NEW CLAUSE.—(Additional deduction in respect of wear and tear of machinery and plant.) (Hansard, 18 June 1934)

§ Mr. DINGLE FOOT
I beg to move, "That the Clause be read a Second time."
Hon. Members will see from the rather unusual juxtaposition of names that this is not a party question. It has received the support of Members in widely different parts of the House. I put down a similar Clause for discussion last year, but the Chancellor of the Exchequer was not able to give any concession. He expressed a good deal of sympathy with the aims of the Clause, and said that if he could see an opportunity of furthering the object which it had in view he would 144 be very glad to give the matter consideration. It is a little disappointing that in the easier financial circumstances of this year the right hon. Gentleman has not made a move in this direction. It may be that the subject of wear and tear and obsolescence allowances do not come within the principle of this year's Budget. If that be the case, I hope that the right hon. Gentleman will take an early opportunity of increasing the wear and tear allowances, and of overhauling the system of obsolescence allowances available for British industry.
There is always a difference of opinion as to the effect of Income Tax upon industry. The view generally taken by Members of the Conservative party is that the whole tax is a burden upon industry and that the remission on the flat rate of Income Tax is likely to be immediately reflected in increased industrial activity. The other view, which I believe was taken by the Colwyn Committee, is that Income Tax is a tax upon profits generally speaking, and that it is not necessarily a burden upon industry. Whichever view one supports as regards the tax as a whole, there can be no question that that part of the tax which is imposed on money spent in acquiring new plant and machinery must inevitably be a burden upon industry.
A year ago I quoted certain figures to the House showing the difference between wear and tear allowances in this country and those in some other European countries. As it is improbable in the highest degree that any Member of the House should recall anything I said 12 months ago, I venture to use those figures again. They were compiled by Mr. George Bonar, one of the leading manufacturers in my constituency, who has taken the trouble to cerrespond with various manufacturers in the same line of business in different European countries in order to get strictly comparable figures. These were the figures which he obtained: In this country up to 1932. the general allowances for wear and tear in most industries was 7½ per cent. on the declining value. In 1932, an extra 10 per cent. was added, raising it to 8¼ per cent. In the majority of industries the exact amount allowed is generally a matter for bargaining between the Inland Revenue authorities and the industries concerned, but I think I am right 145 in saying that the average is 8¼ per cent. of the declining value. In France, Belgium and Italy, the allowance is 10 per cent. upon the original value; in Germany it is 20 per cent. in the first year, and 8 per cent. of the declining value thereafter. It must be obvious that there is a very big difference between the allowances made in this country, and in the countries to which I have referred, and that in this respect British manufacturers competing in foreign and neutral markets must be under a very considerable handicap.
Of course it is open to the right hon. Gentleman or the Financial Secretary to point out that the wear and tear allowances are not the whole story, and that there are also the obsolescence allowances to be taken into account. It is true that after a certain number of years, during which the wear and tear allowance has been made each year, when the machinery is finally disposed of, the obsolescence allowance will come into operation. But the obsolescence allowance only becomes effective if expenditure is actually incurred in replacing plant or machinery; if there is no replacement, there will be no allowance. I would ask the House to compare that with the system which prevails in, to take one example, the Commonwealth of Australia. In Australia, a manufacturer obtains full allowances in respect of any loss sustained by him if he sells machinery, whether he replaces it by other machinery or whether he simply sells the machinery and leaves it at that. I think I am right in saying that within the past 12 months a very similar system to that which prevails in Australia has been adopted in Germany. Obviously in that respect manufacturers in certain other countries, at any rate, have a considerable advantage over our manufacturers.
Since this matter was raised on the Finance Bill last year, the importance of the question of wear and tear and obsolescence has become even more obvious, because a great deal has been said both inside and outside this House on the question of Japanese competition. There are several factors which make Japanese competition a very serious matter from our point of view, but I do not think anyone would deny that one of the principal factors is the efficiency of the Japanese, and the fact that their machinery and 146 equipment are the most modern and up-to-date that they can possibly acquire, and it is obvious that there will have to be considerable replacements if British industry is to compete with them in the future.
In this connection I would like to quote the following passage from a speech delivered at Glasgow on the 14th of this month by Mr. J. O. M. Clarke, the Chairman of Messrs. J. and P. Coats, Limited, in which he dealt with this question of Japanese competition: He said that there had been a good deal of loose thinking, and still more loose talking, about this matter. He did not wish to appear dogmatic, but, as shareholders in one of the leading textile concerns in Japan, and as British manufacturers who met with Japanese competition in various part of the world, they were at least in a position to see both sides of the question. He was of the opinion that the competitive power of Japan was largely due to the efficiency with which her industries were conducted. It was all very well, he said, for textile manufacturers in this country to protest against competition from abroad, but one, and perhaps the chief, reason why this competition was now felt so severely was that there had been a reluctance on the part of many of our manufacturers, whether owing to shortage of capital or for other reasons, to bring their equipment up to date, and consequently British machinery makers had had to look elsewhere for their markets, and had vied with each other in supplying Japan and other manufacturers with the most modern machinery. There had, he said, been comparatively few radical changes in spinning machinery for the last 50 years, but, with so many newcomers in the field, he was confident that this state of affairs was not likely to continue, and anyone who wished to keep up in the race would require to set aside much larger sums for obsolescence in the future than had been done hitherto. That, at any rate, is an authoritative opinion, and I think all Members of the House will agree that, if our manufacturers are to meet competition from Japan and some other countries in neutral markets in the future, very large sums will have to be spent in the next few years on replacement of plant and machinery; and, if that is to happen, I hope that the Government, by increasing, if possible, the wear and tear allowances, and by overhauling our system of obsolescence allowances, will make that process as easy as possible for British manufacturers. I hope that the right hon. Gentleman will be able to accept this Clause as an earnest of what is to come, and in any event I hope that whoever replies for the 147 Government will be able to make some statement as to the future intentions, or at any rate as to the future hopes, of the Government on this highly important issue.

§ Mr. H. WILLIAMS
I beg to second the Motion.
This is one of the few occasions upon which I find myself in agreement with my Free Trade Friend the hon. Member for Dundee (Mr. Dingle Foot). I have always thought that it was in the interests of good trade and employment in this country that depreciation allowances should be as generous as possible. After all, in the long run, you can only depreciate 100 per cent. of the value of anything, and, except for certain risks of fraud, there would be a good deal to be said for every manufacturer fixing his own rate of depreciation. Of course, however, there are certain devices by which it would be possible to get round such a system, and therefore we have to fix these allowances partly by Statute and partly by those friendly negotiations between the representatives of various trades and the Somerset House officials. Everyone will agree that those officials are competent and considerate, but nevertheless the limits within which they can act are rather narrow.
The right hon. Member for Hillhead (Sir R. Horne) has frequently drawn attention to the severe disability suffered by British industry through heavy taxation on the reserves of companies. In so far as profits are fictitious and not real—that is to say, in cases where the depreciation allowances are inadequate, and firms are compelled to declare for Income Tax purposes profits greater than their economic profits—a larger area of reserves is exposed to the burden of Income Tax. The Chancellor of the Exchequer has reduced that burden by one-tenth as a result of his wise administration and of his happy Budget, and to that extent the case is diminished, because the Income Tax is now 4s. 6d. in the pound instead of 5s. Nevertheless, anyone who discusses this matter with industrialists will see that the depreciation allowances are inadequate in many cases. It is sometimes argued that, if a machine has to be thrown out, an obsolescence allowance equal to what is left of the value that 148 cannot be obtained by the sale is credited, but that is not the same thing as having a uniform year-by-year depreciation allowance which is adequate. An obsolescence allowance may provide a large relief in a particular year, but that is not the same in its effect on costs of production as an adequate depreciation allowance throughout the years, and such adequate depreciation allowances are more likely to stimulate manufacturers to throw out obsolete plant and put in new plant promptly, and thereby raise the standard of living than anything else.
I am not so optimistic as my hon. Friend the Member for Dundee, because, as this proposal would cost from £2,000,000 to £3,000,000, I cannot imagine the Financial Secretary saying "Yes" to-night, but I hope that the arguments will impress his mind and that of the Chancellor of the Exchequer. My right hon. Friend has had practical experience in the past of trying to get his own depreciation allowances increased, and I hope he still retains his sympathy for those who are still in that industry from which he has happily departed

§ Mr. CURRY
I do not speak as an industrialist in this matter but as one whom industrialists sometimes—all too seldom—trust to negotiate these allowances. It is generally agreed among people who have first-hand knowledge that the depreciation allowances on the whole are not adequate to meet the situation. Indeed, I hope I shall have the Financial Secretary's agreement to this, that it is because the depreciation allowances proved to be inadequate that obsolescence allowances were introduced, and, indeed, it is obvious that, if wear and tear were allowed at an adequate rate, an obsolescence allowance would not come into the question at all. I only want to add my word in support of the Clause in order to bring this question before the Financial Secretary, that if and when this matter is being gone into we might with advantage consider the advisability of making these wear and tear allowances always upon the original cost of the plant and not upon the written-down value, because, as the wear and tear written off in the accounts is in excess generally of the wear and tear allowed in the computation, you get an increasing disparity between the accounts and the assess- 149 ments, and you get a disproportionate burden placed upon industry by these inadequate allowances.
Another point that I would like to suggest for consideration is that we are now looking forward to, and indeed doing our utmost to encourage, the development on a large scale of the lighter industries of the country. That will mean the introduction more and more of lighter machinery, which depreciates faster, and it is obvious that, if we are going to use on any large scale machinery the life of which is shorter than was the life of machinery when these allowances were first fixed, we are going to get great obsolescence allowances with a greater disparity between assessments and profits, and, what is more, and what I think is bad for taxation, an unequal burden from year to year on the taxation borne by a particular industry.

§ Mr. HORE-BELISHA
I wish that the hon. Member who moved the Clause had put the matter in perspective. When the rate of Income Tax was increased from 4s. 6d. to 5s. in 1931, in order to afford some compensation the Chancellor of the Exchequer proposed to increase by 10 per cent. the wear and tear allowance. This year the Income Tax is being reduced and, therefore, normally this concession, which was a compensatory one, should be withdrawn altogether. The hon. Member chooses this moment, not to thank the Government for not having withdrawn it, but to ask them to double it. The wear and tear allowance is calculated to write off the prime cost of machinery and plant by the end of its physical life. Therefore, by the end of the physical life of any plant or machinery the trader has been allowed the whole of the cost and, if he desires to make away with the plant in the meantime and renew it, he will get the obsolescence allowance.

§ Mr. DINGLE FOOT
Only if he replaces it.

§ Mr. HORE-BELISHA
Certainly. What else would the hon. Member expect? He has the wear and tear allowance while the machinery is depreciating and he gets back the whole of the cost that way. If he scraps it, he gets obsolescence allowance if he replaces it. The whole of the physical life of the machinery and its capital value are thus secured. Some 150 complaint has been made about the rate of allowance in this country as compared with other countries. I would, however, point out to the hon. Gentleman that the rate is subject to appeal. In practice the rate is commonly fixed with industry, and if an individual is aggrieved he has an appeal to the Income Tax Commissioners. If, on the other hand, a whole class of traders are aggrieved, they have an appeal to the Board of Referees. Whatever the merits of this proposal may be—and I am sure the whole House will agree that the proposal would not have the decisive effect contemplated by the hon. Gentleman in his speech—the cost of conceding this Clause would be £2,000,000. That, of course, is quite out of the question at the present time. Therefore, on financial grounds, as well as to some extent upon grounds of merit, so far as the merit must be related to the arguments put forward by the hon. Gentleman, I must ask the House to reject this proposal.