HC Deb 02 December 1947 vol 445 cc305-42
Mr. Assheton

I beg to move, in page 4, line 34, at the end, to insert: Provided that this Section shall not apply in the case of any trade or business the pro- fits of which consist solely of income received by way of fixed dividends, interests or other periodical payments made under an agreement entered into before the first day of January nineteen hundred and forty-seven. We now pass from the subject of betting to the subject of the Profits Tax. This is the first Amendment of a series of Amendments, and the smallest of them. The point it embodies, though small, is important, and I hope the Chancellor of the Exchequer will be good enough to give his attention to it. The object is simple. The proposal made by the Government to increase the Profits Tax has been based upon several broad reasons: to encourage the ploughing back of profits into businesses; to check inflation caused by large distributions; and on account of excessive profits being made by companies. I want to call the Chancellor's attention to a case to which these reasons can have no application whatever. It is the example of a company—[Interruption.] Perhaps hon. Members who are not interested in this subject would at least allow those who are interested to hear what is being said. The subject is rather complicated and is nothing like so interesting as betting, but I want the Government to hear what we have to say.

The illustration is of a company whose sole business is the receipt of a fixed annual rental, somewhere between £2,000 and £3,000, through another company to whom it leased all its assets in 1911 for 99 years. The rental was fixed to provide a return of 3¾ per cent. on the capital. There is no question of a possibility of profits being ploughed back because there is no business into which to plough them. The fixed return to the shareholders is very moderate and cannot be increased, on account of the nature of the business.

This kind of company cannot have been in the minds of those who designed the Profits Tax. If we want to place a tax upon concerns of this sort, we can place the tax upon them in the ordinary way. If we want to encourage ploughing back, we cannot do it because this company has nothing to plough back. All I ask the Chancellor to do is to look at the case and see whether he thinks the Amendment is a reasonable one. I daresay that he has not had the opportunity of considering this class of company very closely. If that is the case, perhaps he will be good enough to do that between now and the Report stage and see what can be done. The illustration I have given is only one and there must be others in exactly the same position, but in every case the same arguments apply.

9.0 p.m.

Mr. Erroll

In drawing attention to the anomaly which is created by the imposition of the Profits Tax on this type of company I would like to reassure the Committee that the type of arrangement of a lessor and a lessee company was not originaly designed, nor indeed is it used at the present time, as some form of profiteering mechanism. It was a system very widely and rationally adopted for the handling and management of property, industrial, commercial and private. The arrangement was largely that the lessor company owning the property would lease a property to a lessee company and leave the lessee company free to manage the company and so derive such profit as it could. The lessor received a fixed annual sum rather in the nature of debenture interest. That was a common enough type of transaction which was entered into frequently before the incidence of Profits Tax and was held to be a perfectly normal and respectable way of arranging affairs.

Now as the result of the incidence of Profits Tax the lessee company pays Profits Tax on its profits but the lessor company does not have to pay Profits Tax on what it receives because it receives them, if one may coin a phrase, free of Profits Tax. In other words, the Profits Tax which the lessor company should pay has in fact to be paid by the lessee company in addition to the lessee company paying its own Profits Tax on the profits which it, the lessee company itself, earns. This is manifestly unfair not only from the point of view of the obvious reason, but from the point of view of hon. Members opposite.

By some strange idea in their own minds they have decided to place a tax on profits only on the profitable part of an enterprise, on the equity profit, but not on the preference or debenture stock. The lessor company is in effect the debenture holder of the stock on which the lessee company operates. The tax is, therefore, particularly unfair in its present form to the lessee company in that that company has no control over whether or not the lessor company's profits shall be distributed. If these are not distributed, then the lessee company has to pay out less, but if the lessor company decides to distribute those profits, the lessee company has to pay the 25 per cent. rate of Profits Tax, so that the lessee company is the victim of the whim of the lessor company.

As my right hon. Friend the Member for the City of London (Mr. Assheton) pointed out, these arrangements when entered into a number of years ago were such as to provide the shareholders of the lessor company with a very small and reasonable rate of interest which was rather equivalent to debenture interest. It was not in the nature of distributed profits. So we have the situation whereby the lessee company is paying the Profits Tax of the lessor company over whom it has no control. The situation would be much altered if Profits Tax could be called an Income Tax. It is in a sense a form of Income Tax because arrangements were made not so long ago whereby Income Tax must be paid by each individual recipient. If Profits Tax could be called Income Tax, the lessor company in the example I have quoted would have to pay its share, instead of being able to insist, as it can at present under the terms of agreements entered into, on being able to transfer its Profits Tax to the lessee company.

A situation of a similar kind arises in connection with a tax free annuity. Up to 1941, a person who left a sum of money could arrange for a tax free annuity to be paid, for example, to his widow and another legatee could receive residuary income. As Income Tax went up, so the residuary legatee found his income diminishing in order that the full tax-free income could be paid to the original annuitant. That situation was put right in the Finance Act of 1941, in Section 25, which laid it down that increases in taxation subsequent to the original will must be borne by the legatee or annuitant concerned. The situation is analogous when we have a contract entered into before Profits Tax was ever thought of, and the effect of it must be borne by only one party to the contract, instead of being shared equally by the two, or disposed of in some other equitable manner.

We quite appreciate that this Amendment has not been on the Order Paper for long, and that, therefore, the Minister cannot have had much time to study its purpose and the implications of Profits Tax as at present levied on this type of company. We do not propose to press the matter unduly far at present if we receive some satisfactory assurance that it will, as we hope, be considered more favourably between now and the Report stage.

The Solicitor-General

We have had a case advanced, two sets of circumstances being outlined by the right hon. Member for the City of London (Mr. Assheton) and by the hon. Member for Altrincham and Sale (Mr. Erroll). My answer to both of them is this: it may be that what they have said would have been relevant when the form of the Profits Tax was being considered originally, but it is not relevant when all that is being done is to increase a Profits Tax which exists already. The hon. Member for Altrincham and Sale instanced the case of a lessor and a lessee company who had entered into a certain agreement which produced, in the face of the tax, certain consequences. It is easy to go on multiplying instances, and all those instances no doubt were taken into account, and should have been taken into account, when the original Profits Tax was framed. The original Profits Tax, which we are doing no more than increase—we are only doubling a tax which exists already——

Captain Crookshank

Only!

The Solicitor-General

I am sorry—we are doubling a tax which already exists and making no other change than doubling it. I respectfully submit to the Committee that once the principle has been accepted—as it was accepted for the purpose of the 1947 Act and, indeed, for its predecessor the 1937 Act—that all companies, never mind what they were, should be within the scope of the Tax, it is too late, when that existing tax is simply being increased, to ask for a change in the system. I would remind hon. Members of the form of the tax. It is imposed by Section 30 of the Finance Act, 1947, and is expressly made to apply to all companies.

The National Defence Contribution applied to firms as a whole, but firms were taken out of the 1947 Act, and Section 30 applies to all companies. The 1947 Act proceeds deliberately to exclude certain income from the categories of income which are to be taken into account in assessing what are described as net relevant distributions. The only income not to be taken into account for that purpose is what is described in Section 32 of the 1947 Act as franked investment income. All profits and investment income have to come in, with the sole exception of franked investment income which is already subject to Profits Tax in the hands of another body corporate. It covers all forms of income, with the exception of incomes which have already been subjected to tax.

Supposing these arguments which have been put forward tonight had been advanced at the time, it may be that the tax would have been differently framed, but the arguments were not advanced then. Even if that had been done, it would not have been sufficient for the purposes of creating an exception to the general rule that all companies are covered. Hon. Members have taken a very special sort of company. I suppose if one looks at various sorts of companies which operate, various other companies might seem to deserve to be taken out of the general category. But it would be most unfair to give this particular advantage to this particular sort of cornpany. It would be very unfair to all the other sorts of companies, which have to bear the increased tax. Why should other companies be subjected to the increased tax, and not these companies?

The hon. Member says that their inclusion does not effectuate any of the purposes enunciated by the Budget. It certainly does effectuate the most important purpose, which is to mop up surplus purchasing power, and, by increasing the tax on the net relevant distributions, it does assist, as do all the other measures outlined in the Budget, the mopping up of inflationary pressure and extra purchasing power. So it is directly conducive to the end the former Chancellor of the Exchequer had in mind, and there is no case for singling out this particular kind of rare company to give it an advantage in preference to all other companies. If there was a case, which certainly does not arise now, and if it should have been taken into account, it should have been given effect to when the original Profits Tax scheme was worked out. For those reasons I ask the Committee not to accept the Amendment.

Colonel Crosthwaite-Eyre (New Forest and Christchurch)

Earlier this evening we listened to various arguments from the Treasury Bench, of which I think the most perfect was that advanced by the Financial Secretary. He certainly had a very good argument, but could not develop it. We have now heard an even better, which is to the effect that if an argument had been advanced earlier it might have been reasonable, but to advance it now is unreasonable. The hon. and learned Gentleman went on to say why, but in everything he has said he has destroyed his own case. If we look back on what the Chancellor of the Exchequer at that time said, on the introduction of this tax, we see that it was to mop up extra purchasing power. The hon. and learned Gentleman said that tonight, but these companies are perhaps the only companies to which that argument does not apply. Of course, there is no extra purchasing power to mop up; as my right hon. Friend the Member for the City of London (Mr. Assheton) said so clearly, they are not the cases where there is any extra purchasing power which can be mopped up.

The Solicitor-General

The increase of the tax on the net relevant distributions has the effect that smaller dividends are payable, and that does what the Chancellor had in mind.

9.15 p.m.

Colonel Crosthwaite-Eyre

That is quite untrue of a lessor company. What is more to the point, if the hon. and learned Gentleman will only look back, he will see that the Chancellor made the point that he had doubled this tax simply because companies were paying increased dividends, and he saw no reason why one particular section of the community, to use his own words, should enjoy greater revenue than any other. Here the Chancellor is faced with a small section of companies which cannot possibly be accused of what the Chancellor advanced when promulgating the doubling of this Profits Tax. Yet the hon. and learned Gentleman tries to use the argument which we have just heard. I have seldom heard two absolutely divergent arguments in so short a time from the benches opposite, and it makes nonsense of the principles which Members on the other side of the Committee advocate.

Here is a very small section of companies, which long before the present Government were ever thought of, entered into specific contracts. What the Government are doing at the moment is to make those contracts, entered into in good faith, untenable at this time. That is an injustice which Members opposite ought to be the first to refute. They are always saying that their object is to try to mop up purchasing power. They are using that argument in respect of the one class of case in which it does not apply. My right hon. Friend the Member for West Bristol (Mr. Stanley), earlier this evening, in mentioning the Bill which is to be taken tomorrow, talked of the happy event which is to happen on the Treasury Bench. All I can assume is that that happy event has made the Financial Secretary and the right hon. and learned Gentleman such flustered parents that they have forgotten their briefs.

Mr. Harold Roberts (Birmingham, Handsworth)

I wish to say a word about the new constitutional theory which we have heard from the Solicitor-General. I enjoyed hearing him lay down a rather new and interesting constitutional view that there is a sort of estoppel governing this Committee and the House so that if once a tax or enactment is passed, it is too late, if the burden is made greater and the grievances made acute, for hon. Members to put forward suggestions to alleviate it. For example, what was done in 1941 when Income Tax was only doubled—raised from 5s. to 10s.— an extremely trifling matter? Parliament intervened and rectified the grievance referred to by the hon. Member for Altrincham and Sale (Mr. Erroll) by a Section in the Act of 1941. I regret that I cannot in the least follow the hon. and learned Gentleman in trying to escape from a discussion of the merits by saying that what would have been very well in the summer of 1947 is quite wrong and inappropriate in the autumn. The whole of our legislation is based on the principle of trial and error. Grievances which initially may be small become more apparent when magnified. I hope I am in Order in saying a word, not on the Amendment, but on Clause 7.

The Chairman

I am sorry, but the hon. Gentleman is only entitled to speak on the Amendment which is before the Committee.

Mr. Roberts

Would it be possible, at this stage, to speak on the Clause?

The Chairman

Not at this stage, and not necessarily at any stage.

Mr. Assheton

I do not want to take up much more time, but I must say that the Solicitor-General had the very greatest difficulty in presenting any argument at all to the Committee. His brief must have been very inadequate, and I am sure that he did his best. His only arguments were that there was some mopping up being done by this process. Of course, there would be some mopping up if the Government were to charge a Profits Tax on gilt-edged securities, but it would be unfair to suggest that that would be any more appropriate. His second point was that we ought to have called his attention to the matter sooner than in 1947 when this was first introduced. Of course, we had not thought about this at that time—nor had he or the Inland Revenue. It is no good saying that we ought to have thought of everything. When a new tax is introduced one does not know all the consequences immediately. When consequences are found which result in gross inequity, the matter ought to be corrected.

The Solicitor-General

This tax was introduced in 1937. This is the National Defence Contribution.

Mr. Assheton

At the time it was introduced, obviously this point had not been discovered. The hon. and learned Gentleman's third point was that all the Government were doing now was to double the tax. If it was inequitable before, it is more inequitable now. Therefore, all three of his arguments were unsound. I ask the hon. and learned Gentleman for something like justice for the unfortunate small number of holders of this kind of investment.

Amendment negatived.

Mr. David Eccles (Chippenham)

I beg to move, in page 4, line 45, to leave out "fifteen," and to insert "twenty."

This Amendment is one to which we attach great importance. When we discussed the Profits Tax last April we made it clear that on this side of the Committee we thought that it was a bad tax but that by far the worst feature of it was the levy on undistributed profits. This Amend- ment would have the effect of leaving the rate of tax upon undistributed profits at 1s. in the £, where it was placed by Parliament last April. If the Clause is approved without Amendment, the rate of tax on undistributed profits will be 2s. in the £.

I ask hon. Members opposite to lock at this Amendment from the point of view—and only from the point of view—of our economic situation which, in all conscience, is bad enough. Will this Amendment help or hinder production? That is the test which I believe we should apply to this proposal. It is obvious enough that politics and production today are pulling in opposite directions. It never has been possible and it never will be possible, to wage war upon profits and at the same time to get the maximum output from industry which is left in private hand. [Interruption.] Hon. Members must choose whether they prefer the class war or the battle of production. Here is a test case of whether the efficiency of production or old prejudices should be the first to go.

Mr. Cobb

Is not the hon. Gentleman being unjust to the managers in industry? If we could segregate and get rid of some of the unwanted financial interests on the boards of companies, I am sure that we could leave the managers alone to get on with the job.

Mr. Eccles

The hon. Member's irrelevant interruption makes no sense whatever. To what purposes are undistributed profits put? They are the main fund out of which repairs, renewals and extension, are made, and out of which scientific processes and inventions are brought to a stage where they are of service to mankind. The Chancellor boasts about his connection with science, but he will find that most of the scientific inventions come to the commercial stage because of the investment of profits which has been retained in some business or other. It is necessary nowadays, when we levy upon the incomes of individuals very high rates of taxation, to rely upon corporate savings more than we used to do. It is becoming increasingly impossible for individuals to save enough equity capital—what the Americans call "venture money"—to finance the expansion of a risky business, and we have to look to the corporate savings to take its place. Therefore, in the interests of efficiency and employment, these savings ought to be encouraged.

Two arguments have been brought forward in defence of taxing, and raising taxation upon, undistributed profits. One is that the total profits of businesses are running at an excessive rate at the present time, and the other is that the reserves in cash which businesses now have cannot be turned into physical assets because of the material shortages from which we are suffering, and, therefore, it does not matter if they are taxed. Those two arguments are related, because it is not possible to say whether the total profits retained in businesses are excessive unless we look at the cost of repairs, renewals and extensions, and, still more, at financing raw materials and stock-in-trade today compared with prewar. It is true that the volume of profits retained by private companies today is greater than it was before the war. I will not enter into the dispute between the Chancellor of the Exchequer and the economist as to which is the greater. The index figure of the latest issue of the "Monthly Digest" shows that basic materials prices are now 259 against 100 in 1938. [An HON. MEMBER: "What has that to do with it?"] The hon. Gentleman asks what has that to do with it? He must surely know that every manufacturing business must hold so much raw material, which has to be financed out of money in hand. It is only because of the shortages today, and because British business is living on a hand-to-mouth basis with raw materials, that hundreds of firms have not already had to go to the banks or to the public to raise fresh money to bring their working capital up to the level at which it should be to finance their proper stock-in-trade at postwar levels. If the hon. Member does not believe that, will he please look at the United States, where it is possible to buy as much raw materials as managers think it is sensible to hold for the benefit of their businesses? He will find that practically all firms in the United States have had to increase their capital since the war, owing to the rise in the prices of raw materials.

Now let me turn to the question of how much profit it is desirable, in the interests of the general community, that a business should retain for the purpose of replacing machinery and making extensions. Last April, the hon. Member for North Battersea (Mr. Jay)—I am sorry he is not in his place now—made some very injudicious remarks on this point, and I had hoped that he would be here tonight to take them back. He said that, because at the present time it is not possible to buy all the machines that industry want or to carry out all the extensions they would like, therefore, they did not need so much reserve. That is entirely wrong. It is true that, for the time being, industry cannot extend itself, and cannot carry out the renewals it would like to carry out. But that does not mean that it ought not to do so at the earliest possible moment.

9.30 p.m.

When we look at the price level of making these replacements, it is, roughly speaking, 100 per cent. above prewar. That is the price level of the increase in building materials, and machinery is much the same. The Committee will remember that the Income Tax allowances for obsolescence and the replacement of plant and machinery are based upon the original cost of the asset. Therefore, when the price of replacing that piece of machinery goes up, the business cannot charge the new price against the cost of the old machine. It must retain some profits merely in order to replace something that has become obsolete. I suggest that this tax weakens every business in the country which has financial responsibilities of this kind. If businesses are weakened in that way, our production must suffer, and also our ability to stand any recessions and to maintain our exports.

The Chancellor claimed that this tax on undistributed profits will be disinflationary. I very much doubt if he is right. In many instances, as hon. Members will know, the effect of a tax of this kind is to make a business put in hand some piece of expenditure rather earlier than it otherwise would. For example, supposing it cost £50 to paint an office, that is an expense which can be charged against the profit and loss account. After this tax is increased, it will appear to the business that the Chancellor is going to pay rather more towards painting that office, and they are quite likely to put the work in hand earlier than they otherwise would. It is only in very few cases that this doubling of the tax will prevent a business from using labour and materials which it otherwise would have used. In the majority of cases, the profits that will be taken away by this increase in tax would have been retained in the business. Although they could be used for the good purposes of the business, they would have been held in cash or Government securities, neither of which is inflationary.

If we are to know whether this is a disinflationary tax or not, we must know what the Chancellor is going to do with the money when he collects it. If he is going to collect the money and use it to pay for the under the line capital items in the Budget, then it is going to be just as inflationary as it was before. The Committee will realise that the Treasury are in some difficulty because they are not going to get the enormous sum every month out of the pockets of the people which was previously forthcoming from the sale of American goods. If all that money was used to finance the Socialist Government's expenditure programme, they must get more money if they are to carry on with those items. We must know what is going to be done with this money, because, if the Chancellor is not going to reduce the public debt with it, he cannot say that this is a deflationary tax.

There is another point of some importance. In this Bill, all the rates of tax are doubled. That means that the tax on undistributed profits, now at the rate of 10 per cent., will he levied upon the profits of companies controlled by foreigners. They are subject only to the undistributed profits tax. Is it really wise, in our present economic circumstances, to discourage foreign capital from coming here or assisting us in, let us say, the development of raw material resources in the Colonies? I know already of several businesses which are in contact with foreign capital where the foreigners have said they will not come in to help us because of the increasing rate of tax upon the profits gained. That is not in the interests of the United Kingdom. I know it will be said that this tax is not a bad tax because the Stock Exchange quotations of shares did not go down when it was announced. I want to say once more to the hon. Members opposite that they must realise that the present prices of ordinary shares on the Stock Exchange are affected by two powerful forces other than the rate of tax; the first is that the quantity of shares on offer has been greatly decreased on nationalisation.

The Chairman

The hon. Member for some time appears to have been attacking the Profits Tax as a whole. The subject matter of the Amendment is the extent of relief which can be granted, and he desires to increase it from 15 to 20 per cent. It is not necessary to go into all the details of the Profits Tax as a whole.

Mr. Eccles

With great respect this is a very serious matter this levy of 5 per cent. upon all profits of business. Surely, considering the immense amount of business, one is entitled to employ the argument. I will end by saying that the hon. Members opposite must make up their minds whether they are able to Socialise the whole of our industry in a short time. If they are not, then 80 per cent. of our production remains in private hands to which this tax is very relevant. If they are not prepared to take steps to see that that 80 per cent. of our production shall be enabled to operate robustly they must expect the result of their action to be lower output. I would say our situation is so bad that, whatever else we all do, we ought to try and see that the nationalised sector and the private sector work efficiently from now on. If my hon. Friends and I were——

The Chairman

I have given the hon. Gentleman a great deal of latitude. He may or may not be in Order to employ his argument on the question that the Clause stand part, but the matter to which he must now direct his remarks is the increase of the relief from 15 to 20 per cent.

Mr. Eccles

I am sorry. I am just finishing. I wish to say that this increase in the rate of tax upon undistributed profits is likely to injure the productive capacity of the private sector of industry and I appeal to hon. Members opposite to join with us and support this Amendment. If they care about the standard of life of the people they would care about the volume of production, and it is not possible to argue that the rate of accumulation of profits by companies today is sufficient to measure up to the increase in the prices that have come about.

Sir Arthur Salter (Oxford University)

I wish to support the Amendment. What precisely is the purpose of the Government's proposal to double this tax in relation to their avowed policy of reducing the inflationary position? First of all, to put this in its proper perspective, we must remember, as my hon. Friend the Member for Chippenham (Mr. Eccles) has pointed out, that it is a mistake to think that the general profits of business have risen to the extent the Government seem to think, when compared with the costs of the proper working and development of business enterprises, and if we relate them to the realities of the prices of the things that they have to buy. What is the purpose that the Government have in this increase of tax? It is not, of course, to reduce the purchasing power in the hands of the shareholders, because this relates only to the undistributed profits.

Mr. Gallather (Fife, West)

It is not what we are discussing at all.

The Chairman

Order.

Sir A. Salter

What is it the Government desire to do with regard to these undistributed profits? What will companies do with these profits, which will be reduced if the Government's proposal is agreed to? They might—and this is the only purpose which might be harmful from the point of view of the Government—they might wish to invest them in such a way as to draw unduly on short labour or short materials. But they have to operate anyhow within the framework of the orders, directions and controls which the Government have, both as regards materials and as regards labour. In this respect the Government's controls would be more effective than the tax.

Secondly—a firm might desire to extend a venture or to enter upon a venture which would clearly be desirable in the national interest as creating much more benefit than the amount of labour and raw materials that would be required would create expense. This tax, to that extent, would obviously be against the national interest, as reducing their ability to operate in that way. Thirdly, they might—and very probably would in present circumstances being restricted by the difficulty of obtaining labour and raw materials—keep these profits as a financial reserve. In that case no harm whatever is done, because no inflationary use of the money is made at all.

When the particular situation is passed, and labour and materials are available, then they would be able to go on with the repairs and extensions of business that, in the general national interest, at any time except the momentary present, is clearly needed. As I say, no harm whatever could have been done in the meantime. There are many branch businesses which will be cut off completely. For example, they cannot get timber. They might have been engaged in a business which was very desirable in any circumstances except those of the period in which there is a world shortage of timber. It is obviously desirable that they should have reserves in order to resume their business as soon as this situation is passed.

Then, as my hon. Friend has pointed out, not only is this tax practically of no use from the point of view of being anti-inflationary, but, in many respects, it very likely will, for the reasons he mentioned, be actually inflationary.

Mr. Scollan

On a point of Order. I want to know, since the Committee is discussing this Amendment which proposes to grant a relief of 20 per cent. instead of 15 per cent., if the hon. Member is allowed to ramble all over the Bill.

The Temporary Chairman (Sir Robert Young)

When came in I found a rather wide discussion taking place on this Amendment; but the fact is that there is a simple Amendment before the Committee, and the right hon. Gentleman is wandering far away from it.

Sir A. Salter

With great respect, I should have thought that I was clearly in Order in arguing that such an increase in tax as is proposed on undistributed profits is not in the national interest. As the Rulings are rather strict tonight I will only just mention an argument, which I should like to develop rather more fully when we come to the Question that the Clause stand part. It is that I do not think we can properly consider this increase from 5 to 10 per cent. on undistributed profits without taking into account that it is the last, but by no means the least, of the handicaps being imposed upon free enterprise within the sphere that is being deliberately left to free enterprise by the Government's general policy. I notice your warning glance, Sir Robert, so I will not develop that argument at this moment. However, when we come to the Question that the Clause stand part, we should consider the very important effect of this extra handicap on the incentives to production and enterprise.

9.45 P.m.

Mr. Glenvil Hall

It can be said, with truth, that this is a very simple Amendment. At the same time, the argument has roamed over a wider field than one would have at first imagined it should have done. Many of the arguments which have been put forward, would have been more useful—and, in fact, some of them were put forward—when the Budget of April last was introduced and this change was made by my right hon. Friend the Member for Bishop Auckland (Mr. Dalton). The principle was then laid down that we should distinguish between distributed and undistributed profits. Tonight, we are not setting up any new principle, but merely altering the rates. We are altering them because, as the Chancellor said, experience over the last six months has shown that, high though the tax on distributed profits was—running to 12½ per cent.—it was not enough to deter many companies from paying considerable dividends. This Budget is designed to mop up excess purchasing power and it was thought that, whilst we are imposing very heavy taxes in other directions—for example, increasing the Purchase Tax at all stages—it was not unfair to take something more from those who receive profits from companies.

Mr. Drayson (Skipton)

But they are undistributed.

Mr. Pitman

On a point of Order. Are we not discussing the undistributed profits? Surely, the Amendment is quite clear?

Mr. Glenvil Hall

I. was about to say, when the hon. Member for Bath (Mr. Pitman) interrupted me, that, if in those circumstances, we thought it proper to increase the Profits Tax on distributed profits, then the gap between distributed profits of 25 per cent, and undistributed profits of 5 per cent. was too big to leave as it was. [HON. MEMBERS: "Why?"] I will come to that. It would have left a very big gap between distributed and undistributed profits. The proposal in this Amendment is that we should have left that gap; that the rate on undistributed profits should remain at 5 per cent., whereas we have doubled it to 10 per cent. We have done so for two reasons, as has been said before, very lucidly, by my right hon. Friend. We did so because it seemed to us fair that, if the tax at one stage and in one direction, on distributed profits, is doubled, then something ought to be done on undistributed profits, and we thought we should double it. [HON. MEMBERS: "Why?"] I am coming to that. The first reason was that much of this money, although in theory it was "ploughed back," was in fact spent in directions which were for the moment anti-social. If building permits could be got, it was sometimes spent on improving offices, in extending buildings, and in launching out in directions which perhaps should have been left, and could have been left, for another day.

Mr. Drayson

Will the right hon. Gentleman give an example?

Mr. Glenvil Hall

I could, but it would be invidious to do so. It would be unfair, and in any case it is irrelevant to the argument I am trying to make, which is a serious one. There was this temptation; they had this money left in the firm, they did not distribute it, and they naturally desired to make improvements, and did so. By taking some of that money away, we are robbing them of a temptation. Therefore, we should be credited with righteousness.

The second reason is that the money can fructify in the Treasury to a much greater extent than it could if left in the coffers of private firms. I was asked by the hon. Member for Chippenham (Mr. Eccles) what the Government intended to do with this money. It is, of course, impossible, ranging over the whole field of revenue, to indicate the particular destination of any given sum of money. I agree with him that, since we want to prevent private or public companies using this money for capital investment, it would be wrong if the Government began launching out in capital investment expenditure. As the Committee know, we are to have a Debate quite shortly on the Government's announced decison to cut capital expenditure by no less a sum than £180 million—it was originally £200 million. My right hon. and learned Friend is quite alive to this. If we are saving this money in this direction under this Budget, by this and other means, we realise it must be saved and not used in any inflationary way.

Sir Hugh Lucas-Tooth (Hendon, South)

Will the right hon. Gentleman explain how it is to fructify?

Mr. Glenvil Hall

I think it is self-evident. If the money is saved and is used to a good end, as it would be by this Government, it seems to me that the word "fructify" is the right word to use. Apart from the argument I have used up to now, which may or may not commend itself to hon. Members opposite, the cost makes it essential that the Committee should reject this Amendment. If this Amendment were accepted, it would reduce the yield of the Profits Tax by no less than £23 million a year gross, and if Income Tax is taken into account, the net reduction would be something like £13 million or more. My right hon. and learned Friend cannot, in this Supplementary Budget, afford to lose a sum of that kind. Therefore, for that reason alone I must ask the Committee to reject this Amendment.

Sir Ian Fraser (Lonsdale)

The Financial Secretary, who said that he could not conceive how this money is to be used, ought to know that it is impossible to fructify if contraceptives are applied. I ask the right hon. Gentleman, however, to apply his mind to the special circumstances of a company which I know very well, because it is one in which my family is interested. I make no apology for mentioning this, because I am not concerned about my interest, or my family's interest, but about the principle. This is a company which uses an extremely expensive material, namely tin. Tin is now many hundreds of pounds a ton, and its price is now two and a half times above the prewar level. If a profit is made in smelting or refining a metal like tin so much the better. That is what a smelter and refiner hopes to do. Our company has made a profit for each of the last 150 years except three. Within recent years we have made bigger profits, because of the extremely steep rise in the price of this metal.

I want Members who have had no experience of sitting on boards, and considering these matters—and I say this with all respect—to follow what happens when a company like this makes an excep- tional profit. It does not benefit the shareholders, or the managers. It puts the company into an extraordinarily difficult position. We have to expect that the price of tin will fall again when the world market comes back. Inevitably, that will be the case one day. We cannot, at the moment, hedge on our purchases of tin. Members will appreciate that the common practice is to sell a ton of tin on the London market while buying a ton of tin in Bolivia, or from the United States. We cannot do that, because there is no London market. We therefore find ourselves, for the first time in our history, carrying two or three times the nominal capital of our company, with overdrafts from the bank, not because we want to, but because we have to. Here is a point which is relevant to this Amendment. The only way we can safeguard ourselves against a phenomenal fall in the value of tin, which would probably put us out of business—and I would remind the Committee that we have been in business for 150 years—is to carry a great amount of our profit to reserve. When we do that we pay ordinary tax on it, and now we are to be called upon to pay double tax.

It is nonsense to say that we shall be stopped from making any expenditure which would be inflationary. We do not want to spend money; we want to try and keep it in order to stand a fall in the price of the commodity we are handling. We are not gamblers in tin; we are smelters. We want to make a few pounds per ton on refinement. We cannot hope to save the business from disaster when the price of metal falls unless we can put money to reserve. It is not that we want to pay bigger dividends. Members opposite may take some pride in the fact that there are directors, managers, and workmen of the fourth generation in this business. There are 400 to 500 people employed, and this is the hazard we are up against. We do not mind paying 25 per cent. on our profits which are distributed—we can stand that—but we mind terribly having the amount doubled on the profits which we are setting up against a rainy day. We do not believe that all is going so swimmingly under this Government or perhaps any other Government. We believe that there are troubles around the corner, that great drops in prices are to be feared against which wise businessmen create reserves to safeguard themselves.

10.0 p.m.

The right hon. Gentleman said that because they have doubled the tax on distributed profits—he says this in an airy way which demonstrates that he does not know his subject—it would not be fair if they did not do so on undistributed profits. This is not a question of fairness. It is a question of bad policy for the businesses on which all the wealth of this country depends, and on which all the hopes of the Socialist Party depend for their schemes. They do not realise that the only wealth in this land comes out of the work of the workers. [Interruption.] I am glad then that they do realise it; and that 80 per cent. of the workers are employed in private business. Great unemployment and dislocation will fall on them and upon the workers, if the Government do not leave it in the hands of these businesses to create reserves against the bad times that may be coming. There is a great difference between taxing distributed profits, which takes money out of people's pockets, and taxing undistributed profits which are our bulwarks against bad times. For these reasons, I ask whether there are not any hon. Members opposite—who understand what I am saying and who think that I am sincere—who will bring some pressure on the Financial Secretary, who clearly does not understand this matter, to alter his view about it.

Mr. Diamond (Manchester, Blackley)

May I answer the invitation of the hon. Member for Lonsdale (Sir I. Fraser)), not only for myself, but for all hon. Members on this side. We appreciate the sincerity with which he speaks, and I followed every word that he said. Because of his speech, I appeal to the Financial Secretary and to the Chancellor of the Exchequer in no circumstances to accept the Amendment. It is nonsense to suggest that there are any companies which are likely to be seriously embarrassed, as a result of this small addition to the Profits Tax, in keeping adequate reserves to enable them to go through any difficult times with which they may be faced. The arguments put forward more or less cancel one another out.

It is nonsense for the hon. Member for Chippenham (Mr. Eccles), whose knowledge of the philosophy of Socialism is only equalled by his knowledge of what goes on in business circles, to say that we are fighting against profits. I do not want to develop that unduly, because I shall be out of Order. I merely want to point out that the great interest that the present Government have taken in the field of industry has been to make it more competent and efficient, and to enable it to earn more profits. Once these profits have been earned, the Chancellor has pointed out ways in which they can be well used. Pressure has been all the time on trying to make businesses more and more efficient, so that they can earn more and more profits. That is what Socialism stands for—[Laughter.] I appreciate the laughter, and I shall listen with very great interest to the reasons given against what I am saying. The hon. Member for Chippenham went on to say that all these funds would be needed because of the repairs, renewals, and replacements which companies had to undergo. Of course, he is quite wrong. By their definition, repairs, replacements and renewals are things which do not come out of reserve. They are by definition ordinary current expenditure, and they are not at all considered in arriving at an assessment for profits tax. Perhaps the hon. Gentleman would like to intervene.

Mr. Eccles

I would. It is perfectly true that a company can charge the whole of the original cost of a piece of plant, but if, when it comes to buying a new machine that costs more, it will not be able to get back against profits which were earned on the old machine, enough money to buy another machine, it will have to get the money from somewhere else and it will go to cash reserve. If there are no cash reserves it will have to borrow.

Mr. Diamond

May I refresh the hon. Member's memory of what he said? I noted what he said and I do not wish to do him an injustice so I will read it. He said, "Repairs, replacements and renewals." There is no use answering one argument by bringing in something else. These are things for which reserves are not used. He is now making an entirely different point, and the point he is making now is that these reserves are needed for expansion. [HON. MEMBERS: "For replacement."] For replacement? I do not wish to be technical, but replacement is the very reverse of expansion.

Mr. Jennings (Sheffield, Hallam)

At a higher cost.

Mr. Diamond

No.

Mr. Jennings

If an item is replaced by a more efficient item, would it not be increasing the cost of production in that factory?

Mr. Diamond

If a company replaces an item by a more efficient item—the hon. Member speaks rather vaguely for one from his distinguished profession—it is doing two things—it is partly replacing and partly improving. The second one is expansion, and hon. Members on the other side of the Committee know these things very well. This tax is aimed at reducing the inflationary pressure on capital costs, the very thing for which hon. Members opposite were clamouring long before this Budget was introduced. Now when it is introduced and this tax is affecting their pockets as well as other people's—I speak with no disrespect, and when I say their pockets are affected, I mean it is affecting interests in which they are primarily concerned as opposed to interests with which hon. Members on this side are concerned—there is considerable criticism. Hon. Members opposite always claim—and I am sure they are right—to be associated with companies and companies' profits. The last speaker added point to that when he said how well he understood these matters and how sorry he was that so few of us on this side of the Committee understood these things.

Sir I. Fraser

Since the hon. Member for Blackley (Mr. Diamond) has referred to me, may I make it quite clear that my own company has been in existence for 150 years, and we are concerned with 500 people who are working for us as well as for our own business? It is perfectly legitimate to be concerned after one's own interests, but that does not mean we are not concerned with the men who are working for us and have worked for us, as their fathers have done before them, for many years.

Mr. Diamond

We on this side, too, could give such instances. The hon. Gentleman the Member for Lonsdale referred to his firm which employs 500. I could refer to a firm in which I happen to be interested where there are 1,000 employees. My point of view, however, is a little larger than hon. Members opposite. We on this side are concerned with the welfare of all people and we say that inflation has got to be controlled in their interests. The way to control it is at the particular point where it is very difficult indeed to control it, namely, on the savings of incorporated companies and we think that we can assist in that way by reducing the amount of it, which is going to be done by this tax. Therefore, I hope that the Financial Secretary will not yield to this pressure, and that on any future occasion when he wants a little more revenue he will again look in this very direction.

Sir Peter Bennett (Birmingham, Edgbaston)

I was very disappointed at the reply of the Financial Secretary. He wound up by saying that the Chancellor could not afford this concession, apart from anything else. We have been told repeatedly that the Budget was not introduced for the purpose of raising additional revenue but for another purpose altogether. Nevertheless the Financial Secretary wound up with those words, after he had lectured us for being anti-social and saying that he wanted to remove temptation from us. For years, the story from the Front Bench opposite, both in this Government and in the Government that preceded it, has been, "For Heaven's sake do all you can to plough profits back, because they are needed in the business." It is rather jumping from one side of the fence to the other. We have an Amendment which is striving to put right the suggestion on the part of the Government that they should increase from one shilling in the £ to two shillings the tax upon reserves which have been reinvested in the businesses concerned. We have been told for years that that should be our aim.

There seems to be a common idea that such reserves are cash in the bank. That error is not confined to Members in this Committee. I find it everywhere. The error is in thinking that profits are always in money form, but nothing could be further from the truth. These reserves are needed for increased production, which we have been urged is very necessary if we are to survive as a nation. We need this money and these reserves, which are not in the form of money but are in the form of working capital. [HON. MEMBERS: "Oh."] It might surprise some hon. Gentlemen who have spoken today to learn that some of the biggest companies at the moment are looking ahead and are considering that in the next year or so they will have to sell Government securities which they purchased during the Government's war drive and have held ever since. They will have to sell them in order to provide working capital for the businesses, as they are today. Now we are being told that all that forward thinking is to be ignored and that people who have striven and are striving to reinvest in their businesses money that they have earned, are to have double the amount taken in taxation.

It is not only a question of replacing or expanding. We have been asked to cut down as much as possible. If we study balance sheets we shall see how difficult firms are finding it to maintain stocks at present rates because of difficulties connected with raw materials. We have to carry a great deal more stock because things are so very much out of balance. A large amount of material which would normally have been fabricated and sent out is held, sometimes because the firm is held up for some small part such as a spring. Such metal parts are difficult to obtain in existing circumstances. Firms who would make them are piled up with work and do not want to make small parcels of steel and convert them into tiny springs. It is one long struggle today to keep a factory going. The result is that raw materials accumulate and the working process is very much slower. At every turn, something is going wrong.

The reserves which we have been urged all these years to create are more needed now than ever before. Unless profits are made—the hope of our existing as a nation will disappear if we do not make them—we cannot reinvest them in the business. If we do not reinvest them in the business, what is in front of us? We have to go to the bank. The bank does not let us have money permanently for investing in our business. The bank lends us money temporarily, and we must make arrangements to get additional capital outside. At a time when the Capital Issues Committee have the brake on and we do not want to have to raise additional capital, when Government securities are being sold and every effort is being made to save working capital, the Government have chosen this moment to make it more difficult for us to carry on. I always maintained that taxing undistributed profit was a vicious principle, and I end by saying that it does not make it any better for the Financial Secretary to say "all we have done is to double it."

10.15 p.m.

Mr. Scollan (Renfrew, Western)

I would not have intervened in this Debate had it not been for what was said by the hon. Member for Chippenham (Mr. Eccles). This Amendment has a tendency, which we all deplore, to stop the distribution of profits while maintaining a high profit level. Companies are distributing at a low profit level and building up towards reserves that ultimately, when the time is favourable will be distributable in bonus shares. [HON. MEMBERS: "Oh."] That has been done before, and it is no use hon. Members saying "Oh." One of the tenets of the ordinary investor is that he has a legitimate right to a fair return on his investment. I have heard that from the Opposition in almost every Debate, but nobody has yet defined what a legitimate return is, how much it should be, for how long it should be paid and whether the capital should be in perpetuity.

At the moment we have depreciation funds, reserve funds and the distributed dividend. In the case of the depreciation fund, one is supposed to replace any machinery that goes out of production. The reserve fund is for emergencies and an emergency may mean fluctuations in the market or something going wrong, in which case the reserve would be called upon. But the position today is as different from the prewar position as night is from day, for the reason that the whole of the productive process in any industry in this country today is almost guaranteed, a thing industry never had before. The old speculative capital of the past had something to be said for it with regard to risks, but the present day capital has not. [HON. MEMBERS: "Nonsense."] There is no risk. It is perfectly obvious from statements made in the Debate that while hon. Members opposite work in the machine and operate it, they do not understand it. The risks of the pioneers in any industry meant that at that period not knowing exactly where they were, too many went into it, and the result was that some failed. That was the risk, but that is not the case today.

That is the reason why there should not be this abatement on the maintained profits that are to be distributed. Is it not obvious that if that concession were given any far-seeing company would do what the hon. Member for Lonsdale (Sir I. Fraser) described in his perfectly sincere and honest manner? He did not see anything wrong with it. The profits made today were being ploughed back into raw materials for the next five or six years. [HON. MEMBERS: "That is business."] Of course, but do hon. Members not know that business is generally roguery? Those who have undistributed profits today, obviously hope to do something with them, and one of the sensible things to do is to buy raw materials ahead, if there is no other method of hiding them. If, however, there is a tax upon them, it will relieve the pressure on those raw materials which are being bought ahead are buying.

One thing that amazes me is that not a single word was said by the mover of the Amendment or any of his supporters as to why we should, instead of having 15, allow 20. Nothing was said about that, there was just the old cry about the difficulties we are having in running industry at present, yet the fact remains that you are showing higher profits than before the war. [HON. MEMBERS: "No."] Yes, higher profits than have been shown before, and the difficulty about the higher profits is that you are afraid to distribute them because of the higher taxation on them. You want to hold them, and you do not want to be taxed on them, until there is a favourable opportunity for reinvesting them as new capital for the extension of business. We on this side sincerely hope that every industry in this country will expand, make no mistake about it, but we hope that for capital investment you will dig your hand down for the capital and not have watered stock by distributing bonus shares on hidden profits made during the war and postwar period. For that reason, I hope the Chancellor will not alter this part of the Clause.

Sir W. Smiles

The hon. Member for West Renfrew (Mr. Scollan) said that all the industries in this country were making large profits. I hope he has noticed that Miles Aircraft Company went into liquida- tion only last week, and that the Cunliffe Owen Aircraft Company have stopped manufacturing a plane. That was mentioned only 10 days ago.

However, I will speak about other companies which operate outside this country but are registered here. I believe that raising this tax on the undistributed profits will have the effect of frightening away capital from this country. It is no use our living in a dream and imagining that this is the only country in the world where people want to register a company. After all, we had a shock on 15th July last when we saw that many foreign countries which had money invested in sterling in this country wanted it changed into dollars. The argument of the learned Solicitor-General was that because the Coalition Government in 1937 imposed a National Defence Contribution to rearm for the war which people thought might come with Germany, that because this tax was right then at a level of 2½ per cent., and went up to 5 per cent., it must be right at a higher figure today. I suppose he would say that a tax which was right at 1 per cent. might still be right at 99 per cent. I call that an absurd argument for an hon. and learned Gentleman to use.

It is no use pretending that everybody is falling over himself to invest money and register companies in this country. There are great companies registered outside like the International Nickel Company and the Brazilian Traction which is registered in Canada and the Anglo-American Corporation in South America. There are still chances in the British Empire for companies to be registered outside this country at much more favourable terms in regard to taxation. For instance, there is the United Asbestos Company with one of its largest mines in Southern Rhodesia still registered in this country, but one wonders how long that will go on. There is the great Roan Antelope and other copper companies which are registered here which still operate in Northern Rhodesia but we do not find Mr. Williamson, who found that great pipe of diamonds in Tanganyika during the last five years by his own efforts, registering here. He has registered his own company in Tanganyika where it will be much better off. As regards taxation, the great Burma Corporation which has the largest lead producing mine in the world is registered in Burma. We cannot expect that every company will wish to register in London.

Some hon. Members have mentioned how machinery and commodity costs have gone up recently. I know a company which ordered an engine from Manchester immediately the war ended. The cost which was quoted was £4,000 subject to the usual clauses that if engineers wages went up or costs increased the price would also be increased. That engine is to be delivered in a month's time, but instead of £4,000 the cost will be £6,000. There are companies which have to buy nitrogen in whatever form they can buy it whether as nitrate of soda or sulphate of ammonia, and nitrogen has gone up at least six times and in some cases nine times on what it was prewar. In all these cases every commodity that is used has doubled or quadrupled and for that reason it would be a very serious blow to the industry of this country if the tax on undivided profits were doubled in the way which has been proposed.

Colonel Crosthwaite-Eyre

A great many things have been introduced in this discussion. The hon. Member for West Renfrew (Mr. Scollan) said that the only reason we were proposing this Amendment was in order to safeguard bonus shares. He surely knows that, irrespective of this tax, company procedure will still be followed in relation to bonus shares, and the merits of bonus share procedure has nothing whatever to do with the tax under consideration. Later in his speech he made the only honest statement which has come from the other side of the Committee. This Amendment is opposed because of the hatred of hon. Members opposite of anything to do with companies. The hon. Member waved his Order Paper with great effect, and made this honest contribution—

Mr. Scollan

I do not want the hon. and gallant Member to misunderstand or misquote me. I did not say anything which would indicate hatred of a company at all. I said that the practice which was being observed by many companies was that of hiding profit on which they should pay taxes, and handing it out on shares.

Colonel Crosthwaite-Eyre

I tried to indicate that, and the very points which the hon. Member mentioned are the ones which cannot be hidden, and can only show what I said, that members opposite were trying to make political prejudice out of a perfectly clear issue.

The hon. Member for Blackley (Mr. Diamond) made a very interesting statement in which he said Socialism wished industry to be more competent and more efficient and that was what Socialism stood for. I hope he will have a talk with the hon. Member for West Renfrew (Mr. Scollan) in a quiet place. It he is serious about that, when this question comes to a Division, as it will, we will find him in the Lobby with Members on this side. Unless he is prepared to support a simple issue like this to promote the recovery of industry not only for the moment but for the future, then indeed his words are a hollow mockery.

The hon. Member said, as did the Financial Secretary—I am glad to find two Members, one on the back benches and one on the Front Bench in agreement—that the main issue was, if profits were ploughed back, that those profits would in fact create an inflationary pressure and try to escape in some form of capital investment. If the Financial Secretary and the hon. Member for Blackley are correct, it simply means that the Government have no confidence in the line they are pursuing. They are saying that capital expenditure is a matter which in fact they cannot control and, therefore, saying, that all those controls they are constantly telling us are so essential are bluff. That is the only conclusion we must come to.

Mr. Diamond

I did not use the word "escape." I only tried to make the point that this tax would reduce inflationary pressure. If the hon. Member's Amendment were accepted, it would mean more money chasing less goods.

Colonel Crosthwaite-Eyre

The hon. Member has taken up the point, but I actually quoted the Financial Secretary, and he has not risen. Secondly, the Financial Secretary said these would fructify in the pockets of the Treasury and would not result in capital expenditure. Are we then to assume that this tax is being taken from the reserves of capital used in company investment to meet current needs of the Treasury, because if this is so, far from fructifying in the pockets of the Treasury, they are merely being used to pay current taxes and have nothing whatsoever to do with the deflation he requires. The third, and possibly the most logical of all his arguments, was that the Treasury could not afford it. Hon. Members on this side have already said that this Budget has nothing to do with what we can or cannot afford.

Mr. Glenvil Hall

I am sorry to interrupt, but this point has been made against me twice. Perhaps I may explain what I meant when I spoke about my right hon. and learned Friend not being able to afford it. In a sense the revenue is not needed. It is clear in all quarters of the Committee we are going to have something over £300 million of surplus in this financial year, and in this sense the revenue is not needed, but my right hon. and learned Friend could not afford to let this £23 million gross go because it was needed as part of the money he has to raise in order to help to mop up this purchasing power which is moving around.

Colonel Crosthwaite-Eyre

The right hon. Gentleman's interruption leads me to his last argument, whether this tax is deflationary or not. This is that in the view of hon. Members opposite, a company putting money to reserve in some way hopes to screw some benefit out of it. Is it going to put its money away at the moment and suffer a 10 per cent. depreciation on what it so reserves or spend it when it can get a hundred pounds for every hundred pounds it spends? If they take this view, what is the action the company is going to pursue? I put that to those who are so constant in their deprecation of commercial honesty as practised in this country.

Is not the fact one very simple thing? We know that through the war and through present circumstances in practically every industry we are not meeting the replacements we need. We know, further, that the cost of replacement has risen. I am concerned with a company—a merchandising concern—where we have found it is practically impossible ever to replace an item we need at the original cost plus our added profit. We are constantly, as indeed are all companies, finding that our cash resources are quite inadequate to meet immediate needs.

This tax as it stands now is a tax on the future of this country; a tax on the improvement of our industries and a tax on the future effort of the nation. We see the hoardings about the country covered with posters stressing the need for endeavour and enterprise in one form or another. They are posters issued by the Government, but this tax which is proposed by the Government is a complete violation of the spirit to which their propaganda is addressed. In one voice the Government says "strive for better living," and in the other the Government is denying those who are responsible for production one of the most important tools for the job. For every pound they gather in under this tax, the Government is depriving the future producers of this country the tools by which we should be able to win the benefits of the peace which we have earned by the winning of the war.

Mr. Pitman

In dealing with this question of inflationary or deflationary effect one cannot generalise. Company "A" may be intending to keep this money in cash, and that can be said to be deflationary. Company "B," as has been pointed out, may be said to be inflationary in its practice if it does any expansion or goes in for investment of any kind. Instances of that sort can be continually put and we shall go backwards and forwards throwing examples at each other because there can be such clear instances which do not lend themselves to generalisation. But it is obvious to me that the view of the hon. Member for Blackley (Mr. Diamond) is the more probable, that on balance firms will tend to go in for expansion and development if they have got the cash there; but it is by no means universal and it is quite impossible to generalise.

But there is an aspect of this on which one can generalise, and it is the reason why I support the Amendment. That is that if one has a very big tax on retained profits one encourages people to go in for expansion on revenue account and not on capital account. That is to say, reductio ad absurdum, that if the tax on undistributed profits went as high as 17s. 6d. in the pound, then anything which a company did to reduce its profits by revenue account expansion and development would mean they would get a pound's worth of expansion for only 2s. 6d. in cost. I think that is an aspect of this tax which has not been sufficiently appreciated by the Chancellor of the Exchequer, and indeed, by those on the benches opposite. That is a very strong reason why the tax on profits which are not distributed should be kept down. Let them, on the other hand, keep a tax discriminating on those profits which are distributed. If a company distributes, it will not spend that money on frivolous things; but if the tax is excessively high on profits which are not distributed, there is this temptation to expand the revenue account. I leave that as a contribution to the Committee, in the hope that it will, if not now, in the future, keep down the tax on undistributed profits.

Mr. Assheton

I would like to intervene for just a few minutes in the Debate to comment on one or two speeches which have been made by hon. Members on the other side of the Committee. We started off with a clear and lucid speech from the hon. Member for Chippenham (Mr. Eccles) in which he made what I thought was a quite unanswerable case. I listened with the greatest care to hon. Members opposite, and only in the argument of the hon. Member for Blackley (Mr. Diamond) did I detect anything worth answering. If I may be allowed to say so, the hon. Member for Bath (Mr. Pitman) has already answered that argument.

The hon. Member for Blackley suggested that this increase in the tax on undistributed profits has to some extent reduced pressure on capital goods. I can see that there is something in that argument. But the point which the hon. Member for Bath makes is much stronger and has a more powerful influence. This is driving those in charge of companies all the time to spend more and more from revenue account, because the temptation to make profits is getting less and less. So, I think the inference on that side outweighs the inference which the hon. Member for Blackley suggested. But it is a matter of opinion; I concede that to him. I am sure that hon. Members on this side of the Committee share my opinion and that of the hon. Member for Bath—rather than the opinion of the hon. Member for Blackley.

Mr. Diamond

May I tell the right hon. Gentleman that he will give my constituency immense pleasure if he can give the name of my constituency its proper pronunciation.

Mr. Assheton

I sometimes suffer from having my name mis-pronounced, so I have every sympathy with the hon. Member. If I may proceed to the speech of the hon. Member for West Renfrew (Mr. Scollan)—I think he has withdrawn for a short time, which is quite reasonable—I would say that he did not seem to understand that capital is generally found out of savings. He did not seem to be at all against capital development. In fact, he told the Committee that he was very keen on it. But he did not want money to be accumulated with a view to forming capital. The hon. Member did not say how else that capital should be formed. So I must leave this point as the hon. Member is not here to answer the question.

Of course, the Financial Secretary to the Treasury, when he came to reply, made a very long speech, but I think there were only two points in that speech. If I am doing the hon. Gentleman an injustice, perhaps he will tell me. The first point was that the gap between 5 per cent. and 25 per cent., which would be a consequence of this Amendment being adopted, was too great. For the life of me, I cannot see the force of that argument. I have thought about it ever since the right hon. Gentleman said it, and I have no idea what his object is. If the right hon. Gentleman will be good enough to tell us, I shall be very grateful. It was as I feared; the argument is entirely without substance. There is nothing in it. It was just a collection of words strung together, to which no meaning is to be attached.

The next argument he used—and I hope he will tell me whether I am wrong in this criticism—was to suggest that if you took this money from the companies, where it would form a reserve, and put it into the Exchequer that money would somehow fructify, but all the time that I was at the Treasury I never saw money fructify there. That is one thing which does not happen to money when it gets into the Treasury. Never, never did I see any money fructify. That is the very last thing that happens to money in the Exchequer. It comes pouring in on one side and it pours out as fast on the other side. This money taken away from the reserves of companies will just be spent by the Chancellor of the Exchequer.

Our Amendment, therefore, suggests that more money should be put to reserve. What is it to be used for? There are all sorts of reasons. The first I would suggest is that put forward by the hon. Member for Edgbaston (Sir P. Bennett)—to take care of finance of stock-intrade because the value of all stock-intrade has gone up tremendously and the capital has not increased proportionately. Indeed many companies are very Much under-capitalised and must make capital out of savings. The best thing to do is to pile up reserves in their own companies. That is a most important thing.

Another thing for which money is wanted is obsolescence. The hon. Member for Wackley has explained with great care the difference between renewals and replacements, and so on, but he did not tell us about obsolescence. Take the case of a big property company. They put aside money to reserve, but they are not in a position to renew their properties when they come to need it. Many of those old buildings ought to have been pulled down years ago. The reason they were not is that they have had no Inland Revenue allowance for obsolescence. I agree with the point made by the hon. Member for Chippenham about money

put into savings or ploughed back into companies, and I suggest to the Committee that they will be very wise indeed to accept this Amendment. The Financial Secretary rejects the proposals we have made on this side. We want to express very fair criticisms and we will divide the Committee on the subject.

Mr. Eccles

May I reply to what the Government have said? We have been discussing the way the £23 million ought to be left to the companies of this country, or in the national interest be taken into the Exchequer. I want to point out that no serious arguments at all have been adduced to show us whether the sum of £23 million additional working capital to the private businesses of this country is in the interest of production or not. We have had no serious arguments at all and I hope my hon. Friends will press this Amendment to the Division.

Question put, "That 'fifteen' stand part of the Clause."

The Committee divided: Ayes, 247; Noes, 96.

Division No. 37.] AYES. [10.49 p.m.
Adams, Richard (Balham) Colman, Miss G. M. Gibbins, J.
Alexander, Rt. Hon. A. V Comyns, Dr. L. Gibson, C. W.
Allen, A. C. (Bosworth) Corbet, Mrs. F. K. (Camb'well, N.W.) Gilzean, A.
Allen, Scholefield (Crewe) Corlett, Dr. J. Glanville, J. E. (Consett)
Anderson, A. (Motherwell) Corvedale, Viscount Goodrich, H. E.
Anderson, F (Whitehaven) Crawley, A. Granville, E. (Eye)
Attewell, H. C. Daggar, G. Grenfell, D. R.
Austin, H. Lewis Daines, P. Grey, C. F.
Awbery, S. S. Davies, Edward (Burslem) Grierson, E.
Ayrton Gould, Mrs. B. Davies, Hadyn (St. Pancras, S.W.) Griffiths, D. (Rother Valley)
Bacon, Miss A. Davies, R. J. (Westhoughton) Gunter, R. J
Balfour, A. Davies, S. O. (Merthyr) Guy, W. H.
Barstow, P. G. Deer, G. Haire, John E. (Wycombe)
Barton, C. de Freitas, Geoffrey Hale, Leslie
Bechervaise, A. E. Delargy, H. J. Hall, Rt. Hon. Glenvil
Bellenger, Rt. Hon. F. J. Diamond, J. Hannan, W. (Maryhill)
Benson, G. Dobbie, W Hardy, E. A.
Berry, H. Dodds, N. N Hastings, Dr. Somerville
Beswick, F. Donovan, T. Henderson, A. (Kingswinford)
Bing, G. H. C. Driberg, T. E. N. Henderson, Joseph (Ardwick)
Binns, J. Dugdale, J (W. Bromwich) Herbison, Miss M.
Blackburn, A. R. Ede, Rt. Hon. J. C. Hewitson, Capt. M.
Blenkinsop, A. Edwards, John (Blackburn) Hobson, C. R.
Soardman, H Edwards, N. (Caerphilly) Hoiman, P.
Bowden, Fig.-Offr. H. W. Edwards, W J. (Whitechapel) House, G.
Bowles, F G. (Nuneaton) Evans, Albert (Islington, W.) Hoy, J.
Braddock, Mrs. E. M. (L'pl, Exch'ge) Evans, John (Ogmore) Hubbard, T.
Braddock, T. (Mitcham) Evans, S. N. (Wednesbury) Hudson, J. H. (Ealing, W.)
Bramall, E. A. Ewart, R. Hughes, Emrys (S. Ayr)
Brook, D. (Halifax) Fairhurst, F. Hughes, Hector (Aberdeen, N.)
Brooks, T. J. (Rothwell) Farthing, W. J. Hughes, H. D. (W'Iverh'pton, W.)
Brown, George (Belper) Fernyhough, E. Hutchinson, H. L. (Rusholme)
Burden, T. W. Field, Capt. W. J. Hynd, J. B. (Attercliffe)
Butler, H. W (Hackney, S.) Fletcher, E. G. M. (Islington, E.) Isaacs, Rt. Hon. G. A.
Champion A J. Foot, M. M. Janner, B.
Chetwynd, G. R. Forman, J. C. Jay, D. P. T.
Cobb, F. A. Fraser, T. (Hamilton) Jeger, G. (Winchester)
Cocks, F. S. Freeman, Peter (Newport) Jeger, Dr. S. W. (St. Pancras, S E)
Coldrick, W. Gallacher, W. Jones, D. T. (Hartlepool)
Collindridge, F. Ganley, Mrs. C. S. Jones, Elwyn (Plaistow)
Collins, V. J. George, Lady M. Lloyd (Anglesey) Keenan, W
Kendall, W D. O'Brien, T. Soskice, Maj. Sir F
Kenyon, C Oldfield, W. H. Steele, T.
King, E. M. Oliver, G. H. Stewart, Michael (Fulham, E.)
Kinghorn, Sqn.-Ldr. E. Paget, R. T. Stokes, R. R.
Kinley, J. Parker, J. Stress, Dr. B.
Lang, G. Pearson, A. Sylvester, G. O.
Lee, F. (Hulme) Peart, T. F. Taylor, H. B. (Mansfield)
Leonard, W. Plaits-Mills, J. F. F. Taylor, R. J. (Morpeth)
Levy, B. W. Poole, Cecil (Lichfield) Thomas, D. E. (Aberdare)
Lewis, T. (Southampton) Porter, E. (Warrington) Thomas, I. O. (Wrekin)
Lindgren, G. S. Porter, G. (Leeds) Thomas, John R. (Dover)
Lipton, Lt.-Col. M. Price, M Philips Thorneycroft, Harry (Clayton)
Longden, F. Proctor, W. T. Tiffany, S.
Lyne, A. W. Pryde, D. J Usborne, Henry
McAdam, W. Pursey, Cmdr. H. Wallace, G. D. (Chislehurst)
McAllister, G. Randall, H. E. Wallace, H. W. (Walthamslow, E.)
McGhee, H. G. Ranger, J Warbey, W. N.
Mack, J. D. Reeves, J. Watkins, T. E.
Mackay, R. W. G. (Hull, N.W.) Rhodes, H. Watson, W. M.
McKinlay, A. S. Ridealgh, Mrs. M. Webb, M. (Bradford, C.)
Maclean, N. (Govan) Robens, A. Wells, P. L (Faversham)
McLeavy, F. Roberts, Emrys (Merioneth) West, D. G.
MacMillan, M. K. (Western Isles) Roberts, Goronwy (Caernarvonshire) Wheatley, J. T. (Edinburgh, E.)
Macpherson, T. (Romford) Roberts, W. (Cumberland, N.) White, C. F. (Derbyshire, W.)
Mallalieu, J. P. W. Robertson, J. J. (Berwick) While, H. (Derbyshire, N.E.)
Manning, C. (Camberwell, N.) Ross, William (Kilmarnock) Whiteley, Rt. Hon. W.
Marquand, H. A. Royle, C. Wilcock, Group-Capt. C. A. B.
Mathers, Rt. Hon. George Sargood, R. Willey, O. G. (Cleveland)
Medland, H. M. Scollan, T. Williams, D. J (Neath)
Millington, Wing-Comdr. E. R. Scott-Elliot, W. Williams. J. L. (Kelvingrove)
Monslow, W. Shackleton, E. A. A. Williams, W. R. (Heston)
Moody, A. S. Sharp, Granville Willis, E.
Morley, R. Shawcross, C. N. (Widnes) Wills, Mrs. E. A.
Morgan, Dr. H. B. Shurmer, P. Wilson, Rt. Hon. J. H.
Morris, Lt.-Col. H. (Sheffield, C.) Silverman, J. (Erdington) Wise, Major F. J.
Morris, P. (Swansea, W.) Silverman, S. S. (Nelson) Woodburn, A.
Moyle, A Simmons, C. J. Woods, G. S.
Murray, J. D. Skeffington-Lodge, T. C. Wyatt, W.
Meal, H. (Claycross) Smith, C. (Colchester) Yates, V. F.
Nicholls. H. R. (Stratford) Smith, Ellis (Stoke) Younger, Hon. Kenneth
Noel-Baker, Rt. Hon. P. J. (Derby) Smith, S. H. (Hull, S.W.)
Noel-Buxton, Lady Snow, J. W. TELLERS FOR THE AYES:
Mr Popplewell and Mr. Wilkins.
NOES.
Amory, D. Heathcoat Glyn, Sir R. Noble, Comdr. A. H. P.
Assheton, Rt. Hon. R. Grimston, R. V. Nutting, Anthony
Baldwin, A. E. Hare, Hon. J. H. (Woodbridge) O'Neill, Rt. Hon. Sir H.
Barlow, Sir J. Harvey, Air-Comdre. A. V. Osborne, C.
Beechman, N. A. Headlam, Lieut.-Col. Rt. Hon. Sir C Peto, Brig. C. H. M
Bennett, Sir P. Henderson, John (Cathcart) Pitman, I. J.
Birch, Nigel Hollis, M. C Prior-Palmer, Brig. O.
Boles, Lt.-Col. D. C. (Wells) Holmes, Sir J. Stanley (Harwich) Raikes, H. V.
Bowen, R. Howard, Hon. A. Rayner, Brig. R.
Bower, N. Hulbert, Wing-Cdr. N. J. Roberts, H. (Handsworth)
Boyd-Carpenter, J. A. Joynson-Hicks, Hon. L. W. Ropner, Col. L.
Braithwaite, Lt.-Comdr. J. G. Keeling. E. H. Ross, Sir R. D. (Londonderry)
Buchan-Hepburn, P. G. T. Lambert, Hon, G. Salter, Rt. Hon. Sir J. A.
Butcher, H. W. Legge-Bourke, Maj. E. A. H. Sanderson, Sir F.
Challen, C. Lindsay, M (Solihull) Shepherd, W. S. (Bucklow)
Channon, H. Lloyd, Selwyn (Wirral) Smiles, Lt.-Col. Sir W
Clarke, Col. R. S. Low, A. R. W. Spearman, A. C. M.
Corbett, Lieut-Col. U. (Ludlow) Lucas-Tooth, Sir H. Stanley, Rt. Hon. O.
Crookshank, Capt. Rt. Hon. H. F. C. Macdonald, Sir P. (I. of Wight) Strauss, H. G. (English Universities)
Crosthwaite-Eyre Col. O. E. Mackeson, Brig. H. R. Studholme, H. G.
Crowder, Capt. John E. McKie, J. H. (Galloway) Thorneycroft, G. E. P. (Monmouth)
Darling, Sir W. Y. Maclay, Hon. J. S. Thorp, Lt.-Col. R. A. F
Davidson, Viscountess Macpherson, N. (Dumfries) Turton, R H
De la Bère, R. Marples, A. E. Wakefield, Sir W. W.
Digby, S. W. Marsden, Capt. A. Ward, Hon. G. R.
Dower, Col. A. V. G. (Penrith) Marshall, D (Bodmin) Wheatley, Col. M. J. (Dorset, E.)
Drayson, G. B. Medlicott, F. White, Sir D. (Fareham)
Dugdale, Maj. Sir T. (Richmond) Mellor, Sir J. Williams, C. (Torquay)
Eccles, D. M. Molson, A. H. E. Willoughby de Eresby, Lord
Erroll, F. J. Moore, Lt.-Col. Sir T. Winterton, Rt. Hon Earl
Fox, Sir G. Morrison, Maj. J. G. (Salisbury)
Fraser, Sir I. (Lonsdale) Neven-Spence, Sir B. TELLERS FOR THE NOES:
Gage, C. Nicholson, G. Mr. Drewe and Major Conant.

Question put, and agreed to.

To report Progress and ask leave to sit again.—[Mr. R. J. Taylor.]

Committee report Progress; to sit again Tomorrow.