NEW CLAUSE.—(Deduction, in respect of undistributed profits.) (Hansard, 21 June 1926)

§ Sir LESLIE SCOTT
I beg to move, "That the Clause be read a Second time."
This is in the same words as the Clause that stood in my name last year, and is very similar in purport to a Clause that was moved in the preceding year, or the year before that, by the present Minister of Health. The object of the proposal deserves very careful and sympathetic consideration. Quite candidly, I recognise that it is a concession which the difficulties of the country at the present time will not permit of being accepted this year, but I want particularly to know the view of the Chancellor of the Exchequer on it to-day.
The proposal is that where productive companies, that is, industrial companies, engaged in production and employing labour, set aside out of their annual profits sums to be used in the replacement of plant and machinery so as to bring the plant and machinery up to date, it is in the interests of the country and in the interests of labour that those reserves should pay a lower rate of tax than the profits distributed amongst the shareholders. It is a practice which, more or less, is followed in certain other countries, and one which would greatly assist by acting as a stimulus to boards of directors in this country to keep the plant and machinery of industrial establishments up to date. It is a principle which has been recognised by a great many Members of this House as a very valuable principle, and it was recognised by the present Minister Of Health as a very valuable principle. If any concession can at any time be made in regard to Income Tax, this is one which, in my humble submission, is almost the first concession which should be made in favour of industry. Last year, when I moved this new Clause, the answer given on behalf of the Chancellor of the Exchequer was that very careful consideration would be given to the matter. If I may read one sentence from the OFFICIAL REPORT of the speech of the Financial Secretary to the Treasury on that occasion, the Committee will appreciate the view then expressed: 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."—[OFFICIAL REPORT, 22nd June, 1925; col. 1158, Vol. 185.) 163 I do not expect the Chancellor of the Exchequer this year to say that this is a proposal which can possibly be put into practice, having regard to the state of our finances to-day, but I should like to have an assurance that during the ensuing months before the next Budget the matter will be given serious consideration.

§ Mr. W. GRAHAM
In a few sentences I should like to put our attitude on this proposal, mainly because of what appears to be the sympathetic reply which was given last year. That was a reply sympathetic from the point of view that inquiry would be made into the proposition. On the surface, this proposal has something to recommend it, but it is only on the surface, because quite clearly what the hon. and learned Member means is that relief to the extent of one-fourth of the standard rate of tax should be given on amounts put to reserve by undertakings which he describes as productive in character. There is a kind of loose definition of the term "productive in character," although the Clause states that the expression "productive industry" shall mean manufacture, engineering construction, mining and shipping. I suggest to the Chancellor of the Exchequer and to the Financial Secretary to the Treasury that a definition of that kind is an unworkable proposition in the Income Tax system of this country, because if any scheme of the kind were adopted it would mean a remission of taxation to these particular undertakings, and presumably no concession at all to the vast mass of other savings of the community which might he deposited temporarily in all kinds of ways, but are, none the less, savings which will be devoted to productive purposes.
The broad effect of a concession of this kind would be to heap the burden of taxation on other undertakings equally productive in character in the last resort, and to lead to hopeless anomaly within our Income Tax system, apart altogether from the fact that, as all investigation into this problem has shown, it could not be adopted without a sacrifice of many millions annually to the Exchequer of Great Britain. I am certain that is a sacrifice which the present Chancellor of the Exchequer and the Financial 164 Secretary to the Treasury are not in a position to make. We on this side wish to make it perfectly clear that we shall resist any device of this kind, but I hope we are not lacking in constructive proposals. This is quite impossible as an Income Tax proposition. Hon. Members will recollect that when the Royal Commission investigated many problems of industry as they were related to Income Tax, they tried to show that it would be wise for this country to work out a proper scheme dealing with wasting assets, obsolescence and depreciation. Since 1919, for a variety of reasons, we have not worked out a true and accurate scheme of that description. If we are to give relief to industry at all, it is only along that line that it can be given, because then we should be providing for plant and machinery which disappears in the ordinary process of use or obsolescence, and for the undeniable burdens upon industry from day to day. The proposal made by the hon. and learned Member would be false to any true economic analysis of production in this country, and, quite apart from that, it would be rank bad administration of our Income Tax system.

§ Colonel GRETTON
I fail to understand the argument of the right hon. Member for Central Edinburgh (Mr. W. Graham), except that he does recognise that there is a case for wasting assets, obsolescence, etc., in regard to plant and machinery. The rest of his statement consisted of a series of phrases which we usually hear from the Treasury officials, to the effect that the Government cannot afford to make a concession or to deal with the case. That is the sort of argument we get. There is a case to be dealt with. In any sound system of taxation it is to the advantage of the State to encourage the development of industry and the investment of capital in an effort to secure increased production and increased revenue, in connection with which the State in its turn becomes prosperous and benefits by the taxation which it derives from the resultant income. In our system of taxation it is an extraordinary anomaly that the money set aside to reserve for investment and development of business is taxed as capital. A business out of its earnings which puts by money for the purpose of development is actually taxed in the process. The right hon. Member 165 for Central Edinburgh approves of taxation under that process. I submit that that is not sound finance and that it is not ultimately for the benefit of the State. This question has not been met either by the speech made by the right hon. Member for Central Edinburgh or by the speeches which were made a year ago. It is a question which requires the serious attention of the Government as a. matter of principle. I recognise that the Chancellor of the Exchequer is in great difficulty this year, but there is a case to be met, and ultimately if it is met justly and on sound lines the result will be that the yield of taxation will he increased.

§ Mr. CHURCHILL
I cannot face the loss of £7,500,000 which would be involved in the acceptance of this Amendment. Of this £7,500,000, the loss of which would fall on the Exchequer, only £2,500,000 would reach the particular class of industries which claim the sympathy of my hon. and learned Friend who moved the new Clause. But I do not regard the matter as disposed of purely by reciting the regular principles of Income Tax Clauses. There are answers which can always be given on these grounds. At the same time, we must not be blind to the real difficulty, which is coming more and more plainly before us. A large part of the wealth of this country is in active and healthy operation, but there is one particular class of business which lags increasingly behind, namely, the important industries which have to employ large numbers of workpeople, and which also have to operate through very large rateable properties; and when those two adverse factors unite upon an export trade—not a sheltered trade, but one which is in full contact with foreign competition—there is no doubt whatever that the enterprise and industry of the capitalists concerned are definitely weakening under the combined pressure. Whatever views we may have or on whatever side of the House we may sit, it would be affectation to pretend that that is not the case. An industry which provides for great masses of British labour, which organises business so that it will ensure them the standards of living which they desire, which at the same time bears the heaviest part of the rates, and which is confronted with the keenest of foreign competition, constitutes a problem that hitherto has not been sur- 166 mounted and which is being faced with less and less success, so far as I can see by any figures that have been brought before me, in the last few years since the War.
It is an important thing to diagnose the evil, but, unless the malady be recognised, it is idle to attempt to seek the remedy. I am not going further to-night than to point very clearly to where this weak point in our production has led us. One has only to look at the Income Tax returns to see the classes of business which are able to maintain themselves, out of which the revenue of the country is obtained, and by which it is increased year by year, and also to see those great basis industries, employing hundreds of thousands of workmen and occupying hundreds of thousands of acres, which have fallen steadily behind in the general march of the prosperity of the country. I do not suppose that we can continue entirely to be governed by the principles of taxation and rating that were applicable to a condition of affairs when the basic industries were not falling behind, but were fully participating in the great upward thrust of the prosperity of the nation. I can only say that this problem, if it is to be faced at all, must be approached, not in an incidental fashion such as is contained in this Amendment, but that it deserves continuous attention before it can reach the stage at which it can receive the essential consideration of the. Government and become a matter of high policy. There is relief asked from Income Tax on money in reserve, and on wasting assets, and in various other ways, but the question we have to face is one which we cannot face to-night. I cannot accept the Amendment, nor can I make any definite promise or engagement for the future other than the statement I have made, namely, that we shall undoubtedly have to face the situation of whether the undue weight of the burdens which rest upon the great basic industries under our present systems of taxation and rating will receive the attention which it increasingly deserves.