>NEW CLAUSE.—(Amendment as respects income from investments and other property in certain cases.) (Hansard, 28 June 1938)

§ Captain Sir William Brass
I beg to move, "That the Clause be read a Second time."
1868 I shall be as brief as possible in explaining this rather complicated Clause. What it really means is that insurance companies, who at the present time pay National Defence Contribution on the whole of their reserves, shall pay National Defence Contribution only on 100 per cent. of the premium income. In other words, if the income of an insurance company were £500,000, the Clause assumes that the reserves of the company would be £500,000, on the interest on which the company would pay the National Defence Contribution. I am not a lawyer, neither am I an actuary, but I will try to explain in the simplest way and in the shortest time the case for the insurance companies. The point is not that the insurance companies cannot pay; they are quite willing to do so if it is just and fair, but they consider that they have a grievance. I do not want to blame the Treasury. The real trouble arose last year when an Amendment was moved in the wrong place and was declared out of order. The Debate which we might have had then on the suggestions I am now proposing did not take place, and the Treasury could not answer or consider the suggestions.
The National Defence Contribution was introduced as a temporary tax, and it was laid down that it should be for five years. It was to be made on the trading profits of businesses. It was not intended to be an extra Income Tax but a separate tax, although on Income Tax lines. Certain individuals were exempted from it because they were not expected to pay it in the same way as Income Tax. In its original form, this tax was on increased profits due to Government expenditure on the rearmament programme; that form was dropped, because the incidence of that tax was not fair, or was considered not fair, and as a result, the flat-rate tax was introduced—[Interruption.] Perhaps the hon. Member will go outside if he wants to discuss something, and discuss it there. It is a little more easy to talk without a discussion going on.
I want to give one or two examples. The Imperial Tobacco Company buys its leaf, makes its cigarettes, pays its overhead charges, sells its cigarettes, pays its expenses for advertisements and then makes a profit, which is a trading profit, on which it pays the National Defence Contribution. That company has a 1869 reserve of £10,000,000, which is invested and produces an interest on which the contribution is not charged. The Shell Transport Company does the same sort of thing; they also have a reserve of £10,000,000, on the interest on which National Defence Contribution is not charged. That position is quite right, because the National Defence Contribution was intended as a tax on increased profits. It was expected that, as the result of the Government's expenditure on rearmament, there would be increased prosperity in the country and these companies would increase their profits, and it was felt that they should make, out of their trade profits, a contribution towards the rearmament programme. Insurance companies are in a different position, and do different business. They do different kinds of business. Their life assurance business is more or less an investment business, and, as far as life and redemption business are concerned, the companies have no objection to the way in which they are taxed at the present time for National Defence Contribution. The Prudential, which is the biggest of these companies, has, as reserves, invested assets of £330,000,000, 98½ per cent. of which relates to life business. The Pearl has £80,000,000 invested, of which £70,000,000 is life, and the Legal and General £39,000,000, of which all is life except £3,000,000.
The investments of these big insurance companies are already, for the most part, liable to National Defence Contribution. But other insurance companies do fire, accident and general business, including motor business, employer's liability business, workmen's compensation, and so on; and there are also those which do marine business. I think I am right in saying that all these kinds of business are really trading business. The insurance companies in these cases sell risks, and Lord Sumner's view was that they should he treated as trading businesses. They collect their premiums, pay their overhead charges and expenses, and pay their claims, the difference being their profit. That is their trading profit, and that is what ought to be subject to National Defence Contribution, which of course is paid at the present time. But beyond that they ought to have some reserve.
Some people think that an insurance company should be treated as an ordinary 1870 industrial company, and that all its reserves should be treated in exactly the same way as those of an ordinary business; but in my view insurance companies should have some reserves as a sort of stock-in-trade, and we suggest here that the reserve in the case of insurance companies should be roc) per cent. of the premium income. That means that, if a company has a premium income of £1,000,000, it would have behind it a reserve of £1,000,000, on the interest on which National Defence Contribution would be charged. Expenses and overhead charges absorb about 35 per cent. of the premium income, leaving 65 per cent. to meet claims. These claims usually account for about 55 per cent., leaving something like 10 per cent. as profit. The premiums do not all come in at the same time of the year, and there must be some reserve to meet claims as they come in during the year.
What is suggested is that this reserve of zoo per cent. of the premium income should be for that purpose. First of all the reserves have to cover unexpired risks. There are certain unexpired risks that come in for it is estimated that that requires about 40 per cent. of the reserve that I am suggesting. In addition there are claims which have been made but have not been satisfied. That would account for another 35 per cent. We have added to that very generously I think, because 75 per cent. is ample to cover any risks that might be encountered, another 25 per cent. for contingencies. I am told—I cannot say this is accurate because it is difficult to calculate—that it will cost the Exchequer approximately £200,000. We must remember that these are very old companies. Some go back to 1710. They have been building up reserves for many years. How can it be contended that the National Defence Contribution can in any way be attached to the income from the old reserves of the companies? It is not a question of the companies not wanting to pay. It is a question of what is fair and what is not. If they are expected to pay National Defence Contribution on all their reserves, so ought all other companies. Courtalds, which have £15,000,000, and Shell Transport, which has £10,000,000, also ought to pay on their reserves, and it is not fair or right that insurance companies, apart from the amount I have suggested, 1871 should be made subject to a temporary tax intended to be paid out of increased profits supposed to accrue as the result of the rearmament programme.

§ Sir J. Simon
I will do my best to state my view briefly. The National Defence Contribution is a tax upon profits of trade and business. That is the nature of the arrangement. It is not, generally speaking, a tax upon the earnings of investments. Indeed, a tax on the earnings of investments is excluded, generally speaking. Earlier in the day I had occasion to point out that investment income of co-operative societies does not attract any tax under this head. Broadly, the National Defence Contribution is a tax on the profits of business, and not upon investment income. But there are certain kinds of enterprise—perhaps a bank is the most obvious case—where really the making of investments and of profits from investments is the very business carried on. It would be absurd to say you were taxing the profits of business and then to refuse to tax the earnings of a bank's investments. The same is true of investment companies and, with certain adjustments, of life insurance companies. The life insurance company, generally speaking, receives premiums, invests them, keeps those investments for a number of years, and then pays out. In those cases we have to make an exception, because their real business is the making of investments. I have always taken the view that when you come to fire or accident insurance you are approaching a case which is betwixt and between. I was glad to hear my hon. and gallant Friend say he did not share the view, which I have heard advanced by the companies, that investment had nothing to do with their business. That is an absurd claim. Of course, they must hold investments or they cannot carry on their business. When that argument has been advanced I have always, on behalf of the Treasury, resisted it. But I think there is a great deal more to be said for this view, that when you come to consider fire or accident insurance it is rather a middle case. When any one of us takes out a fire policy it usually runs only for 12 months. You may change your company at the end of 12 months if you like. It would be quite wrong to say that investment 1872 has nothing to do with their business, but I am convinced, after detailed inquiry, that they are not in quite the same position as a bank or a life insurance company, where you may take it that the whole of the investments they may make are connected with the carrying on of their business. The fire and accident companies really have accumulated investments which are not necessary for the carrying on of their business.
But I am not at all satisfied that my hon. and gallant Friend in this proposal has drawn the line at the right place. I think myself that there ought to be a larger contribution from investment income before you can say that you have got this thing fair as between different kinds of enterprises. But if my hon. and gallant Friend has followed what I have said—and I think it will appeal to the good sense of the Committee—he will, I am sure, take my assurance that I appreciate the difficulty and will consider the matter with a view to putting up a proposal on the Report stage. I shall be prepared then, to deal with it along the lines which I have suggested. I think it must be agreed that adequate provision ought to be made to get National Defence Contribution from the investment income of these fire insurance and accident insurance companies, but at the same time I can see that their position is not the same as that of the banks or the life insurance companies.
It is right to say, in conclusion, that this matter would have been dealt with last year had it not been for the incident to which my hon. and gallant Friend has referred. As a matter of fact, the proposal then made appeared in the wrong place in the Amendments and was never discussed at all. I believe it should now be possible to achieve the object, which I am sure the Committee would all like to see achieved, of dealign with this matter fairly as between these different classes of companies. I am not prepared, however, to accept this new Clause. To do so would, I think, be giving more than I ought to give. I believe that I can find a figure which would be regarded by reasonable and sensible people as a fair settlement of the matter, and in the circumstances I suggest that my hon. and gallant Friend might be prepared to withdraw his proposal.

§ Sir W. Brass
May I thank my right hon. Friend for the explanation which 1873 he has given to the Committee? He has quite definitely admitted the principle of this proposal.

§ Mr. Ellis Smith
Yes, and it is a disgraceful bit of business—with the means test still on.

§ Sir W. Brass
I agree with my right lion. Friend that it is now largely a question of amount, and I would only point out that the insurance companies have gone as far as they possibly could in this matter. I think, however, that on the question of amount the method suggested by my right hon. Friend is the right one and in the circumstances I shall ask leave to withdraw the proposed new Clause.
Motion and Clause, by leave, withdrawn.