TAXING BUILDERS' PROFITS.
MR. LLOYD GEORGE has now announced that he has no intention of introducing legislation to deal with the situation created by the judgment in the Lumsden ease delivered on January 13th last by Mr. Justice Horridge in the King's Bench Division. This judgment shows that the popular conception of what is meant by the taxation of land values is completely at variance with the legal interpretation of Mr. Lloyd George's famous Budget. According to the popular conception the purpose of that Budget was to tax the value given to land solely by the growth of the community, apart from any value attributable to the industry or to the enterprise of the owner. This was the supposed moral justification of the Budget. It was urged on hundreds of platforms by Radical partizans and by Henry Georgite enthusiasts. The principle was again and again asserted in the House of Commons, and whenever the Opposition argued that the effect of the proposed taxes would be to penalize enterprise, the Government spokesmen replied that nothing would be taxed except the unearned increment in the value of the bare land. Not only were these statements in explanation of the new taxes made during the discussion of the Finance Bill, but they were frequently repeated by responsible Ministers even after the Budget had passed into law. On this point Mr. Pretyman has furnished to the Times of January 18th a piece of documentary evidence which no ingenuity can twist from its plain meaning. In October 1910 a corre- spondent wrote to the Chancellor of the Exchequer expressing the fear that under the operation of the Act legitimate profits on sales of property might be taxed as unearned increment on site values. On November 1st, 1910, the secretary of the Chancellor of the Exchequer wrote:—
"Increment value duty will only be chargeable on any portion of the increased value which is due to the increase in the value of the land as it would be if divested of buildings and improve- ments."
We are bound to assume that when the Chancellor of the Exchequer authorized the sending of this letter he believed the words quoted to be true. It is therefore incumbent upon him to explain how it is that the department of which he is the political chief has since put forward a totally different interpretation of the Act, has urged that inter- pretation with all the legal skill that the purse of the Government can command, and has finally secured a favourable judgment in the King's Bench Division, which he proposes to accept. To make the matter clear to our readers it is necessary to go briefly into the history of the case which Mr. Justice Horridge decided. In the year 1908 Mr. Lumsden, a builder carrying on business in the neighbourhood of Newcastle-on-Tyne, was approached by a colliery company and invited to buy an estate and build upon it houses suitable for the workpeople employed in the colliery. He did this, and spent between £30,000 and £40,000 in building houses and laving out roads. The houses were completed in 1910, and -leased to the colliery company. As a result of this personal enterprise a large population settled on what was previously unoccupied land. At the same time Mr. Lumsden, foreseeing that this population would appreciate the convenience of having a shop on the estate, obtained a release from a restrictive covenant into which he had entered not to build any shops, and built on his own account the shop which forms the subject of the present case. The shop was built during the spring and summer of 1909. Mr. Lumsden first offered to let it for £52 a year, but finally sold it outright for £750 to a Mrs. Stobie, who took possession in August 1910. It was not until February 1911 that Mr. Lloyd George's valuers put in an appear- ance. They then presented their provisional valuation of the property as on April 30th, 1909. This valuation, which was not ehallenged, made the total value of the property on that date £625, and the assessable site value £105. Four months later the Commissioners presented a claim for increment value duty, payable on the occasion of the sale of the property in 1910. The substance of the claim was that after the necessary deductions for cost of building, &c. had been made from the sum of £750 there remained 1230, which became the site value accord- ing to the terms of the Act, and that consequently increment value duty was due on the difference between £230 and £105. Deducting the statutory allowance of 10 per cent., the sum demanded worked out to £22.
Mr. Lumsden appealed, and the case was in the first instance heard by the referee sitting at Newcastle-on-Tyne in February 1912. The counsel employed by the Com- missioners of Inland Revenue was Mr. Finlay, and the statements made by him on behalf of the Government give an illuminating picture of the true nature of the new system of taxation for which Mr. Lloyd George is respon- sible. These statements are so extraordinary, and so completely at variance with what the public had been led to believe was the purpose of the new taxes, that we quote them in full, as reported in the Land Union Journal for April 1912. On behalf of Mr. Lumsden evidence was produced to show that as a matter of fact the value of the site in question had not risen between April 30th, 1909, and the occasion of the sale in the summer of 1910. This evidence was accepted by the Commissioners. Indeed, it was confirmed by their own witnesses. Mr. Howell Thomas, deputy chief valuer for England and Wales, stated in cross-examination that in his opinion there had been no rise in the value of the land. To most people this admission would appear to be conclusive against the liability of the owner to pay the increased value duty. But that is not the view of the lawyers. According to Mr. Finlay, whose view has now been confirmed by Mr. Justice Horridge, the fact that there had been no rise in the value of the land has no relevance to the matter. To quote his words :- "Site value is a term which is interpreted in a very special way in the Act. It is not site value as you would ordinarily under- stand it, or as anyone else would ordinarily understand it, and, of course, as the witnesses understood it to whom the question was put. It is the site value as defined by this Act."
In combating Mr. Lloyd George's Budget in 1909, we always contended that the whole idea of site values, as put forward by the Henry Georgite party, was an abstraction incapable of measurement by any financial test known to business men. It now appears that we understated the case against the proposed system of taxation. From the above statement it is clear that statutory site value does not even correspond to the conception of site value on which the whole scheme was based. It is a purely legal term, having no relevance to the value of the site. Yet this figment of the legal imagination is made to serve as the basis for a demand for real taxes in hard cash.
This is not the end of the story. In the course of his remarks before the referee Mr. Finlay attempted to justify the demand of the Commissioners for a land value duty when there had been no increase in land values, by asserting that Mrs. Stobie paid for the property " more than it was worth." Here are his words :— " Therefore in substance, divested of all complications caused by the inevitably complicated processes of the Act, what we are claiming to tax here is an increment of £125. We are claiming that Mrs. Stobie gave £125 too much for the property and we claim to tax that. . . . There would have been no tax whatever if the property had fetched its value. It did not; it fetched some- thing more than its value. My friend, Mr. Allen, put it to one of the witnesses that this was a legitimate profit of Mr. Lumaden's. I perfectly agree. If Mr. Lumsden is so fortunate as to find a Mrs. Stobie who will give more than the place is worth, it is perfectly legitimate ; I do not criticize it in the least. What I do say is that the Government under the scheme of the Act is entitled to a share of the profit as increment ; and I say that in taxing that we are not putting a sixpence on the value of the property ; we are putting it on the increment. I hope that Mr. Lumsden will find many other Mrs. Stobies ; and I hope that
when he does find them he will not in the future, after the explana- tion which has been given in this case, object to share a little of his most well-deserved and ingeniously won profit with the Government."
If this extraordinary statement had stood alone it might have been dismissed as the rhetorical effusion of a barrister who had temporarily lost control of his own reasoning power in his zeal for his client's case. But the report in the Yorkshire Post of January 14th, 1913, shows that this view of the case was explicitly endorsed by Sir John Simon and implicitly accepted by Mr. Justice Horridge. It has now been formally adopted by the Chancellor of the Exchequer, who on Wednesday last, in answer to a question in the House of Commons, said that increment value duty was due in this case " because that builder realized a price considerably in excess of the combined market value of the land and the buildine.t' erected by him." A whole new vista is thus opened up. Not only does the Government claim to share in the legitimate profits of the building industry, but it also claims to determine the value of every man's property in defiance of the evidence afforded by actual sales. We ask with some personal anxiety where this is to stop? The Spectator sells every week for sixpence a copy ; but we feel little doubt that Mr. Lloyd George would say that it was only worth a halfpenny and dear at that. Are the proprietors to be required to pay an increment value duty every week on the basis of 5t,d. a copy ? Let us press the matter a little further. Sir John Simon earns a very considerable income as Solicitor-General. For ourselves we are willing to admit that his fees are, at any rate in Mr. Finlay's phrase, " ingeniously won " and may be regarded as the legitimate profits of professional skill combined with party loyalty. But it is within the bounds of possibility that an official valuer might decide that fees running into five figures for a year's work are more than Sir John Simon's speeches are worth, and that he must share his profits with the Government. We wonder whether party. loyalty would survive a proposal to put a new tax of 4s. in the pound on lawyers' fees in addition to the existing income tax. Yet this is exactly what has been done in the case of builders. That such a terrific burden on the building industry will have a disastrous effect on the housing problem is so obvious that we need not press the point. Business men will not put money into an industry that alone among the industries of the country is required to share profits with time Government, while bearing the whole of its losses. If Mr. Lloyd George had any regard for his many statements in the House of Commons, explicitly confirmed by the letter quoted above, he would at once introduce an amending Bill. He refuses to take this course, because he and his officials know that the only chance of getting any money out of the pretended land taxes is to lay hold of builders' profits. In order to disguise the complete financial failure of his land value duties, he endorses a legislative quibble by which the legitimate profits of a builder's enterprise are attributed to the growth of land value, when his own valuers declare that the value of the land has not grown.
Previous page
