HC Deb 12 July 1939 vol 349 cc2284-92

4.37 p.m.

Sir H. Williams

I beg to move, in page 24, line 12, to leave out from "thirty-six," to the end of the Subsection, and to insert "or the year nineteen hundred and thirty-seven."

This Amendment and certain Amendments which follow it on the Order Paper form one group, and I shall endeavour to explain their purpose as briefly as possible. The basis of computation in the Bill is that the firm or the person to be subjected to taxation can select as their standard year, their year of account which ends in either 1935 or 1936; or they can take the average of 1935 and 1937, or they can take the average of 1936 and 1937. The one thing they are not permitted to do is to take the year 1937. I think it is fairly obvious why the Chancellor of the Exchequer has left out 1937. Naturally it is not calendar years that we are considering. This has reference to a year which will vary from firm to firm, because it is the year of account which ends some time during 1937—it may end on 31st January in the case of one firm and on 31st December in the case of another.

The year 1937, as a whole, was a year of rather good trade and in the case of most firms it was a year of reasonably profitable trade. It was not, incidentally, a year in which armament contracts were very important. They cannot have been to judge by what we had not got in September last, which was a substantial period after 1937. Armament contracts cannot have been an important contributory factor to the general level of profits in 1937. As I say, that was a year of good though not of overwhelmingly good trade. It was, at any rate, a year of substantially better trade than we have known for some time past. The Chancellor of the Exchequer, primarily because it would diminish his revenue if they did so, has decided that these people shall not compute their profits for this purpose in relation to this year of fairly good trade. The Chancellor's point is that he wants to get as much as he can out of this tax. The primary object of all Chancellors is to get as much as they can. That is what they are there for and the more successfully they perform that task, the more we admire them. On the other hand, I am satisfied that in particular cases the exclusion of this year 1937—which, to many firms, was a good year in ordinary, normal trading, having nothing to do with armaments—will involve a certain measure of injustice. I find it a little difficult to understand on what ground of principle, apart from the ground of endeavouring to get as much as possible out of the tax, the Chancellor has introduced the rather novel idea of offering these alternatives in this form, and the Amendment proposes to include the year 1937.

Captain Strickland

I beg to second the Amendment.

4.41 p.m.

Mr. Noel-Baker

This Amendment would change the standard year by reference to which excess profits may be calculated for the purposes of this duty. As far as the Amendment goes, taken by' itself, I, personally, am opposed to it. I am much less inclined, however, to oppose the arguments by which the hon. Member for Duddeston (Mr. Simmonds) supported a similar proposition in Committee. He then pointed out that a great part of the yield of this duty will be paid, not by what are normally known as armament firms, but by firms which were not doing armament work at all during these three standard years. I think the hon. Member touched on a point of great importance. Broadly speaking, during the years 1935, 1936 and 1937 there was no industrial mobilisation. There was no organisation of the ordinary engineering and other firms of the country for armament production. They were engaged in making their normal peace-time goods, and it was those firms which are normally known as armament firms, which were producing the vast majority of the country's defence requirements.

I think I can show that the Chancellor's proposals, as they stand, may work unfairly as between armament firms proper and other firms which are now engaged in making arms. Indeed, I think I can show that it would be wrong and unjust, and certainly undesirable from the public point of view, to have one standard only. Everybody recognises that the great majority of firms concerned will choose the last of the Chancellor's four offers, namely, the average of the years 1936 and 1937. I think even the hon. Member who moved the Amendment would agree that even for ordinary firms that is not unjust. That average is not far below the peak of prosperity which ordinary engineering firms have been able to achieve in recent years. But for armament firms that average is a great deal more than just; it is extremely favourable. It covers a period during which their orders from the home Government and from foreign Governments, their production and their profits, had all been tremendously expanded when they already stood at a very high level indeed. I ventured to recall to the Chancellor in Committee—and as it is germane to my point, I am afraid I must weary him with a repetition of it—that in 1934 Government expenditure on defence was £113,000,000, and that the average expenditure of the two years 1936 and 1937 was £230,000,000, or more than double that of 1934.

Sir H. Williams

Does the hon. Gentleman mean the year which ended on 31st March, 1938?

Mr. Noel-Baker

Yes. Of course it overlaps a little, but it includes nine months of 1937. Not only had the expenditure on armaments and munitions doubled; it had more than doubled because we had not reached the stage of expanding our man power very much. In point of fact, if we examine the figures we find that, by 1937, expenditure on armaments and munitions was about four times what it had been in 1934. That is not the end of the story. The share of the private firms had also greatly increased, proportionately to that of the Royal Dockyards and arsenals. I think it is true to say that, by 1937, orders to private armament firms were approximately six times what they had been in 1934, which was the last year of the normal period as far as armaments are concerned. The greater part of that additional business had gone to the ordinary Admiralty, War Office and Air Ministry contractors. No doubt they put out some component parts to subcontractors, but, broadly speaking, up to that time their sub-contracts were nothing very great.

That means that the firms which are normally known as armament firms were by 1937 at a high peak of prosperity; their profits and their dividends show that that was the case. I cited in Committee 30 firms engaged in armaments work whose total of profits had risen from £3,800,000 in 1934 to £11,750,000 in 1937, that is, had increased by three times, or rather more. There had been an increase of £8,000,000 of profit on the same capital—because there had been very little increase, if any, of real capital—and they were making quite good normal profits on their capital in 1934. That total excluded the aircraft firms, and I was able to show that those firms had also had a great increase in orders and profits by 1937, and that, in fact, they were paying dividends of 20, 30 or 40 per cent.

Before the end of the Committee I proposed to the Chancellor that he should consider whether it would be possible to take a different standard year for armament firms proper and that 1934 would perhaps be the right year. If he would take 1935 I should be content and I think it would be an improvement, though I venture to think that 1934 is the right year. With his usual courtesy the Chancellor promised that he would consider the question, and he left me with some hope that he might say something about it on the Report stage, and that is why I am raising it now, but he was very far from promising to make a change. Indeed, he did advance certain reasons against the acceptance of the year 1934 as a general standard for all firms, and some of those reasons applied also against the acceptance of 1934 as the standard even for armament firms. The Chancellor said that the year 1937 was before our great armament expansion began, that it was only the beginning of what he called the quinquennium of our rearmament plan. With great respect that really begs the question. The quinquennium has nothing to do with it. We have to take the point from which rearmament began, and if the orders to private firms had by 1937 increased by six times over what had been the normal for the preceding 12 years I venture to think that, for the purposes of this new tax, that is rearmament expansion, and expansion on a very considerable scale, and if the firms were paying dividends of 20, 30 or 40 per cent, that is profiteering for the present purposes. I am not blaming the firms. The Government allowed them to do it, they must look after their finances, but it was profiteering of which, for the purposes of this tax, he ought to take account.

The Chancellor also said that it was as a result of the expansion of the quinquennium that the costings system, which was our principal guarantee against profiteering, had failed to operate, that it was because of the immense increase of output due to the development of the five-year plan that the principal guarantee had not operated as it was hoped that it would operate in preventing excess profits. To that there is a double answer. First, there is the answer that before 1937 the costings system was less efficacious than it is to-day. The second answer is that, even by what he himself contends, the sixfold increase in orders must have broken down the efficacy of that principal guarantee against profiteering, and I think that is the reason why profits and dividends had risen to such a high point by 1937.

I think that the Chancellor's reasons for rejecting the year 1934 as a standard for armament firms proper are not conclusive. I trust that he will agree that there is a case for establishing a different basis for armament firms, and that perhaps 1934, or at the latest 1935, would be right. I hope he will not reply that there would be a difficulty in determining which firms ought to be made subject to this standard year. I do not think there would be any difficulty about it. I suggested in Committee that he might take the contractors who were on the Admiralty, the War Office and the Air Ministry lists as armament firms, but perhaps an even simpler plan would be to include all firms who in the standard year, 1934 or 1935, received £200,000 worth of armament orders. I think that would work extremely well and without injustice to anyone concerned.

I would press this on the Chancellor, because if he refuses some change of this kind I think he will be creating a system which the country will regard as a sham. It has been calculated by an expert in a Conservative paper that under this system Vickers would last year have paid only £70,000 Excess Profits Duty, in spite of the tens of millions of pounds worth of armament orders they must have had, and surely that is a result which would bring the whole system of this new taxation into well-merited derision. When the Prime Minister proposed it he said that it was to meet the views of the Labour party. Our views are that the profit should be taken out of war and the preparations for war, and that we should not now, in this time of crisis, allow an increase in the power or the wealth of a vested interest which draws great profits from the armaments which the nation now needs. The tax as it now stands will do remarkably little to meet any of these purposes, and therefore remarkably little to fulfil the Prime Minister's statement.

I hope the Chancellor will remember that in the Peace Ballot 94 per cent, of those who voted desired that the private manufacture of armaments should be abolished altogether and they would certainly desire that profiteering should be really got rid of; yet I venture to doubt whether there has ever been greater profiteering out of armament manufacture except in the early days of the last War, than there is to-day. I hope the Chancellor will not complete his armament record which at Geneva was not, in the view of some people, a very happy one, by maintaining a scheme which in reality would be a sham. The proposals are lamentably inadequate.

Sir H. Williams

On a point of Order. May I ask whether we are having a Second Reading Debate or a discussion upon my Amendment?

Mr. Speaker

The hon. Member has been getting a long way from the terms of the Amendment.

Mr. Noel-Baker

I am sorry to be out of order. I was really trying to elicit from the Chancellor a statement on something which he said that he would consider in Committee, and as there was a certain argument which he used in his final statement I thought I might be allowed to put the answer to that argument. But I have finished. I would end by begging the Chancellor to say that he will not accept the Amendment.

4.54 p.m.

Sir J. Simon

If I were to address myself to the Amendment which is now before the House I doubt whether I should be able to deal with the matters raised by the hon. Member for Derby (Mr. Noel-Baker), but as he has mentioned them I will trespass so far outside the rules of Order as to assure him that I did consider the suggestion which he made in the Committee stage that I should draw a distinction between armament firms and non-armament firms, and that firms should have a different standard year according to whether they were in the one class or the other. On reflection, I do not think it is a good suggestion. For one thing, I do not think it is true to regard all those who are now making armaments as falling into two simple categories, those who are armament firms and those who are not armament firms, because there are infinite gradations between the two. There are firms who did some armament work in addition to their principal work, others who did next to nothing, and others who did none at all. In the circumstances I think there is no doubt that the course we have taken in the Bill is the right one, and that is to have some common formula for the standard year, to give an adequate number of well selected alternatives, and to provide that in certain cases where this may cause manifest hardship there should be a reference to the Board of Referees.

The hon. Member for Derby was not concerned very much with discussing the Amendment, but with discussing other things, but as regards the Amendment itself, that, too, I have considered since the Committee stage. Another hon. Friend of mine made this proposal during the Committee stage, and I then opposed it but undertook to look into it further, and that I have done. I certainly do not think that the year 1937 standing by itself should be regarded as a normal year for armament purposes. The hon. Member for Derby, who has the figures very much at his finger ends, pointed out how the totals have risen, and I do not think that we could regard that year by itself as what we might call a normal year. On the other hand, as I have pointed out, we are trying in this Bill by simplification to produce a plan for fixing a standard which does not introduce—at any rate does not introduce in the case of old companies—a reference to interest on capital. I am sure that is a wise decision, because whatever rate of interest you allow on that capital it cannot be more than a very rough approximation. We have to use this method as regards new businesses or the increases of capital in old businesses, but if in the case of established businesses we have not to make this calculation of capital and a percentage on it it is a much better plan.

Therefore, we have provided no less than four alternatives. I do not think I can accept the suggestion of the hon. Member for Derby that in every case people will choose one of them, the one which he referred to as the most favourable one. In many cases that may be so, but not in all cases. We have offered the alternative of the year 1935, or the year 1936, or the alternative of either of two averages, the averages of 1935 and 1937 or of 1936 and 1937. My hon. Friend the Member for South Croydon (Sir H. Williams) has done something which is very rare with him: he has made a mistake in the reading of the Bill. He said that for this purpose you might imagine that the year ended at any month, but for the purpose of fixing the standard it is the calendar years which are referred to. You have to take the accounts of a business—if they do not make up their accounts to 31st December—and divide them in such a way as will produce the figure for the calendar year. That, however, is a small point.

I think the four alternatives we have offered will turn out to be about fair. It is true that there was a very considerable increase in the amount which the State spent on armaments in the latter of these years. In the fiscal year 1936–37 the amount was £186,000,000, and in the next fiscal year, 1937–38, it had risen to £262,000,000; and as we all know, and I have more reason to know it than anybody else, the amounts have risen since then in the most fearful way. There is no question, therefore, that 1937 is the year in which we began to feel the effect of the armaments drive, but it is equally true to say that it does not reflect the full effects of it. I take the view that it is when you get to production on a very large scale that you find yourself at the greatest risk of there being excessive profits which call for taxation. I think, therefore, that the proposals that we make are right.

In arguing here for the provisions of the Bill, I am between the devil and the deep sea—I do not attempt to allocate the parts—in one quarter I am asked to go further in one direction, and in another quarter I am asked to go not so far. I have taken the middle of the road. It is the safest place, and that is where I propose to remain.

Amendment negatived.