Standing Committee E
Thursday 21 May 1998
(Morning)
[Mr. Roger Gale in the Chair]
(Except clauses 1, 7, 10, 11, 25, 27, 30, 75, 119 and 147)
10.30 am
The Chairman: Order. Good morning, ladies and gentlemen. For their convenience, Committee members may remove their jackets if they so wish.
Mr. Tim Loughton (East Worthing and Shoreham): On a point of order, Mr. Gale. The individual savings account regulations, which were promised on Monday, on Tuesday and again on Wednesday, have failed to appear despite constant entreaties to the Paymaster General during the past three months. The Committee will need those regulations in order to debate future clauses. [Interruption.] I gather that individual hon. Members have received copies. However, copies are not available from the Vote Office for Members generally, despite the gist of the regulations having appeared in the press on Monday and Tuesday. Will the Financial Secretary explain how the press has discovered the document’s contents before Committee members?
The Chairman: The hon. Gentleman will appreciate that the provision of Government papers is a matter for the Government, not for the Chair. However, the Chair and Madam Speaker deprecate the provision of papers to the press before their distribution to Members of Parliament. I understand that the document in question was mailed to hon. Members last night. If the Financial Secretary wishes to respond, she may.
The Financial Secretary to the Treasury (Dawn Primarolo): I can confirm your point, Mr. Gale. If the hon. Gentleman checks his post, he may find that he has received a copy.
Mr. Loughton: Further to that point of order, Mr. Gale. Can the Financial Secretary also confirm that the full consultation responses on the ISA exercise, which the Paymaster General assured us would accompany the document, are now available in the Library? They were not there this morning.
The Chairman: Again, that is a matter for the Government. If the Financial Secretary wishes to respond, she may. I shall now resume the business that we failed to conclude late on Tuesday night.
Clause 42
Computation of profits of trade, profession or vocation
Amendment proposed [19 May]: No. 129, in page 24, line 39, leave out
‘which gives a true and fair view’
and insert
‘drawn up according to generally accepted accounting principles,’.—[Mr. Gibb.]
Question again proposed, That the amendment be made.
Dawn Primarolo: Good morning, Mr. Gale. We began to debate the amendment on Tuesday, when a number of questions were raised by the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb). He said that clause 42 would introduce the change from a cash basis for professionals. I am sure that the hon. Gentleman understands the difference between, say, a barrister and a small company, to which he repeatedly referred. However, he asked whether the clause would apply to companies, and I am happy to answer.
I should remind the hon. Member for Bognor Regis and Littlehampton and the right hon. Member for Wells (Mr. Heathcoat-Amory) that they agreed that the phrase “a true and fair view” had a precise meaning that accountants understood. The Government are using that concept so that accounts must include debtors, creditors and work in process, rather than the more cuddly phrase “open to interpretation”, which would cause confusion and dispute, the very things that the right hon. Member for Wells and the hon. Member for Bognor Regis and Littlehampton want to avoid for the profession. They know that there is no clear meaning of the phrase,
“according to generally accepted accounting procedures”.
So it is important that the legislation should make that clear. The first point was that the phrase “true and fair” had no technical meaning and would not achieve the Government’s objectives. That is not the Government’s opinion. The two hon. Gentlemans confirmed that the phrase had a definite meaning for accountants, and that it had always been the law that tax on profits was computed by applying accountancy principles. This phrase ensures that those principles are applied.
The hon. Member for Bognor Regis and Littlehampton asked a specific question about clause 42(1), regarding the phrase,
“subject to any adjustment required by law.”
The clause sets out tax law, as it applies to any business, and its purpose is to ensure that it does not preserve the cash basis. There may be a strategy provision that any item is not deductible to tax even though it may be written off in the balance sheet, for example in relation to entertainment costs, but the purpose is clear.
Next, the hon. Gentleman asked whether the phrase “true and fair view” meant that the Revenue would always accept accountancy treatment for tax purposes. The right hon. Member for Wells also raised that question. The answer is no. It does not mean that. The accountancy treatment remains subject to any adjustment required or authorised by law in computing profits for tax purposes.
The hon. Member for Bognor Regis and Littlehampton then went on to ask about section 8(2) of the Taxes Management Act 1970 and about making a complete and correct return. As he knows, that refers to income tax payers. The accounts have nothing to do with it; it is the figure of profits that is required, not the account. The hon. Gentleman then went on to ask several questions on behalf of the Institute of Directors, including one about prudence and materiality. Indeed, that organisation raised the same question with the Government. The clause merely seeks to put professionals on the same basis as other traders. Everyone else follows this practice, but professionals do not, and the law now requires them to do so. Professionals will be able to take prudence and materiality into accountant in exactly the same way as other businesses already can. That cannot be beyond the wit of such talented and experienced members of a profession that is held in such high regard.
The continuing discussions between all the professionals and the Revenue have been positive about ensuring that everyone is clear about the Revenue’s interpretation of the legislation and that everyone understands what is intended. To my knowledge, there have been no problems so far and the Revenue is always happy to discuss queries about tax returns.
Mr. Philip Hammond (Runnymede and Weybridge): Will the Financial Secretary give way?
Dawn Primarolo: May I deal with the legal points first? The hon. Gentleman did not speak in the debate—he can, but in courtesy to the hon. Member for Bognor Regis and Littlehampton, I should deal with the specific legal points that he raised.
The hon. Member for Bognor Regis and Littlehampton is confused about the relevance of Pepper v. Hart. As he knows, it concerned benefits in kind and the court said, as a side issue, that when legislation was unambiguous, Hansard could be used in court. The Governments legislation is not unambiguous and I have no intention of being unambiguous on the record.
The hon. Gentleman then referred to the Duple Motor Bodies v. Ostime case of 1951. The decision in that case was not quite what he suggested, but that
"a basis of valuation which conforms with accountancy principles cannot be challenged by the Revenue unless it violates some rule of tax law”
The hon. Gentleman also knows that accountancy practice on the inclusion of overheads has changed substantially since that case.
The main point made by the hon. Gentleman concerned Threlfall v Jones, in which the court decided that accountancy standards were acceptable for tax purposes. That is what the Government are doing.
Does the hon. Member for Runnymede and Weybridge (Mr. Hammond) wish to intervene on the legal points? I shall explain whether the clause changes the law for companies, which was the general thrust of the comments by the hon. Gentleman and the right hon. Member for Wells. The hon. Gentleman said that it was important that the record stated the position. How is this for being clear? No. Companies are not, in law, capable of carrying on a profession or vocation. Cash basis has never applied to companies, which are in the same position as any other non-professional business, there is no change in the law covering the basis on which they compute their profits.
Mr. Nick Gibb (Bognor Regis and Littlehampton): I am astonished by that speech from the hon. Lady. When the professions and outside bodies read it, they will realise the problems that arise when a Labour Government is elected and Ministers of the hon. Lady’s calibre are appointed to the Treasury. That was an appalling response to my speech. She has no understanding whatever of the issues I raised. I want to ask her one question. Does clause 42(1) apply to trades?
Dawn Primarolo: I expect the hon. Gentleman to disagree with me. There would be something wrong if people with such diverse politics agreed, but our discussions with the professions were very clear and there is a precise understanding of what is going on. My answer is yes, that clause 42(1) does apply to trades, but it does not change the law. That is the issue and the theme to which he kept returning. He is trying to imply that the change concerning professionals and cash basis changes the law in a wider context. I have explained that it does not.
The hon. Gentleman also asked about audit, but then answered his own question. He knows that there is no link between “true and fair” and audit.
The right hon. Member for Wells asked whether tax treatment would change as accountancy evolved. It may do, but the courts continually recognise that that is already happening. The courts have always wanted to tax profits based on accountancy principles as the evolve.
Mr. Hammond: Will the Financial Secretary give way?
Dawn Primarolo: If the hon. Gentleman wants to make a speech, he can.
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