§ (1) Excess Profits Duty under the Finance (No. 2) Act, 1915 (in this Part of this Act referred to as "the principal Act"), shall be charged, levied, and paid in respect of the excess profits of every trade or business, and repayment and set-off of duty shall be allowed, for the period which is the final accounting period of that trade or business within the meaning of this Section in all respects as if that period were an accounting period within the meaning of Part III of the principal Act, and no period subsequent to the final accounting period shall be deemed to be; or to be part of, an accounting period within the meaning of the said Part III.
§ (2) For the purpose of the provisions of this Part of this Act, the final accounting period of a trade or business shall be taken to be the period which commences at the end of the accounting period of that trade or business last preceding the fixed date and ends on the fixed date, and the expression "the fixed date" means in the case of a trade or business which was commenced on or before the fourth day of August, nineteen hundred and fourteen, whether there has or has not been a change of ownership, the date of the expiration of eighty-four months from the date of the commencement of the first accounting period of that trade or business and in the case of any other trade or business the thirty-first day of December, nineteen hundred and twenty:
§ Provided that in the case of a trade or business formed by the amalgamation, after the fourth day of August, nineteen hundred and fourteen, of two or more trades or businesses, the final accounting period of the amalgamated trade or business shall be the period ending on the earliest day on which the final accounting period of any one of the constituent trades or businesses would have ended if it had remained a separate trade or business.
§ (3) Where any trade or business is, after the termination of its final accounting period, amalgamated with any other trade or business the provisions of the principal Act shall have effect as if the amalgamation had never taken place, and the profits or losses of that other trade or business shall be separately computed.
§ (4) Where any period, which would if this Act had not passed have been an accounting 932 period of any trade or business within the meaning of the principal Act, commences before and ends after the termination of the final accounting period of that trade or business, the total excess profits, and any deficiencies or losses, shall be ascertained as if the first-mentioned period were such an accounting period as aforesaid and shall be apportioned between the time ending on and the time subsequent to the date of the termination of the final accounting period in proportion to the number of months or fractions of months before and after that date respectively.
§ (5) If, before the passing of this Act, any duty has been paid by, or repaid or allowed by way of set-off to, any person in respect of the excess profits or the deficiencies or losses, as the case may be, of any period (being a period which if. this Act had not passed would have been an accounting period), comprising any period subsequent to the termination of the final accounting period, those excess profits, deficiencies, or losses shall be apportioned in accordance with the foregoing provisions of this Section, and a proportionate part of the amount of duty paid, or repaid or allowed, as the case may be, shall be repaid or allowed by, or repaid to, the Commissioners of Inland Revenue, and any amount so repayable to the Commissioners shall be recoverable as a debt due to the Crown from the person to whom the repayment or allowance was made.
§ (6) For the purposes of this Section trades or businesses carried on by companies shall not be deemed to have been amalgamated by reason that the profits of the companies are assessed together by virtue of the provisions of Rule 6 of Part I of the Fourth Schedule to the principal Act and the trade or business of each such company shall be treated as a separate trade or business.
§ (7) The Commissioners of Inland Revenue may make such assessments as may be necessary to give effect to the provisions of this Section.
§ The CHAIRMAN
The Amendment on the Paper in the name of the hon. and gallant Member for Leith (Captain Wedgwood Benn), to leave out Sub section (2) and insert other words, is out of place. If he will embody the substance of his Amendment in Sub-section (2) after the word "shall" ["business shall be"], it will be in order. The second Amendment, in the name of the hon. and gallant Member for Moss Side (Lieut.-Colonel Hurst), is not in order as it stands on the Paper, but he has handed in a manuscript Amendment very much to the same effect, which is in order.
§ 4.0 P.M.
§ Lieut.-Colonel HURST
I beg to move, in Sub-section (2), after the word "business" ["that trade or business"] to insert the words,or at the option of the taxpayer the thirty-first day of July, nineteen hundred and 933 twenty-one, the first accounting period of each such trade or business in the event of the exercise of such option being readjusted accordingly.The Amendment carries out the same intention as the Amendment on the Paper, but it is in order by making the provision exerciseable at the option of the taxpayer. The intention is to give the taxpayer the option of terminating the final accounting period for which his business is liable to Excess Profits Duty at the 31st July, 1921. This Amendment is of great importance to the whole business community. It is of peculiar importance to those firms which are liable to Excess Profits Duty and which, by the accident of fortune, follow the practice of making up their accounts at the end of one of the months in the later portion of the year instead of one of the months in the earlier portion of the year. The aim of the Amendment is to give these firms equality of treatment with other firms who have had the good fortune to close their books on such a date as the 31st July, the 30th June or the end of some month in the first half of the year. With regard to the Excess Profits Duty in general, the economic objections have always been well understood by all classes, but it was accepted as a necessity of war. That acceptance, however, was undoubtedly upon the footing that all classes in the business community who were to become subject to the duty were to receive equality of treatment. Upon the face of it, this Bill purports to give equality of treatment, because it makes the accounting period for all firms 84 months. The inequality arises from the fact that the 84 months are different in the case of all firms. The 84 months may coincide with 84 months of war period or post-war period, or with 10 or 11 months of pre-war period and only 73 or 74 months of war or post-war period. It is affected by the blind chance as to whether or not a business was in the habit in 1914 of closing its annual accounts at the end of a month in the earlier portion of the year or in August or some other later month.
4.0 P. M.
This inequality of treatment has caused very great hardship to those businesses which are in the habit of closing their yearly accounts in August, September, October, or November. On those dates in 1920 business was at a high tide of prosperity, and those firms made up their accounts at the 934 crest of a great wave of economic well-being, which affords a very great contrast to the depression to which all trades are liable at the present time, and have been liable since the beginning of the year. The result is that the firm which has made up its accounts on the 31st August, 1920, as being the termination of its final accounting period, is assessed for Excess Profits Duty upon debts which appeared in their balance sheet as good and which, therefore, remain good for the purpose of Excess Profits Duty. It is assessed on stocks which appear at their inflated values and which remain nominally as stocks at those inflated values, and it is also assessed on a basis of profits shown in the balance sheet as high profits and they remain nominally as high profits. On the other hand a very large proportion of the debts have proved to be irrecoverable. I have had a communication this morning from a firm in Huddersfield who state that 50 per cent. of debts which appeared as good in the balance sheet on 30th September lastyear have proved to be irrecoverable debts. The stocks have depreciated in many cases to the extent of three-fourths in Value since the end of August and September last year, while the profits which then appeared to be great have proved to be phantom profits. In other words, the balance sheet at the end of the final accounting period of a very large number of trades and businesses during the later portion of last year now appear to have reflected a mere mirage. The prosperity was illusory; but it has remained stereotyped as a liability to which these firms are subject in respect of Excess Profits Duty. That works very great hardship in the case of firms who by the mere accident of fortune make up their accounts on those particular dates. There may be two firms who compete with one another, who carry on businesses side by side and deal in the same markets, and whose profits and turnovers and general dealings are very much the same. One of those firms stands to lose to an immense extent by becoming liable to the Excess Profits Duty by reason of its final accounting period terminating at one of the dates to which I have referred, while the other firm by the mere accident of terminating its last accounting period in the earlier 935 portion of the year are able to recover their losses from the Government. One firm who wind up their final accounts on 30th September compare their position with the position of another firm who have the good fortune to wind up their accounts in June or July this year and who happen to be their chief competitors. They say:They are able to reclaim all their losses in the depreciation of stocks, all their losses in bad debts, and all their losses in commitments up to the extent of the total sums which they have paid in Excess Profits Duty. In addition to this, owing to the statement by the Chancellor of the Exchequer in July last as to his intentions, they have been able to make their arrangements and to dispose of their stock at very low prices knowing that they had a claim on the Government for their loss, and by these operations they have been able to undersell the market and spoil legitimate trading.That is the case in regard to the competition between one English firm and another. It is just as much a hardship when you compare one British firm subject to the Excess Profits Duty, who have made up their accounts to the end of one of the months in the later portion of last year, with foreign competitors. There is no merit at all in happening to balance your books in the early portion of the year. There is no principle at the bottom of this differentiation. It is simply the mere accident of fortune. This Committee has to address its mind to the question whether this great inequality of treatment, involving very severe hardship to many firms, is in any way avoidable. It is perfectly true that in the Schedule there is a paragraph which provides that subsequent depreciation in stock after the last balance sheet has been taken can be brought into account, but that does not really cover a very large number of the cases where this hardship is felt, because many firms have been carrying on business on a system of forward contracts, and these forward contracts are not covered. In many cases, not one-quarter of the stock held by the firms, in whose interests I have brought forward this Amendment, is protected by the Bill in its present form.
Another difficulty has arisen with regard to bad debts. A great many of these balance-sheets at the termination of the final accounting period have been adjusted on the footing that the debts were good debts. There is nothing in the 936 Bill at present enabling a readjustment of those balance-sheets to meet the eventuality of some of those debts proving to be bad debts. It is quite true that Clause 27 gives power to make re-assessments and repayments, but it is exceedingly general in its phrasing, and my own impression is that it is not sufficiently specific to cover these cases, even if it be intended in any way to deal with them. The Amendment, I admit, is a counsel of perfection. It proposes that there shall be one uniform date for the final accounting period at the option of the taxpayer, so that firms that stand to lose very greatly by having their final accounting period made up to some date last year can elect to substitute 31st July this year. It is quite true that there may be inconvenience in adopting this Amendment. It is, however, quite possible to preserve the existing datum line upon which the duty is to be based, and, although it is perfectly true that the Treasury may stand to lose something by a readjustment of this character, it is far better, after all, to stand a certain measure of loss than to bring it about that firms have to close down in consequence of having to pay very large sums in Excess Profits Duty, sums which never became properly due from them, and which in the present condition of affairs they are totally unable to meet.
There must be a very substantial case for some such Amendment, because since it was put down upon the Paper a very large number of hon. Members have put down their names in support of it. Those hon. Members represent many districts all over the country, and that shows, I think, how gravely and widely this grievance has been felt. One recognises that in politics the true wisdom is the discovery, not of perfection, but of the second best, and those firms who feel the grievance would be grateful if he Government could offer them something short of the counsel of perfection indicated in this Amendment. There are new Clauses down in the names of the hon. Member for Limehouse (Sir W. Pearce) and myself which provide specifically for forward contracts and bad debts. If the Chancellor of the Exchequer can see his way to promise that those new Clauses will have not only his serious, but his sympathetic attention, that will do something to allay the very great apprehension which is felt in many business quarters at 937 the present time and which this Amendment is intended to meet. Of course, till he has given some indication of the Government's intention to meet these very genuine hardships, which operate intolerably on industries in many parts of the Kingdom, it is desirable that this Amendment should be before the Committee, because it serves two good purposes. First of all, it enables the Committee to realise how grave and how general is this hardship, how accidental it is in its origin, and how it has no foundation whatever either in merits or on principle. Therefore, it must be met in the interests of justice and of the large amount of capital and labour that is involved in those industries which by the mere accident of the date when they made up their final accounts in 1914 at present stand to lose so much. It is also desirable to bring it forward in the hope of eliciting from the Government some assurance that the claims of the firms and trades affected by the Bill in its present form may be met with a large measure of forbearance and generosity, so far as any Government can show forbearance and generosity in these difficult and troubled times.
The CHANCELLOR of the EXCHEQUER (Sir Robert Home)
I regret that I cannot give way to my hon. and learned Friend, who has put this matter with great lucidity. He has referred to the body of support which has been given to his Amendment since it was put down upon the Paper. I am not at all surprised that a variety of names have been added to his proposition. I would venture to collect a large number of names to any proposition which would relieve any portion of the community from taxation which at the moment they do not wish to meet. In point of fact, the object of this Amendment and of many others, is to have the best of both worlds. My hon. and learned Friend seeks to give to the trader an option as to the period when his accounting period for Excess Profits Duty shall cease. In the first place, that would be entirely contrary to the pledges which were put forward by the Lord Privy Seal (Mr. Chamberlain) when he made his announcement at Birmingham as to what he proposed to do in connection with the Excess Profits Duty. He then stated specifically that in the case of businesses which started before the War their accounting period would cease in seven years, and that as to 938 those which started during the War the end of the accounting period could be the 31st December, 1920. To vary that now would undoubtedly create far more dislocation in the business community than even the benefits which my hon. and gallant Friend would offer to them. Of course, if you offered them an option, every man would take that which suited him best, and the result would be exceedingly detrimental, because it would involve the Exchequer in losses which would run into many millions. Accordingly, I am not favourably impressed with the Amendment at the outset.
I feel bound also to follow the pledges which were given by my predecessor and to stand by the dates which he announced. I should like, further, to say that I have met several deputations of business men upon this question, many of them being very representative deputations. I have never yet had put before me by any representative deputation the proposition which is now brought forward by my hon. and learned Friend. I do not say that this rules it out, but at least it shows that the business community has not readily taken to this way of dealing with the matter. I appreciate part of the argument of my hon. and learned Friend. It was pointed out to me that there would be very great disparity in the results to business people whose accounting period ended at different dates, and that under the circumstances in which we live to-day it would give certain traders advantages over others. I have met that point of view, I think, satisfactorily. In any case, I have at several times received grateful acknowledgments from various bodies of the business community for the proposition which I put forward and which is now embodied in this Bill. We provide that there shall be what we call a levelling process, by which all people who have stocks which are depreciating in value at the present time shall be able to write off their loss against the profit upon which they have previously paid, and that they shall be able to do that down to a common date, which is the 31st August of this year. In these circumstances, as I have satisfactorily met, as I believe and as I have been assured, the claims of the business community upon this matter, it is perfectly obvious that it would upset the whole plan if we were now to arrange that there should be an option 939 which would enable people to choose the 31st July instead of any other date at which their accounting period might happen to end. So far from creating equality, it is perfectly obvious that it would still leave business people able to choose very different dates, and perhaps choose them badly, thus putting themselves in a position of great disadvantage as compared with their competitors. For these reasons, I am afraid that I cannot accept the Amendment.
§ Mr. HOLMES
I do not see how the Committee can ask the Chancellor of the Exchequer to accept this Amendment. In my view the original Act was all wrong in the date that it allocated for the end of the first accounting period. The Excess Profits Duty was intended to be a rough and ready way in which large profits made by some firms during the War should be taxed. Finance Bill No. 2, 1915, which dealt with that matter should have provided for taxing for Excess Profits Duty, profits made after the 4th August, 1914. Instead of that the original Act said that the first accounting period which was assessed to Excess Profits Duty shall be the first date at which the business makes up its accounts after the 1st August, 1914. The result is that there were firms in this country who made up their accounts—I know one—on the 8th August, 1914, and paid Excess Profits Duty for the year ending 8th August, 1914. Those profits had nothing to do with the War. Many other firms made up their accounts on the 30th September, 1914. Again, their profits had nothing to do with the War. Many businesses made up their accounts to the 31st December, 1914, and paid Excess Profits Duty on those profits though they had actually lost money since the 4th August, 1914, and were thus paying on profits made during the first seven months in 1914. That is the reason why there are so many anomalies in the assessment of this duty, but it is not the present Chancellor whom we blame for it. The mistake was originally in not assessing Excess Profits Duty as from the 4th August, 1914, for all businesses, but while professional accountants would bless the hon. and gallant Gentleman for sending them work there is no doubt that if the present Amendment were accepted it would create far more anomalies than exist under the law as it at present stands, together with 940 the Bill which we are now considering, and I therefore hope that the Chancellor will not accept the Amendment.
§ Sir W. PEARCE
I do not think my hon. Friend opposite expected the Chancellor to accept the Amendment. I agree with my hon. Friend who has just spoken. In many respects the Chancellor has met the business community very fairly, but there is a particular fact of which he has so far not been able to take cognisance. That is the case of persons who made up their accounting period to the 31st December last, and have since had to face entirely unexpected circumstances. The enormous drop in values has changed the whole prospect of business since and made a great difference as to bad debts and materials for contracts and so on, with the result that the estimates for bad debts and many other matters are entirely wrong. Therefore it would be well if the Chancellor could be persuaded to deal with this particular point. There has been such a change in the commercial position since the 31st December last that those who have made their accounting period to the 31st December are at an enormous disadvantage compared with those who have taken the 30th June. Firms with exactly similar engagements who are competitors in business are in this unequal position, one being at a disadvantage as compared with the other. I hope that the Chancellor will take cognisance of this matter and deal with the point raised so skilfully by my hon. Friend opposite.
§ Mr. A. M. SAMUEL
There is one small point on which I would like the Chancellor of the Exchequer to give an explanation. Accepting my hon. and gallant Friend's explanation as to how the fact of taking an accounting period earlier or later might be advantageous to one firm as compared with another, what would happen if a man bought a certain quantity of goods on the 1st December, but by reason of some misfortune these goods had not been delivered until, say, the middle of January? It would be a hardship if a great fall had taken place in the price of these goods, and he sustained a loss because the goods did not come in before the 31st December and consequently were not taken stock of then. If it can be proved that those goods were on their way under an old contract and had not 941 been delivered by the time the accounting period ended, will some relief be given to these people?
§ Sir R. HORNE
My hon. Friend will notice the Clause in the Finance Bill which provides that such a transaction as he describes will come within the period anterior to the 31st August this year. The loss upon the goods in stock would be set off against the duties paid upon profits. It is dealt with in the White Paper.
§ Mr. SAMUEL
As there is some doubt about it, I think that the matter should be made clear, so that we may understand how it stands, for I did not take it so from the White Paper.
§ Mr. HOLMES
I suppose that my hon. Friend meant that if a man ordered goods on the 1st December, and closed his last accounting period on the 31st December, and received delivery of the goods in January—
§ Sir R. HORNE
I shall deal with that point, if I may, on an Amendment dealing with forward contracts.
§ Mr. KILEY
As I understand, no claims can be made unless stock is taken and accounts are made up to the 31st August. Many firms make up their accounts and stock, not to the 31st August, but to September, October, or November. That will necessitate two stock takings and the employment of the accountants twice instead of once. Could not the Chancellor see his way to extend the period and let stock be taken at the usual time, and then allow claims to be made on a pro rata basis, and so save expense and trouble?
§ Amendment negatived.
§ Major HILLS
had given notice of an Amendment, in Sub-section (2), to leave out the wordsthe final accounting period of the amalgamated trade or business shall be the period ending on the earliest day on which the final accounting period of any one of the 942 constituent trades or businesses would have ended if it had remained a separate trade or business,and to insert instead thereof the wordsthere shall be deemed to be a separate final accounting period for each of the constituent trades or businesses included in the amalgamated trade or business ending on the day on which the final accounting period of each respective constituent trade or business would have ended if it had remained a separate trade or business, and for the purpose of ascertaining the profits and losses of each such constituent trade or business in such final accounting period the profit or loss of the amalgamated trade or business at the latest accounting period thereof shall be divided in proportion to the statutory capitals of the constituent trades or businesses as fixed for the purposes of Excess Profits Duty at the last accounting period of each such trade or business next preceding the date of the amalgamations and the amount of the profit or loss of each constituent trade or business so ascertained, or such proportion of that amount as may be attributable to the number of days, if any, of the final accounting period necessary to make up the full period of eighty-four months for each of such trades or businesses, shall be deemed to be the sum which shall determine its assessment for Excess Profits Duty for that period.
§ The CHAIRMAN
The Amendment of the hon. and gallant Gentleman is not in order. There would be some cases in which it would operate as a relief, and there might be others in which its effect would be the reverse. Therefore it would increase the charge.
§ Major HILLS
Without disputing your Ruling, Sir, may I ask the Chancellor of the Exchequer if he has any announcement to make on the subject of amalgamated businesses?
§ The CHAIRMAN
We have not dealt with amalgamated businesses, and it would not be in order to make a statement now.
§ Captain W. BENN
I beg to move in Sub-section (2) to leave out the wordsthe period ending on the earliest day on which the final accounting period of any one of the constituent trades or businesses would have ended if it had remained a separate trade or business,and to insert instead thereof the wordsthe earliest period at which the respective constituents of the amalgamated business would have terminated its liability under Excess Profits Duty if it had remained a separate trade or business; or at the option of the trade or business concerned a special accounting period, the date of which is the mean date between the earliest and the latest seventh accounting periods of the constituents of the amalgamation business.943 I understand the Chancellor of the Exchequer is prepared to meet us in some way, and therefore I content myself with moving the Amendment.
§ Sir R. HORNE
The question of amalgamated businesses gave the Inland Revenue a great deal of trouble. Obviously, it is a very complicated problem, and it becomes enormously complicated when you take into account businesses with different dates, so far as accounting periods are concerned, amalgamated during the period for which businesses are liable to Excess Profits Duty. I do not pretend to have any specific for arriving at perfection in this matter. Anybody who tries his hand at finding an appropriate plan will be able to urge objection to any single device which I may adopt. Therefore, the best I could do was to adopt something which was the least difficult to operate and was calculated to do least injury to the business of the country. First we considered what appears in one of the Amendments on the Paper—the plan of trying to disentangle the businesses so as to give them their own period of accounting as if they had never been amalgamated. That proved to be completely impossible.
Next we said, "Let us take a mean date." A mean date, where you had several businesses, some of them very different in size and quality from the others which form a part of the amalgamation, really seemed just as illogical and imperfect in application as anything could well be. Accordingly we were driven from that solution. In the end we came to the conclusion that the best thing to do would be to give a date which was the earliest at which any of the businesses in the amalgamation finished its accounting period. That seemed a satisfactory plan, for we thought of the great clamour from the whole of the business community to end the Excess Profits Duty as soon as possible. But this Excess Profits Duty had certainly boomerang tendencies. Now a large number of people, who wished to see it ended as rapidly as possible, desire to see, if not its continuance, at least the continuance of its effect for a much longer period. The Order Paper has borne witness to the fact that most of the businesses of the country now desire to get an extension of the time of that benevo- 944 lent duty's operation. There was an idea suggested in one of the Amendments of the hon. Member for North-East Derbyshire (Mr. Holmes), to provide that where there was a disproportion between one of the businesses and another in an amalgamation, an account should be taken of the disproportion and that a method should be discovered, left to the discretion of the Inland Revenue in the main, by which that disproportion could be met. That is a very difficult thing to do.
We have devised a method which, I think, comes as near a practical scheme as anything of which I can think. We propose to provide, taking into account the disproportion in businesses, that that which has had the largest pre-War standard of profit shall rule, or, at least, have a preponderating effect in ruling, the date at which the accounting period shall be assumed to end. Suppose you had, for example, and in very rough fashion, one business amalgamated with another, where one of the businesses has three times the pre-War standard of profit of the other, then the accounting period will end—again to use very rough language—three times as near to the date at which the larger business would have ended as to the date at which the smaller would have ended. You can work it out in a large number of instances. It does not sound like a scheme which you could explain on the pure grounds of logic, but logic, after all, has very little to do with business. We think it will work out in practice fairly, justly and equitably in all the, circumstances. Accordingly, I have had a Clause drafted on these lines. It will, of course, necessitate a Resolution in Ways and Means, as it involves a charge, and a recommittal of the Bill; but if the Committee is satisfied with the general outline I have given of the scheme, it may avoid discussion of some of the Amendments on the Paper, and hon. Members will then be able to consider the precise terms of the Clause when it appears on the Paper.
§ Mr. HOLMES
I think the Chancellor of the Exchequer has met us fairly and considerately. This was obviously a very difficult point with which to deal, and having regard to all the difficulties I think the new Clause is a sure and ready way of settling the matter, and probably it does it as equitably as any way that has 945 been thought of by anyone. In the circumstances I suggest to my hon. and gallant Friend that he should withdraw his Amendment.
§ Major HILLS
The Chancellor of the Exchequer is quite right in saying that, now Excess Profits Duty is going, businesses are showing an extraordinary affection for it. In fact, one can see the picture of businesses standing round the death-bed of Excess Profits Duty and saying, "We did not like you very much when you were alive; in fact, we disliked you extremely; but please do not die just yet." Anyhow, though death has not come, dissolution is near. We have to arrange the exact hour of death, and the Amendments on the Paper have been directed to finding a proper kind of dissolution. We are all rather impressed with the merits of our own suggestions, and I still have a modest belief that mine is the best, and that the two constituent parts should bear their share of the tax or claim their share of the refund in proportion to their pre-amalgamation capital. In view of what the Chancellor of the Exchequer has said I do not propose to argue that, but I want to make sure that I understand his suggestion. I believe it to be this: That the larger business will have, say, a dividend standard of £50,000 a year, and a smaller business a dividend standard of £10,000 a year. Therefore, in the larger business the standard dividend is five-sixths of the amalgamation dividend. Assume that the larger business would come out of Excess Profits Duty six months after the smaller business, I understand that the amalgamated business will come out of Excess Profits Duty five-sixths of this six months, or five months, after the earliest period, or one month short of the longest period. If that is so, I think it very fairly meets my point. Of course, it does not meet it in all cases, but one cannot expect everything. I think it is a solution that might very well be accepted.
§ Mr. MANVILLE
I think the solution proposed by the Chancellor of the Exchequer is equitable and will meet what must be a very complicated question. I am confident that it will satisfy those who take exception to the Clause as it originally stood. I therefore hope the hon. and gallant Member will withdraw his Amendment.
§ Captain W. BENN
I am very much obliged to the Chancellor of the Exchequer for the treatment he has meted out to the Amendment. His solution has the elements of a just and equitable arrangement. Would he be able to circulate the draft of his proposed Amendment to-night?
§ Amendment, by leave, withdrawn.
§ Mr. HOLMES
I beg to move, at the end of Sub-section (7), to insert a new Sub-section—(8) For the purpose of removing doubts, it is hereby declared that in Sub-section (3) of Section thirty-eight of the principal Act, the words 'trade or business' shall be substituted for the word 'person,' and that the necessary verbal alterations shall be deemed to have been made.This Amendment is designed to reverse the House of Lords decision in the Gittus case. The Finance (No. 2) Act, 1915, imposed Excess Profits Duty not on persons but upon trades or businesses Sub-section (1) of Section 38 stated:There shall be charged, levied, and paid on the amount by which the profits arising from any trade or business—and so on; and then in Section 39 it says:The trades and businesses to which this part of this Act applies are all trades or businesses—and so on. It was trades or businesses upon which Excess Profits Duty was assessed. The duty of paying was imposed on persons for the time being owning the business. Sub-section (3) of Section 38 says:Where a person proves that in any accounting period, which ended after the 4th day of August, 1914, his profits have not reached the point which involves liability to Excess Profits Duty, or that he has sustained a loss in his trade or business, he shall be entitled to repayment of such amount paid by him as Excess Profits Duty in respect of any previous accounting period, or to set off against any Excess Profits Duty payable by him in respect of any succeeding accounting period, such an amount as will make the total amount of Excess Profits Duty paid by him during the whole period accord with his profits or losses during that period.So that the right of payment or the right of set off was not given to a trade or business, but was given to a person. As a result of what one may assume was ere thoughtless drafting, a great many difficulties have arisen, and there is a considerable amount of feeling concerning 947 the unfairness with which this particular section operates. I have referred to the Gittus case. That was a judgment given on April 18th last, and the facts, briefly, were that a son succeeded to the business of his father, a wagon builder, at Penistone. The father had paid Excess Profits Duty. The son incurred a loss, and claimed repayment of a portion of the Excess Profits Duty which had been paid by his father. Notwithstanding that it was the same business, and that Excess Profits Duty is levied upon trades and businesses, the right of the son to claim repayment in respect of his father's business was refused by the Inland Revenue. As a result of the wording of this Clause the House of Lords upheld the Inland Revenue and the appellant was held to be wrong.
The result of that case is, that a number of men who have paid Excess Profits Duty cannot now recover. I will give one example. A firm, consisting of four partners, was carrying on business in a well-known North of England town. At the beginning of 1918 they decided to form themselves into a private limited company, and they divided up the shares in exactly the same proportion as they had shared the profits in the past. It was really the same thing continued as a private limited company, the four of them holding all the shares between them instead of private partnerships. Under this decision they are unable to recover the Excess Profits Duty which they paid. This morning I had a letter from Manchester giving me another case from there, in which a man turned his business into a limited company and, although practically the whole capital belongs to him, repayment of the Excess Profits Duty, which he himself paid, is being refused to him. I am quite sure that was never intended. I want to point out, on the other side of the picture, something which makes the unfairness all the greater, and the chagrin of the taxpayer who cannot claim, all the more. A limited company is treated as the same trade or business right through the period. You may have in 1914 a limited company whose shareholders are A. B, C, and D. In 1916 they may sell all their shares to F, G, H, and I, and because it is a limited company, F, G, H, and I can recover the Excess Profits Duty which A, B, C, and D paid. I suppose in all 948 Acts of Parliament hardships will occur in one way or another. I believe in this case the word "person" was thoughts-lessly put into the original Act so that it is a person who has to prove that profits have not reached the point which involves liability to Excess Profits Duty.
As a matter of fact, the Excess Profits Duty is assessed upon trades and businesses, and this Amendment would make this Clause dealing with claims for repayment read so as to provide that where it can be proved that a trade or business in any accounting period has not, so far as its profits are concerned, reached the point of liability for Excess Profits Duty, or if a loss has been sustained, the trade or business shall be entitled to repayment. That would make the trade or business the entity assessable for Excess Profits Duty, and it would be the trade or business which would have the right to claim repayment, so that the person who for the time being owned the business might either be called upon to pay or had the right to recover. The effect of that would be in some cases, that men would have the right to recover duty which had been paid by other persons, but that happens under the law at present, as in the case I have given, where the shares changed hands. Even, apart from the Gittus case, there have been many cases in which commercial men have bought businesses and taken a risk feeling that these businesses, if they were paying Excess Profits Duty, also carried with them the right of recovery in the event of losses being made. That point would be taken into account in fixing the purchase price. If a man who had paid Excess Profits Duty handed over to his successor a probable right of recovery he would take that into account in the price demanded. The Gittus case upset the prevailing opinion with regard to this matter and is causing a feeling of great uneasiness amongst businesses where ownership has changed, so far as the law is concerned, by a partnership becoming a company, but where it has not really changed as a matter of fact. I hope the Chancellor of the Exchequer will see his way to accept the Amendment.
§ The FINANCIAL SECRETARY to the TREASURY (Mr. Hilton Young)
I should say at the outset that it will not be possible to accept this Amendment. With a great deal of what has been said by the hon. Member for North East Derby 949 (Mr. Holmes) I am in agreement, but I find it is rather agreement on questions of detail than on the question of principle. I think the Committee will best appreciate the reason why it is impossible to accept this Amendment if I go back rather far to the beginning of the hon. Member's argument. It is not possible to agree with him that the Excess Profits Duty, any more than any other duty or tax, is a tax upon businesses as entities and not upon persons. Every tax is in the last resort a tax upon the person and is paid by the person, and in this instance Excess Profits Duty bears that out. In all stages of its application it has reference to the burden imposed on the people who pay, and not to businesses regarded as separate entities. For that reason I should be inclined to quarrel a little with the hon. Member's references to the use of the word "person." There is no question of its being a result of thoughtless drafting. I should be inclined to say that the word "person" does really carry out what is the bed-rock principle of the Excess Profits Duty, that it is a charge personal to the man who pays it and the man who carries on the business, and that for very practical reasons it cannot be attached to the business as an entity distinct from the person or persons who carry on the business. I do not really think there will be any dispute between the view I have advanced and that advanced by the hon. Member, as regards the great majority of ordinary cases of the transference of a business to a successor. In these cases, as he said, when there is a true change in the person carrying on the business, when there is such a thing as a sale, the fact that there are certain conditions outstanding at the time of the sale as regards liabilities for and right to repayment of Excess Profits Duty, is obviously taken into account in the price or the consideration for the transfer of the business. Those matters are adjusted in the price and the individual who knows of these outstanding conditions, in taking over a business, has therefore nothing to complain of. Let me go further and point out what extraordinary results this Amendment might have in application to particular cases. If a business has been badly managed by the transferor and then the transferee manages the business well, what may happen? The transferor may have made a loss on which he would be entitled to allowances. The 950 transferee, by managing the business well, may be making a profit, but under the Amendment he would be entitled to the allowances accruing in the first place to his predecessor. You would in such circumstances as those, have a result which I venture to describe as ludicrous, namely, that the transferee would come into these allowances simply on the ground that his predecessor had mismanaged the business.
We can go upon rather wider grounds in considering the possibility of accepting this Amendment, and on the very widest grounds I have to say it is not acceptable. In its present form it would work more inconvenience to the great majority of those who are liable to Excess Profits Duty than it would benefit the minority. The immense inconvenience, the doubt and uncertainty which this Amendment must create in opening up innumerable new assessments, would have a bad effect. I am inclined to believe that people would rather have certainty in this matter than the small amount of advantage this might allow them. Let me come to the ground on which quite openly and freely I can agree with the hon. Member. It appeals to me very strongly, that there are cases such as those which he has described, in which the application of the tax, according to what I hold is the true theory, does work hardship. It is so, in such a case as that of the conversion of a private firm, into a limited liability company without any change in the persons involved or the distribution of their interests in the business. In that case, admittedly, you have only a technical transfer, and the loss of the Excess Profits Duty allowances on such a transfer as that seems to work hardship. There, again, another point of view has to be considered. I do not quite accept the statement of the hon. Member that the decision of the House of Lords in the Gittus case is a surprise, or that it works any change in what has always been understood as to the manner of the application of this Statute. I rather imagine that the reverse is the case, and that the decision of the House of Lords upholds general practice and was in accordance with the expectations of the business world as a whole. It is this Amendment which rather tends to create surprise and a reversal of practice. It having been, as I contend, the general expectation of the business world that this Section would be applied in this manner, we have to 951 consider, in such a transfer or conversion of a firm, whether the step has not been taken by those concerned with their eyes open. They must have weighed the results, and, if they considered it was worth while to make the conversion of the business at the expense of sacrificing the right to allowance on Excess Profits Duty, then they did so with their eyes open, and they must have considered it worth while. I quite agree that there would be hardships possible in the too punctilious application of the Statute in some cases. I believe they are not hardships which it is possible to frame legislation to overcome, but they more approach matters of administrative action. As is so well known, in trying to frame legislation on such lines, you try to get a Clause to cover a certain number of hard cases, and wherever you fix your line, you leave a certain number of hard cases outside that line. You act with far more general equity by leaving it to administrative action than to have such an unsatisfactory Clause as that to which I have referred. Finally, I think the Committee always feel a certain natural reluctance to upset a legal decision of the highest authority, and, as in this case, as I contend, the decision is in accordance with right principles and right practice, I believe the Committee will be disinclined to upset the decision, or to change the law, as is proposed by this Amendment.
§ Amendment negatived.
§ Clause ordered to stand part of the Bill.
§ Clause 24 (Adjustment of Excess Profits Duty over aggregate period of Charge) ordered to stand part of the Bill.