HC Deb 22 June 1925 vol 185 cc1145-72

If in any year a productive company does not distribute amongst its shareholders the whole balance of its profits and gains (whether in cash or shares), there shall be deducted from the next payment of tax payable by such company a sum equal to a quarter of the standard rate of tax payable upon an amount equal to the sum undistributed; provided that if at any time such profits or any part thereof are distributed, whether in cash or shares, Income Tax shall forthwith become payable upon the amount so distributed at the same rate as that upon which the deduction aforesaid was calculated.

(2) The expression "productive company" shall, for the purpose of this Section, mean a company registered under the Companies Act, 1908, and engaged in productive industry, and the expression "productive industry" shall mean manufacture, engineering construction, mining and shipping.

(3) Where such a company as aforesaid is engaged in trade or in any industry other than the said industries the deduction of tax granted by this Section shall be allowed only in respect of profits earned in that branch of the company's business which is limited to productive industry.

(4) The provisions of the Income Tax Act, 1918, governing procedure and appeals in relation to exemptions, abatement, or relief, shall apply to claims for relief under this Section.—[Sir Leslie Scott.]

Brought up, and read the First time.


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

The principle involved in this Clause and in the Clause standing in the name of the right hon. Gentleman the Member for Carmarthen (Sir A. Mond) is one of great and general importance. Both put forward a proposal, which has been submitted in previous years, that the rate of Income Tax to be charged upon the portion of a company's profits not distributed to shareholders, but used for development, should be lower than the standard rate. The object of the proposal is to encourage development. In these days, when the burden of taxation is inevitably so heavy upon industry, the greatest Chancellor of the Exchequer is the one who does industry the least harm. I invite the attention of the House to that aspect of the question, because it is the essence of these proposals. If the Chancellor of the Exchequer hung on his mantelpiece the daily maxim, "Do as little harm as you can," then when he died, if he had observed his maxim, ho would deserve an epitaph on his tomb, "He did as little harm as he could." It is important, having regard to the burden of taxation that has to be borne, to consider how that burden can be exacted so as to cause the least harm in exacting it. The industrial prosperity of this country was built up in the last century almost entirely on annual savings, and those industrial concerns which have prospered most attained their prosperity by putting, out of their annual profits, large sums to reserve, to be used for the purpose of development, improving their plant and machinery, and so on. That is the essence of all industrial progress. At the present time, when the state of affairs financially is so different from what it was before the War, it is important to realise that the process of putting aside profits for development is a much more difficult one. The purchasing power of money is much less than it used to be, and the insistence by shareholders on a maximum dividend is, consequently, more urgent than before. The cost of production as regards labour, materials, rates and taxes and everything else is much higher than it used to be, and the result is that the available volume of profits for distribution is smaller. The smaller profits coincide with a demand by the shareholders for a greater distribution.

Those tendencies must, necessarily, militate gravely against the rehabilitation of machinery and against the progress of every industrial concern, as science progresses. If taxation could be so adjusted as even partly to neutralise that bad tendency, the Chancellor of the Exchequer would have achieved a step in the direction of doing less harm to industry. The belief of those who support the principle contained in this Clause and that of the hon. Member for Carmarthen is that it can be done. The principle of the Clause is to provide a financial stimulus to every board of directors to use as large a part of the profits as possible for the purpose of developing the company instead of for distribution to shareholders. That financial stimulus, once the principle had been adopted, would always be acting, silently acting like most economic forces, but none the less effectively because acting silently. If the result is what we believe it must be, namely, to encourage boards of directors to use more of their annual profits for development, it is obvious that the concerns which do that must progress better than those which do not. The progress of our industrial productive concerns would be greater than if this stimulus were lacking, and in the result the yield of Income Tax to the Chancellor of the Exchequer in subsequent years would increase, and make up for anything that might be lost by this concession in the year when it was put into force. Of course, it is essential, if this proposal is to be included in our taxing legislation, that there should be a safeguard against abuses. The Clause which stands in my name, and that of other Members of the unofficial Industrial Group, provides such a safeguard, because it states that if at any time money, that has been put to reserve is distributed, whether as cash or in shares, the tax that was remitted in the first instance shall then automatically become payable.

The principle of these Clauses has been before this House in its discussions on at least two or three, and perhaps more, Finance Bills. The right hon. Gentleman the Member for Carmarthen himself brought up a similar Clause in 1923, or, at any rate, supported one. The present Minister of Health last year, the year after he had been Chancellor of the Exchequer, moved such a Clause, and it was supported by the present President of the Board of Education. The present Minister of Health stated in the course of the Debate on the Budget, speaking on the 8th of July: 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 realty 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."—[OFFICIAL REPORT, 8th July, 1924; col. 2211, Vol. 175.] That is what the present Minister of Health said last year, and I commend his remarks to his colleague the present Chancellor of the Exchequer. The right hon. Gentleman the Member for the Hill-head Division of Glasgow (Sir R. Home) has also expressed himself in favour of the principle involved in the Clause. What line the opposition above the Gangway will take upon the Clause remains to be seen. I hope that in the common interest of industry, in the interest of both sides, employers and employed, they may support the principle of the Clause. If the principle is what we say it is, and believe it to be, it must tend to a reduction in the cost of production, and therefore increase our power of competition in foreign markets by enabling us to sell at a lower price; and that must tend to help in the solution of the great problem of unemployment.

At the present moment the scientific development of our competitors, Germany, France, Holland and the United States is so keen, and progressing so fast, that it is more than ever important that we in this country should miss no opportunity, and they are few enough, when the legislature of the country can contribute directly to industrial progress or prevent damage being done. Germany, operating under a financial stimulus different in degree but similar in kind, the stimulus of the ever falling mark, has, since the War, completely renewed nearly the whole of her plant and machinery. As was said of Germany in the Dawes Report: Ever since 1919 the country has been improving its plant and equipment; the experts specially appointed to examine the railways have shown in their report that expense has not been spared in improving the German railway system; telegraph and telephone communications have been assured with the help of most modern appliances; harbours and canals have likewise been developed; lastly, the industrialists have been enabled further to increase an entirely modern plant which is now adapted in many industries to produce a greater output than before the War. That was very largely done by the stimulus of the financial scheme of the falling mark pressure. As regards France, let any hon. Member go to the industrial town of Lens in Northern France, and he will find that my statement is borne out: the re-equipment of industry has been marvellous. The United States is also up to date in these matters in regard to industrial development; and all these countries are the competitors we have to face.

In addition everyone of those four countries I have mentioned have in their taxation law a difference between the tax upon dividends that are distributed and the portions of profits that are not distributed.

In regard to Holland, I have received recently a note from the permanent secretary to the Dutch Treasury, and he tells me that in the case of companies the Income Tax is imposed only on dividends and profits distributed, and no tax at all is charged on the companies' profits unless and until they are distributed. In Germany shortly after the War, and before the great slump in the mark, the position was that the tax on companies' profits was 20 per cent. when allotted to reserve and not distributed, whereas profits distributed paid a tax of 60 per cent. For a time that system lapsed, but in this year's Budget I understand it is being resumed. In the United States and in France the legislation, both as regards companies and as regards Income Tax, is somewhat different, and it would be impossible to find an absolute analogy. The broad fact, however, is that in both countries there is a tax on companies' profits, and there is an Income Tax to be paid on the incomes of individuals, with the result that the portion of profits distributed to individuals pays both taxes, whereas the portion placed to reserve only pays the profits tax, and there you get the differentiation which we are asking for in this new Clause.

Regarding these two taxes as one, there is a lower rate on profits put to reserve, and used for development purposes, than there is upon profits distributed. Even so in France they are not content with this arrangement, and in March this year there was a conference of the Presidents of Chambers of Commerce, and they asked for a complete dispensation in regard to this tax upon profits of companies put to reserve.

That is the position, and broadly speaking that is the case for consideration. It is most important either that the proposal I am putting forward should be adopted now in this year's Budget, or if that is not possible, then that it should be adopted next spring. If the Chancellor of the Exchequer says that in this year's Budget the cost would be too much, and would upset the whole balance of his Budget, of course we should have to submit, and we quite recognise that fact. I have gone closely into the question of the cost of such a provision as I am suggesting in order to make it possible for him to accept what I may call the thin end of the wedge this year. Although I want the principle adopted wholly and not partially, I have framed this Clause) in a very limited way for the express purpose of making it cost as little as possible. I know it is difficult to ascertain what the cost of a proposal of this kind is likely to be, but having regard to the extreme importance of not taking an unduly long time over this Debate, it is undesirable for me to go into the question at length. I put a question to the Chancellor of the Exchequer not long ago as to the cost of this proposal, and he gave me the figure of £14,000,000 as being the cost of a 2s. remission for productive companies, including both companies under Parliamentary Charter and companies registered under the Companies Acts. I cannot help thinking that that estimate is rather excessive, because in the "Economist" of 25th April last there appeared an analysis of the returns of about one-third of all the companies re- gistered in this country, and raking all their profits, the amount put to reserve was 2 per cent. of their capital. Taking those companies which had a capital of £1,300,000,000 as typical, the total number of companies in this country of all kinds would have a capital of about £4,400,000,000, and 2 per cent. on that obviously would not be a figure which would be ten times as much as the Chancellor of the Exchequer suggested. Therefore, I think that estimate was considerably in excess of the cost of the tax. But the reason I am anxious to get this claim adopted is, because I regard it as the thin end of the wedge, and in this way the Chancellor of the Exchequer, at, I believe, a very small cost, would be able to test the results of this proposal.

I agree that, limited as is this Clause, all sorts of inequalities will arise. Private firms will object that they are left out, while companies are allowed to come in; statutory companies will complain that they have been left out; while companies that do not come within the category of productive companies, will also object. All I have tried to do is to confine my proposal in such a way that the sum required to carry it out would not be one that the Chancellor of the Exchequer would be inclined to regard as impossible. I shall be glad to hear what the Chancellor of the Exchequer has to say on this point, and even if he cannot adopt my modest thin end of the wedge this year, I hope he will consider the subject with a view to this deduction being made next year, and not with a view to placing departmental difficulties in its way. It is perfectly clear from the fact that there is a comparable provision in the legislation of the four countries I have mentioned, that the difficulties in practice cannot be said to be insuperable. I think it is in the interests of this country that this principle should be adopted, and I hope that if the right hon. Gentleman is not able to accept this New Clause he will give the House an assurance that he will be able to adopt this proposal next year.


I rise for the purpose of seconding the Motion which has been so ably moved by the hon. and learned Member for the Exchange Division of Liverpool (Sir L. Scott). There is a New Clause standing in my name which goes a good deal further than the proposal we are now discussing, but from the point of view of convenience it has been thought best to have a discussion on both these New Clauses at the same time. On the general question I would very much like to support what has been said by the hon. Member who has just sat down. During the course of the Finance Bill we have had a number of discussions as to the merits and demerits of the reduction which is proposed in the Income Tax, and it has been argued in some quarters of the House that a reduction of the Income Tax does not of necessity create any advantage to industry or to trade.

I will not enter now into the economic arguments on that subject, but even those who have taken the line that the reduction of the Income Tax proposed in the Budget is not necessarily of any advantage to industry and to trade, because the money derived in this way by the individual may be spent in an uneconomic manner, cannot raise such an objection in connection with the proposal we are now discussing, which is a more limited application of the reduction of the Income Tax for the purposes of the development of trade, and not only its development but keeping up to a proper standard of efficiency the industrial enterprises of this country. Nobody can argue that any reduction of the Income Tax will not only have a direct and absolutely beneficial effect on the whole industry of the country. It has already been pointed out that this principle and ideal has been recognised in many other countries. May I quote the case of the Corporation Profits Tax in America, where 12½ per cent. only is charged on the profits distributed, and where no charge at all is made upon the profits kept in reserve.

There is a tendency in America to accumulate large sums in order to adopt new processes, and to allow the scrapping of old plant to take place. That is what is being largely done on the other side of the Atlantic. The same principle has been adopted to some extent in Germany and other countries. Income Tax legislation and public companies are treated much better than they are treated in this country, and the differentiation in this respect in regard to the imposition of the Income Tax in foreign countries does not seem to be fully realised here. I remember a discussion recently in which the hon. Member for Huddersfield (Mr. J. Hudson) took part, and in the course of a very able speech he seemed obviously to be under the impression that companies only paid Income Tax on the profits distributed and not on profits put to reserve. Under our legislation the Income Tax paid by a limited liability company has no relation whatever to what is done in foreign countries, because we pay much more Income Tax on profits, and under the depreciation scale, any industrial concern could not possibly depreciate so little as the depreciation allowances of the inland authorities would allow.


And they are doing very well on it.


The hon. Member who has interrupted me, and who is a professor of the new economics, ought to know what the effect of that would be. Surely it is all to the advantage of industry that proper provision should be made for depreciation and to replace obsolescent plant. On that subject I must point out that the keen competition in every form of industry has made it necessary to make provision for the replacement of one process by another, and the general improvement of machinery and plant, and this has to take place almost at an alarming speed, and only those who are in a position to provide sufficient money to replace their machinery and introduce new processes can hope to survive at all in the modern industrial struggle. What is the proposal which we have put forward in both these Clauses? It is not even that money should be exempted from Income Tax which is set aside for this purpose; it is a much more modest proposal. It is that a very moderate deduction should be made—indeed, to my mind, it is too small—for the purpose of stimulating directors of companies to increase their reserve funds, to replace their machinery, and to give added incentive in that direction, which to-day is sadly lacking.

There is no doubt in the mind of anyone who is engaged in practical business that the present very high taxation on enterprise acts as a deterrent to enterprise, to initiative, and even to the daily carrying on of business. The necessity of handing out a quarter of the profits which have been earned with great anxiety and trouble during the year, is a discouraging psychological factor in our present industrial world, and, to my mind, it accounts for some of the unemployment at present existing. By this proposal we should at any rate stimulate, and, I think, stimulate to a considerable extent, the wise and prudent practice of not distributing profits too largely, and it would give directors the advantage, which they would be glad to have in some cases, of being able to give to their shareholders a good reason why they were not paying larger dividends. My hon. and learned Friend has already referred to the very interesting speech last year by the present Minister of Health, and I should like to quote a few words from that speech, which I hope has been read and digested by the present occupants of the Government Bench who are dealing with the finances of the country. The right hon. Gentleman said: 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 sums in the nature of secret reserves. That, I think, is a very sound objection. He concluded with the following words, which are worth quoting: I feel very strongly that it 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."—[OFFICIAL REPORT, 8th July, 1924; cols. 2211–2, Vol. 175.] He has now in office a Chancellor of the Exchequer of his own party, and I am sorry he is not here to make his speech to his own Chancellor of the Exchequer, and extract from him what he failed to extract when in Opposition from the Chancellor of the Exchequer of last year.

Fortified, as we are, by the support of a Cabinet Minister on this point, it is difficult to imagine that we shall not receive a sympathetic reply from the Government Bench. I think it is very regrettable, though I imagine it was unavoidable that neither the Chancellor of the Exchequer nor the Prime Minister is present during a very important discussion affecting very seriously the industrial position. This question has been brought up on a good many occasions, and I find, looking back to 1923, that I moved a Clause in very similar terms to the one that stands in my name on the Order Paper to-day, and at that time it received very sympathetic consideration. The objection raised to it by the Solicitor-General, who replied, will, I hope, not be raised again to-day. The Solicitor-General then objected to any differentiation in Income Tax in the sense that the Clause proposed, on the extraordinary ground that it was in no way the duty of the Inland Revenue authorities to say in what way the money was spent; their whole purpose was to get the tax, and when the tax was collected they had no further concern. I can scarcely imagine that view prevailing to-day, and I do not know why it should ever have prevailed. Surely, in levying taxation, you are not only entitled, but bound, to see how this taxation is going to affect, and what result it is going to have on, the industry and life of the nation that is being taxed. If that be so, surely it cannot be argued that you have no concern with what is done with the money that is saved from taxation, for the simple reason that you levy your taxation in a particular way in order to achieve a certain economic result.

I think all the discussion on the present Finance Bill has shown that the point we are arguing now is much more fully appreciated than it was. It is an advantage, not only to individuals, but to the country at large, that we should have efficient industries and, in fact, it is only by having efficient industries that we can economically survive. If that be so, we ought to receive considerable support from the Labour benches, because hon. Members on those benches are deeply interested in realities, and those for whom they claim particularly to speak are as deeply interested in this matter as we are. Our proposal is based upon our practical experience of this very question, and we realise, perhaps, the more strongly from our practical experience, the great importance and real seriousness of the problem which this matter presents. In Germany, before the War, companies were compelled to put to reserve a cer- tain percentage of their profits. In this country the matter has never been dealt with in that stringent way; we have been more lax in our company system than they have been on the Continent of Europe. [Interruption.] If hon. Members think there is any advantage in that, there is no reason why we should not have it also. At any rate it is better than Russian methods.

I should like to refer to one objection which I know has been raised on technical grounds to a proposal of this kind, and that is that the reserves of companies might some day be capitalised and issued as bonus shares in order to avoid Income Tax, and that there would in consequence be a loss to the revenue. In my hon. and learned Friend's Clause, and also in the Clause which I have on the Paper, that point is quite fairly met. It would obviously be unfair to the revenue that payment of Income Tax should be avoided merely by the method of putting sums to reserve year after year and then issuing them as bonus shares. If such a step were taken at any time, it is obvious that the shares in question must be treated for Income Tax purposes as if they were income, and Income Tax must be levied on them in a proper way and at the proper rate.


What rate?


It might be the rate for the current year, or it might be the average rate for the period, which perhaps would be fairer. Either method, however, could be adopted, and it would be easy to overcome any difficulty in that direction. I do not know whether the Chancellor of the Exchequer could see his way to accept my hon. and learned Friend's Amendment in his present Budget. The most serious criticism that can be levelled against the Budget is that, instead of concentrating, as might have been done, upon an object of this kind, whereby a reduction of Income Tax could be focussed in a direct manner upon industry, and create an immediate nexus between the remission of taxation and the improvement of plant, a general survey has been taken over the whole class of Income Tax payers, which is a much more doubtful proposal from the point of view of this purpose, and which is more difficult to adjust and, perhaps, more remote in its consequences, and certainly not so beneficial in its results. Personally, I think it would have been much more advisable, if no greater remission than 6d. was within the purview of the Chancellor of the Exchequer, to proceed first by dealing with that part of the Income Tax which would have an immediate and stimulating effect on the industries of the country.

No doubt the Financial Secretary will tell us what is the view of the present Government on this matter. I do not know whether, in this nicely balanced Budget, which has rather come unstuck in different parts by this time, it is possible to tackle a proposition of this kind. The Chancellor of the Exchequer, in introducing his Budget, prophesied that he would be there for at least four or five years, and said he was throwing out a large and spacious programme, as I think he called it, and spoke of the great financial reforms which he was going to make. He has time before him, therefore, to go into these matters; if he cannot do it now, he has time to do it next year. He can then foresee, no doubt, the reductions which he will be able to obtain in expenditure, and the increased revenue which he will be able to obtain from his new duties; and he will then be in a position to achieve a long-asked-for and much wanted, and, to my mind, one of the most useful reforms in Income Tax legislation that any Government could possibly introduce.


The House is, I am sure, indebted to the hon. and learned Member for the Exchange Division of Liverpool (Sir L. Scott) for having brought before it this very interesting topic, but I think he can hardly have been quite serious in saying that he was proposing this in a email form because he wished it to be within the power of the Chancellor of the Exchequer to accept it in the present Budget. The Clause which we are now considering would involve a loss to the revenue of £7,500,000 in a year, and the proposal of the right hon. Baronet the Member for Carmarthen (Sir A. Mond) would involve a loss of about £13,000,000 a year.


Is that for a full year, or for the current year?


For a full year. While there is a margin on the Budget, neither of these figures could conceivably be accepted without upsetting it. I am sure we all agree with the excellent object that the Mover of the Clause has in mind in encouraging saving, but it is a matter of very great complexity, when you get down to details, as to how that can be done. The hon. and learned Member mentioned that this matter was brought forward last year, and the right hon. Gentleman the Member for Carmarthen has mentioned that a member of the present Cabinet took a prominent part on that occasion.


If I might interrupt the right hon. Gentleman, last year it was the present Minister of Health—who the year before had been Chancellor of the Exchequer—who actually moved the Clause, supported by the present President of the Board of Trade.


On that occasion the Clause was brought forward, no doubt as it is to-day, as a demonstration of the necessity of dealing with this very important question. The Chancellor of the Exchequer authorises me to say that he is going to consider this matter and to explore it in all its bearings to see whether there is any method by which it could be dealt with on a safe and satisfactory basis. I do not think hon. Members can reasonably be impatient in this matter of very great difficulty, and perhaps, in view of what has been said, it is well in a few sentences to point out some of the difficulties which are involved, not only in this proposal, but in any recasting of our Income Tax system to consider people's liability to be taxed on the ground, not of their income, but of their expenditure. The Clause we are considering deals with only one class of savings—reinvestment in the reserves of the company in which the profits were earned. My hon. and learned Friend admitted quite frankly that he had brought it forward merely as the thin end of the wedge, and it is patent to everyone that if we once allowed this thin end to be inserted, it would very shortly be driven home to the level of the proposal of the right hon. Gentleman the Member for Carnarvon Boroughs, and it is very doubtful whether we could stop there. After all, why should you limit these incentives to saving to the case of public companies who receive their fresh capital for development from their own resources? Why is the reinvestment of funds in the companies in which the profits were originally made more meritorious than an original investment in a new issue? After all, it has not been proved that, at present, companies, generally speaking, are in need of more capital. I am afraid a large number of them need not more capital but more orders. If you once begin to give a concession of this kind, I do not see how you are going to pull up short of giving remissions of taxation to all savings. May I remind the House, too, of the very novel questions of incidence which will necessarily be involved in the acceptance of any such proposal. My own feeling is that this Clause would mean, not a subsidy to reserves, but a subsidy to dividends. If it be the case that, generally speaking, established industrial undertakings already set aside what is necessary for their business, is it not certain that they will not put any more to reserve, but that this remission of taxation will merely be a subsidy to dividends and will not go to any increased accumulation of reserves?

But, apart from that, there is the broader question of the incidence of the remission. If you are going to lighten the tax burden on savings, you must necessarily increase the tax burden on spendings. Whatever you shift from the shoulders of the man who is in a position to save must be thrown on to the shoulders of the man who is obliged to spend. How would this work out? Might it not prove to be a tremendous subsidy to the rich, who can afford to save, a tremendous handicap on married people, who have to spend to bring up their families and to face another meritorious form of capital expenditure to enable their offspring to be equipped for the battle of life? I am afraid any widespread remission of taxation on savings in this way would mean an increase of many pence in the pound on the greatly narrowed area of Income Tax which would be left and which would have to be borne out of spendings. Last year, we are told by the right hon. Gentleman, the Solicitor-General said it was not the duty of the Revenue to see how income was spent, and he was rather surprised at that statement. I should have thought it expressed an absolutely obvious truth about our present system of taxation. It might or might not be desirable for the Revenue to go into how people spend their money, but it certainly is not their practice at present, nor would there be any legislative or statutory foundation to interfere in that matter. So far our Income Tax has been a tax on income and on nothing else, and I apprehend that this proposal would mean a revolutionary change in the basis of taxation and would transform our premier tax from being a tax on income into a new basis of being a new tax on expenditure. It is not for me to express any opinion as to whether this wide and far-reaching change can be made, but anyhow it cannot be made on a Clause brought forward on the Report stage of a Finance Bill. If the House and the Government responsible is to accept a transformation in tax methods of this character, it must at least be done with our eyes open and aware of the revolutionary character of the change that is proposed.


One of the great advantages of the reply we have just had is that we have now discovered which is the really revolutionary party. I am bound to remind the right hon. Gentleman that this proposal, in an even more advanced form, was pressed very strongly on us during our term of office last year and it was advocated at this very Box by the present Minister of Health, who was if I remember rightly, supported in the Division Lobby by a considerable number of Conservative Members of the House. That is a very extraordinary situation because we have this proposal condemned root and branch as a revolutionary change by the Financial Secretary to-day. So that when I look back upon our term of office I think I am entitled to say that we may well be ashamed of our moderation and restraint. But I am glad the Financial Secretary has made it perfectly plain that this proposal cannot be entertained, although I do not understand his statement that between now and Budget time next year inquiry is to be made as to whether anything in this direction can be done. The truth is that this is a very old proposal which, on every analysis that has been made, absolutely fails. I do not want to dwell too largely on the technical difficulties of a device of this kind, but let the House observe the Clause. The hon. and learned Gentleman proposes to give this one-fourth abatement in Incomer Tax to what he calls productive companies, and these are mining, engineering and manufacturing. There is no student of taxation who would ever for a moment accept that definition of production at all. There are all kinds of other companies directly and indirectly engaged in industry which are either productive companies or ministering to production and accordingly, in the very operation of this Clause, you would at once land yourself in a great mass of technical difficulties in the administration of Income Tax. On that ground the proposal fails.

Secondly, the hon. and learned Gentleman was altogether wrong in trying to draw any analogy at all between the conditions in foreign countries, and more particularly in Germany, and our position in industrial enterprise in Great Britain. It is quite true that certain differential methods are employed in other countries, but when we look into their systems of taxation we find that they have devices and methods which are unknown in this country, and in the case of Germany the whole position has been distorted and poisoned, by the large scale depreciation which took place, enabling them to get rid of a great deal of their internal debt and rendering an analogy of that kind perfectly impossible in the Debate in which we are now engaged. I feel I need not argue this matter at any length to-day, because the Financial Secretary has made it plain that no Government could entertain it. I have merely risen for the purpose of pressing the Government not even to undertake the inquiry which the Financial Secretary seems to suggest. There is only one point in the industrial field which I think calls for a little investigation at present. When the Royal Commission considered this and kindred problems in 1919 and 1920, it did say there were certain issues of depreciation, obsolescence and wasting assets upon which, in the national interest, some kind of uniform policy should be framed, and I dare say I speak for a good many Members on this side of the House when I say that in that sphere there are probably changes in taxation which should be introduced, because if you take the depressed condition of the mining industry at present, there is not the least doubt that there you want a programme as regards wasting assets which, of course, we have not got, although the Royal Commission made specific recommendations on that point. Beyond that, however, we dare not go and we certainly cannot entertain any suggestion that you are going to give a differentially lower rate of tax to a profit merely because that profit is placed to reserve for purposes of development or anything like it.

6.0 P.M.

The right hon. Gentleman the Member for Carmarthen (Sir A. Mond) fell foul of an argument used by the late Solicitor-General when he resisted a similar proposal some time ago. The then Solicitor-General made it clear that we should never, in the Income Tax practice of this country, look to the destination or the use of a profit. I think that principle is perfectly sound. We cannot embark upon a device of that kind without considering every individual taxpayer who has any saving at all. That would apply with equal force, and, in some cases, a great deal more, to the smallest saving placed to reserve and which had gone to the development of some industrial enterprise in the State which also in justice would be entitled to a lower rate of tax. That is the natural logic of the situation. If you extend it far enough you simply come back to the great mass of taxpayers in this country. Your remedy then appears to be a lowering of the general burden of taxation all round, and not a differential reduction in favour of one class as against the rest of their fellows. On every ground, without arguing the matter at any greater length, I agree with the Financial Secretary that this new Clause would mean a revolution in Income Tax practice, and there is not the least doubt that, with an expenditure like our own of more than £800,000,000 at the present time, if it were adopted, it would mean a heavier burden upon the rest of the community for the benefit of a particular section who ought to make provision in a different way.

We on these benches have never disputed that a great deal of the capital in this country is misdirected, or not used to the highest advantage at the present time. Even in the midst of our great burden of taxation and industrial distress we see millions of money raised in this country for what cannot be called productive enterprise at all. On the other hand, we find valuable enterprises struggling to obtain capital or only ob- taining that capital on onerous terms. Our suggestion is that the time has come, and more than come, when we should definitely direct our available capital into truly remunerative channels. Hon. Members opposite are not prepared to agree with that. They regard that as a Socialistic device. I prefer that better method of dealing with the kind of difficulties we are discussing this afternoon. There is no remedy whatever in introducing a revolutionary change in our Income Tax system which can only operate unfairly against the overwhelming mass of our taxpayers.


I wish to draw attention to the extraordinary speech made by the Financial Secretary to the Treasury. He began by expressing in very sympathetic terms the desire of the Treasury to consult the heads of industry on the important new Clause proposed by my hon. and learned Friend the Member for the Exchange Division of Liverpool (Sir L. Scott) and seconded by the right hon. Member for Carmarthen (Sir A. Mond). Having said that, he proceeded, in a long disquisition, to speak on the revolutionary qualities of the new Clause. I submit that he cannot begin by a volume of expressed sympathy and then finish up by describing the new Clause as revolutionary. The Amendment is exceedingly simple in its proposals. In discussions which have taken place with his right hon. colleague the Chancellor of the Exchequer and himself during the past 12 months, a very sympathetic ear was given to the proposals submitted by industry in this respect, and to-day in this House on the moderate and generous Amendment moved by my hon. and learned Friend we thought we were going to have some responsive note from the Treasury in the interests of productive enterprise in this country; but we were told by the Financial Secretary, and his remarks were loudly cheered by hon. Members opposite, that this proposal to relieve industry of an unfair burden, and to stimulate enterprise with a view to the expansion of industry, is a proposal revolutionary in character.

A great many people engaged in industry in this country have begun to think from day to day that the present Government are not very sympathetic towards business men, and I am bound to say, after the speech of the Financial Secretary this afternoon, that there seems to be a good deal of justification for that conclusion. I am exceedingly sorry that the Chancellor of the Exchequer is not in his place. He has indicated that he has some feeling of sympathy towards this proposal. We have in this country to-day a- great number of enterprises that are struggling to survive in the face of competition in the world market. The concession sought for in this new Clause would have enabled them, by adding to their opportunities of expanding their enterprise, to meet that competition more effectively. Of course, distinguished economists on the other side object. All I have to ask is, without repeating the arguments of my hon. and learned Friend and the right hon. Member for Carmarthen, that the Treasury, even now, following upon the speech of the Financial Secretary, will agree to consult the heads of our great trade organisations during the next 12 months and see whether a solution of this question cannot be found

Mr. GUINNESS indicated assent.


The right hon. Gentleman indicates his assent, but how he can ride two horses I do not know.


I thought that I made it perfectly clear that we are anxious to find a way of achieving this very difficult object of encouraging savings without incurring the results which might be expected from this particular proposal. I felt it to be my duty to point out the difficulty. I do not want the hon. Member to think that the Government are unsympathetic towards industry. We are looking for a way of doing what is desired in a safe manner, without risking unfortunate results.


I am delighted to hear the observations of my right hon. Friend, but when he made his speech he did not express his attitude towards the new Clause in terms which would make us feel that there was very much sympathy for it at the Treasury. I do appeal to the House that in making this concession to productive industry, in order that it may be able to expand its activities in this country in the face of world competition, we should have all the sympathy that we can. Those who are familiar with the intensity of industrial organisation in every part of the world in order to create and maintain markets for their goods, feel that in this country industry should get every conceivable help and sympathy, both from the Government and from this House; otherwise, it will be impossible for us to maintain our position in the future. I hope that when the right hon. Gentleman is consulting with the heads of great industries in this country—the Association of British Chambers of Commerce, the Federation of British Industries and other great trade organisations—he will not put his case in the same extravagant language which he has used in this House to-day.


I have been in considerable doubt about this new Clause, and the discussion leaves me in greater doubt. We have seen the singular, I might also say the diverting spectacle of the official reply on the new Clause coming from the Front Opposition Bench, while the Financial Secretary to the Treasury has advanced in opposition to it arguments which we should expect from the Back Benches on this side. I hope that the Financial Secretary will not ask some of us to be persuaded of his arguments before we vote against the Clause, because were I to be so placed I should feel that I was voting on financial matters of much more importance. It will not escape the attention of the House that in his argument this afternoon the right hon. Gentleman has destroyed the whole of the Government case for the reduction of the Income Tax. I argued in support of that reduction. I think it was the right thing to do, and that prevents my being converted by the Financial Secretary's arguments this afternoon.

I think that more concessions should be made. More reductions of taxation should be made by the Government in order to promote savings. The Financial Secretary has argued against any action on the part of the Government to promote savings. The greater really includes the less. The Financial Secretary has drawn a distinction. He says that you must not promote the interests of those who can afford to save and not to spend, at the expense of those who have to spend. That is not a true distinction. He would not, I am sure, contend that the man who saves his income does not spend it. Of course, he spends it. He foregoes the advantage of it for the time but spends it, and it is used in the production of goods and services, just as much as is the case with the man who spends the first part of his income. Therefore, there is no true distinction drawn by the right hon. Gentleman. He says that what the industries of this country want at the present time is not fresh capital but fresh orders. Is not that rather a facile antithesis? Is it a true one! Is there no connection between fresh capital and fresh orders? I think it is perfectly obvious. We are not getting fresh orders because we are not getting enough fresh capital. [HON. MEMBERS: "Oh!"]


Hear, hear!


Why are orders not coming to this country? Because we cannot quote competitive prices. Why cannot we quote competitive prices? Because our standard of production has not been sufficiently maintained by the refreshment of industry with fresh capital. That is the opinion of every man in trade. Although there is sound principle in this proposal, I agree with the Financial Secretary that you cannot draw a line as is done by this Clause. My right hon. Friend the Member for Carmarthen (Sir A. Mond) extends it further than the hon. and learned Member for the Exchange Division of Liverpool (Sir L. Scott). My hon. and learned Friend would include only incorporations. My right hon. Friend would include partnerships. You cannot stop there. You are admitting the principle of differentiation in favour of savings. That is a matter which in the coming inquiry we hope will be pressed forward. You are admitting a, new principle of great importance, going to the basis of our principles of taxation, and one which is as important as the differentiation of earned and unearned income. If you make differentiation in favour of earned income, why should you not extend the field of preference covered by the State to preference as to the manner in which the money is spent. I think that is perfectly logical, and I am sure it is perfectly sound in economics. I think the only difficulty is in practice. There is a very great difficulty in practice.

The necessities of the Revenue are vitally concerned in this Clause. If it were to be passed in a hurry without sufficient fortification of the Income Tax I believe it would be a very serious danger to the Revenue structure of this country. I am afraid that the provisos inserted in the Clause by my hon. and learned Friend and my right hon. Friend are not adequate to protect the Revenue. Let me point out one danger. I believe it to be impossible to earmark a profit once it is put away in reserve. Accountants and intelligent secretaries will be too many for the Revenue if you simply trust to the permanent earmarking of certain profits. Suppose that a profit of £1,000 is made this year and put to reserve. What so easy to an ingenious and not too scrupulous accountant—such there are, in small numbers, no doubt—as in the next year to take that thousand pounds into a secret reserve; and in the following year it is dragged back into a visible reserve and is distributed all round. Or a company is reconstructed. Companies can reorganise their capital and can create a company of straw. There are thousands of devices by which a company can conceal profit which it puts away into reserve. It needs the most careful investigation and fortification in order to prevent this being used as a danger to the Revenue. It is a useful principle if it can be applied, and it should not pass the ingenuity of man to devise sufficient fortification of that principle. I earnestly hope that it will be taken into consideration.


The argument of the Mover of this New Clause, I gather, was that it was essential for big companies to have more money to put aside out of revenue, and that taxation is so high that they have not sufficient margin for that purpose. Though I heard him state that argument again and again, I did not hear him make any attempt to prove it by the facts and the balance-sheets which our great companies are issuing every week. The fact is that the reserves on which we have to depend in this country are contributed mainly by large, successful limited companies, and one of the facts which may be noticed by anyone who reads the balance-sheets of these companies at their annual meetings, held from week to week, is that a very large proportion of them already have enormous sums in reserve in Stock Exchange securities.

I am not interested in these companies, but I like reading their balance-sheets, and I read 10 days ago the balance-sheet of Boots submitted at their annual meeting. I found it stated that they had £750,000 in reserve in War Loan. Only a few days ago I read the balance-sheet of Howard Bulloch, which has a capital of £1,500,000, and it had nearly £1,000,000 in reserve outside its business in Government, Trustee and similar securities. As one looks into balance-sheet after balance-sheet, one finds, I believe, that in the majority of cases of these big successful companies they have reserves of a similar kind. The result of this Clause would be simply to hand over millions of pounds, £7,500,000 now and £13,000,000 according to the Liberal Amendment, which would increase probably to £20,000,000 or £30,000,000 if we follow this Clause to its logical conclusion, to these great successful companies who already, by the balance-sheets published week after week, show that they have ample funds for development.

There is one other point with which I would like to deal because it arose out of certain articles which, I noticed, the mover of this Clause has been reading, and which I have been reading too. He used what I may call a psychological argument. He said that if you lower the Income Tax on these reserves it will encourage directors to increase the reserves and diminish the proportion of profits which they distribute. He referred to a series of articles in the "Economist."


I only referred to an analysis of the returns of about one-third of the companies in order to get the ratio between the capital invested and the money put to reserve, and it is only 22 per cent. That was the only article to which I referred.


I also have been reading that article with a number of others, and my conclusion is that that article, and the article which preceded it, show that even if you gave this concession it would not have any appreciable effect upon the amount of capital put aside to reserve. These articles in the "Economist" have collected, and give, the figures of a selection of the largest companies five years before the War and five years after the War. Those figures show that, quoting the figure of the Mover, these companies for the five years before the War put to reserve about 2.3 per cent. of their capital, and for the five years after the War they put to reserve about 2.2 per cent. of their capital. That means that, in spite of the enormous changes in trade and in industrial conditions between the period before and after the War, and in spite of the difference between the Income Tax before the War and after the War, and in spite of those revolutionary distinctions, the proportion of money put to reserve has remained identical throughout the whole period. In those circumstances, it is clear that this Clause would have no appreciable effect in altering the distribution between profits and reserve, but would put millions of pounds into the hands of the wealthiest companies in the land, and for no practical object.


I rise to support the contention that these two Clauses have a very close relationship to an Amendment which I moved, and on which the Chancellor of the Exchequer gave a definite promise closely to investigate the matter. The right hon. Gentleman the Member for Central Edinburgh (Mr. W. Graham) spoke just now on the question of an adequate depreciation being allowed for wasting assets and obsolescent machinery. I do not know to what extent the Mover of the Amendment regards the arguments from the Treasury Bench as really relevant to the Clause, but I do feel, particularly in view of the speech of the right hon. Member for Norwich (Mr. Young), that very likely they will come to the conclusion, to which I have come, that the only safe way of giving any direct assistance to productive industry is to see, not that you do something to encourage thrift which may be a very much wider application than what is intended, but that you follow on the lines of the Report of the Royal Commission, so that you shall collect your tax upon industry upon the true profits of the industry, and not upon money which ought to be, and must be, in any properly managed business, used not for distribution but for the restoration and replacement of obsolescent assets and for dealing with the diminishing capital value of mining assets to which particular reference has been made.

I do not believe that on those lines we shall get so many of the complaints which have wrecked these Amendments this afternoon. There is no question of intro- ducing a new principle of taxation at all, but there is urgent need for a full investigation of that question, so that the exact cost may be ascertained, and so that, when next the Chancellor of the Exchequer is able to make some remission of Income Tax, he will make it directly on the productive industry of the country so as to increase employment in those industries. Therefore, I hope not only that the Financial Secretary will carry out his promise to look into the question underlying these two Amendments, but that he will, having looked into it, find on making that investigation that the easiest and sanest mode of doing something for the productive industry of the country and increase employment is on the lines of dealing with the wasting and obsolescent assets question, and seeing that the Income Tax is charged on the true profits of industry in future.


In view of the promise given from the Front Bench that this matter will be fully investigated during the ensuing financial year, and before next year's Budget, I beg to ask leave to withdraw the Clause. [HON. MEMBERS: "No!"]


I do think that before the House considers the possibility of withdrawing this Clause attention should be called to the very remarkable, and I must say the pitiful, changes which we have all witnessed in regard to this matter, because, though no one is surprised at slight divergences in the opinions held by hon. Members as they change from one side of the House to the other, yet to-day we have had an example which, I think, is not within the experience of hon. Members. Last year I sat where the Financial Secretary is sitting now, by the side of the then Financial Secretary, and the Minister of Health got up in his place and from this very Box introduced, against us, this very Clause in substance, the principle being precisely the same as this one introduced to-day, we being then in a hopeless minority in this House. That was put forward with all the weight of the financial knowledge of the Conservative party. We were in a hopeless minority and might have been defeated on our Budget. The Liberal party came to our assistance. The Conservative party with all their financial knowledge were unable to persuade the House that this Clause was the one which the country needed.

To-night the right hon. Gentleman (Sir A. Mond) got up in his place and proposed the very principle in opposition to which the Liberal party came to our support last year, and no sooner had he done it than the Financial Secretary got up in his place and said that the proposal backed by the right hon. Gentleman was a revolutionary proposal in finance, and no sooner had he said that than the hon. Member for the Moseley Division of Birmingham (Mr. Hannon) got up in his place and said that it was now becoming generally believed throughout the country that the Conservative Government were opposed to the great financial interests of the country, and that the Financial Secretary had confirmed that view by his speech to-night, whereupon the Financial Secretary arose again and expressed his regret that he had been so misunderstood, and offered the most sympathetic consideration to the revolutionary proposal of the Liberal Member which the Labour Government had opposed so strongly last year.

Where are we? The House wants to know where the Financial Secretary ought to be sitting? If we were sitting there the Conservative Government would be opposing us for not introducing this proposal, and when they are sitting there, and the Liberal party are supporting it, they say that it is a revolutionary proposal. I am certain that anyone coming to this House for the first time this afternoon, and learning these facts, would be pardoned for thinking that "Alice in Wonderland" is nearer reality than is generally imagined, though who would be selected as the Mad Hatter I do not know. It does not end there, because, as I am sure the country knows—at least my constituents were told so at the last Election—the Conservative Government, if they are anything, are magnates in finance. Two nights ago the Chancellor of the Exchequer standing there decreased Income Tax, because he said, in spite of our protest, that industry wanted capital, and to-night, when the right hon. Gentleman got up to support this proposal, the Financial Secretary arose in his place and said, "Is it true that industry wants capital? No." Again, where are we? Who is right? I, as a humble Member of this House and not a financier, would like to know. Does industry want capital or does it not? Perhaps we had better wait until the Chancellor of the Exchequer returns in order that he may tell us. I thought the Conservative Government took the view that industry wanted capital. The hon. Member for Norwich (Mr. H. Young) has told us that it does not; the right hon. Member for Carmarthen (Sir A. Mond) says that it does. Again, who is right? We on the Labour benches know nothing. I hope that some time before this monumental Budget finds its resting place in the archives of the House, we may have an answer to one or two very simple questions. Does industry want capital, or does it not? Is the Government considering this proposal, or is it not? Which is the revolutionary party, the Liberal party or the Conservative party?

Question put, "that The Clause be read a Second time."

The House proceeded to a Division; but there being no Members willing to act as Tellers for the Ayes,

Mr. Speaker declared the Noes had it.


On a point of Order. Did you, Mr. Speaker, put the Question, "That the Clause be read a Second time?" Here we were under the impression that you were putting the Question that leave be given to withdraw the Clause.


The House refused leave to withdraw the Clause. Therefore, the only course open was to negative the Clause. The Clause has been negatived. The next Amendment that I select is a new Clause relating to "Allowance for travelling expenses."