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[Cd. 2575.] Price 3d.

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Presented to both houses of Parliament by Command of his Majesty.

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Aug 7







By the original Terms of Reference to this Committee we were


"To inquire into and report whether it is desirable to effect any alteration in the SYSTEM OF THE INCOME TAX, as at present prescribed and administered, under the following heads:


(a) The prevention of fraud and evasion;


"(b) The treatment of income derived from copyrights, patent rights, and terminable 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 average of the profits actually realised in the three years preceding the year of assessment.

"(e) The rules and regulations governing the recovery by taxpayers of over-payments of Income Tax."

In the course of our inquiry, however, it seemed to us desirable that the reference should be extended so as to embrace the question of the position of Co-operative Societies in connection with the Income Tax, and on a representation to this effect to the Chancellor of the Exchequer we were accordingly instructed

"To inquire and report whether Co-operative Societies enjoy under the present law any undue exemption from liability to Income Tax."

1. It will thus be seen that we were appointed in order to consider what changes or improvements, statutory or administrative, might well be made within the limits defined in the existing method of assessment of the Income Tax. The general principle and basis on which the tax is levied, was outside the scope of our Reference.

2. In the following sections of our Report, we make certain suggestions in regard to the various points referred to us. But we are glad to state that no very drastic alterations seem to us to be necessary in the administration of the Income Tax. Indeed, we desire to place on record our opinion that the tax appears, on the whole, to be levied with a minimum of friction and a maximum of result.

3. The Board of Inland Revenue furnished us at the outset of our inquiry with memoranda on the several matters referred to us. These memoranda have been of great service to us in our deliberations, and we have thought it desirable to include them, for permanent record, in the Appendix to this Report. We have also heard oral evidence from thirty witnesses, including representatives of Income Tax Commissioners, Chambers of Commerce, Trade Associations and Accountants and Actuaries' Societies.

197. 1250.-Wt. 7013. 6/05. Wy. & S. 2474r.

A 2


4. It may be well to preface our Report with a short explanation of the actual method now in force for the assessment of the Income Tax under Schedule D, with which we are chiefly concerned.

5. At the commencement of each financial year the local Assessor for each parish-who is appointed by the General Commissioners of the District, themselves appointed by the Land Tax Commissioners, except in the cases 5-6 Vic., cap. 35. specially dealt with under section 5 of the Income Tax Act, 1842-prepares

a List of all persons who in his opinion are liable, or probably liable, to Assessment under Schedule D, and issues to each a form of Return. In practice this means that all persons carrying on a business or profession, unless obviously exempt, and all persons assessed in the previous year, are called upon to make Returns of profits chargeable under that Schedule. Persons on taking up a residence in the parish, though having no ostensible income assessable under Schedule D, are also applied to for a Return of income, and applications in such cases are renewed from time to time, usually at intervals of from three to five years, if as a result of the initial application no liability is disclosed. Employers, too, are served by the Assessor with forms upon which they are required to furnish a list of persons in their employ; and to such of these persons as are considered possibly liable an ordinary form of Return is issued. General Notices are also affixed to the Church and Chapel doors requiring Returns to be made by all persons liable to the duty.

6. If a Return form issued by the Assessor is not sent back in due course a further application is made by him, either personally or by the issue of a printed Notice calling attention to the matter.

7. The Assessor completes the List above mentioned by entering therein the names of all persons to whom forms have been issued, stating whether they have been returned to him, and giving his estimate of the assessable income in each case where a Return has not been made.

8. From the List furnished by the Assessor, the Clerk to the General Commissioners prepares the Assessment, and enters up the Returns rendered by the tax-payers. The Assessment shows the name and address of the person to be assessed, the source of income chargeable,—the amount of profit returned, and the Assessor's estimate where no Return has been made. The Clerk to the Commissioners also inserts, for purposes of comparison, the particulars of the amounts returned and assessed in each of the three preceding years.

9. The Assessment so prepared is delivered to the Surveyor of Taxes, who makes further application to such persons as have failed to make Returns: checks the correctness of the entries made in the Assessment; enquires as to the basis or sufficiency of the Returns in doubtful cases; discusses with the Assessor the liability of the several persons included in the assessment; enters the amount of assessable profit as ascertained from the accounts of Public Companies; and notes, for the information of the Additional Commissioners, any particulars of insufficient Returns, omissions, or undercharges, of which he may have knowledge.

10. These Additional Commissioners are appointed by the General Commissioners. They fix the assessment, basing the decision upon :--

(1.) The amounts returned.

(2.) The estimates put forward by the Assessor or Surveyor.

(3.) The amounts shown by accounts produced to the Surveyor, or Estimates which the Additional Commissioners themselves consider to be correct.


The meetings of Additional Commissioners are attended by the Surveyor.

11. The Assessments as made are delivered by the "Additional Additional" to the "General" Commisioners, who after an interval of fourteen days, cause notices of charge to be issued to the persons assessed, giving the date of the meeting fixed to hear appeals, with instructions as to the course to be followed in the event of any objection to the charge. Such instructions require that Notice of Appeal be given to the Surveyor ten days before the date fixed for the hearing, and that accounts or other necessary evidence in support of the objection should be furnished to him before the date of the meeting. This evidence is examined by the Surveyor, who, in a large number of cases, interviews the appellant, and, as the result, the bulk of appeals are settled "out of Court" the settlement arrived at being submitted to the General Commissioners for their approval.

12. At the appeal Meeting, the Surveyor attends on behalf of the Crown, and supports the Assessments made by the Additional Commissioners; the General Commissioners, after hearing the evidence, fix the liability; and the Assessments are determined accordingly. From such determination of the Commissioners there is no appeal on questions of fact, but an appeal lies to the High Court on a question of law.

13. The Clerk to the Commissioners then completes the books of Assessment and prepares duplicates thereof, which, after being checked by the Surveyor, are issued to the Collectors.

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14. The system of assessment which lies at the root of British income tax administration, and which is known as "collection at the source," is in itself a very great check on fraud and evasion. Under this system a considerable portion of the Income Tax is collected from parties who have less inducement, and, as a rule, less facility than the ultimate taxpayer, for the practice of any kind of fraud or evasion. Thus it is extremely difficult for any one whose income is derived, for example, from Government stock or public companies, or from the rent of lands and houses, to escape payment of the tax in full. The tax is stopped before it reaches his hands.

15. It will be seen, from the Inland Revenue Memorandum (Appendix I), that something like four-fifths of the income tax now brought into account is either assessed at the source or subjected to other satisfactory methods of verification. Moreover, the sphere within which that system operates has been extended largely and rapidly by the conversion of private businesses into public companies, which cannot practise evasion of the ordinary kind; and as regards incomes from abroad, by the operation of Section 26 of the Customs and Inland Revenue Act of 1885, which provided for the deduction and 48 & 49 Vic, cap. payment of Income Tax by Bankers or Dealers in respect of interest or 51. dividends on foreign and Colonial investments paid by means of coupons.

16. But there are many kinds of income to which the system of assessment at the source cannot be applied at all, or can be only very imperfectly applied: as, for instance, the profits derived from a private business, the income derived from a profession, and, certain descriptions of income derived from abroad. In order to ascertain these incomes the Government has to rely largely upon self-assessment by the taxpayer.

17. Unfortunately, there is abundant evidence to show that, in the sphere in which self-assessment is still requisite, there is a substantial amount of fraud and evasion. We cannot attempt a quantitative estimate, but we have no doubt that the loss to the Revenue is serious enough to demand some amendment of the law and practice.

18. The evil might be to some extent met by the more drastic use of the powers which the Board of Inland Revenue and the Local Commissioners already possess. We are We are fully alive to the undesirability of making the Revenue

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