§ Any individual carrying on a trade or business by himself or in partnership shall he entitled to deduct such proportion of the profits or gains derived from such trade or business from the profits or gains assessable for super tax as shall appear to be reasonably required as capital in such trade or business or has been actually utilised as capital in such trade or business throughout the year of assessment to that tax.—[Mr. Holmes.]
§ Brought up, and read the First Time.
§ Mr. HOLMESI beg to move "That the Clause be read a Second Time."
A limited company at the present time pays Income Tax on the whole of its profit, but the members of the company only pay Super-tax on such amount of the profit as is distributed in dividends In other words the company can put aside the. whole or a large part or any part of its profit for the development of its business and the Inland Revenue does not get Super-tax on that amount, but in the case of an individual or partnership not only is the whole profit assessed for Income Tax but the individual or the partners are assessed for Super-tax so far as their proportion of the profit is concerned, even though the proportion may not be drawn out of the business but put to reserve. The object of the Clause is to ensure that 1383 where people are carrying on business as a partnership or a man is carrying on business in his own name Super-tax cannot be charged on such portion of profits as are put aside for the development of business. It may be said that the limited companies on the other hand pays Corporation Profits Tax. That, at the moment, is a fair argument to use, but the Chancellor told us on the Committee stage that the Corporation Profits Tax was a bad tax, that he did not regard it as a permanent instrument of our taxation system and he hoped it would be withdrawn as soon as possible. If that is done we shall be where we were two or three years ago, and a private firm or individual will be taxed on reserves as far as Super-tax is concerned, whereas a company will not. This has been a vexed question for many years. The reason for putting the Clause down this year is because of the Chancellor himself, having put down a new Clause dealing with the Super-tax of private companies so far as undistributed profits were concerned. If it is possible for the right hon. Gentleman to say what is reasonable and proper for a private company to put aside for the purpose of reserve, and then tax the balance as far as super-tax is concerned, it is equally possible, so far as an individual or private partnership is concerned, to say how much they should be allowed to put aside for the purpose of reserve and on which they should not be charged on Super-tax.
§ Mr. HANNONI beg to second the Motion.
The case made out by my hon. Friend is perfectly sound. The Chancellor of the Exchequer has given great care and thought to the new Clause which is to safeguard the Treasury against the avoidance of Super-tax in the case of what are known as one-man companies. The private individual or partnership carrying on business in the manner indicated by the Mover is entitled to at least some measure of consideration from the Chancellor and the new Clause merely suggests that that consideration should be extended to them in order that they may be able to expand and enlarge their businesses and invest a reasonable share of their profits in the development of that business. After all they are entitled to every opportunity of expanding and if 1384 they are limited and crippled under existing conditions of Super-tax special consideration should be given to the circumstances.
§ Mr. A. HOPKINSONI hope this Clause will not be accepted by the House, for the reason that words here speak of deducting such amount as shall appear to be "reasonably" required as capital in such trade or business. I submit to the House that those words have absolutely no definite meaning. How on earth can any income tax authority, or even a man himself, say what is reasonably necessary as capital in a business? I speak in this matter from personal experience of a one-man business. I know perfectly well how galling it is when large sums which really ought to be set aside as fresh capital are taken year by year in income tax and super-tax. But whatever the hardships of the one-man business, they are certainly not to be mitigated by putting into an Act of Parliament a Clause which has no meaning whatsover. it is perfectly ridiculous for anyone to have to decide what is reasonably necessary in the way of fresh capital. It may be possible by increasing the capital invested in a business largely to increase the turnover of that business but is such capital reasonably or unreasonably invested in that business? It may be said that any capital necessary to replace and maintain the existing output and turnover in a business is reasonable, but everyone knows perfectly well that if there is considerable new capital available for a business the owner of that business can take the risks of fair speculation with a view to largely increasing the turnover, though without any certainty of adequate return.
§ Mr. HOLMESWill the hon. Gentleman direct his criticism to the Chancellor of the Exchequer, who has done the very thing against which he is protesting in Clause 17?
§ Mr. HOPKINSONI opposed the Chancellor of the Exchequer in that matter, but it was the enormous pressure of the hon. Gentlemen opposite which persuaded him to accept that Clause. But because the right hon. Gentleman was forced to accept a Clause on a former occasion it is no argument for proceeding to put an equally absurd and inadequate Clause into another part of the Bill. It is not the least use by putting two mistakes into a Bill to think that you 1385 are improving it. In this particular instance this is going to give rise to an enormous amount of evasion. You have here two sorts of people to deal with. You have the man who means honestly to pay as far as he can what is due from him, and you have the other man who intends, at any cost, to evade his fair share of the burden of taxation. In this particular instance the man who means to evade his taxation will be put, if this Clause be inserted, into a position of extremely unfair advantage in regard to his neighbour who intends to deal honestly and fairly.
§ Sir L. SCOTTThe cost of this suggested alteration would amount to £5,000,000. Let me add the reason why in principle this is, in my opinion, utterly wrong. The Exchequer has nothing what-to do with what the income tax payer does with his income after he has earned it. If you have earned your income you may save it or you may "blue" it. The Exchequer is not- concerned with investments or any capital purposes, and it is simply and solely a form of investing the income after it has been earned, and whether it be a company or an individual who out of profits puts money aside for reserve to be used as capital, that is an investment of the profits and gains, and in Income Tax law it becomes taxable. The suggestion that there is any difference between the principles applicable to companies and to an individual has nothing in it. In the case of the Income Tax a company pays at a higher rate in most cases than the individual. A company always pays at a flat rate of 5s., whereas individual shareholders
| Where the payment, excluding the amount or the duty does not exceed 3½d. | … | a halfpenny. |
| Exceeds 3½d., but does not exceed 5d. | … | a penny. |
| Exceeds 5d., but does not exceed 8d. | … | three halfpence. |
| Exceeds 8d., but does not exceed 1s. | … | twopence. |
| Exceeds 1s., but does not exceed 1s. 3½d. | … | twopence halfpenny. |
| Exceeds 1s. 3½d., but does not exceed 1s. 9d. | … | threepence. |
| Exceeds 1s. 9d., but does not exceed 2s. 2d. | … | fourpence. |
| Exceeds 2s. 2d., but does not exceed 2s. 7½d. | … | fourpence halfpenny. |
| Exceeds 2s. 7½d., but does not exceed 3s. | … | sixpence. |
| Exceeds 3s., but does not exceed 5s. | … | ninepence. |
| Exceeds 5s, but does not exceed 7s. 6d. | … | one shilling. |
| Exceeds 7s. 6d., but does not exceed 10s. 6d. | … | one shilling and sixpence |
| Exceeds 10s. 6d., but does not exceed 15s. | … | two shillings. |
| Exceeds 15s. two shillings for the first 15s. and sixpence for ever 5s. or part of 5s. over 15s. |
§ —[Sir Walter de Frece.]
§ Brought up, and read the First time.
§ Sir WALTER de FRECEI beg to move "That the Clause be read a Second time."
§ in a company very likely are paying at a lower rate in order that they may have the initial exemption. A company has to pay Income Tax on its profits, although it puts them to reserve, just as it pays a tax on the dividends which it distributes to its shareholders, and it pays on the whole of its income. In the case of a one-man company controlled by not more than five persons, the very gist of the proposal is to strip from what is in fact a partnership the cloak of company law which gives it a legal personality to which, from the taxgatherers' point of view, it is not entitled and which puts that company in the position of a private firm. It is only when that company shows, by not distributing a reasonable proportion of its profits amongst the shareholders, that it is not acting really as a separate company, that then it has its company cloak stripped from it and it is put on the same footing as a firm. Because we are treating a company as a firm is no reason why we should treat a firm as a company, and with one hand, so to speak, take from those who are evading the law- the cloak which they have wrongfully assumed and put that cloak in a different form around a number of other people.
§ Question, "That the Clause be read a Second time," put, and negatived.