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UC-NRLF




^B 313 AST



'FITS DUTY



:s



THE PRACTICE AND LAW

OF

EXCESS PROFITS DUTY



BY



WILLIAM SANDERS

Of the Department of Commissioners of Taxes, Lichfield ;
Lecturer on Income Tax to the Birmingham Municipal School of Commerce
Author of " Practice and Law of Income Tax and Super Tax."



London :

Gee & Co. (Publishers) Ltd., 34 Moorgate Street, E.C.

if)i6.



<^^



PREFACE.

The exceptionally momentous financial effect of
the Excess Profits Duty renders it of vital significance
that the many statutory relief provisions be observed.
The Act is a war measure, and, therefore, could
feasibly introduce a certain amount of inequity,
but, in the passage through Parliament, extensive
amendments secured the maximum of justice con-
sistent with sane workability. The Board of
Inland Revenue and the Board of Referees are
vested with wide discretionary powers, so that the
possibility of the evolution of hard technical points
is minimised. It should, however, be noted that
claims be made for the applicable concessionary
benefits, as the Revenue, if the Income Tax proce-
dure is followed, will not advance any point of relief.
The general scheme of the Duty is that the State
appropriates half of the difference between the
profits of trading periods ending after the commence-
ment of the war, and the standard of profits applicable
prior to the war. While the former is based on
actual profits, the latter is calculated on the average
of pre-war years, but a percentage on the capital
may be substituted for such pre-war average.
Provision is made for increased and decreased
capital, exceptional depreciation, &c., so that there
is a welcome absence of a hard and fast rule which
would tend to inequity. It is hoped that the work
may prove of assistance to the Accountancy and
other professions in the settling of liability to the
Duty.

WM. SANDERS.

Lichfield.

igth January 191 6.

342001



i



TABLE OF CONTENTS.





page


Preface


iii


Table of Statutes


vii


CHAPTER I.




Scope of the Duty


1-7


The Duty


1-2


The Excess


2


The Accounting period


3-4


AppKcation of the Duty


4-7


CHAPTER n.




Profits Chargeable


8-21


Exceptions


9


Specific items . .


9-II


Basis of Profit


II


Deductions


12-16


Losses in pre-war years


16


War Losses


17-20


Investments . .


20-21


Contracts


21


CHAPTER III.




Pre-War Standards


22-C7


Profits Standard


22


Capital Standard


23


Pre-war Depression of Trade


24


New Businesses


25-26


Change of Ownership . .


27


CHAPTER IV.




Capital


28-39


Board of Referees


28


Small Capital . .


29


Definition of Capital . .


30-32


Variation of Capital . .


.. 32-38


Unremunerative Capital


• . 38-39



TABLE OF CONTENTS.

CHAPTER V.



Returns and Assessment


40-43


Returns


40


Notice of Liability


41


Liquidators


41


Recovery


41-42


Appeals


42-43


Case Stated


43


CHAPTER VL




Mineral Rights


44-47


Basis of Assessment . .


44-45


Increment Value Duty


46


Returns


46


Appeals


46-47


CHAPTER VIL




General


. - 48-58


Secrecy . .


48


Deduction of Duty for Income Tax


48-49


Names of Board of Referees . .


50-51


Controlled Establishments . .


. . 51-58


Pre-war Standard


52


Definitions


. . 52-53


Deductions


54


Increase of Capital or Output . .


55-56


Returns . .


• • 57-58


Appeals . .


58


Penalties


58



APPENDICES.— Finance (No. 2) Act, 191 5

(part of) 59-77

Excess Profits Duty Rkgu-

LATIONS . . . . . . 79-82

INDEX 83



TABLE OF STATUTES.



PAGE



5 & 6 Vict. c. 3^ (Income Tax Act, 1842) —
s. lOI

s. 134

16 & 17 Vict. c. 34 (Income Tax Act, 1853)—

s.s. 21-22
43 & 44 Vict. c. 19 (Taxes Management Act, 1880)-

s. 59

56 & 57 Vict. c. 39 (Industrial and Provident

Societies Act, 1893)
loEdw. 7, c. 8 (Finance (1909-10) Act, igio) 44 46 66 67

. . . . 66

66



6 7
77

43 69

43 69

9 73



s. 20 (3)

s. 22

s- 33
5 & 6 Geo. 5, c. 54 (Munitions of
5 & 6 Geo. 3, c. 89 (Finance (No

s. 35 ••

s. 38 (I)

(2)
(3)
s. 39
s. 40 (i)

(2)

(3)

s. 41 (I)

(2)
(3)
(4)
s. 42

s- 43 (I)
(2)
(3)
(4)
(5)
(6)
(7)

s. 44 (I)

(2)
(3)
^- 45 (I)
(2)
(3)
(4)
(5)
(6)

(7)
(8)
Fourth Schedule



47 66
War Act, 191 5) 51

2) Act, 1915)—

48 49 76 7J

■• 2 4 59

59

. . 17-20 59

8 60

7 II 22 60

23 61

62

32 34 36 62

• • 32 36 63

13 3.^ 37 63

63

28 63

44 65

65

66

66

66

66

67

40 67

41 67
15 67

68

. . 4 27 68

68

41 69

42 69
70

7 70

48 70

5 II 12 13 14 15



24 27 30 31 61 62 71-77



Practice and Law of Excess Profits
Duty.



CHAPTER I.

T^HE Excess Profits Duty introduced by
the Finance (No. 2) Act, 191 5, and
which will be re-enacted annually during
the continuance of the conditions giving
rise to the excess profits, is a tax on the
excess of profits made in trading \^ears
or periods ending after the commencement
of the w^ar — 4th August 19 14 — over the
ordinary profits made before that date,
irrespective of whether the increased profits
are made owdng to the existence of the
war or not, but the first ;/^200 of the excess
is exempted.

It is, obviously, impossible to determine
with precision the exact applicable profit
which obtained prior to the war, as the
year or years in question may not ha\ie
been ordinary years of trade, so that in
order to secure uniformit}^ w^hich is essential
to the imposition of any tax, a prescribed
pre-w^ar basis, statutorily termed the " pre-
war standard," has been adopted. Certain



2 SCOPE OF THE DUTY.

exceptions are permitted in order to alle-
viate or remove specific inequities, but the
basis of assessment is only intended to give
an approximation to what is the actual
excess.

The assessments are to be made by the
Board of Inland Revenue, and the Surveyor
of Taxes will attend to local matters. The
taxpa3^ers' rights cover appeal to the local
or Special Commissioners of Taxes, while on
specific points (p. 28) there is an appeal
to an independent Board of Referees.

The Excess.

The assessment to the duty is, by Section
38, to be made on 50 per cent, of the differ-
ence between (a) the profits of any
^' accounting period," i.e. trading period
ending after 4th August 19 14 and before
ist July 191 5, less £200, and {b) the pre-war
standard of profits. This is illustrated by
the following example, which assumes the
pre-war standard to be arrived at on the
principles given at p. 22.

£
Profit of Year to 31st December 1914 . . . . 4,000
Lcs5 Exemption 200

3,800
Z,«ss Pre-War Standard 2,000

50%) 1, 800

Excess Profits Duty £900



THE ACCOUNTING PERIOD. 3

The Accounting Period.

The " accounting period," which in the
above example is the trading year to 31st
December 19 14, is statutorily defined as
the period for which the accounts have been
made up, but in the following cases the
Board of Inland Revenue is empowered to
prescribe the period and ending thereof,
subject to the restriction that the period
must be not less than six months or more
than tw^elve months : —

{a) When the accounts have not been
made up for any definite period.

{b) When the accounts have not been
made up for the usual period.

(c) When a year or more has elapsed
without accounts being made up.

The Board of Inland Revenue is, there-
fore, only empow^ered to specify the length
and ending of a period when the accounts
ending after the w^ar have not been made up
for the usuaV^ period," so that an alteration
of the ending of a period is not prohibited
so long as the period is the same ; thus the
changing of the date of making up annual
accounts from 31st December to 30th June,
when e.g. stock is taken half-yearly, is not
negatived if the new period is the same as
the old one, viz. a year.



4 SCOPE OF THE DUTY.

The references in Section 38 to " period "
assume that word to relate solely to a
period of time irrespective of the ending
unless specifically mentioned.

When the accounting period is less than a
year the exemption of ;^200 and the pre-
war standard are proportionately reduced^
thus in the example at p. 2, if the profit
of ;£4,ooo were for nine months the assess-
ment would be as follows : —

£

Profit, 9 months to 31st December 1914 .. .. 4,000
Less Exemption (| of £200) 150

3,850
Less Pre-War Standard (^ of £2,000) .. .. 1,500



50%)2,35o
Excess Profits Duty £i,i75

Application of the Duty.

The assessment is to be made by Section
45 (2) on " any person for the time being
" ow^ning or carrying on the trade or
'' business " after commencement of the
war, and the following rules are also
prescribed : —

( 1 ) Business ceased. Assessment on the
person who owned or carried on the trade
or business, or acted as agent, immediately
before cessation.

(2) Change of owner sliip. The " account-
ing period " may, if the Board of Inland



SUBSIDIARY COMPANIES. 5

Revenue think fit, be taken as ending on
the date of change, and the assessment be
made on the owner or agent up to or at
such date. See also p. 27.

Subsidiary Companies. In the case of
subsidiary companies when the parent
company owns, either in its own name or
that of a nominee, the whole of the ordinary
capital of another company in the same
trade, or so much of that capital as a single
shareholder can hold '' under the general
law," the subsidiary company is, under the
Fourth Schedule, to be treated as a branch
of the parent company and a joint assess-
ment made. This may have a vital effect
on the assessment, and only one exemption
of ;^20o is deductible. Assume the profits
of {a) the parent company and {b) the
subsidiary company to be as follows : —





(a)


(6)




£


£


r to 31st December 191 1


5,000


100


1/ » 1912


500


2,000


1913


2,000


3,000


1914


. . 10,000


2,800



The results of treating the companies
separately (c), and jointly {d),are as follows :
the pre-war basis being arrived at as at
p. 22 : —



SCOPE OF THE DUTY.

(c)





(a)
£
10,000
200




2,800
200


War Profit

Less Exemption




Less Pre-War Standard


9,800
3,500




2,600

2,500




50%)6,30o




50%) 100


Excess Profits Duty ..


£3.150




£50




=


£3,200








t

12,800
200




War Profit






Less Exemption


50




Less Pre-War Standard


12,600
5,050






%)7,55o




Excess Profits Duty . .


••


£3,775





The reason of the difference is in the
computation of the pre-war standard, for
which the two best of the three last pre-war
years are averaged. When assessed sepa-
rately (a) the parent company and (b) the
subsidiary company, and when jointly
(c) the pre-war standards are arrived at as
follows : —





(«)




ib)




(c)




£




£




£


I9II ..


5,000


1912 ..


2,000


19" ..


5,100


I9I3 ••


2,000


1913 ..


3,000


1913 ..


5,000



2)7,000 2)5,000 2)10,100



£3,500 £2,500 £5,050



Two or more Businesses .

Under Section loi of the Income Tax
Act, 1842, a loss on one business may be
set off against the average assessable profit



TWO OR MOKE BUSINESSES.



on another busfiness in the same ownership.
The Board of Inland Revenue has power,
under Section 45 (7), to adopt any income-
tax rules, and, under Section 40 (i), profits
are to be ascertained on income-tax prin-
ciples, so that Section loi should operate,
but it only applies to an actual loss in one
of the businesses, as e.g. a reduced profit
would not affect the resultant income-tax
liability whether such profit was included
with that of the other business or not, but
with Excess Profits Duty a profit less than
the pre-war standard is equivalent, in
effect, to a loss, as the Duty only relates
to that part of the profits in excess of a
fixed pre-war standard. A statement has
been made in the House of Commons that
a set-off will be allowed.



CHAPTER II.

Profits Chargeable.

The Duty does not extend to every class
of profits assessable to income-tax, but it
does not apply when income-tax is not
chargeable. Liability attaches, by Section
39, to '^ all trades or businesses of an}^
description " {a) carried on in the United
Kingdom, or {b) owned or carried on out-
side the United Kingdom by persons ordi-
narily resident in the United Kingdom.
Inclusion is expressly made of the follow-
ing :—

(i) Any person " taking commissions in
" respect of any transactions or services
" rendered."

{2) Any agent " of any description "
except a commercial traveller, or an agent
remunerated wholly by a fixed and definite
sum not dependent upon the amount of
business done or any other contingency.

The Act exempts commercial travellers
irrespective of the basis of remuneration.
The reference to remuneration being of a
fixed sum, only relates to " agent," as
travellers are isolated.



EXCEPTIONS. 9

Exceptions .

The following are excepted from liability
to the Duty : —

(a) Husbandry in the United Kingdom.

(b) Offices and employments.

(c) Professions where the profits are
dependent mainly upon personal
qualifications, and where capital ex-
penditure is not required or is com-
paratively small in amount.

Apart from the said specific exceptions
the duty is of universal application and
extends to municipal undertakings and e.g.
co-operative societies. "^The following special
factors are introduced by the Fourth
Schedule in connection with those con-
cerns : —

Local Authorities.

The total amount required to be raised
(out of rates or otherwise) for sinking fund
purposes in connection with the trade or
business assessed is deductible.

Co-operative Societies.

y With societies registered under the Indus-
trial and Provident Societies Acts, such as
co-operative societies, there are no "profits"
in the commercial acceptance of the term,
and the basis of assessment to Excess Profits



lO PROFITS CHARGEABLE.

Duty is the excess of (a) over {b) multiplied
by the number of members in the " account-
ing period " (p. 3) : —

(a) Profits per member for the account-
ing period (including any surplus
arising from transactions with mem-
bers).

(b) The like profits per member in the
pre-war trading year or average (p.
22).

Taking the trading year, i.e. the account-
ing period , as ending on 3 1 st December 1 9 1 4 ,
the assessment would be arrived at as follows
on the given figures : —

No. of Profit per

Members Member

£ s d

1911 1,000 .. 600

1912 1,500 .. 5 10

. 1913 1,600 .. 500

\ 1914 2,000 .. 800

On the principles applicable to ascertain-
ment of the pre-war basis (p. 22), the
two best of the three pre-war years, viz.
191 1 and 191 2, would be adopted, giving
a pre-war average of ;^5 15s. The assess-
ment would, therefore, be as follows : —

£ s d

(a) War Profit 800

(b) Pre-War Standard . . . . 5150

2 5 X 2,000 £'4,500

£

Profit 4,500

Less Exemption .. .. 200

5o%i4,3oo

Excess Profits Duty £2,150



SHIPPING COMPANIES. II

Shipping Companies.

The Fourth Schedule contains a provi-
sion which covers e.g. shipping companies.
It provides that when a business is confined
to the management of any particular assets
and there is power to substitute other
assets, such a substitution shall not con-
stitute a change of ownership (see p. :^y)^
but, where such substitution has been carried
out by the sale of assets and purchase of
other assets, the capital shall be taken to be
increased or decreased (see p. 32) only*
by the amount of the difference between
the price of the assets purchased and the
price obtained for the assets sold. This
prevents e.g. a ship purchased fof^ioo,ooo
before the war being sold for ;^20o,ooo now,
and the latter being taken as capital.

Basis of Profit.

Profits for Excess Profits Duty are, by
Section 40, to be ascertained separately,
but on the same principles that are appli-
cable to income-tax with certain specified
exceptions. Income-tax profits have been
judicially determined in Usher's Wiltshire
Brewery Co.y Lifn. v. Bruce (i9i4),in the
House of Lords, to be commercial profits
subject to non-deduction of specified ex-
penses such as those attributable to capital,
viz. capital withdrawn, sums employed as



12 PROFITS CHARGEABLE.

capital, wasting assets, capital employed
in improvement of premises occupied for
the trading purposes and expenses not
" wholly and exclusively " laid out for the
purposes of the business.

Deductions.

Under the Income Tax Acts no deduction
is allowed for the following, as tax is
deducted by the payer : —

(i) Interest on money borrowed for the
purpose of the business.

(2) jRent and royalties and other pay-
ments'lsubject to deduction of tax.

For Excess Profits Duty, however, these
items are to be deducted both from the pre-
war profits and the w^ar profits, while profits
arising from lands and buildings forming
part of the assets, which are excluded for
income-tax purposes as they are separately
assessable under Schedule A, are to be
included for Excess Profits Duty.

Specific provision is made in the Fourth
Schedule that deductions for the following
shall only be such as are allowable under
the Income Tax Acts, and only of such
amount as the Board of Inland Revenue may
determine to be '' reasonably and properly



DEDUCTIONS. 1 3

" attributable to the year or accounting
" period."

(a) Wear and tear. ,

(b) Expenditure of capital nature on
renewals.

(c) Such expenditure for development of
the trade or business or otherwise in
respect of the trade or business.

No deduction is permissible for the
payment of, or liabilit}^ to pay, Income-
tax or Excess Profits Dut}', but deduction
is allowed for any foreign or colonial Excess
Profits Dutv or similar tax.



Modification of Fourth Schedule.

It is provided by Section 41 (3) that the
Fourth Schedule, which prescribes the
basis of ascertaining profit (both pre-war
and war profit) and also defines capital, may
be modified, on application to the Board of
Inland Revenue, in the undermentioned
cases, and the modification is to be such as
the said Board may think necessary " to
meet the particular case^ The taxpayer
has a further right of requiring the matter
to be determined b}' the Board of Referees,
who are vested with the same modifying



14 PROFITS CHARGEABLE.

powers as the Board of Inland Revenue.
The cases involved are as follows : —

(i) Change in constitution of a partner-
ship.

(2) Postponement or suspension, owing
to the war, of renewals or repairs.

(3) Exceptional depreciation or obso-
lescence of assets used in the trade, due to
the war.

(4) Provision, in connection with the
war, of plant which will not be required
after the war for the purposes of the trade
or business.

(5) Any other special circunistances speci-
fied in regulations made b}^ the Treasury.

See also p. 28.

Directors ' Renin neration .

For income-tax, directors' remuneration
is, in many cases of private limited com-
panies w^here practically all the shares
are held by one man, varied so as to absorb
the profits, thus leaving nothing chargeable
under Schedule D at the unearned rate, but
securing assessment under Schedule E at
the earned rate on the directors person-
ally. The Excess Profits Duty does not
extend to employments, so that liability
could have been escaped by such disposal
of profits had the Act made no provision
for such circumstances. The Fourth



DEDUCTIONS. 1 5

Schedule provides, however, that the deduc-
tion for remuneration of directors, managers,
and persons concerned in the management
of the trade or business shall not exceed the
sums allowed in the last pre-war trading
year, ''or a proportionate part thereof as
the case requires," unless the Board of
Inland Revenue otherwise direct in the
following cases : —

(i) Special circumstances.

(2) The remuneration of " any managers
or managing directors " depending upon the
amount of profits.

Artificial Disposal of Profit.

It is laid down by Section 44 (3) that no
fictitious or artificial transaction or opera-
tion '' for the purpose of avoiding the
payment of Excess Profits Duty " shall be
entered into or carried out, and any such
act before the commencement of the Act
shall be voluntarily disclosed to the Board
of Inland Revenue. A fine not exceeding
^loo is leviable on summary conviction,
and this applies to {a) any transaction
after the commencement of the Act whether
disclosed or not, and {b) any undisclosed y
transaction before the said commencement.

The Fourth Schedule prohibits deduction
in respect of such part of the transaction or



1 6 PROFITS CHARGEABLE.

operation that has artificialh' reduced the
profits.

Losses in Pre-war Years.

When the net result of the last three pre-
war trading years has been a loss and {a)
the pre-war standard is a capital percentage
and {b) part of the profits have been applied
in extinction of that loss, the war profits
may be reduced by the amount of the
profits so used. Assume the profits to be
as follows, and the capital ;^20,ooo, with an
applicable percentage of 7 : —

£ £

Year to 31st December 191 1 .. .. 1,000
„ „ 1912 .. .. 200
H „ 1913 loss 2,000

n » I914 . • • • 4,000

The three pre-war years show the fol-
lowing result : —

£ £

Loss, 1913 2,000

Profit?, 1911 1,000

„ 1912 200 1,200

Net Loss £800



The assessment to Excess Profits Duty
would, therefore, be as follows : —

£

Profit, Yeir to 31st December 1914 4,000

Less Less £800

Exemption 200

1,000

3,000
Less Pre-War Basis — 7% on £'20,000 .. .. 1,400

50%) 1, 600

Excess Profits Duty ^800



LOSSES. 17

War Losses.

The profits of the whole period during
which the war continues are to be taken as
an entity, and Section 38 (3) provides that
when the profits of any " accounting
period " ended after 4th August 19 14
'' have not reached the point which involves
liability to Excess Profits Duty " or a loss
has been sustained, repayment may be
claimed of such Excess Profits Duty paid
in respect of any previous accounting
period as w^ill make the total duty paid by
him ** during the whole period accord with
his profits or losses during that period," or
it may be claimed to set-off against the
duty on any future accounting period such
an amount as will attain the desired end.
The provision is demonstrated by the
following example, which assumes the war
to last three years.



r to 31st December


I9II ..


£
. . 4,000





I9I2 ..


.. 5,000


U H


I9I3 ..


. . 4,000


»


I9I4 ..


.. 20,000


"


1915 .•

1916 ..


. . 12,000



'^ 8,000



The total profits for the period of the war
are, therefore, ;^24,ooo, and the total duty is
to be paid on ;^24,ooo — three years' exemp-
tions (;^6oo). The pre-war, basis would be
as follows :



l8 PROFITS CHARGEABLE.



/



1912 5.000

1913 4>ooo

2)9,000
£4,500

The assessments would be as follows : —

1915-16.

Profit 20,000

Less Exemption 200

19,800
Less Pre-War Basis 4,5oo

50%)i5.300

Excess Profits Duty £7.650

1916-17.

The profits 6f the two years are thus : —

£

1914

J915



20,000
8,000



12,000

Less 2 years Exemption .. .. .. .. ^00

11,600
/.ess 2 years Pre-War Standards .. .. 9,000

50%)2,6oo

Duty for 2 years £1.300

Repayment is, therefore, made as fol-
lows : —



^,i



Duty Paid in J915 I'7,650

„ Due for 1915 and 1916 1.300

Repayment . . £6,350

1917-18.

Profit 12,000

Less Exemption 200

11,800
Less Pre-War Basis 4.500

5o%)7,30o
Excess Profils Duty 3,650



LOSSES. * 19

The intention being to tax the war profits
as a whole, the total Duty paid should equal
that on the total profits. The latter are
;^24,ooo, and the result should be as
follows : —

Total Profits 24,000

L€ss 3 J ears Ex»=mptions £600

„ „ Pre-War Standards 13,500



— 14,100
50%)9,900



£4,950



The Duty actually paid is ;£4,95o, made
up as follows : —

£

1915-16 7,650

1917-18 .. .. 3,650^



11,300

Repaid 1916-17 6,350

£4.950



The equity of this course may be seen
from assuming a total profit of the same
■amount, viz. ;^24,ooo, but spread evenly
over the three years. Each year's assess-
ment w^ould then be as follows, giving the
same total of ;^4,95o.



fit


8 000


Less Exemption


200


Less Pre-War Standard


7,800


1 3 4 5

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