HC Deb 08 July 1924 vol 175 cc2210-7

Where any part of the profits of a company registered under the Companies' Acts, 1908 to 1917, is transferred to a special fund, to be called the development fund, the rate of Income Tax upon such transferred profits shall be half the standard rate.

Provided that any sums transferred from the development fund and distributed either in cash or as bonus shares shall be included in the profits chargeable to Income Tax at the rate current in the year in which the transfer is made.—[Mr. N. Chamberlain.]

Brought up, and read the First time.


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

In the course of the Debate on the Budget I expressed the view that it would be a good thing for the trade of this country if manufacturers could be induced to put more money into bringing their machinery and equipment up to date, even at the cost of a lesser distribution to shareholders. I went so far as to say it was a mistake in my view to consider that surplus and profits were the same thing, and that an appreciable part of the surplus at the end of the year ought really not to be considered as profits at all, because they should constitute a fund from which machinery and plant ought to be kept in accordance with the highest standards, and not allowed to become obsolescent. It would be possible to deal with this matter by way of increased allowances for depreciation, but that method does not commend itself to me because it would enable one to set aside something in the nature of secret reserves. When I spoke on the subject before there were indications from some of the Members opposite that they desired to know whether it was not possible to frame a Clause to carry out the idea I had in mind. An attempt was made by Sir Alfred Mond who framed a Clause. It was slightly different from that which I have here and it was not accepted. My Noble Friend the Member for Hastings (Lord E. Percy) has also put down a Clause with the same general object as mine, but as that has not been called, I hope we may have an expression from the Chancellor of the Exchequer on the Clause before us. There are of course possible abuses to be guarded against in a proposal such as this, which is to give some remission of Income Tax on that part of the surplus set aside for the particular purpose of improving the capacity of the business, but the proviso in my Clause is a safeguard, for it ties up the money for the particular purpose intended so tightly that whether distribution be in the form of cash or bonus on shares the full rate of Income Tax is payable on money so brought back, so that one and a half times Income Tax would be paid instead of the ordinary rate. There would be therefore the strongest possible check on any attempt to elude this provision. I hope the right hon. Gentleman will see that this is a serious proposal and that I have endeavoured to provide for any difficulties which seem likely to arise from the adoption of the Amendment. I feel very strongly that this is a matter which is worthy of attention. We are going possibly to find ourselves very seriously menaced by competition from the Continent, where the great profits that were made by industrialists in Germany in particular during the period of inflation were largely invested in bringing up to date their factories. I am anxious, in view of this, to see our manufacturers here encouraged to put aside money for this particular purpose, and I hope very much the Chancellor of the Exchequer may see his way to accept this proposal.


Within a very few minutes I will try to indicate the views we take of the proposal which the right hon. Gentleman has made. No Member of the Committee could deny for a moment when looking to existing industrial conditions in this country that it is important that manufacturers and others should make a definite provision for the improvement and the enlargement of our industrial capacity, and in saying that I hope we on this side, as, indeed, all Members in different parts of the House, keep in view the bearing of an effort of that kind upon employment in Great Britain. In that brief introduction I have indicated that, as regards the general principle, there cannot probably be very much difference of opinion between us. But I want to point out that there are two or three very grave difficulties in the way of a Clause of this kind which I have no doubt the right hon. Gentleman himself fully appreciates, because he was Chancellor of the Exchequer, and he knows exactly the far-reaching character of the proposal of this nature. There are certain administrative difficulties. This Clause provides a safeguard as regards the use of the sum put to reserve. Other Clauses have been suggested by other hon. Members which did not provide a real safeguard, and it is very difficult to see under their proposals whether or not these reserves may have been distributed at some later date. That is only one of the administrative difficulties which would arise. But the more substantial administrative difficulty is that this would involve some injustice or anomaly as amongst taxpayers themselves.

The right hon. Gentleman's Clause is confined to companies, and it must be plain to the House that it would be difficult to refuse a similar concession in the case of very large numbers of private individuals who were also making provision against this increased industrial capacity. If the case were made out, and I think there would be very little difficulty in making it out, then the cost of this to the Exchequer would very speedily grow until in the long run it would be of very large dimensions. As the Clause stands it could hardly be inserted in any Finance Bill because in the first year of its operation all these anomalies would arise. The House will agree that they would be substantial in character and not of a nature which could be redressed by subsequent legislation. We should require amending legislation in the future in order to put all on the same footing. I have mentioned these things because it is only just to the Committee that they should be familiar with the difficulties as they are seen by the Treasury. The final objection is, of course, the cost of this proposal. When the right hon. Member for Hillhead (Sir R. Horne) made a suggestion of this kind during the second reading of the Finance Bill, I understood him in the course of my reply to refer to public companies and to suggest that the whole of the standard rate, namely, 4s. 6d., should be conceded, whereas the right hon. Gentleman now proposes only one-half of that rate. Quite clearly if the original proposal at the full rate we had then in mind were put forward that would cost in a full year anything between 25 and 50 million pounds. But on the basis of the proposals submitted now there is no doubt whatever that the cost would be between 12 and 20 millions per annum. There is the further difficulty that this raises a large issue in Income Tax administration in that it looks to the destination of the profits which have been earned. Once we get out into the field of discussing destination, we are exposed to almost every difficulty under the sun in Income Tax administration. The House recognises quite frankly that we cannot accept this Clause, because of the cost and the other difficulties. But in making that announcement on behalf of my right hon. Friend, and on behalf of every Member on this side of the House, we are not blind to the importance of improving the industrial capacity of this country, and we do not ignore, from the point of view we have in mind, the importance of an improvement in the conditions for the recovery of trade.


There is just one thing I should like to say in further elucidation of this question. The Financial Secretary to the Treasury, as usual, has endeavoured to give the House a very fair and clear survey of the difficulties. But I think he has given the Committee the impression that we are in this matter embarking on a new field that it is impossible to say what would be the effect when we have numbers of intricate difficulties to meet, and that the cost will be enormous, not only to begin with, but permanent. May I point out that we are not really embarking on any new scheme at all Roughly speaking, this system is the Dutch Income Tax system, which is actually in operation. The exemption of reserve funds of this kind is actually in operation.


It is actually in operation in this country under Section 21 of the Act of 1922.


If my hon Friend will look at the Amendment he will see that I carefully dealt with Section 21 in the new Clause I propose. Anyway, I want to clear up the point. It is actually in operation, and I think the Financial Secretary will admit, when once instituted and working for a few years, the revenue will suffer no loss at all. It does not really matter one little bit whether you tap your wealth as we tap it now at a point where it is going back into capital, or whether you tap it later on when it comes out as increased wealth when it is distributed. That is the basis on which the Dutch Government have gone, and I believe they have been fully justified by results. If any system of this kind is going to be of benefit to our manufacturers it must be of benefit to our trade.

One word more. The Financial Secretary points out that the cost of taking off the Income Tax altogether on reserves would be between £20,000,000 and £25,000,000 in a full year. Once and for all get rid of the economic absurdity of talking about Income Tax as direct taxation. The Financial Secretary's figures show that between one-fifth and one-sixth of the taxation of this country is taxation of the most indirect kind, that it is a tax on the cost of production, a tax on the consumer, and a tax on employment. Having suffered now many days from hearing a discussion of this and other objects on the basis that all Income Tax is direct taxation, and that any relief of Income Tax is relief of direct taxation, let us after this revelation from the Financial Secretary definitely resolve that we will never talk economic absurdities like this again.


We have heard that Section 21 allows exemption of reserves for Income Tax. That is surely a mistake As far as my experience goes, I know of no procedure by which Income Tax has ever been allowed on reserves. I know of Income Tax having been allowed by way of depreciation, and special claims for obsolescence, but certainly nothing in the nature of reserves. I suggest that the proposition now made is extremely novel

and should not be accepted, because it would be possible in a one-man company, where all the shares except one are held by one individual, that the whole of the profits could be placed to development, if the individual had sufficient investments outside to live on.


Under the Section the Commissioners can allow such a sum as they consider is necessary for the maintenance and development of the business. That means that a certain sum put to reserve to develop the business is excused a certain payment. I would like to elaborate the view of the Noble Lord. If you are going to allow certain monies to be excused certain taxes, it is true the revenue to-day may lose those taxes, but that money going back into the business yields revenue sooner or later, and if the State allows that money to go without taxation for a year it gets the profit a year later.

Question put, "That the Clause be read a Second time."

The Committee divided: Ayes, 66; Noes, 174.

Division No. 146.] AYES. [5.29 a.m.
Balfour, George (Hampstead) Harland, A. Pielou, D. P.
Barnston, Major Sir Harry Hartington, Marquess of Pownall. Lieut.-Colonel Assheton
Birchall, Major J. Dearman Harvey, C.M.B. (Aberd'n & Kincardne) Raine, W.
Bird, Sir R. B. (Wolverhampton, W.) Hennessy, Major J. R. G. Remer, J. R.
Blades, Sir George Rowland Herbert, Dennis (Hertford, Watford) Rhys, Hon. C. A. U.
Bowyer, Captain G. E. W. Hope, Rt. Hon. J. F. (Sheffield, C.) Richardson, Lt.-Col. Sir P. (Chertsey)
Burman, J. B. Howard, Hn. D. (Cumberland, Northrn.) Roberts, Samuel (Hereford, Hereford)
Chadwick, Sir Robert Burton Hughes, Collingwood Ropner, Major L.
Chamberlain, Rt. Hon. N. (Ladywood) Inskip, Sir Thomas Walker H. Roundell, Colonel R. F.
Clayton, G. C. Kindersley, Major G. M. Russell, Alexander West (Tynemouth)
Cope, Major William King, Captain Henry Douglas Samuel, A. M. (Surrey, Farnham)
Courthope, Lieut.-Col. George L. Lamb, J. Q. Sandeman, A. Stewart
Dawson, Sir Philip Lumley, L. R. Sheffield, Sir Berkeley
Dixey, A. C. Maitland, Sir Arthur D. Steel- Shepperson, E W.
Eden, Captain Anthony Makins, Brigadier-General E. Smith-Carington, Neville W.
Eyres-Monsell, Com. Rt. Hon. B. M. Moore-Brabazon, Lieut.-Col. J. T. C. Warrender, Sir Victor
Ferguson, H. Morrison-Bell, MajorSir A. C. (Honiton) Wells, S. R.
Gates, Percy Newman, Sir R. H. S. D. L. (Exeter) Wilson, Sir Charles H. (Leeds, Central)
Gaunt, Rear-Admiral Sir Guy R. Nicholson, O. (Westminster) Windsor-Clive, Lieut.-Colonel George
Gibbs, Col. Rt. Hon. George Abraham O'Neill, Rt. Hon. Hugh Wise, Sir Fredric
Greene, W. P. Crawford Penny, Frederick George Yerburgh, Major Robert D. T.
Greenwood, William (Stockport) Percy, Lord Eustace (Hastings)
Hall, Lieut.-Col. Sir F. (Dulwich) Perkins, Colonel E. K. TELLERS FOR THE AYES.—
Hannon, Patrick Joseph Henry Philipson, Mabel Captain Hacking and Captain
Douglas King.
Ackroyd, T. R. Briant, Frank Darbishire, C. W.
Acland, Rt. Hon. Francis Dyke Broad, F. A. Davies, Rhys John (Westhoughton)
Adamson, Rt. Hon. William Bromfield, William Dickie, Captain J. P.
Adamson, W. M. (Staff., Cannock) Brown, A. E. (Warwick, Rugby) Dickson, T.
Alexander, A. V, (Sheffield, Hillsbro') Brown, James (Ayr and Bute) Dodds, S. R.
Ammon, Charles George Buckle, J. Dukes, C.
Aske, Sir Robert William Charleton, H. C. Duncan, C.
Attlee, Major Clement R. Clarke, A. Edwards, G. (Norfolk, Southern)
Baker, Walter Climie, R. Egan, W. H.
Banton, G. Compton, Joseph Fletcher, Lieut.-Com. R. T. H.
Barclay, R. Noton Comyns-Carr, A. S. Gardner, B. W. (West Ham, Upton)
Barnes, A. Costello, L. W. J. George, Major G. L. (Pembroke)
Batey, Joseph Cove, W. G. Gibbins, Joseph
Birkett, W. N. Cowan, D. M. (Scottish Universities) Gillett, George M.
Bonwick, A. Crittall, V. G. Gosling, Harry
Gould, Frederick (Somerset, Frome) Lawson, John James Scurr, John
Graham, W. (Edinburgh, Central) Leach, W. Seely, H. M. (Norfolk, Eastern)
Greenwood, A. (Nelson and Colne) Lee, F. Sexton, James
Grentell, D. R. (Glamorgan) Leasing, E. Sherwood, George Henry
Grundy, T. W. Linfield, F. C. Short, Alfred (Wednesday)
Guest, Dr. L. Haden (Southwark, N.) Loverseed, J. F. Smith, Ben (Bermondsey, Rotherhithe)
Hall, F. (York, W. R., Normanton) McEntee, V. L. Smith, W. R. (Norwich)
Hall, G. H. (Merthyr Tydvil) Mackinder, W. Snell, Harry
Hardie, George D. Maclean, Neil (Glasgow, Govan) Snowden, Rt. Hon. Philip
Hartshorn, Rt. Hon. Vernon Mansel, Sir Courtenay Spence, R.
Harvey, T. E. (Dewsbury) March, S. Spero, Dr. G. E.
Haycock, A. W. Marley, James Spoor, B. G.
Hayday, Arthur Martin, F. (Aberdeen & Kinc'dine, E.) Stamford, T. W.
Henderson, A. (Cardiff, South) Martin, W. H. (Dumbarton) Starmer, Sir Charles
Henderson, T. (Glasgow) Middleton, G. Stranger, Innes Harold
Henderson, W. W. (Middlesex, Enfld.) Mills, J. E. Sturrock, J. Leng
Hillary, A. E. Mond, H. Sunlight, J.
Hindle, F. Morris, R. H. Tattersall, J. L.
Hirst, G. H. Morrison, Herbert (Hackney, South) Thomson, Trevelyan (Middlesbro. W.)
Hobhouse, A. L. Morrison, R. C. (Tottenham, N.) Thornton, Maxwell R.
Hodges, Frank Morse, W. E. Thurtle, E.
Hoffman, P. C. Mosley, Oswald Tout, W. J.
Howard, Hon. G. (Bedford, Luton) Moulton, Major Fletcher Vivian, H.
Hudson, J. H. Murray, Robert Wallhead, Richard C.
Isaacs, G. A. Murrell, Frank Ward, G. (Leicester, Bosworth)
Jackson, R. F. (Ipswich) Naylor, T. E. Watson, W. M (Dunfermline)
Jenkins, W. (Glamorgan, Neath) Nixon, H. Watts-Morgan, Lt.-Col. D. (Rhondda)
Jenkins, W. A. (Brecon and Radnor) Oliver, P. M. (Manchester, Blackley) Wedgwood, Col. Rt. Hon. Josiah C.
John, William (Rhondda, West) Paling, W. Whiteley, W.
Johnston, Thomas (Stirling) Palmer, E. T. Williams, A. (York, W.R., Sowerby)
Johnstone, Harcourt (Willesden, East) Parkinson, John Allen (Wigan) Williams, David (Swansea, E.)
Jones, C. Sydney (Liverpool, W. Derby) Pattinson, S. (Horncastle) Williams, Dr. J. H. (Llanelly)
Jones, J, J. (West Ham, Silvertown) Perry, S. F. Williams, Col. P. (Middlesbrough, E.)
Jones, Morgan (Caerphilly) Pethick-Lawrence, F. W. Williams, Lt.-Col. T.S.B. (Kenningtn.)
Jones, Rt. Hon. Leif (Camborne) Phillipps, Vivian Williams, T. (York, Don Valley)
Jones, T. I. Mardy (Pontypridd) Potts, John S. Willison, H.
Jowitt, W. A. (The Hartlepools) Purcell, A. A. Wilson, C. H. (Sheffield, Attercliffe)
Kay, Sir R. Newbald Raffety, F. W. Wilson, R. J. (Jarrow)
Kedward, R. M. Rathbone, Hugh R. Windsor, Walter
Keens, T. Rea, W. Russell Wright, W.
Kirkwood, D. Richards, R. Young, Andrew (Glasgow, Partick)
Lansbury, George Richardson, R. (Houghton-le-Spring)
Laverack, F. J. Robertson, J. (Lanark, Bothwell) TELLERS FOR THE NOES.—
Law, A. Romerils, H. G. Mr. Morgan Jones and Mr. Warne.