Chief Inspector of Taxes' Branch,
Imperial Hotel,
Llandudno, Caerns.
<>u>To: Deputy Chief Inspector.
(1) In accordance with your verbal instructions when you handed me these papers on the 22nd ultimo, I have obtained the Claims Branch papers (C.R. 48909) and the City 15 District file. The information available in these files is sufficient to enable me to report on all the points raised in the Vice- Chancellor's letter of the 10th ultimo but you will no doubt consider whether or not the papers should be referred to the Income Tax Specialists who, but for your instructions, would have been called upon for reports on the Income Tax aspects of the case.
(2) "Oxford University Press" is the name of the Department of the University which carries on a considerable commercial undertaking. This is managed by "Perpetual Delegates" appointed by the University and its activities include:
(a) a publishing business at Oxford (The Clarendon Press);
(b) a publishing business in London;
(c) a printing business;
(d) a paper manufacturing mill;
(e) an American branch (an American Company treated as a branch of the United Kingdom business for taxation purposes).
(3) It appears from the documents in the file of the Chief Inspector (Claims Branch) attached, that a claim for Charity exemption under Section 24, Finance Act 1927, was formulated by Price Waterhouse & Co. (then Accountants to the Press), but in 1929 the Accountants informed the Inspector that the Committee of Delegates had decided for the present to take no further action with regard to this claim for exemption. At an interview on 13th August, 1940 a representative of the Accountants informed a member of the staff of the Chief Inspector (Claims) that "the University were not willing to press their claim for exemption on the whole of the investments and trading profits of the University Press, although his firm had emphasised to their clients the possibility of obtaining relief as a Charity on such income". In a letter from the Chief Inspector (Claims) to Mr Harris then in charge of the City 15 District dated 24th September 1942 which is filed in sub-file No. 3 of the Press Permanent Notes file, Mr Booth states:
"I find that in fact these people never actually formulated a Charity claim. If, as I imagine may be the case, they are on all fours with the Cambridge University Press, they would not be able to claim relief from trading profits. The Cambridge people had a shot at it on appeal, but were turned down on the ground that the business was not the carrying on a of a primary purpose of the charity itself, which is the University. This was a decision by the Special Commissioners."
It would appear from this that the University has not in fact supplied the necessary information to enable a claim under Section 24, Finance Act 1927, to be considered but that it is reasonably certain, as a result of a similar claim by Cambridge University, that if the claim is made it will be unsuccessful.
(4) The "special difficulties" arising from taxation and war conditions are set out in the Vice-Chancellor's letter of 10th June and in greater detail in the memorandum sent herewith. These difficulties may be summarised as follows. In normal times the University Press is engaged in a mixture of commercial and "charitable" work. (The term "charitable" is not used by the Vice-Chancellor in the technical sense applicable to its use in the Income Tax Acts but as denoting printing and publishing books and journals for the advancement of learning and research, education and religion - work which is undertaken in the full knowledge that it is bound to be unremunerative.) Prior to the present war, the Press made sufficient profits on its ordinary commercial work to cover losses on this "charitable" work and have a very handsome balance which, after payment of Income Tax, was available for extensions and developments of the business, i.e. capital expenditure. As a result of the war, the Press has had to undertake special work for the Stationery Office and its "charitable" work has been drastically curtailed. The profits made on the commercial work are now absorbed by taxation while stocks of the "charitable" publications are being rapidly depleted in the absence of any replacements while arrears of necessary "charitable" publishing work are piling up. When the war is over it will be necessary to overtake these arrears but the profits on commercial work against which the losses would normally have been set are the profits which will be taken away as E.P.T. The "charitable" work after the war must result in a loss; it is impossible to raise prices as the people for whom the publications are made are not in a position to pay extra for the books. Hence by the separation of the commercial work from the "charitable" work, the former being done during the currency of E.P.T. and the latter being deferred till a post-E.P.T. period, the normal practice of using commercial profits to finance "charitable" losses is interfered with and the publication of "charitable" work after the war will be crippled.
(5) Whatever sympathy one may feel for the Press in the circumstances set out in detail in the memorandum, one cannot but recognise that the hardship of having to convert stock into cash during a period when E.P.T. attaches to the resulting profits while the stocks will have to be replaced at enhanced cost after E.P.T. is repealed, is one which is felt by a very large number of commercial concerns both in the printing and publishing trade and in other industries. It is a hardship which is inseparable from a tax on excess profits in wartime. This appears to be recognised in the third paragraph of the Vice-Chancellor's letter in which he differentiates between what commercial concerns suffer and the Press hardship by drawing attention to the fact that the Press is called upon to replace stocks uneconomically in the interests of universities everywhere. It would seem, however, on a complete survey of all the relevant facts, that the Press hardship is very much exaggerated in the Vice-Chancellor's letter and the memorandum. It should not be overlooked that E.P.T. does not take away the whole of the profits arising in wartime which would otherwise be available to finance "charitable" publication after the war and for other purposes including capital expenditure. The standard profits are not affected and these are substantial. There is a rough calculation in the P.N. file showing a profit standard of £57,000 without taking into account adjustments for increased capital and the Press intends to claim a substantial standard which must be greater still. All that E.P.T. takes away is the extra war profits which might not have been made at all if there had been no war and no E.P.T. Again, the point about higher costs after the war may not be so serious as is suggested. "Charitable" work is only a part of the Press's activities and even if the higher costs after the war should swell the losses which are inevitable on this work, the higher cost of the ordinary commercial work may be accompanied by higher rates of profit and consequently larger sums available to cover "charitable" losses. The Press will have its standard profits for each c.a.p., its E.P.T. Post War Credit and its Post War profits on commercial work out of which to meet its requirements in regard to "charitable" work. It is not clear to me that the end of the war will bring financial difficulties and I cannot but think that the fears expressed in paragraph IV (iii) of the memorandum are unduly pessimistic and fail to take account of the whole of the facts.
(6) I cannot suggest any remedy for the general hardship which is the main subject of the memorandum and I am inclined to think that the author does not contemplate any relief will be available. In my view, paragraphs IV (iv) and (v) indicate the only way in which we can show practical sympathy to the Press. Paragraph IV (iv) suggests that many valuable old assets do not appear in the Balance Sheet and paragraph IV (v) states:-
"If the Press cannot be relieved altogether from E.P.T., in view of its special circumstances and obligations, a re-valuation of the capital actually employed would mitigate the extraordinary incidence of E.P.T."
I think we can and should give an immediate assurance that while there appear to be no grounds for relieving the Press altogether from E.P.T., we will be glad to co-operate with the Press Accountants in an attempt to arrive at the true capital employed in the business whether or not this capital appears in the Balance Sheets.
(7) It will be seen from the file that there is clearly no E.P.T. liability to 31st March 1942 and consequently detailed computations have not been prepared by the District Inspector. Accounts for the year ended 31st March 1943 have recently been received together with detailed E.P.T. computations for the c.a.p.'s ended 31st March 1941, but these have not yet been examined. The Accountants have intimated that a substituted standard is claimed and have promised to submit particulars in due course and profits computations for the c.a.p.'s ended 31st March 1940 as soon as the Income Tax computations of these years have been agreed. In these circumstances it is impossible to foresee whether or not the District Inspector will find any difficulty and satisfy the Accountants on the question of the amount of the capital for the purposes of this substituted standard or whether such a standard will prove adequate "to mitigate the extraordinary incidence of E.P.T." When a reply has been sent to the Vice-Chancellor, the papers might perhaps be sent to City 15 with instructions to report through me if any difficulty or dispute emerges.
6th July, 1944