. We have formed the opinion that in Income Tax matters simplicity is not the sole object to be aimed at, and that the price that would have to be paid for a simple Income Tax could not be justified. 650. On the other hand, a tax that aimed at providing legislative provisions for every case, so that no hardship of any sort should be possible, would be so intricate and detailed, so full of exceptions and provisos, that it would be unintelligible to the ordinary taxpayer, and would render the machine ineffective. Mr. Gladstone's declaration in 1853 — " Whatever you do in regard to the Income Tax you must be bold, you must be intelligible, you must be decisive "—has lost little of its Force in the intervening years, though the advice it contains is now much more difficult to follow. There is a point at which legislative provision must cease if the tax is not to be smothered under a mass of detail. CONCLUSION. 141 651. Taking our recommendations as a whole we are satisfied that if they were now adopted in their entirety there would be no ultimate loss of revenue, and that there would not even be a loss of revenue in the years in which the changes were gradually approaching their full effect. 652. In concluding our Report, we have to express our deep sense of obligation to our Secretary, Mr. Ernest Clark. His great knowledge of the subject matter of our inquiry, together with his outstanding ability for organisation and arrange- ment, has enabled the work of the Commission to proceed with a smoothness and order which we have constantly appreciated during the course of our sittings. But even adding to these qualities his originality and ingenuity, if it had not been for his foresight and self-sacrificing devotion to his task, it would have been impossible for this Report to have been issued at so early a date. We cannot over-estimate the value of his share in our labours. Our thanks are also due to our Assistant Secretary, Mr. H. M. Sanders, whose work, particularly in connection with the drafting of the Report, has been most valuable, and to the other members of the staff who have so ably seconded their efforts. (Signed) COLWYN (Chairman). C. W. BOWERMAN.* a WILLIAM BRACE.* b t ERNEST G. PRETYMAN * c E. E. NOTT-BOWER.* d N. F. WARREN FISHER.* e J. S. HARMOOD-BANNER.* f WALTER TROWER. R. M. HOLLAND-MARTIN. J. C. STAMP* g GEOFFREY MARKS.* h HENRY J. MAY.* i PHILIP A. BIRLEY. J. WALKER CLARK.* j WILLIAM GRAHAM.* k D. M. KERLY. LILIAN KNOWLES.* 1 WILLIAM McLINTOCK.* m E. MANVILLE. A. C. PIGOU.* n NICHOLAS J. SYNNOTT.* o H. A. TROTTER, E. Clark, (Secretary). H. M. Sanders, (Assistant Secretary). Dated the 11th day of March, 1920. 2, Queen Anne's Gate Buildings, Westminster, S.W.I. * Signatures subject to the Reservations which are appended. Reservations are given below : — The references to the several a. See page 163. f. See pages 147, 165. k. See page 163. b. „ „ 163. 0- „ page 166. 1. „ pages 142, 147, 151. c. „ „ 165. h. „ pages 142, 144, 147. m. „ page 166. d. ,. „ 163. %. „ page 163. it. „ „ 163. e. „ „ 163. J- „ pages 142, 147, 150, 151. n. „ pages 142, 147, 161. | Subject to the following Reservation : — " 1 do not agree to the £150 limit for single persons." 27*126 K 3 142 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. I. RESERVATION TO PARTS I AND II. 1. The undersigned Commissioners wish to make the following reservation in regard to the scope of the inquiry. 2. The reference to this Commission was in the widest terms, namely, " to inquire into the Income Tax (including Super-tax) of the United Kingdom in all its aspects" under four main headings, namely, (1) scope, rates, and incidence of the tax; (2) allowances and reliefs; (3) administration, assessment, appeal, and collection; (4) prevention of evasion. 3. The last three subjects of inquiry, in so far as they affected individuals, were fully considered, but we think that the " scope " and " incidence " of the tax " in all its aspects " were not fully considered, and that in dealing with the other heads of the inquiry due weight was not given to some relevant aspects of the incidence and scope of the tax. 4. Apart from the Terms of our Reference we have the high authority of the Select Committee of the House of Commons of 1861 (which included Mr. Robert Lowe and Sir Stafford Northcote) " that it would be unjust to make any alteration in the present incidence of the Income Tax without, at the same time, taking into consideration the pressure of other taxation upon the various interests of the country." The Committee recommended in particular the consideration of the effect of the Succession Duty. 5. The reasons which impelled that Committee to recommend a fuller inquiry into the system of taxation as a whole are much increased in number and force since 1861, owing to the great alteration in the system of Income Tax, and its new features of (a) high and steep graduation, (b) Super-tax, (c) differentiation, and owing also to the great extension of abatements and allowances, combined with a. high standard rate of tax. 6. We submit that an inquiry into the scope and incidence of a tax is incomplete unless the effect of that tax is considered in connection with the imposition of other burdens; and unless taxation is regarded not merely from the point of view of the individual, but from that of its general result on production, industry, and saving. These questions affect and react upon that " ability " to bear taxation upon which some stress is laid in the Report. As has been pointed out, the State is now in effect a partner in every trade and business, and being entitled to a share of the profits is necessarily interested, therefore, in the maintenance of the total volume of profits. 7. It was recently stated by the Right Hon. A. Bonar Law that whereas in 1912 the indirect taxes produced 42 per cent, and the direct taxes 58 per cent, of the total taxation, in 1918 indirect taxes produced 18 per cent, and direct taxes 82 per cent., and the actual and relative burden of indirect taxation on necessaries or quasi-necessaries, especially in the case of the lower incomes, was discussed by the Rt. Hon. H. Samuel, M.P., in a lecture before the Royal Statistical Society on the 21st January, 1919. 8. We had clear evidence from witnesses representing the working classes that they looked upon direct taxation as the fairest and best means of taxation, and that they would not be opposed to an extension in the range or rate of the Income Tax if indirect taxation were correspondingly reduced. 9. Another question which, in our opinion, should be fully considered is the effect of the Death Duties, considered separately or translated into an annual tax. This question was considered by Sir Charles Dilke's Committee of 1906, which first suggested a system of graduation by Super-tax. 10. Since that time there has been a large extension of the area of graduation and rates of Death Duties. It is obvious that " ability to pay " is thus seriously affected, especially in the higher incomes which bear the greater burden, and a consideration of this point might materially affect the question of the exemption limit of allowances, and of the scale of graduation both of Income Tax and Super- RESERVATION TO PARTS I and II. 143 tax. Mr. Herbert Samuel pointed out in the lecture previously referred to that in the case of an estate bringing in an income of £50,000 a year the burden of combined Income Tax and Death Duties amounts to 64 per cent., bringing down the net income to £18,000 a year. It may well be that if the effect of the Death Duties were fully considered, the recommendations of the Commission might be materially altered. 11. Other matters are the effect on actual saving and the motives for saving, and on the supply of capital necessary to replace war-destroyed capital and to extend production and industry. 12. We are asked to report on the assumption that the sum to be levied by the tax is to be no less a sum than the present, and it is therefore materia^ to consider whether a very steeply graduated tax on higher incomes will not tend in course of time, and perhaps soon, to reduce the whole volume of taxable income. 13. During the last few years enormous sums have been allocated out of the revenues of the State for so-called public assistance, i.e., for the direct material or social benefit chiefly of those classes of persons who are now exempted from direct taxation, or receive the benefit of the lower rates of Income Tax. Leaving out subsidies for rates, it appears from a recently published Return (No. 218, July, 1919), and an official answer in the House of Commons, that the total amount of such State subsidies amounts to about £182,000,000, or if the bread subsidy is left out, about £132,000,000. It is proposed to extend these subsidies in the case of education and unemployment, and the amount has been recently increased to the extent of £10,000,000 for old age pensions. Under other heads come the increase of wages to railway servants, the subsidy to the coal industry, and the proposed grant for houses of the working classes. 14. It is also material to consider that the present scheme relieves a very large number of persons, who are also voters, from all payment of tax, and largely reduces the liability of a great many more. Only 3,406,000 persons pay Income Tax out of a total number of Parliamentary voters amounting to 21,392,322. A wider investigation than we have been able to make would enable us to consider the question whether it is conducive to wise and economical administration that so many million voters should pay no sum by way of direct taxation. 15. We think that sufficient consideration was not given to the fact that we are dealing with a War Budget, the result of a struggle in which the safety of the whole community was at stake. We consider that the price of the safety achieved by this struggle should be more widely distributed. 16. For the above reasons, whilst on the evidence before us we accept the Report as a whole as a method of raising an exceptionally large fixed sum under abnormal conditions, we consider that to complete the inquiry and to do full justice to all taxpayers in the interest of future revenue and industrial production, the points we have indicated should be fully and impartially considered; moreover, if the needs of the Revenue are considerably lowered, or there is any material reduction in profits and prices, the scheme of exemption, allowances, and graduation may have to be altered. (Signed) GEOFFREY MARKS. J. WALKER CLARK. LILIAN KNOWLES. NICHOLAS J. SYNNOTT. 27925 K 4 144 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. II. RESERVATION TO PART I, SECTION VIII; PART III, SECTIONS VI and XVI: and PART V. SECTION N. With due deference to the opinions of my colleagues. I desire to make certain reservations to the recommendations of the Royal Commission in reference to the following subjects. Part I. Section VIII. Casual profits. 1. I agree generally with the recommendations contained in paragraphs 91 and 93 of the Report. 2. I do not, however, agree that profits arising from ordinary changes of investment should be charged " if and when they constitute a regular source of profit." Nor do I agree that the ordinary speculative transactions of individual taxpayers, if they result in a profit, should be subject to tax. 3. Further, I cannot agree that, if the recommendations as to the imposition of a tax are accepted by Parliament, the limitations as to the set-off contained in paragraph 94 are justified. My reasons for these views are as follows. (a) That to tax profits arising from ordinary changes of investment is repug- nant to the conception of the tax as a tax on income. (b) That if profits are to be taxed as part of a taxpayer's regular income, there is no reason why losses should not be treated as a diminution of regular income, and allowed as a set-off against the total income, how- ever derived, subject to the limitation that losses should not be carried forward for more than six years. (c) The existence of a speculative market, both in securities and in commodi- ties, has an economic value to which sufficient consideration has not been given. (d) The tax would be difficult to collect, and would encourage the practice of evasion. (e) There has not been before the Commission sufficient evidence from re- sponsible bodies, such as the Committee of the Stock Exchange, to justify the far-reaching recommendations which are made. (/) That if it is necessary to raise revenue from speculative transactions, it should be done by means of stamp duties (so far as the transactions to which such duties are applicable are concerned) rather than through the Income Tax. Part III. Section VI. The exemption limit. 4. I am of opinion that when due regard is had to allowances and reliefs, the exemption limits recommended by the Commission, namely, £150 for unmarried taxpayers and £250 for married taxpayers, are too high. 5. I feel some doubt as to whether the amount of the exemption limit lor married persons may not be justified, but it must be remembered that in households which enjoy only a small income, the wife is an asset rather than a liability. As regards the limit for unmarried persons, I am convinced that there would be a taxable margin even if the exemption limit were lowered below the existing figure of £130. My reasons for this opinion are as follows. (a) The smaller earned incomes have increased proportionately to the rise in the cost of living, and in many cases have gone beyond it. (b) The possibility of increasing earnings where payment by results has been or can be adopted, has not been sufficiently considered. (c) My own experience of the increase in the amount of small insurances derived from persons with .small incomes, convinces me that such in- comes now show a taxable margin which would justify the maintenance of direct taxation at its present level and the cost of collecting it. RESERVATION TO PART I, S. VIII ; PART III, S. VI, AND XVI ; and PART V, S. X. 145 (d) Sufficient consideration has not been given to the indirect reliefs, such as the bread subsidy, which are now in force. 6. I feel that undue weight has been given to political considerations in the decision of this question. I believe that proper explanation of the financial position of the country would reconcile wage-earners to the necessity for increased taxation, and that to raise the necessary revenue, so far as is possible, by direct taxation on all classes, is a desirable method of bringing home to the mass of voters their political responsibility. Part III. Section XVI. Superannuation Funds, TitOVIDENT AND THRIFT FUNDS, &C. 7. I cannot agree that there is any difference, either in their principles or practice, which would warrant the application of different principles of taxation to these funds. A comparison between paragraphs 317 and 321 will show that the method by which the two classes of fund are built up, and the benefits which they give, are identical, except to the extent that there is no direct provision in a Provi- dent and Thrift Fund as described in paragraph 321 for payment of pensions. It is, however, evident that the " capital sum " received from the Provident and Thrift Fund can be converted into an annuity, and that this power places the beneficiaries in both classes of fund on exactly the same footing. 8. I therefore submit that whatever principles of taxation are applied to one class of fund should, in justice, be applied to the other, and I suggest that the recommendation of the Commission is based on some confusion between the so-called Provident and Thrift Funds and the Thrift and Self-help Societies described in paragraph 323. Part V. Section X. Life Assurance companies. 9. I agree with the contentions of the English Life Offices as to the basis of assessment which should be applied to Life Assurance companies. It is admitted on all sides that the business of Life Assurance is a thing sui generis, and that the principles of taxation which can be applied to ordinary trading companies are inapplicable, without some modification, to Life Assurance companies. I submit that the statement in paragraph 510 to the effect that the alternative basis of charge on Schedule D profits, or on interest less expenses, whichever is the greater, is " common to all trading concerns " is not a complete statement of the case. As a matter of practice, this alternative basis imposes no special hardship on any con- cerns except Life Assurance companies, and it was shown that where it appeared likely that such hardship would arise in the case of banks, discount brokers, and members of the Stock Exchange, special legislation was passed which would exempt them from the hardship to which Life Assurance Offices were still left subject. 10. Further, I submit, and it was agreed by the official witness (see Minutes of Evidence, Questions 27,757 to 27,762), that the legal decision that interest as such was a separate subject matter of taxation has been found incapable of general application, and has had to be modified in certain directions in order to avoid in- equities, although the claim of the Life Offices for some relief from the burden imposed on them by the decision referred to has constantly been refused. 11. The official view that the interest income of the Offices is taxable income of the policyholder cannot, in my opinion, be sustained. The policyholder, unlike other investors, not only loses control of his capital, but the interest on it is never reduced into his possession during the currency of his policy, and cannot therefore be taxable income as the interest from an ordinary investment would be. 12. If the policyholder is the taxable entity, then it is submitted that the Government is bound to find some method of meeting the case of those policyholders who are exempt from or only partially liable to the standard rate of tax. Since this is impossible, it is submitted that the method of taxation on profits will produce the most equitable results, and is in the closest analogy with the methods applied to companies and individuals generally. 13. The official witness agreed that taxation on an interest basis produced inequitable results as between with-profit and non-profit policyholders in the same Office, and between the policyholder who died unduly early and the policyholder who 146 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. outlived his fellows and paid into the Office more than he received. The official witness further stated that the present basis of assessment embarrassed the Life Offices in the conduct of their business. 14. Some of these difficulties would be met by the suggestion that the Offices should be taxed at a differential rate lower than the standard rate. It is admitted that this is not an entirely satisfactory alternative, since it gives too little to the very large number of exempt or partially liable policyholders, and too much to those who are subject to the full rate and to Super-tax. Nevertheless, it is in accordance with the general principles of average applied to Life Assurance business, and was supported by the official witness. 15. The new method of graduation removes partially the injustice to the policyholders, since those who will in future be liable to the full rate of tax can have no grievance in regard to that portion of their interest income which, on the official hypothesis, they receive through the Life Office. The suggested graduation does not, however, touch the case of the Super-tax payer, or of the exempt or partially liable policyholder. 16. The alternative to the present option now suggested, namely, that invest- ment income, less expenses, or the amounts paid to shareholders, should be charged, is not satisfactory. It is agreed on all sides that dividends payable to shareholders should be taxed. The basis of the suggestion appears to be that the principle of taxation, interest less expenses, produces no revenue in the case of industrial Life Offices. It is submitted that since there is no difference in the principles on which Life Assurance business is conducted by both industrial and ordinary companies, the necessity to impose a different basis of assessment on the industrial offices implies the breakdown of the principle of taxation which is proposed for ordinary Life Offices. This breakdown is further emphasized in the proposal which the Commission did not support, that the industrial business of a Life Office should be treated as a separate business from its ordinary life business. 17. No answer has ever been given to the contention of the Life Offices that since the principles of taxation applied to them would, if pushed to extremity, reduce them to insolvency as a result of income taxation alone, and that since this is a state of things which could not produce similar results in the case of a private individual or of any other form of company, it is manifestly unjust. 18. The recommendation of the Commission that any profits from annuities should be taxed as income of those Life Offices which grant annuities, is a proposition that such offices should be taxed not only on their investment income but also on their trading profits. The injustice of this is evident, particularly as the relief which is granted to private traders under section 34 of the Act of 1918, is not allowed to the Life Offices. The argument that the profits on annuity business are the same as the profits from reversions is unsound. Profits from reversions are profits of the company derived from the investment of a portion of its funds. Profits from annuities, although they fall into the general surplus of the Office, are not investment income of the Offices while the annuity fund of the Office and the annuities are separately taxed. 19. The Report of the Commission suggests that the subject of a differential rate is one so bound up with the whole principles of insurance that it might be dealt with by a body specially designed to consider insurance as such. I agree with this suggestion, which might be extended to cover consideration of the whole subject of the taxation of Life Assurance companies. In this connection it is note- worthy that Life Offices are taxed in an exceptional way in every foreign country and in our own Dominions. Only in the Union of South Africa are Life Offices taxed on the principles which are applied to them in this country, and the explana- tion of this is that in the preparation of her Income Tax Act the Union of South Africa was advised by an official of Somerset House. On the other hand, the Government of India has recently applied to the Life Offices in India the principle of taxation advocated by the English Life Offices. 20. Owing to limitations of time which press very hardly on those members of the Commission who do not see eye to eye with the majority of their colleagues, I have been unable to submit the conclusions embodied in this memorandum to any of my fellow-commissioners, and I am therefore compelled to sign it alone. (Signed) GEOFFREY MARKS. RESERVATION TO PART II, SECTION t. 147 III. RESERVATION TO PART II, SECTION I. 1. The undersigned beg to express their disagreement with that Part of the Report (Part II, Section I) which recommends the retention of the principle of " differentiation " which at present imposes a lower rate of tax on so-called " earned " incomes than on " unearned " incomes. It is true that the system now proposed effects the distinction (which is equivalent to a bounty) in favour of the " earned " income by subtracting a fractional amount (l/10th) from such income, to obtain the net assessable income ; instead of by the present system of a differential rate of tax- but the new system is, we submit, equally arbitrary, is based on an alleged principle which is capable of a variety of meanings, and does not represent a real distinction in fact, when fully examined, and for these reasons and many others is not properly applicable to a just system of taxation. 2. As a canon or method in the Income Tax code, " differentiation " is a modern feature, owing its origin to the Select Committee of the House of Commons of 1906, of which the original inspirer and dc facto Chairman was Sir Charles Dilke, whose Report, it is to be observed, was not adopted. Up to that date successive Chancellors of the Exchequer had refused to adopt the method of differentiation, as departing from the root principle of the Income Tax that income was to be taken as a fact, and not vicariously measured by its origin or source. 3. From first to last the Committee of 1906 were in difficulty as to nomen- clature, " precarious," " spontaneous," and other alternative adjectives being succes- sively rejected. The fact is, that the difficulty of definition was due (1) to material differences of view as to the object to be obtained; (2) to the fact that none of the alternative expressions, including those which were eventually adopted — " earned and " unearned " — covered a real distinction in the great bulk of incomes, which in fact might with some reason be said to come under either head, or both heads. The truth of the matter is evidenced by the proceedings of the 1906 Committee. The driving power of the demand for differentiation was the popular notion that the earned incomes on the whole were small, and the unearned were large; it was in fact a demand for graduation on a higher scale. This has been accomplished by successive increases in the steepness of graduation, by increased rates of tax for the higher incomes, and by the Super-tax; whilst the revision and increase in the Death Duties place a heavy discriminating tax on the capital funds from which unearned income proceeds. In addition, as a member of the Commission (Dr. Stamp) has pointed out (Economic Journal, Vol. XXV., p. 168, " The Meaning of Unearned Income "), there was the effect of propagandist literature down to the Land Campaign of 1910, and even now, which pointed to many owners of property as having received some- thing for nothing, and which held up the possession of large " unearned " wealth as at once unethical and unjust. " Their appeal " (as Dr. Stamp states) " to primitive passions was an effective finish to political harangue." 4. The actual position, during and since the war, is largely reversed. Earned incomes have enormously increased, the figures down to 1918 (which can be seen in Appendix No. 15 to the Minutes of Evidence) showing a very large increase in " earned " incomes, even after deducting the 80 per cent. Excess Profits Duty, which of course should be added to show the whole increase; whilst the income from property and investments shows an increase almost entirely balanced by the interest and service of the various War Loans. At the same time the capital value of Stock Exchange investments (all so-called " unearned ") shows an enormous depreciation. 5. The truth of the matter is that every investor, especially those in foreign and railway securities, has been made aware that there is as much " precarious- ness " in many forms of " unearned income " as in certain kinds of " earned " income; since " earned income " covers many classes of income, from those in which personal effort is everything, to those where it is an infinitesimal element, and capital, goodwill, and monopoly are the principal ingredients. The element of personal effort varies even in the same business or vocation, and it is impossible to measure effort, or the part played by it in so-called mixed incomes. 148 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 6. If there is to be any uniformity of principle in taxation it seems strangely inconsistent, first to put a special tax, by an Excess Profits Duty, on earned incomes, and then to give incomes of the same character a special exemption or rebate. For differentiation is an exemption and nothing else, and, like all exemptions that are not entirely justifiable, works a double injustice — the theoretical one of making the burden unequal, and the concrete one of imposing the loss of revenue caused by the exemption as a burden on the unexempted. According to Mr. Gladstone's well- known version of the principle, the exemption of one man means the taxation of another. 7. Figures presented to us (see Appendix No. 15 to the Minutes of Evidence) show that this particular abatement or exemption results in a loss of revenue of about £12,500,000. In other words, if " differentiation " were abolished the proposed increase in the rate of the Super-tax above 10s. in the £ would have been unnecessary, and the evidence of the witness representing the Scottish Trades Union Congress Parliamentary Committee was to the effect that 10s. in the £ was a reasonable and proper limit for direct taxation, even under present abnormal conditions. (Q. 19,032.) 8. It is suggested that the distinction in question is justified on the ground that the recipient of a professional or industrial income is obliged in ordinary prudence to save a portion, and that the saved portion should not be taxed. It might be a sufficient practical answer to reply that he now gets the benefit of the exemption whether he saves or not, and that it would be impossible to discover in most cases how much was saved. But the argument in answer goes a good deal further. If the proposal is that no Income Tax ought to be placed on such revenue as it is a man's duty to save, it follows that, in so far as so-called " unearned income " is due to savings (to put the argument at lowest), there is no reason for putting a special tax on the income of such savings. No one suggests that the income from such savings should be untaxed ; our submission is that such a tax should not be at a higher rate; for that is what both the present system and the new proposals amount to. 9. We do not think that the statement appearing in the Report that not much evidence was advanced against the principle of differentiation is correct. The following persons gave evidence against it — Mr. Pratt, representing the National Chamber of Trade (Q. 19,975), Professor Edgeworth (Q. 11,796), Mr. Mackie (Q. 24,802; 24,860), Mr. Blacker Quin, on behalf of the Institute of Chartered Accountants in Ireland (Q. 24,326; 24,357), Mr. Schooling (Q. 1,021; 1,078; 1,083) and others. Professor Edgeworth showed that the existence of the principle was a great drawback to any scheme of smooth graduation, and in the memoranda and examples given by the official witnesses, Sir Thomas Collins and Mr. Harrison, this is made apparent (see Appendix No. 71 to the Minutes of Evidence), see also Mr. Pratt (Q. 19,933), etc. Taxable ability is best represented by the actual income received or receivable, and not by speculation as to its source and nature, whether transitory or permanent. This consideration cannot be better put than in paragraph 99 of the Report, which is printed in large type: — "any attempt to measure taxable capacity by a system that is not based upon the amount of the income— by a system that looks to the way in which an income is earned, to the circumstances in which it is received, to the hours of labour, or to the conditions under which the work is performed— would cause great injustice as between one taxpayer and another and would lead to indefensible results." The reasoning and statements in the Report show that the new adjustment suggested to diminish the earned income by one- tenth- is as anomalous and as arbitrary as the system which it is intended to replace. All other fractional rates would be just as reasonable and just as arbitrary. 10. It is not necessary to argue that the bulk of the savings has been at one time or another earned ; it is sufficient to say that a large part of savings have that origin, and not a little during the life of the existing body of taxpayers, put by as provision for old age or for family requirements. The interest on such a saved capital is in principle not different from a pension granted for services, which is treated as " earned " income and bears a lower rate. 11. There is great truth in the statement of one witness (Dawson. Q. 17,289) that there is no strictly unearned income, except what comes from inherited wealth, which already Dears the heavy and increased burden of Death Duties. Differentiation, therefore, operates against, and is a tax on thrift. RESERVATION TO PART II, SECTION I. 149 12. As if there were not enough anomalies, the present system reveals another (amounting to an exception on an exception), by which the income from shares in companies is treated as unearned, however largely the business may depend on personal management, and though the company may be, in all but name and structure, a private concern. This is really a subsidy (the worse for being unseen) to private firms, and results in an inequality of rate for the same class of trading profits. 13. Again, a trader who puts his savings into his business pays tax on the increased profits at the earned rate; if he invests his capital outside, say in War Loan, he pays at a higher rate. We can follow up this point by pointing out the result on war finance. Producers and traders were strongly urged to save and put their savings into War Loans, and they now find that differentiation operates to make them pay a higher tax than if they put them into their businesses, where they would have fructified into a larger return. If there is to be a differentiation at all. it should not be against the citizen who helped to pay for the war. 14. The proposals put before us show a certain inconsistency. If the principle is a good one, why is it not continued, as is the allowance for married persons, right up the scale in its entirety? The new canon of differentiation is in fact framed in such vague and ambiguous terms, so little corresponding with the facts of life and industry, distinguishing things which are indistinguishable, that it is utterly unsuited to a system of taxation, which should be clear, precise, and free from ambiguity either in language or principle. 15. The objections to it are not merely, or even mainly, theoretical. Its results are perfectly well known and naturally resented by the industrious portion of the community who have saved for the support of their old age, or that of their dependants, and who find their neighbours, with perhaps higher incomes, getting an abatement which is considered inequitable. The widow of a professional man, supporting herself and family on the income of his savings, cannot see the justice of paying tax at a higher rate than her neighbours whom she thinks or knows to be enjoying high war profits. Representatives of the wage-earning classes pointed this out to the Commission. 16. Lastly, it seems inappropriate that at a time when it is the duty of all to repair the breaches that have been made in the edifice of capital, and to furnish the new capital necessary for increased production; when the doctrine of saving and thrift is rightly preached; it seems inopportune, we submit, to take more by tax from those who have saved than from those who have not. 17. Income is a fact; its source, permanence, and amount are of infinite variety; and justice is done, as far as it is possible, if the tax proportionately attaches when it is received and ceases when it stops — thus if the income is pre- carious, so is the tax, and vice versa. 18. For these reasons we urge that differentiation in favour of so-called " earned " income should cease to be embodied in the Income Tax law. (Signed) J. S .HARMOOD-BANNER. GEOFFREY MARKS. J. WALKER CLARK. LILIAN KNOWLES. NICHOLAS J. SYNNOTT. 150 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. IV. RESERVATION TO PART II, SECTIONS I and II, and PART III, SECTION VI. 1. I much regret that I cannot agree with the decisions of my colleagues on the Royal Commission on the above-mentioned Sections. The facts showing the exact pressure of taxation on different classes and different incomes ought to be available to the Government, and it seems to me that the knowledge gained during the last few months has enabled the Commission to make a valuable report thereon. There are many and very divergent opinions, but these are influenced by the know- ledge and opportunities of those who possess them. I submit that this Royal Commission cannot properly recommend either increased or reduced taxation for any class or for any income unless the full facts are completely disclosed and accurately known to us. If additional evidence of this character had been received and our findings thereon had been clearly stated, the Report would, in my opinion, have been enormously increased in importance both as regards its permanent value to all who study national and Imperial finance and taxation and also as a basis for legislation. 2. The Select Committee of 1861 reported in the following terms, inter alia :- " Your Committee also feel that it would be unjust to make any altera- tion in the present incidence of the Income Tax without, at the same time, taking into consideration the pressure of other taxation upon the various interests of the country. . . ." That Committee specifically mentioned Succession Duty. I desire to mention (a) Excess Profits Duty, (b) the subsidy on bread, (c) local rating, (d) indirect and direct taxation, (e) Death Duties. I respectfully submit that all these do very seriously affect ability to pay, which is so vital and important as the fundamental basis of Income Tax. 3. The crushing burden of Excess Profits Duty on a trader with a low pre-war standard, and the gross injustice both to new businesses and as between one business and another is admitted. The great benefit of the subsidy on bread to the man with the small income, and the tremendous increase of local rates — much of which is largely due to the cost of education and other charges which are national rather than local — are all factors of paramount importance. It is well known that local rates are based on rental, and are therefore a serious tax on trade. 4. The point as to indirect taxation may be put in a sentence. An ex- Chancellor of the Exchequer recently stated that, whereas in 1912 the indirect taxes produced 42 per cent, and direct taxes 58 per cent, of the national income, in 1918 indirect taxes produced 18 per cent, and direct taxes 82 per cent. 5. Death Duties have been revised and seriously increased. 6. As all these changes tend to relieve the smaller incomes and to increase the burden on the larger incomes, I am unable to agree to any raising of the exemption limit or to any additional taxation on higher incomes until I am satisfied that all incomes are equitably contributing their quota, and that greater injustice will not result by increasing taxation on those who are already inequitably over-taxed. In my judgment, no sufficient reasons are given in the Report for the recommendations under the headings of "Differentiation." "Graduation," and "The exemption limit," (Signed) J. WALKER CLARK. RESERVATION TO PART III, SECTIONS VI to XI. 151 V. RESERVATION TO PART III, SECTIONS VI TO XL (1) THE SEPARATION OF THE INCOMES OF HUSBAND AND WIFE FOR INCOME TAX PURPOSES. (2) ALLOWANCES. Synopsis. 1. The £20 million penalization of marriage. 2. The new penalization in the new exemption limits. 3. The unfavourable position of married persons when contrasted with other family units — the unreality of the doctrine of " the common purse." 4. The " ability to pay." 5. Sex grievances — the disregard of the position given to married women in the Married Women's Property Act, the merger of individuality, the annual application for separate assessment, the responsibility of the husband for the Income Tax when he has no control over the income. 6. The departures from the principle of identity of income. 7. Disabilities of married persons with earned incomes. 8. The wife's allowance. S). The question of the alleged unfairness to the high-minded man who has not married money, if incomes were separated. 10. The alleged danger of collusion and the remedy. 11. The undesirability in general of allowances in their present form. I regret that I cannot agree with my colleagues on the subject of the desirability of continuing to treat the income of husband and wife as one for Income Tax purposes. I consider that each spouse ought only to pay on his or her own income as if he or she were unmarried, i.e., two married persons with property should not be put in an inferior position to any other two persons with property who choose to live together. The proposed concession that two spouses with incomes earned in separate businesses should be given an addition to the marriage allowance does not in my opinion go far enough. 1. We are told by the Inland Revenue in their official evidence (Minutes of Evidence, Q. 2669) that if the separation of incomes were carried out the " loss " would be £20 million every year. This, in other words, means that there is a penalization of marriage to the tune of £20 million every year, because if these married persons were treated as single persons they would pay £20 million less. This £20 million penalization is continued under our proposed scale. 2. The disability attaching to persons each possessing an income who marry is still further continued in the exemption limits now proposed. A single person is to get, if our recommendations are adopted, £150 exemption limit (for earned incomes), married persons £250, i.e., two persons who get £300, exemption before marriage are to lose a £50 exemption when they marry. If there is a £150 exemption for single persons, there should be £300 for married persons. This is, however, only proposed in cases where the wife earns, quite separately from the husband, £50 a year or more. 3. — (a) If married persons' incomes were separated for the purpose of income taxation the " loss " can be made up, as is any other deficit in the revenue, either by another tax or by an increase in the rates of Income Tax The loss would then be spread over the whole Income-Tax-paying community, and not confined to one class of persons. It is not merely unfair and undesirable to penalize marriage as is now proposed, but it is undesirable that married persons possessing separate incomes should be in an inferior position to two sisters living together, a father living with a married son or daughter, or two brothers, or two friends, or any of the many family units one sees. It creates a sense of grievance to pick out that class of the community for extra taxation which ought to be considered especially valu- 152 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. able since these two individuals "have undertaken what the other groups cannot undertake, the bearing and rearing of children " in comfortable, well-conducted homes, in such a way that these children are likely to become good citizens." (Minutes of Evidence, Q. 1257.) (b) Three sisters, each with £135 investment income, living together would have to pay no Income Tax at all under the scale that is now recommended, a husband and wife with one child living next door (the same unit of three), equally with £405 investment income, would have to pay on £144 of it, which, at the 3s. rate, would be £21 12s. It is difficult to see why the second family unit with one costly item, the child, should pay £21 12s. per annum more than the other. (c) If persons living together live cheaper than persons living separately, then the only logical basis for taxation for Income Tax purposes is the family unit. It is said, however, that in marriage there is a common purse, and that in these family units there is no common purse or identity of interests. It is absolutely ignoring the facts of everyday life to say that husband and wife have a common purse. If incomes are automatically pooled on marriage, why do all the elaborate arrangements about marriage settlements exist? There are many cases where the wife is totally ignorant of the husband's income, and he of hers. (d) In the Historical Note on the assessment of Income Tax on married persons (Appendix No. 7 (d) to the Minutes of Evidence) it is stated that after the Super-tax was imposed " it was soon found in practice .... that in many cases the husband did not know, and had no means of ascertaining, the income of his wife." If this be true of the husband's ignorance of his wife's income, it is certainly true the other way round. (e) There are doubtless many cases where the marital relations are so perfect that there is a common knowledge of the amount of the joint income and a common banking account. But I venture to suggest that among well-to-do couples the usual practice is for the husband to place a sum of money to the wife's credit in a bank in her name or give her an allowance, but that he does not usually give her the run of his whole income. This is equally true of the artisan class. The husband makes the wife a weekly allowance and pockets the rest. It is the experience of all social workers that the wife has frequently no conception of the amount of the man's earnings. In other words, although there is considerable identity of interest in the majority of cases, there is not a common purse. Other family units have also identity of interest; a brother and sister, a father and daughter living together, would certainly have some identity of interest, but the practice of taxing them together is only applied to married persons. 4 — ( a ) in the Report the following reasons are alleged for the aggregation of the incomes of husband and wife. (b) " The question involved should not be regarded as a political question, but purely as one of finance and revenue, and we are satisfied that it must be decided, not on any theoretical grounds of equality of citizenship, but in accordance with the outstanding principle of ' ability to pay,' which we recognize as governing all questions of taxation. . . . It is beyond question that in the immense majority of cases where the wife has separate means she contributes to the common purse, either by actual merger of her income with her husband's, or by bearing expenses which in less fortunate households falls upon the husband." (c) As to the sacred doctrine of " ability to pay," I contend that it is not applied so as to " govern all questions of taxation." Do not two friends living together contribute to the common expenses of the household, or does an adult son living at home with his parents pay nothing for his keep ? Yet there is no proposal to tax these persons, on the ground of their contributions to the household and its con- sequent greater ability to pay as a unit. T also contend that we have no data whatever for saying that in the " immense majority " of cases the wife contributes to the common purse The Inland Revenue itself has admitted that there are mad- rases where the man is totally ignorant of the wife's income. We have no budgets of the Income-Tax-paying class which give us any scientific evidence for saying that the wife does contribute more to the common expenses than an individual in any other group of persons living together who are not taxed. Supposing, however, that she does help out. Is that any reason for taxing her? It may be a reason for extra taxation of the husband, but not for raising the wife's rate at the same time. She can do what she likes with her money, and to tax her extra because she chooses RESERVATION TO PART III, SECTIONS VI TO XI. 153 to be self-supporting, or make a gift to her husband, is to limit her in the right of free disposal of her property, which she already enjoys under the Married Women's Property Act. (d) The doctrine of " ability to pay " is, therefore, applied quite arbitrarily to penalize a special class of persons. It has become a catchword to squeeze £20 mil- lion per annum out of persons who, having been married, cannot separate and do not usually wish to do so. They are therefore made to suffer because of their fundamen- tal decency and respectability. I agree with my colleagues in thinking that persons are not likely to live together without being married merely to escape Income Tax. Human nature is too fine for that, and the relationship of marriage too sacred. It seems, however, to me to be quite intolerable that the Crown should take advantage of that fact in order to single out these persons for special taxation when they both happen to possess money and that on the ground that the tie is so close that the woman usually contributes towards the household. " This is a beautiful relation- ship, let us tax it extra " is the result. (e) I am further of opinion that the doctrine of ability to pay is a dangerous one as worked at present. I have tried to show later on that a clumsy, and in my view inequitable, readjustment is made in the shape of allowances based on this same idea of ability to pay. My objection to it is this : Who is to decide on other persons' ability to pay ? There are no scientific data existing which gives any basis for determining the ability to pay of the various Income-Tax-paying classes. It has been apparently decided by my colleagues on no scientific grounds whatever, and we have not had a single budget in support of it, that a wife of a man whose income is less than £400 costs £13 10s. per annum, and if this income is £500 or more she costs £27. Nor have we had any evidence based on the cost of living which justifies us in fixing the exemption limit at £150 and £250 on the ground of " ability to pay." The doctrine of ability to pay, worked on no definite principle except perhaps politi- cal pressure, may become a gigantic instrument of doles. By remission of Income Tax or allowances to a limited number of the community on the ground of inability to pay, those of the 3,406,000 Income-Tax-payers who get the remission would be subsidized. But there is no question of the remission of indirect taxation to the poorer classes on the ground of inability to pay. The doctrine of ability to pay would, if carried to its logical conclusion, resolve itself into a series of hidden subsidies in the shape of allowances given by rule of thumb to certain favoured classes. But in the case of husband and wife it is not used as a subsidy but as a penalty. When the Income Tax was a few pence the injustice could be borne. Now it is a real hardship and should be adjusted. It has been suggested in the Report that this is merely a grievance, not a hardship, but £20 million per annum is no mere grievance when levied only on a proportion of the 3,406,000 Income-Tax-payers. It is impossible that all the repre- sentation we have had from the various women's societies should be " more vocal than real," as suggested in the main body of the Report. The whole trend of recent legislation has been to regard the woman and the man when married as two separate persons, and women are asking that the principle tardily acknowledged and laboriously gained should not be nullified by the Income Tax Acts. (/) The Crown itself has admitted for the past thirty-seven years that married persons have not an identity of interest in the ownership of property, and that there is not in fact a common purse. The wife's income is her own, and subject to the obligation on the husband to maintain his wife and children he also is master of his own income. A wife can now sue her husband for money lent by her to him, and vice versa. Even under the Copyright Act a married woman who writes a book with her husband and is to that extent in partnership with him is allowed to claim her share in the book as part of her separate estate. Although her separate right in the book is legally acknowledged, she is penalized under the present Income Tax system when she gets her receipts from that book as if she had no separate right in the book whatever. The doctrine of identity of interest and consequent ability to pay is annihilated by the law of the separate estate of husband and wife founded on actual experience and is, I submit, only a fiction still maintained to penalize a special class of persons who are easily get-at-able, and is quite out of harmony with women's present position under other branches of the law. In other words the merger, though law, is not justice, and it is undesirable in my opinion to separate the two notions. 27i)2") L 154 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 5. — (a) The separation of the incomes of husband and wife would therefore be in accordance with the principle by which, under the Married Women's Property Act, the woman is deemed to own her own income. It seems an anomaly to take away from her for Income Tax purposes (because more revenue is obtained thereby) this righ't which the law has given her since 1883. (b) The assumption running through all the sections of the Income Tax Acts relating to women is that on marriage a woman ceases to be an individual for Income Tax purposes. ,l The income of a married woman living with her husband is deemed by the Income Tax Acts to be his income, and should be included in any statement rendered by him for Income Tax purposes,'' are the instructions on the Form for individuals, provided, however, that if an application is made for the purpose of any year of assessment either by the husband or wife within six months 'before the 6th of July in such year the husband or wife can obtain a separate assess- ment, but they both pay us if it were one income. The merger of the incomes so far as the extra cost is concerned is, therefore, not a woman's grievance but a married person's grievance. But it is the woman who on marriage loses her identity for Income Tax purposes and not the man. She has to make a fresh demand every year if she wishes to be separately assessed, i.e., she is presumed not to know her own mind for more than a year when she wishes to pay her own taxes towards the upkeep of the State in which she is, if over thirty, a voter. The man can equally demand to be separately assessed, but as he is already treated as a human being and not an 'incapacitated person" there is no reason wh)^ he should demand a separate assessment on the ground of the loss of his individual status. (c) The husband also has a sex grievance. He has not merely to pay at a higher rate but he is held liable for the wife's Income Tax, i.e., he has got to pay Income Tax on property over which he has no control because under the Married Women's Property Act it belongs to his wife, and in respect of an income he possibly does not know. Even where the wife obtains a separate assessment a special notice is sent to the husband to inform him " that the power to distrain, in the case of non- payment of any Income Tax payable by the wife, shall extend to the goods and chattels of the husband, as well as to the goods and chattels of the wife." (d) The Crown seems not unwilling to depart from its own principle of treating two incomes as one and holding the man responsible when it gets more revenue by so doing. While all through life the income of husband and wife has been treated as one, any property passing from husband to wife or wife to husband on death has to pay the duties leviable on death. These duties are sometimes spoken of as " deferred Income Tax." If this be so then capital, the income from which has been treated as one during the lifetime of the spouses, should be treated as one on death and the survivor escape the Death Duties. The Crown treats the spouses as having one income from a merger of capital when it can get more money during lifetime, and as having two separate capitals on death in order to tax property passing from one to the other which it has hitherto regarded as one under the doctrine of identity of interest. (e) Further, although the present system assumes that there is a common income for which the husband is liable, it is now proposed that the Crown shall have the right of recovering from the wife by a separate assessment. This is to cover the case given in paragraph 13.S23 of the Minutes of Evidence where a husband had £72 a year and the wife £39,000. There was something like £8.000 Super-tax due, and all the husband had to meet it was £72. While it is highly undesirable that a woman with £39,000 a year should escape her fair share of taxation, the Crown which merges her income in her husband's and makes him liable ought to abide by the consequences. To say that the income of the wife shall be deemed to be the income of the husband, unless she takes special steps, and then, when the husband has not got enough to satisfy her liability, to 1 peal her as a separate person when other married people are not so treated seems a case of " having it both ways " so far as the Revenue is concerned. (/) The grievance of the merger under the proposed scales is that it brings married people sooner into the high 6s. rate or into the Super-tax rate than it would bring single persons. There are three points in the new scale proposed where the Income Tax begins to increase; after £250 (earned income) for married persons who are not entitled to the allowance for children, when the rate is 3s.: and after £500 (earned income) when they become liable to the high 6s. rate on the excess over £500: and at £2.000 when they get into the Supertax rates RESERVATION TO PART III, SECTIONS VI TO XI. 155 (g) A man marries a woman with £150 investment income and himself earns £150, joint income £300. Wife's income £150 £150 Husband's 150— l/10th 135 Taxable ineome 285 Allowance 225 60 @ 3s. = Tax £9. If single the Income Tax would be as follows :- Woman £150 Allowance 135 15 Tax = £2 5s. Man £150 Tax = nil. Annual penalization £9 — £2 5s. = £6 15s. Suppose the man by his skill increases his earnings to £650 a year, total income £800. J Wife £150 Husband £650 £65 585 Allowance 735 22S 510 225 at 3s. - Tax £33 15s 285 at 6s. = Tax £85 10s. £119 5s. The tax, if these persons were unmarried or treated as separate persons, would work out as follows : — Woman £150 Tax £2 5s. 585 135 450 225 at 3s. = 33 15s. 225 at 6s. - 67 10s. £103 10s. Annual penalization £119 5s.— £103 10s. - £15 15s. The merger becomes more of a hardship where the husband's and wife's shares of the income are more nearly equal because if the incomes were separated each would stay on the 3.9. basis for a longer period. Joint income £^00: wife £400, investment income: husband £400, earned income. Wife £400 Husband £400— £40 360 760 Allowance 225 06ii 225 at 3s. Tax £33 15s. 310 at 6s. Tax £93 £126 15s. 27925 h 2 156 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. If separate : — Woman Allowance £400 135 265 225 at 3s. = Tax £33 15s. 40 at 6s. = Tax £12 £45 15s. Man £400 £40 . 360 Allowance 135 225 at 3s. - Tax £33 15s. £79 10s. Penalization £126 15s. — £79 10s. = £47 5s., not £15 15s., as in the previous case, though the incomes are the same.* 6. It is unfair to increase automatically the taxation, say, on the wife, because the husband increases his income from which she may or may not get an in- creased share. Indeed, the only knowledge she may have of the increased income is an increase in her Income Tax rate, and she has no power to compel him to make it good to her. Married persons are two human beings and it is unreasonable to penalize two people by taxation because they are respectably bound together. The wife is legally allowed to own her own money, the husband owns his. If over 30 the woman can vote for a candidate for Parliament against her husband's views if she so chooses, she can stand for Parliament herself and if elected can help to pass finance laws, and yet, unless a special annual procedure be adopted, the husband is liable for the wife's tax exactly as if she were the " incapacitated person " she is stated to be in the Income Tax Act of 1918. While it is now proposed to alter the phraseology and say " incapacitated person or married woman," the terms as far as the married woman are concerned are synonymous. It is illogical that when a woman and man though married are two persons for owning property and voting they should be treated as one for taxation at a higher rate. 7. — ( a ) Marriage is still further at a disadvantage in other ways. If two married persons are earning, it is suggested that they should be given an addition to the marriage allowance. But they must earn in different businesses. If the woman helps in her husband's shop, she is not held to be " earning " her living for Income Tax purposes, nor is she doing so if she helps her husband on a farm or in an hotel or in a laundry. She can only, in the case of the farmer for instance, get the separation of income if she goes and helps another farmer and if his wife comes to help the first lady's husband, then both can separate their incomes for Income Tax purposes. (b) The idea is' the prevention of collusion. It is thought that a man would actually charge his wife's salary against his business expenses. Why not? The woman does earn a salary, but she is not paid it. If her services were rated in the books at a definite money value it would considerably improve her position. She might even get it paid to her direct, and would be much better off than when she has to ask for every penny or somehow screw anything she may want for herself personally out of the housekeeping money. If a woman's position as a partner in her husband's business, such as farming, were recognized for Income Tax purposes by a separation of the incomes, whether she works at home or goes out, her status would be considerably improved and a great injustice to married persons removed. The husband would gain by paying less Income Tax and would perhaps realize his wife's pecuniary value. (c) Even in the case where the wife does not help in the business, hotel or dairy, farm or school, as the case may be, she is " earning her living " as a rule when she stays at home. Her services as a housewife have a distinct pecuniary value, as * It may be noted that the children's allowance confers no benefit on married persons as distinct from single persons who choose to adopt a child. If two persons choose to live together without being married, their children, though illegitimate, conlil still be allowed for if they "adopted them. RESERVATION TO PART III, SECTIONS VI to XI. 157 the man finds out if she dies and he has to get a housekeeper. It therefore seems unjust to penalize married persons by making their exemption limit begin £50 lower down than that of two unmarried persons free to earn as they like. This is not merely a question of this £50, but of bringing the income of the spouses on_to the 6s. rate sooner than they would otherwise get there, e.g., at £500 instead of £550. 8.— (a) We have been told that the State does not penalize marriage but rather encourages it, because it makes a " wife's allowance." It has been tardy in encouraging marriage, since this only started in 1918. As the " loss " of separating the incomes was assumed to be £20 million, and the cost of the wife's allowance in 1918-19 is said to be " roughly three millions " (Minutes of Evidence, Q. 2819) by the official witness, the encouragement to marriage in the year 1918-19 may be taken as a net loss of seventeen millions. The wife's allowance was doubled in 1919, and the " encouragement " to matrimony is in 1919 only a loss of £14 million to married persons as a class. The wife's allowance was, therefore, in the past no real " set off " to the disabilities of the merged income, though, of course, persons got the " wife's allowance " who would not have profited by the separation of incomes. (b) Under the present proposed scale a married man whose earned income has reached the £150 limit, and whose wife has no money of her own, will not get the £100 wife allowance, since he does not begin his payments till his income reaches £250. If the wife has money, then he gains the tax on the difference between the £250 and his £150 and her income, whatever it may be (not exceeding £100), i.e., supposing he had £150 and she £60, he would gain on the remission of taxation on £40. The wife's allowance is to be either £100 or her income if less than £100. (c) In my opinion any special allowance made in virtue of a wife is undesir- able. The man who marries generally obtains the valuable unpaid services of a woman, and there is no need to give him an extra allowance, because he does not have to pay the wages of a housekeeper or help to keep his landlady. (d) No one can say that a farmer's wife is not a distinct pecuniary gain to the farmer unless she be exceptionally incapable. The wife of an hotel keeper is a distinct pecuniary asset to her husband. A wife is not a " burden " or a " disability " to be allowed for. A man on marriage often acquires a good cook and housekeeper who will give a service he could not hire, and one who by her devotion and efficiency will save him money, to say nothing of the pleasure and comfort of a wife and home of one's own. It is true that a man usually takes a larger house when he marries, i.e., he acquires more comfort and more space, but there seems no reason to subsidize him because he adopts a higher standard of living when he sets up for himself. It is degrading to a woman who manages a home to be allowed for as an expense which affects a man's " ability to pay." Wives are either economies or luxuries, and I can see no reason why they should be " allowed " for under either head, particularly as this seems to be used as an argument for not separating the incomes of husband and wife. (Minutes of Evidence, Q. 2664, 2665, 26736). (e) The wife's allowance is quite recent, being given for the first time in 1918 (8 & 9 Geo. V., c. 15, s. 27), and it should not be continued even in its present form. The persons who pay Income Tax are a small proportion of the total population. It seems unfair to subsidize the wives of the richer members of the community, i.e., those that have attained to the Income Tax level, and yet give no subsidy to the wives of persons below the Income Tax level. If a man on marriage gets £100 off the point at which he would begin paying his Income Tax, he gets under our pro- posed scale from £13 10s. to £27 per annum for his wife. Is his wife more precious than the poorer person's wife that he should be allowed, say, £27 a year towards her keep? The richer the man the larger (within the limit stated) the allowance he gets for his wife. If his income be under £400 all earned he pays 3s. Income Tax, and his wife's allowance is therefore £13 10s. (£100— £10 = £90 at 3s.). If, how- ever, his income is £500 or over, all earned, then he gets on to the 6s. rate, and his wife is worth £27 annually in Income Tax allowance. (/) If the allowance is given because of an extra burden, i.e., because his " ability to pay " has been lessened on marriage, then it should vary with prices, and not be a stationary ratio as is proposed. It is at best a clumsy way of helping a man to bear his supposed " burdens." 9. — (a) One objection urged against the separation of the incomes of married persons is that it would be unfair to the man who had not married money. (b) A man with £500 earned income and a wife with £500 investment income would pay, under our proposed scale, £60 15s. and £75 15s. if their incomes were 27925 L 3 158 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. separated, i.e., £136 10s. The married man with £1,000 a year would pay £168 15s. on an earned income or £198 15s. on an investment income. (c) If a man or woman marries a spouse with no money, it is surely from personal choice; no doubt the lady or gentleman had other attractions. At any rate, both of them were free agents. The point is that if a man marries a woman with, say, £500 a year, she may share it with him or she may not. It is hers, not his. He has no guarantee that she will share it, and he has got to keep her. If she chooses to live on his £500 and gives £500 a year to an aged relative he cannot stop her. It is unjust to penalize a man on an income over which he has, in the absence of settlements, no control whatever. It is equally unjust to penalize a woman in a higher rate for Income Tax because her husband has an income over which she has no control. As long as he maintains her and the children he may keep lavender mice with the rest of his income and no one can prevent him. 10. Then there is the fear of collusion between husband and wife—husbands, so it is thought, would make over to wives, and wives to husbands, a certain amount of money to escape Income Tax. This would specially help people liable to Super- tax to bring their incomes below Super-tax level. Taxation on a family basis would obviate this. There are, however, certain deterrents. Spouses do not usually die at the same time. If a man made a large sum of money over to his wife, or vice versa, he or she would have to pay duties on death to get their own money back again Moreover, people are not fond of letting money go out of their own control. If a husband made capital over to his wife it would be hers. She might leave it away from him by will, or if she survived him she might bestow it on a second husband, or she might waste it in bridge during his lifetime, and he would have no power to provide against these contingencies. On the other hand, if a woman gave money to her husband to escape Income Tax. the same thing might happen the other way round. It would be easy, however, to get at this form of evasion by extending the principle on which we propose to tax casual profits in business. If it should appear that a sum of more than £100 in any one year has been transferred between spouses — the result of which would appear in the next return to the Inspector of Taxes — I suggest that that sum. whatever it is, be subject to Income Tax. Married persons would feel considerable hesitation about transferring from one to another, say, £1,000 if they knew it would cost them £300 out of the £1,000 at 6s. rate. After all, arrangements are made under the Bankruptcy Acts to prevent the fraudulent transfer of money from husband to wife; no doubt the Inland Revenue, with its extensive knowledge of fraud, could devise even more satisfactory methods. 11. (a) I venture to submit that the whole question of allowances as part of the Income Tax is unsatisfactory. One has only to look at the continuous growth of the allowances to see how pressure is constantly brought to bear to expand them. There has been an almost yearly increase of these doles for wife and children. £ In 1918 wife's allowance for exemption ... ... ... 25 „ 1919 „ „ „ „ 50 ,, 1920 proposed exemption ... ... ... ... ... 100 The dole has, therefore, quadrupled in three years. The progressive increase in the children's allowance is even more striking. Allowance. Age of children. Limit of income. 1909 ... £10 ... Under 16 ... £500 1914 ... £20 1915 ... £25 L916 ... 125 ... ... £700 1917 ... Adopted children included. 1918 £800 800-1,000 on chil- dren after first two. 1919 Up to age of leav- ing school or university. 1920 £40 lor first .,' All incomes. (E'roposcd) 'l'SO for subsequent. RESERVATION TO PART III, SECTIONS VI To XI. 159 (b) Persons with children do suffer under a considerable ■'disability,'' and their " ability to pay " is considerably diminished by their obligations towards their children. The allowance for children, though not quite so recent as that for the wife, which dates from 1918, is still fairly modern, being instituted only in 1909. Under the present system £40 for the first child and £30 for subsequent children are the allowances proposed, i.e., £5 8*. and £4 Is. a year is the bounty that my col- leagues suggest should be given by the State to the children of persons wealthy enough to pay Income Tax and whose joint incomes come under £500 all earned. When, however, the income is considerably more (all earned), then the bounty to children doubles, and the richer person gets £10 16*. and £8 25. for his children, as he deducts £36 and £27 for them from his income at 6s., not 3s. My contention is that while a bounty should be given in aid of the maintenance of children, it should be given to all parents for all children, and that the Income Tax is not the place in which to make a gift to one special minority of relatively well-to-do persons while refusing the gift to the great mass of poor parents who need it most. This is also the case with the remissions on Life Insurance. The relatively well-to-do get Income Tax remitted on their Life Insurance premiums, poor people below the Income Tax level get nothing. (c) In the first place the income Tax should not, in my opinion, be worked as an engine of social policy by which to carry out hidden bounties. The bounty should be given in the case of children, but it should be given where it can be seen, where its cost can be estimated directly, and in a form in which people realize what they are getting. (d) On the analogy of the separation allowances the bounty for children should be paid to the person who lays out the money for the children's benefit, i.e., to the mother, but the Inspectors might allow the bounty as a set-off against her Income Tax liability in the case of a married woman who is assessed. (e) That hidden bounties are contained in our present system of allowances was clearly brought out by Sir Warren Fisher in his cross-examination of Mr. Bruce and Sir Hugh Orange. They came before the Commission on behalf of the Board of Education to advocate the extension of the relief in respect of children beyond the age of 16 for those who attend school. Sir Warren Fisher characterized this as indirect State assistance (Minutes of Evidence, Q. 4769), and put the question (Q. 4770) : " Do you not think it would be more scientific, and could be applied in cases according to their needs, if it were an overt grant from the Exchequer proportioned to the requirements of each case rather than an all-round and disguised bonus which will apply indifferently whether it is needed or not?" He continued (Q. 4773) : " My suggestion to you is that there is left as an alternative, if the State is going to help, that it should do it openly and in a form by which it can be scientifically adjusted to the needs of the respective families." (/) The bounty to children as at present given is open, therefore, to the objec- tion that it is only paid to the children of the Income-Tax-paying classes. The number of incomes chargeable with tax in 1918 was said to be 3,406,000, while 1,940,000 incomes were entirely relieved by the operation of abatements and allow- ances. As the incomes of husband and wife are classed as one income, it is impos- sible to tell how many persons the 3,406,000 incomes represent out of the 47 million persons, of whom perhaps 24 million are adults in possibly eleven million separate families, who comprise the population of the United Kingdom, but it is certainly a small proportion of the whole. It is this small proportion only who will get the bounty for wife and children. It may be said that they get a bounty only as an offset to the disability of paying the Income Tax. But it is generally admitted that the poorer persons pay indirect taxation out of proportion to the indirect taxation paid by the richer classes, and that the Income Tax to a certain extent equalizes this. If this be true, then there seems no more reason for making the richer families an allowance .towards the maintenance of their children because they pay Income Tax than for paying the poorer families a similar allowance because they pay indirect taxes. Although the bread subsidy may be held tempo- rarily to cancel out any inequalities in indirect taxation, as more bread in propor- tion is eaten by the poorer families, the bread subsidy is only supposed to be a temporary expedient, and the Government has more than once announced its early withdrawal. 27925 L i 160 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. (g) This form of giving a bounty through the Income Tax is very inelastic. Prices vary up or down, but the allowances remain the same. When prices go up the recipient loses; when they go down, if the allowance was fair before, the Government then gives too much. (h) The allowance should be given for all children, not for a special class, and it should vary according to the level of prices. (i) I further submit that it is impossible to administer the children's allowance without giving rise to a great deal of fraud. In 1806 the children's allowance was given up owing to the abnormal official increase in the number of children for whom claims were made. At the present time there is no supervision to see that people do not claim the children's allowance improperly. Under our proposed allowances of £40 and £30 the fraud would pay better than ever. It would be very easy for dis- honest persons to add annually a child or twins to their claim, whether they had any or no. No birth certificates are asked for, nor is there any supervision to see that if a child dies the allowance is no longer claimed. Even if three or four extra chil- dren should appear on a claim the next year it could always be claimed that they had been adopted, and it would be easy to borrow a few children for production if necessary. A more tempting and easy method of fraud it would be difficult to conceive. (j) I find it difficult to see why my colleagues propose to recommend the con- tinuance of the allowances for children to children kept at school or college up to any age, and yet will not consider making the parents a similar allowance for children who are bound apprentices to a trade. If the father of the prospective clerk or teacher kept at school till 18 should get an allowance, the father of the prospective engineer ought to have a similar privilege. The latter's son is under- going a technical education. It is true the apprentice earns a pocket-money allow- ance, and the school-boy does not, but his father does not get much relief as the apprentice is probably much " heavier on his clothes.'' We ought not to dis- courage boys from being apprenticed. (k) The abolition of the children's allowances and the substitution of a clear bounty would relieve the Income Tax of some of its almost intolerable complica- tion, and would save much work to the administration. The incomes that have to be passed under review to see whether the recipients are entitled to total exemption or abatements must comprise a large proportion of the incomes of the country. It is only when winnowed out that they amount to the 3,406,000 mentioned above. (I) The separation of the incomes of husband and wife is carried out in the United States and in most of the British Dominions, excluding South Africa. (m) I therefore suggest (1) that the income of husband and wife should be separated for Income Tax purposes; (2) that "allowances" of all kinds should be abolished; but (3) if it be considered desirable to assist certain classes or to promote certain objects that the bounty should be given in a democratic manner to all persons; that it should be given directly in a form in which it can be seen and which will enable the cost to be estimated from year to year ; and the amount of the bounty should be made to vary with the rise or fall of prices. Finally, I regret that I cannot con- cur in any recommendation by which the State would make it cheaper for certain persons to live together in irregular unions rather than in the " honourable estate " of matrimony. (Signed) LILIAN KNOWLES. T concur with the above Reservation J. WALKER CLARK. RESERVATION TO PART V, SECTION IV. 161 VI. RESERVATION TO PART V, SECTION IV. 1. I have to express my disagreement with the recommendation that there should be a new general valuation in Ireland. 2. This raises, in the first place, the question of the overtaxation of Ire- land; but inasmuch as the Terms of Reference do not cover the separate taxation of Ireland, but speak of the United Kingdom as a whole, the question of overtaxa- tion could not be raised before this Commission. 3. Apart from this point, the proposal has serious inherent objections. The present time seems most inopportune for a general valuation, whilst prices of all agricultural products on the one hand, and of stock and equipment on the other, are so unstable, and the cost of labour is so variable. 4. Whatever may be the case in the towns, the difficulties of revaluing fairly land in Ireland under present conditions seem almost insuperable. It would prob- ably take about fifteen years to accomplish, according to the official evidence of Sir John Barton before the Valuation Commission in 1902, and by the time it was com- pleted a considerable portion would probably be out of date. Sir John Barton pointed out that the boundaries of every holding in Ireland would have to be inquired into, as well as the value, and whilst the boundaries of lands purchased under the Land Pur- chase Acts are known and set out in maps, there has been no such survey in the case of non- purchased lands. The differences between these two kinds of properties are material in this matter in other respects. In the case of lands purchased, some per- haps twenty or thirty years ago, there is ho present standard of rent, either competi- tive or judicial, to guide the valuer. The valuer could not safely rely on a temporary eleven months' or conacre rent. He would have nothing before him, apart from the crude method of examining the soil, but an investigation of the prices paid for the owner's interest in the case in question, or in neighbouring cases — an absolutely uncertain guide, as proved up to the hilt in the evidence given before the Committee on Irish Finance in 1913, generally known as the Primrose Committee. It was proved there that such selling prices varied immensely according to districts, and in the same district according to local and individual circumstances. In any event, such prices unquestionably now are of that abnormal and ultra-competitive character, containing so much of the element of land hunger, that they would be quite an inequitable basis for a valuation for taxing purposes. It is true that the judicial rent does not perhaps contain the whole value, none the less there is the same insuperable difficulty of finding what the fair, true, annual value is. Annual profits and values depend largely on prices, on the one hand, and expenses and cost of labour on the other. Both are very uncertain, except that agricultural wages now are mounting perhaps faster than prices. 5. For revenue purposes such a valuation would be largely a waste of money, for a large percentage of the farms that would be valued would be exempt from Income Tax. Before the Primrose Committee it was pointed out that for Income Tax purposes only 22 per cent, of the land in Ireland would be affected by the valuation. The fact that it is now proposed to base the profits from the occupa- tion of land for Income Tax purposes on the annual profits shown under Schedule D, and not on the basis of twice the valuation, renders any valuation for Income Tax purposes less necessary. The evidence of Sir John Barton, late Commissioner for Valuation, before the Committee on Irish Finance in 1913, should really settle the matter.^ He pointed out, to use his own expression, that it would be " very dan- gerous " to revalue now, that it would be much better to leave the matter over, if it was to be done at all, until the land purchase was completed. The existing valua- tion (Griffith's), is on the whole for agricultural lands fair enough as between one taxpayer and another. It was true that Griffith eliminated competitive rent which 162 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. was then perhaps unfairly high, but he tried to make his values correspond to a fair rent, due regard being paid to productivity. Griffith's valuation is and has been for a long time the basis on which rates are paid, and it is of course impossible to have one valuation for rating and another for Income Tax purposes, but to change the present arrangement by which subsidies and grants are made to the rates from Imperial taxation by altering the valuation of units, districts, and counties, would lead to interminable confusion and wrangle, and in many instances to positive injustice. 6. The Report does not deal with these considerations, although they were brought before the Commission. It is impossible to go into this difficult question at full length without again raising all the issues which were before the Valuation Commission in 1902 and the Primrose Committee in 1913. It is sufficient to say that the evidence and reports of these inquiries were not fully before the present Commission, and I have to state it as my strong opinion that no such project as the revaluation of Ireland, especially under present conditions, should be con- sidered without an examination of the whole question from all points of view. (Signed) NICHOLAS J. SYNNOTT. RESERVATION TO PART-V, SECTION XII. 163 VII. RESERVATION TO PART V, SECTION XII. 1. We regret that we are. unable to agree with our colleagues on the subject of the assessment of Co-operative Societies. The widest issue upon which we have had to come to a decision may be stated as follows. The witnesses on behalf of the Traders' Associations maintain that the whole of the receipts of a Co-operative Society after expenses of management have been deducted constitute taxable profit, and that no difference is made to the taxable nature of this profit by the fact that part of it is redistributed in dividends-on-purchases to the members. Witnesses on behalf of the Co-operative Societies maintain that the whole of the receipts (after deducting purchases and expenses) of a Co-operative Society from transactions with its members constitute not profit but a surplus belonging to the members, and that no difference is made to the non-taxable nature of this surplus by the fact that a part of it, instead of being returned to the members in dividends-on-purchases, is used by them to increase the society's reserves. A third view, which has been adopted by our colleagues, is that that part of a Co-operative Society's receipts (after expenses have been deducted) which is repaid to members as dividends-on- purchases does not constitute taxable profit, but that that part which is retained by the society does constitute such profit. 2. We are cordially in agreement with our colleagues that the first of these three views is untenable. The dividends paid to members on their purchases are not a profit in any sense. They are rather a refund for an overcharge. In order to encourage thrift on the part of the members, Co-operative Societies prefer, instead of selling an article to them for 5*'. (cost price plus expenses) to sell it to them for 6*. (current trade price) and to return Is. later on in the year. If they chose to arrange their book-keeping differently and to sell for 55. in the first instance no question of taxable profit could possibly arise. The claim that a taxable profit is created because the form of transactions is modified, though the substance remains exactly the same, must necessarily we think be rejected as soon as its meaning and implications are properly understood. Nor is there, in our opinion, any force in the reply that a dividend paid to the purchaser of tea is not adjusted to the surplus accruing to the society in respect of that particular article, but may also contain elements of surplus derived from the retailing, whole- saling, or even the manufacture of a number of other articles. This is a matter of arrangement among the members. One may be given rather a bigger refund than he is strictly entitled to ; another rather a smaller refund. But this does not alter the fact that the sum total of dividends paid on purchases are a refund and not a profit. Our conclusion, therefore, remains intact. These dividends (except in so far as they contain the element of profit from trading with non-members or from investments) are not taxable profits. If, however, a member of a Co-operative Society buys from a society {e.g., a farmer's society) some material to be used in his business, he should not, of course, be allowed to deduct as expenses in computing his own Income Tax liability the full price paid for this material, but only that price minus the dividend-on-purchase which is returned to him in respect of it. 3. The contention of the Co-operative Societies that no part of the proceeds of their transactions with their members constitutes taxable profits is based upon what has been called " the principle of mutuality." This principle asserts that, when a group of persons club together for a joint undertaking, any payments that they make among themselves are in the nature of transfers or contributions to a common pool, and cannot, therefore, give rise to any profit. If, for example, the members form an organisation for retailing, say, coal among themselves, whatever they choose to pay into this organisation, whether or not it leaves a balance over the expenses which the organisation incurs in getting the coal, represents not a profit to anybody, but simply a transfer of income already belonging to members from one pocket to another. The opposing contention, which our colleagues accept, is that a registered Co-operative Society cannot be regarded merely as a group of individuals, but is a separate legal entity ; and that the net receipts left in the hands of this 164 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. separate legal entity after its trading operations have been completed by the refund of dividends-on-purchases constitute taxable profits independently of the way in which they have arisen. 4. If there were in the United Kingdom, as there is in the United States of America, a corporation tax levied specially on corporations as such, it would, no doubt, be proper that a Co-operative Society should, as a separate legal entity, be made liable to that tax. But the Income Tax is not a corporation tax. It is a tax upon the incomes or profits of individuals, and though for convenience it is assessed in the first instance upon corporations in which they hold interests, the amount of it is always adjusted to the income not of the corporation, but of the individual shareholders. It is true that, when a company receives profits which it does not distribute, the profits are taxed at the standard rate. But it is universally recog- nized that the reason for this is, not that the company as such is liable to Income Tax, but that it is impracticable to tax the separate parts of a company's undistri- buted profit at the rates to which the separate shareholders to whom those parts ultimately belong are respectively liable. The mere fact, therefore, that a number of individuals have formed themselves into a separate legal entity does not con- stitute the receipts of this legal entity a taxable profit under any part of the British Income Tax law. We see no reason why it should be made to do so for Co-operative Societies. But, if it is not made to do so, the circumstance that a Co-operative Society is a separate legal entity is irrelevant to the question whether its net receipts should be treated as taxable profits. They are or are not taxable profits in the hands of the legal entity according as they would or would not be taxable profits in the hands of the group of individuals who have set it up, had no special legal nexus between them been created. In our opinion, the proceeds of mutual trade are not profits in any sense to the group of individuals among whom the mutual trade is carried on. They are no more profits than the payments to a club by its members are profits. The contention of our colleagues implies that the question whether or not the receipts of a Co-operative Society constitute a profit depends not on the origin of those receipts but on the use to which they are put. This test is not employed as regards any other class of receipts, and we cannot agree that it can properly be applied with regard to this particular class of receipts. We conclude, therefore, in agreement with the Committee of 1905, that no part of the receipts of a Co-operative Society which arise from transactions with its own members, whether they are dis- tributed in dividends-on-purchases, or placed to reserve, or disposed of in other ways, are properly assessable to Income Tax. The principle upon which this con- clusion is based, and the conclusion itself, hold good of all classes of Co-operative Societies, to which section 39 (4) of the Income Tax Act of 1918 applies. (Signed) C. W. BOWERMAN. WILLIAM BRACE. E. E. NOTT-BOWER N. F. WARREN FISHER. HENRY J. MAY. WILLIAM GRAHAM A. C. PIGOU. RESERVATION TO PART V, SECTION XII. 165 VIII. RESERVATION TO PART V, SECTION XII. 1. I agree with the conclusion arrived at by my colleagues who have signed the previous reservation to this Section, but on somewhat different grounds. 2. The question of liability to Income Tax under Schedule D depends upon the legal definition of " taxable profit," and I think that if the net receipts of a Co- operative Society, or any part of them, can be brought within that definition, they should be liable to Income Tax, and that the present statutory exemption should be withdrawn; the question of liability can then, if necessary, be tested in the Courts. If, however, as I understand from the evidence given before the Commission, the receipts of these societies from mutual transactions with their own members cannot, under the present law, be brought within the definition of taxable profit, special legislation would be required to impose this liability upon them. 3. I cannot agree with my colleagues who have signed the Report that it is consistent to divide these receipts into two parts, and to treat one part as taxable profit and the other part as a refund to members. The whole of them have a common origin in mutual transactions, and I do not see how their liability can be affected by their destination. 4. There remains the question of whether legislation should be proposed to impose liability upon the whole of these receipts or upon that part of them which the societies allocate to their reserve funds. The evidence we have heard indicates that any general statute drafted to bring the receipts of Co-operative Societies within the definition of " taxable profit " would also cover the receipts of a club from transactions with its own members, and other transactions undertaken for their mutual advantage by any two or more persons. This could, no doubt, be avoided by specially limiting its application to the receipts of Co-operative Societies, but such a limitation would be as undesirable, and would give rise to as much ill-feeling and misunderstanding, as the present exemption. 5. If, as suggested in the Report, the new liability is to be limited to that part of the receipts which is placed to reserve, it would not only require the same invidious discrimination, but would be ineffective from the standpoint of revenue unless the Co-operative Societies allocated large sums to their reserve funds. The effect of such an enactment would obviously be to reduce these allocations to a minimum, to the detriment both of the Revenue and of the societies' business. I therefore think that if, when the exemption is withdrawn, the receipts of the societies are not found to be liable to Income Tax, it will be impracticable to include them by legislation. 6. I have, however, been much impressed by the evidence of the growth of these societies, of the magnitude of their operation's, and of their tendency to absorb business previously carried on by trading organisations whose liability to Income Tax is unquestionable. It is obvious that if this process is indefinitely continued the loss to the Revenue will be very great, and that a corresponding increase must take place in the burden of other taxpayers. It is also clear that the present high rate of tax must tend to increase the advantage of the societies over private traders and manufacturers and so to accelerate the progress of their absorption or displace- ment. I think that the very large trade carried on by Co-operative Societies ought to bear its due share of taxation, and that if the Income Tax is not a suitable instru- ment for that purpose then some fair and workable method of taxation should be devised to fit the circumstances of the case, and that the Co-operative Societies themselves should be consulted as to how this difficult subject can best be approached. 7. On minor points, such as the liability of Co-operative Societies for taxation on trade with non-members and on interest on investments, and also on the point that trading members should credit their trading accounts with refunds received or purchases. I am in full agreement with the Report. (Signed) ERNEST G. PRETYMAN. I concur with the above Reservation J. S. HARMOOD-BANNER 166 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. IX. RESERVATION TO PART V, SECTION XII. 1 (a) We agree with the recommendations in the Report, but do so for reasons which are not precisely brought out therein, and which are briefly set out below. (6) In our view the question whether the principle of " mutuality " prevails to put the tangible results of human effort outside the category or working definition of " profits " is one of degree, and we are not prepared to subscribe to the view that in all circumstances where an element of mutuality is present no advantages can arise which it is expedient to bring within a definition of profits for taxation purposes. At one end the principle should prevail for exemption from a tax on income, but at the other extreme the mutuality may be so attenuated that its presence can properly be disregarded. 2. — (a) The underlying question of principle is a little obscured by the terms of our monetary economy, and may be more easily discussed if we can for a moment dispense with them. If A, a carpenter by trade, decides to paint his house himself in his leisure hours, instead of paying a painter for the job. he reaps a certain advantage and adds to his personal wealth by personal labour, but the result is under no extant code of thought regarded as " income." Similarly B, a painter, makes himself a fowl-house. The " incomes " of A and B are unaffected. But if A derides to work overtime at his own trade and spend the proceeds on having his house painted and B similarly earns extra money to buy a fowl-house, the taxable " income" of each lias increased, though the objective conditions are identical with 1 he preceding case. It may well be that B is the painter whom A employs and pays, and A is the person whom B employs and pays — but the taxable incomes are increased as before. If. however, A and B are friends and agree together to spend their leisure for each other in performing tasks at which they are respectively skilled, and which have a roughly equivalent exchange value, A could build B's fowl- house, and B would paint A's house as in the preceding case, but their " incomes" would not be increased by the exchange of services. Mutuality is complete in this last case, but is seen to depend upon rather fine considerations or distinctions, and the conventions of a definition of " income " for a particular purpose cannot be absolute, but must have a relative character. (b)^ ll Mutuality " is most marked where the services can be withdrawn from the ordinary economic sphere, and rendered more or less independent of competitive prices and business conditions. It is therefore at its strongest when the persons are few in number and known to each other, so that they are less dependent upon purely commercial tests, and it is also dominant where the services rendered can only be enjoyed in common and are not competitively obtainable. Mutuality is thus most complete in the case of clubs where members pay (ultimately " at cost price ") for services and advantages which are hardly obtainable in an open market, Mutuality, as a test of whether the advantages enjoyed were "income" or not, was also very complete in the early days of Co-operative Societies. 3. But where the aggregation of individuals serving each other is very large, and they are for the most part unknown to each other, commercial methods and tests must prevail, and the element of mutuality becomes less dominant and too diluted to justify alone a plea for exemption from taxation. Moreover, the advantages tend to become averaged out, and to have no definite relation to the individual interest, Thus, the " divi." on particular purchases has no necessary connection with the true surplus price charged thereon, and is only a rough adjustment to reach cost price over the trading as a whole. It could be shown by no very extravagant process of economic reasoning that in a practically self-contained community, such as a town, there may be a degree of interdependence or mutuality not far removed in net effects from the results of co operation. Tt would be perfectly possible for members of any such self-contained group to serve each other " without a profit," or on a cost basis which, in its net results as to the distribution of goods and services, would be closely analogous to the results of formal co-operation. RESERVATION TO PART V, SECTION XII. 167 4. Once " mutuality " is abandoned as a ground for exemption there is pro- bably no logical stopping short of the position that the whole advantages accruing to the individual participating in this form of collective action should be treated as income, i.e., that the difference between the goods that he is able to obtain and consume under one regime as compared with the other is " income " shifted from each of a number of separate grocers, tailors, butchers, &c, under a competitive regime, to each member serving all the others, and each as a composite " butcher- groeer-and-tailor ", in a co-operative regime. But this whole " advantage " may be more or less than the difference between the cost and the gross price actually charged, because that price is not necessarily the market price — it may be less or more. So the whole " advantage " which theoretically would be income to the individual, may be less or more than reserve plus dividend. It certainly cannot be dependent, as many have suggested, upon a figure of price which can be arbitrarily fixed, because such a price has no permanent significance. The true figure is indeter- minate, and the more widely spread the co-operative movement the less can it be tested by the market prices obtaining over a lessening area. It is, therefore, not possible to adopt this conception of profit for the practical purposes of taxation. But all the same, even if this profit were exactly ascertainable and treated as income, it would be receivable in the main by persons (the owner-purchasers) who are not effectively liable to tax, because their individual incomes are less than the exempt margins now recommended. In our judgment a division of the " profit " or income so con- ceived (roughly including both reserve and discount or " divi.") between liable and non-liable persons, and a charge to tax upon the former, would give results not widely different from the method proposed, viz., the complete exemption of the " divi." and the complete charge upon the reserves, with an exact allocation of liability in respect of share interest. 5. But it is not particularly by reference to the considerations in the foregoing paragraph that the recommendations in the Report are justified. It is rather that the " mutuality " nexus between the individual's position as part owner of a business and his position as a purchaser is so slight and remote, and of so little significance as a practical factor, that it can be disregarded for taxation purposes in favour of a completely objective view of the business as a whole. Under such a view it is difficult to discern any difference between its activities and those of an ordinary business. The purchasers buy their goods at a. certain net cost and do not fall to be objectively distinguished from other purchasers; the shareholders receive certain incomes in respect of their shares and are not to be differently treated from other shareholders; the entity itself is charged upon its retained " trading " profits put to reserve, just as a company would be, without regard to the status of its shareholders. This view leads, therefore, to the position set out in the recommendations as con- sistent with the logic of facts in the present development of the co-operative movement. (Signed) J. C. STAMP. WILLIAM McLINTOCK. 168 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. APPENDIX I. REPORT OF THE SUB-COMMITTEE APPOINTED BY THE ROYAL COMMISSION ON THE INCOME TAX TO CONFER WITH REPRE- SENTATIVES OF THE DOMINIONS ON THE SUBJECT OF DOUBLE INCOME TAX WITHIN THE EMPIRE. 1. This Sub-Committee was appointed on the 3rd July, 1919, and consisted of the following members of the Royal Commission : — The Rt. Hon. E. G. Pketyman. M.P. (Chairman of Sub-Committee). The Rt. Hon. C. W. Bowerman, M.P. Sir W. Trowek. S. A. Armitage-Smith, Esq., C.B. Dr. J. C. Stamp, C.B.E. P. A. Birley, Esq., J.P. H. J. Mackinder, Esq., M.P. W. McLintock, Esq. Mr. Mackinder, having been appointeil British Commissioner for South Russia, retired from the Royal Commission in November, and his place on the Sub-Committee was taken by Mr. R. M. Holland-Martin, C.B. 2. The terms of reference to the Sub-Committee were : — " To consider what arrangements with the various Dominions are practicable in order "to ensure that any existing hardship arising from the imposition of Double " Income Tax within the Empire may be remedied." 3. At the time when the Royal Commission was appointed, the Chancellor of the Exchequer, after an interchange of views with Lord Milnei - , Secretary of State for the Colonies, suggested to Lord Colwyn that a conference should be arranged between members of the Commission and representatives of the Dominion Governments, in order that the views of the Dominions might be ascertained on the subject of Double Income Tax within the Empire before the Royal Commission made its Report. The self-governing Dominions were accordingly invited by the Colonial Office to nominate representatives, and the following were appointed before the Sub-Committee's first meeting : — Australia G. H. Knibbs, Esq., C.M.G. Canada ... ... ... W. L. Griffith, Esq. India Sir James Scorgie Meston, K. C.S.I, (now Lord Meston). New Zealand ... ... Sir Thomas Mackenzie, K.C.M.G. South Africa J. Burns, Esq., I.S.O. The Board of Inland Revenue were invited by the Royal Commission to be represented at the conferences, and they nominated Mr. E. R. Harrison, one. of their Assistant Secretaries, to act on their behalf ; subsequently the Hon. Sir Edgar R. Bowring was appointed to represent the Dominion of Newfoundland, and at the request of the Government of the Isle of Man, Mr. W. Williams, the Income Tax Assessor for that Island, was present at the later conferences. 4. Lord Colwyn, in a letter to the Chairman of the Sub-Committee dated the 17th July, 1919, defined the position of the Dominion and other representatives, and indicated the course which in his opinion might with advantage lie pursued by the Sub-Committee. He said " I think the Delegates from " the Dominions, and Mr. Harrison, are more or less in the position of Assessors sitting with a " ( 'uiirt. It is obvious that instead of calling a number of witnesses, the Sub-Committee, with these " Delegates sitting with them, may be able to arrive at conclusions which will commend themselves " as practicable, and also as more or less politically expedient to the various Governments concerned ; " hut in my judgment, it is the members of this Commission, forming the Sub-Committee, who must " come to a conclusion and make a Report." In the proceedings of the Sub-Committee we have followed the course indicated, the representatives of the Dominions being furnished with copies of all evidence given before the Royal Commission on the subject referred to us for consideration. •5. It was not found practicable to bold any meetings of the Sub-Committee until the 23rd September, 1919, as the representative of the Commonwealth of Australia did not arrive in this country until the 13th September. (I. The problem which we were asked to solve had been a subject of discussion at the Imperial War Conference in 1!M7, and that Conference passed the following resolution: — " That the present system of double income taxation within the Empire calls for review in " relation ; — " (1) to firms in the United Kingdom doing business with the Overseas Dominions, India " and the Colonies; APPENDIX I. 169 "(2) to private individuals resident, in the United Kingdom who have capital invested '• elsewhere in the Empire, or who depend upon remittances from elsewhere within. " the Empire ; and ' (3) to its influence on the investment of capital in the United Kingdom, the Dominions " and India, and to the effect of any change on the position of British capital " invested abroad. " The Conference, therefore, urges that this matter should be taken in hand immediately ' after the conclusion of the war, and that an amendment of the law should be made which will " remedy the present unsatisfactory position." 7. The extent of the problem is perhaps most easily demonstrated by a statement of the present law and its effects, and of the principal relevant suggestions which have been made to the Royal Commission. 8. The Income Tax of the United Kingdom is, broadly speaking, charged («) in respect of all income arising in the United Kingdom, and (£>) on the income, wherever it arises, of residents in the United Kingdom. 9. The Income Taxes levied in the various Dominions differ considerably in their scope. India, Canada and Newfoundland tax both income arising in the country and income, wherever arising, enjoyed by residents in the country. On the other hand, the Income Tax of the Commonwealth of Australia, of the Australian States and of the Union of South Africa, is more limited in scope, and in general applies only to income whose source is within the State imposing the tax. 10. The United Kingdom law provides for the deduction of foreign and colonial Income Tax in calculating the income upon which tax is to be charged in the United Kingdom. It further provides that "'here a person has on any part of his income borne both United Kingdom Income Tax (at more than 3s. (id. in the £) and also Dominion Income Tax, he shall be repaid the smaller of the two following amounts :— (a) such an amount as will reduce the United Kingdom Income Tax on that part of his income to 3s. (id. in the £ : or (/)) the amount of tax on that part of his income at the rate of the Colonial Income Tax. 11. For example, if an income of £2,000 arises in Australia and accrues to a resident in the United Kingdom, and if the respective rates charged be assumed to be 5*. 3c?. in the United Kingdom and 3a-. id. in Australia, then at present the tax paid in Australia is 3s. 4rf. on £2,000= £333 6*. 8r/., and in the United Kingdom the tax charged is at the rate of (5s. 3d. minus Is. 9d.) = 3s. 6d. in the £ upon the balance of the income after deducting Australian Income Tax, viz., on (£2,000 - £333 6s. 8d.) = £1,666 13s. \d. i.e., £291 13s. 4r/. The total tax is therefore £625 0s. Orf., which is equivalent to tax at a combined rate of 6s. 3c?. in the £. 12. This relief is of a temporary and makeshift character, and the burden of it is entirely borne by the United Kingdom Exchequer. Moreover, it has this serious defect — that large incomes benefit from its operation more than medium incomes, and small incomes do not benefit by it at all. 13. The suggestions which have been made to the Royal Commission by witnesses on this subject may be summarized as follows : — (a) that throughout the Empire income should be charged primarily in the State where the income arises, with or without a further charge for any excess of the tax assessable in the State of residence over the tax paid in the State of origin ; (Young ; Rayner) (u) that the State which imposes the higher rate should collect its tax and adjust the loss of revenue between the two States ; (Young ; Firth ; Cash) (c) that income arising outside the State of residence should not be charged therein ; (Mosenthal) ('/) that the tax assessable in the State of residence in respect of income arising in another State within the Empire should be charged only on the amount of income remitted to the State of residence. (Mosenthal ; McLeod.) 14. In view of the evidence already given to the Royal Commission on behalf of fully representative bodiei we considered it unnecessary to call further witnesses, and our sittings were therefore occupied in deliberation, and in considering the views of the representatives of the various Dominions. 15. At an early period of our conference we came to the conclusion, admitted in the evidence of the Board of Inland Revenue, and adumbrated in the Terms of our Reference, that having regard to the essential homogeneity of the Empire, there is an inequity in requiring a taxpayer to make two 27925 M 170 EiErORT OF THE ROYAL COMMISSION ON THE INCOME TAX. contribution? of Income Tax towards what must certainly in part be a common purpose, viz., the well-being of the British Empire; and that this inequity should be remedied. We further concluded : — (a) that no citizen of the Empire ought to be penalized because he invests his money in a part of the Empire outside the particular State in which he resides ; ,//) that where the hardship of double income taxation exists, it operates as a hindrance to Imperial trade ; (c) that in present financial circumstances no State ought to be called upon to sacrifice more revenue than is absolutely essential ; (r/) that the demands of equity would be met by the elimination of such excessive taxation as exists in the individual case ; in other words, that the removal of the burden of Double Income Tax would be effected if an amount equal to the lower of the two taxes imposed by two States on an individual were remitted. 16. We discussed and admitted as general principles of taxation governing any conclusions at which we might arrive : — (■::. N 172 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. 29. In the higher ranges of income, the calculation of the relief by reference to the rate of United Kingdom tax (inclusive of Super-tax) would operate to the convenience of the taxpayer aud give a benefit to the Dominion Government greater than would be the case if the relief had been calculated with reference to the rate of United Kingdom Income Tax that would be applicable to the income arising in the Dominion if that income were considered the total income. 30. In the case of a limited company an adjustment will be made by reference to the rate of tax chargeable upon the company in the United Kingdom and in a Dominion respectively. Any subsequent adjustment t £ the rates of the United Kingdom tax by reference to the total income of an individual shareholder will be duly made, subject always to the restriction that any such further relief shall not reduce the rate finally chargeable upon him below one-half of the United Kingdom rate appropriate to his total income. 31. Where a shareholder derives income from a company, and the Dominion also adjusts the burden of Income Tax (including the tax borne by the company) upon him by reference to his total income, any further necessary adjustment in respect of Double Income Tax in addition to that made in the United Kingdom will be made in the Dominion. But where the Income Tax assessed upon a company is treated as a company tax not adjustable by reference to the shareholder's individual income, the tax ultimately borne by the shareholder will be — (1) the tax in the United Kingdom at the rate indicated in paragraph 30, and (2) the tax in the Dominion at the rate ultimately borne by the company. At the present time the rates of Income Tax charged upon companies in the Dominions are such that in the majority of cases the total relief necessary for complete adjustment can be granted in the United Kingdom. 32. Under this system the income to which the respective rates would apply is, of course, the gross income, that is to say, the United Kingdom tax on income derived from a Dominion would be based, not as at present on the amount of the income less the Dominion tax paid thereon, but on the full income without such deduction. 33. We are of opinion that this proposal is suitable for recommendation by the Royal Commission and possesses the element of permanency since it would leave each State free to alter its rates of tax without as a consequence reviving the question now at issue. It will result in a generous contribution towards relief from Double Income Tax on the part of the United Kingdom, and will, we hope, form the basis for complete reciprocal action by the Dominions. While the majority of us think that it is inexpedient to make the relief conditional upon such reciprocity, some are of opinion that the United Kingdom Government should reserve to itself the right to apply the scheme only to those cases where the necessary measures are taken in the Dominion to allow to the individual taxpayer the balance of the relief. 34. The proposal has been submitted to the various Dominion Governments by their repre- sentatives, but no reply has yet been received. We are, however, authorized by all the representatives, with the exception of one who preferred to await instructions from his Government before expressing an opinion, to state that they agree that the suggested solution of the appro- priation of the burden of the necessary relief is one of which they personally approve, that they are prepared to recommend it to their respective Governments, and further that the proposed relief should also be applied by the Dominions inter se, if applied as between the United Kingdom and the Dominions. The proposal does not necessarily relate to the Isle of Man, whose financial connection with the rest of the United Kingdom is the subject of existing arrangements with the Treasury. 35. We have been able in the course of our inquiry to settle principles only, and in order that the arrangements entered into may be carried out harmoniously, it will be necessary to give departmental consideration to the various details that will arise in applying these principles in practice ; we accordingly suggest that Rules for the application of these principles be drawn up and agreed. Such Rules should admit of repayment in respect of all adjustments being made, if practicable, in the State in which the recipient of the income resides. 36. We are informed that the total immediate cost of the proposed relief is not likely to exceed £4,000,000, from which should be deducted the cost of the existing reliefs (£2,000,000) in order to obtain the additional cost of the proposed relief. 37. We have considered, as a subject subsidiary to that of double taxation within the Empire, what tax in respect of income chargeable in this country, should be paid by British subjects who arc resident in the Dominions, and we are of opinion that any relief dependent on total income (e.g., exemption, abatement, wife allowance, children allowance and allowance for Life Assurance) which would be granted to a resident in the United Kingdom should equally be granted to British subjects resident in the Dominions. APPENDIX I. 17.H 38. The term " Dominion " is used throughout this Report to include not only the self- governing Dominions, but also India and British possessions generally. 39. The Sub-Committee are greatly indebted to the Secretary for the assistance he has given them in dealing with this very difficult subject, and they have also had very valuable help from Mr. Robinson. Mr. Clark's administrative experience was specially valuable in view of the nature of the problem of adjustment with which the Sub-Committee had to deal. E. G. PRETYMAN (Chairman). C. W. BOWERMAN. W. TROWER. R. M. HOLLAND-MARTIN. S. A. ARMITAGE-SMITH. J. C. STAMP. P. A. BIRLEY. W. McLINTOCK. E. Clark (Secretary). C .J. Robinson (Assistant Secretary to the Sub-Committee). 2nd January, 1920. '"'•'-•"' N 2 174 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. APPENDIX II. Tables showing the tax payable and the effective rates of tax chargeable on earned and investment incomes of selected amounts in the cases of : — TABLE No. 1. — Single persons whose incomes are not greater than £2,000. TABLE No. 2. — Married couples without children, whose incomes are not greater than £2,000. TABLE No. 3. — Married couples entitled to the allowance for three children, whose incomes are not greater than £2,000. TABLE No. 4. — Single persons whose incomes are between £2,000 and £20,000. TABLE No. 5.— Married couples without children, whose incomes are between £2,000 and £20,000. TABLE No. 6. — Married couples entitled to the allowance for three children, whose incomes are between £2,000 and £20,000. Note. — The rates of tax are shewn to the nearest id. in Tables 1 to 3, and to the nearest Id. in Tables 4 to 6 TABLE No. 1. SINGLE PERSONS. Table showing amounts of Income Tax payable by single persons on earned and investment incomes of selected amounts, and the effective rate of tax on each £ of actual income iu each case ; as at present, and as indicated in Section II of Part II of our Report. ] '.{ income ill earned. If income all investn lent Actual i total Present charge. Postulated charge. Present charge. Postulated charge. income. Amount. Effective rate. Amount. Effective rate. Amount. Effective rate. Amount. Effective rate. £ £ s. d. s. d. £ s. d. s. d, £ s. d. s. d. £ s. d. s. d. 135 1 13 9 3 1 2 5 4 — — 140 2 5 4 \ Nil Nil 3 5 15 14 150 3 7 6 54 J 4 10 7 2 5 34 160 4 10 7 1 7 2 6 9 3 15 5A 170 5 12 6 8 2 14 4 7 10 104 5 5 74 200 9 11 6 15 8 12 1 24 9 15 0j 1 1 .', 220 115 1 0^ 9 9 104 15 1 44 12 15 1 2 251 1 11 12 6 1 2 13 10 1 1 19 10 1 64 17 5 1 44 300 20 5 1 4 20 5 (1 1 4 27 1 94 24 15 1 8 350 25 17 6 1 5£ 27 1 64 34 10 1 114 32 5 1 lit 400 31 10 1 7 33 15 1 8 42 2 1 45 15 2 34 500 45 i n 60 15 2 5 60 2 5 75 15 3 04 600 75 O 2 6 87 15 (1 2 11 93 15 3 14 105 15 3 64 Too 94 10 2 84 114 15 3 34 118 2 6 3 44 135 15 3 104 800 120 3 it 141 15 1) 3 64 150 3 9 165 15 ■i 14 900 L35 3 168 15 3 9 168 15 3 9 195 15 4 4 1,000 150 3 o 195 L5 3 U 187 10 3 9 225 15 4 6 1,250 23 1 7 6 3 9 263 5 4 24 2S1 5 4 6 300 15 4 9J 1,500 281 5 3 9 330 15 4 5 337 10 4 6 375 15 5 2,000 450 4 6 465 15 4 8 525 5 3 525 15 G 5 3 APPENDIX II. 175 TABLE No. 2. MARRIED COUPLES WITHOUT CHILDREN. Table showing amounts of Income Tax payable by married couples without children on earned and investment incomes of selected amounts, and the effective rate of tax on each £ of actual income in each case ; as at present, and as indicated in Section II of Part II of our Report. Actual total If income all earned. Present charge. Amount. Effective rate. Postulated charge. Amount. Effective rate. If income all investment. Present charge. Amount. Effective rate. Postulated charge. Amount. Effective rate. £ 135 140 150 160 170 200 220 250 300 350 400 500 600 700 800 900 1,000 1,250 1,500 2,000 £ s d. Nil s d. Nil 3 7 6 4 5 12 6 6 9 8* 14 12 6 114 20 5 1 2 £ s. d. V Nil 6 15 13 10 25 17 6 39 7 6 67 10 87 112 10 135 150 234 7 6 281 5 450 1 34 1 7 2 3 2 6 2 10 3 3 3 9 3 9 4 6 20 5 33 15 60 15 87 15 114 15 s. d. \- Nil 54 94 1 1 4 2 04 2 6 2 104 141 15 168 15 236 5 303 15 438 15 3 3 3 4 4 44 04 ^2 £ s. d. s. d. ) > Nil I Nil 4 10 7 10 12 19 10 27 ) 51. 8 o m 1 34 1 64 34 10 52 10 84 7 108 15 140 12 6 6 1 84 2 1 2 10 3 H 3 6" 168 15 187 10 281 5 337 10 525 3 9 3 9 4 6 4 6 5 3 £ s. d. Nil 3 15 11 o 18 15 26 5 48 15 78 15 108 15 138 15 168 15 198 15 273 15 348 15 498 15 s. d. ► Nil 34 9 1 1 1 4 1 114 2 74 3 H 3 54 3 9 3 114 4 44 4 8 5 TABLE No. 3. MARRIED COUPLES ENTITLED TO THE ALLOWANCE FOR THREE CHILDREN. Table showing amounts of Income Tax payable by married couples entitled to the allowance for three children on earned and investment incomes of selected amounts, and the effective rate of tax on each £ of actual income in each case ; as at present, and as indicated in Section II of Part II of our Report. If income all earned. If income all investment. Actual total Present charge. Postulated charge. Present charge. Postulated charge. income. Amount. Effective rate. Amount. Effective rate. Amount. Effective rate. Amount. Effective rate. £ £ s. d. s. d. £ s. d. s. d. £ s. d. s. d. £ s. d. s. d. 135 1 1 ' 1 • " 1 140 150 160 170 -Nil -Nil -Nil .Nil -Nil [►Nil -Nil J- Nil 200 220 250 . J . 300 4 10 34 6 5 J 350 10 2 5 7 J . 13 10 9 J 5 5 oh 400 15 15 94 6 15 4 21 i 04 12 15 74 500 29 5 I 2 20 5 91 39 u 1 64 27 1.". (i l 14 600 54 1 94 33 15 i 14 67 10 2 3 51 15 l v 700 73 10 2 1 60 15 1 9 91 17 6 2 74 81 15 ■2 1 800 99 2 5* 87 15 2 24 123 15 3 1 111 15 2 94 900 129 2 104 114 15 2 64 161 5 3 7 141 15 3 2 1,000 144 2 10* 141 15 2 10 1 Ml (1 3 7 171 15 3 5 1,250 234 7 6 3 9 209 5 3 4 281 ."■ 1 6 246 15 3 114 1,500 281 5 3 9 276 15 3 84 ;s:',7 lo 4 6 :i_' 1 15 4 34 2,000 450 4 6 411 15 4 14 525 5 3 471 15 4 84 176 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. TABLE No. 4. SINGLE PERSONS. Table showing amounts of Income Tax and Super-tax payable by single persons on earned and investment incomes of selected amounts, and the effective rate of tax on each £ of actual income in each case ; as at present, and as indicated in Section II of Part II of our Report. If income all earned. Actual total Present charge. Postulated charge. Income Tax. Super- tax. Total. Effective rate. Income Tax. Super- tax. Total. Effective rate. £ £ £ £ s. d. £ £ £ s. d. 2,000 450 — 450 4 6 466 — 466 4 8 2,250 591 — 591 5 3 541 19 560 5 2,500 656 — 656 5 3 616 37 653 5 3 2,750 825 44 869 6 4 691 62 753 5 6 3,000 900 62 962 6 5 766 87 853 5 8 4,000 1,200 162 1,362 6 10 1,066 212 1,278 6 5 5,000 1,500 287 1,787 7 2 1,366 362 1,728 6 11 6,000 1,800 437 2,237 7 5 1,666 537 2,203 7 4 7,000 2,100 612 2,712 7 9 1.966 737 2,703 7 9 8,000 2,400 787 3,187 S 2,266 962 3,228 8 1 9,000 2,700 987 3,687 8 2 2,566 1,212 3,778 8 5 10,000 3,000 1,187 4,187 8 4 2,866 1,462 4,328 8 8 15,000 4,500 2,312 6,812 9 1 4,366 2,712 7,078 9 5 20,000 6,000 3,437 9,437 9 5 5,866 3,962 9,828 9 10 If income all investment • Actual total Present charge. Postulated charge. Income Tax. Super- tax. Total. Effective rate. Income Tax. Super- tax. Total. Effecti ve rate. £ £ £ £ s. d. £ £ £ s. d. 2,000 525 — 525 5 3 526 — 526 5 3 2,250 675 — 675 6 601 19 620 5 6 2,500 750 — 750 6 676 37 713 5 8 2,750 825 44 869 6 4 751 62 813 5 11 3,000 900 62 962 6 5 826 87 913 6 1 4,001) 1,200 162 1,362 6 10 1,126 212 1,338 6 8 5,000 1,500 287 1,787 7 2 1,426 362 1,788 7 2 6,00(1 1,800 437 2,237 7 5 1,726 537 2,263 7 7 7,000 2,100 612 2,712 7 9 2,026 737 2,763 7 11 8,000 2,400 787 3,187 S 2,326 962 3,288 8 3 9,000 2,700 987 3,687 .S 2 2,626 1,212 3,838 8 6 10,000 3,000 1,187 4,187 S 4 2,926 1,462 4,388 S 9 15,000 4,500 2,312 6,812 9 1 1,426 2,712 7,138 9 6 20,000 6,000 3,437 9,437 9 5 :>;.w 3,962 9,888 9 11 APPENDIX II. 177 TABLE No. 5. MARRIED COUPLES WITHOUT CHILDREN. Table showing amounts of Income Tax and Super-tax payable by married couples without children on earned and investment incomes of selected amounts, and the effective rate of tax on each £ of actual income in each case ; as at present, and as indicated in Section II of Part II of our Report. If income all earned. Actual total Present charge. Postulated charge. 1 1 1 > ' ' 1 1 1 ' ■ Income Tax. Super- tax. Total. Effective rate. Income Tax. Super- tax. Total. Effective rate. £ £ £ £ s. d. £ £ £ s. d. 2,000 450 — 450 4 6 439 — 439 4 5 2,250 591 — 591 5 3 514 19 533 4 9 2,500 656 — 656 5 3 589 37 626 5 2,750 825 44 869 6 4 664 62 726 5 3 3,000 900 62 962 6 5 739 87 826 5 6 4,000 1,200 162 1,362 6 10 1,039 212 1,251 6 3 5,000 1,500 287 1,787 7 2 1,339 362 1,701 6 10 6,000 1,800 437 2,237 7 5 1,639 537 2,176 7 :; 7,000 2,100 612 2,712 7 9 1,939 737 2,676 7 8 8,000 2,400 787 3,187 8 2,239 962 3,201 8 9,000 2,700 987 3,687 8 2 2,539 1,212 3,751 8 4 10,000 3,000 1,187 4,187 8 4 2,839 1,462 4,301 8 7 15,000 4,500 2,312 6,812 9 1 4,339 2,712 7,051 9 5 20,000 6,000 3,437 9,437 9 5 5,839 3,962 9,801 9 10 If income all investment Actual total 1 Tl PflTYl P Presenl charge. Postulated charge. IllL/UillC Income Super- Total. Effective Income Super- Total. Effective Tax. tax. rate. Tax. tax. rate. £ £ £ £ S. (1, £ £ £ s. d. 2,000 525 — 525 5 3 499 — 499 5 2,250 675 — 675 6 574 19 593 5 3 2,500 750 — 750 6 649 37 686 5 6 2,750 825 44 869 6 4 724 62 786 5 9 3,000 900 62 962 6 5 799 87 886 5 11 4,000 1,200 162 1,362 6 10 1,099 212 1,311 6 7 5,000 1,500 287 1,787 7 2 1,399 362 1,761 7 1 6,000 1,800 437 2,237 7 5 1,699 537 2,236 7 5 7,000 2,100 612 2,712 7 9 1,999 737 2,736 7 10 8,000 2,400 787 3,187 8 2,299 962 3,261 8 2 9,000 2,700 987 3,687 8 2 2,599 1,212 3,811 8 6 10,000 3,000 1,187 4,187 8 4 2,899 1,462 4,361 8 9 15,000 4,500 2,312 6,812 9 1 -1,399 2,712 7.111 9 6 20,000 6,000 3,437 9,437 9 5 5,899 3,962 9,861 9 10 J, '.l.' N4 178 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. TABLE No. 6. MARRIED COUPLES ENTITLED TO THE ALLOWANCE FOR THREE CHILDREN. Table showing amounts of Income Tax and Super-tax payable by married couples entitled to the allowance for three children on earned and investment incomes of selected amounts, and the effective rate of tax on each £ of actual income in each case ; as at present, and as indicated in Section II of Part II of our Report. If income a 11 earned. Actual total Present charge. Postulated charge. Income Super- Total Effective Income Super- Total. Effective Tax. tax. rate. Tax. tax. rate. £ £ £ £ s. d. £ £ £ s. a. 2,000 450 — 450 4 6 412 — 112 4 1 2,250 591 — 591 5 3 487 19 506 4 6 2,5(10 656 — 656 5 3 562 37 599 4 10 2,750 S25 44 860 6 4 637 62 i\W 5 1 3,000 900 62 962 6 5 712 87 799 5 4 1,000 1,200 162 1,362 6 10 1,012 212 1,224 6 1 5,000 1,500 287 1,787 7 2 1,312 362 1,674 6 8 6,000 1.800 437 2,237 7 5 1,612 537 2,149 7 2 7.000 2,100 612 2,712 7 9 1,912 737 2,649 7 7 8,000 2,400 787 3,187 8 O •> 21a 962 3,174 7 11 '.1,000 2,700 '.187 3,687 S 2 2,512 1,212 3,724 8 3 10,000 ; i,ooo 1,187 4,187 8 4 2,812 1,462 4,274 8 7 15,000 4,500 2,312 6,812 9 1 4,312 2,712 7,024 9 4 20,000 6,000 3,437 9,437 9 5 5,812 3,962 9,774 9 9 If income all investmen t. Actual total Present charge. Postulate! 1 charge. Income Tax. Super- tax. Total. Effective rate. Income Tax. S 11 per- tax. Total. Effective] rate. £ £ £ £ S. (/. £ £ £ s. d. 2,000 525 — 525 :, :; 472 — 472 4 9 2,250 675 — 675 6 547 19 566 5 2,500 750 — 750 6 622 37 659 5 3 2,750 825 44 869 6 4 697 62 759 5 6 3,000 900 62 962 6 5 772 87 859 5 9 4,000 1,200 L62 1,362 6 10 1,072 212 1,284 6 5 5,000 1,500 287 1,787 7 2 1,372 362 1,734 6 11 6,000 L,800 437 2,2:17 7 5 1,672 537 ".209 7 4 7,000 2,100 612 2,712 7 9 1,972 737 2,709 7 9 8,000 2,100 787 3,187 8 " ■'72 962 3,234 8 1 '.1,000 2,700 987 3,687 S 2 2,572 1,212 : 1,784 8 5 10,000 3,000 1.187 4,LS7 S 1 2,872 1,462 4,334 8 8 !5,ooi) l,5oo 2,312 6,812 9 1 4,372 2,712 7,084 9 5 2i i,| ii ii i 6,( ii " i 3,437 9,437 9 5 < 5,872 : 1,962 9,834 9 10 RAPH I- INCO E by a SINGLE PERSO EXISTING < ewn thus Appendix N° 3. Graph I. ncome under the gsents tax payable on on earned income. [See Graph I (a) for ±i 500 600 700 800 1.700 1,300 1,900 2.000 500 4-50 400 350 300 250 200 150 100 2,000 GRAPH I.- INCOMES NOT EXCEEDING &2.000. Appendix N° 3. Graph I. Shewing the TAX PAYABLE by a SINGLE PERSON on (I) INVESTMENT and (2) EARNED income under the EXISTING and PROPOSED systems. Tax under the existing system shewn thus proposed „ „ „... As regards each system, the higher of the two lines represents tax payable on investment income, and the lower line, tax payable on earned income. [See Graph I (al for the corresponding' effective rates of tax.] 100 200 300 400 500 600 700 800 900 1.000 1,100 1.200 1,300 1,400 1,500 1.600 1.700 1,800 1,900 2.000 550 ' investment ^s* 500 i INCOME 500 450 j^s *" EARNED INCOME^,'- 450 ^S^\* ^ t^^ ^S\s'' ^* * '^^ 400 400 s -i-***" j^^ 350 .* s / *" ' JOU V 300 ,* _^S^ s ' 300 z ,* ,*■" X 250 ^ s * ^s^ V''' ^ 250 < ^'s'*' s"~ h > i + "" ■ S* / "* 200 , * s- ,' ^z*^ 150 s' ^^^ 150 s^^"^ _, *' 100 '^*^' 100 s f J. " 50 5C ^* * ' J ^ r^^^ 1 1 1 1 i 1 !°° 200 300 400 500 600 700 800 900 1.000 1,100 1,200 1,300 1,400 1.500 1.600 1.700 1,800 1,900 2,000 INCOME IN £ ?;r- ItM j» xw i \ 1(a). - INCOME EFFECTIVE RATE OF TAX (2) EARNED incomeiy shewn thus CM 600 700 800 900 y s f u .' / v Appendix N°3. Graph 1(a). presents effective rate effective rate of 1-800 1,900 2,000 iSTMENT EARNED INCOME. .J INCOME. V J L 600 700 800 900 5/0 4-/6 4/0 3/6 3/0 2/6 2'0 1/6 fid 1,800 1,900 2.000 GRAPH 1(a). - INCOMES NOT EXCEEDING &2.000. Appendix N°3. Graph 1(a). Shewing the REAL EFFECTIVE RATE OF TAX CHARGEABLE on a SINGLE PERSON in respect of (I) INVESTMENT and (2) EARNED income under the EXISTING and PROPOSED systems. As regards each system, the higher of the two lines represents effective rate of tax chargeable on investment income, and the lower line, effective rate of tax chargeable on earned income. Real effective rateof tax under the existing system shewn thus .. proposed „ „ ., . 100 200 300 400 500 600 700 800 900 1.000 1.100 1.200 1.300 1.400 1.500 1,600 1.700 1.800 1,900 2.000 i ^VESTMENT INCOME 50 4/6 O 5 4/0 4- J 5'n .--— ~ l EARNED INCOME. "" h ^^~- .----"" -- — .,-'- /__. 1 I U5 ,' . *»* 1 / 1 3/6 3/0 2/6 2/0 1/6 I/O 6d Z X < 3 / I s f r — — " s 1- 0- o 2/6 UJ (- < 2/0 / / / / / / \ / \ / \ / \ / / I / / / 1 UJ > H O ^ 1/6 s s / / / .— li- UJ I/O / / / / > Ss**"^ 6") 1 III 1 ^- IP- ' t / //' ' V ' \i i ' ' li ; 1 luu zo ° 300 400 500 600 700 800 900 1000 1.100 1.200 1.300 1400 1,500 1.600 1.700 1.800 IJSOO 2O00 INCOME IN S. v wtiiitooo s.io JAPH E. - INC YABLE by a MARRIE VRNED income unde wn thus Appendix N° 3. Graph II. ENT and its tax payable on earned Income. 2,000 450 400 350 300 250 200 GRAPH H. -INCOMES NOT EXCEEDING &2.000. Appenoix N c 3.GraphU. Shewing the TAX PAYABLE by a MARRIED COUPLE WITHOUT CHILDREN on (I) INVESTMENT and (2) EARNED income under the EXISTING and PROPOSED systems. | As regards each system, the higher of the two lines represents tax payable on I investment income, and the lower line, tax payable on earned income. |_See Graph H(a) for the corresponding effective rates of tax! Tax under the existing system shewn thus proposed , .... 100 200 300 400 500 600 700 800 900 1.000 1.100 1.200 1.300 1.400 1.500 1.600 1.700 1,800 1.900 2000 ^ 500 300 40^ 900 1.000 1. 100 INCOMt IN I POH 1500 1.600 1.700 1800 H H(a). - INCO Appendix N°3. Graph 11(a) )F TAX CHARGEABLE oespect of 1) EARNED income.tems swn thus sents effective rate fective rate of tax 600 700 800 9O0 1,800 1,900 2D0O 5/0 4-/6 4/0 3/6 3/0 2/6 2/0 1/6 I/O 6 d 600 700 800 900 l800 |900 2p o & ■ is Liih. GRAPH H(a). - INCOMES NOT EXCEEDING &2.000. Appendix N°3. Graph 11(a) Shewing the REAL EFFECTIVE RATE OF TAX CHARGEABLE on a MARRIED COUPLE WITHOUT CHILDREN in respect of (I) INVESTMENT and (2) EARNED income under the EXISTING and PROPOSED systems IAs regards each system, the higher of the two lines represents effective rate of tax chargeable on investment income, snc the lower line, effective rate of tax chargeable on earned income. Real effective rate of tax under the existing system shewn thus .„ _., .proposed... . „ 100 200 300 400 SOO 6O0 700 800 900 1000 UOO l,£00 1300 1,400 1500 I6QO 1700 IfiOO 1,300 2000 100 £00 300 4-00 SOO 600 700 800 300 1000 MOO INCOME IN £ 1200 1,300 1400 1500 1600 1,700 1,600 1.900 2p00 PH ET.- INCOM by a MARRIED COUP (2) EARNED inco systems. Appendix N? 3, Graph HI. HILDREN on us I A&s tax payable on J irvearned income. [Set Graph EL (a) for the eoo 1,900 2,000 500 -^ 450 400 350 300 250 200 150 100 GRAPH EL- INCOMES NOT EXCEEDING 5.2,000. Appendix N? 3. Graph IH. Shewing the TAX PAYABLE by a MARRIED COUPLE ENTITLED TO THE ALLOWANCE FOR THREE CHILDREN on (I) INVESTMENT and (2) EARNED income under the EXISTING and PROPOSED systems. Tax under the existing system shewn thus „ ......proposed „ „... | As regards each system, the higher of the two lines represents tax payable on I investment income, and the lower line, tax payable on earned income. [See Graph HI la) for the corresponding effective rates of tax.J 200 300 400 500 600 700 800 900 1.200 1,300 1,500 1.600 700 ISOO 1300 ^ 300 Z >5 250 I- INVESTMENT INCOME^X^ Lx^ EARNED II* COME, + s s^, s,*^ >- / /' I y I s I ^ s S • * r • * I -" ■S j- *+" s , — -» *■ — s if*'' / / S ^ II' ' 7 -'' i s f /" S / S / y ^-- — ' ^ ^- — > s 1^- 200 300 400 500 600 700 900 1.000 INCOME IN £ !.3CO 1,400 1 500 ?,000 H 111(a)- iNCC Appendix N°3. Graph IU(a). X CHARGEABLE on _. em. 2.000 .700 1,800 1900 2,000 GRAPH W.(a).~ INCOMES NOT EXCEEDING &2.000. Appendix N?3. Graph TV(a). Shewing the REAL EFFECTIVE RATE OF TAX CHARGEABLE on a SINGLE PERSON and a MARRIED COUPLE ENTITLED TO THE ALLOWANCE FOR THREE CHILDREN in respect of (I) INVESTMENT and (2) EARNED income under the PROPOSED syster ;m. Real effective rate of tax on INVESTMENT INCOME shewn thus ,...„..., EARNED INCOME „ ,_. :} IOC 200 300 400 500 000 700 600 900 1,000 1,100 1,200 1,300 1.4-00 1,500 1.600 1,700 1,800 1900 2 000 -, ■ ! 1 1 1 1 1 1 1 1 1 , ! 1 INCOMES B&ppend.x N? 3 Graph V. 1,200 600 1700 Iff OQ |,9Q 3200 3300 3A00 3500 1,150 1100 1050 1000 950 900 - 850 800 750 7O0 650 600 550 500 4-50 4-00 350 300 W° l60 ° V°° W° i?o ^ioo 3^00 3*00 3500 GRAPH V.— INCOMES BETWEEN £1,500 AND £.3,500. Ap PENDIX n?3.g RA phV . Graph shewing the TAX PAYABLE on INVESTMENT and EARNED income under the EXISTING system; and on INVESTMENT income by a SINGLE PERSON, and EARNED income by a MARRIED COUPLE ENTITLED TO THE ALLOWANCE FOR THREE CHILDREN, under the PROPOSED system. Tax under the existing system shewn thus. ..„ proposed...,, (See Graph V(a) for the corresponding effective rates of tax.) 1600 1700 (BOO 1,900 2000 2,100 2£00 2^00 2,4-00 2,500 2/500 2700 2000 2900 aOOO 3100 21200 3300 3fK)0 3S00 1,150 i • 1050 I00O 950 900 860 Qui 800 — 750 X < |_ 700 s s s 1 5 o . ■ s s / s 8 s S l 1 / s s f s / s s • s s .' s s 1 i 1 s • • • • s s V s i 1 a s S 1 • s s 800 750 700 *l EXISTING SYSTEM i A / s \ s \s 1 1 All persons; if vestment All pe-sons, e irneck / s * si SI ,A . \ PROPOSED SV STEM 1 1 s \^ / s s s \ X Single Manied coup )erson5 es, three , investment children earned 600 550 500 4- s s s s s / ' 5 / s S • • y- s s / s s fs /'. / ' s s *' s ! jf S^s i / 7 \S ' s s . s J^ <*■' V : ^" ,'" \ 300 / S s- " \ -' 15 DO 16 )0 L7 DO 16 DO 19 00 20 00 2j 00 2< 00 21] DO 27 00 2S 30 29 DO 3,0 DO 3I( O 32 DO 33 )0 3.* DO 35( '0 INCOME IN £ i V(a).- INCOMES Appendix N?3. Graph V(a) teal effective rate of tax under th€ " » - - I» M •E E D rn ; 1,600 1,700 |,£ 3.100 3.20Q 3.300 3.4CC 3.500 6 6 LE scb vn lib ; th >es hat les 60 5 6 5 4 6 1500 I.SOO 1.700 1.8 A C 3 6 3,100 3,200 3,300 3,400 3.500 GRAPH V(a).- INCOMES BETWEEN £l,500 AND £3,500. Appendix N?3. Graph V(a) . Real effective rate of tax under the existing system shewn thus „ „ ..„ „ proposed „ Graph shewing the REAL EFFECTIVE RATES OF TAX CHARGEABLE on INVESTMENT and EARNED income under the EXISTING system; and on a SINGLE PERSON in respect of INVESTMENT income.and on a MARRIED COUPLE ENTITLED TO THE ALLOWANCE FOR THREE CHILDREN in respect of EARNED income under the PROPOSED system. NOTE. This Graph should not be read in conjunction with Graphs 1(a) to JVo) inclusive, since the increase in the effective rate of tax shewn in this Graph, in the range of incomes dealt with, has been magnified as compared with the increase shewn in the range of incomes dealt with in Graphs If a) toIVfd), in order that the effect of the proposed scheme on incomes between £1,500 and £ 3,500 may be more clearly demonstrated . 1,900 2,000 2,!O0 £.300 2.40Q 2,500 £.600 2.700 2.300 2,900 3.000 1700 1,800 2.000 2,100 2.200 2.300 2400 2.500 2,600 INCOME IN S. 2,700 2,800 2,900 3.000 3,100 3,200 3.300 3,400 3,500 T— INCOMES BE' Append«xN°3. Graph VI .LE :d em; )y a NED >LE :e the :ffective 10,000 9500 3,000 8,500 1,000 3500 9000 8500 8000 7500 7000 6500 GOOO 5,500 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 2000 3.000 4000 ig.OOO 17.000 18.000 19000 20,000 MaJbj ASons Lith GRAPH VI- INCOMES BETWEEN £2.000 AND £20.000. App EWD ,x n?3. graph vi v 3000 4000 5,000 6000 7000 8000 9000 10,000 M.000 IfcOOO 13000 1*000 15000 16000 17000 (8000 13000 20000 Graph shewing the TAX PAYABLE on INVESTMENT and EARNED income under the EXISTING system; and on INVESTMENT income by a SINGLE PERSON, and EARNED income by a MARRIED COUPLE ENTITLED TO THE ALLOWANCE FOR THREE CHILDREN, under the PROPOSED system. Tax under the existing system shewn thus. proposed „ (See Graph VI (a) for the corresponding effective rates of tax.) vi X mes that ->mes •e 'PENDIX N°3.GRAPHYI(a> 3.000 17.000 IS.000 19.000 20,000 UJ > F 4 /° o UJ u_ Lu u fThis Section f is reproduced on a larger scale as a part of G~ a ph V(a). < UJ 3/0 z/o I/O 2.000 3.000 4.0r 9S*7 4/0 3/0 2 I/O 000 18,000 13,000 ?.0.000 MaJby&So 19 GRAPH VIo)- INCOMES BETWEEN £2,000 AND £20,000. Appendix N°3. GraphIHi; Graph shewing the REAL EFFECTIVE RATE OF TAX CHARGEABLE on INVESTMENT and EARNED income under the EXISTING system; and on a SINGLE PERSON in respect of INVESTMENT income and on a MARRIED COUPLE ENTITLED TO THE ALLOWANCE FOR THREE CHILDREN in respecb of EARNED income under the PROPOSED system. Effective rate of tax under the existing system shewn thus . - .... ..... _ ... proposed . NOTE. This Graph should not be read in conjunction with Graphs 1(a) to IVtai or Graph V(a) sines the increase in the effective rate of tax shewn in this Graph, in the range of incomes dealt with, has been magnified as compared with the increase shewn in the range of incomes dealt with in Graphs Iiai to Vrai , in order that the effect of the proposed scheme on incomes between £2,000 and £20.000 may be m one clearly demonstrated . 10/b 3,000 4,000 5,000 G.OOO 7,000 8,000 9,000 10.000 1 1,000 12 000 13,000 14.000 15.000 16.000 17,000 18.000 19000 20000 b -I"" . _ — -f ■ PROPOSED system __ - — " r _ — — Single perfeons. in-l-estmen'^-^^^ ..--' ""_*.- --''1 _ Marr :d Coup!*:, three , — - , — — 3/0 ^ , — " _, -* S*. <■ " — ■ 9/ *' *' ^ i s' -■" if* — EXISTING TEM i ^ v^" All person i . jnve 31 ■1 eai ne i 8/0 i .. x* ' ^-^"^ — i — » V) ■y^ o 4S* ^ s z ^ s -j 7/0 s / / L r y O) / / z A / / ' x 6 /° | \ / / 6 C < r- '\ i U_ > ! o 1 — ' / id 5/b / 1 / s/o < a. / iii ITh.s Section > 'S reproduced p 4 /° see/* Jb o Id pari of Grtph Via) Ul Ll. Id 1 3/0 3/0 < • Id CC 2/0 2/0 1/0 1/0 2,000 3,000 4.000 5,000 6,000 7.000 8,000 3,000 10,000 11,000 12.000 13,000 14,000 15,000 16,000 17000 18,000 19,000 20,000 INCOME IN £ APPENDIX IV (a). 1711 APPENDIX IV (a). LIST OF WITNESSES. Minutes Name of witness. Bodies of persons represented. of evidence. Page. "A.B." 1296 Allen, J. E British Association for the Advancement of Science (joint evidence). 73 Allen, W Middle Classes' Union 696 Allpass, Charles Hire Trailers' Protection Association (joint evidence) 1204 Arbuthnot, Mrs. Girls' Friendly Society 981 Stead Memorial Fund 984 Atkinson, The Revd. A. G. B., M.A. Parochial Clergy of the Church of England 728 Auerbach, Julius (Joint evidence) ... 99 Aveling, Councillor Charles, J. P. ... National Chamber of Trade (joint evidence)... 974 Barker, George Miners' Federation of Great Britain (joint evidence) 938 Baxter, T Licensed Victuallers' Defence League of England and Wales. 1301 Beck, Arthur 850 Belfour, E London Chamber of Commerce (joint evidence) 285 Best, W. S Association of Tax Surveying Officers (joint evidence) 1049 1270 Biggart, Thomas Federation of British Industries (joint evidence) 802 Shipbuilding Employers' Federation 802 Binns, A Board of Inland Revenue 1122 Blakemore, Felix J., F.G.I. National Chamber of Trade (joint evidence) ... 974 Bodington, 0. E British Chamber of Commerce, Paris (Incorporated) 703 Bohn, H. A. Godson Self-Help and Thrift Societies (joint evidence) 106 Booty, E. L Chartered Institute of Secretaries of Joint Stock 598 / Companies and other Public Bodies. Bowley, Professor Arthur L., Sc.D. 323 Brabrook, Sir Edward, C.B. British Association for the Advancement of Science (joint evidence). 73 Bremner, A. M. General Council of the Bar of England 789 Brierley, Wallace Federation of Master Cotton Spinners' Associations, Ltd. (joint evidence). 688 Bristol, The Bishop of The Bishops of the Church of England 659 Brown, Stanley National Association of Assessors and Collectors of Government Taxes (joint evidence). 1081 Bruce, The Hon. W. N., C.B. Board of Education (joint evidence) ... 235 Buckeridge, Clement Self-Help and Thrift Societies (joint evidence) 106 Budd, JohnW Law Society (joint evidence) ... 1174 Cahill, Michael Frederick The United Kingdom Association of Multiple Shop Proprietors. 886 Home and Foreign Produce Exchange, Ltd 886 Retail Distributors' Association 886 Campbell, Athol Central Association of Accountants (joint evidence)... 1170 Carter, George R., M.A Labour Party 987 Carter, Roger N., F.C.A 147 Cash, S. E Federation of British Industries (joint evidence) 802 Cash, William, F.C.A Institute of Chartered Accountants 406 Cholmeley, R. F Incorporated Association of Head Masters 428 Churchman, Ernest J., J. P. Manchester, Salford and Counties Property Owners' Association. 1016 Cliff, C. E Manchester and Salford Playing Fields Society 1113 Collins, Sir Thomas... Board of Inland Revenue 14, 1328 Colville, The Hon. George Royal National Life-Boat Institution ... . . 743 Congdon, P. J. Excise Clerks' Association (joint evidence) ... 1302 Cook, F. W., J.P Drapers' Chamber of Trade 879 Cooper, Newman Hall Co-operative Union of Great Britain and Ireland (joint evidence). 912 Cox, H. Bertram Board of Inland Revenue 1317 Cox, Harold 354 Craig, Commander Herbert James 593 Crook, Charles W National Union of Teachers 281 Currie, George W. ... Association of British Chambers of Commerce (joiut evidence). 374 180 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. Name of witness. Bodies of persons represented. Minutes of evidence. Page. Dagg, J. Ralph, Dp. Ec, J.P. Darwin, Major Leonard Dawson, Sidney Stanley, J. P., M. Coin., F.C.A. Dick, L. H. M Dunlop, Robert, J.P. Durham, A. W. Robertson, C.A., F.F.A. Fames, Edward Eborall, E. A ■ Edgeworth, Professor Francis Ysidro, M.A., F.B.A., J.P. Edwards, Charles, J.P., M.P. Ereaut, A Evans, Edwin, J.P Fergusson, J. C. Firth, Sir Algernon F. Fisher, R. E Franklin, Leonard B., O.B.E., J.P Furtado, M. C Garnett, Henry W. ... Garnett, Henry W. ... Gibbs, The Hon. Herbert .. Goodwin, Thomas Gordon, Mrs. Ogilvie, D.Sc, Ph.D. Gorman,$Michael Hall, Frank Hall, T.Hall Harrison, E. R Haslip, Dr. G. E. Hatton, J. L. S. Haviland, W. A. Ha ward, Sir Harry ... Henderson, Col. H. I). Hewitt, Copley Delink' Hilton, J. P. .". Hobson, Albert J Holme, Randle F. W. Home, J. H. Milne Hook, A Hopkins, Richard Borrough Hopkins, R. V. N., C.B. ... Hovil, Lewis Frederick Howe, G. F Hubback, Mrs. Hughes, Fred Association of Trade Protection Societies of the United Kingdom (joint evidence). Royal National Pension Fund for Nurses Belfast Property Owners' Association Scottish Land and Property Federation (joint evidence). Association of Tax Surveying Officers (joint evidence) South Wales Miners' Federation National Federation of Property Owners and Rate- payers. Assessors and Collectors for the City of London Association of British Chambers of Commerce (joint evidence). National Association of Assessors and Collectors of Government Taxes (joint evidence). Board of Inland Revenue Federation of Master Cotton Spinners' Associations, Ltd. (joint evidence). Co-operative Union of Great Britain and Ireland (joint evidence). National Council of Women of Great Britain and Ireland. Miners' Federation of Great Britain (joint evidence) London Playing Fields Society Board of Inland Revenue British Medical Association Central Landowners' Association Land Union Land Agents' Society Surveyors' Institution ... Royal English Arboricultural Society Scottish Aboricultural Society English Forestry Association Landowners' Co-operative Forestry Society, Limited (joint evidence). Institute of Municipal Treasurers and Accountants (Incorporated). Association of Municipal Corporations London County Council... Convention of Royal Burghs of Scotland, &c. (joint evidence). Excise Clerks' Association (joint evidence) ... Clerks to the Commissioners of Taxes .. Birmingham Corporation Savings Bank Glass Research Delegacy, University of Sheffield ... Law Society (joint evidence) ... Scottish Laud and Property Federation (joint evidence). Board of Inland Revenue National Federation of Iron and Steel Manufacturers Board of Inland Revenue Life Oifices' Association ... National Union of Societies for Equal Citizenship ... National Union of Clerks 1021 783 854 248 997 1104 745 1270 581 114 237 997 1081 374 1081 1265 3.256 1346 688 694 142 912 61 1267 938 1113 308, 708 751, 1225 1328 821 1222 1094 1094 1094 1094 1094 1094 1094 1094 545 545 545 545 1302 1059 645 438 1174 1104 477 647 i,i,s;> 826 666 138 226 APPENDIX IV (a). m Name of witness. Bodiea of persons represented. Minutes of evidence. Page. Hutchison, Alfred Jeuks, Maurice, F.C. A. Johnston, Alexander Johnstone, Gilbert Jones, George Morgan Edwardes Jones, Dr. Robert ... Keay, William Keith, Ex-Provost ... Kelly, E.J Lakin-Smith, H., F.C. A Leake, P. D., F.C.A Leake, P. D., F.C.A Leather, H. D. Littler, H. W., F.C.I.S London, E. Stanford, C.B.E. Louis, Professor Henry, M.A., D.Sc, M.Inst.C.E., &c. Low, George M. Lucas, S. B., B.A. .. Luya, Thomas, LL.B. LyoD, Hugh Mace, F. L Macintosh, Robert Mackie, John, F.C.A. Macnaghten, Steuart Martineau, Philip Hubert ... Martin, Sir James ... Matthews, J. M McLeod, Sir Chai-les Campbell Mitchell, John C, F.C.I.S.... Money, Sir Leo Chiozza Montgoinerie, John ... Mosenthal, William Muspratt, Max Nelson, C. Hewetson, J. P. ... Nickson, The Right Revd. George, D.D. Norman, F. H. Norton, G. P. Orange, Sir Hugh, C.B., CLE. Osier, R. W Parsons, G. 0. Partridge, The Revd. Canon Frank Pegler, Ernest C, F.C.A Phillips, Dr. Marion Piggott, Arthur Edwin Pool; A. F., O.B.E Pratt, Councillor Thomas ... Association of Trade Protection Societies of the United Kingdom (joint evidence). Corporation of the City of London National Union of Manufacturers (Incorporated) The Committee of the Stock Exchange (joint evi- dence) (Joint evidence) ... Professional Workers' Federation (joint evidence) ... Institute of Municipal Treasurers and Accountants... Association of Municipal Corporations London County Council... Convention of Royal Burghs of Scotland, &c, (joint evidence). Association of Tax Clerks (joint evidence) ... Association of British Chambers of Commerce (joint evidence). Institution of Mining and Metallurgy... Association of British Chambers of Commerce (joint evidence). Cremation Societies (joint evidence), and Cemetery Companies of the Greater London area. Board of Inland Revenue British Lead and Zinc Mine Owners' Association and West Coast Hematite Iron Ore Proprietors' Associa- tion. Associated Scottish Life Offices Incorporated Association of Assistant Masters in Secondary Schools. Parliamentary Committee of the Scottish Trades Union Congress (joint evidence). Board of Inland Revenue Co-operative Union of Great Britain and Ireland (joint evidence). Life Offices principally concerned in the transac- tion of Foreign Life Assurance business. London Chamber of Commerce (joint evidence) Association of Tax Clerks (joint evidence) Conference of Superannuation Funds Imperial Commercial Association National Association of Master Bakers, &c, &c. (Joint evidence) ... Federation of British Industries (joint evidence) ... See Bristol, The Bishop of Professional Workers' Federation (joint evidence) ... Association of British Chambers of Commerce (joint evidence). Board of Education (joint evidence) ... Association of Tax Surveying Officers (joint evidence) Central Board of Finance of the Church of England Standing Joint Committee of Industrial Women's Organisations. Cremation Societies (joint evidence) ... Board of Inland Revenue National Chamber of Trade (joint evidence) 854 567 '.•47 351 255 608 1382 545 545 545 545 1101 374 161 811 374 604 615, 951 422 422 826 544 270 932 506 912 1214 826 1189 285 1101 91 219 518 872 S72 99 802 968 608 374 235 1270 77 739 1306 158 604 634 974 182 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. Name of witness. Bodies of persons represented. Minutes of evidence. Page. Price, E. C Purcell, Sir Gilbert Kenelin Treffry Purdie, Mrs. E. Ayres, F.L.A.A. Quin, Stewart Blacker, F.C.A. Rawes, G. J Rayner, William George . Reinganum, Percy E. Rintonl, Peter Ryde, Arthur Lyon ... Schooling, William, C.B.E. Scrimgeour, John A. Sewell, Samuel James Sharland, W. Shirkie, Robert Singer, Adam Mortimer Spry, C. G Staines, W. Leonard Stamp, J. C, C.B.E., D.Sc... Steel, James, M.A., F.S.I., F.A.I. Steel-Maitlaud, Sir Arthur, M.P. Stewart, John Sulley, Philip Teale, George Edward Thompson, E. R. Towle, F. S Tudor, Henry Edmund Vestey, Sir William... Walker, Councillor James Walker, Robert Webb, Sidney, LL.B. Wherry, Albert E. K. White, lames Dundas, LL.D. Whiteley, F. Ogden Williams, Evan Williamson, The Rt. Hon. Sir Archibald, M.P. Wolstenholme, F. E. Wood, Leslie S Young, J. T Young, Sidney, O.B.E. Young, Sir Frederick, M.P. Zorn, John Charity Organisation Society Women's Freedom League Association of British Chambers of Commerce (joint evidence). Institute of Chartered Accountants in Ireland Association of Tax Clerks (joint evidence) ... Society of Incorporated Accountants and Auditors London Chamber of Commerce (joint evidence) Chartered Accountants of Scotland Surveyors' Institution The Committee of the Stock Exchange (joint evidence) Hire Traders' Protection Association (joint evidence) Board of Inland Revenue Parliamentary Committee of the British Trades Union Congress. (Joint evidence) ... Board of Inland Revenue Central Association of Accountants (joint evidence) Property Owners' and Factors' Association (Glasgow), Ltd. National Farmers' Union of Scotland ... Hire Traders' Protection Association (joint evidence) Federation of Grocers' Associations of the United Kingdom. Association of Tax Surveying Officers (joint evi- dence). Hire Traders' Protection Association (joint evidence) Parliamentary Committee of the Scottish Trades Union Congress (joint evidence). National Traders' Defence League National Association of Corn and Agricultural Mer- chants. Agricultural Seed Trade Association Institute of Municipal Treasurers and Accountants (Incorporated). Association of Municipal Corporations London County Council... Convention of Royal Burghs of Scotland, &c. (joint evidence. Mining Association of Great Britain Professional Workers' Federation (joint evidence) Central Landowners' Association Land Union Land Agents' Society Surveyors' Institution Royal English Arboricultural Society Scottish Arboricultural Society English Forestry Association Landowners' Co-operative Forestry Society, Limited (joint evidence). Association of Tax Surveying Officers (joint evidence) Association to Protest against the Duplication of Income Tax within the Empire. 852 251 329 374 1193 1101 430 285 1251 778 45 351 1204 1028 440 255 125, 497 1170 456 1007 1378 1167 1158 1204 910 1049 1204 450 932 860 337 980 980 1012 545 545 545 545 319 360 608 1094 1094 1094 1094 1094 1094 1094 1094 1270 587 32 1210 APPENDIX IV (6). 183 Appendix IV (b). LIST OF BODIES REPRESENTED. Minutes Bodies of persons represented. Names of witnesses. of Evidence. Page. Accountants, and Auditors, Society of Incorporated... William George Rayner 430 Accountants, Central Association of ... Athol Campbell 1170 W. Leonard Staines ... 1170 Accountants, Chartered, Institute of ... William Cash 406 Accountants, Chartered, Institute of, in Ireland Stewart Blacker Quin 1193 Accountants, Chartered, of Scotland ... Peter Rintoul 1251 Accountants, Municipal, and Treasurers (Incorpor- See Municipal. ated), Institute of Agricultural Seed Trade Association Albert E. K. Wherry 980 Assessors and Collectors for the City of London J. C. Fergusson 1081 Assessors and Collectors of Government Taxes, R. E. Fisher 1081 National Association of. Stanley Brown 1081 Assistant Masters in Secondary Schools, Incorporated S. B. Lucas 544 Association of. Bakers, National Association of Master See Master. Bar of England, General Council of ... See General. Belfast Property Owners' Association Robert Dunlop 997 Birmingham Corporation Savings Bank J. P. Hilton 645 Bishops of the Church of England, The The Bishop of Bristol 659 Board of Education The Hon. W. N. Bruce 235 Sir Hugh Orange 235 Board of Inland Revenue A. Binns 1122 Sir Thomas Collins 14, 1328 H. Bertram Cox 1317 M. C. Furtado 1256, 1346 E. R. Harrison 308, 708 751,1225 1328 A. Hook 477 R. V. N. Hopkins 1,185 E. Stanford London 615, 951 F. L. Mace 506 A. F. Pool 634 W. Sharland 1028 C. G. Spry 125, 497 British Association for the Advancement of Science Sir Edward Brabrook 73 J.E.Allen 73 British Chamber of Commerce, Paris (Incorporated) 0. E. Bodington 703 British Chambers of Commerce, Association of Sir Algernon F. Firth 374 George W. Currie 374 G. P. Norton 374 H. D. Leather 374 H. Lakin-Smith 374 Stewart Blacker Quin 374 British Industries, Federation of See Federation. British Lead and Zinc Mine Owners' Association Professor Henry Louis 422 British Medical Association Dr. G. E. Haslip 821 British Trades Union Congress Parliamentary See Trades. Committee. Cemetery Companies of the Greater London area H. W. Littler 604 A. E. Piggott 604 Central Association of Accountants See Accountants. Central Board of Finance of the Church of England The Revd. Canon Frank Partridge 73S Central Landowners' Association See Landowners. Charity Organisation Society ... E. C. Price 852 Church of England, The Bishops of the See Bishops. Church of England, Central Board of Finance of the See Central. Church of England Clergy, Parochial See Parochial. Clerks, National Union of Fred Hughes 226 Clerks to the Commissioners of Taxes Copley Delisle Hewitt 1059 Co-operative Union of Great Britain and Ireland ... Newman Hall Cooper 912 Thomas Goodwin 912 Robert Macintosh 912 184 REPORT OF THE ROYAL COMMISSION ON THE INCOME TAX. Bodies of persons represented. Names of witnesses. Minutes of Evidence. Page. Corn and Agricultural Merchants, National Associa- tion of. Corporation of the City of London Cotton Spinners' Associations, Limited, Federation of Master. Cremation Society of England (and cremation authorities generally) Drapers' Chamber of Trade ... Duplication of Income Tax within the Empire, Association to Protest against the. English Forestry Association ... Equal Citizenship, National Union of Societies for ... Excise Clerks' Association Farmers' Union of Scotland, National Federation of British Industries General Council of the Bar of England Oirls' Friendly Society ... Grocers' Associations of the United Kingdom, Federation of. Head Masters, Incorporated Association of ... Hire Traders' Protection Association ... Homo and Foreign Produce Exchange, Ltd Imperial Commercial Association Industrial Women's Organisations, Standing Joint Committee of. Ireland, Institute of Chartered Accountants in Iron and Steel Manufacturers, National Federation of Labour Party Land Agents' Society Land and Property Federation, Scottish Land Union Landowners' Association, Central Landowners' Co-operative Forestry Society, Limited Law Society Licensed Victuallers' Defence League of England aiul* Wales. Life Offices, Associated Scottish .. Life Offices' Association ... Life Offices principally concerned in the transaction of foreign Life Assurance business. London Chamber of Commerce London, Corporation of the City of Loudon County Council London Playing Fields Society Manchester ami Salford Playing Fields Society Manchester, Salford and Counties Property Owners' Association. Manufacturers, National Union of (Incorporated) ... Albert E. K. Wherry See London. See Master. A. E. Piggott.. H. W. Littler. F. W. Cook Sir Frederick Young W. A. Haviland Leslie S. Wood Mrs. Hubback P. J. Congdon Colonel H. D. Henderson John Stewart Max Muspratt Thomas Biggart S. E. Cash A. M. Bremner Mrs. Arbuthnot E. R. Thompson R. F. Cholmeley S.J. Sewell H. E. Tudor C. Allpass G. E. Teale Michael Frederick Cahill .. John Montgomerie ... Dr. Marion Phillips... See Accountants. Richard Borrough Hopkins George R. Carter W. A. Haviland Leslie S. Wood See Scottish. W. A. Haviland Leslie S. Wood W. A. Haviland Leslie S. Wood W. A. Haviland Leslie S. Wood John W.Bu, 1.1 Randle F. W. Holme T. Baxter See Scottish. Lewis Frederick Hovil Steuart Macnaghten Sir James Martin E. Belfour Percy E. Reinganum Maurice Jenks Sir Harry Haward F. Ogdeii Whiteley Ex-Provost Keith T. Hall Hall C. E. Clift Ernest J. Churchman Alexander Johnston 980 604 604 879 32 1094 1094 138 1302 1302 1167 802 802 802 789 984 910 428 1204 1204 1204 1204 886 872 158 647 987 1094 1094 1094 1094 1094 1094 1094 1094 1174 1174 1301 826 826 285 285 285 567 545 545 54.'. 1113 1113 1016 947 APPENDIX IV (6). 185 Bodies of persons represented. Names of witnesses. Minutes of Evidence. Page. Master Bakers, National Association of, and kipdred associations. Master Cotton Spinners' Associations, Ltd., Federa- tion of. Middle Classes' Union ... Miners' Federation of Great Britain ... Miners' Federation, South Wales Mining and Metallurgy, Institution of Mining Association of Great Britain ... Multiple Shop Proprietors, United Kingdom Associa- tion of. Municipal Corporations, Association of Municipal Treasurers and Accountants(Incorporated) Institute of •} National Association of Assessors and Collectors of Government Taxes. National Association of Corn and Agricultural Merchants. National Association of Master Bakers National Chamber of Trade National Council of Women of Great Britain and Ireland. National Farmers' Union of Scotland National Federation of Iron and Steel Manufacturers National Federation of Properly Owners and Rate- payers. National Traders' Defence League National Union of Clerks National Union of Manufacturers National Union of Societies for Equal Citizenship ... National Union of Teachers Nurses, Royal National Pension Fund for Parliamentary Committee of the Trades Union Congress. British ... Scottish ... Parochial Clergy of the Church of England Professional Workers' Federation Property Owner." and Factors' Association (Glasgow), Limited Property Owners and Ratepayers, National Federation of. Property Owners' Association, Belfast Property Owners', Manchester, Salford and Counties, Association. Retail Distributors' Association Royal Burghs of Scotland, Convention of Royal English Arboricultural Society Royal National Life-Boat Institution Royal National Pension Fund for Nurses Scotland, Chartered Accountants of Scotland, Farmers' Union of, National Scotland, Royal Burghs of, Convention of Scottish Arboricultural Society... Scottish Land and Property Federation Scottish Life Offices, Associated Scottish Trades Union Congress Parliamentary Com- mittee. John Montgomerie 872 Henry W. Garnett 688 Wallace Brierley ... ... ... 688 W. Allen 6% George Barker ... ... ... 938 Frank Hall 938 See South. P. D. Leake 811 Evan Williams 319 Michael Frederick Cahill 886 Sir Barry Haward 545 F. Ogden Whiteley 545 Ex-Provost Keith 545 See Assessors and Collectors. See Corn and Agricultural Mer- chants. See Master Bakers. Councillor Thomas Pratt 974 Councillor Charles Aveling ... 974 Felix J. Blakemore 974 Mrs. Ogilvie Gordon ... ... 61 See Farmers' Union. See Iron and Steel Manufacturers. See Property Owners and Rate- payers. See Traders' Defence League. See Clerks. See Manufacturers. See Equal Citizenship. See Teachers. See Royal. See Trades. See Trades. The Revd. A. G. B. Atkinson F. E. Wolstenholme F. H. Norman Dr. Robert Jones James Steel... Edwin Evans See Belfast Property Owners. See Manchester. 728 608 608 608 1007 997 Michael Frederick Cahill 886 Sir Harry Haward ... ... ... 545 F. Ogden Whiteley 545 Ex-Provost Keith 545 W. A. Haviland 1094 Leslie S. Wood 1094 The Hon. George Colville 743 L. H. M. Dick See Accountants. See Farmers. See Royal. W. A. Haviland 1094 Leslie S. Wood 1094 J. H. Milne Home 1104 A. W. Robertson Durham ... 1104 George M. Low See Trades. 186 REPORT OP THE ROYAL COMMISSION ON THE INCOME TAX. Bodies of persons represented. Minutes ef Evidence Page. Secretaries of Joint Stock Companies Public Bodies, Chartered Institute of. Self-Help and Thrift Societies and other Sheffield, University of, Glass Research Delegacy Shipbuilding Employers' Federation ... Society of Incorporated Accountants and Auditors Stead Memorial Fund Stock Exchange, The Committee of the South Wales Miners' Federation Superannuation Funds, Conference of Surveyors' Institution ... Tax Clerks, Association of Tax Surveying Officers, Association of Teachers, National Union of Thrift and Self-Help Societies Trade Protection Societies of the United Kingdom, Association of. Traders' Defence League, National Trades Union Congress, Parliamentary Committee of the. British Scottish ... United Kingdom Association of Multiple Shop Pro- prietors. West Coast Hematite Iron Ore Proprietors' Associa- tion. Women of Great Britain and Ireland, National Council of. Women's Freedom League E. L. Booty ... H. A. Godson Bohn.. Clement Buckeridge Albert J. Hobson Thomas Biggart See Accountants. Mrs. Arbuthnot Gilbert Johnstone .. John A. Scrimgeour Charles Edwards John C. Mitchell .. Arthur Lyon Ryde .. W. A. Haviland Leslie S. Wood J. M. Matthews G. J. Rawes E. J. Kelly F. S. Tow'le W. S. Best E. A. Eborall. R. W. Osier J. T. Young Charles W. Crook ... H. A. Godson Bohn... Clement Buckeridge Sidney Stanley Dawson Alfred Hutchison Robert Walker Robert Shirkie Councillor James Walker Hugh Lyon ... See Multiple. Professor Heury Louis See National. Mrs. E. Ayres Purdie 598 106 106 438 802 984 351 351 114 219 778 1094 1094 1101 1101 1101 1049 1049, 1270 1270 1270 1270 281 106 106 854 854 860 440 932 932 422 329 ,J '' / ,01^ % University of California SOUTHERN REGIONAL LIBRARY FACILITY 305 De Neve Drive - Parking Lot 17 • Box 951388 LOS ANGELES, CALIFORNIA 90095-1388 Return this material to the library from which it was borrowed "%OJI1V1JO : ^OFC y cw •