§ In those circumstances it does not seem to me to be unreasonable to ask that this growth in business profits should be made the occasion of some special and temporary contribution on the part of those concerns which have benefited, towards the cost of National Defence. Accordingly, I am going to propose the imposition of a tax upon such growth, which, in order to emphasise its purpose, I call the National Defence Contribution. I propose that the National Defence Contribution shall be payable in respect of the growth of profit by all persons engaged in industries, trade, or business of any kind whose profits, in any accounting year ended after 5th April, 1937, exceed £2,000. That, of course, lets out small concerns whose profits are at a low level. The charge will be in respect of the growth of profit only, and therefore if there is no growth of profit, there will be no charge. It will not be applicable to professions and employments, for although those who are engaged in employments or in professions will no doubt benefit by the general improvement, I do not consider that circumstances would warrant their inclusion in this charge; and indeed the particular proposal which I have to make could not be appropriately applied to them.
§ In order to measure the growth of profit, some standard must be taken. I am proposing that there should be two alternative standards, the choice being the choice of the taxpayer. Either it will be the actual profits of certain specified years, which I call the profits standard, or it will be a percentage on the capital employed in the business, which I call the capital standard. Where the profits standard is adopted, it will be the average 1617 profits of the years 1933, 1934 and 1935, and the charge therefore will be on the amount of the increase of profits shown in the accounting period over the average of those three years. Where the capital standard is adopted, the capital will be calculated at the cost of the assets in the business, subject to suitable adjustments, and upon that capital I propose that, in the case of a company, 6 per cent., and in the case of individuals or firms, 8 per cent. shall be taken as the base which forms the capital standard. Therefore, where the taxpayer chooses the capital standard, the charge will be on the amount by which the profit in the accounting year exceeds 6 or 8 per cent., as the case may be, upon the capital employed.
§ Now I come to the rate of contribution, and I think that sound principle requires that a special and temporary tax of this character should be related, not only to the growth of profits, but also to the absolute prosperity of the firm. You may have a considerable growth of profit without there being, accompanying it, a prosperity on the part of the firm, or you may have a firm which is very prosperous but whose profits have only increased by a small amount. I have in mind, therefore, that the rate of charge is to be increased as the prosperity advances. In order to carry out this plan, it will be necessary in each case to ascertain what is the capital of the concern, whether the profits standard or the capital standard be adopted, because the only way of measuring the absolute prosperity will be by determining the rate of yield on the capital that is represented by the actual profits. The first step, therefore, will be to calculate out the profits, expressed as percentage upon capital, and that percentage will determine the charge upon the growth.
§ I have said that the rate will advance with prosperity, and for the purpose of graduating the charge I am proposing to divide the return on capital into four regions—up to 6 per cent., between 6 and 10 per cent., between 10 and 15 per cent., and over 15 per cent.—and the rate of the charge applicable to the increase of profits will depend upon the region or regions occupied by the increase. For instance, if the capital standard is adopted, the increase, if small, will lie wholly in the region between 6 and 10 per cent. As the profit grows, it may 1618 cover successively higher regions until it reaches the top, and the part which lies in each region will be charged at the rate which is appropriate to that region. Where the profits standard is adopted, the principle will be the same, but the increase will start from a higher level, because the taxpayer will always choose the profits standard in preference to the capital standard if the profits standard is higher than 6 per cent. of the capital. The actual rates of charge will be: Up to 6 per cent., nothing; between 6 and 10 per cent., one-fifth of the growth; between 10 and 15 per cent., one-quarter of the growth; and over 15 per cent., one-third of the growth.
§ Mr. Chamberlain
That part which is over 15 per cent. is charged according to the region it applies to. Now I candidly say that I can hardly expect hon. Members to grasp at the first hearing and in full all the implications of the system which I have been endeavouring to describe. I spent considerable time in trying to frame words which would exhibit at once a simple and an accurate description of this system of graduation, and I am afraid I may have had very little success. [HON. MEMBERS: "No."] In practice I do not think that this plan will be found at all difficult, but in order to elucidate it further I have had a number of illustrations worked out, and they will be found in the White Paper. I should add that where in one accounting period the profit falls below the standard, that deficiency will be available for set-off against the profit in excess of the standard in other periods. But there is one particular class of case which I think deserves special mention, because it differs materially from the normal. I refer to the struggling concern which has had a series of losses in the past and which is only just beginning to make a profit. Of course, in that case the standard of growth of profit will be reckoned not by reference to the losses which have been made before, but by reference to the capital employed in the business.
But I want to go a little bit further in meeting a case of that kind, and I am proposing, therefore, that the losses which have been incurred during the last four years, in so far as they have not yet been written off, shall be carried forward 1619 and set off against the profits chargeable against that year. I have already said that the contribution will only be payable if profits exceed £2,000 in all, but if the full charge were made directly the profits exceeded that figure the transition would be too abrupt and accordingly I have included a device for tapering off this exemption, under which a deduction will be allowed from profits of a fifth of the amount by which the profits fall short of £12,000. The effect of that is this: where the profits are £2,000 they are exempt, where they are £3,000 a deduction of £1,800 will be made from the profit. When they reach £4,000 the deduction will £1,600, and so it goes on, the deduction diminishing until at £12,000 profit it disappears altogether.
The Committee will desire to know when this new proposal is intended to operate. It would, of course, be possible to fix a single date and say that the accounting period should begin then; but, of course, different concerns have different accounting periods ending at different times of the year, and I think it will be much more convenient to allow the first assessment to be made for that accounting period in each case which first ends after 5th April of this year. That means, of course, that the accounting periods fall on different dates according to the practice of the firms. For example, if a firm is in the habit of making up its accounts to, say, the end of June, the first accounting period will end on the 30th June next. If, on the other hand, it has been in the habit of making up its accounts to the 31st March, which comes before the 5th of April, the first accounting period will end on the 31st March, 1938.
Of course, the corollary to that is this, that when the National Defence contribution comes to an end, provision will have to be made, so that every concern has been subject to the contribution for exactly the same period of time. When it is remembered that most firms make up their accounts to the end of December, that no assessment can be made until after those accounts are completed, and that the tax in all cases will only be payable two months after the assessment has been made, it will be seen that I can expect but very little revenue from the National Defence contribution this year. I should not like to put it higher than 1620 £2,000,000. But next year there should be a yield of the important order of £20,000,000 to £25,000,000. Thereafter, the yield will depend on the general prosperity of the country' as shown by the excess of profits over the basic return on capital. Thus, Sir, the National Defence contribution will fulfil my requirement of a new sort of revenue, which will be sufficient this year to bridge the very narrow gap and will grow next year to such an extent as, with the expansion of revenue from existing taxes, will serve to meet the country's needs. Beyond that I will not at the moment look.
§ Mr. Chamberlain
It is not for me to say now, but I should say for so long as it is required. I impress upon the Committee that I regard it as a temporary tax, and as the process of rearmament cannot proceed for any indefinite time, it is perfectly clear that the purpose for which the tax is being imposed will come to an end at some time, and I should imagine that the tax would then come to an end. I should like to add that I believe that I have in this new impost created a flexible instrument, which should be easily adjustable to changing conditions with the least amount of disturbance of confidence and stability. The Resolution which covers it will necessarily be drawn in wide terms, but the provisions for the exemption of small concerns and the other adjustments will appear in the Clauses of the Finance Bill.