§ It is hereby declared that, for the purpose of Excess Profits Duty, profits of any trade or business arising and accumulating during any accounting period are not, during that period, to be treated as accumulated profits within the meaning of Part III. of the Fourth Schedule to the principal Act or as capital employed in the trade or business.
§ Mr. GRETTONI beg to move, to leave out the word "not." The Clause refers to the third part of the Fourth Schedule of the principal Act, and in the form of which it stands it would have the effect of nulifying the provision of that Schedule—
nothing in this Part of this Schedule shall prevent accumulated profits employed in the business being treated as capital.For some reason which has not been explained, they propose to reverse that provision, and any accumulating profits affecting the business and employed as capital will be taxed under the present Govern- 654 ment proposal to the full amount of the Excess Profits Duty. The effect of that change would be that accumulated profits necessary to carry on the business affected would be reduced by 60 per cent. There will be very severe stress and great competition after the War, and if a business firm requires to take £10,000 of its accumulated profits as additional capital, the Government now propose to take £6,000 and only allow £4,000 to be taken into the business and used as new capital. That is a most drastic change, and I contend is of a most harmful character. There are many businesses in this country which are necessary and which will require considerable development if we are to be able to carry on after the War. I take the case of the trade which I am acquainted with. In this country we formerly imported bottles greatly from Germany, Belgium, and Holland, especially from Germany, and since the stoppage of the German and Belgium supplies the works in this country of that character have had to produce a larger quantity, and the sources of production have been increased. At the end of the War it will be found that a very large quantity of bottles will be sent into this country from Germany or other countries. The Chancellor of the Exchequer will therefore sea that this is an important Amendment which covers a very large number of factories. If the bottle industry is not kept in this country we shall then be inundated with imported bottles, and, even as it is now, if the manufacturers put down the necessary plant it will cost 50 per cent, more than the normal price. If they are not allowed to use the accumulated profits, instead of creating further capital, to extend the business the industry at the termination of the War will be overburdened with capital and will be hampered in the competition that will come afterwards. This covers a very large case, and it cannot be looked upon as a small Amendment. The Government proposal seems to me to be absolutely reversing the policy which was agreed upon by this House last year. There may be some reason for it, but I do think that there should be strong and sufficient reason given before the Committee passes the Clause as it now stands.
§ The DEPUTY-CHAIRMAN (Mr. Maclean)I do not know in what form the hon. Member intends to move his Amendment. The greater part of his speech seemed to be directed against the inclusion of the Clause.
§ Mr. MONTAGUThere is a difference between this Amendment and the omission of the Clause. If the reason for moving this Amendment had been a good one, I think your suggestion would have been right, and it would have been the same thing to move to leave out the Clause; but I venture to submit to the Committee that the motives for moving the Amendment are not good ones. There is a difference. Our contention is that this is purely a declaratory Clause. The hon. Member says that it is a direct contradiction of the existing practice and of existing legislation. I contend that this Clause simply declares what is the true meaning of the legislation which was passed last year. If, therefore, he is successful, he reverses the meaning of last year's legislation, whereas if he moved simply to leave out the Clause, as my hon. Friend the Member for West Aberdeenshire (Mr. Henderson) proposes to do later on, the result, according to our view, would be to leave the law vague and to lead to litigation. I would far rather decide the question on this Amendment than leave out the Clause, because then we should know where we stand. In the Act of last year, in the Fourth Schedule, Part III., it was stated that nothing should prevent accumulated profits employed in the business being treated as capital, and from this it was argued by the hon. Member opposite and by certain taxpayers and their representatives who take the same view that when we use the words "accumulated profits" we mean "accumulating profits." I am sure it was the intention of the House not to include "accumulating profits." The effect would be that whereas the Bill of last year imposed an Excess Profits Tax of 50 per cent, in the case of public companies, this Amendment would reduce that tax by 3 per cent., and in the case of a private firm by 3½ per cent, because it must be remembered that a private firm is allowed 7 per cent, of the capital and the other firms are allowed 6 per cent, of the capital. The accumulating profits in the example I have taken affect to exactly half their amount on the average the capital on which we allow 6 per cent, or v per cent, as excess profits, and therefore he would simply reduce the amount of the tax. I am quite sure that was not the intention of the House at the time, and I may quote the 656 words of the Chancellor of the Exchequer on the 23rd of November, 1915, in which he said this:
My hon. Friend will know eases where money is retained for distribution as dividends. Clearly that ought not to be included as capital.There was the case of profits which were accumulating and had accumulated for a particular purpose, and he expressed the view that these accumulated profits ought to be excluded, but we found that unworkable, and our interpretation by this Clause is to except all accumulating profits, whether they are kept for dividend or not. I make that quotation to show what was clearly the intention of Parliament when this Act was passed. You except only accumulated profits and not accumulating profits. If we were to adopt this Amendment we should make a big hole in the revenue by exempting certain firms and we should create considerable confusion, but if we pass this Clause, which as I said is a declaratory Clause, we shall make quite clear the meaning of the Act which was passed last year. It has been introduced with a view to preventing litigation, and it is in no sense a reversal of our previous decision.
Mr. HENDERSONI have no objection to a discussion on this Amendment of the point which I intended to make on my own Amendment later on. So long as the Clause will make it clear that accumulated profits are to be considered as part of the capital. I quite understand that you object to accumulated profits since the date of the passing of the Finance Act. The question is what meaning you will allow to be taken as the meaning of the words "accumulated profits." You must remember that the accumulated profits are very often, and in fact nearly always, profits which are used necessarily in the business. Suppose that a company has paid for two or three years profit of £50,000 or £60,000 and it wants new machinery; it must either go and borrow fresh capital or let the shareholders go with a smaller dividend and use these accumulated profits for the purpose of obtaining this new material and new machinery. That is a very common case, and the consequence is that the undivided profits in the balance sheets of a great many companies do not represent cash immediately available, but represent, at any rate, a great part of it, sunk capital for the purpose of developing or taking the business. Suppose that the capital is sunk in machinery it takes the shape of assets, and it must take that 657 shape because it must have fructified in the building up of the business. If you say nothing accumulated after the passing of the Act, or nothing afterwards accumulated, then there is not very much in the case. People will take care there is nothing accumulated. They will deal with it in some other way. Last year's Act distinctly says that accumulated profits shall be taken. There is nothing to prevent them being taken as capital. There is one other point I should like to clear up. I take it that this Clause only appertains to percentage standards. I do not think it affects any company or firm paying Excess Profits Tax. It only applies, so far as I can make out, where you adopt a percentage standard and pay a percentage upon your capital employed. But there is no such thing where the excess profits are available on the ordinary standard of prewar profits, and I do not think in that case that the Clause has any effect. I would suggest to my right hon. Friend that between now and the Report stage he should consider whether he will fix a date for the "accumulating" as distinct from the "accumulated."
§ Mr. MONTAGUI shall be glad to take any hon. Friend's advice and consider the matter before the Report stage, but I do not think that there is any difficulty. The Clause defines accumulating profits. It says
profit arising and accumulating during any accounting period.As soon as the end of the accounting period or year comes the profits are then accumulated, provided they are not almost immediately paid out in dividends.
§ Mr. MONTAGUNo, I am suggesting that. If the hon. Member will look at the Clause, he will see it says:
It is hereby declared that, for the purpose of Excess Profits Duty, profits of any trade or business arising and accumulating during any accounting period.The accounting period is the date fixed already in the Clause for the end of accumulating profits. After that they become accumulated. As regards profits which are used for plant, as soon as they are employed in plant they become accumulated, and the percentage is applied to those profits as being new capital put in during the War. In all such cases the percentage basis applies.
§ Colonel GRETTONI am afraid the right hon. Gentleman has rather darkened counsel by his explanation. He explained to us that the effect of this Clause is not to repeal the provision in the principal Act, the words of which are most distinct. It says:
Nothing in this Part of this Schedule shall prevent accumulated profits employed in the business being treated as capital.This Clause says that until the end of the accounting period those profits are to be treated as accumulating profits. Therefore, before the end of the accounting period they become accumulated profits and may be employed as capital. While they are accumulating they may not be employed, but when they are accumulated they may be employed. Do I understand that is his explanation?
§ Mr. MONTAGUindicated assent.
§ Colonel GRETTONThat is rather different from what the right hon. Gentleman desired the Committee to understand. I have no policy in this matter, and I frankly explain to the Committee that my purpose is to enable businesses to develop themselves in order to meet the exigencies of the time of War, in the time that comes after the War, and that their profits, not being invested and kept outside the business, but actually used in it, should not be taxed as proposed in the Bill. I gather that the right hon. Gentleman does not wish that profits which are necessary to carry on a business or for the efficiency of a business, if the business is a sound one and carried on for the benefit of the community, shall be taken for the Excess Profits Tax in such a way as may cripple the business. If that is so there is no serious difference between us. I would only ask the right hon. Gentleman to look at this matter again before the Report stage, and by that time I do not think there will be any great difference between him and myself and the hon. Member for West Aberdeenshire (Mr. Henderson). All that we are anxious to do is to preserve certain things from the devastating effects of the Excess Profits Duty which are necessary to carry on the business, the money which is actually embodied in the business, and the money put by to enable them to pay later on. By grasping too avariciously at the tax for the moment you may do great harm to the taxable capacity of the business and to the prosperity of the 659 business as an asset of the State at a later stage. I think the right hon. Gentleman will agree with what I have said on that matter.
§ Mr. MONTAGUindicated assent.
§ Colonel GRETTONI am quite satisfied with his assurance that he will give the matter most careful consideration and try to carry out what I have endeavoured to explain to the Committee. On that assurance, and on the understanding that I shall be able to raise the matter again on the Report stage, I ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.