FINANCE BILL. (Hansard, 12 July 1938)

HC Deb 12 July 1938 vol 338 cc1131-42 1131

§ As amended, further considered.

§ NEW CLAUSE.— (Deduction for purposes of National Defence Contribution and Income Tax of expenditure for protection of employees of factories, etc., against air-raids.) A sum amounting to one-fifth of any expenditure other than expenditure properly chargeable against revenue for the year in which such expenditure is incurred approved by the Secretary of State for the Home Department, and actually incurred in providing protection for the employees of factories, works and industrial premises again air raids, may, notwithstanding anything in the Income Tax Acts, be deducted in computing the amount of the profits or gains assessable to national defence contribution or to income tax in the year in which such expenditure was incurred, and a fifth in each of the following four years: Provided always that if at any time a shelter provided for such protection shall be substantially used for a purpose other than for protection from air raids, the allowance provided for such shelter by this section shall cease to be granted in that year and the following years.—[Mr. Craven-Ellis.]

§ Brought up, and read the First time.

§ 3.54 p.m.

§ Mr. Craven-Ellis
I beg to move, "That the Clause be read a Second time."
This new Clause, which is on the Order Paper in the names of myself and a number of my colleagues, relates to expenditure on the part of industrialists for the purpose of giving their employés protection against possible air raids. At the moment they are in the position that if they comply with the wish of the Home Office that they should provide protection, there is nothing in the Income Tax law which will allow that expenditure to be deducted in arriving at the profits of the year. Under the law as it is at present it is treated as capital expenditure. It is suggested that the Chancellor of the Exchequer should give favourable consideration to the request for this allowance and for it being spread over five years. It is a new departure to ask private enterprise to provide protection of this kind. Industrialists have shown their willingness to meet the wishes of the Home Office but, quite rightly, they say that the Chancellor of the Exchequer ought in return to give them some consideration, 1132 and I do not think that is unreasonable. Who are the people who will have to stand the cost of such work as providing trenches, strengthening buildings or providing shelters? It is the ordinary shareholders, who have already suffered the imposition of N.D.C. The House has always shown itself to be fair, even to private enterprise, when it is willing to take part in what is nothing more or less than a public service.
It has also to be remembered that in this connection different industries find themselves in different circumstances. Some are located in densely built-up areas, where the strengthening of a building may be an extremely costly process; and the matter does not end there, because the loss of productive space must also be taken into account, and that will persist for longer than the five-year period for which I am asking this relief. In order that the House may have some knowledge of what the provision of shelters and general protection means I have drawn up a schedule of 77 firms, all of which have prepared protection schemes, with an estimate of the cost to them, and I will quote a few cases. Number one, a marine engineering and shipbuilding firm, employs 4,000 people and proposes to provide shelters and trenches at an estimated cost of £12,500, which is £3.125 per employé. The second, a rubber firm, employs 3,700 workpeople, and the cost there is £3.5 per employé. An electrical power generating station is in a very different position from the industries which I have just named, because there it will cost £60,000 to provide protection for the 3,000 employés, which is equivalent to £20 per employé. I have in this schedule firms employing very large numbers of workpeople. One tobacco firm employ 22,500 and it will cost them £70,000. I hope, therefore, that the House will not turn a deaf ear to this appeal, because it is reasonable that some consideration should be shown to those employers who are willing and ready to act in co-operation with the Home Office in this matter of aerial defence; and I feel that the Chancellor of the Exchequer, who throughout the proceedings on this Bill has shown himself to be extremely reasonable and fair, will give some consideration to this new Clause.

§ 4.0 p.m.

§ Sir John Mellor
I beg to second the Motion.
1133 The Government through the Home Secretary have laid it down that it is the duty of owners of businesses to provide protection against air raids for their employés. In doing so they have insisted upon what is really a very far-reaching proposition. I think that the Home Secretary in issuing directions to employers in that way should very carefully consider, and I hope the Chancellor of the Exchequer will very carefully consider, the effect upon the great variety of businesses concerned. In this new Clause we are dealing solely with the question of capital expenditure. The Chancellor has already made a certain concession with regard to Schedule A Income Tax and rating assessments, but I suggest that although that has its value it is a purely negative value. The Home Secretary also indicated that in respect of air-raid precaution works generous maintenance allowances would be given, but of course that again is quite indefinite. I feel that expenditure upon structural works for the purpose of protection against attack from the air certainly creates no asset, at least nothing which could be called an asset in any business sense of the word, for the reason that it is quite impossible to expect that any such works would ever produce any revenue.
I think we ought to consider how such works are to be financed from the point of view of the business. If the cost of, say, shelters, is to be found out of capital, certainly that amount ought to be written off as a loss as soon as it is incurred, and certainly no prudent business man would suggest that he could reasonably borrow the amount to meet the cost of such works. If on the other hand it has to be found out of the income of the business year by year, then certainly it must involve a reduction of the dividend paid to the ordinary shareholder. The senior Member for Southampton (Mr. Craven-Ellis) pointed out that this will be a charge really upon the ordinary shareholder, who already exclusively has to bear the charge of National Defence Contribution. If it is suggested, as I rather think the Home Secretary suggested in a Debate on the subject, that it is a moral duty upon employers to provide this protection for their employés, surely it is a burden which ought to be borne by all the proprietors of the business and not exclusively by the ordinary shareholders. If on the other hand it is suggested that 1134 it is a business risk against which people ought to make provision in the ordinary course of business, I think it ought to be borne in mind that in the event of war, which is the only event in which these precautions will come into play and be of any advantage to the business, there is a very strong probability that the business will come under Government control, and if that business is not sufficiently important from the point of view of our national activity at that time to come under Government control, it is very likely that it will be shut down altogether, or at least very drastically curtailed in its enterprise.
We are not asking for any direct Government contribution; at least we are not asking for it in this new Clause. All we are asking for is that businesses should not be taxed upon the profits which they cannot truly be said to earn in the particular year, for this reason, that any prudent business man would regard the cost of air-raid precaution works as a charge against his profits. If he does so, I suggest that it is only fair that the Government should also recognise that fact and allow him to make an appropriate deduction in respect of his Income Tax and National Defence Contribution. In the new Clause it is suggested that these deductions should be spread over a five years' period, which would make it more favourable, I suggest, from the point of view of the revenue. I hope very much that the Chancellor will consider very carefully the position in which the business man finds himself when he is really trying to carry out the invitation of the Home Secretary to provide proper protection for his employés against air raids.

§ 4.7 p.m.

§ Sir Patrick Hannon
I wish to support the new Clause. Nobody knows better than my right hon. Friend the Home Secretary the serious burden imposed on large works in this country in making anything approaching adequate provision for the safety of their workpeople in the event of the disaster of war. The substance of this new Clause is that an allowance of one-fifth should be made, extending over five years, in order to compensate the business for the risk undertaken, the expenditure involved and the deduction which has to be made from the profits of the concern in order to make this necessary provision. Surely if that 1135 is the effect of what is now a part of our national policy—the taking of precautions to safeguard the lives of our workpeople and the properties out of which they make their livelihood—the Government must take into consideration how far by any direct subsidy or financial contribution they can meet the responsibility in the direction suggested in this Clause.
Those of us who are engaged in large industrial enterprises are certainly willing to do our best to meet the exigencies of the times and to conform with the moral obligations which rest upon us in meeting the great question of looking after our people and their safety; but surely we have a right to ask that in doing that we ought to have some consideration from the Government in the matter. Take some of the larger concerns engaged in production on a large scale, and in some cases showing considerable activity in the preparation of armaments. Is the whole responsibility for the capital outlay in making adequate provisions for the safety of the workpeople to devolve entirely on the company? It is very unfair that the Chancellor should expect that the entire burden should be borne so. As my hon. Friend the Member for Tamworth (Sir J. Mellor) has said, in any carefully managed business the first charge upon profits expended in the provision of these safeguards would be regarded as a loss. As any well-managed company must from year to year, during a period of five years, provide one-fifth of the expenditure for this necessary work as a loss incurred in the management of the company, we feel that we ought to have sympathetic consideration from the Government. The proposals of the Clause are reasonable and do not make any startling suggestion that the Government could not accept, and I hope very much that the Chancellor will see his way to meet us in the matter.

§ 4.10 p.m.

§ Mr. H. G. Williams
I recognise that the problem we are discussing is one of very considerable complexity and that already the Government have done a certain amount. I would like to pay that tribute to them, because already, so far as Schedule A assessments are concerned in respect of buildings erected for this purpose, provided they are used for no other purpose, they are to be free of assessment, and we know that only this week we shall 1136 have two Bills, one of them English and one Scottish, dealing with the exemption of air-raid shelters from assessment to local rates. We also know that the Government, after long negotiations, have come to an arrangement with the local authorities whereby about 75 per cent. of the expenditure incurred by the local authorities in the defence of the civilian population, will be a State charge. I took the view that they could not defray the whole of it, because if you have local administration without local responsibility you get wasteful administration. That is quite obviously true. If anyone is entitled to spend money which he has not the responsibility of raising, he will be wasteful. That is commonly understood.
Let me turn to another aspect of the problem. My hon. Friend the Member for Moseley (Sir P. Hannon) is familiar with the problem as it presents itself in the great industrial establishments of Birmingham. I have been examining the problem in an industry with which I have some connection, electricity supply. I am associated with the company side of the industry, two-thirds of which, I know, is municipal. Our problem is of even greater complexity, because every one will expect generation to be carried on even while an air raid is progressing, and that is going to impose on the electricity supply industry, and equally on the gas industry and the water supply industry, very heavy expenditure, some of it capital expenditure and some of it a form of current expenditure. I take it that the current expenditure will be a deductible charge against profits. Another problem arises under that heading. The Clause deals with capital expenditure, I understand, and the creation of an asset which has no economic or commercial value.

§ Mr. Bellenger
Is the hon. Member right in saying that the new Clause refers to capital expenditure? Capital expenditure is usually not deductible from profits.

§ Mr. Williams
That is why this Clause is moved. It refers to: A sum amounting to one-fifth of any expenditure other than expenditure properly chargeable against revenue for the year. I take it that, just like ordinary precautions against fire, current expenses are an ordinary charge against revenue. But 1137 this is capital expenditure which is incurred in the long run for the purpose of national defence. It is not an economic asset, as such, of any value. The proposal is that this capital expenditure should be treated as if it were revenue expenditure, but that instead of the whole of it being written off in one year it should be written off in five years. It is very difficult to estimate what is going to be the magnitude of the capital expenditure forced upon industrial undertakings. I should not be at all surprised to find that for a year or so, at a rough guess, the electricity supply industry may find its expenditure in the neighbourhood of £200,000 or £250,000 a year, and a substantial part in the earlier years will be capital expenditure. These are very large sums which, in the interests of national defence, some undertakings will have to incur and others not, according to circumstances. Undertakings in areas which are more susceptible to attack than others will be called upon to incur much greater capital expenditure in relation to the total number of people they employ.
There is another problem besides those which the Government have already tackled. It would be unfair and unjust criticism of the Government to complain that they have not been able to deal with the numerous problems both economic and defensive, which will arise in large-scale air raids, but, in any case, the Government should be grateful to the hon. Member for Southampton (Mr. Craven-Ellis) for having raised this question. If it is not settled now it is bound to be raised later. This is a burden which is undertaken essentially in the national interest and not primarily as an individual interest, and it should at least be a national charge to a certain extent. As the State is now the sleeping partner in industry to the extent of 5s. 6d. in the £ in the balance of profits, plus a further amount in respect of the National Defence Contribution, when exceptional capital expenditure comes along the sleeping partner should be prepared to bear a fair part of that expenditure. In the days when Income Tax was not a very heavy charge the situation was different, but that charge is very heavy to-day, and it is only right that the sleeping partner, who does the least work and gets the most benefit, should bear a share of the burden. I hope that the Chancellor of the Exchequer will find himself in a 1138 position to examine this proposal sympathetically, and even though he cannot go the whole way in accepting it, I hope he will be able to present some alternative which will have the effect of distributing the burden which will arise more equitably than is the case under the law as it stands at the moment.

§ 4.18 p.m.

§ The Chancellor of the Exchequer (Sir John Simon)
I am obliged to my hon. Friend who has just spoken for reminding the House that an effort has already been made in this Finance Bill to provide some relief in respect of air-raid precaution structures. It is to be found in Clause 17. I think that provision was generally approved by the House. I arrived at the conclusion that that Clause should be inserted in the Bill after examining the general problem from many points of view, not omitting the undoubtedly serious consideration urged by my hon. Friend who moved this Clause.
I am afraid, however, I cannot accept this new Clause, and I will shortly state why. It is not that I do not recognise that a very large and heavy burden in some cases may be thrown on factories and works, in making provision for air-raid precautions. Unless we can get the world into a better state than it is at present that burden is likely to fall upon all undertakings—and I cannot limit it to those mainly prosperous firms who employ a large number of individuals. Nor do I say that the action of firms and factories in providing air-raid precautions is unconnected with the useful and effective carrying on of their businesses. I am sure that it will be found to be very necessary in connection with the carrying on of the businesses that there should be proper precautions of this kind provided.
Let me take, not as a complete analogy, but as a useful illustration, something which can be set side by side with the present proposal. When I was Home Secretary I had the duty of carrying into law a Factory Bill, a very elaborate Measure which required all sorts of improvements in various directions in factories. Greater space, fire escapes, healthier places for washing and all the rest of it had to be provided for work-people in some cases, and all of that might well involve additional outlay and expenditure, as no doubt it did. I do not dispute that that outlay was a serious 1139 burden; none the less it was thought right by Parliament, and was arrived at perfectly fairly after proper consideration on all sides of the House. Those requirements were very much more stringent than those which are now referred to, and involved in some cases additional capital expenditure. I received deputations from various employers of labour urging that the Clauses in question should not come into operation too quickly, because it would be necessary for them to make that capital expenditure, and I thought that was a very reasonable request. I do not say that that is a complete analogy, but it shows plainly to the House how additional capital expenditure has to be provided for by those who carry on factories or workshops in connection with matters which are as essential as those which are the subject matter of the present new Clause.
It is not some technicality or some lawyer's device, but an essential and very obvious distinction, that anybody proposing Income Tax deductions must bear in mind that those deductions must be in respect of revenue and not of capital. Income Tax is charged upon a calculation of annual profits, and before you fix the figures of the tax you are entitled to make certain deductions, but those deductions will always be found to be of a revenue character.

§ Mr. H. G. Williams
Does the right hon. Gentleman include in those deductions the item of depreciation of capital works which are to be spread over five years?

§ Sir J. Simon
Perhaps my hon. Friend will allow me first to finish my point. I agree that the point he has raised has to be considered. Income Tax, being in the nature of an annual recurring tax, must always be arrived at by deducting from the gross income items in the nature of revenue deductions. I do not believe there is any case in the Income Tax provisions relating to business profits in which you are entitled to make a deduction of capital against a revenue charge. My hon. Friend the Member for South Croydon (Mr. H. G. Williams) spoke of an item of depreciation. I have no reason to suppose that at the end of five years those capital constructions will be exhausted and will have to be rebuilt. It has nothing to do with depreciation 1140 at all. I agree that capital works such as plant and machinery would no doubt earn that allowance in respect of their wear and tear, but there is no justification for regarding this proposal as anything in the nature of a proposal for depreciation of things which have either been used a great deal or have fallen out of use. I do not see any reason why premises which are not going to be used should depreciate very rapidly, and, as things are, at the end of five years I hope we shall none of us need them.
It is not possible to justify the acceptance of such a principle. I do not doubt that the burden is serious, but it is merely a question of where we are to put the burden. It is a delusion to suppose that you will get rid of the burden by putting it upon the Chancellor of the Exchequer. It would be merely putting it upon the rest of the taxpayers of this country. I think we must face the uncomfortable fact that, as in the case of the improvements required by the factory laws so with air-raid precautions, these are in the nature of capital outlay and that the burden must be borne where it falls. I would make it plain that everything possible is done to include within legitimate revenue deductions expenditure which can be so regarded. I stated in answer, I think to the hon. Member for Duddeston (Mr. Simmonds), on 18th March this year, the kind of expenditure on which the Inland Revenue authorities would be prepared to permit deductions of a revenue character in respect of air-raid precautions, and they are very substantial. As the hon. Gentleman said, of course, we have to consider such things as the provision of respirators, protective clothing, the covering of certain things with precautionary material, the provision of screens, equipment of stores and first-aid plant and equipment for decontamination. Anything that can, on a favourable view, be regarded as a revenue charge shall be so regarded, and instructions have been so given.
Wear and tear allowance would certainly be allowed upon anything in the nature of plant and machinery, such as air-filtration plant, but when you get beyond that point it really is not practicable to accept without any demur or limit a proposal that outlay which is admittedly of a purely capital character should be treated as though it had suddenly become a revenue deduction. Those are the 1141 broad considerations on which I regret to have to resist my hon. Friend's proposal. I do not wish to take any smaller points, but I would observe before I sit down that it is not very satisfactory to provide the test that the provision shall have been approved by the Secretary of State for the Home Department. I do not know what kind of approval is intended, or whether it is suggested that the Home Department should prohibit people from spending more than a certain minimum amount. Neither do I think that the provision of the proposed new Clause is very reasonable. The main Clause says that this is to be allowed in connection with air-raid precautions and nothing else, while the proviso says that if at any time after four years it is found that the shelter has not been substantially used for the purpose of air-raid protection, the allowance provided for that shelter shall cease to be granted. That is to say, these people having enjoyed the use of the building for four years and also the relief in respect of it may, in the fifth year, change their minds and use the building for something else. These are matters which could be adjusted, but I want the House to understand that my difficulty in the matter is a difficulty really of principle, and I regret that I am not able to accept the Clause.

§ Sir J. Mellor
Does the Chancellor consider that a factory owner could prudently allow expenditure on constructing an air-raid shelter to appear as an asset in his balance sheet?

§ Sir J. Simon
I do not know; it would depend partly upon whether or not he was increasing the annual value of the premises by such a provision. With a private house it might be the case that the house was worth more with an air-raid shelter than without it.

§ 4.31 p.m.

§ Mr. Higgs
I am very disappointed that the Chancellor has not seen his way to grant some concession in connection with this Clause. He has pointed out that allowances are not made for modifications made in factories in accordance with the Factory Acts, but I think I am right in saying that there is no Section in the Factory Acts which would call for such a great expenditure as the provision of air-raid shelters involves. He referred, at 1142 the conclusion of his speech, to the proviso to the Clause, and I was glad to note that he said that that could be in some way modified. Surely, to meet the possibility of the shelter being used for any other purpose after the allowance had been made, a suitable provision could be inserted so that tax which had been deducted could be repaid. I feel convinced that the absence of any provision for the remittance of Income Tax in such cases will restrict the provision of air-raid shelters more than any other factor. I agree that certain allowances have been granted. Local rates are not charged. But they are a very small matter compared with Schedule D and National Defence Contribution, and that is the main factor which prevents the building of these shelters. An expenditure of £3 per employé has been stated by one or two speakers to be necessary for providing these shelters. I am very surprised to hear that they can be supplied for that small amount. Probably it could be done in the case of factories where the whole of the land has not been built upon, but, where the land is built up, it is a very difficult problem to supply these shelters, and it is going to cost far more than £ per employé in the majority of cases in built-up areas, where these shelters are so very necessary. I am exceedingly sorry that the Chancellor is not able to see his way to grant some concession on this very important matter.

§ Question, "That the Clause be read a Second time," put, and negatived.

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