§ Amendment to Section five of Part I. (Computation of Profits. of Fourth Schedule, at end, add the following proviso:
§ Provided that if the Commissioners of Inland Revenue or the Board of Referees shall refuse to allow a deduction for any increase in the remuneration of directors, managers, or other persons concerned in the management of any trade or business, and the taxpayer shall be required to pay Excess Profits Duty in respect of such disallowed deduction the taxpayer shall be entitled to recover from any such director, manager, or other person the amount which he shall have paid by way of Excess Profits Duty in respect of such increase.—[Sir J. Harmoorl-Banner.]
§ Clause brought up, and read the first time.
§ Motion made, and Question proposed, "That the Clause be read a second time."
§ Sir J. HARMOOD-BANNERIn moving this Clause I should like to call the special attention of the House to Section 5 of the Fourth Schedule of the No. 2 Act of 1915. Experience has shown that the working of that Clause will do one of two things: Either it will cause a great leakage from the finances of the Treasury, a leakage which we ought to avoid, and a reduction of the sums it ought to receive, or it will impose a great hardship on the companies, who will have to pay Excess Profits Duty in respect of a sum they have already paid to their directors and managers. Section 5 as it stands at present says:
"Any reduction allowed for the remuneration of directors, managers and 968 persons concerned in the management of the trade or business shall not, unless the Commissioners of Inland Revenue owing to any special circumstances, or to the fact that the remuneration of any managers or managing directors depends upon the profits of the trade or business, otherwise direct, exceed the sums allowed for those purposes in the last pre-war trade year, or a proportionate part thereof as the case allows, and no deduction shall be allowed in respect of any transaction or operation of any nature, where it appears, or to the extent to which it appears, that the transaction or operation has artificially reduced the amount to be taken as the amount of the profits of the trade or business for the purposes of this Act."
I have no doubt that when that Section was passed it was expected that the amount to be dealt with under it would be of small amount—say, £500 or £1,000, or more. My personal experience, how-ever, shows a very different state of things. The arrangements made with the managers—and the War has caused very large sums to be payable—provide for, say, salary plus 10 per cent, on gross proceeds; salary plus 2½per cent, on gross receipts; salary plus 25 per cent, on profits; and the profits made in the War, and the proceeds which have been entailed by the War, amount to very large sums. I have in my own experience seen sums paid, in one case amounting to £15,000, in another to £50,000 or £60,000, and in another case amounting to nearly as much as £80.000 or £90,000 in respect to these particular arrangements. The result of the Section as it stands at present is that the Treasury have either to say they will allow that sum, in which case there will be a very large loss to the Treasury—I hope the Chancellor of the Exchequer, notwith standing my criticisms, will believe I am trying to do my best for the Treasury quite as much as trying to correct any informalities which I think may exist in the Actߞ
§ Mr. McKENNAHear hear!
§ Sir J. HARMOOD-BANNERThe Treasury will say either that they allow that amount in excess of the pre-war payment—which will mean handing over very large sums to the firm—or that they will not allow it, in which case it would come-into the profit and loss account of the company making up its profit and loss account on which to pay Excess Profits Duty. The 969 result will be that the firm will then have to pay on a profit and loss statement including the amount payable to other parties, so that, in effect, the company or individual will be paying in respect of the profits twice over. For instance, if the Treasury say they will allow £50,000 without Excess Profits Duty being payable, it will mean- a large loss to the Treasury, which in the interests of the Treasury I hope this Committee will not permit. If they do not allow it, as the Act stands at present, the £50,000 will remain in the profit and loss, and the firm would have to pay 50 per cent, or 60 per cent, of it. Then the man who made the bargain for the year's salary plus 10 per cent, of the gross receipts will come in and say, "You made a bargain with me, and you have to pay me my £50,000," so that the firm or company would not only have to pay 50 per cent, or 60 per cent, on the £50,000, but also would have to pay in full the manager or director with whom they made that bargain. That would be a great hardship on them. To meet the difficulty I have proposed this now Clause, which I think meets the case. It has been drawn up by a very eminent barrister and solicitor. If there is any informality about it it can be corrected on Report, I believe that the Chancellor of the Exchequer, in the goodness of his heart, when the Act of 1915 was being passed, did make some sort of suggestion which is the reason why the Treasury have been peculiarly mild and easy in dealing with payments under the Act so far. While that might be quite fair with regard to a sum of £500, £1,000, or £2,000, we should all agree that it is most improper and unfair when we come to sums exceeding £2,000, and which may reach £10,000, £15,000, £20,000, £30,000, or even £50,000.
§ Mr. McKENNAI am sure the Committee is indebted to the hon. Member for having brought this matter forward. The Committee will remember that last year, in the Debate on the appropriate Section, I was pressed to make a concession which would free from Excess Profits Duty the salaries of managers who were paid by commission. The case was represented to me as a very ordinary case of business where a man earning a salary of a few hundreds a year might have an additional amount paid to him by way of share of profits, which would perhaps add another £100, £200, or £300 a year to his income, and that it would be a great inroad upon the established customs of business if we 970 did not in practice allow such payments to be a charge or an expense of the business, and therefore not subject to the Excess Profits Duty. I have looked back to the Debate upon the subject, and I summarised the arguments in this way: That in these circumstances I admitted there might be some cases where the directors' payments might be small, which would seem to be a proper case for an additional allowance, and although at that time in the Debate I refused to meet hon. Members, later on in the Debate I gave way on the point, and agreed that we should retain power to say that salaries augmented in this way by a share of the profits or commission should not be charged Excess Profits Duty. What do we find? That while we think we are making a concession —I am sure the whole Committee were of the same mind as myself that it was quite reasonable and proper—in practice it means that some directors or managers are paid gigantic sums which really means that they are getting a big share of the profits. It is quite true that they have no controlling interest in the ordinary sense, but inasmuch as they have directors' or managers' contracts which give them, as in the case mentioned by the hon. Member, anything from £10,000 to £80,000 a year, it is quite clear we did not mean cases of that kind to be exempted from the Excess Profits Duty. I therefore gladly accept the Clause moved by the hon. Member, which will be supplemented in practice by the Commissioners, who will not allow as an expense of the business these heavy payments to directors and managers in consequence of a prewar contract which gives them a substantial share of the profits. We shall have to fix some limit, because I do not wish at all to withdraw from the concession made last year. We shall have to fix some limit which we will always allow as an expense of the business, but beyond that we should not propose to allow these large sums as an expense of the business. Consequently it would be necessary for the protection of the company that the Amendment of the hon. Member should be introduced into the Bill. Otherwise all the other persons interested in the company will have to pay the Excess Profits Tax out of the total of the profits, while the managers or directors, who would really be in the position of partners if it were an ordinary firm, would escape paying their share of the Excess Profits Duty. With 971 this explanation I hope the Committee will allow me to accept the Clause as it stands.
§ Mr. COWANWill the right hon. Gentleman say whether the Clause refers only to remuneration by way of commission or a share of the profits, or whether it applies also to salaries or fees of directors?
§ Mr. McKENNANo; salaries do not come in here, as I understand it. I think it is expressly so stated. Of course the case we have in mind is where a director or manager is paid a share of the profits. Any new arrangement made with a manager, so that instead of receiving a salary of £1,000 a year he is to receive a salary of £80,000 a year, would be scrutinised with great severity.
§ Mr. McKENNAIf it was a pre-war contract, the question would not arise.
§ Sir A. MARKHAMAssuming that a director receives remuneration by way of commission on the amount of dividends disbursed, and that he has been so paid during the pre-war period. I take, for example, say, 5 per cent. of the total dividend declared. Would that also be paid in the accounting period?
§ Mr. McKENNAYes, it would.
§ Sir A. MARKHAMMay I put the case quite clearly? I am paid, in the case of one company, 5 per cent. on the total amount of dividend distributed. I receive no remuneration whatever except that 5 per cent. I was paid that amount in the pre-war period, and I am to be paid that same amount in the accounting period.
§ Mr. McKENNALast year, when the Committee had before them small cases of that kind, we agreed to make an allowance, and that in estimating the profits for the purpose of Excess Profits Duty the additional amount paid to the manager should be treated as an expense. We have followed that rule. We did not, and the Committee did not, intend that that rule should apply where a manager who was getting £1,000 now gets £15,000. An increase of that kind in war profits was never intended. Now we have come to the conclusion that we must fix a limit beyond which the excess earnings of a manager who is paid by percentage on the profits must not be allowed to be reckoned as an expense in the business. Suppose we 972 limit it to £2,000 a year—I do not say that is the figure, but I take it because it has been mentioned—and the manager gets £10,000, the £2,000 would be treated as an expense and the £8,000 as excess profit. If we did not have this Amendment of my hon. Friend, the company would pay excess profit on the whole of its profits except the £2,000 which was allowed as I expense, and therefore would pay Excess Profit Duty on the £8,000 paid to the manager, and the manager would escape paying his share.
§ Mr. McKENNAYes, he pays Income Tax but not Excess Profit Duty. It is treating the Excess Profit Duty like the Income Tax and making him pay his share of the Excess Profits Duty.
§ Sir A. MARKHAMThat is not quite my point. Assuming that the commission payable to a managing director was £2,000 before the War, and a dividend of 10 per cent, was paid before the War, and during the War a divident of 10 per cent, was also paid and the remuneration paid to the managing director is again, say, £2,000 a year, is there any addition to the tax?
§ Mr. McKENNANo.
§ Mr. J. MASONMight I ask a question? In the event of an arrangement having been made for the managing director to receive a commission and a percentage of the profits, which had nothing to do with dividends before the War, if it were not for some arrangement of this kind it would be quite possible for controlled firms which are now making very large profits to pay in commission to the managing director more than the whole profits received by the shareholders, and leave nothing at all for the shareholders and still owe the managing director money. If such an exaggerated case exists, does this mean that the company would recover from the managing director 60 per cent, of the commission they have paid him though that might well absorb the whole of the profits?
§ Mr. McKENNAYes.
§ Sir C. CORYI understand that if a manager was paid a commission amounting to £2,000 before the War, and it runs to £10,000 a year during the War, £8,000 would not be attributed to expense. Is that fair? Surely it is an expense of the 973 business. Surely that is part of his salary and it ought to be debited to expenses before he estimates the excess profits of the business.
§ Mr. McKENNAMy hon. Friend may disagree with it, but that is the whole point we have been discussing. The whole argument I have put to the Committee is that we should go back to the position in which we stood last year, and we limit our concession now to what it was intended to be—to cases of small increases. It was never intended to cover the ease of a man who receives for instance £80,000. That surely is an excess profit dependent upon the success of the business.
§ Sir C. CORYIt is an excessive amount, but, as far as the shareholders are concerned, if they had to pay him £10,000 a year the extra £8,000 comes out of their pockets and ought to be debited as an expense of the business. Whether you collect Excess Profits Duty from the recipient is another matter.
§ Mr. McKENNAThis Amendment enables us to charge it to the recipient of the profits.
§ Sir C. CORYThe actual amount paid to the manager and the extra £8,000 ought to be debited to the business as an expense before the profits of the business are made up for excess profits purposes. It makes all the difference. If you take £8,000 from £20,000, it leaves £12,000 that they have to pay Excess Profits Duty on. If you do not take it, does he pay it on the whole £20,000?
§ Mr. CURRIEI should like the right hon. Gentleman to clear up another point which is, perhaps, rather a verbal one, but seems to me to carry some amount of reason. A contract of this kind might run, that So-and-so was to receive a large sum, perhaps calculated as a share of profits lint expressed as a salary. I think we are guarded on that point.
§ Mr. McKENNAI think so.
§ Question, "That the Clause be read a second time," put, and agreed to.
§ Clause added to the Bill.