HC Deb 19 June 1940 vol 362 cc201-5

5.18 p.m.

Sir K. Wood

I beg to move, in page 33, line 1, to leave out "the purpose of."

The House may remember that on the Committee stage in dealing with the Excess Profits Tax I indicated that there was need for further amendment of what I might call the personal standard which exists as an alternative to actual profits in the cases of individuals, partnerships, and director-controlled companies. As the law now stands, the personal standard consists of £750 per person, with a maximum of £3,000 when there are four or more partners or controlling directors. There are, of course, many businesses which have low profits in standard years where it would be unfair to allow only £750 per head for the services of those running the business and to take the rest in taxes. There were a number of representations made by nearly everybody about this matter when the tax was less than 100 per cent., and now the Excess Profits Tax is 100 per cent. it makes the difficulty and injustice all the more. As no deduction is allowed in computing profits for E.P.T. purposes in respect of the remuneration of proprietors who are individuals or partners, it follows that where such partners or directors are actively employed in the business the figure of £1,000 or £750 per working proprietor represents remuneration for the services of the working proprietors and return for capital employed in the business.

I will give an example. Say you have a partnership which has £20,000 capital employed in the business. The minimum standard which at present obtains is £1,500. I think everybody will agree that that is clearly inadequate for the remuneration of two partners and a return on £20,000 capital. Accordingly, I am proposing that the figure of £750 per working proprietor should be increased to £1,500. The minimum standard where a business is carried on by a body corporate will remain at £1,000 as before, but where a business is carried on by an individual or partners or a director-controlled company, then it is suggested that there should be such sum not exceeding £6,000, which is arrived at by taking £1,500 each per working proprietor, subject to a possible further addition not exceeding £4,000 or £1,000 for each working proprietor in certain cases. In cases where the minimum standard will remain at £1,000 these will cover all the companies not director-controlled and will also cover individual proprietors who take no active part in business but employ a manager to run the business on their behalf. In such cases a company is allowed to deduct directors' remuneration, and an individual proprietor is similarly allowed to deduct the salary of his manager so that the minimum standard is not intended to cover any element in respect of remuneration.

As regards other cases, the new figure of £1,500 for each working proprietor, with a maximum of £6,000, will be allowed in all ordinary cases where the business is carried on by an individual, a partnership, or a director-controlled company. There is also the provision which permits the Commissioners of Inland Revenue, where they are satisfied that the standard of £1,500 is inadequate, to increase by an additional sum not exceeding £1,000 for each working proprietor, or £4,000 in all. The proviso I have inserted is to meet cases of hardship, which are of two particular types. The first is where the ordinary minimum standard would be inadequate in view of the nature of the business. You may have a business where it is essential that they should employ a highly qualified technical expert whose remuneration in the ordinary way would be £2,500, and if he is a director and holds more than 5 per cent. of the share capital, his remuneration will not be deducted in computing profits, and unless this proviso is inserted the standard will be only £1,500. In such circumstances the Commissioners, if satisfied, will be able to allow an additional £1,000.

The second type of case is where the normal minimum standard will he inadequate having regard to the size of business as shown by its assets. For example, there may be three partners, working proprietors, and the capital employed is, say, £50,000. In such circumstances the minimum standard, apart from the proviso I have mentioned, would be £4,500 when the standard is supposed to represent a reasonable remuneration for partners and something by way of return on capital. The figure of £4,500 cannot be fairly regarded as adequate remuneration for partners and return on capital. Again, in that case the Commissioners, if satisfied, could direct the standard to be increased by an extra £1,000 for each working proprietor, or £3,000 in all. I hope that adequately explains the meaning of the Amendment and that it will be generally acceptable to the House.

5.27 p.m.

Mr. Pethick-Lawrence

The Chancellor has explained this Clause with considerable lucidity and I think the House is in possession of the situation. With a great deal of what he says I find myself in agreement. The object of this Amendment is to rectify certain cases of hardship, and in so far as it confines itself to that I am prepared to support it. Further than that, taking the two Amendments together, I am glad to see he has put in a definition of the working proprietor, because without that definition a good many people calling themselves working proprietors might go to their offices for one hour each week and claim large remuneration for doing so. I am perfectly satisfied that the Inland Revenue ought to have a certain amount of latitude to go beyond the standard proposed in the earlier part of the Amendment where special cases demand it. But what I am not quite satisfied about—and the Chancellor has not altogether allayed my misgivings—is in regard to the paragraph beginning: (2) The minimum amount referred to.… I am not quite satisfied why that should apply in all cases and why there should not be some discretion, not to allow this addition, left to the Inland Revenue. The Chancellor gave us, breezily, an example of a business with a capital of £20,000 and four working partners, and called attention to the fact that it might not earn more than £2,000. That may be the case, but suppose you take a weaker case—a business with a small amount of capital, partners, earning small salaries, who have limited ideas, but owing to the war suddenly come into increased business without any particular exertion on their part. I do not quite see why a business which is now able to earn double or treble the remuneration in years gone by should not be subject to this Excess Profits Tax. I hope it may be possible to make some addition to that first paragraph, so that the Inland Revenue should be satisfied and that there should not be universal application to all cases, whether it was wanted or whether it was not. I would be glad if someone on the Government Benches could explain why such a provision was made. I fear there will be some cases where there will be quite needless expansions as a result of which the Inland Revenue will lose money.

5.30 p.m.

The Financial Secretary to the Treasury (Captain Crookshank)

The answer is that owing to the raising of the basic rate of the Excess Profits Tax to 100 per cent. and the effect of that increase upon this class of case, it has been thought necessary to make this concession. It is a matter which will obviously have to be watched in the course of administration, and, if it is found to be too generous, steps will be taken to deal with it. However, I do not think that is likely to happen.

Amendment agreed to.

Further Amendment made:

In page 33, line 2, leave out from "1939," to the end of line 16, and insert: there shall be substituted the following Sub-section— '(2) The minimum amount referred to in Sub-section (1) of this Section is one thousand pounds, or, in the case of a trade or business carried on by a single individual, or by a partnership, or by a company the directors whereof have a controlling interest therein, such greater sum, not exceeding six thousand pounds, as is arrived at by allowing one thousand five hundred pounds for each working proprietor in the trade or business: Provided that if, in the case of a trade or business carried on by a single individual, a partnership or such a company as aforesaid, the Commissioners, having regard to the nature of the business and the size of the business as shown by the value of the assets employed therein, are satisfied that the said greater sum is inadequate, they may, if they think fit, direct that there shall be allowed in respect of not more than four working proprietors such additional sum, not exceeding one thousand pounds for each individual working proprietor or four thousand pounds in the aggregate, as may be specified in the direction. In this Sub-section—

  1. (a) the expression "working proprietor" means a proprietor who has, during more 205 than one half of the chargeable accounting period in question, worked full time in the actual management or conduct of the trade or business;
  2. (b) the expression "proprietor" means, in the case of a trade or business carried on by a partnership, a partner therein, and, in the case of a company, any director thereof owning more than one-twentieth of the share capital of the company."—[Sir K. Wood.]