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(3) The persons to whom this section applies are persons who were contributory employees of a local government authority before the coming into effect of the regulations provided for in section one of the Local Government Superannuation Act. 1953 (which relates to regulations as to superannuation benefits), and who—
(4) The income to which this section applies is the amount by which the annual benefits, which were paid to any person to whom the last foregoing subsection applies under a superannuation scheme in force at the time of his ceasing to be a contributory employee, exceeded the amount which would have been paid had the aforementioned regulations been in force at that time; such amount having been retained by him in consideration of the whole or of a part of a lamp sum payment to which he has become entitled by virtue of the said regulations.—[Mr. Wade.]
I beg to move, That the Clause be read a Second time.
This Clause is rather lengthy but I will endeavour to move the Motion as briefly as possible. I am aware that the circumstances are well known to the Financial Secretary. The amount involved is small so far as the Treasury is concerned, but it is a matter of considerable importance to certain local government pensioners. I believe that there are only a few hundred people affected. Subsection (3) of the new Clause defines the persons who are affected, namely:
… persons who were contributory employees of a local government authority before the coming into effect or the regulations provided for in section one of the Local Government Superannuation Act, 1953…
and the regulations therein. For most of those who exercise this option it involves the receipt of a lump sum less an amount equal to the excess of actual benefits already paid over those that would have been paid if they had retired after the scheme came into effect.
The question arose whether tax was payable on this excess. If not, these pensioners would be entitled to a refund of the amount of tax paid. This matter has been before the courts, and it was decided that as the law stands at present the tax should not be refunded, for the portion of this lump sum was income liable to tax. I am asking that the money which has been treated as income should be treated as part of the lump sum on which tax should not be payable.
That this difficult situation has arisen is due partly to the length of time taken by the negotiation of the new system of payment and partly to the time taken in issuing the new regulations. I am not complaining but am merely stating the circumstances. It would be reasonable that this whole lump sum should be treated as a tax-free payment and that the tax that has been paid should be refunded.
If the Financial Secretary considers that the wording of the Clause can be amended or improved I shall be only too pleased to accept his advice. Alternatively, if he could meet this point in some other way I should also be satisfied. I hope he will treat the proposed new Clause sympathetically as it seems fair that this small group of pensioners should receive this lump sum.
This is not a matter on which we should feel it necessary to take a collective view, but what I say, I think, represents the opinion of hon. Members in all parts of the Committee.
I was first involved in this matter last year, when I wrote to the then Financial Secretary. At the end of October, I took a deputation to see him representative of the County Councils Association, the Association of Municipal Corporations and the National and Local Government Officers Association. At that time the law did not seem clear. With the passage of events we now know that, in accordance with a judgment given recently by Mr. Justice Harman, the view which was put forward on behalf of those bodies is not good in law. In those circumstances I do not want to traverse the ground in any technical sense but I want to ask the Financial Secretary and the Government whether they would not feel that it would be just and fair in all the circumstances for them to change the law so as to permit the refund of tax paid on this element.
In theory where a widow had received a lump sum payment it would be possible, although I think it would not happen in practice, that if the law were changed some part of that payment would attract tax. I do not want to put this forward on any precise or strict basis because I do not believe that is possible, but only on the ground that there are a number of people who feel aggrieved, and who are clearly in the position that if the changes in the law had been made earlier they would not have been subject to tax because they would never have received this element in their pension at all. I hope that in the circumstances the Government will feel able to deal generously with quite a small but meritorious group of former public servants.
I appreciate the manner in which the proposed new Clause has been moved and supported because it relates to a very difficult problem, though one which concerns only a limited number of people. It arises, as the hon. Member for Huddersfield, West (Mr. Wade) explained, from changes which were made in the superannuation conditions in 1954. Those changes were twofold. A lump sum plus a lower pension was substituted for a higher pension. The second change was that a widow's pension was introduced. It was decided at the time of the Regulations to job backwards, as far as 1950, so as to enable both types of persons affected to put themselves as near as possible in the position they would have been if the Regulations had had effect from 1950, by enabling the pensioners to refund the excess of their pension and get a lump sum, and by enabling widows to draw as a lump sum what they would have received as pension in the intervening years.
The question before the Committee is whether those compoundings, those payments one way or the other which were made after the Regulations came into force, should be treated for tax purposes as though they had actually been made between 1950 and 1954 in the form in which they would have been made if the Regulations had been in force in those years. The effect of that, as the right hon. Member for Brighouse and Spenborough (Mr. J. Edwards) recognises—and I quite understand the presentational reasons why only one of the consequences is featured in the proposed new Clause—is that there would be a refund to the pensioners of the amount of tax paid by them on the excess pension drawn in the intervening years, but that the widows would have to refund that part of the lump sum they had received which represents the tax which would have been payable on the pension receivable by them between the death of their husbands and 1954.
So the first question which the Committee has to decide is whether there would have been greater hardship one way or the other from this change in the tax law. I submit that the hardship which would be involved—it would necessarily follow—in clawing back a portion of the lump sum from the widows affected is greater than the hardship involved in the tax actually paid between 1950 and 1954 by the pensioners being retained; so that, on practical grounds and on the balance of hardship, I recommend the Committee that it is wiser not to alter the law.
There is a very important general consideration which leads in the same direction, and that is the undesirability, in however deserving the class of case, of altering the tax law retrospectively so that payments which were made in one form have to be treated as though they had been made in another form. That situation is not unique; it arises when divorce court orders are varied so that refunds one way or the other in respect of payments already made become payable. It may happen that there have been mistakes in settlements or in seven-year contracts. In none of these cases, as the law stands, are the tax consequences undone, even when the compensatory payments come to be made.
It would be extremely unwise for us to get into the position of altering tax obligations retrospectively. It will readily occur to members of the Committee that considerable opportunities for tax avoidance would be created if it were possible in subsequent years, by repayments of one kind or another, to alter tax liability in years gone by. So, on those two grounds, the particular ground of the balance of real hardship in the practical case and the general ground of the inadvisability of retrospectively altering tax liability. I recommend the Committee that the law should remain as it is at the moment.