HC Deb 05 July 1917 vol 95 cc1447-61

There shall be added to the exceptions specified in Section thirty-nine of the Finance (No. 2) Act, 1915, the following:— (d) Societies registered under the Industrial and Provident Societies Acts.

And paragraph ten of the Fourth Schedule of the Finance (No. 2) Act, 1915, is hereby repealed.—[Mr. W. Thorne,]

Brought up, and read the first time.;


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


The object of this new Clause is really to put right what the co-operative societies of the country feel is a real grievance, that they should be subject to Excess Profits Tax when, as a matter of fact, they do not in any sense: make what can be considered a profit at: all. In fact, the application of the Excess Profits Tax to them is a misapplication of the Income Tax entirely. The co-operative dividend, for that is the correct term to apply to what is sometimes termed in trade circles a profit, is really nothing but a rebate on prices, and not a profit in any real sense of the word. For example, assume a number of persons determine to purchase at the pit-head a truck of coal, and in doing so are able to make more favourable terms with the colliery proprietor. They then make arrangements to distribute it among themselves, and because of that they are able to allow for themselves a rebate on their purchase. That rebate is an equivalent to the dividend of the co-operator. I have never heard anyone suggest that if men so act. whether Members of Parliament or anyone else, any rebate they are able to get for this, by acting together co-operatively, is entered on their Income Tax return with a view to its being assessed for Income Tax purposes. In this connection I want to remind the House that if there is no profit there can be no excess profit. Hon. Members seem to have forgotten entirely that this question was fully inquired into by Lord Ritchie's —he was Mr. Ritchie then—Committee. A Departmental Committee of that day— 1904—specifically had its terms of reference enlarged so that it might bring within the scope of its inquiry this question of co-operative profits. This Committee, having had this question specifically brought to its notice, after its terms of reference had been fixed, went very fully into the matter and had submitted to it statements on behalf of private traders and by co-operators. It came to this conclusion, that industrial and provident societies enjoy no real exemption from Income Tax.

In practice, then, it amounts to this, that to suit the convenience of the Inland Revenue authorities the co-operative societies are not taxed on their dividends, and for a very obvious reason, that so few of the members of the co-operative societies are persons who are liable to pay Income Tax at all. An estimate was made in 1904. and it was found that about 1.8 per cent, of the members of the co-operative societies were liable to Income Tax. The number may have been enlarged since by the reduction of the income limit, but still, for the purpose of the collection of Income Tax, it was found to suit the Inland Revenue authorities beat not to apply to co-operative societies the same principle that they did to companies in general. Therefore it is merely a question of application of Income Tax machinery, and the purpose is achieved of applying the tax. if the tax is necessary at all to the individual, in the case of the co-operative society, and by taxation at the source in the case of the company. Co-operators feel that there is, in their case, an attempt to apply to them something which is most unfair. It is sometimes alleged against them, as a reason for the application today of this Excess Profits Tax, that they enjoy huge contracts in competition with the private trader. [An HON. MEMBER: "Hear, hear!"] I hear that statement cheered—and that, as a result of these contracts, profits are made which should be liable to the Excess Profits Tax. Let me remind the Committee that, as a rule, these contracts ace in the nature of compulsory contracts imposed upon cooperative societies by the Government, and as a rule the contracts are completed at cost price rates, the effect of this being of course that the co-operators in this connection are- discharging al national service at no profit to themselves. Let me remind the hon. and gallant Member opposite that even if these contracts are included in non-members' trade, the percentage of non-members' trade is only about 1 per cent, of the whole, and if they were assessed there would be always the right to make a claim for rebate. I imagine that the Treasury would find it much more convenient not to attempt to get the tax at the source, owing to the great number of applications which would come in later on for the return of the small amounts for which the co-operators in the bulk had been assessed.

I may call attention to one or two cases of injustice which arise from the application of this Excess Profits Tax to co-operative societes. I have in mind, for example, certain societies which, in pre-war days were not cluing particularly well, and then, as a result of munitions works springing up in their areas and the increase in trade, there is an increase in their profit, so called, but it is really dividend, and the pre-war rate I is taken and a deduction is made from the war rate. Then the difference is multiplied by the number of members, and the Excess Profits Tax is levied on the cooperative societies. This is most unfair from the point of view of the societies, having regard to the growth in munitions areas for which they are not responsible, and they are really, through their distributing agencies, doing National Service, and, I should say, are severely hit in she process. Take actual figures, which will show how unfair is the application of this tax to cooperative societies. Take a person with annual purchases to the amount of £40. The dividend paid by the society is 2s. in the £—his dividend or surplus; surplus is a better term to apply to this than profit; that is what it really is, the surplus on his purchases. The taxation in prewar days is nil. Through the operation of increase of prices the £40 formerly paid for the goods is now increased to £72, shall we say, by the increase of 80 per cent. The dividend, which is still 2s. in the £, is now £7 4s. instead of the £4 which he used to have. The amount of deduction now proposed by the Bill would be £2 11s. 2d., so that his net dividend on surplus is £4 12s. 10d. His rate of dividend, therefore, is reduced from 10 per cent., which it originally was, to 6.4 per cent.

Some may say that the co-operative society can easily meet this by a reduction in prices. It can, and it will be forced into that position, unless the Government meets the hard case which has been put before them. If the co-operative societies meet the case in this way the small private trader will feel the competition very severely, for he will find that his ordinary customers are diverted through higher prices to the cooperative society. Co-operators are not anxious to deal with the matter in this way. They believe that they have a legal right to exemption from the Excess Profits Tax, and if the Report of the Commission to which I have referred were adhered to by the Treasury and applied logically right through to this Excess Profits Tax, then it seems to me that the case would have been met and the co-operative societies would not necessarily be driven into the position into which they will be driven of lowering prices and hitting the private trader, and not being liable to the Excess Profits Tax. The very fact that the co-operative society can do this shows how unjust and illogical is the incidence of the Excess Profits Tax in this particular case. Then it may be said, "Yes, they have the concession of £200," but let me point out that £200 applied to the co-operative society means no concession at all. Again, there is the charge of 6 per cent, on increased capital, which applied under the Excess Profits Duty to co-operative societies, as they, and as I think too, constitutes an element of injustice in their case. Let us see how it applies to them. The co-operative society is on the basis of individual membership, and where the co-operative society has grown, as many co-operative societies have, through the aggregation of people in munition centres, the co-operator who joins brings his £l or £2 to the capital. Through the application to the co-operative society of the Excess Profits Duty, where you have a large membership, you may have, on the average, a reduced capital per member, yet the society is, forsooth, because of that, liable to be charged by the Treasury on that account. In fact, the way this thing works results in a direct hit at the thrift which the co-operative society is founded to encourage. You hit this surplus, and you really force the co-operative society into a system which reduces this surplus that the Government ought to desire to promote. If it is the intention of the Government to promote thrift, then they ought to remove this Excess Profits Duty in the case of co-operative societies. However this matter is regarded, it seems to me that the Government should take the opportunity of being logical in the application to co-operative societies of their Income Tax proposal. I equally commend to the hon. Gentlemen opposite the Report of the Departmental Committee, and they will find no ground for the application to co-operative societies of the Excess Profits Duty, because there is no profit and, therefore, no reason for the application of the Excess Profits Duty.


I support this new Clause. I myself have a similar Amendment on the Paper dealing with the subject. We are anxious to get this new Clause in order that these industrial and provident societies may be placed under the exceptions in connection with the Excess Profits Duty. This Amendment proposes, in Section 39 of the Finance (No. 2) Act, 1915, to add societies under the Industrial and Provident Societies Act. We are also anxious to deal with Provision 10 of the Fourth Schedule of that Act. 1 contend that co-operative societies make no profits at all, and therefore the question of the Excess Profits Duty does not arise. I want to go a little further than that, and explain to the Committee that under Provision 10 this Excess Profits Duty is being brought into play on account of the increased cost of the necessaries of life. It is being levied upon that increased cost, and because of that, not only commits an injustice but it is actually perpetrating an iniquity. I have embodied these views in unstarred questions to the Chancellor, and you will find the answers in the OFFICIAL REPORT of 18th, 20th, and 25th June, and they are entitled "Excess Profits Duty, Co-operative Societies." I think I might make it perfectly clear if I were to set up a little working model from materials gathered from my own experience. I have been a member of a co-operative society for many, many years, ever since the days when it was not considered a vice to cultivate the habit of thrift, and I have drawn regularly my half-yearly dividend from the co-operative. [An HON. MEMBER: "And paid Income Tax."] The dividend, I am talking about. I paid the Income Tax on my shares. It does not amount to very much, but the Income Tax collector always gets the two or three shillings Income Tax upon the shares in the co-operative society. This society is managed by a committee of eight fellow villagers on principles I am going to explain true to life. The sums and the names shall be assumed. I assume that I am chairman of the kitchen committee and the treasurer of my own household. Before the War I spent 20s. per week on my groceries—that is £26 for the half-year. Of that I spent £20 at the co-operative society and £6 with tradesmen in the neighbourhood. I paid that £20 to the co-operative society on the express understanding that by virtue of my membership, if they found after they had reckoned all up that they had managed to supply the groceries for less than the £20 they were to refund to me the difference. They found at the end of the half-year that they had cost them £18 and so they refunded to me the £2 which was called the dividend of 2s. in the £. That is not income, it is not a dividend in the ordinary commercial sense of the term. The right hon. Gentleman the ex-Chancellor rightly termed it a discount. It is not a dividend. I was only getting my own money back again which I had overpaid. It came to me, of course, in the guise of savings. I was at liberty to do what I liked with the. £2, and consequently I could put it into the Yorkshire Penny Bank. I submit that that is not a proper subject for Income Tax. Just turn aside and see what happened to my transaction with the tradesmen. I spent £6 with them, and I have not the slightest doubt but that they supplied them to me at a cost all told of £5 8s. But they did not return that 12s. to me, but put it into their own bank. I make no complaint, and I have no grievance against the private tradesmen, although they seem particularly keen to tax my dividend. I do not begrudge them their 10 per cent, dividend, but it is 10 per cent, dividend to them, and, I submit, it is a proper subject to receive the attention of the tax collector. That was before the War. During the War and owing to the War I have been obliged to spend 30s. a week upon the same amount of groceries, that is, £39 in the half-year. £30 of that I spent with the co-operative society, and £9 with the private tradesmen. At the end of the half-year, when the accounts are audited and found correct, the society have found that they had managed to supply those goods to me for £27, so they have refunded me again that £3, or once move a "divi" of 2s. in the £. Hon. Members will understand that if it were profit it was not excess profit, because the 2s. was the same in both cases. Again, however, I must insist they are not profits; they are simply a refund of my own money which I had overpaid. I am amazed to find that under this Provision 10—which we propose to repeal—they rule that I have made excess profits of £l, and claim 60 per cent. Excess Profits Duty, or 12s. I do not know how to put up a working model for this; it seems rather like a clever conjuring trick.

If we could summon a draftsman from the Treasury he might be able to explain it, but he would have to explain it something like this: "Here are two £1 notes which were the pre-war profits of the hon. Member for Skipton. He spends £20 on his goods and twenty times 2s. is £2. Now we will assume that it is no longer discount"—as my right hon. Friend would call it—"we call it bonâfide profits of £2 prewar; we must call upon the hon. Member to vanish"—so they cause me to disappear and they say that that £2 was the prewar standard of profits for the society. They put the two £l notes in a box, wave their magic wand over the other box, and when we open the other box we find that it contains three £l notes. That is rather astonishing! But no trick can be easier than that during the War. If you can only harness up the increase in the cost of living—because the War automatically, and as a matter of course, has increased the cost of living—and so the Treasury takes full advantage of that fact. They say that I have this time spent £30. I have again received a dividend of 2s. in the £. Consequently (they say) the society made for this member £3 profit, or thirty times 2s., which is represented by the three £l notes, and as £3 is £1 more than £2 they call that £l excess profits and claim 60 per cent. Excess Profits Duty or 12s. They say the more members of the society the merrier—the more multiples of 12s. will flow into the Treasury, I repeat that it is the increase in the cost of living that has worked the oracle. I might have received less dividend this time and yet been assessed for Excess Profits Duty. Instead of 2s. in the £ I might have received Is. 8d. or 50s., and 50s. is 10s. more than £2, and is liable to Excess Profits Duty of 60 per cent., or 6s. The Treasury may plume themselves on their cuteness or smartness in smuggling this Provision on to the Statute Book, but there are many simple-minded folk throughout the country who fail to see the joke or to admire the cleverness of the performers. On the other hand, they are feeling very sore about it. They regard this as a gross imposition, and they think that it has been palmed off on to them by a method which approaches perilously near to an exhibition of sharp practice. I hope that the Chancellor of the Exchequer will see his way to accept this Motion. He cannot tell us how much revenue he gets from this. I have asked—and other Members have asked— how much revenue he gets, and he does not know, but whatever it be I appeal to him to accept this Clause, because this Excess Profits Duty is being imposed in. a way that is unworthy of a great State Department.


I must confess that the working model which the hon. Gentleman has given as an illustration is not only very interesting, but puts the case very clearly. I am sure, however, in spite of his hopes as to the reply I shall give, he has a pretty-fair idea that I cannot accept the Clause. But I should like to say at the outset that the most interesting thing to me, and the most satisfactory, in the account the hon. Member has given is to find how successfully the representatives of the Inland Revenue get the small amounts due to the Revenue. It is a tribute, which I think The Committee will appreciate, to the serious efforts of the Department, to get into the Revenue all the money to which they are entitled. The hon. Member said that many people throughout the country did not appreciate the joke. Whenever taxation touches certain individuals they are always inclined to think there is some special hardship, and that they are treated worse than their fellow-citizens. I hope the Committee will not consider that I do not realise the importance of this subject, or the amount of feeling, if I do not make a long speech about it, but no new principle has arisen in connection with the Finance Bill this year. We are continuing what was done previously, and I believe the Committee as a whole will think that anything which the House of Commons after full debate—and there was full debate—thought reasonable before in the way of increasing the revenue is more needed now than ever, and therefore no Chancellor of the Exchequer would be justified, unless in some flagrant case of injustice, in depriving the Revenue of duties previously sanctioned. I may remark in passing that the sharp practice to which the hon. Member has alluded is not the sharp practice of the Treasury, but of the House of Commons, which passed this tax. The War created the need for sacrifices which were recognised by everybody at the time that this duty was imposed. They recognised that we were in an exceptional position, and that every means of getting money that were fair should be adopted. In doing that the whole principle of the Excess Profits Duty was to treat every trade as one industry and to regard excess profits from that point of view. That is the difference between the Income Tax and the Excess Profits Duty. But there is really something else to be said. I do not myself think that in equity it is unfair, and the hon. Gentleman's illustration itself proves it. Let us take his working model. Before the War he divided his expenditure between tradesmen and the co-operative society. Presumably, he did not pay more to the co-operative society than he paid to the tradesmen. Presumably their prices were not higher. It comes to this, that the members of the co-operative society are getting their goods of all kinds at least as cheaply as they can possibly get them in any other way, and yet, in addition, they have something coming back to them. They had a certain amount coming back to them before the War. That amount has increased during the War, and therefore, in my opinion, it is a fair thing for the State to get a share of that excess.

Take what the hon. Gentleman says about the cost of living. The fact that it is now £3 instead of £2 before the War represents a real gain that he personally has made and a real gain that the society has made through him. [HON. MEMBERS: "No!"] Of course it does. Supposing the whole amount had been bought from tradesmen, there would have been none of these profits gained. Therefore, it is an increased profit for the simple reason that there has been a greater saving by buying through the co-operative society. That, at all events, is how it strikes me, and in equity I think this is fair. Members of co-operative societies buy their goods, in spite of the increased cost of living, at least as cheaply as, and probably more cheaply than, if they bought them in any other way. If, after buying as cheaply as their neighbours who have to buy in other directions, something comes back in the way of discount, or whatever you like to call it, it is again due to trading with the co-operative society, and, as such, in my opinion, as a matter of equity, we are in a case of this kind entitled to get a part of it. It really is not a pleasant consideration if I am right in what I am going to say. Let the Committee remember that this was done not only by the House of Commons, but also by arrangement with the co-operative societies. They accepted it. Surely nobody is going to take up this position—that our zeal for the War has cooled and that an arrangement which in the early stages of the War was accepted as fair by those who suffered from it is not to be carried out now when our need is greater. I quite recognise that there is a case here which is widely felt. I do not think that there is any want of equity in the way we are dealing with it. Under other circumstances—and certainly if I were proposing the tax for the first time—I should make a much longer speech in justifying what I was doing, but, in view of the circumstances that we really must get the Bill to-night, I hope that the Committee will not consider that I am showing a want of interest in it by not making a longer speech.


I was the author of this Clause in the Finance Bill of 1915, and I think it is due to the Committee that I should say a few words as to how it came to hand in its present form. It is an undoubted fact that co-operative societies, quite apart from the discount repaid to members, do in many instances make profits in the ordinary sense of the term—that is to say, profits made by trading with non-members—and I felt that it was my duty in imposing the Excess Profits Tax upon other tradesmen to devise a Clause which would impose a fair Excess Profits Tax upon co-operative societies. A Clause was drafted with that object, and it was submitted to representatives of the co-operative societies, who discussed the question very fully with me at the time We came to the conclusion, and I think at the time quite rightly, that the actual Clause which we proposed was the best method of dealing with the matter, and I would ask my hon. Friend the Member for Skipton (Mr. Clough) to agree with me so far that if prices had not risen his complaint would fall to the ground. His complaint arises solely from the fact that prices have risen and have automatically increased the amount of the total dividend or discount though not the amount of the rate of the dividend or discount. We did not anticipate such a rise of prices as we have since seen, and if that rise had not taken place I believe the Clause as we introduced it in 1915 would have been the fairest possible way of dealing with the excess profits, because, in spite of what my hon. Friend said, he must admit that there are cases in which, in the truest sense of the term, excess profits may be made by co-operative societies; in fact, co-operative societies pay Income Tax in certain circumstances.


Not on dividends.


Not on dividends, but they ought to pay on the profits made out of non-members. It is a small amount, but it might increase, and as a matter of fact in certain places it was increasing at the time. For my part, I readily admit that owing to circumstances which have since arisen the Clause has not operated in the way we expected at the time. This increase in prices has automatically increased the amount if not the rate of the dividend, and consequently the tax does not operate as we expected it to operate. Let me deal with my right hon. Friend's argument as to whether excess profits ought to be charged where there is an increase of the total dividend though not an increase in the rate of the dividend. I am not sure that I quite follow the case which he put forward. Supposing I deal with two shops, both of which charge me fair and reasonable prices, but only one of which makes a practice of giving me 5 per cent, discount for ready money. When I get that 5 per cent, returned to me as discount from one trader, am I to be expected to pay Income Tax on it again? It is part of my income on which I have already paid Income Tax. We must not confuse discount which is returned as part of a person's expenditure with profit which is his source of income. The two things must be kept distinct. A person who deals with a co-operative society has the advantage that he spends his money for a better return, but his income is no bigger and it is only on his income that he ought to pay Income Tax. He ought not to be charged a special rate because he spends his money in the most profitable manner.

I feel myself in very great difficulty with regard to the point. I still adhere to the view that there are cases in which co-operative societies ought to pay the Excess Profits Duty, where they do make genuine profits and where they are making more profits during the War than they did before. I am much impressed with the view that the proposed new Clause as it stands could hardly be accepted. I do not think the Chancellor of the Exchequer can be asked to accept it. It goes far beyond the agreement. I would, however, ask the right hon. Gentleman whether he would be willing to reconsider the question with his advisers between now and the Report stage? I had the greatest difficulty in dealing with this subject, and should never have introduced the Section as it now stands in the Act had it not been that it was agreed with the co-operative societies as being, in the circumstances of the time, the fairest way of dealing with the matter. I do not think that the Chancellor of the Exchequer ought to be asked to give up his whole claim to the Excess Profits charge where one is properly due, but equally I am bound to say that, in the actual circumstances, the present existing Section of the Act of 1915 has worked unfairly. In these circumstances, I do not know whether the right hon. Gentleman will accept an appeal from me that he should agree, if he can, with his advisers to reconsider the question before the Report stage.


I should like to enforce the appeal just made to the Chancellor of the Exchequer. We have another Amendment on the Paper which, in our opinion, would have met the case much better than the present proposal, but we have been informed that it would be out of order in its present form. I hope the Chancellor of the Exchequer will agree to the proposal that the whole question should be reconsidered. If he with his advisers can draft a Clause, even on the Clause we have put down, which he can move and we cannot, we shall be much obliged to him.


In joining in that appeal may I ask the right hon. Gentleman to take into consideration the fact that two of the most eminent lawyers in the country have been consulted by the co-operative societies, as probably he would know—the right hon. and learned Gentleman the late Home Secretary (Sir J. Simon) and the present First Lord of the Admiralty. Within the last six months they were asked to give a joint opinion upon this particular question, and they were both of opinion that it is unfair, that it is a reversal of the previous policy, and that it cannot be justified. If he will take this fact into consideration and also keep in mind the fact that the co-operative societies are helping the working classes by encouraging thrift, I hope he will be able to meet the case on the Report stage. If he can, I shall be very glad.


I must say the fact that my right hon. Friend, who was the author of this proposal himself, says he now thinks it works unfairly makes me inclined to say it is not unreasonable to ask that we should reconsider it; but I wish clearly to say—and I hope the Committee will understand me—that probably this only means that the dispute over it will take place on the Report stage, I promise to reconsider it. I wish also to say to the Committee that the fact that there is no change in principle had the result, which I do not think I need be ashamed to confess, that I have not given close personal attention to this matter. I am sure the right hon. Gentleman will not object to my saying that I was not convinced by his argument. He spoke as if the whole point were the taxation for Excess Profits Duty of trade with those who are not members of the co-operative society.


There is another point. There is the other case where goods are sold at a higher price and the rate of dividend is increased—not the total amount paid, but the rate. I think they ought to be liable for Excess Profits Duty, but in this case it is the total amount of the dividend and not the rate which has increased.


But they can get excess profits for the lower dividend.


If a co-operative society puts away an enormous reserve or puts its profits into building extensions, ought not that to pay Excess Profits Duty?


I think it does.


I am very much obliged to the right hon. Gentleman for meeting the appeal of my right hon. Friend. I hope he will not allow the forecast ho has made that this reinquiry will lead to no alterations to have too much effect upon the way in which he conducts the reinquiry. This matter is really a very serious one of the state of social discontent and of its effect upon thrift in those parts of the country, particularly where thrift has been steadily growing by this means and at a time when the importance of national thrift is greater than it ever was. However this tax has been defended the fact remains that in thousands of cases people are really being taxed in the increased cost of the necessaries of life and that is causing, as I know from careful and extended inquiry in Lancashire, a sense of injustice. They are actually being taxed not on what they get but on what they have to spend in addition, because of the rise in prices. That is working widespread anxiety and discontent. It is disturbing the regular practice of thrift, and it is serious, at a time when you want to have all classes of the community in the mood to exercise the maximum of thrift, to leave this festering grievance. The financial results are trifling, and when the present state of things was not and could not have been foreseen, surely there is nothing derogatory to the Government in being willing to reconsider sympathetically the unfore- seen circumstances, and there is no inconsistency either in the proposal of this tax two years ago and its maintenance last year with its modification now when you find that its results, financial and social, are not what you expected and that circumstances for which nobody blames you have contributed so largely to these results! Therefore if the right hon. Gentleman can make that modification it will have permanent value to the stability of public opinion in a large part of the country.

Question put, and negatived.


The hon. Member's second Clause—[Application of Excess Profits Duty to Industrial and Provident Societies]—involves a charge, and is out of order.


There is another Clause in my name relating to co-operative societies.


That comes further on.

The following stood on the Paper in the name of Mr. G. TERRELL: