HC Deb 24 May 1932 vol 266 cc280-9

Motion made, and Question proposed, "That the Clause stand part of the Bill."

Sir S. CRIPPS

I should like to ask the Financial Secretary one or two questions on this Clause in order that the Committee may understand what they are being asked to do. This Clause deals with the question of deductions in the case of machinery and plant, and last April Lord Snowden in his Budget speech said that he thought that in proper cases deductions might be made before arriving at the amount of the taxable income of the company. This Clause lays down the standard upon which these allowances are to be made. There is to be an additional deduction equal to one-tenth of the amount of the deductions already allowed under existing rules. As I understand it, that sum is allowed in order that the trader may keep his plant and machinery in a better state, more up to date and more efficient. Is there any guarantee that the money so allowed will be expended upon the purpose for which it is allowed? Is there anything to stop the money so allowed, tax free, being paid out immediately in dividends, or in dividends after a series of years when it has been accumulated? It does not seem fair that any particular Income Tax payer should get this special benefit unless there is a corresponding onus upon him to put the money so received to a certain specified use.

The argument is put forward that there should be a greater allowance in the case of machinery, but it is highly undesirable that this type of allowance should be made unless there is some control to ensure that the money is expended in accordance with the purpose for which the allowance is made. We have a strong objection to this type of allowance being made unless there is some provision to enforce the proper use of the money allowed. We put down an Amendment to this effect to this Clause, and I hope that the Financial Secretary before Report stage will provide some sort of a check in order to assure the Committee that this money will be used for the purpose for which it is obviously and clearly intended to be used, and will not be used to build up larger profits over a period of time and then being taken out of the business in the way of dividends. I hope the Financial Secretary will not tell us that we can rely on the manufacturers to see that the money is so expended. The question of reserves is a very thorny one, and there has been a great deal of criticism in the past because people have distributed money which ought to have been used for reserves. If we are going to make them this gift, I suggest that there should be some provision by which it can be ascertained whether those who get the benefit of this money are giving the services for which we are entitled to ask.

Sir A. M. SAMUEL

Here again in this Clause it is just as well for us to know without doubt what we are going to do. In the case of Schedule D we have the word "obsolete," applicable for arriving at a deduction, and we ought to know whether it is going to have a limited meaning or not. I think it is necessary in order to avoid litigation that we should have a much closer definition of the word "obsolete" as it affects replacement. There is a great deal of confusion between the word "obsolete" and the word "obsolescence." In the ordinary arrangements of business there is a growing practice of substituting motors for horse vehicles. A horse vehicle may not be worn out, it may not be obsolete, but only obsolescent and it is to be replaced by a motor vehicle. We should also know exactly how this matter will stand when we are dealing with machinery and plant. There is considerable indefiniteness about the words "machinery and plant." Do they apply to a retail shop, like a shoe dealer's shop and the fittings of his windows, or does the Clause apply to the expensive fittings of a jeweller's shop window? I am not condemning or criticising the Clause but I think these points should now be made clear in order to avoid litigation.

Major ELLIOT

The questions which were raised by the hon. and learned Member for East Bristol (Sir S. Cripps) would have arisen if the Amendment of the Opposition had been in order. As he knows, the wear and tear provisions in the Income Tax laws have always been claimed to be insufficient to the wastages which were actually taking place. The object of these Clauses was to do something to remove that grievance which had been pressed on Lord Snowden. When Lord Snowden introduced his Budget in April of last year he was strongly pressed by Amendments, moved I think by the present Home Secretary, but he was not able to make any concession then, though he realised that there was a great deal of substance in the case then put forward. He considered the question again in his emergency Budget later in the year, and it was in that Budget that he made the promise which Clause 16 implements.

The hon. and learned Member asks, how are we to ensure that the money set free by this remission will actually be expended for the purpose to which it is ostensibly devoted. First of all we can be sure that in the past sums more than equal to the amounts which are covered by these allowances have in fact been actually expended. The principle underlying this allowance is the principle that it is an allowance in respect of the annual using up of the existing plant, and it, relates to expenditure on plant which has already been incurred, and not to future expenditure in replacing plant. As regards repairs of machinery or plant of course the cost of this is allowed as expenses quite apart from wear and tear allowance.

Sir S. CRIPPS

Surely the object of making this extra allowance is that the owner of machinery may build up a fund which will replace that machinery at the time when it becomes necessary so to do. Take the common case of a locomotive on the railway. It has a 30 years life. There is a 3 per cent. sinking fund put aside every year and invested in reserves. Up to the post-War period there was no obsolescence fund to accompany that, though there should have been. That however is another point. But that 3 per cent. put aside each year, is for the purpose of acquiring a new locomotive or keeping the existing locomotive in a new state of repair annually. The fund may well be accumulated and may not be used for that purpose. It may be distributed as dividends instead of being used for that purpose, and the machinery would be allowed to get out of date. I understand the object of the Clause is to stop that. It cannot be stopped unless there is some provision that the 3 per cent. is put to the proper purpose.

Sir A. M. SAMUEL

It seems to me that the Clause actually defeats the declared object of Lord Snowden.

Major ELLIOT

This double questioning on a technical subject causes some difficulty. I hope that the Clause does not defeat Lord Snowden's intention and promise. In a matter so technical I must be guided by my advisers and I am assured by them that the Clause fully carries out the intention of Lord Snowden, which was in a non-technical sense that a relief roughly equivalent to the extra 6d. of Income Tax should be granted to productive industry. As to whether the actual technical language of the Clause assures that or not I feel I must rely on my technical advisers. The further point was raised that the sums allowed for this may in fact not be put aside but distributed by a company, and the company thereby may be allowed to go to pieces. The allowance is an allowance for the wear and tear of existing plant, regardless of whether it is replaced or not. If the allowance were not made the profit would not be a true profit. The true profit excludes of course the element of capital wastage involved in the using up of machinery.

It is impossible by legislation so to draft a Clause as to defeat not merely human crime but human folly. I do not think it is possible to devise a formula which would do that. I do say that the Amendment drawn up by the hon. and learned Member for East Bristol (Sir S. Cripps) would not in fact have prevented what he seeks to prevent. However, I should not be in order in discussing that now. I have been asked two specific questions by my hon. Friend the Member for Farnham (Sir A. M. Samuel). He asked does the Clause apply to cases where the element of obsolescence enters, such as the case of a company which is replacing its horse traction by motor traction. They would in that case get the obsolescence allowance as a business expense on discarding the horse traction units. My hon. Friend asks further what about the depreciation of the plant, and whether the Clause covers plant in a jeweller's window, show cases and so on. As I am advised it would not cover that plant because it is not plant used in productive industry. It could not be said that plant in a jeweller's window was plant used in productive industry. But I am prepared to go into the matter further between now and the Report stage.

Sir A. M. SAMUEL

There are many shoe manufacturers who have retail shops associated with their factory, branches which are not part and parcel of the factory. The fittings of the shoe shops selling the products of the factory, I submit, would be plant which ought to come under this Clause. The distributors and the producers are one and the same firm.

Major ELLIOT

My hon. Friend, I think, is right, and I was wrong. I have consulted my advisers further, and I am advised that the Clause would cover even the point that my hon. Friend has in mind. I hope that that statement meets his case.

Mr. A. BEVAN

I am not rising to increase the embarrassments of the Financial Secretary, because we all feel that he is dealing with these matters in a courteous and most efficient way. But I want to put one point. It may be that the Amendment put on the Paper by my hon. and learned Friend the Member for East Bristol (Sir S. Cripps) would not meet the point that he desires to meet, but I suggest that it must be within the competence of the Commissioners of Inland Revenue to see that the rebate which is allowed is used for the purpose for which it is intended. Those who were Members of the last Parliament will recall that some of the Liberal party including, I believe, the hon. Member for South West Bethnal Green (Sir P. Harris) put down an Amendment to the previous Finance Bill to secure this point and that there was a considerable scene in the House in regard to it. The parties then were so evenly divided that one did not know what was going to happen in the Division Lobby and a promise was made by the then Chancellor of the Exchequer that he would give a rebate in the next Finance Bill. If Parliament was prepared to go to the length to which it did go, in order to secure this object, surely it is reasonable to ask that the Commissioners of Inland Revenue should take the next step and see that this additional 6d. is used for the purpose which Parliament intended. It should not be beyond the wit of the Commissioners to achieve that end.

Several Royal Commissioners have reported on finance and industry in this country to the effect that it is a regret-able development that companies nowadays are not so scrupulous in laying aside reserves as they were before the War and that in many cases companies find themselves compelled to go on to the open market for money—a course to which they would not have to resort if they had been sufficiently parsimonious in putting money to reserve and not distributing it in dividends. It has frequently been stated that the distribution of reserves in the form of dividends is a method which has been used to "bear" the shares of certain concerns so that those who held them might get out in profitable circumstances, leaving the future shareholders with a concern which had inadequate reserves.

Sir A. M. SAMUEL

All traders are not limited liability companies. There are 500,000 shopkeepers, traders and producers who are not limited companies. The hon. Member talks as if there were no producers in the world except limited companies.

Mr. SEVAN

Because the limitations of human language will not permit me to include everybody in one sentence, the hon. Gentleman must not assume that those whom I do not mention I have not in mind. At the moment I was dealing with limited liability companies and not with private proprietary concerns. If the hon. Member wishes to deal with private proprietary concerns, the opportunity is available for him to do so. The point which I was attempting to make was that, if this tendency which I have described has developed in British industry, and if the present powers for laying aside reserves are not adequately used, and if Parliament is going to make a gift or is going to allow an additional 6d. in the pound for an obsolescence fund, surely it is reasonable, to ask that steps should be taken to see that that allowance is used for the purposes for which it is intended. We are not going to press this matter to a Division if we can get something like a satisfactory reply. We hope that the right hon. and gallant Gentleman will be able to state that he has sufficient administrative powers to enable him to see that this is done, or that appropriate words for that purpose will be inserted during the Report stage to meet our wishes.

8.30 p.m.

Our wishes are very modest. We desire simply to ensure that the money which we are voting shall foe used as Parliament intends it to be used. I agree that in respect of this 6d. we are asking for something which could as appropriately be asked for in respect of the whole rebate. Probably, without giving this additional assistance at all, it could be argued that the rebate allowed under previous Finance Bills ought to be safeguarded in the same way and that consequently we are asking for something which need not necessarily attach itself to this 6d. in the pound. We are prepared to concede that point but we want to seize this opportunity to try to correct what many of us regard as the regrettable tendency of modern industry to distribute funds which ought properly to be conserved for replenishing the technical resources of the country.

Me. EADY

I have had practical experience in regard to machinery nearly all my life. This percentage is an allowance on capital charge in respect of machinery and it has been proved beyond doubt on many occasions that the 7½ per cent. was not sufficient to cover the wear and tear in each year—that is the money actually spent during the year on replacing certain parts of the machinery with a view to ultimate complete replacement. The amount was gratuitously increased, but as a practical man I can say that, even now, it is quite little enough to answer the purpose for which it is intended. As for putting it aside for any specific object or setting apart an amount and saying that it is to be used for a particular class of machinery, I regard that as an utter impossibility. This is a distinct allowance made for repairs and renewals. It answers its purpose very well and I am sure that the country will be very sorry if the Committee make an attempt to allocate it to any specific purpose.

Major ELLIOT

If I may deal further with the questions so courteously put by my hon. Friend the Member for Ebbw Vale (Mr. A. Bevan), I think in the first place he himself made the point that the conditions which he desires to attach to this extra 6d. might as legitimately be attached to the whole of the Income Tax allowance. May I suggest further that it might more legitimately be attached to it, because this 6d. is not a gift as he suggested but an extra allowance on the sums which one may allow a proprietor or operator to deduct before he puts in a return that he has earned so much profit. Naturally, any manufacturer desires to deduct on the whole a larger amount than the Income Tax authorities are willing to allow and it has always been a bone of contention between manufacturers, particularly up-to-date manufacturers and the Income Tax authorities, that the allowance given by the latter in this respect was ridiculously small, and in fact meant a life of machinery far greater than any up-to-date manufacturer allows. I have been much struck by the representations made to me by mine-owners of a progressive kind who say that the replacement of underground machinery ought to be far more rapid than the replacement allowed for in the deductions given by the Inland Revenue. This proposal makes a step towards meeting that case. As I said at the beginning, some may doubt whether this step is sufficient but it is all that we can do in these hard times. Lord Snowden, when he made his statement in the House of Commons on 10th September, 1931, addressed himself to this matter as a general problem. He said: The problem of giving some relief on sums placed to reserve as the Committee know quite well has often been discussed in the House of Commons and I have on many occasions expressed sympathy but up to now we have always found the practical difficulties to be insuperable."—[OFFICIAL REPORT, 10th September, 1931; col. 304, Vol. 256.] He then indicated that although he found the immediate problem of dealing with this whole question insuperable, he agreed that it would be actually injurious to employment to stiffen the Income Tax impost and accentuate the drain made by the Income Tax on the capital of the country by demanding that sums which every manufacturer reserves from profit should be treated the same as distributed profit for the purposes of the tax. I do not think I can fully meet the point made by my hon. Friend the Member for Ebbw Vale as to whether, by administrative action or by inserting words on Report, we can secure the ends which he desires, but I am confident that those ends are secured and more than secured by the fact that our experience and that also of Lord Snowden has been that by manufacturers these sums are already regarded as barely adequate to cover a reasonable depreciation and that in the case of modern and up-to-date firms they depreciate their machinery and replace it at a greater rate than that which is allowed even after the increase which we have in view. I think that at the present the average of firms are quite sufficiently convinced of the necessity of writing down their plant and renewing their plant. I think the pace at which renewals has to take place is increasing constantly and far faster than at present we see our way to compensate for by an increase in these wear and tear deductions. With that I am afraid I must ask my hon. Friend to be content. I think the force of circumstances is driving these replacements forward, and I think that in no case will your progressive firm do what he fears, namely, keep this money and distribute it as profit instead of using it for replacement of plant and the odd case of the firm which in the face of sound actuarial estimation and sound economy does not make allowance for the depreciation of its plant and gives this money away I do not think can be met by legislative formulae drawn up by this Committee. The proof of that is, I think, that if the Amendment had been called which has been carefully drawn up by my hon. Friend it did not meet the case which he had in view.