HC Deb 29 June 1939 vol 349 cc739-47

(1)For the purposes of the armament profits duty the profits arising from a business in any year constituting or comprised in the standard period, or arising in any chargeable accounting period shall be separately computed and shall be so computed on the principles on which the profits arising there from are computed for the purposes of Income Tax under Case I of Schedule D, as adapted in accordance with the provisions of Part I of the Schedule (Computation of profit and capital for purposes of armament profits duty)to this Act, and the average amount of the capital employed in a business in any such year or period shall be computed in accordance with Part II of that Schedule.

(2) Where a standard period or chargeable accounting period is not a period for which the accounts of a business have been made up, such division and apportionment to specific periods of the profits and losses for any period for which the accounts relating to the business have been made up and such aggregation of any such profits or losses, or any apportioned part thereof, shall be made, as appears necessary, to arrive at the profits arising in the chargeable accounting period.

(3) Any apportionment under the preceding Sub-section shall be made in proportion to the number of months or portions of months in the respective periods, unless the Commissioners having regard to any special circumstances otherwise direct.— [Captain Crookshank.]

Brought up, and read the First time.

8.29 p.m.

The Financial Secretary to the Treasury (Captain Crookshank)

I beg to move, "That the Clause be read a Second time." I do not think this Clause requires very much explanation. Sub-section (1) provides that profits are to be computed, with certain adaptations, on the same general lines as profits are computed for purposes of Income Tax under Case I of Schedule D. The Committee will notice that the words in the line are: shall be so computed on the principles on which the profits… are computed for the purposes of Income Tax. In case hon. Members want to know what that means, I will explain that it means that it is not necessarily the automatic computation of the Income Tax because there may be some error, and this would allow of modification if that were so. Sub-sections (2) and (3) deal with the apportionment which is obviously necessary, as the standard period or the chargeable accounting period may not be the same as that for which accounts are made up.

8.30 p.m.

Mr. Pethick-Lawrence

On a point of Order. I should like to ask your Ruling, Sir Dennis, on this question: The proposed new Clause contains a reference to the first of the proposed new Schedules which are to be put forward by the Chancellor of the Exchequer, and in that Schedule paragraph 2 of Part I contains a reference to the depreciation allowance and to the special depreciation of 10 per cent. which is provided under this scheme. At a suitable time I propose to move an Amendment to reduce that 10 per cent. to some other figure. I also want to discuss in general what the effect of that depreciation will be upon the whole scheme of the Government. Subject to your approval, I should propose, on the proposed new Clause, to discuss what will be the effect of the scheme as outlined by the Government and then, when we come to the Schedule, I should propose to move a definite Amendment substituting a different figure for 10 per cent. The argument then will be on a specific point. I should like to ask whether you approve of that method of proceeding with the matter?

The Chairman

The course which the right hon. Gentleman proposes is I think, if I rightly understood him, the correct one. He may discuss questions which could be raised on the Schedule, when speaking on the proposed new Clause, but in such a case when we come to the Schedule the discussion must not be repeated. I gather that the right hon. Gentleman wishes to discuss certain points, and to move an Amendment in regard to something which is definitely provided for by the Schedule and not by the Clause. If he were to put down an Amendment to the Schedule to an effect contrary to the Clause then the Clause having been passed the Amend- ment would not be in order. He proposes in that case to move an Amendment to the Schedule. I do not think it is necessary for him to discuss, or that it would be in order for him to do so, the points which he proposes to deal with by moving an Amendment to that Schedule. There may be other questions of general principle, on which I gather from him that his intended remarks would be in order on the Clause and not on the Schedule and in that event perhaps he would like to deal with such questions of principle in discussing the Clause. I may have to rule him out of order if he refers to the Schedule, but I am sure that the right hon. Gentleman will not discuss anything which he thought would be in order on the Schedule and not in order on the Clause.

Captain Crookshank

I quite understand what it is suggested that we are to do. The Sub-section merely says that the computation is to be on the principles of the Income Tax as adapted in accordance with the Schedule. I should have thought it would be almost impossible to discuss the Schedule because that is the only point which arises on this Subsection. I do not want to make it awkward for the Committee or for the right hon. Gentleman but I should have thought that the Schedule was the place to deal with the modification since the Schedule deals only with the modification and adaptations under Schedule D.

Mr. Pethick-Lawrence

I do not intend in any case to make any very lengthy remarks, so perhaps it will save time if I proceed to say what I intend to say. If you think that I am going in the wrong direction, Sir Dennis, you will no doubt stop me and I will then reserve my remarks until we come to the Schedule.

The Chairman

In these matters I can safely allow the right hon. Gentleman to say what he wants to say if he will bear in mind what I have said. I do not think that he can find very much to say which would be in order.

Mr. Pethick-Lawrence

I will bear your remarks in mind while I set out my case. The proposed new Clause, as I understand it, says that profits are to be computed according to Income Tax law except in so far as they are modified under Schedule D. One distinction in the Schedule is that, in addition to the normal Income Tax depreciation there is to be allowed an additional 10 per cent. In a later portion of the Schedule there is a provision for a review of this amount if the emergency comes to an end and when it comes to an end. I want to put this point to the right hon. and gallant Gentleman and to the Minister without Portfolio who is sitting by his side. I want to understand exactly what is going to happen under the provisions of the Schedule as they stand.

Let us take a company which, perhaps largely in order to carry out Government work, goes in for considerable capital expansion. For the sake of argument, I will take the large round figure of £ 1,000,000. I understand that what happens immediately, in the: first year under review, is that they are allowed this provisional figure of 10 per cent. for additional depreciation, so that, on £ 1,000,000, they are allowed £ 100,000 by way of provisional depreciation. Whether it has actually taken place or not, that is the figure that they are allowed. Further, they are allowed the Income Tax depreciation. I do not profess to have that intimate knowledge of these matters which those who are directly concerned in the kind of businesses that make armaments have, but I imagine that that figure will differ very much from factory to factory, according to the precise kind of armaments made, owing to the wide scope covered by the Bill.

I will take the very low figure for Income Tax depreciation of 7 per cent. I believe it is far more than that under the present arrangements. That makes 17 per cent. On the top of that, this firm is to be allowed 8 per cent. interest in computing the profits in the chargeable year as compared with the standard year. That makes altogether 25 per cent., or £ 250,000. As I read the Clause and the Schedule, a firm which has recently, since the standard year, spent £ 1,000,000 in expansion of its capital, would be earning no less than £250,000 more in the year under charge: than in the standard year before it would begin to be considered to have earned excess profits. When I speak of earning that amount, I mean that the actual return for depreciation and so on allowed on the capital could be £ 250,000 more.

Of course it may be said that in fact the capital has been depreciating all this time, and that that has to be taken into account. There is certainly something in that, but, at the same time, this 10 per cent. has been added, not because there will be any physical depreciation in the capital, or not mainly for that reason, but because there is a notional depreciation arising from the fact that, after the emergency is over, the capital may be no longer required, and may only represent scrap iron. It seems to me, however, that, although in the ordinary course of a business that is carrying on from year to year the same kind of work the depreciation has a more or less physical counterpart, in this case the 10 per cent. which is being allowed may or may not have a physical counterpart; it may be purely notional.

The two questions of broad principle that I want to put are these: In the first place, as I see it, this addition 10 per cent, is only provisional, and the actual amount that is going to be allowed, if I am right, either up or down, against the 10 per cent.— I am not quite sure; I shall be corrected if I am wrong— is not finally to be settled until the period arrives when the emergency is practically over. I cannot find the exact place where that is stated, but I think it is the case. In the case I am considering, it might be as much as £ 100,000 a year, and, supposing that the firm is doing scarcely anything but armament work, 60 per cent. on that is 60,000, which the firm will be paying on one basis. If the 10 per cent. should be proved to be utterly inadequate, the firm may find that it has overpaid by a very large sum, whereas if the 10 per cent. should prove far too much in the sequel, it will be the other way. Do I understand that all these matters will remain open for an indefinite time until the emergency can be said to be over? If so, it seems to me that it will be a highly complicated business, and will interfere with the distribution of dividends. It seems to me to be a very complicated notional scheme. The second question is: May it not prove to be the case that this principle which we are now adopting will in a great number of cases reduce the actual profits of the firm, as computed for Income Tax purposes, to an almost negligible quantity?

Another point about which I want to ask is this:

What is the position where the money has been put up, not by the firm, but by the Government? I imagine that there is some place in the Bill where it is provided that it is only where the money for the capital expansion has been put up by the firm itself that any of these provisions will apply. I imagine that, if it has been put up by the Government, it is outside the provisions of this particular part of the schedule. I cannot imagine that that is not so, but I should like to be assured that that is laid down somewhere in this rather complicated scheme. We cannot read it like a single page; it is very difficult to follow, and we have not had any very long time in which to master it. I should like to be assured that this point is settled, and that any capital put up by the Government is entirely excluded from any provision of this kind. How far the firm is ever going to get finality on this matter until what is called the end of the emergency comes seems to be a very difficult question. In some cases, at any rate, the effect of this provision may be to wipe out a very large part of what is normally regarded as the additional profits of the firm.

8.46 p.m.

Captain Crookshank

My right hon. Friend intended, when this matter came up on the Schedule, to give one of his very lucid explanations. I am not quite as clear about this as I should like to be, because I did not foresee that this matter would be raised at this stage, but I think I can perhaps explain it in this way. Depreciation will be computed under this Schedule as for Income Tax, but it is proposed to give this further exceptional depreciation in particular cases where the buildings have been provided or plant or machinery installed since 1st January, 1937, for the purposes of the rearmament programme. The Committee will realise that such a factory, with its machinery, by the nature of the fact that it has been put up for the purposes of the rearmament programme, is one where there may well be exceptional depreciation, because it must be very likely, if not more than likely, that when the rearmament period comes to an end it will be obsolescent, or possibly completely redundant. I am sure that, on reflection, everybody will see that some thing of this sort is right. We provide for the final determination of this allowance at some time. That "some time" must be when Parliament— I am precluded from discussing it in the terms of the Schedule— determines that the emergency is over. The duty is limited to three years, but the end of the emergency must be determined by Parliament.

In regard to the Excess Profits Duty a great number of questions remained open in this way, and somewhat similar provision as was made in the case of the Excess Profits Duty is found here. The difficulty which the right hon. Gentleman found himself up against was as to whether there would be any special depreciation allowance in the case of factories and machinery put up with Government assistance, or at Government expense. The answer to that is that I understand there is no special allowance; this deals only with what is to be put up by the firm itself. I do not know whether I have dealt entirely with what the right hon. Gentleman wished to know, but the exceptional depreciation— I take it that this is really what he wants to know— attributable to the period during which the Armament Profits Duty is in force— that is three years— will be from the 1st April, 1939, with the Armament Profits Duty comes into force. I am sorry that my right hon. Friend was not aware that this was going to be raised, because he intended to deal with it himself, but I will see that the right hon. Gentleman gets a fuller answer on the Schedule.

Mr. Pethick-Lawrence

I thank the right hon. and gallant Gentleman, and, for myself, I will not delay the Committee any longer on the matter.

8.50 p.m.

Mr. Benson

I am not quite clear on this. In the Schedule depreciation is mentioned twice— in Sub-section 3 (1) and in Sub-section 3 (2). Am I to under stand that the 10 per cent. mentioned in Sub-section 3 (2) is additional to the normal standard of depreciation, and that firms will be allowed normal depreciation and then a further 10 per cent. of the capital value in addition, so that, as my right hon. Friend has said, they may get depreciation of 17 per cent. or 20 per cent.?

8.52 p.m.

Mr. Gallacher

Take the case where a firm is building an extension for the pur- poses of this work. Will the mere fact that the firm has built the extension since that date entitle it to depreciation on that construction regardless of other circumstances? Is it not the case that there were certain firms which during the last crisis extended their plant for Government purposes, and that, at the end of the crisis, the plant was, as the Minister says, redundant? There were firms— of which I know many myself— which very considerably extended their factories for Government contracts during the War, and, as a consequence, they were able, when the War was over, to wipe out a lot of smaller competing industries, and they have now established themselves as great and flourishing concerns. This is known to the Minister. We have here a situation in which firms, on the promise of Government contracts, will build new factories, and out of the profits they will pay for those buildings, and the new factory, after the crisis is over, will become part of a great new establishment, bringing in very great profits at the expense of smaller firms round about.

Yet, without any consideration as to the circumstances attending the building of these factories, or additions to factories, or without considering the possibilities of maintaining the buildings after the crisis, all of these new buildings are to be treated as being inevitably redundant. I suggest that this should be considered, and steps taken to see that so many loopholes are not left. It has become quite obvious that there will be justification given for the most excessive profit to be made, and I ask the Minister to reconsider the question of depreciation.

Mr. Benson

May I have a reply to the specific question whether these two depreciations are to be added together or whether they are alternatives?

8.56 p.m.

Captain Crookshank

Perhaps the hon. Gentleman was not present when the discussion started.

Mr. Benson

Yes, I was.

Captain Crookshank

The scope of the discussion was made very narrow by the Chairman, and I said that I was in some difficulty because of that fact. It was not anticipated that points on the Schedule itself would be raised. Perhaps I can answer the points made by both hon. Gentlemen. The hon. Gentleman the Member for West Fife (Mr. Gallacher) was referring back to the "last crisis," by which he meant 1914–1918. There have been a few crises since then, but he meant that one. Here we are dealing with quite a different matter, and I do not think that his argument is particularly relevant. What is being dealt with here, from the point of view of exceptional depreciation, are, as I said, firms whose factories were built or whose machinery was installed since 1st January, 1937, for the purpose of the rearmament programme. As regards the hon. Gentleman the Member for Chesterfield (Mr. Benson), I think I can say that the answer is that the ordinary wear and tear allowances now have to show an increase of 10 per cent. and 20 per cent. The original allowance is additional to that and is not more than 10 per cent. of the capital cost. All this question of wear and tear allowances was reviewed at the time of the Finance Acts of 1932 and of 1938, when certain additional allowances were given to industry as a set-off against the increase in the standard rate of Income Tax.

Mr. Benson

This allowance was a 10 per cent. increase in the depreciation, and not a depreciation of 10 per cent. of the capital, which is a fundamental difference.

Clause read a Second time, and added to the Bill.