HC Deb 14 July 1920 vol 131 cc2529-44

In the application of Part III. of the principal Act to excess profits duty for any accounting period ending after the thirty-first day of December, nineteen hundred and nineteen, the following provisions shall have effect:—

(1) For the pre-war standard of profit there shall, on the application of the taxpayer, be substituted a standard (in this section referred to as "the substituted standard") of an amount equal in the case of a trade or business which had no pre-war trade year to the statutory percentage on the capital employed in the accounting period, and in the case of any other trade or business to the percentage standard, with the addition in either case of a sum of five hundred pounds in respect of each working proprietor in the trade or business:

Provided that—

(a) the amount of the substituted standard shall not as respects any trade or business exceed the sum of seven hundred and fifty pounds in respect of each working proprietor in the trade or business; and

(b) in computing the profits of a trade or business in any accounting period as respects which the substituted standard is in force, no deduction shall be allowed in respect of the remuneration of any working proprietor; and

(c) where the accounting period is less than a year the substituted standard shall be proportionately reduced; and

(d) where a substituted standard has been adopted in the case of any trade or business for any accounting period the provisions of paragraph (4) of section twenty-six of The Finance Act, 1917, as amended by this part of this Act, shall not have effect as regards that trade or business in respect of that accounting period.

In this paragraph—

The expression "trade or business" means any trade or busi- ness carried on either by an individual or by persons in partnership or by a private company within the meaning of The Companies (Consolidation) Act, 1908;

The expression "proprietor" means, as the case may be, the individual carrying on the business, any partner in the partnership, or any director of the company owning not less than twenty per cent. of the share capital or stock of the company;

The expression "working proprietor" means a proprietor who has, during not less than half the accounting period, worked full time in the actual management or conduct of the trade or business, but no person shall be deemed to be a working proprietor in the same accounting period in respect of more than one trade or business;

(2) Any trade or business carried on or owned by a company or other body corporate whose directors have a controlling interest shall, for the purpose of the provisions of the principal Act relating to the statutory percentage as amended by any other enactment, be treated as if it were a trade or business carried on or owned by a body other than a body corporate:

In this paragraph the expression "director" includes any person engaged in the management of the trade or business whose remuneration is provided out of the funds of the trade or business.—[Mr. Chamberlain.]

Brought up, and read the First time.

Motion made, and Question proposed, "That the Clause be read a Second time."—[Mr. Chamberlain.]


I would like some explanation of this very important Amendment. As I understand, it 10 principally to mitigate hardships which have been put to the Chancellor of the Exchequer not only in this House, but by means of deputations. I have read through the White Paper and find it difficult to follow. It contains references to two or three Statutes. Clauses which are referable and relevant to the explanation are not set out in the White Paper. The only way in which we can understand what the Chancellor really intended would be by having the actual sections of those Statutes spread out before us. There are very many hardships. I may instance one or two of which I have some personal knowledge. In my own constituency there is a large number of paper mills. There are two ingredients in making paper—esparto grass and wood pulp. It is no exaggeration to say that the cost of these two very important raw materials has gone up 500, 600 or even 700 per cent. Some of these businesses are very hard hit. How far under the new Clause are such circumstances met? I see that there is to be a substituted standard. I also notice that there are no fewer than six Amendments to the Clause on the Paper. I do not know whether the hon. Members whose names are attached to those Amendments are present, but I should have thought that after an explanatory statement from the Chancellor of the Exchequer of the meaning of this new Clause it would have been better to have reported progress and to start on this very important matter with minds which are not full of the somewhat heated and rather unmusical demonstration which we have just seen and heard—to start with minds much more adapted to the intricacies of the Chancellor's new proposals.


We have done our utmost to meet the convenience of the House. My hon. Friend knows, and no one knows better, what efforts the Government have made to meet the particular desires of himself and his party in respect of the matter we have just discussed. My right hon. Friend knows that hopes were held out that the discussion would end at the dinner hour. It was not Ended by dinner-time and until 11 o'clock no effort was made to bring it to a conclusion. We have done all we can to meet the right hon. Gentleman and his friends and the House generally, for instance those who were interested in the Corporation Profits Tax, by giving good time for discussion. But we are now working within narrow limits of time. There must be a reasonable interval for reprinting of the Bill and the consideration of Amendments between the Committee stage and Report. There is a limit by Statute of the time within which we must have the Bill through not only this House but the other House. According, we must finish it on Friday. I submit, that if the Committee will co-operate it will be for their convenience to get through these clauses which are clauses giving concessions, to-night, and then to adjourn, and to take the clauses moved by critics of the Budget on Friday.

The clauses I have put down are designed to fulfil, and do fulfil, a pledge given first by my right hon. Friend, the Secretary to the Treasury, and subsequently repeated by myself, that we would propose amendments to alleviate the pressure of the tax in respect of new businesses and small businesses. By these clauses we confer four reliefs in regard to all accounting periods ending December 31st last; we increase by one per cent. the statutory percentage on increased capital and capital in new businesses. That is at a cost to the Exchequer in a full year of £4,000,000. We increase the small business allowance at a cost in full of £5,000,000, and we grant a new relief to small private businesses, including private limited companies which are conducted by the proprietors. The relief consists of a right to substitute for the normal standard a substituted standard consisting of, first, £500 for each working proprietor, and, secondly, the statutory percentage on the capital, subject to the overriding qualification that the substituted standard so fixed shall not exceed £750 for each working proprietor. The Clause contains ancillary or correlative relief for private limited companies. The total cost of that in a full year is £5,250,000. Hitherto we have treated these cases harshly, because we have treated the private trading companies like partnerships where it was to the advantage of the revenue, and like companies where it is to the advantage of the revenue. We ought to treat them on one footing or the other, and we propose to give them the relief which is correlative to the tax which they pay. These matters are not very easy to explain, but I hope what I have said is sufficient to indicate to the Committee, at any rate as supplemented by the White Paper, both the purpose for which I have put down the Clauses and the extent of the relief which we have given.


Will the right hon. Gentleman say to what extent exactly the two Clauses are alternative and to what extent they are cumulative? In regard to one provision they are clearly alternative, viz., the Amendment of paragraph (4) of Section 26 of the Finance Act, 1917.


I think that is the only case in which they are alternative, the single case where the man must choose which of the two measures is the most favourable to him, but he cannot have both. Otherwise the provisions are supplementary one to another.


I do not think the right hon. Gentleman's speech can be passed over without a word of protest against taking a matter after 11 p.m. upon which the business world are thinking very deeply. We have listened this evening to a debate on land taxes which I do not think the people of this country are thinking two minutes about.


We must not revert to that. It is a matter of the procedure of the Committee.


We feel deeply on this question, and we should like a full discussion of it, because there many intricate matters in this new Clause.


It is really in the general interests of business and the convenience of Members, as I think they will come to recognise in time, that I make this appeal to-night. Of course this is not the last stage. We have still the Report stage.

Clause read a Second time.

Lieut.-Colonel SPENDER CLAY

I beg to move as an Amendment to the proposed new Clause in Sub-section (1) after the word "business" ["working proprietor in the trade or business"] to insert the words "or widow of such proprietor."

The object of this Amendment is to extend to the widow who has lost her husband, and who has a working partner in her business, the same advantage which the husband would have had had he survived the War.


This is an extension I had not contemplated, but I am ready to accept it.

Amendment agreed to.

Further Amendments made:

In Sub-section (1a) after the word "business" ["in the trade or business"] insert the words "or widow of such proprietor."

At the end of Sub-section (1) insert the. words The expression widow of such proprietor means the widow of a working proprietor where the business is carried do for her benefit and the relief could have been claimed by her late husband had he lived and retained the position in the business which he held before joining the forces."—Lieut.-Colonel Spender Clay.


I beg to move, at the end of Sub-section (2), to insert the words Provided that, where it is proved to the satisfaction of the Commissioners of Inland Revenue or of the General or Special Commissioners on an appeal to them that, owing to alterations of value or other circumstances, the pre-war standard of profits, as, defined for the purpose of Part III. of the principal Act, no longer represents a fair basis of comparison with the profits of the accounting period, the Commissioners of Inland Revenue or the General or Special Commissioners, as the case may be, shall add to the pre-war standard as so defined such percentage of the amount of the standard as so defined as is required to make the pre-war standard a fair basis of comparison, and that amount so increased shall be taken as the pre-war standard for any accounting period on and after the first day of January, nineteen hundred and twenty. There are many cases where the pre-war standard is manifestly unfair and unjust. We know special and exceptional circumstances. I maintain that there ought to be some right of appeal, and that these circumstances should be taken into consideration by the Assessors of Income Tax and if a case can be proved, some adjustment or alteration of the assessment should be made, and the injustice remedied. I could recall many cases, but I will only give one instance, that of a flour mill. Three years before the war this mill was equipped with old-fashioned and inefficient machinery. Its receipts, owing to this uneconomic working, got very low. In the year preceding the war the proprietors installed new, modern, and very efficient machinery. During the installation the output of the mill was naturally limited by the fact that this work was going on, and therefore the three years' standard of profits was very low. The new machinery was made full use of, and the profits rose. Now we have got to the end of the war, the mill is efficient, and capable of earning considerably higher profits owing to the outlay of the proprietors. I submit in all the circumstances of the case the calculation for the purposes of the Excess Profits Duty should be made on a juster basis. Many appeals would overwhelm the officials, I quite admit, but some machinery should be provided for exceptional cases to be decided on their merits.


I desire to associate myself with the appeal which my hon. and gallant Friend has just made, and I hope the Chancellor of the Exchequer will see his way to accept the Amendment. I have had a great number of cases submitted to me of extraordinary hardship of firms reconstructing and re-equipping their works within the period that comes under the datum line and but for the war they would have had much higher standards. The grievance s is against the datum line, and there is no equality between two firms capable of equal production because one has a high and the other a low datum line. I hope the right hon. Gentleman will grant power to allow the Commissioners to examine cases on their merits and allow any appeal either to the Commissioners or the Referees. I want to make things easier in these hard cases which are rankling in people's minds. I am not trying to whittle down the tax, and what is suggested by the new Clause will not involve any recasting of the Budget and will not give much trouble. This is a very genuine grievance, and in view of the great victories which the Chancellor of the Exchequer has secured all along the line in connection with the Budget I think he must be merciful in this case and endeavour to make the burden of this tax less oppressive. I trust that this proposal will be accepted.


If I thought the result of this proposal was likely to be to knock a hole in the Chancellor's scheme I would not support it. I understand that hon. Members who have supported this new Clause accept in a perfectly loyal spirit the decision of the Committee on the tax. What they are urging is that here is a very great and an admitted grievance, and if it is at all possible either by the suggestion in this Clause or by some other method, they ask for a mitigation of that policy and request that these firms should be given an opportunity of laying their special grievance before an impartial tribunal. I am quite sure that if the right hon. Gentleman could do something of that kind without damaging his proposal too much he would be going a long way towards making this tax operate with a far less share of injustice than it appears to do at present.


I quite recognise the difficulty of the class of cases to which the speakers have alluded. It has been a difficulty which has been inherent in this tax from the beginning, and in my opinion the only way of remedying this grievance is to get rid of the tax altogether. After all, what is it that we are asked to do in this Amendment? First, let the Committee remember that the whole system of arriving at the standard on which the computation of excess profits has to be made was debated at great length in this House, and has been settled by Parliament. A basis was arrived at on which the tax has been assessed on the businesses of the country from the beginning of the tax until now. The Amendment asks leave to appeal to the Commissioners of Inland Revenue, or to the General or the Special Commissioners, and it asks them to say whether the position of the individual company still represents a fair basis of comparison with the profits of the accounting period. In other words, when Parliament has laid down a method of doing this, certain businesses of this country are to be at liberty to appeal to some hundreds of different authorities, who will act without co-ordination, and may give almost as many different rulings as they are themselves in number.

This must evidently throw into confusion the whole system of assessment. Probably there is no man in the Kingdom whom, if he realise that he has the power to make an appeal on the ground that he is not fairly assessed, will not make his claim. He has everything to gain by making it, and nothing to lose. He could not be in a worse position than he is, and he may be in a better. You would, by passing such a proviso, go away from what has been laid down, and you would put it into the power of any one of the authorities from one end of the kingdom to the other to alter the method of assessment agreed to by Parliament, and to impose some other mode. In my opinion, at the present stage of the existence of this tax, you would thus cause an endless amount of confusion. You might quite possibly upset seriously the calculations that have been made as to the receipt of income from and on all these grounds. I hope very much that the Committee will not pass this proviso.


I think my hon. Friend has overlooked the fact that this Amendment is the corollary of the provision contained in Section 40, Sub-section (3) of the principal Act, the words of which are:— Where it appears to the Commissioners of Inland Revenue on the application of a taxpayer in any particular case that any provisions of the Fourth Schedule to this Act should be modified in his case, owing to any other special circumstances specified in regulations made by the Treasury, those Commissioners shall have power to allow such modifications of any of the provisions of that schedule as they think necessary in order to meet that particular case. It goes on: If the Commissioners refuse, on any such application, to allow any modification, or if the applicant is dissatisfied with any modification allowed, the applicant may require the Commissioners to refer the case to a Board of Referees. In face of that, the right hon. Gentleman's argument falls to the ground.


I do not think that the allowing of applications to the Commissioners would have such a result as the right hon. Gentleman seems to fear. The Commissioners would have to decide, not the mode of assessment, but simply the facts of the case, that is to say, whether, the mode of assessment laid down by Parliament being applied, the result is a fair one.


On similar facts arising in different districts, coming before different tribunals, wholly different decisions might be arrived at. That is what my right right hon. Friend was explaining.


I do not think the Chancellor of the Exchequer has shown that sympathy with grievances and injustice which he has been showing during the progress of the Bill, and I think he is badly advised. My right hon. Friend, the Financial Secretary, also, is a little less fair than he usually is, when he argues exactly on the wording of this particular Clause, and not on the case put before him. I took care not to associate myself with the phraseology, but to commend the case, and not the words, to my right hon. Friend's attention. As it is inconvenient to dispose of the matter at this very late hour, I propose to ask leave to withdraw the Amendment until a more convenient season.

Amendment, by leave, withdrawn.

Lieut.-Colonel GUINNESS

I beg to move, at the end of Sub-section (2), to add (3) Article five of the Fourth Schedule of the Finance (No. 2) Act, 1915 (which limits in certain conditions the deduction which may be made for the remuneration of directors and others in computing profits for purposes of Excess Profits Duty), shall be amended so that the words 'exceed the sums' shall read exceed by not more than 50 per cent. the sums.' The object of this Amendment is that the remuneration of directors and the salaries of higher officials should be raised to 50 per cent. over the pre-war rate, and be allowed as a deduction from the gross profits before ariving at the figure on which Excess Profits Duty is assessed. The law on this matter is at present governed by the Fourth Schedule of the principal Act. Sub-section (5) lays it down that the deduction from directors' remuneration shall not exceed the sums allowed for that purpose or paid to directors in the last pre-war trade year. That obviously is no longer fair. Wages have gone up enormously and salaries of all descriptions have risen and why should directors who were working at a certain standard six years ago be limited to that standard at present? It is true a discretion is allowed in this Sub-section to the Commissioners of Inland Revenue but that discretion is limited to special circumstances or to the fact that the remuneration of any manager or managing director depends on the profits of the trade or business. I take it that the latter category is the very class to which the provisions of this new Clause have already been applied by the Chancellor, and there is an equal claim on the part of public companies of other than a private character and it is felt very generally as a grievance at present that there is no statutory right to a reasonable increase in the remuneration under present conditions. Therefore I hope the right hon. Gentleman will see his way to remedy the grievance by accepting the Amendment.


I am afraid I cannot accept the Amendment and I think I shall convince my hon. and gallant Friend that it is neither necessary for the purpose he has mostly in mind nor in itself such a proposal as he would like to father. I think he did not quite appreciate the present position. The rule in question prohibits the allowance as deducted in computing the profits of any business for Excess Profits Duty in any particular year in respect of remuneration of a director, manager or person concerned in the management of the business in excess of the amount paid in the last pre-war year unless the Commissioners of Inland Revenue otherwise direct. In practice, and in pursuance of announcements made by Ministers in this House in the early days of the Excess Profits Duty, the Commissioners allow no deduction in excess of the pre-war amount of remuneration paid to a director or manager who has a substantial proprietary interest in the business, such as the proprietor or director of a private limited company, who is analogous to a partner in a private business. That places an individual in the same position as regards Excess Profits Duty, whether he is the proprietor of a private business or a director with a large proprietary interest in a private company. These two cases ought to be treated alike. The case I think my hon. and gallant Friend has in mind is not that case but the case of an employé director who is really a servant. In that case, again the following declarations made publicly, and within the knowledge of the House, the Commissioners in the exercise of their discretion allow as a deduction remuneration paid up to an amount equal to the remuneration paid in the last prewar year plus £2,000 per annum.

Lieut.-Colonel GUINNESS

For the whole of the salaries of the company?


An employé director without a controlling interest. He is not to escape duty by taking his profits in remuneration instead of taking them in dividends.

Lieut.-Colonel GUINNESS

Is the right hon. Gentleman referring to an in- dividual or to the whole company? If it is the case that the increase of £2,000 is payable to an individual it more than meets the case, and that was not in the knowledge of those who desired me to put the Amendment forward.


It is not confined to one individual in a company. It does not depend on the number, but on the nature of their position.

Lieut.-Colonel GUINNESS

It may be divided among a great many.


They can pay up to that amount in respect of more than one person provided he occupies a status which justifies him in being treated in that way. In other words, a director who is merely the servant of a body of shareholders and not the equivalent of a partner in a private firm could not get this relief.


Can every member of the same firm get it?


Yes. It is not a question of the number of people. It is a question of the position in which they stand. I hope I have fulfilled my object in rising, and that I have satisfied my hon. and gallant Friend that his Amendment is unnecessary.

Lieut.-Colonel GUINNESS

I am very grateful to the right hon. Gentleman for his explanation.

Captain W. BENN

I have a case in my mind of a man holding a number of shares in a limited liability company. Suppose he is a director and is the proprietor of a large number of shares. He is disqualified from having his remuneration raised as a director because he holds a large number of shares or is a proprietor in this private company. That works very hardly upon him. He is called upon to retain his original salary because, for the purpose of calculating these duties, the Commissioners would never permit his co-directors to raise his salary above what it was before the war. That does not seem fair. If he was a servant of the company, according to the Chancellor of the Exchequer's explanation, the company would be permitted to increase his salary—there would be an allowance up to £2,000; but because he happens to be the owner of a substantial number of shares the Commissioners would be unwilling to make an allowance, and it is a case of keeping the lower salary. I should be glad to know from the right hon. Gentleman what size of holding a managing director could have who would not be ranked as a partner, and what salary would disqualify him for an allowance. Will the right hon. Gentleman explain what is the allowance to an employee who is a director, and what is the allowance to a director who holds shares in the company?


It is very difficult for me to deal with a technical matter of this kind in reply to a question with reference to the particular case which the hon. and gallant Member says he has in his mind. I cannot go into the details of a case.

Captain BENN

I only asked for a general statement.


I will do the best I can to answer the hon. and gallant Gentleman. I am not making any complaint. I am only pointing out the difficulty of satisfying him in his inquiry upon an individual case. There is no absolutely fixed size of holding which will qualify or disqualify for the allowance because the cases have to be judged by the Commissioners on their merits. It is a question of evidence. He gave a case, as I understood it, of four or five people who own a company, or practically own a company—which is called a private limited company in which they are the partners. I can say this: they would not be allowed to divide up the profits among themselves in the shape of remuneration, thereby avoiding the payment of Excess Profits Duty. But if it was a case of a man who in order to be a director had to have a qualifying number of shares it would be different. He might even have more than the shares qualifying him as a director. It is a question of degree and fact to be decided on its merits in each case. The object of my predecessors and of those who have had to administer the Act has been, and is, that we should give relief in respect to the servant of a company who is not analogous to a proprietor and to a director who is not analogous to a partner. They should get the same relief and should be treated alike.


In my opinion this touches the very root and crux of the injustice which is felt with regard to this tax by many people. If a firm started business with a couple of partners, and fixed their remuneration at £100 per year each they are tied down to that sum no matter how the business has increased. An agent in Manchester who sells for another firm and who has a wife and five children made total profits for the year of £1,500 and he has had to hand over to the revenue authorities no less than a thousand pounds. A case like that should be remedied. In recent times a lot of people have touched substantial sums of money, and I submit you should allow a sum of £2,000 before excess profits are considered. That sum is reduced to £1,200 by taxation. It may be that such a man for the first time has the opportunity to send his boy to a public school, and that may be the only manifestation of his new position that his wealth can give. A man in that position should be allowed a living wage.


Is this in order on an Amendment relating to directors?

Captain BENN

May I submit that the hon. Member's remarks refer precisely to what the Amendment is.

The DEPUTY-CHAIRMAN (Sir E. Cornwall)

The hon. Member is in order.


Men in South Wales who work with their hands are receiving from £30 to £50 per week, and men who start business may only be allowed a couple of hundred per year and that is not fair.


There is an allowance of £500.


It is too little. I think the clause should allow £1,200 after all taxes are paid.

12 M.


I trust that the Chancellor will do something to remove the inequalities and injustice of this tax by accepting this Amendment, or a new Clause of which I have given notice, and which asks that pre-war agreements should be honoured. Great hardship is inflicted on managers and directors, who are the brains and the driving power, and who are restricted as to remuneration and exceptionally taxed. The treatment experienced rankles in the minds of a great number of people. Article 5 of Part I. of the Fourth Schedule gives a discretionary power to the Commissioners of Inland Revenue in regard to special circumstances. From a reply to a question of mine it appears that the Commissioners, instead of going into every individual case, as they should, exercise their discretion by issuing a White Paper of instructions to the tax assessors. That is not fair treatment, and the action of the Treasury in regard to this question of remuneration has excited the bitterest feeling of hostility. I hope that the Chancellor may see his way to grant some modification, and, unless he does so, we shall have to consider this matter on Report and take the sense of the House on it.


My right hon. Friend used the same argument last night, that the one man proprietor of a business could pay himself a salary and therefore destroy all the advantage of these profits to the Treasury, but he was overlooking the fact that anyone doing that would immediately make himself liable to super-tax.

Major NALL

I understand that £2,000 is allowed, in so far as it is granted, to those who have no controlling interest in the business. That raises the difficulty—what is a controlling interest? In some cases blood relationship. Take father and son separately, neither has a controlling interest. Together they have, and the rule disallows the £2,000 in that case. The hon. Member for Stockport referred to the case of a father and son in Manchester. I think I know the same case. Before April, 1914, the son was receiving £500 a year. Then they formed a company. The father had a controlling interest because the son is still limited to £500, though he himself has no controlling interest. I would suggest that the right hon. Gentleman might consider on Report three points—first, the definition of what is "controlling interest"; second, where there is no controlling interest to allow the £2,000 as now in force, and third, where there is a controlling interest that it is reasonable to allow some increase as compared with 1914, even if it is only £1,000.

Amendment negatived.

Lieut.-Colonel BUCKLEY

I beg to move at the end of Sub-section (2) to add a new Sub-section— (3) section forty, Sub-section (2), of the principal Act shall, as respects excess profits arising in any accounting period commencing on or after the first day of January, nineteen hundred and twenty, have effect as if for "six per cent. "and" seven per cent." were submitted "ten per cent." and "twelve per cent. I cannot understand why there should be this difference between pre-war capital and post war capital.


I raise the same point, though on a different percentage, on a new clause of the Chancellor of the Exchequer which comes next, and I would suggest that it would be more convenient to take it then.


Perhaps hon. Members would desire to take it in the next new clause.

Amendment, by leave, withdrawn.

New clause, as amended, added to the Bill.