HC Deb 01 July 1937 vol 325 cc2222-41

(1) Where the profits arising in any chargeable accounting period from a trade or business do not exceed two thousand pounds, those profits shall not be chargeable to the national defence contribution.

(2) Where the profits arising in any chargeable accounting period from a trade or business exceed two thousand pounds but are less than twelve thousand pounds, those profits shall, for the purpose of assessment to the national defence contribution, be reduced by a sum equal to one-fifth of the difference between the amount of those profits and twelve thousand pounds.

(3) In relation to a chargeable accounting period of less than twelve months, references in this section to two thousand pounds and twelve thousand pounds shall be construed as references to a sum which bears the same proportion to two thousand pounds or to twelve thousand pounds, as the case may be, as the length of the period bears to twelve months.—[Sir J. Simon.]

Brought up, and read the First time.

6.59 p.m.

Sir John Mellor

I beg to move, as an Amendment to the proposed Clause, in line 13, at the end, to add: (4) The amount of tax payable in respect of the profits of a company for any accounting period shall in no case exceed the amount represented by ten per cent. of the balance of the profits of that period after deducting from the amount of those profits any interest or dividends actually paid out of those profits at a fixed rate or any debentures, debenture stock, preference shares (so far as the dividend thereon is at a fixed rate) or permanent loan issued before the commencement of this Act or on any debentures, debenture stock, or permanent loan issued after that date for the purpose of replacing an equal amount of any debentures, debenture stock, or permanent loan issued before that date. I am moving this Amendment, which stands in my awn name and the names of certain of my hon. Friends——

Sir Irving Albery

On a point of Order. I wish to ask whether it would be convenient and possible for the Amendments to the proposed Amendment standing in my name and that of my right hon. and gallant Friend the Member for Ripon (Major Hills) to be discussed at the same time.

The Deputy-Chairman

I am not quite clear whether the hon. Member wishes to move his Amendments. If so we shall have to take them in their proper place.

Sir I. Albery

I want to move my Amendments to the Amendment.

The Deputy-Chairman

Then the hon. Member must wait till they are called.

Sir J. Mellor

These words are virtually a reproduction of the words of Section (52, b) of the Finance Act, 1920, which related to the Corporation Profits Tax and the purpose of these words is to add an over-riding limit so that the amount of tax payable in respect of the profits of a company shall in no case exceed the amount represented by 10 per cent. of the balance of the profits after deducting from the amount of those profits any interest or dividends actually paid out of those profits at a fixed rate on any debentures or preference shares. The Chancellor of the Exchequer, in moving the Charge of the National Defence Contribution, referred to the question of the over-riding limit, and he first made the objection that it could not be applied to partnerships. That is true, but it is not comparing like with like, and I suggest that it is no answer to a claim that ordinary shareholders of a company are suffering an injustice to say that there is no corresponding injustice inflicted on partners in a partnership.

He proceeded to make another objection and that was, in the case which he instanced where you had two companies both making the same profit; the company which only had a very small amount of preference shares would pay the National Defence Contribution in full, whereas a company with a large amount of preference shares ranking in front of ordinary shares would pay considerably less. If that objection is valid now, it was valid also in the days of the Corporation Profits Tax. But he proceeded to consider the case where the whole of the profits is absorbed in paying preference dividends and he pointed out that under the terms which have been embodied in this Amendment, because one-tenth of nothing is nothing, no National Defence Contribution would be paid by that company. That is perfectly true, but let us consider that case for a moment. Under the Bill if you have a company the whole of whose profits are only just sufficient to satisfy the payment of cumulative preference dividend, then either one of two things will follow. Either the company will have to default upon payment of its cumulative preference dividends, which means piling up arrears, a handicap to that company's future business, or it will have to pay its National Defence Contribution out of reserves, and I am sure that the Chancellor of the Exchequer will not suggest that that is a desirable situation.

I want to know exactly what is in the Chancellor's mind. If he is not prepared to limit the tax upon the balance of profits after the deduction of fixed interest and fixed dividends to a matter of 10 per cent., would he be prepared to limit it to some other percentage? If he wants more than 2s. in the £, would he be content, say, with 5s. in the £ or 10s. in the £? I am afraid that I do not seem to evoke any response. Does he want 15s. in the £ or does he want the whole lot? As a matter of fact, under the Bill as it stands, he is proposing in some cases to take more than the whole lot.

Mr. Garro Jones

The hon. Member is asking what is in the Chancellor's mind, but what is in his mind as to the method by which he would prevent companies inflating the fixed dividend on their preference shares so as to absorb the whole of the profits and the whole of the percentage which the Chancellor might allow?

Sir J. Mellor

If the hon. Member will read the words on the Paper he will find that the matter is dealt with in the last part of the Amendment: interest or dividends actually paid out of those profits at a fixed rate on any debentures, debenture stock, preference shares (so far as the dividend thereon is at a fixed rate) or permanent loan issued before the commencement of this Act or on any debentures, debenture stock, or permanent loan issued after that date for the purpose of replacing an equal amount of any debentures, debenture stock, or permanent loan issued before that date.

Mr. Garro Jones rose——

Sir J. Mellor

I hope that the hon. Member will deal with the point later, and allow me to proceed with the discussion of my Amendment. I feel that the motive which has actuated the Chancellor of the Exchequer in discussing this matter so far has been due to what I may call almost an obsession that this tax should be a tax upon the institution of the company, rather than a tax on individuals. That can be carried to extremes—even to pedantry. He has distinguished debenture interest; he has distinguished that because it is payable to creditors. On the other hand, he has referred to dividends on preference shares as merely a question of distribution, a private arrangement or contract by virtue of the articles of association. That is technically quite correct, but the point is this: It has often been largely a question of accident how a company has evolved; whether it has been constructed with a large amount of debentures or whether it has a certain proportion of preference shares to ordinary shares, and so on. That has often just been a question of what appeared to be the most convenient arrangement at the moment, and in these days in many cases there is no very great distinction between debentures and preference shares in practice, so much so that we find companies issuing participating debentures or income debentures and we know of redeemable preference shares.

The distinction is no longer as definite as it used to be, and therefore I feel that the Chancellor ought to look at this matter as it affects the commercial community rather than as it would be regarded in a court of law. I suggest that the cost of this Amendment is not going to be enormous, because the only companies which will be seriously affected or benefited will be those companies one can describe as being very highly geared. Further, this is a perfectly simple Amendment. The Chancellor, on 21st June, used these words: I think that this provision"— referring to the proposal for an overriding limit— would introduce a complication, and I hope that this tax, whatever else it may he known as, will be known as a simple tax."—[OFFICIAL REPORT, 21st June, 1937; col. 864, Vol. 325.] I am sure that we are all with the Chancellor in that, but many of us when we read some of the words in the new Clauses felt that it did not now appear as simple as once we hoped it would be. But, compared with the complications which must arise out of much of the phraseology which he has put upon the Paper, the words which my hon. Friends and I have put on the Paper are very simple and straightforward. Unless this overriding limit is reintroduced—it worked perfectly satisfactorily in the case of the Corporation Profits Tax—many business enterprises are going to be seriously crippled and the Chancellor of the Exchequer would be the last person, I am sure, to desire to see enterprises in this country discouraged.

7.10 p.m.

Mr. Boothby

I beg to support the Amendment. My hon. Friend has really covered the ground. The Amendment is lucid and no one could fail to understand the words. They would be of benefit to the highly geared company. On the whole, that is a good thing from the point of view of the general body of the community of shareholders in this country. The only point I would like to make, supplementing an argument which has already been addressed to the Committee by my hon. Friend, is that I think that a lot of us are still rather unhappy about the difference made by these proposals between debentures and preference shares. There is, of course, a complete legal distinction between them, but in commercial practice there has been in recent years a great diminution of any practical difference between a debenture and a preference share, and it seems to me that the proposals taken as a whole benefit or hit a company to a large extent because of the wholly fortuitous way in which that company's capital is built up and was created. There is no doubt that any company with a large number of debentures is going to score and that a company which for reasons which may have been good at the time and which had no connection with this tax, has a large number of preference shares, is going to be very hardly hit. I suggest to the Chancellor that there may be a real injustice here, and while I do not know whether lie is going to accept this Amendment or not, I ask him seriously to consider whether he does not think that in this proposal as a whole an unjust distinction is made in favour of the company which by mere accident happens to have a capital structure consisting of debentures rather than preference shares. It is to that point that I wish to direct the attention of the Committee.

7.13 p.m.

Sir I. Albery

I want to add only one word. I feel sympathetic to this Amendment. It does not seem to me to be a question of what the legal difference may be between a debenture and a preference share. The object of the Clause is to tax the equity holder. If I may give the right hon. Gentleman one example, under his Clause as it stands, if a company is earning, for instance, £100,000 in the year, and has to meet a debenture interest of £20,000, it appears that that company will have to pay the tax on £80,000. If a similar company is earning £100,000 and has to pay interest of £20,000 on a preference share, perhaps bearing interest at a lower rate than the debenture, that company will have to pay the tax on £100,000. It is obvious that any good company in good credit, if it wants to raise money is not going to put out a debenture if it can put out a preference. Nor can it be in the interest of good busniess that they should be compelled to do so. I hope, for all those reasons, that the right hon. Gentleman will give consideration to this Amendment.

7.15 p.m.

Major Hills

I submit that lawyers are apt to make too great a distinction between debentures and preference shares. Many a man who invests in preference shares is lending money to the company, it may be at a lower rate of interest. Why should the chance that one company raises its preference capital by debentures, and another raises its debenture capital by preference shares, cause them to be differently treated? In many cases the ordinary capital has been heavily written down and the preference capital left intact, but all those cases will suffer very severely. The only important different between debentures and preference shares is the amount of the profits that comes to one or the other. That is the only business effect. They are similar. In the case of fixed dividend preference shares there is a strong reason for accepting the Amendment, possibly with the Amendment to the Amendment which will be moved by my hon. Friend. I feel strongly that certain cases, not selected cases, but cases that depend upon pure chance, might suffer severely.

7.17 p.m.

Sir I. Albery

I beg to move, as an Amendment to the proposed Amendment to the proposed Clause, in line 4, to leave out "at a fixed rate."

I will move this Amendment more or less as a formality, because the Chancellor of the Exchequer made a point that there are some preference shares that carry a very high rate of interest, sometimes 15 per cent. or even 20 per cent. The object of my Amendment is that the equity shareholders of such companies should benefit only to the extent of 5 per cent. of the preference dividend. That would be an equitable proposal. In the circumstances, 5 per cent. is a reasonable rate of interest.

7.18 p.m.

Mr. Garro Jones

This attempt to bring preference shares into the same category as debentures ought to be resisted by the Committee.

The Deputy-Chairman

Before we discuss that subject we had better dispose of the Amendment to the Amendment.

Mr. Garro Jones

Is not the point the same?

The Deputy-Chairman

No. The Amendment to the proposed Amendment merely says that if preference shares are taken out, they should not exceed a fixed rate of 5 per cent. We had better dispose of that point first, and then we can discuss the proposed Amendment.

Mr. Garro Jones

The limitation sought by the Amendment applies both to dividend and to preference shares. The attempt is being made to bring preference shares into the same category, and we must rebut the attempt and the argument at one and the same time. It is necessary to indicate what is the fundamental difference between debentures and preference shares. The right hon. and gallant Gentleman the Member for Ripon (Major Hills) said there was no difference, except a small lower rate of interest.

The Deputy-Chairman

We really must get rid of the Amendment to the Amendment before we proceed to that argument.

Question proposed, "That the proposed words be there added."

7.21 p.m.

Mr. Garro Jones

In view of the attempt that is being made, to which I have already referred, it is as well to point out that debentures are secured upon the assets of the company, irrespective of the liabilities. If the hon. Gentleman has debentures for £20,000 on a company, and that company has £20,000 worth of assets and £100,000 of liabilities, and if he forecloses upon the company, he will be able to get his money out of the assets, in spite of the liabilities. That is the fundamental difference between preference shares and debentures. Any attempt to reduce, as this Amendment would reduce, the liability of preference shares to tax, must be resisted to the last ditch. As far as I can see, there is nothing in the Amendment to deal with the difference between preference shares and ordinary shares. If a new company is formed, these benefits would not appear to apply to it, in the Amendment as moved by the hon. Member. That seems to be a serious defect. A still further defect is, if a company has £100,000 preference shares and it cancelled a certain number of them and issued those shares at a higher fixed rate, they would he exempt from tax under the Amendment. I sincerely hope that the Chancellor will not need to say very much in rebutting the proposal.

7.23 p.m.

Sir J. Simon

The arguments on this subject must be fairly familiar by this time. When I spoke upon the Resolution, I thought it right to say something about this subject because I knew that many people who had been looking into the matter had observed that in the Corporation Profits Tax there was a limiting provision of this kind. It naturally occurs to anyone that perhaps the same provision should be inserted now. As my hon. Friend reminded the Committee, when the Resolution was under discussion, I did deal with this matter at some little length. He has been good enough to deal with some of the observations I then made. When I had made my speech, some hon. Members who took part in the Debate, including my hon. Friend the Member for the City of London (Sir A. Anderson), no mean authority on the subject, admitted the force of my argument. A good many hon. Members saw no answer to what I suggested, although the hon. Member is perfectly right in raising it.

Briefly, the answer is—we must not skate over this point—that we must remember that whereas the Corporation Profits Tax was solely on the profits of corporations, the present tax applies to firms and individuals carrying on business as well as to companies. It would be very odd if we were to incorporate into such a scheme a limiting provision which, the hon. Member admits, can apply only to companies and which the Amendment shows does apply only to companies. That would not be equal treatment between one taxpayer and another. I have taxed my brains to consider whether I can devise some form of consideration in the case of firms, but I have not succeeded, and I gather that nobody, either my hon. Friend or anybody else, has succeeded since then. The tax applies to individuals as well as to companies, and that is a good reason for not putting in anything which will admittedly operate only for companies and can never operate for individuals and firms.

7.26 p.m.

Mr. Bracken

A large part of this tax will come from companies and not from individuals, and it really is a quibble for the right hon. Gentleman to quote those instances. Because a few private firms cannot be helped by the Amendment, a vast number of companies who have to pay the tax are to have their claims disregarded.

7.27 p.m.

Sir J. Simon

I do not know whether what I have been saying is a quibble, but perhaps the particular language to which the hon. Member refers was not clear. I am pointing out what is perfectly legitimate, that even if it were the case that the greater part of the yield was coming from companies, it would still be necessary to meet the case of firms. So much for the quibble. Then it is not a case, as the hon. Member may have thought, of merely applying a similar provision to that contained in the Corporation Profits Tax. I will point out the distinction. In the case of the Corporation Profits Tax, the 5 per cent. was on the profits, including debenture interest and not excluding it. It was a tax on profits which included investment income. The tax we are now considering is 5 per cent., so far as companies are concerned, on profits less debenture interest, and it does not apply to investment income. When I heard my right hon. and gallant Friend the Member for Ripon (Major Hills) speak of the way in which debentures were treated, I wondered whether he would like us to say: "Very well, you shall not be allowed to deduct your interest on debentures. We shall seek to get the tax on the larger sum before you pay your debentures."

We are therefore dealing with a rather different subject. I want to come to what my hon. Friend regarded as a fundamental difference. The hon. Gentleman who interrupted me just now will see that this can hardly be described as a quibble. I doubt very much whether the conception involved in this form of Amendment is fair, and I will tell hon. Members why. Suppose you have a company which, after it has paid its interests on debentures is left with £50,000. If that company needs that £50,000 to pay the interest on its preference shares, nothing will be left for the ordinary shareholders, which is the case with many companies. If there is to be nothing for the ordinary share- holders, the company would not be subject to the tax at all. I should have thought that in that case it was manifest that fairness required that you should take from the £50,000 the amount of this tax and that the preference shareholders would to that extent go short.

I see no reason why, because there are preference shareholders whose claims would absorb what is left in the form of profits, therefore the company should pay nothing. I should have thought the thing to do would be to slice off the bottom, not the top, of the profit enough to pay the tax, and then having done that, of course, the rest of the profit would be available to be distributed in the ordinary way. The equity shareholder is the man who is taking the rough with the smooth. He says, "If profits are high, I am going to gain more, but if profits go below that, I am the unfortunate one, because prior interests are entitled to be paid before me." I really cannot see my way to take every company in the Kingdom and reconstruct, on some principle or other, the respective rights of the proprietors as between themselves. Everybody buys and sells his shares on the basis of the contract, and it would be an extraordinary thing to say that there may be cases where the ordinary shareholder is hard hit, and therefore I propose to rearrange their respective rights.

To sum up my argument, first of all, there is the fact, which is very simple, that you must really devise some plan which will operate fairly as between firms and companies. That was the whole point of the Amendment moved the other day by the hon. Member below the Gangway here. The second point is that this is not the same thing as the Corporation Profits Tax, but quite a different scheme. The Corporation Profits Tax put part of the contribution on the money that was needed for paying debenture interests. I do not attempt that. The third thing is that I do not think the remedy proposed by the Amendment is fair as between one company and another, because it would be a purely artificial and haphazard thing to make a condition of the kind proposed. With these considerations in mind, I hope the Committee will see that the matter has been very carefully considered and analysed, and I regret that I cannot accept the Amendment moved by my hon. Friend.

7.35 p.m.

Mr. Bracken

The Chancellor of the Exchequer says that it is not possible to rearrange the capital of all the companies in the country, but what he has not attempted to do is to give us any alleviation of the unfairness of this tax. When he talks about people buying shares, he says they must accept risks, but had the ordinary shareholder known the methods that were to be proposed by the Chancellor of the Exchequer in this National Defence Contribution, he might not have bought those ordinary shares. The Chancellor of the Exchequer speaks with ease about his difficulties, but the whole basis of our argument against his proposal here is that he has chosen one class of shareholder alone to bear the burden of this taxation. Is the ordinary shareholder to be regarded as a criminal that he is to be singled out in this invidious way for taxation?

The right hon. Gentleman says that the ordinary shareholder bears all the risks of the company if anything goes wrong. In bad times he gets no dividend, and in good times it is now proposed to chop his profits down by another 10 per cent., rising in many cases to 100 per cent. But what the Chancellor will not do is to give us an explanation of why he singles out the equity shareholders to bear this burden. If he could answer that question, all our objections would be removed. He comes along and gives us a very eloquent description of his difficulties in trying to deal with accidental or chance capitalisation of companies, but he evades the whole issue. When I used the word "quibble," I did not use it in an offensive sense, but I meant that the great objection in industry to this tax is the fact that this particular type of shareholder is singled out for special taxation, and the more we bring the Chancellor of the Exchequer up to the point of trying to get him to explain why he does this, the more he falls back on questions of chance capitalisation and so on.

I really think the right hon. Gentleman should consider what he is doing by this tax. If he is going really to discourage subscription to ordinary shares, he is going to do a great disservice to industry. The capitalist system depends largely on the people who are willing to take chances. If you want to raise money for new industries from the rentiers of this country, who are the people who normally buy debentures, you will very soon find that they will not put their money into new industries. It is what the Americans call the forward-minded chaps who are the creators of new industries. Now the Chancellor of the Exchequer comes along and says, "I am very sorry, but I cannot rearrange the business of this country. I have got to impose a tax, and therefore I shall put a big, heavy tax on the enterprisers."

Sir J. Simon

We put a tax on profits.

Mr. Bracken

The right hon. Gentleman puts the tax on the part of the profits that is taken by equity shareholders. He used an extraordinary argument about the preference shareholders. Is a man who holds six per cent. preference shares to be told, "We have not got enough money to pay six per cent. and this tax, and then give something to the ordinary shareholders, so we will give you 4 per cent."? Any company that did that would very quickly find itself haled before the Court. However, it is obvious that you cannot get the Chancellor of the Exchequer to change his mind. He is determined to tax the equity shareholders, and I venture to think that he will live bitterly to regret this policy. If he taxes the enterpriser in this way he will find that he will not come forward in the future in such great numbers.

7.41 p.m.

Mr. Alexander

I have listened with very great interest to the very detailed and, I think, unanswerable arguments of the Chancellor of the Exchequer. When, later on, dealing with the Schedule, some of us put forward the very firm claim both of the building societies and of the industrial and provident societies that the application of this new tax to them shall be on the basis of the assessment which has already been approved by Parliament under the Income Tax law, I hope the right hon. Gentleman will turn an equally deaf ear to those who plead that he should depart from the rectitude of the Financial Resolution, and that he will strictly follow the Income Tax rules.

7.42 p.m.

Mr. Spens

I regret very much indeed that there is a great outcry on the part of those who own equity shares in this particular connection. You have all sorts of capitalisation in this country. You have cases where the preference shares carry a very large rate of interest, and there may be cases, and there will be some, where the only people who will suffer from this tax will be the preference shareholders themselves, who will go shorter than they otherwise would in respect of their dividends. You have also a vast number of preference shareholders in this country who, in addition to a small or even a large fixed preference dividend, share in ordinary dividends as well, and those preference shares will bear their burden with the ordinary shares. It is quite true that in a great number of cases of companies in this country the persons who will ultimately bear the burden will be ordinary shareholders. This is a further deduction from the general profits of the company and the people who subscribe to ordinary shares in this country subscribe for them knowing perfectly well that whatever accident it be, whether it be an act of God or an act of the National Government, they are the people who will bear something that unexpectedly comes upon them. I venture to suggest that to represent this as an attack on the ordinary shareholders is completely unfounded in law, which I am aware does not appeal to the Committee, but I also think it is wholly unfounded in fact.

Mr. Boothby

I agree with every word that the hon. and learned Member says, but would he not say this, that the owner of ordinary shares in a company which likes to have debentures rather than preference shares under these proposals will have a better time? It is rather tough luck on the owners of shares in a company which has been capitalised in such a way as to have preference shares rather than debentures.

Mr. Spens

My hon. Friend has mentioned another important factor, but there it is. Some companies prefer to capitalise themselves with debentures, and it is a very important matter to remember that the owner of the ordinary shares who has only got preference shares in front of him is very much safer in bad times than the owner of ordinary shares who has a large issue of debentures in front of him. There is all the difference in the world between those two cases. If I may turn for a moment to the Amendment, the Chancellor of the Exchequer said it was entirely beyond his power to control the capital of companies in this country, but I would remind him that it is not outside the powers of shareholders to vary substantially their rights as between themselves, and as this Amendment is worded, I can see very well, if it is passed in this form, ordinary shares being slipped into three-quarters preference shares carrying a fixed rate of dividend and their interest on their preference shares thereby becoming deductable before any tax was payable at all, and probably being able to escape the tax. On those grounds, while disagreeing in principle entirely with the argument addressed on behalf of ordinary shareholders, I respectfully suggest that the Amendment itself would not effect what its Movers are endeavouring to do.

7.45 p.m.

Mr. Tinker

On the occasion of the withdrawal of the original National Defence Contribution, assurances were given that there would be general assent to a simpler proposal—

Mr. H. G. Williams

There were a great many people who were never quite so stupid as to do that.

Mr. Tinker

The Chancellor was urged from all quarters of the House to withdraw his original proposal, and he received assurances from everyone who spoke that, if a simpler form of tax were adopted, he would get even more than the amount he originally estimated. Now we have protests from hon. Members on the other side, including the hon. Member for North Paddington (Mr. Bracken). The hon. Member for North Paddington does not take much part in our Debates, but when we are discussing monetary matters he comes along and urges all his objections to the particular plan that is put forward. He assures us that he has no personal interest in this matter. Does he mean a direct personal interest, or something that is a long way round?

Mr. Bracken

I think the hon. Member's remark is very offensive. I consider that every Member of Parliament comes here to try to serve his constituents, and not in any way to forward his private interests. I think the hon. Member ought to withdraw that offensive remark.

Mr. Tinker

Not at all. Indirectly we are all concerned. When I speak on behalf of the miners, I am indirectly concerned, and it is a personal interest that I have in them. When hon. Members on the other side speak for rich people, they have a personal interest, because they are rich people. Now we have the threat that, if this kind of thing is proceeded with, people who have invested money will consider taking it away and letting the whole thing fall to the ground. Those who invest money are getting a jolly good thing out of it, and, so long as that obtains in this country, they will always be ready to invest their money. When they fail to get a return, we may expect to see some capital going to other countries. I trust that the Chancellor of the Exchequer will pay no heed to this protest. If he would only go forward even a little bit more, he would get support from these benches.

7.49 p.m.

Mr. Mabane

I wish to say in a few words why I hope the Committee will not accept this Amendment. There are two reasons against it, which, I think, so far have not been mentioned. In the first place, if the Amendment were accepted, it would work very inequitably as between company and company, because its effect would be to give a tremendous advantage to the highly geared ordinary share. I am thinking at the moment of two companies. One is Raleigh Cycles, which has a capital of £2,000,000 entirely in ordinary shares, and which, so far as I remember, makes a profit of 10 per cent. The other is Vickers, a company which has enormous capital including only a very small proportion of ordinary shares, and which also, I believe, earns 10 per cent. If this Amendment were accepted, it would result in a most unfair differentiation as between a company of which all the shares are ordinary shares and a company in which a large proportion of the shares are preference shares, with a very small proportion of ordinary shares, and it would operate in such circumstances very unfairly for the Exchequer.

There is another reason, which bears on the point made by the hon. Member for North Paddington (Mr. Bracken). It is not true to say that preference shareholders will not bear any of this burden. One of the most important factors in determining the price of a preference share is the number of times that the dividend is covered. If this tax is applied to the profits which remain after paying the dividend on the preference shares, that will have the effect of reducing the extent to which the preference dividends are covered, and that, in turn, will have the effect of reducing their price on the market, so that, while the preference shareholder may not be directly affected as regards his dividend, he will be affected as regards the capital value of his holding. These are two important considerations which have not been mentioned before, and which, I think, are additional reasons for rejecting the Amendment.

7.52 p.m.

Mr. H. G. Williams

The hon. Member for Leigh (Mr. Tinker) has suggested that everyone promised, when the original proposal was abandoned, enthusiastic support for its successor, and I am not unaware of the fact that a great many eminent business men were unwise enough to commit themselves in that way; but many others of us were rather too old at the Parliamentary game ever to commit ourselves in advance to support something that we had never seen. This tax is frankly a bad tax. It has only one merit—it is not as bad as the one that it superseded. We know that it is bad from past experience. It is the Corporation Profits Tax slightly extended. The old Corporation Profits Tax was abandoned for precisely the reason that this Amendment is being moved to-night. [Interruption.] I am asked what is the difference.

Let us consider its application where the conditions are the same as those of the old Corporation Profits Tax. So far as it applies to corporate bodies, it has the same effect on them as the old tax, which was abandoned, to the delight of Parliament, in 1923. Everyone agreed that it was a bad tax; it had not a friend left. I agree that there may be certain difficulties about the Amendment, because the tax is not the Corporation Profits Tax in this respect, that it is extended to unincorporated bodies and persons. That may be a ground of criticism against this Amendment, but I would remind my hon. and learned Friend the Member for Ashford (Mr. Spens) that even in the bad Corporation Profits Tax there was the principle of this Amendment. It is no use his saying that when you invest in ordinary shares you take the risk of an act of God or an act of the Chancellor of the Exchequer. Against an act of God we cannot do much, but, thank God, we can do something against the Chancellor of the Exchequer, and we are entitled to do what we can. My hon. Friend the Member for North Paddington (Mr. Bracken) put his finger on the point. It is no use the hon. Member for Leigh saying that the wicked capitalists do these things and it is very naughty of them. Every human being in this land tries to arrange his business to his greatest advantage——

Mr. Tinker

That is what I said.

Mr. Williams

Precisely. At the present moment a great and friendly country is in a mess because large numbers of people there are disturbed as to what is happening, and are trying, rightly or wrongly, to put their wherewithal outside the control of the Government of that country. It may be said that that is unpatriotic, but it does not matter; there is no country in the world in which it is not done. Germany to-day is starved of capital because of its ill-treatment of the Jews. You cannot pass legislation which imposes on people burden which they think are unfair without their taking steps to defend themselves. There will be a rearrangement of capital structure, there will be a greater reluctance, as my hon. Friend the Member for North Paddington said, on the part of people to invest in industrial concerns, and in a few years' time this tax will be abandoned, because it will then be recognised that it is a bad tax.

Indeed, there are no sensible new taxes. The only taxes that are sensible are those which have been gradually arrived at, with all their proportioning and adjustments to fit in with all the hard cases. The moment anyone comes along with a bright idea for a new tax, he comes along with a bad idea. We have arranged the structure of our taxation on the assumption that, the richer you are, the higher the proportion that you pay. That is the generally accepted principle, but it is not the principle of this tax. A great many people who are quite poor will pay the equivalent of an extra 2s. in the £ on the Income Tax, and a great many rich people will not pay a shilling. It completely departs from the principle, which we have gradually built up, of the upward graduation of taxation. I am glad to have this opportunity of saying that the tax in essence is a bad tax. We accept it because we know the difficulties of the Government. Their first proposal was so bad that it had to be abandoned, and in a hurry they produced something else. In the circumstances we have to support it, but do not let anyone be under any misapprehension that we think it is a good idea. We think it is very bad. I have much sympathy with the Chancellor of the Exchequer in his position of having become the unfortunate parent of such a dubious child. I wish him luck with it, and hope it will turn out better than the last, but we are not to be charged with any inconsistency because we were not unwise enough to commit ourselves, as other people were.

7.58 p.m.

Mr. George Balfour

I listened with close attention to my hon. Friend the Member for North Paddington (Mr. Bracken) and to my hon. and learned Friend the Member for Ashford (Mr. Spens), and felt that I agreed with them both, especially my hon. and learned Friend, who stated a case which was indisputable. I should like to make a suggestion to my right hon. Friend the Chancellor of the Exchequer as to how he might meet the objection raised by the hon. Member for Huddersfield (Mr. Mabane) with regard to the difference in the gearing of the capital of these companies. I suggest that he might well consider, between now and Report, making this allowance of 10 per cent., or some other percentage, apply, not merely to the assessment after deduction of debenture interest and preference dividends, but to the gross assessment, so that the limit would apply before the deduction of debenture interest and preference dividends. It would thereby bring all companies to a common denominator by making the assessment on their actual gross earnings. I make that suggestion to my right hon. Friend because I believe that there is a serious case to be made out as to the unlimited burden on the equity shareholder. That he should take his luck of suffering a reduction of dividend in bad times and getting a big dividend in good times is right and fair, but I think that, in this temporary tax, there should be a limit which is capable of reasonable computation by the equity holder, and I trust that my right hon. Friend will give consideration to this suggestion between now and Report. Naturally, I should be the last to ask the Chancellor for any definite commitment at this moment; it would be unfair to do so; but I think he might well give consideration to my suggestion and see if it is not possible, without damage to his revenue, which I do not think it would affect by more than a very small fraction, to satisfy the equity holder that proper attention has been paid to this point.

Amendment to the proposed Clause, negatived.