§ (1)Where the profits arising in any chargeable accounting period falling within the three years beginning with the first day of April, nineteen hundred and thirty-nine, from any armament business (as hereinafter defied) exceed the standard profits, there shall be charged on so much of the excess as arises from armament contracts a tax (to be known as the armament profits duty) equal to three-fifths of that part of the excess.
§ (2)The proportion of any such excess as is mentioned in Sub-section (1) of the Section which is to be attributed to armament con tracts shall be ascertained by reference to the 552 proportion which the turnover under armament contracts bears to the total turnover of the business in the chargeable accounting period in question:
§ Provided that—
- (a) if the person carrying on the business satisfies the Commissioners that in fact a proportion of the excess less than that ascertained as aforesaid arises from armament contracts, such adjustment shall be made as appears to the Commissioners to be just; and
- (b) if on the application of the Commissioners the Board of Referees, after giving the person carrying on the business an opportunity of being heard are satisfied that in fact a proportion of the excess greater than that ascertained as aforesaid arises from armament contracts, such adjustment shall be made as appears to the Board of Referees to be just.
§ (3)If the person carrying on a business is dissatisfied with any decision of the Com missioners under proviso (a) to the last preceding Sub-section, he may appeal to the Board of Referees and the board may make such order in the matter as they think just.
§ (4)If any dispute arises between the Com missioners and the person carrying on any business whether or not a contract is an armament contract the matter may, on the application of either party, be referred to the Minister and the Minister, after giving each party an opportunity to be heard, shall decide the matter and his decision shall be final.—[Sir J. Simon.]
§ Brought up, and read the First time.
§ 10.18 p.m.
§ The Chancellor of the Exchequer (Sir John Simon)
I beg to move, "That the Clause be read a Second time."
I think the Committee has already followed the scheme of this duty, though no doubt a number of fresh points of detail may arise on the later new Clauses.
§ Mr. Garro Jones
On a point of Order. May I ask you, Colonel Clifton Brown, and also the Chancellor of the Exchequer whether, as the new Clauses dealing with this subject appear to be interwoven at many points, it would not be desirable to have a wide Debate which would cover all the new Clauses?
I could not approve of that course. We have already had a wide Debate on the Ways and Means Resolution. I think at this stage we must keep to each new Clause as it is presented to the Committee.
§ Mr. Garro Jones
While in no way objecting to your Ruling, Colonel Clifton Brown, may I respectfully submit that 553 the fact that a full Debate has taken place on a Financial Resolution has never been regarded as a reason why a comprehensive Debate should not take place on the Clause, when the Financial Resolution has been embodied in one Clause. In this case the Financial Resolution is embodied in several Clauses, and while I do not wish to press the matter in face of contrary opinion, it seems to me that it would be better to have one discussion on the wider issue, including this and the subsequent new Clauses.
§ Sir J. Simon
In so far as this is a matter of order, you, Colonel Clifton Brown, have given your Ruling, and we shall accept it. I should have thought myself that we were bound to treat the new Clauses, which now appear on the Paper—as indeed we shall—in the same way as Clauses in the Bill, that is one by one. At any rate, I have prepared myself so to deal with it, and I hope there will not be any unnecessary complications. I agree with the hon. Gentleman in this sense, that it might be convenient that we should be reminded that when we come to the later Clauses there will be some definitions of matters included in this Clause, and no doubt hon. Members may wish to remind themselves of that now. This new Clause begins:Where the profits arising in any chargeable accounting period falling within the three years".—the definition of that is to be found in the later Clause on page 1739. It goes on:beginning with the first day of April, 1939, from any armament business (as hereinafter defined")—that is the Clause on page 1734—exceed the standard profits, there shall be charged on so much of the excess as arises from armament contracts a tax … equal to three-fifths of that part of the excess.I would like to point out to the Committee that while the duty thus proposed is three-fifths, or 60 per cent., that is the charge made on the excess in respect of armament profits alone, and consequently, if we take for greater simplicity the figure of 100 as measuring the total excess of armament profits, this contribution will take 60 of the 100. There is superimposed on that the National Defence Contribution of 5 per cent., or 1s. in the £ and, therefore, taking my figure 554 as before, that will reduce what was originally 100, and has now become 40, to 38. There is then imposed on what is left Income Tax at 5s. 6d. in the £,and that will reduce the £38 by £10 9s. The result is that there is left, after paying these three taxes out of the £100, £27 us. I do not think it will be denied, therefore, that the application of 60 per cent. is an adequate charge. No one will suggest that there must not be left a proportion of the excess, or the result would be to discourage rapid production and increased profits. I mention that because I think there must have been some misunderstanding as to the severity of the proposed duty.
The next subject dealt with in the Clause is in Sub-section (2), which was the subject of some observations by the right hon. Gentleman opposite when we discussed the Resolution. The proposal is that we should take the excess, which in many cases will be the result of a combination of non-armament and armament work, and proceed, by the provisions of Sub-section (2), to find out what part of it under this Clause should be attributed to the armament side of the business. I have studied carefully what the right hon. Gentleman said the other day. He has great mathematical power. He explained his proposal to the Committee, and I think I understand the difference, but I think his suggestion is open to two very considerable objections. Unquestionably it is a more complicated plan, for the right hon. Gentleman suggested a method of distribution which would involve essentially, in the first place, taking the profits of the standard year, whatever it may be, and seeing how the profits of that year were made up as between armament and non-armament work.
The method which we propose here avoids that, which is a difficult computation, and it produces a formula which I think is certainly simpler. I doubt, with great respect to the right hon. Gentleman, whether his alternative even has the right to claim that it is more scientific. It proceeds upon the assumption that the profits on the non-armament side of the business are not to be regarded as having increased, and, consequently, that anything which shows as an increase must be attributable alone to the armaments business. At any rate the illustration which he gave the other day seemed to have 555 that result. We think it would be better to have the plan which is proposed here, by which, having found what is the excess as compared with the standard year—that is, for the business as a whole—the attribution of that excess as between the non-armament part of the business and the armament part should prima facie be proportionate to the turnover, but that if there be adequate reason for challenging that distribution there should be a provision made, as is made in Sub-section (3) of the Clause, for it to be corrected by the Board of Referees. Nobody can doubt that the Board of Referees are the body to do it.
The right hon. Gentleman appeared to think the other day that it would result in endless appeals to the Board of Referees. I do not think that the Inland Revenue on the one hand and great business firms on the other are so completely quarrelsome over the methods of examining accounts that that would happen. I think it will be found in many cases, as we find in connection with Income Tax, that the Inland Revenue authorities and the taxpayer will arrive at an adjustment which is right and proper by an examination of the same figures with the same care as is employed in connection with other branches of direct taxation
Those are the main provisions here. The turnover which is referred to in Sub-section (2) for the purpose of distributing the excess of profit between armament and non-armament business is not the same thing as the receipts. "Receipts" mean the amounts that are paid and received in respect of the work of the year, but turnover, as it is defined in a later Clause, is the net amount charged in the chargeable accounting period in question. If everybody paid everything that he should pay on the day it is charged the two things might be the same, but I think it is the experience of people in various walks of life that there is a certain lag, and that the net amount that is charged is more, probably, than the amount which is received. I have known professions in which that sometimes occurs, and I dare say it is so in business as well. That is the nature of the Armaments Profits Duty which is here proposed. The application of it to particular contracts is the subject matter of the following Clause, a very important one with the side heading, "Meaning of 'armament business' and 556 'armament contract'" and therefore, I do not discuss it now. In the same way, the detailed provisions as to the computation of the standard profits occur in a third Clause which we shall come to in due course. I hope I have dealt adequately with what the Clause before us actually contains, and, of course, we shall discuss in due order the provisions of the Clauses which carry this proposal into effect.
§ Mr. Gallacher
If a firm has the same amount of armament work as of civil work and makes the 6 per cent. the standard profit, made up of 9 per cent. profit on the armament work and 3 per cent. profit on the civil work—that would be a general level of 6 per cent. Profit—would that firm have to pay on the excess profits made out of the armaments or would it be cleared because of the general level?
§ Sir J. Simon
I think the hon. Gentleman's illustration puts the point very simply. I do not know whether he has a copy of the Clause in front of him, but if so I would ask him to refer to the proviso. Prima facie the distribution might be a level 6 per cent. overall as he suggested, butif, on the application of the Commissioners the Board of Referees, after giving the person carrying on the business an opportunity of being heard are satisfied that in fact a proportion of the excess greater than that ascertained as aforesaid arises from armament contracts"—therefore it is not really 6 per cent., but is 9 per cent.—such adjustment shall be made as appears to the Board of Referees to be just.The scheme is really that, in the first instance, the distribution shall be level as between the two kinds of business, but that, as the proviso reads, if, on examination of the figures, it is shown that the greater part of the profit comes from the armament figures, it must be liable
§ Mr. Gallacher
The proviso, which I have carefully read, refers to an excess over the standard profits with which the Commissioners are dealing and it says:if the person carrying on the business satisfies the Commissioners that in fact a proportion of the excess less than that ascertained as aforesaid arises from armament contracts, such adjustment shall be made as appears to the Commissioners to be just.557 In the Clause and in the proviso we are discussing the excess over the standard profits, but if there is a standard profit in the business, will the Commissioners trouble with it at all to find out whether the standard profit represents an excess of profit's in armament work as against the very low profit on civil work?
§ Sir J. Simon
I think my explanation is right, but I will do my best to make the point clear. For this purpose we assume that we have, from the particular firm, a figure which is the standard profit. The object of the Clause is to get a contribution, not from anything up to the standard profit but from an excess above the standard profit. It is necessary to ascertain how far the excess profit is to be regarded as coming from non-armament work and how far from armament work. I agree with the hon. Member that the scheme is that, unless there is something to be shown to the contrary, it will be treated as arising in proportion to the turnover, but that is subject to the proviso—a very important proviso—that if the Commissioners of Inland Revenue, after hearing what the firm has to say, and of course examining the books say, "No, the pro portion of the excess"—
§ 10.35 p.m.
§ Mr. Pethick-Lawrence
We are now about to discuss the main principle underlying this new taxation. We dealt with the matter fairly fully last Monday, but we are now discussing the Clauses in detail. In the case of the first Clause, Subsection (1) is the general operative part, and Sub-section (2) defines exactly how the taxation is going to be imposed. We are accustomed at Question Time to hear a stentorian voice which frequently reminds Ministers in the form of a question: "Is not the whole matter thoroughly unsatisfactory?" I venture to suggest that the condition of Sub-section (2), as it has been explained and re-explained by the Chancellor of the Exchequer last Monday and to-day, is still thoroughly unsatisfactory. I will explain my point, and I think that in so doing I shall probably be able to answer the hon. Member for West Fife (Mr. Gallacher).
558 This tax is not concerned with the excess of the rate of profit over some rate which ought to be the standard rate; it is concerned with the excess of the total profit made by the firm on armaments in one particular year over the total profit made by the same firm in another year, namely, the standard year, and I understand that that is the object of the tax. I take it that those who drafted these provisions, when they went into the matter, found that the profits made in one year might differ from the profits made in another year, partly, perhaps, owing to an increase in the profit on armaments, and partly owing to an increase of other work. But when they came to apply the test, they did not in the least concern themselves with that fact, but took an entirely extraneous criterion, namely, what part of the profit in the year under review arose from armaments, and what part arose from other matters—an entirely separate thing.
Let me give one or two illustrations. In the standard year, the amount of non-armament work may have been considerably in excess of the amount of armament work, and the profit arising from the first may have been, therefore, in excess of that which arose from the second. But when you come to the year under review—the chargeable year—the proportion is not at all likely to be the same. It is just conceivable that the amount of work done by the firm on general contracts may have gone up very much, while the amount of work done on armaments may have remained stationary or may not have gone up equally. That is not very likely, but it is conceivable. On the other hand, the amount of work on the two sides may have gone up proportionately, though that again is not very likely at the present day.
The third alternative is that the amount of work done on armaments will have increased considerably, and the amount of work of a general character, if it has increased at all, will have increased by very much less. If, as we are told in Sub-section (1), the object is that the whole 60 per cent. is to be charged on so much of the excess as arises from armament contracts, the question which has to be decided is how much the profit on armaments in the year under review exceeds the profit from armaments in the standard year. But the criterion which 559 the Clause suggests is a totally different one, bearing no relation whatever to the facts. The Chancellor has treated this objection as a trivial one, but the same objection has been forcibly expressed by the hon. Member for Kidderminster (Sir J. Wardlaw-Milne) and the hon. and gallant Member for Erdington (Wing-Commander Wright). They both pointed out this utterly absurd position in which we now find ourselves: that the criterion proposed has no relation whatever to the actual facts we are seeking to discover. That being so, this Sub-section is framed on an entirely wrong basis. As the hon. and gallant Member for Erdington pointed out, it might easily work out that the 60 per cent. tax would fall on only half the amount shown, and that, therefore, it would really be a 30 per cent. tax.
§ Sir J. Simon
I have some difficulty in following this. I wonder if the right hon. Gentleman would tell me what would be his way of dealing with the case of a company which in the standard year was not doing any armament work at all. It seems to me that in that case he would call the whole profits made out of armaments by the company in the year under review, excess profits.
§ Mr. Pethick-Lawrence
Where the right hon. Gentleman is entirely incorrect is in assuming that I have suggested any specific method of arriving at a result. What I have said is that the method the Government propose is so confused that the right hon. Gentleman in his various explanations has not finished explaining his confusion. All I have said is that the prime criterion adopted is, what proportion of the whole work is armament work in the year under review? That does not convey in the slightest how much of the excess of the year under review over the standard year has resulted from armaments profits.
Then, the right hon. Gentleman suggests that either party shall be entitled to call the facts into question, in order to right the wrong of the criterion which he has in the first place suggested. It would be perfectly clear that, in the vast majority of cases, the "simple" criterion—as the right hon. Gentleman calls it—will not give the correct result, and, therefore, one or other of the parties will certainly want to appeal. The 560 right hon. Gentleman says that it is only a trivial matter, and that he has too good an opinion of the Board of Inland Revenue and of the firms in question to believe that they will quarrel over some little difference in figures, but, in point of fact, it is practically the whole measure. It is a very large part of the tax. Supposing they are able to show that, in fact, their non-armament work has increased far more than their armament work, then clearly the criterion that is going to be accepted will serve their purpose. They will be able not to say that the real facts are that all their excess profit, or practically the whole of it, is due to non-armament work. Take a much more common case. If the Board of Inland Revenue are able to prove that nearly the whole of the increased profit of one year was on armament work, the Board of Inland Revenue will act entirely wrongly if they allow the proportions that the Government suggest here to remain. Therefore, they will bring a case and try to get the Board of Referees to take the opposite view.
What I said last Monday I will repeat. In fact, in nearly every case, if the firms are to do justice to them selves and the revenue authorities are to do justice to the country, they will have to dispute this wholly vicious figure which the Government are suggesting is the right figure in the first instance. Naturally I am not out to say exactly how the thing should be done. I cannot recast the whole of the Government's method of taking the tax, but I say that their criterion is an erroneous one, and that the method of putting that criterion right is going to involve, in nearly every case, a revision of the proportion. In these circumstances, so far from this proposal being a simple and reasonable one, it is a highly complicated one which will arouse considerable controversy, and naturally so. If a firm can prove that excess profits are mainly due to non-armament work, it can reduce the 60 per cent. of the excess quite properly to 5, 10 or 20 per cent. If, on the other hand, the revenue authorities prove that it is wholly due to the tax quite apart from the amount of non-armament work being done in the year under review, then they ought to get the whole 60 per cent. Therefore, it is extremely complicated.
If that complicated process is not gone through, in a very large number of cases, 561 a farm, instead of paying 60 per cent. will be paying 30 or 40 per cent. As the hon. and gallant Gentleman quite properly pointed out and as the hon. Baronet the Member for Kidderminster (Sir J. Wardlaw-Milne) also pointed out, it is a very ill-thought out method of computing the results. I believe that it makes the yield of the tax derisory, because a very large part of what should be the tax will escape the mesh, unless in nearly every case the Commissioners make the application that is put down here. We have not had an explanation which really covers the point.
§ 10.49 p.m.
§ Mr. Benson
May I put one particular case to show how appallingly complicated and difficult this Clause is going to be. Take the case of an engineering firm—a very large number of contracts will go directly to engineering firms—which has been engaged either in the manufacture of motor cars or in the manufacture of motor car parts. Under an armament contract this firm might well be engaged in the manufacture of lorries or aeroplane parts for the Government. Owing to the increased horse-power tax there will be a big diminution in the output of cars, and the work that has hitherto kept the firm going will be seriously reduced. Another point that arises is that in the production of motor cars on a profitable basis it is essential to keep the machines working fully and to be able to produce more than a given number of any one model. The profit on motor car manufacture is based on the marginal number turned out, which may well be reduced to nothing because of the horse-power tax. While this diminution in the number of cars takes place another factor comes in—that is, an increase in the amount of engineering orders which are armament orders. The result would be that whereas the motor car manufacturing part has contributed nothing to profits, the profits have been borne entirely by the extension in the manufacture of aeroplanes or other Government orders.
There will be extraordinary difficulty in analysing, when you have two comparatively similar types of product, which part of the output is bearing the profits. You will have to go with meticulous care into the whole costings of the firm. The Commissioners will have to prove their case and give the costings to show that the 562 armament work has produced a higher ratio of profit than the private work. But you are already supposed to have put your armament orders under a careful costing system which has been directed towards eliminating excess profit. If there is excess profit arising to be taxed under this Clause it is due to the failure of your costing system, and it is only your costing system which will enable you under this Clause to apply the tax. The profits have arisen because your costing system has failed, and you are going to use that system to remedy the original failure. It cannot be done. This tax must fall crudely and inequitably because you will have to depend on a costing system which ex hypothesi has failed.
§ 10.54 P.m.
§ Wing-Commander Wright
When we discussed this matter on Monday I put four questions to the Chancellor of the Exchequer, which I do not think were frivolous, and I go: a reply to only one of them. As there is a good deal of doubt existing in the minds of manufacturers on the questions which I raised, I should like to ask them again. I will refer first to the question of receipts. I think the Chancellor of the Exchequer has answered my question, because it seems as if he does mean receipts of cash in a particular year. I should, however, like to ask him a further question on that point, because I think it is one which will cause a certain amount of unfairness and will lend itself, perhaps, to a suggestion of, I will not say twisting, but unfairness on both sides.
Under the normal method of business, obviously, if a firm receives £200,000 worth of business in one year it will have to have done a great deal more than £200,000 worth of turnover in the first year of its business in Government contracts, because the normal lag is at least three to four months. Therefore, a firm may easily have done over £200,000 worth of business in its first year and not have received anything like £200,000. If it is understood that that is the basis on which we are working, I am content, but I think my right hon. Friend will see that a firm might normally be doing a turnover of £180,000, and therefore would never in any particular year be liable for this duty, by delaying payment in the first year and hurrying payment in the second year the Treasury would be able to obtain a tax in the second year, while actually in 563 neither of those years would the firm have done £200,000 worth of business. That may arouse a good deal of controversy and trouble, and therefore I suggest to my right hon. Friend that he might review that matter further before coming to a final decision.
A further point that I raised, which has been referred to to-night by the right hon. Member for East Edinburgh (Mr. Pethick-Lawrence) was the question of arriving at the tax on the excess profit. Those of us who understand business will not have any doubt in our minds that excess profit which arises where a firm has had an enormously increased turnover arising from armament orders adding to its civil business, has actually made that excess profit by reason of the fact that it has received those extra orders from the Government. We all know that in running a business there is a certain datum line of turnover which must be reached before any profit is made, but when you have passed that datum line of turnover then the proportionate profit on the increased turnover is proportionately large, and as in this case the increased turnover comes only from the added Government business, obviously the excess profit must arise from that source.
My third question, which is perhaps the most important of all, and I do not see anything which clears it up, relates to subsidiary companies. I asked whether subsidiary companies were going to be treated as if they were individual companies receiving individual contracts, or whether the parent company was to be treated as the company which was receiving the business. I gave as an instance of a company the I.C.I., who, obviously, would be receiving orders for many of their subsidiary businesses which probably would not amount to £200,000. Obviously, the I.C.I. would be doing business far in excess of that figure. I pointed out that this could be a double-edged sword, and I think it is only fair that companies and traders throughout the country, who are most anxious to receive information on this point, should have it made clear to them whether subsidiary companies are, in fact, to be treated as separate businesses, or whether they are to be treated as part of the parent company.
The hon. and gallant Member is getting away from the new Clause. I do not think that question arises.
§ 11.0 p.m.
§ Mr. Gallacher
I am sorry that I did not make my question to the Chancellor of the Exchequer sufficiently clear, but I would like him to understand that I put the question because of the wide experience I have had in the engineering industry. The hon. and gallant Member who has just spoken referred to those who know something about business being able to offer advice. I may not know much about business, but I know a lot about business men, and I know that with even the most efficient costing methods you can still have a process which will defeat the desires of the Chancellor of the Exchequer. If it is a firm which is doing armament work, lathes, jigs and gauges will be necessary. They will go in as overhead expenses on the armaments account, but it does not follow that all the time they will be used in armament work. With a slight modification they can be used for carrying on civil work. There is not only the question of the overheads which can be legitimately charged to armament work £I have seen them so charged £but the position of such a firm as the Imperial Chemical Industries with its subsidiary companies. Take a firm which is doing Admiralty work and also doing civil work. The civil work which it is doing it may be done by a subsidiary company or by a firm in which it has considerable interest. We have had experience of that. The Financial Secretary to the Treasury was until recently Minister of Mines, and he can tell the Chancellor of the Exchequer that it was a common thing in the mining industry for coal owners to charge heavy prices to the consuming public and sell certain of their products at quite a nominal price to the subsidiary undertakings. That is a common thing.
You can have an industry where the normal profit for a standard year is 6 per cent.—I would not give them more than 2½ per cent.—and for all that trading profit to come out of the arms account and not out of the civil work. The Clause deals only with excess of standard profit for the year, and nothing else. If there is no excess there is no question of the Commissioners coming in and interfering 565 with the profits of that firm. Yet you can quite easily have a situation where 12 per cent. is being made on armament work, and the civil work is done at a loss, and big profits are made out of some other civil work of a subsidiary character for which that particular work is being done. That is a situation that will arise, although not to the exaggerated extent that I have mentioned in every industry. We had experience of it during the War. The shop stewards went round the different factories watching the operations there, and if the Government had been prepared to consult the shop stewards, they could have made most alarming exposures of what was happening; but the Government did not want to consult them, and, as a matter of fact, Ministers were anxious to proclaim to the world that they did not want to have anything to do with shop stewards. That was a very serious mistake.
During the War, we had experience of what can happen. For instance, they were getting an allowance for the men who were being employed, and they were employing engineers who had never seen an engineering job. There was a case in an ordnance works in Coventry where an engineer who had been taken on was given a chisel which needed sharpening, and he put it on the grindstone and gave it two or three rubs, and then stopped the grindstone and started to strop the chisel up and down the driving belt. That is typical of what was happening. They were stuffing the place with men in order to get money out of the Government. There could be a situation in which men were placed on Government work or armaments work and were spending most of their time on work of a civil character.
Therefore, I ask the Chancellor to recast this new Clause. I am certain that as the new Clause is now, he will get little or nothing out of the proposed tax. Proof of that can be seen in the fact that when the Resolution was being discussed, none of the hon. Members opposite was interested in the discussion. I am certain that there is not an hon. Member opposite who is prepared to make any sort of opposition to this tax. Never before have we had a new tax directed against industry without finding some representative of industry opposite who was prepared to say something against it. There is not an industrialist in the country who will not be capable of getting round this tax 566 and avoiding any serious payment under it. Therefore, I suggest to the Chancellor that, whatever may be made the standard, the Clause should be framed in such a way that the Commissioners will be able not only to ensure that, as far as costing is concerned, all the weight is not thrown on the side of armaments, but that, at the same time, where the general profit is only the standard profit, the Commissioners will be able to examine whether the standard profit is made up from excess armaments profit, and if so, to tax it accordingly.
§ 11.9 p.m.
§ Mr. Ede
I realise that the long-stop is now sitting beside the wicket keeper, who appears temporarily to have gone out of business. While he still retains the pads and gloves, the right hon. Gentleman, I suppose, is now like a small boy who acts as long-stop and has some old coat with which to stop balls coming his way. This one caught him rather unprepared, and he had to put out his raw hands in order to stop the ball. The hon. Member for West Fife gave the question in percentages. As I understand it, we are not engaged in percentages but in lump sums. Let us assume that' a firm made a profit in the standard year of £100,000 and that in that year it was doing no armament work at all. It still carries on a civilian business of the same size and, in addition, it gets certain contracts which for the purposes of this Act will be regarded as armament contracts. As I understand it, it may cut down its profit on its civilian work and charge a quite exorbitant sum for its armament profits, and, unless its profits on the two exceed £100,000, there will be no excess and, in consequence, no sum will be brought into review. That was the right hon. Gentleman's answer as I understood it. If I am told that that was a mistaken answer, or that I misunderstood it, I do not want to pursue the point.
§ Sir J. Simon
I think in substance the hon. Member is right, though there are one or two qualifications, for instance the 567 ruling out of an increase in capital. But I agree that it is a scheme by which you compare what is the standard profit of the firm with the profit in the year of charge, and it is when the profit that it makes in the year of charge is found to be greater than in the standard year that you arrive at an excess and certain calculations follow.
§ Mr. Ede
In the case I have given one must reasonably assume that there would have been some increase in the capital employed, but I am assuming that some formula is employed, so we get back to the comparatively simple case which is the essence of the problem that the two sides of the Committee would desire to have argued out. It seems to me, if that is a simple way of putting what will be a more complicated case, the Clause is seriously lacking, because I cannot think that anyone in the Committee really means that firms are to be in a position where, by getting Government work, they can make unusually high profits in order to depress the profits they get out of civilian work, and thus for civilian work to enter into unfair competition with firms which have not managed to get Government contracts. I do not know the extent to which such a temptation would cause people to fall. Some hon. Members opposite think that no amount of temptation would lead anyone into such a way of conducting his business, but clearly we spend a great deal of our time in trying to do things in this Bill which arouse the most terrible fears in the breast of the hon. and learned Gentleman the Member for Ashford (Mr. Spens) and others as to the extent to which our effort to prevent evasion of taxes is going to unreasonable lengths.
Here is a comparatively easy way of evading this new tax which ought to receive the attention of the Government before the Clause is finally incorporated in an Act of Parliament. If it is as easy to evade the clear intention of Parliament, as I have suggested, then Parliament ought to deal with the matter. I hold the view that in connection with this duty we shall ultimately get into difficulties such as beset us in connection with the Excess Profits Duty. I remember the case of a public house in Surrey which was painted continuously for a year by the brewery company. As soon 568 as they had finished at one end, they started again at the other in their efforts to absorb money which would, otherwise, have been paid in Excess Profits Duty. What we want to do is to prevent profit arising. If unreasonable profits are made out of armaments, even if we do get 60 per cent. back in taxation, the effect will be seriously to disturb the price level in ordinary civilian commodities. I think that cannot be disputed. Those of us who buy steel in the form of household requisites may find the prices put up against us, as the result of the higher profit of the armament manufacturers, while nothing goes into the Exchequer in respect of that increase. In a substantial number of cases, we fear, increased prices will be paid by civilians and the Exchequer will reap no benefit.
I ask the right hon. Gentleman to give his views on the case which I have put to him. Are we to understand that the Government regard that position as one which can very easily arise in the working of the Clause. The right hon. Gentleman will agree that while that may satisfy the long stop, while it may even satisfy the wicket-keeper—who is always glad to see the long-stop getting his hands injured rather than himself—he cannot expect it to satisfy either the captain of the team or the spectators, and the barracking that ensues may lead the Chancellor of the Exchequer to take a far longer journey than that from Spen Valley to Yarmouth. If he regards this tax as a serious proposal, we must ask him to deal with the point which has been raised.
§ 11.18 p.m.
§ Mr. Garro Jones
I venture to offer my congratulations to the Parliamentary Secretary to the Treasury on having contrived, as usual, to bring about a Debate on a subject of this character at this hour of the night. Everybody knows that, at this time, nothing except a speech in favour of the reform of the law of libel, or a speech on the reform of the Official Secrets Act, or the unusual event of something arising in the Debate which redounds to the credit of the Government, is likely to have any notice in the Press on the following day. I desire to deal with the question of evasion, and I recognise the difficulty of doing so on this Clause, without referring also to the other Clauses which are interlocked with it. 569 Two questions are involved. One is the question of assessability to the tax in respect of the amount received and the figure of £200,000. The other is the degree of assessability, in respect of the amount to be paid, and it is impossible to separate these two matters in discussing evasion. I want to ask the Chancellor of the Exchequer to reinforce what was said by the hon. Members for West Fife (Mr. Gallacher), South Shields (Mr. Ede), and Erdington (Wing-Commander Wright) on the question of evasion.
I propose to put forward two or three further possibilities of evasion of this tax, in regard to which I should like to be assured that the Chancellor is at least forewarned, and the first matter that I should like to raise is the question of evasion by adjusting, as between different years, the amount received. The initiative there does not rest solely with the Treasury. The hon. and gallant Member for Erdington was very much afraid that the Government Department, by withholding payment to any particular firm, could ensure in any given year that that firm would be above the £200,000, realising that it would be impossible for it to go above that amount in another year. The hon. and gallant Member wanted to secure that the company should be fairly treated by the Treasury, but I want to secure that the Treasury shall be fairly treated by the company, and my point is that the initiative in making these adjustments does not rest solely in the hands of the Treasury, but may rest in the hands of the company, in this way: Everybody knows that when an amount is in dispute, payment is held up, and I can conceive of circumstances in which companies on the borderline of assessability will do all they can to postpone payments in order to ensure that in a particular year they will not come within the limit of £200,000. That is only one aspect of the matter, and I mention it only in view of the remarks made by the hon. and gallant Member for Erdington.
The second aspect of evasion to which I should like to draw attention is the question of subsidiary companies. [Interruption.] I trust the Chancellor will not raise the question of relevance, because I think he did not hear my opening remarks, in which I attempted to connect this question with the Clause now before the Committee, and I think I have 570 successfully shown that it is impossible to discuss it except in connection with this Clause, because here we are dealing with profits arising under a later Clause, dealing with assessability, but it requires both those matters to bring evasion into relief. Therefore, I trust that I shall be permitted to discuss it now. If the Chancellor of the Exchequer is not going to take drastic measures to prevent evasion by way of judging as between companies, he will further deplete the already sparse amount that he expects to receive from this proposal, and there again it will not only be depletion in respect of avoiding assessability, that is to say, avoiding coming within the £200,000. There are all sorts of ways of distributing profits as between companies in order to ensure that some of them will escape and others gain. I will give one example, that of a company with three subsidiary companies. One of these companies is a retail company, another a manufacturing company, and the third a company which holds the shares and manipulates them on the Stock Exchange. Everybody knows that it is possible, by one company purchasing its supplies from one of its subsidiary companies in one year at an extremely low price, to show in the next year very favourable profits, and when the shares have been duly inflated by that procedure for two or three years, it induces its subsidiary company to sell its goods at an increased price. The shares then fall, and those shareholders who were forewarned will again reap the benefit. I want the Chancellor of the Exchequer to make sure that, both as regards assessability and the juggling of profits as between subsidiary companies, these matters have his supervision.
The final aspect of evasion to which I desire to draw attention, though I have not exhausted or even begun the catalogue of possibilities in this direction, is the division of orders as between companies. With the Clauses in their present form nothing could be easier than to divide orders. If a company has a large factory it is a very easy accounting matter to divide that factory into two or three subsidiary companies, and, so far as the Chancellor has told us, if they succeed by that method in bringing the total amount received by all those companies in any one accounting year below £200,000 in the aggregate, they will not be assessable. I 571 trust that that is not an accurate assumption, but it has been made several times, and the Chancellor has not yet thought it necessary to deny it.
As to the method of collection, I understand that it will depend upon the supervision of the Ministry of Supply, that it will be for that Ministry to attempt to follow down the orders through the main contracting company; by means of reports from the main contracting company as to their sub-contracts they will follow the contracts right down to the sources of supply of certain raw materials, except those raw materials which the Minister is empowered to exempt from taxation under a later Clause of the Bill. Further, I should like to know whether it is proposed that returns shall be made, and that those returns will be demanded only from those firms which the Minister of Supply has information to show have received armament contracts; or will general forms be sent out to all companies within the range of the net requesting them to make returns of all their armament orders? Have the Government considered the possibility of securing that every order issued by Government Departments should be marked "A.P.D." and every sub-contract sent out in connection with that order marked "A.P.D.," and that every order which is received with that mark upon it shall be included in the returns sent in by the company, whether it is asked for a return or not? I should like to make that suggestion to the right hon. Gentleman.
I will conclude by saying that I have just been reading an article in a publication called the "Stock Exchange Gazette." I am not able to say whether it is one of the respectable or other class of publications dealing with Stock Exchange business. It says:The new duty is the Government's concession to Labour. Despite the heavy scale of taxation, wealth must be conscripted as well as man-power.I hope that is not the beginning of an attempt to saddle any responsibility for this tax upon us. The second point I read is:Its rules are so complicated that no company secretary can tell his board what they have to pay.The next point is:We imagine that few, if' any, firms are engaged solely on armament work, and that no 572 company will be able to assess its liability quickly or with certainty.The last point is:Whether the Treasury will make a large haul remains to be seen, and optimism is restrained on that score.I believe they have chosen the wrong word. I believe the Government would be very alarmed if they thought they were going to get a large haul from armament manufacturers. The right hon. Gentleman has made no computation of the receipts from this source. For several months most of the speeches from the other side have been in defence of profits made by armament manufacturers, and the claim has been made that, unless they are allowed to make these profits, we shall not get the goods. Therefore, I should say that, not optimism, but pessimism, is restrained at the Treasury, and that they are not really anxious to receive large amounts from this source. The next article in the publication from which I have quoted is headed "Promising Securities." I venture to say that the same fate which usually awaits what are classified as promising securities in these publications will probably await this proposal.
§ 11.31 p.m.
§ Sir J. Simon
I think the Committee will wish me to deal shortly with some of the points that have been raised, and I will take first the one which has just been made by the hon. Member for North Aberdeen (Mr. Garro Jones). It is true that I cannot offer any estimate of the yield of the duty, but all contributions will be welcome, and if the duty, applied, as it will be, according to the law, should produce substantial sums, I as Chancellor of the Exchequer, shall be the last person to regret it. The public generally would certainly desire that a proper contribution should be obtained, and if, as is alleged, there should be a number of cases in which the ball gets past the wicket-keeper, or a series of wicket-keepers, there will still be a number in which it will be prevented from reaching the boundary by the activity, skill and energy of the long-stop.
The right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) put extremely clearly the point on which he asked for an answer. This proposed duty, as he says, is not a duty that deals with percentages, but with 573 total sums. The scheme is that it shall deal, not with profits, but with excess profits, and not with profits however made, but with profits which are so made that they can be called excess armament profits. I agree that if we were taxing all sorts of profits above a particular standard, and were not trying to divide as between armament and non-armament work, that would in some respects be simpler. If you make a thing universal, it is naturally simple. The right hon. Gentleman supposed the case of a company which in the standard year made £50,000 from armaments and £50,000 from other goods, and in the year of charge made £75,000 from armaments and £25,000 from other work, so that the total amount of profit was the same in both years. That is excluding, as the right hon. Gentleman and I agree, all questions of additional capital. He says that in such circumstances the tax would not bring in anything, and that is quite true.
Take the case of a business which some years ago was devoting itself successfully to the production of ordinary articles of commerce. On the invitation of, or under pressure from, the Government, such a firm may have set aside that work and have undertaken an extensive business of producing armaments. It may also be that the company has sacrificed its non-armament business and has pushed on with the other part of it. Would it be just in such circumstances for me to say: "That is your story, but none the less I am going to disregard altogether the fact that you have lost the profit on your non-armament business which you have so starved. I am simply going to attend to the fact that you have made a profit on the later development. Therefore, I am going to charge you with the special tax." That would not seem fair at all. The instance which I gave to the right hon. Gentleman the Member for East Edinburgh was very much in point. I consider the case, a very common one, of a firm which earlier on was not making armaments at all, but was doing only the ordinary commercial business, which it has now substantially abandoned in order to undertake armament work. How is it proposed that you should deal with the profits of that firm. It is now an armaments firm, doing nothing but armaments. I think I was right when I put that case to the right 574 hon. Gentleman and asked him how he proposed to deal with it. The right hon. Gentleman replied, as he was entitled to, that he was not proposing any solution. He was in the position of the critic, pointing to what he thought were the defects in the Government's plan. If we say that the profits which are made by a firm which is now doing nothing but armaments are to be exposed to the tax, how are we to determine what the tax is to be? Are we to tax the lot? The only possible way of trying to determine the armament and the non-armament profit is to have a standard, and to ask: What were the profits of the firm in the year of charge? Having ascertained whether there is excess, you ask yourself the question: Where does the excess come from? I agree that it would be wrong to assume that it is spread equally over the whole, without the possibility of correcting it, for it may well be that in many cases it is due more to the armament work than to the non-armament work.
By all means correct that, but do not adopt a method which would cause great injustice to people who have deliberately accepted losses or deductions or even failures in the non-armament part of their established businesses because they are engaged in the intensive application of their powers for the purpose of producing armaments. I do not think we shall be doing a good thing to the country or a fair thing by them if we do not recognise that when their total profits go above a standard which has been reasonably fixed then, and then only, arises the question of getting this special contribution from them.
§ 11.39 p.m.
§ Mr. Pethick-Lawrence
As the right hon. Gentleman has quoted me, perhaps I should answer his point, which is entirely distinct from that which I made. The right hon. Gentleman poses his question on the assumption that the firm was making all non-armament work and subsequently transferred to armament work. I have never suggested or even thought that you ought not to deduct the profit made in the first year from the profit made in the second year in order to get the excess. What I have said is that, having got that excess, as the right hon. Gentleman suggested, then only to take a part of it on which to impose the duty was a wrong way.
§ Mr. Ede
I put to the right hon. Gentleman this specific point. Where a firm is still doing the same amount of civilian work as before, it sees in this method of taxation an opportunity to reduce the amount of profit made on its civilian work by being very careful not to allow the amount to go above that for the standard year. If the profits from the civilian business in the first year are £100,000, and the total profits in the second year are £100,000, appropriately weighted, no charge will be made. It might be possible even for the firm to be losing, say, £20,000 on its civilian contracts, by deliberately undercutting its ordinary competitors, and then, by making £120,000 on its armament work, it may still evade taxation. That is a means of evasion that ought to be stopped.
§ Sir J. Simon
We often hear of clever schemes for making profits. The hon. Member suggests now the possibility of a plan to avoid making profits, in order to avoid paying taxes.
§ Mr. Gallacher
Will the Chancellor ask the Minister for Mines whether that kind of thing is not actually being done by the mine owners?
§ Sir J. Simon
It is certainly the case that this is a scheme by which, on comparing the profits for two different years, you get the excess, and I am still of the opinion that that is the just way, especially having regard to the fact that many of the firms affected will be firms which have changed from non-armament into armament production. I recognise that the point put by the right hon. Gentleman was important, but his point really was as to whether we had adopted the best method.
The hon. Member for Chesterfield (Mr. Benson) said there ought not to be any of these excess profits if the costing assessment had been properly applied; yet you could not analyse these excess profits except by using your costing system. That is the nature of the argument. I do not agree that because we may have cases to deal with under this duty, as no doubt we shall have, it proves that the 576 costing system in the ordinary sense has failed. The costing system is the system, most carefully developed, by which you ascertain what the production of a considerable quantity of manufactures requires in the way of outlay, and you make some provision for profit on them. The thing which causes this rise in dividends on ordinary shares and these indications of exceptional prosperity in some armament companies is not that the costing system has not been suitably and skilfully applied; it is due to the fact that the quantities that have been produced are so vast that the amount that has been received has increased at a vastly greater rate than any increase of capital or plant. When that happens, it is possible to pay a greatly increased return on the ordinary shares, but that does not really prove that the costing system as such has not been properly applied. It is due to an immensely increased output which may, and does, require supplementary adjustments to be made.
§ Mr. Benson
May I remind the right hon. Gentleman that our costing system has been devised, and is supposed, to take into account that very point. As the increased orders are given, so the price is reduced. As has been explained to us on the Estimates Committee, most elaborate precautions are taken, and if these precautions operate effectively, they ought to be successful.
§ Sir J. Simon
The hon. Gentleman is speaking, no doubt, with a good deal of special knowledge, because I believe that he serves on the Estimates Committee. All the same, and this is a feeling that is widespread—if you come to some very large production, some supplementary check is needed such as has caused us to produce the Clause. I think it will be found that there will be cases which will show that, in spite of the best efforts of everybody in this immensely increased production, it is right to take the steps that we are now taking.
I was asked a question by an hon. Gentleman below the Gangway about subsidiary companies. I do not know whether it will be in order or not, but may I state in a sentence that the present provisions of this scheme are provisions which will deal with each company as it stands. There is not in this scheme a 577 provision which would group together a great many companies for the purpose of applying the main provision. The reason is that, from the revenue point of view, the point is only of importance if we have to check manipulations. It is very easy to talk about manipulations as if they were matters which could easily be devised without powers of control, but we are dealing here mainly with firms with very large businesses with which the Ministry of Supply or the other Departments place their contracts. The very fact that the Government place the contracts will act as a very effective check against such devices, and the powers that the Minister of Supply is getting under his Bill are to be such as further to insist that the contract is placed with the main contractor and is not manipulated as is suggested by some hon. Gentlemen here. Moreover, although we carry this now, the matter cannot come into full operation until the accounting period is over. If there were any ground for thinking that these methods of seeking to avoid the tax were really being adopted to a dangerous degree we should certainly take steps to correct that, as we could very well do, in the Finance Bill of next year. But I do not think that to the Inland Revenue Department this is going to be as serious a point as the hon. Member who raised it seems to think.
§ Mr. Garro Jones
The right hon. Gentleman has made a very important announcement to the effect that units of parent companies will be separately considered for the purpose of assessment. That is a further diminution in the yield of this tax. Suppose a great many companies take advantage of the repeated hints they have received from the Chancellor of the Exchequer that any lawful method of evading tax is all right and should form themselves into subsidiary companies for purposes which may have some collateral object but which will also result in avoidance of tax, I must say that I do not share the optimism of the Chancellor of the Exchequer that the mere power of the Minister to withhold contracts would be effective. We have found repeatedly in the Estimates Committee that the investigations of the Service Departments do not extend into the relationships between parent and subsidiary companies.
§ Sir J. Simon
I am afraid that I must attach some importance to the views taken by the very experienced people who are dealing with this most important matter. Nevertheless, I am obliged to the hon. Member for warning me as to the difficulties.
As to the last point which was mentioned by the hon. Member for Erdington (Wing-Commander Wright), it certainly is the case that the test which must be applied for the purpose of listing the companies liable is the test of receipts, and for the reason that that is the figure which the Minister of Supply knows. He could not know, except without a very elaborate inquiry, what is the turn-over. I have tried to answer these matters to the Committee, and I hope that I have given some information at least. If the Committee will let me have this Clause we may then deal with the next one.
§ 11.53 p.m.
§ Mr. Kirkwood
I want to tell the Chancellor of the Exchequer on behalf of the young engineers who are in the armament factories that his statement to-night will cause a good deal of discontent among them. His statement is that the manufacturers, the employers; and the shareholders in those manufacturing firms are going to carry on just as usual. They are to get their standard returns. How does that affect the young engineer who has just finished his time, whose mother has starved in order to make her boy a tradesman? The ambition of the engineer's wife is that her boy shall be a tradesman. He has just arrived at the stage of a young journeyman. His time is just out and for the first time in his life he is going to enjoy a decent wage of from £3 10s. to £4 a week. Then along comes this Government and takes away that boy from her, deprives him of that income of £4 a week, and the only income he is to get is 10s. a week.
The sacrifice is all from one side. The armament firms are to carry on and get what they were always getting—a good return. There is to be no sacrifice from the side of the big employers of labour, but all the sacrifice is on the youth of the country. If this Committee thinks that the young engineers are going to lie down under that sort of thing it never made a bigger mistake in its life. The funny thing is that it never seems to dawn on Members on the other side, where all the brains are supposed to be, that we have 579 this spirit in Britain. I warn them that they can go on in this way only until human nature breaks. It only stretches a certain length. I warned the House when it introduced conscription that the engineers would revolt against it. As sure as fate the statement which has fallen from the lips of the Chancellor of the Exchequer to-night will cause nothing but discontent among the engineers in this country, and in no uncertain fashion.
I hoped that the Chancellor would tighten up this matter. I know something about the boys who are working. I will give the Committee an instance of my own employer, Beardmore. Beardmore told me that he was as poor as a church mouse, that he had made for the British Government £68,000,000 and that he had got nothing. He died a millionaire. Will this sort of thing always go on and will the working class tolerate the statements that are made from that Box time after time? If I do not raise a protest the very paving-stones will cry out against me. I warn the Chancellor of the Exchequer that something will have to be done. He cannot always go on mystifying the Members of this House. If he thinks that the working class inside the workshops are going to lie down without something happening he never made a bigger mistake.
Stoppages of work are taking place of a very serious character. The Government are not paying attention. They have not got their ear to the ground to ascertain what is going on in the workshops. Because everything is managed here and there are all kinds of arrangements, it is no indication. It is as if we were all working here for one another's good and were a harmonious party. You would think for the last fortnight that the House of Commons was a mutual admiration society. Instead of our fighting the Government, the purpose for which we were sent here, we are accommodating them. I want the Chancellor of the Exchequer to understand firmly that this sort of thing can go only a certain length, and that it has about reached the breaking-point in the statement which he made to-night.
§ Clause read a Second time, and added to the Bill.