Where pursuant to any arrangement or agreement a sum becomes payable to the holder of an office or employment in connection with the termination of his office or employment due to redundancy such sum shall not be assessable under Schedule E but shall be subject to the provisions of section 37 of the Finance Act 1960.—[Mr. Graham Page.]

Brought up, and read the First time.

I beg to move, That the Clause be read a Second time.

With this proposed new Clause can be discussed new Clause No. 53—"Redundancy payments".

The point involved here is that if an employee's service is terminated and the employer makes a voluntary payment, that payment is not liable to tax in the hands of the employee or allowable as an expense against taxable income unless it exceeds £5,000. If, on the other hand, on the termination of employment, a contract takes effect and the employee has a right to a payment as a result of the termination of that employment, then it is taxed as if it were his salary or wage.

That is the position for payments not over £5,000. If they are received as of right, they are taxable. If they are ex gratia, they are tax free. If they are over £5,000, then by Section 37 of the Finance Act, 1960, whether or not they are made in pursuance of a legal obligation, they are chargeable to tax under Schedule E if—and here I bring in Section 38 of the 1960 Act—they are over £5,000. The words at the end of the new Clause No. 37 … shall be subject to the provisions of section 37 of the Finance Act 1960 are intended to do exactly the same thing as Section 38 did; that is to say, the Clause would apply only to sums up to £5,000.

12 m.

It must, I think, be entirely accepted that if we are to modernise industry there will be many occasions when redundancy will occur, when it will be necessary to cut down the number of employees and to terminate their employment. It is, therefore, essential that employers should recognise their financial obligations to those who have to be sacked in order to modernise the industry: that not only should they recognise their financial obligations to those employees whose contracts are terminated, but that they should be seen to recognise them; not that it should be merely done by an under-the-counter, "old boy" method of "We'll pay you something ex gratia."

We say to the employers that it is good commercial practice, that it is good labour relations, and it is acting in all humanity that they should recognise this obligation to their employees while, on the other hand, we say in law, and in tax law in particular, "If you do recognise your obligation by putting it in a contract and making it enforceable, the recipients will have to pay tax on the money you pay them." So it is left to the vague basis of "Well, you'll be paid, but I shall not put it in writing." In short, the employer will not bind himself by contracting to pay on termination of the contract because, if he does so, that money will be taxable in the hands of the sacked employee.

If the voluntary payment is free of tax, so should the contractual payment be. The employer should not be deterred, by tax on the contractual payment, from binding himself to make payment on redundancy. As industrial development accelerates—as, indeed, it surely will—this will become more and more urgent. But it has become of particular urgency this year, in that the Contracts of Employment Act is shortly to come into operation.

By that Act the employer is under an obligation to provide a written statement of the terms of employment, and he should insert in that written statement the particulars of the payments that will be made on termination of contract, and the redundancy he binds himself to pay. But if he does put that into the written statement—as, indeed, I think he is required to do by the Contracts of Employment Act—at once that payment becomes taxable in the hands of the recipient. By accepting this Clause, my right hon. Friend the Chancellor of the Exchequer could bring about a very great benefit to labour relations in the modernisation of industry.

I support the new Clause, but I should like to take the other side of the counter from that taken by my hon. Friend the Member for Crosby (Mr. Graham Page). He has spoken, quite rightly, about the position of the employee, but I want to take the position of the employer.

Quite obviously, it is essential in the modernisation and rationalisation of industry that there will be some firms closing down and others starting up. As I understand it, the law at present is that redundancy payments paid on the cessation of trading are not allowed for tax purposes because they are not expenses wholly incurred for trade but incurred only when ceasing to trade. I am sure that my hon. Friend who is to reply will agree that this is anomalous.

Here we have the Government, on the one hand, saying that they will be generous with regard to redundancy payments due to employees, if my hon. and learned Friend's Clause is accepted, but it is anomalous that if the employer wants to be generous he is further penalised in that he is not allowed to charge the redundancy payments for tax purposes. In those circumstances, although I cannot move my new Clause No. 53, I should be glad if my hon. Friend would say a word about it when he replies.

Although it is a little late, unfortunately, to discuss this matter, I accept at once that both these new Clauses touch on a very important matter indeed. This I instantly accept. I think that the Committee will recall that earlier this year my right hon. Friend the Minister of Labour made a statement in which he said that this whole question of redundancy and, therefore, the related matters such as have been raised tonight, were being considered by the Government in consultation with the main interests involved.

I suggest to my hon. Friends that there is a fundamental point here, that it is probably wrong to legislate in a sense piecemeal—although they have intelligibly anticipated the points that are liable to be made—in advance of a clearer picture of how to deal with redundancy generally in which both sides of the Committee, I am sure, are thoroughly interested.

I can perhaps give a particular reason in the case of each of these two new Clauses as now drafted why I believe that it would be wrong to try to legislate piecemeal on this point. On new Clause No. 37, the real difficulty is that my hon. and learned Friend is quite right in saying that all redundancy payments made ex gratia—under the £5,000 limit—or made in lieu of notice, which I think covers the point which he raised on the Contracts of Employment Act in so far as we know it now to be applicable in such cases—are not treated as income in the ordinary sense for tax purposes. Therefore, he is quite right in saying that over the last part of the field the practice and application of the law are already what he seeks to make them. But if we go the whole hog, so to speak, and apply, as he wishes to apply, to all contracted redundancy payments at this moment in time this same application of the law, then I must tell him that as worded there is a real chance of avoidance which can be very simply contrived.

An employee, for example, gets taken on on a modest salary with a relatively handsome terminal payment if dismissed on redundancy grounds. The drafting of the Clause would lay us open to this. The employee is then dismissed at the end of the year and he collects his capital sum, instead of his income, in terms of the redundancy payment promised to him under the contract which he has. After a decent interval of time he re-emerges as an employee of that same company or of an associated company. This would be a genuine risk of avoidance inherent in the drafting of my hon. Friend's Clause,

It is for that reason that I am afraid that I cannot accept the Clause because it would not really tie in with what we all want to do subsequently, and that is to avoid the prospect of avoidance and to give a definitely better treatment to those who pursue the Government policy of producing better redundancy payments in their firms.

The Clause would not do what my hon. Friend wants it to do without this great risk of avoidance. We do not want to spoil the thing by its being open to abuse. I have great sympathy with the intention and spirit of most of the Clause but I think that my hon. Friend the Member for Nottingham, South (Mr. W. Clark) would agree that limitations really are necessary and must be devised to ensure that there is no avoidance.

One must take care in circumstances, for instance, where the cessation of trading will involve amalgamation and reconstruction which is the obvious example, and there are the usual problems associated with controlling shareholders and the directors. Both my hon. Friends have put their fingers on a very important matter for which I am certain appropriate legislation must be devised. It would be more sensible to try to get a clearer picture of the whole redundancy field and then we would get the matter right and avoid abuses which would spoil a very necessary improvement in our whole industrial and trading arrangements. If my hon. Friends will accept that, which has been said sympathetically, I hope that the Amendment may be withdrawn.

That is a very unsatisfactory answer to a very good Clause. I preface my remarks by saying how delighted I was to hear the hon. Member for Crosby (Mr. Graham Page) turn over a new leaf, as it were, in his attitude towards severance payment generally. Everything that he said was acceptable. I have heard in Committee upstairs on different legislation the hon. Member expressing sentiments with which I did not agree and I therefore welcome this conversion.

The Government have responsibility in this matter. It may have been in his Budget statement a year ago, or even two years ago, that I heard the Chancellor of the Exchequer promise that the whole of this field would be looked at because, he said, he was fully aware that there were these developments in severance payments, that there were private schemes and that the whole tax system was out of date in relation to modern schemes. He said that the whole thing would be looked at and that suggestions would be brought before the House of Commons. That has not happened. What the Financial Secretary has said is merely what could have been properly said two years ago. The Government should have looked at the matter and brought forward proposals.

It is not the job of back benchers on either side of the Committee to bring forward a watertight scheme to cover all sorts of possibilities. Only the Government have the resources available to them, but they have not done this. The Financial Secretary is not making any contribution to the solution of our problem beyond saying that we ought to wait until the precise form of Government law on severence payment has been decided.

I am sure that the hon. Member does not want to be unfair. I pointed out to my hon. Friend, and I saw him agreeing with me, that the vast bulk of redundancy payments are not treated as being normal earnings and normal income. The new Clause therefore would really not do much and there would be great risk of avoidance.

I will deal with the difficulties of the risk of avoidance, but I was dealing with the Government's failure to carry out a promise which the Chancellor of the Exchequer made at the time of a Budget speech that he would bring forward proposals dealing with the whole issue. He has not done so. That is the simple point which I am making. If that had been done, we could have had a proper scheme which we could have examined, with all the relevant points before us.

12.15 a.m.

As to the question of avoidance, I was not all that impressed by what the Financial Secretary said. I may not have followed his argument completely, but the challenge he put against the scheme proposed by the hon. Member for Crosby was that it opened the door to avoidance. It seems to me that that would apply not only under the hon. Gentleman's proposal but under the existing tax law. There is very little to prevent some of these things happening now. I may not have followed the hon. Gentleman's argument completely, but that is how it appears to me. However, that is a minor point. The major point is that we have had no proposals such as we were entitled to expect from the Government.

It is no sufficient answer to say that we have not got Government legislation on this and we do not know precisely what we should be catering for. We were promised Government legislation, but the Government changed their mind, being pushed away from the idea by the action or attitude of employers. If we have not yet got Government legislation and, every time they come near to proposing something, they run away from it, there will be a long time before we have satisfactory Government legislation with regard to severance payments and redundancy payments generally, and we shall never have a satisfactory arrangement in relation to the tax aspect of the matter.

Private schemes are affected. Private schemes are going ahead all the time. Negotiations are taking place between employers and trade unions representing employees, and many employers are alleging that the existing state of the tax law is a deterrent to working out a satisfactory scheme. Therefore, so far as there are private schemes going on, something ought to have been done.

No one will attempt to usurp the right of the hon. Member for Crosby in saying what he wants done about this particular Clause. I only say that I agree with the Financial Secretary that it was very helpful that the matter should be aired and brought before us. It is a pity that the debate came on so late, but it has been well worth considering. I am sorry that the Government are not ready to come forward with a definite proposal.

I appreciate the point which my hon. Friend the Financial Secretary made about the possibility of tax avoidance if the new Clause were accepted as it stands. There is a very simple remedy for that. The Clause could be restricted to a capital payment proportionate to the wage in some way. That would be a simple but effective addition to the Clause.

I am very disappointed that my hon. Friend could not go further than he did in acceptance of the new Clause, because I think that the Government have been overtaken by their own legislation. They have been overtaken by the Contracts of Employment Act, and it is necessary for employers to put some confirmation in the written statement under that Act of what will happen on termination of the employment. By so doing they bring the payments within the tax law. To that extent, the Contracts of Employment Act has, by a side-wind, altered the tax position.

I am sorry that my hon. Friend cannot take the matter further tonight. Of course, I cannot press it further now. I am happy that he has accepted the principle, and, on that basis, I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.