HC Deb 28 June 1916 vol 83 cc930-8

(1) The principal Act shall be read and have effect as though the following paragraph were added to Part II. of the Fourth Schedule of that Act, that is to say:—

7. Where in the case of any trade or business in which the last pre-war trade year shall have ended before the first day of April, nineteen hundred and fourteen, it is shown to the satisfaction of the Commissioners of Inland Revenue that the profits of such trade or business between the last pre-war trade year and the fourth day of August, nineteen hundren and fourteen, were considerably larger proportionately than during the last pre-war trade year, and that in consequence thereof the pre-war standard of profits when computed on the basis of any two of the three last pre-war trade years gives an unduly low estimate of the average annual profits of the trade or business during the two years immediately prior to the War the Commissioners when computing the prewar standard of profits of the trade or business shall increase the same by such amount as appears to them reasonable in order to make the prewar standard of profits a fair estimate of the average annual profits during the two years immediately prior to the War.

(2) Where in any such case as aforesaid the pre-war standard of profits has been computed prior to the passing of this Act, the taxpayer may, if he thinks fit, claim to have such standard computed again, and if he makes such claim the Commissioners of Inland Revenue shall recompute the pre-war standard of profits of the trade or business in question, having regard to the paragraph added to Part II. of the Fourth Schedule to the principal Act as hereinbefore enacted.—[Mr. J. Mason.]

Clause brought up, and read the first time.


I beg to move, "That the Clause be read a second time."

This Clause is designed to alleviate a hardship which is very fully admitted in all parts of the House. It is quite admitted that it is a great hardship that the pre-war increases in profits, that is to say, profits made before the War began and due to causes entirely independent of the War, but which owing to the pure accident of the acounting period ending, say, in August, or at at any rate within a very short time of the outbreak of the War, should be subject to the tax. We have discussed the point and it has been said that cannot be altered. I should like to quote two cases, one of a large concern and the other of an extremely small one. This larger concern had extended its business very considerably in the year 1912, and its accounting period finishes on 31st August, so that inasmuch as the accounting period only included twenty-seven days of the period of the War it is a particularly hard case because that means that eleven months and some odd days were pre-war period, but nevertheless subject to the tax. The profits for the year ending August, 1912, were £13,000 odd, for the year ending 31st August, 1913, they were £24,000, and to 31st August, 1914, £34,000—that is to say, there was a very-steady increase of profit due, of course, entirely to causes other than the War. The other case I have is a very small one, but I think for that reason a particularly hard one. It is the case of a small millinery business in the West End of London conducted by two ladies. Of course in a business of that kind personality and skill have a good deal more to do than the amount of capital involved, which is extremely small. According to the information given to me the capital is £1,200. The business apparently started only four months before the War, but its first accounting period ended shortly after the War began. I admit I do not quite understand that and I think there must be some mistake. The letter goes on to say: As it opened at the busiest season of the year for that particular trade, and on the very day that an old business in the same line a few doors off closed down, it had an unusually good start, and made a big profit in the first four months. This is, of course, a class of business which was very badly hit by the War itself, and directly the War broke out it seriously declined. Nevertheless, out of these profits which were made during the few months prior to the War, profits which it is admitted not only had nothing to do with the War but were put an end to by it, this shop is charged with payment of £593 for excess profits. If the facts are as stated in the letter it seems to me to be an extremely hard case of the incidence of the tax. It is stated that that cannot be altered, and that these pre-war profits have to be brought in because of this unfortunate accident that the accounting period ends at a particular time of the year, but I think it is admitted, in spite of that, that the object of the tax is not to tax pre-war profits. It is to eliminate the pre-war profits as far as possible. It is also, of course, admitted it must be—that we want to get the fairest standard possible for he application of this tax. My Clause would have this effect, that where the materials are available and where any firm was able to bring its standard period up to a moment nearer the outbreak of war—in this case it might be made up months later than at present it is made up—where the accounting period has hitherto been the end of August or September, and the firm is in a position to bring up its accounting period, where it has materials for that purpose—and the burden of finding materials, of course, would be on the firm itself—a new accounting period should be possible, bringing the accounting period itself for the purposes of the standard up nearly to the outbreak of the War. In that case, of course, if the first accounting period liable to the tax included a considerable amount of profits which were made prior to the War, they would have to compare with a standard which, by bringing it up nearer to the outbreak of the War, would be at a higher level, and therefore the difference between the period to be taxed and the standard period would be considerably less than it is now.


It is impossible to listen to the hon. Member's arguments without realising that the Clause does in many cases inflict hardship. We have never denied that. We have always admitted that it is inherent in a temporary law of this kind that it should inflict hardship. This question was discussed at very great length last year. An Amendment, not exactly in the same form, but aiming at precisely the same object, was moved by the hon. Member (Mr. Penne-father) and was rejected, because the House accepted the view that we must take as the basis of taxation the time when the profits are enjoyed, and not when they are earned. The moment we begin to alter a, firm's recognised business year of accounts and allow every firm to make up a new set of accounts for a new period upon figures, many of which must be hypothetical, it is almost unavoidable, when it has to take stock relating to its condition two years ago, that with every desire to do justice to the revenue it should find great difficulty in not assessing itself at rather a high standard of profit. I really would appeal to the Committee that at this stage we must adhere to our original principle. We have already under assessment for the first year of the Excess Profits Duty £21,000,000, and we have already collected. I think, not far short of £6.000,000—that is to say, we have under assessment very nearly the full amount of the revenue which we expect to obtain. I think the final figure in last year's Bill for the year in question now was £26,000,000. We should have to reopen all our assessments, and in many cases repay money which has already been collected, in support of a principle which everyone admits cannot be carried out. It is quite true you might carry it out in respect of particular firms here and there, which you may select, but you cannot carry it out generally with all the firms and say they are to be allowed to take a new year of account previous to 4th August, 1914. It could not be done. Therefore you give rise to a whole new series of inequalities, as between one class of firm and another. I think we had better adhere to the simple principle that we take the normal business year's accounts at the time to which we have referred as the time when the profits are enjoyed. That is to say, are the profits enjoyed during the War, and if they are, we submit that they are properly the subject of taxation. I appeal to the Committee to adhere to the law as it now stands, which is much the simplest on the whole, and that we do not make the change suggested by the hon. Member.


I am sorry the Chancellor of the Exchequer has taken such an unyielding view of the case which we have put before him. He has told us we cannot alter the principle, that the tax should be imposed on profits not earned but enjoyed during the War. But I think in some of these cases there are means which he might take to provide a more lenient method of dealing with them. In Clause 42 of the Finance Act, 1916, there are rights of appeal by a class, but you could not make a class of many of these particular cases, and therefore you must take them individually. You cannot make a class to appeal to the Commissioners for a higher statutory percentage which will put you on a fair basis. Whilst I hope I am right in saying that the Chancellor of the Exchequer did in one case give an answer to a question and say that a class might be a single individual, yet I should like to say that in my experience the Income Tax officials do not accept that view, and I think it is a very good thing that we should have it reiterated in the House that a class may be a single individual because, to my actual knowledge, that point has been raised, and the Income Tax authorities have declined to treat a single individual as a class with rights which come under Clause 42. Then, in addition to that, there are, undoubtedly, in Clause 40, certain rights as to making Regulations, and those Regulations can be altered or amended by the Treasury to meet these special circumstances without affecting the principle which the Chancellor of the Exchequer seeks to have permanently established. The right hon. Gentleman is reported to have said: The Treasury can make regulations. They can also, whenever the special circumstances are brought to their notice, make special regulations forthwith. 7.0 p.m.

Here we have, as the hon. Member for Windsor (Mr. J. Mason) pointed out, two or three very hard cases. One of these particularly hard cases is where a certain firm has prepared in every way to make their business a success. They have spent capital, and they have spent money in advertising, and have done everything possible to make their business a success. In the pre-war years, before the accounting period, the business has only produced a moderate turnover, or only a slightly increased turnover beyond what it paid in the previous years. Then, suddenly, the fruition of all their industry comes into existence, and they have a good return. The profits, because of their preparation, jumped from £13,000 or £20,000 up to £34,000, and all because they have sown the ground. They ploughed the fields, and made everything ready, and yet they cannot bring that into the calculation at all. They have to take simply the figures as they stand. There is no comparison between the two years. One period is a period with the ground sown, but the ground not coming to maturity, and the other is a period where the ground is cultivated and sown, and it comes to maturity and makes a profit. There is really no comparison between these two periods, and yet because of the preparation the profits of the accounting period have to pay on a very much larger scale of excess profit because they are so much higher than in the pre-war period. Surely there can be nothing less fair than such a proposition as that. I think that the accounting period should have the benefit of services done in the pre-war period without being taxed in this way. I admit the principle that we must not alter the position which has been laid down by the Chancellor of the Exchequer in regard to the taxation of excess profits which are enjoyed, but I would appeal to him to look at the class appeals, and at the regulations which may be made by the Treasury, and see whether cases of this particular hardship, where there is no real comparison in the profits that are earned, might be met. I would like to know whether he could not make regulations which would provide for these cases. Several hard cases have been submitted to me, and I have no doubt other Members have got them. I have an Amendment lower down on the Paper which is more or less like the Amendment we are now discussing. Therefore I am dealing with the point now, and I shall not move my Amendment. I do hope that the Chancellor will look at the regulations and at the class appeals, and see if he cannot meet these extremely hard cases.


I should like to have an answer from the Chancellor of the Exchequer on a point which has risen recently in several companies as to what is the view of the Treasury on the point of what constitutes the pre-war period for a company whose business has been continuing for less than two years. Part (II.), Sub-section (4) of Schedule 4, provides

"Where there have not been two prewar trade years but there has been one pre-war trade year, the pre-war standard of profits shall be taken to be the profits arising from the trade or business during that year."

Several cases have been brought to my notice. I had one case this morning where a company had been trading for seventeen months, and the Treasury took the profits of the seventeen months instead of the profits for one year as the pre-war standard. I would like to know how the Treasury read the Act where a company have not been trading for two years, and whether they will take the one year's account, or whether they will take the average of seventeen months, as in the case I have mentioned. In regard to sowing and reaping, I should like to give a case which may astonish the House. I am not complaining, because I have always said that I think the excess profits, ought to come to the State. This is the case of a company of which I am managing director. It is a colliery company with a capital of £466,000. Very great difficulties were experienced in sinking this colliery. In 1911 a trading account was opened, but owing to the great depth of the mine, water, and other troubles, a loss was occasioned in the first two years of its operations. The output of coal in the first year, 1912, was 110,000 tons at a cost of 12s. The following year the output rose to 342,000 tons at a cost of 9s. In the following year the output was 562,000 tons at a cost of 10s. 3d., and in 1915 the output was 630,000 tons at a cost of 9s. 6d. These figures in each case are for the years ending 25th March. The profits which the company would take under the Act amount to a little more than one week's wages paid to the workmen by the mine-owners. In these periods the average price realised for the coal was, in the twelve months ending 1912, 9s. 8d.; in the succeeding year, 10s. 8d.; in 1914, 11s. 2d.; and in the year ending March, 1915, only 10s. 7d. There has been a reduced cost and a largely increased output.

The net result on the pre-war standard gives an average of £6,000, and on that basis the company is assessed for the purpose of excess profits. The result is that the workmen are receiving at the present time about £5,000 a week in wages, or something like £250,000 a year, and the total amount of money that we receive on our capital is £6,000. Of the £466,000 which has been invested in the company, a large amount is in the form of debentures and borrowed capital. Therefore the Chancellor of the Exchequer and the country may realise that in this case practically the whole profits go to the State, and the total profit the company receives, although they are now raising about 700,000 tons of coal, amounts to about 2¼d. per ton. Here is a case where after seven years' hard work, and having to face difficulties in connection with the mine, the proprietors have arrived at this position, and they get practically nothing at all, because the Exchequer take the lot. I should like to have an answer to my first question as to taking the average for the pre-war period, and I should like to know whether the Treasury are not bound by the Act. I think they are bound by the Act, because it says where the business has not run for two pre-war years, but for one, the pre-war standard of profits shall be the profits arising from the one pre-war trade year.


I rather agree with my hon. Friend when he says that the Act confines the period to one year where the business has not run for two years, but I will make inquiries. There may be special circumstances in special cases which make the difference between the year and the two years, and provide for the intermediate period, but I will not express an opinion now.


I received some accounts this morning, and I find that by taking the profits over the seventeen months the Exchequer lost £400 by the transaction.


I think it was very clearly understood throughout the country that the excess profits were to be regarded as profits that had been exclusively earned after the War had broken out. There has been no impost which has caused more injustice than this one under the Regulations which now exist. I have before me an admirable illustration of this point. A firm in Wolverhampton, named J. Marston, Limited, started a new department in their business for the manufacture of motor cycles. They were makers of ordinary cycles, but finding that there was a falling-off in the demand for what are technically known as push bicycles, they went into the motor cycle trade. They had to lay down a large quantity of very expensive machinery, and had to spend considerable sums of money in advertising. The first year was very disappointing. The second year they began to get more encouraging results, and the third year was entirely of a satisfactory character; but, unfortunately, owing to the accident that their annual balance was computed from the 31st August in 1914, there were twenty-seven days within which they came under the operation of these new Regulations. The figures are very striking. The profits for the year ending 31st August, 1912, amounted to £13,754. For the year ending 31st August, 1913, £24,375, and for the year ending 31st August, 1914, they amounted to £34,248. Owing to the fact that they had twenty-seven days of August, 1914, within the operation of this new impost, they are to be mulcted in a very large sum for excess profits which were earned practically and entirely before the new tax came into operation. The average profits of the two pre-war years was £19,064, and the excess profit would be £14,184. The net amount payable after Income Tax deduction is provisionally £7,117.

The result is that when the War broke out instantly trade fell away. Ever since then they have had to make very great efforts in order to recover the pre-war standard, and even now they have not yet reached it. Further than that, their works have been controlled, and they are in this difficult position, that though their works have been controlled they are not given sufficient Government business fully to occupy them and keep their men entirely on Government work. Therefore they are liable at any moment to lose some of their most valuable men, and the staff, which has been the result of the accumulation through many years of skilled men, is taken away from them without any remedy, and their position is worse than ever, notwithstanding this very large amount which has been levied for excess profits. It seems a most extraordinary principle for the Chancellor of the Exchequer to contend for that, to suit his convenience for accountancy and revenue purposes, taxpayers are to be mulcted so unjustly as this case indicates. I know hundreds of cases. The Chancellor of the Exchequer and the Financial Secretary must know. They have found some very energetic exponents of the injustice under which so many firms have been labouring. I do say that this Amendment would afford relief. The Government should do the honest, straightforward thing, and not levy taxes which were never levied by this House. I hope that further consideration will show the Chancellor of the Exchequer that it is a very bad policy to penalise manufacturers and discourage them to produce Government work and make great sacrifices in the present crisis. I hope that on the Report stage the right hon. Gentleman will consent to some Amendment on the lines proposed by the hon. Member for Windsor.

Question put, and negatived.