HC Deb 23 May 1940 vol 361 cc333-62

Order for Second Reading read.

3.54 p.m.

The Chancellor of the Exchequer (Sir Kingsley Wood)

I beg to move, "That the Bill be now read a Second time."

The House will doubtless recall the references which my right hon. Friend my predecessor, now Lord Simon, made in the course of his Budget Speech to this Measure and to its general aim and purpose. I need, therefore, refer only briefly to one or two statements that were then made. In speaking of the large sum that had to be raised otherwise than by way of taxation, Lord Simon said: What we have to do is to foster and improve the conditions under which the flow of voluntary contributions to Government loans may be stimulated and inflation may be avoided Whatever measures will help to restrict the misuse of spending power, and especially the misuse of increased spending power coming into the hands of an individual as a consequence of war conditions are of vital importance."—[Official Report, 23rd April, 1940; cols. 83–4; Vol. 360.] Therefore, I would state that the primary purpose of this Bill and of the limitation of dividends is to play its part in avoiding an increase of purchasing power in the hands of consumers which would, by increasing competition for available goods, contribute towards a rise in prices. The second purpose which I would give to this Measure is the creation of resources in the hands of companies out of which it is hoped they will give the utmost support to Government loans to be issued for the purposes of the war. It is a further benefit that these greater reserves will, by strengthening the financial position of companies, help them when, as must be expected, a period of difficulty and readjustment has to be faced after the war. I particularly emphasise the third purpose of the Bill because I am convinced that it is of increasing importance every day. The House has already generally approved of the aims and principles of the Measure, and I hope it will do so again this afternoon. When further details of the proposals were made on 25th April it was stated that it was not proposed to make the Bill retrospective, but an appeal was made to business men to do their utmost to secure that the spirit of the arrangement should be observed in the interim period before the Royal Assent was given to the Bill. A number of companies which have declared their dividends for the year ending March last have obviously taken steps to conform to the proposed limitations and others have revised proposed dividends which they had already announced before the proposals were made public. I would like to express on behalf of the Government our gratitude to these companies for so readily meeting the appeal and the desires of the Government and for making an endeavour to follow out the principles of this Bill before it became law.

The Bill applies to every company registered under the Companies Act, 1929, or the previous Companies Acts, and to companies incorporated by Act of Parliament or by Royal Charter, with the exception of private companies and companies which have no share capital. The Bill covers, for instance, various statutory companies whose dividends and earnings are already subject to control by other enactments or by orders made under enactments, such as gas companies, electric supply companies and water companies. I propose to say a word, because I observe the question has been put once or twice in the course of the Debates, as to why private companies are excluded from these proposals. Two main reasons can be given. The first is that I think it is pretty obvious that there would be very great difficulties indeed in ensuring effective control, so far as private companies are concerned, of the proposals made in this Bill, and I am afraid it must be stated—and I have endeavoured to look into the matter myself—that, apart from another consideration which I shall mention shortly, the administrative difficulties in war-time would really be too heavy to be faced. The second reason is that the inclusion of private companies would certainly raise very difficult questions indeed with regard to taxation where, as Members of the House know, special considerations arise as to what are known as one-man companies. Private companies number about 150,000, with an aggregate share capital of about £2,000,000,000. Public companies number some 15,000, with an aggregate share capital of over £5,000,000,000. Therefore, at any rate, this can be said, that the Bill covers the principal field in which dividends are paid.

I said there were considerations of taxation, apart from the obvious considerable administrative difficulties, in applying a Measure of this kind to such a large number of small companies, many or, I suppose, all of whom do not have to comply with the various measures which give publicity to the dealings and accounts of public companies. It would, in fact, in dealing with the administrative side of the proposals, involve very considerable additions to the staff and many inquiries, and it would be next to impossible to carry them out, especially in war time, in the necessary manner and with the particularity which would be necessary to see that the Measure was complied with. But there are important considerations on taxation. Individuals or partnerships trading as companies should pay Surtax on what they earn and not on what they purport to distribute, and in the case of trading companies the Income Tax law requires what is called a reasonable distribution of the profits to be made in order to secure Surtax on all profits which the exigencies of the business do not require to be withheld from distribution. If the Bill applied to these companies, a dividend which accorded with a statutory Measure like this could claim to be a reasonable distribution, whatever the exigencies of the business might have been. Therefore, I think it is pretty clear that the inclusion of such companies would conflict with the principles of the Surtax legislation designed to prevent evasion of tax by individuals forming themselves into companies.

Mr. Levy (Elland)

It is within the knowledge of my right hon. Friend that there is an Act of 1922 whereby, in the case of a public company in which all the ordinary shares are held by five people or less, the profits rank for Super-tax, and it is an offence if they are not distributed. How does he reconcile that Act of 1922 with these proposals?

Sir K. Wood

Perhaps my hon. Friend will allow me to examine that point. I do not think it destroys the argument which I have just addressed to the House. I would like to say a word about the broad outlines of the general scheme itself. As Members know very well, the Bill limits the amount paid out in dividends, other than fixed rate dividends, to the Sum which was paid out in the best of three standard years. I would like to emphasise four points in that connection. In the first place, under the proposals in the Bill "dividend" means the amount which has been paid and not the rate per cent. In the simplest case, it would come to the same thing, but many hon. Members will appreciate that the varieties of capital structure are so considerable and the changes in the amount of paid up capital and the differences of allotment are so great that we have reached the conclusion that the only practical way of dealing with the matter is to work on the amount paid out.

Secondly, I would like to explain that fixed rate dividends payable on preference stock, or on any stock entitled to a fixed rate in priority to some other class of stock, are outside the scope of the Measure. It follows, therefore—I have received a communication from an hon. Member about this—that there is no interference with the payment of arrears of fixed rate dividends where the shareholder has cumulative rights in a company. Thirdly, "dividend," therefore, covers any amount paid out otherwise than in respect of fixed rate dividends, and it thus includes not only the ordinary dividends of which we commonly speak, but any sum paid in respect of participating rights of fixed rate stock over and above the fixed rate itself. Finally—my hon. Friend opposite put a question to me about this yesterday—"dividend"under Clause 3 (2) means the gross amount of the dividend. If, for instance, it is paid free of tax, the amount actually received by the shareholder has to be what is called grossed up by reference to the standard rate of Income Tax for the year of assessment in which the distribution was made.

I would like to say a word about the standard period. The House will observe by reference to the Bill that these are the periods by reference to which an existing company must regulate its annual distribution, and the proposals in the Bill cover any accounting period ending after 30th June, 1936, and before 1st July, 1939. A company is open to choose whichever year suits it best, and the standard is the amount distributed in respect of that period. I had a representation made to me as to what was the object of taking June, 1939, as the terminal date and whether the date could not be made later. The object of that is to exclude from the standard any period during which profits have actually been earned during the war or immediately prior to the declaration of war. The next step is this. A company, having ascertained the amount that was distributed in ordinary dividends for each of the standard years, can then, under Clause 2 (1), adjust the figures in two respects—where it has increased or reduced its ordinary capital, proportionately to the increase or reduction in that capital; the second adjustment that can be made is that where the lengths of the accounting periods in the standard and war years differ, a proportionate adjustment can then be made. Having done that, the company can take whichever of the standard years suits it best and can take the highest amount distributed in respect of any standard year as the amount which it can distribute annually during the war.

But there is an alternative. Under Clause 2 (1, c) a company can pay for any year during the war period an amount equal to interest at the rate of four per cent. per annum on the paid-up ordinary capital of the company at the end of the accounting year, and that provision is inserted in the Measure in order to meet the case of a company which has been unfortunate in its dividend position throughout the standard years. I should add in that connection that in any of these calculations any increase of capital which is the result of a bonus share issue made after the standard period—I emphasise that—is to be ignored and is not to be allowed as a capital increase for the distribution of dividend, and in what I would call the four per cent. alternative, any bonus capital issued after 30th June, 1939, is excluded. This, of course, is done to assimilate this class of case to that of a company which has a dividend standard. There is another case which I should mention to the House, and it is the case of a company which is a new company as defied by this Bill, one for which the first accounting period after its incorporation ended after 30th June, 1939. That company, it is proposed in the Measure, is to be allowed to pay dividends during the war period of an amount equal to 5 per cent. on the paid-up ordinary capital at the end of the war period.

Two questions have been put about that particular part of the Bill, and I will endeavour to say a word about both. The questions are, What is the reason for taking 4 per cent. in the case of existing companies and 5 per cent. in the case of new companies? With regard to an existing company, you have to observe that the 4 per cent. is what I should call a hardship provision, which only operates when no better standard is available under the standard-year calculation. We must take it that such a company has been in a position where either losses have been incurred or profits have been small, and it is felt that in the circumstances 4 per cent. is a fair rate to fix, especially, and I emphasise this, as from the nature of the case that company is likely to be in a financial position which justifies a policy of adding to its reserves. In the case of the new company—where the figure is 5 per cent.—there is no standard whatever in existence, and the question is one of fixing a fair rate of dividend which will not unduly hamper any desirable new development.

My hon. Friend asked why not 4 per cent. instead of 5 per cent. Considerable representations have reached me that in certain cases 5 per cent. would not, perhaps, be a sufficient inducement, and I think there is this to be said, that in cases where development is held to be desirable or even essential—and one can conceive of such cases with companies which might be helping us to win the war—there is a case for special consideration, and provision is made whereby an appeal can be made under the provisions of Sub-section (4) of Clause 2. One can very well visualise a case in which 5 per cent. might not be sufficient in certain circumstances to attract capital. People who take that view can under the procedure of Sub-section (4) of Clause 2 put their case. Therefore, I submit that both the 4 per cent. and the 5 per cent., having regard to the considerations which I have pat before the House, are on the whole fair and reasonable proposals. In the case of the new company, I again emphasise that there is an opportunity for appeal, and I have no doubt a fair hearing will be given.

There are two further matters affecting the maximum distribution on which I should like to speak. They are dealt with in Sub-section (3) of Clause 2. If a company has issued or issues ordinary paid-up capital which ranks for only part of its accounting year it would, I think, clearly be a hardship if an appropriate adjustment of the distribution were not made, and this Sub-section makes that adjustment possible. Further, when you are dealing with such a large number of companies as exist in this country, the limitations which we are laying down in this Measure must of necessity produce harsh results in some cases, and I think it is quite impracticable to attempt in this Bill to deal with every type of variation in capital structures—and changes which may have taken place, and which constantly take place, in capital structures. The conclusion was reached that in order to deal with such cases provision should be made for them to receive proper consideration where there was real hardship or exceptional difficulty, and accordingly in Sub-section (4) of Clause 2 provision is made whereby the Treasury may give special and individual consideration to such cases and may direct that the maximum distribution permitted under the Bill shall be increased by such amount as they think fit. But, of course, this dispensing power will be exercised on the advice of the Capital Issues Committee, presided over by Lord Kennet, which now advises the Treasury constantly on all matters affecting capital issues.

I would bring to the attention of my hon. Friends one or two types of case which I suggest could only be dealt with equitably by a consideration of the facts in the individual case itself. I will mention two types. I do not say for a moment that they shall receive a special consideration by the Treasury, but at any rate they form what I would call a prima facie case. I take first a company which has gone through a very bad trading period, which has had to write off losses and has suffered a drastic reduction of capital. Under the Bill it will be entitled to assess its distribution at whatever it paid in the best standard year, if any, reduced in proportion to the reduction in its ordinary capital, or, in the alternative, it can pay an amount equal to 4 per cent. on its paid-up ordinary capital existing at the end of the war dividend period. Those are the alternatives which face a company in that position; they can take whichever is the more favourable. I think it can be said this afternoon, without pre-judging the decision in a case of that kind, that there might very well be a burden which would bear very hardly indeed on a company, though the burden it would have to bear would, of course, vary according to the stage of recovery which it had reached. At any rate I suggest that that is an illustration of a case which offers some prima facie grounds for consideration and which this particular Sub-section is designed to meet.

I will give one other illustration. Take the case of certain mining companies which have undergone a period of development and are just reaching the dividend stage. Here it is probably only just that some attention should be paid to the fact that a mine constitutes an investment with a limited life, and there are no doubt other cases in which special circumstances may arise. They will have the opportunity which is afforded by this provision to have their case dealt with on its merits. I should like to say, so far as companies generally are concerned, that I hope that before making any application a company will most carefully consider whether its circumstances really are exceptional and act to the utmost in the full spirit of this Measure. I would emphasise that, after all, this is not a taxing Measure, and that the result of forgoing a distribution of dividends is to strengthen the future position of the company.

I shall perhaps be expected to say a word or two about Clause 3, which deals with the computation of the ordinary dividend and adds to the definition. Under the Bill the ordinary dividend includes not only the amount of the dividend on the ordinary capital but the amount paid in participating rights on preference shares, preferred ordinary shares or on any other form of fixed-rate capital, but always excluding the fixed rate itself. By Clause 3, for the purposes of the standard rate, "ordinary dividend" covers all cash distributed other than by way of fixed rate on preference capital or by way of repayment of any share capital. Thus a company which has distributed a cash bonus during the standard year counts it in reckoning its maximum distribution, because such a bonus is really indistinguishable from the dividend itself. But the other side of the picture is that for the purposes of the war dividend period the ordinary dividend includes not only cash in the sense which I have mentioned but any assets other than cash distributed to the holders of share capital. The reason for that distinction is, I think, plain and reasonable and fair. It is, of course, that for the purpose of reaching its standard a company is not allowed to inflate the figure by anything it may have done in the way of distributing assets, such as giving shareholders a block of shares held in another company. It is necessary to stop that sort of device as a means of getting round the limitation in the war period; and so any distribution is counted as dividend, in order that the company may not transgress its proper limits as laid down in the Bill.

In the same Clause, provision is also made to attach any such distribution to the accounting period immediately preceding the distribution, unless the distribution has been specially declared to be in respect of the current accounting period. I do not think I need say anything about the substantial penalties which are laid down for contravention of the provisions of the Measure. They will be found in Clause 1, Sub-sections (3) (4) and (6). I hope that, in the vast majority of cases, the business men who are associated with our companies will carry out the spirit and the intentions of this Measure, but one is bound, in a Measure of this kind, to provide penalties which I hope will not be required in the vast majority of cases.

Clause 4 provides that the Treasury may make regulations modifying the provisions of the Bill in its application to special classes of company, in the first place, and exempting subsidiary companies from the provisions of Clause 1. The idea is this: After the Capital Issues Committee have considered certain types of case, it may become possible, so to speak, to codify their decisions in a form which would reduce applications to the committee and assist the companies themselves. If this is possible, we intend that it shall be done. We think that, in any event, it should be possible to produce regulations exempting from limitation cases in which a very substantial proportion of the ordinary capital of the subsidiary companies is held by the parent company. The parent company, and thus the distribution to the public, would, of course, be controlled by the Bill. We do not want to do anything that is unnecessary, and it is not necessary, so far as one can see, to interfere with dividends passing between one company and another, unless the public is appreciably affected.

Clause 5 contains provisions designed to close the door to certain devices by which the limitations under the Bill might be defeated. They are made retrospective to all resolutions passed after 15th May. As hon. Members will remember the Bill became available on 16th May. The provisions will apply to resolutions which may then have been taken in anticipation of these limitations. The first case is where a reduction in capital is proposed and submitted for the confirmation of the court. It is possible that companies which have appreciably increased their reserves by limitation of dividend might choose this method of conveying cash to their shareholders.

Another case in which Treasury approval will be required will perhaps be a more likely means of evasion. It relates, first, to the conversion of capital from one class to another. It would, of course, be a simple process for a company having, say, £100,000 of ordinary capital, by the conversion of, perhaps, £50,000 into 10 per cent. preferred ordinary shares to increase its distribution. That would mean that the purposes of the Bill would be evaded.

Again, there is the case of the alteration of the dividend rate attached to any class of shares in the company. If, say, preference shares were held substantially by the same class of shareholder as the ordinary shares, an increase in the fixed rate of the preference shares could be made and this would not be within the Bill. Then there is the application of assets to the satisfaction of uncalled liability in respect of any share capital. This, of course, is similar in effect to a bonus issue, but it does not come under the Capital Issues Committee's control. It is, therefore, being stopped by the Bill as a means of evading the limitation.

Sir Frank Sanderson (Ealing)

Would this provision in the Bill prevent either insurance companies or banks calling up any unpaid capital on their ordinary shares?

Sir K. Wood

I should like to examine that point.

Sir Reginald Clarry (Newport)

How does my right hon. Friend propose to prevent the evasions which he has just enumerated?

Sir K. Wood

Before a company takes any step to put any of these matters into operation, the consent of the Treasury has to be obtained. I would say, in that connection, that the Treasury can, of course, attach conditions to its approval. If it is thought desirable—one does not want to penalise unnecessarily—it may modify the provisions of the Bill relating to the maximum distribution. I would say, in reply to my hon. Friend, that it is not desirable to prevent alterations in the form of capital, but it is essential to make sure that the maximum distribution is equitably adjusted so as to produce broadly the desired results from the Bill.

Clause 6 enables the Treasury to obtain information, as is set forth in that Clause. It may be from time to time necessary for the Treasury to ask the companies for information, not of a general character but as is set out in Clause 6. In any case it is not expected that it will be necessary to set up much machinery for ensuring that the provisions of the Bill are observed. Most of the matters in connection with the Bill are publicly known in relation to public companies, but it is necessary to take power to obtain certain information from a company where a breach of these provisions is suspected. The saving in Clause 7, with one or two minor provisions, ensures that in the case of companies which are already controlled by or under other Acts of Parliament in relation to dividends, like gas companies and certain electrical supply companies, the limitations now proposed are additional and do not remove the existing limitations. Clause 8 is the standard Clause relating to expenses under the Measure.

Mr. Lewis (Colchester)

Who is responsible for the figure of £4,000 suggested as being the probable cost? It would seem from what my right hon. Friend has told us that the cost must be very much greater than that.

Sir K. Wood

I do not think so. I am afraid that I must take the responsibility for the assessment. It has been done, of course, on the advice of the officers of the Treasury who are very skilled and cautious in these matters. I think the expenses in respect of this Measure will be in relation to the Capital Issues Committee. After this Measure has been in operation for a short time, I do not think that there will be any undue complications or difficulties. When a certain number of these companies have been to Lord Kennet's Committee I think we shall find in some classes of cases that a sort of general application of the rules has been laid down which we hope to be able to bring to the notice of other companies by the issue of regulations. I do not see a great deal of difficulty or unnecessary complication. We are obviously dealing with a very large number of cases and regard must be had to that fact; but my own impression is that, taking the Bill as a whole, in very many cases it has been welcomed as a very reasonable provision. No doubt from the point of view of many companies it is very desirable, especially when one looks at the complexities of business to-day.

Mr. A. Bevan (Ebbw Vale)

Is the right hon. Gentleman fully satisfied that he is taking to himself enough power under Clause 6, which provides for information in respect of companies?

Sir K. Wood

I will look at that point. As at present advised, I think it may be sufficient, but I will look at what the hon. Member has suggested. I do not think it will be necessary, and I dare say that he does not think so, in any but a few cases, to obtain such information. I would like to thank the House for listening to me so patiently this afternoon.

Sir Irving Albery (Gravesend)

I did not understand my right hon. Friend's reference to regulations.

Sir K. Wood

When Lord Kennet's Committee have considered the cases of particular classes of company, they will no doubt say that, in relation to particular classes of company, their position is to this or that effect and for this or that reason; and in order that companies in the particular classes need not go to Lord Kennet's Committee, the position in regard to those companies will be put into a regulation stating exactly what the position is.

Sir R. Clarry

Is "regulation" the right word to use? Is it not rather "information"?

Sir K. Wood

"Regulation" is the word used in the Bill, and that is the intention.

4.43 p.m.

Mr. Pethick-Lawrence (Edinburgh, East)

When this proposal was originally brought forward by the predecessor of the Chancellor of the Exchequer there was, I think I am right in saying, no opposition shown to it in any part of this House. Therefore, the right hon. Gentleman may expect a similar reception for the Bill, which follows the Budget speech of the right hon. Gentleman who has now gone to another place. I take no exception to the Bill, and I am prepared to give my support to the Second Reading on this occasion. I believe that the Bill will be very valuable in withdrawing from immediate purchasing power certain sums of money and that, in consequence, it will, as far as it goes, help to find the finances of the war and, what is still more important, relieve the economic strain and, from the economic point of view, make the prosecution of the war more possible. In fact, it is a limited application of the principle which Mr. Keynes has described as deferred pay. It is not in any case a confiscation or even a tax, either upon the company as such or upon shareholders. If it had been a tax, it could, of course, have been included in the Finance Bill, and the very fact that it is not so included is an indication that it is a regulation and not a tax of any kind. As I understand it, it does not in the very least affect the Income Tax which the company will have to pay. What it does do, however, is to affect the amount of Surtax, because as the profits of a company in the current year do not find their way into the pockets of the shareholders, their income will not be extended by the additional amount, and, therefore, they will pay less Surtax in the current year than they would pay if this Bill did not come into effect, in the case of those companies which are affected by it. When the money does find its way into their pockets later, they will have to pay additional Surtax in those cases, and whether they gain or lose on the transaction will depend upon whether the rate of Surtax in the current year should in the end prove to be greater or less than it is in the year when the money actually flows into their pockets.

I do not propose to take up the time of the House in discussing this Bill, which I hope will have an easy passage, but there are three points on which I think there is a good deal of misconception, perhaps not in this House but in the country, as to the effect of this Bill. Therefore, perhaps I may say one or two words upon it. First of all, with regard to the question of the standard years, I think there is an opinion among people who have not studied the details of this Measure that you go straight from the standard year to the year under control; of course, that may be so in certain cases, but in what I think will prove to be the majority of cases there will be an intervening period. It depends upon the actual accounting periods of the various companies and upon the actual dates to which they relate, but in a number of instances there will be an intermediate period that is neither one of the standard years nor the year of control, and it is to those years that the Chancellor of the Exchequer more particularly referred when he said that companies were playing the game and were not trying to distribute an extra large dividend in the intermediate period. We can be glad that that is the case, but I think it is only what we should expect from any patriotic institution in this country, particularly in view of the special circumstances of the day.

The next point about which I think there is some confusion is that it is not the actual net dividend which is paid to the shareholder but in general the gross dividend which is the subject of these provisions. I think the terms of the Bill in which the word "cash" is so very frequently used tend rather to mislead the casual reader. To take perhaps the simplest illustration, supposing a company in a previous year declared and distributed a dividend of 8 per cent.—that is to say, 8 per cent. before deduction of tax—if Income Tax was at the rate of 5s. in the £ the actual dividend which would reach the shareholder would be 6 per cent. Some people assume that the net dividend to which they will be entitled in the year of control will also be 6 per cent. That, of course, is not the case, because it is not the net dividend which is controlled; it is the gross dividend. So that if the highest amount in one of the standard years was 8 per cent. gross dividend, it will be 8 per cent. again in the year of control, and if in this year of control the Income Tax is not 5s. but 7s. 6d. in the £, of course, they will be entitled only to 5 per cent. net instead of 6 per cent. in the standard year. That, I think, is rendered quite clear by paragraph (b) on the top of page 5 in Clause 3 of the Measure.

The final point is one which has never been officially cleared up, but I think there is little doubt as to what the facts are. The Bill specifically uses the word "distribution" and not the word "declaration." Some ingenious people have taken the view that it would be quite possible to declare a bigger dividend than in one of the standard years though it is forbidden by the Bill to distribute it. So far as I can understand the position, that would serve no practical purpose from the point of view of the shareholder. Whether it would be possible for a company to declare a dividend and yet not distribute it seems to be a matter of some doubt, but the shareholder would gain no advantage whatever from that unless it should prove to be the case that the part of the dividend which had been declared but which had not been distributed gave the shareholder in some way a negotiable right. Perhaps the Financial Secretary, if it is the Financial Secretary who is to reply to the Debate to-day, will say a word or two on that point. I should imagine that the answer would be that the practice is one which is not very likely to be followed, that if it were followed it would have no valuable consequence from the point of view of the shareholder, that it would not therefore be any disadvantage to the Exchequer, but that if ever there could be some advantage, it would very soon be discovered by the Government, and they would take steps to put a stop to it.

With those three points of detail I have said all that may be said at this stage of the Bill, and I will end as I began by hoping that after suitable discussion the wish of the Chancellor of the Exchequer that this Bill be read a Second time will be accorded by the House.

4.54 p.m.

Mr. Craik Henderson (Leeds, North-East)

One agrees thoroughly with a great many of the remarks of the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence). There is one point, however, with which one finds a little difficulty in agreeing. He said that when the proposals were originally put forward by the late Chancellor there was no opposition from any part of the House and he expects there should be little now, but since then I think there has been a very material change which affects this Bill, namely, the introduction yesterday of the Bill by which Excess Profits Tax as I understand, is to be 100 per cent. If that is the case, this Bill ceases to have the importance it had originally, and it becomes largely a case of taking a steam hammer to crack a nut. I was also very glad that the right hon. Gentleman raised the question of the maximum distribution under Clause 2, because there is a good deal of doubt as to what is meant by that. I hope we shall have some statement as to what is meant, because the hardship is considerably greater if maximum distribution is the gross amount distributed in respect of any standard period.

This Bill will undoubtedly cause a great deal of hardship. That can be justified if it can be shown that the Bill is necessary in the national interest. Despite the Chancellor's persuasiveness, I am afraid I am still not convinced that anything has been said to show that this Bill now really achieves anything in particular. As I understood him, he said that the two reasons for the introduction of this Bill were that it will keep down spending power and also will make undistributed profits available for loans. If 100 per cent. of excess profits are to be seized, then in the most important cases the amount available for loans, except in exceptional cases, must be very small indeed. With regard to keeping down the spending power, I think we are having rather contradictory arguments in this House, because in the short time I have been here I have heard on several occasions the argument put very strongly that the income and wages of civil servants or of workmen must increase to some extent with the increased cost of living. Here is an example of exactly the opposite. When thinking of companies, there is always a tendency to think of rich shareholders paying Surtax. Actually, inmost cases members of a company are probably holding 100 or 200 shares, and a very common case is that of a man who has taken out an endowment policy payable at 65, or a contributory pension payable at 65, by which he gets a sum of £3,000 or £4,000, which he invests in a company. This will give him a return of, say, £200 at 5 per cent. If one company passes or reduces the dividend, probably another company will pay an increased dividend. The effect of this Bill will be that no company can increase its dividend and that inevitably the shareholder must receive a smaller sum for the reason, as the right hon. Gentleman the Member for East Edinburgh himself said, that Income Tax will be deducted at 7s. 6d. instead of 5s. and the amount which actually reaches his pocket will be smaller.

It may be that it can be established that this is a Bill which is necessary in the national interest, and, if so, we can disregard the hardship which will be caused to hundreds of thousands of small shareholders by reason of the fact that while the cost of living is rising, their income by this Bill must be reduced. I submit that nothing has been said to show how this Bill will do anything in the national interest which would justify the infliction of such hardship. This Bill is also very contradictory. Under it the tendency is to prevent distribution. Under the 1922 Finance Act, as amended by the 1927 Finance Act, the Legislature tried to persuade companies to distribute dividends so that the amount so distributed might be made available for Surtax. This Bill is designed to prevent companies distributing beyond a certain amount, while, under the 1922 and 1927 Finance Acts, companies under the control of five or less persons were encouraged, as far as possible, to distribute, and in certain circumstances profits not distributed were made liable for Surtax. These two intentions are completely contradictory. If it can be shown that this Bill is necessary in the national interest, then, whatever the hardships, I am sure the House will pass it, but at the moment it seems unnecessary and futile, and, as far as I can see, it will inflict hardship without doing any particular good.

5.1 p.m.

Mr. Hely-Hutchinson (Hastings)

I wish to say a few words in support of the Bill. I fully approve of the first two main objects, and my comments are directed towards ensuring that those objects are in fact achieved. The first object, we are told, is to stop increased spending power coming into the hands of individuals. That, in time of war, is most important. But we must be careful that in doing so we do not increase the incentive for the companies to spend. The second object is to help the Government bond market. That, I support without qualification. The third object mentioned by my right hon. Friend relates to the post-war position of companies. I suggest that that is an argument to which company directors will not pay very great attention. They can themselves best judge the position of the companies for whose finances they are responsible, and I think that, as far as this House is concerned, our view should be that in war there is only the present tense—we have to concentrate on the present effects of this Bill, rather than on what its effects may be at some time in the future.

I think that the question which a great many directors of companies will ask when they consider the Bill, as they must, in conjunction with the Excess Profits Tax, is "What are now our terms of reference?" The directors are appointed by the shareholders, and are responsible to the shareholders, and are supposed to do their best for the shareholders. I think that business generally will willingly accept the formula that in war-time their duty is to conserve the assets of companies and to help the general national situation as far as possible, but there must be some lingering recollection in the minds of directors that they have a duty to shareholders; and if that recollection should linger in their minds, they are bound to consider the tremendous incentives that now exist for spending money. For instance, if a company is in a position where it can make certain charges to expenditure this year, which five or six years from now—when, we hope, taxation will be lower—will come back in the form of income, if those charges can be made, say, in the case of a tobacco company, for popularising a new brand of cigarettes, such expenditure will save them the payment of 100 per cent. in the form of Excess Profits Tax or three-eighths in the form of Income Tax. In other words, at least 37½ per cent. and perhaps as much as 100 per cent. of the risk will be borne by the Government. Therefore, the incentive is very great, and, indeed, it is the responsibility of the directors to pursue such a course if they can.

Secondly, there is the question of capital expenditure. This Bill does nothing to help the Government bond market in respect of a company whose directors may have come to the conclusion that any surplus assets they may have are better held in the form of plant or property or goods than in the form of cash or Government bonds. On all these matters, I think the directors need some guidance from the Government as to what their terms of reference are. I am quite sure the general run of directors will willingly accept whatever terms of reference the Government lay down, but terms of reference are not in this Bill. What my right hon. Friend has said in this House is not evidence in a court of law. Therefore, I am afraid we have to consider that there will be a certain number of directors who, under the strong incentive to spend money now, and with the responsibility to do so in the interests of their shareholders, will be exposed to a grave temptation to pursue such a course unless there are certain sanctions to prevent what I might call the unpatriotic kind from pursuing that course. The intimations that I am making are designed entirely to help the Government to achieve their objects.

There will be a large number of companies which will fall in asort of borderline of hard cases. The Government will find it easier to deal with these cases if they provide that where increased dividend is paid it shall be in some form of blocked Government bonds. The machinery for that would be very simple. The ordinary process of paying dividends is for the company to pay a certain sum into the bank, and then to issue orders to the shareholders entitling them to receive certain amounts from the bank according to their respective shareholdings. It would be just as easy for the company to pay over to the Government a certain sum equivalent to the increased dividend, and for the company to issue to its shareholders orders on the Government for the money at some date, say, five to ten years in the future, such orders carrying interest at an appropriate rate meanwhile. In order to prevent present spending of money, the particular tranche of bonds which would be issued in respect of this money could be blocked for whatever period was thought necessary. The Government would then themselves have the power to put the money back into circulation when they wanted to. I make that suggestion solely in order to find some way of obtaining more elastic treatment of hard cases, without defeating the purposes of the Government. One ought, too, in connection with hard cases, to draw a distinction between the class of company which for a number of years has been earning 15 per cent. and paying 5 per cent., and is now getting to the point when it feels that it ought to pay its shareholders more, and the class of company which has been earning 11 per cent. for a number of years and has been paying 10 per cent. The first of those classes can be regarded as a hard case. The course I have suggested would enable the Chancellor to deal with those companies with a good deal of liberality. May I say that I gladly support the main purposes of the Bill, and what I have said has been designed to assist the Government to achieve their objects?

5.10 p.m.

Mr. Mander (Wolverhampton, East)

I agree with the remark made by an hon. Member just now that the importance of this Bill is considerably affected by the announcement that Excess Profits Tax will amount to 100 per cent., though I am not clear whether that applies to all companies. I understand that it does not. In that case, the Bill is more important perhaps than the hon. Member appreciated. I support this Measure, which seems to me thoroughly sound, and which will be welcomed all over the country, including financial and stock broking circles, so far as my information goes. No one would desire that at a time like this people should receive more in the way of income from dividends than they did before the war.

Reference has been made to the Keynes plan. Certainly this Bill is an acceptance of a part of the Keynes scheme. It is compulsory saving for the purpose of release at a later period. Whether when that later period comes the spending of the money will be in the hands of the individual shareholders of companies, or whether a considerable part will be taken over and spent by the State, is perhaps arguable. I should imagine that the State would come in a good deal—indeed, it has been made clear by the Government that their policy is that there shall be no increase of war wealth on the part of individuals, and there shall be after the war some form of levy on war wealth. That will have an effect on these companies and on the reserves that they are building up. One cannot, on an occa- sion like this, discuss the Keynes plan, but I would make this general remark. I have seen many arguments against it, based on prejudice, tradition and wishful thinking, but I have not seen any argument based on reason which has convinced me. I know of no alternative scheme at the present moment.

I should like to deal first with the question of private companies, with which my right hon. Friend dealt at some length. I quite see the difficulties that he pointed out. I fully appreciate the point that the Treasury have been using their influence with private companies to make them pay out their profits in dividends, so that Surtax may be obtained, but I think that one might properly assume that the Treasury, with their well-known efficiency have been exercising this influence in the desired degree and that the full correct dividends have been paid, and, if so, the objection to limiting them further does not seem to me to be so very serious. It will be said, no doubt, that one of the difficulties about bringing in private companies is that the directors of these companies can increase salaries; that they need not pay dividends, but can pay the money in salaries to themselves. It is true that at present, under the Excess Profits Tax, there is no machinery for prohibiting that. But there was such machinery in the last war, under the Excess Profits Duty, and I should think it extremely likely that in the near future some provision of that kind will have to be brought in, in which case that objection to bringing in private companies will go too.

It is wrong to assume that all private companies are family concerns that affect only a few individuals. Some of them are very large indeed; they are public companies in all but name. It is true, however, that there are some which are family concerns. I suggest that in this case, in spite of the difficulties, the fact that you had it on the Statute Book that there should be no increase in the dividends of private companies would be a very strong deterrent to any decent private company. They are nearly all of that type, I believe. It would be a very strong deterrent, and they would feel that they were not playing the game if they took advantage of the position to pay out to themselves in some form what the State obviously intended should not be paid.

In order to show the immense scope of these private companies, I will mention the names of one or two with their issued capital. There is Vickers-Armstrong, Limited, with a capital of over £17,000,000; the English Steel Corporation, Limited, over £3,000,000; Shell-Mex, with an issued capital of nearly £9,000,000; the Asiatic Petroleum Company, Limited, £31,000,000; the Anglo-Saxon Petroleum Company, £50,000,000; the I.C.I. (General Chemicals), Limited, with a capital of £5,000,000; Nobel's Explosives Limited, £4,000,000; and the British Dyestuffs Corporation, Limited, over £4,750,000.

Mr. Levy

On what authority is the hon. Gentleman quoting when he says that these huge concerns are private companies and not public companies?

Mr. Benson (Chesterfield)

The companies quoted by the hon. Gentleman the Member for East Wolverhampton (Mr. Mander) are private companies, but they are subsidiaries of some holding company, which is the company that pays the dividend.

Mr. Mander

I take it that these companies are private companies. I will mention one more—the well-known milling combine of Joseph Rank, Limited, with a capital of £7,500,000.

Sir R. Clarry

Does the hon. Member for East Wolverhampton (Mr. Mander) contend that these companies are outside the limitations of this Bill? Private companies are not included in the Bill, but do the companies that he has just quoted come outside the Bill?

Mr. Mander

I think that some of them will be outside and some will be inside. [An Hon. Member: "They will all be inside."] It depends how far they are controlled, but in view of the fact that hon. Gentlemen have challenged that particular list, I will give them some figures of private companies in the sense of which they are thinking, notably Barclays Bank, France, Thomas Cook and Son, Copleys Bank, and C. Hoare and Co.

Mr. Levy

They are all subsidiaries; they are not outside the Bill.

Mr. Mander

They are private companies, and it is not entirely clear to me that they are outside the scope of the Bill. In any case, I hope that the Chancellor of the Exchequer will be good enough to consider the question of private companies, because I think that for the reasons I have given there is a good deal to be said for the deterrent effect in certain cases that a provision of that kind would have.

I would like to say a word about the permitted rate. That comes in Clause 2, page 3, line 21. My right hon. Friend dealt with the difference between 4 per cent. on the established companies and 5 per cent. on the new companies, and it did not seem to me that he really made out a very strong case. I should have thought that it would be simpler, if any company felt that it had a case for the payment of a higher dividend than 4 per cent., for it to take advantage of the provisions of Clause 2, Sub-section (4) and make an application for permission to pay a higher dividend. I should have thought that that would be the way to deal with it, but at the same time I do not think it is a very important point.

I would next like to deal with the question of issuing shares which comes under Clause 2 (1, b). That provides that: If the paid up ordinary capital of the company at the end of the war dividend period is greater or less than it was at the end of any standard period, the amount so distributed in respect of that standard period shall be deemed to be increased or reduced proportionately. Apparently, therefore, where after the end of the standard period shares have been issued to shareholders for cash, perhaps at a price substantially below the market value, they will be entitled to the same rate of dividend as the old issue. Let me assume the case of a company with a capital in the standard period of £100,000 in ordinary shares and a distribution by way of dividend of £50,000. After the end of the standard period the capital is increased, say, by the issue of a further £100,000 at par. The ordinary share capital would therefore be £200,000, and apparently the company could distribute as dividend £100,000 per annum. It would seem that where you had the issue of bonus shares prohibited the dividend would be restricted, but when the shares are issued for cash at possibly a good deal below their real value, in this case the dividend would not be restricted. Attention ought to be given to that point to see whether there should not be some element of restriction brought in there too. Clause 2, Sub-section (3) provides machinery for dealing appropriately with free bonus shares, but apparently, as I have tried to indicate, where an issue is made on bonus terms, the new shares are entitled to receive a distribution up to the rate paid during the standard period on the old shares. That is a point to which I would like consideration to be given.

I will next deal with the effect of the participating preference shares on the ordinary shares, and that comes in Clause 3 (1, a). That provides that the total amount distributed by a company, except the dividend at or on account of the fixed rate or preference capital, shall be regarded as paid by way of ordinary dividend. Where a company has participating preference shares, the dividend on the preference shares, so far as in excess of the fixed rate, is regarded as part of the amount distributed as ordinary dividend. If, owing to very low distributions in the standard years, a company's distribution under Clause 2 (1, c) is limited to an amount equal to 4 per cent. per annum on the paid-up ordinary capital, then when there are participating preference shares the amount of such participation will come out of the 4 per cent. Therefore, the amount left to the ordinary shareholders will in fact be less than 4 per cent. This seems to me to be rather inequitable in the way that it works out. If the 4 per cent. is really a proper minimum standard to be fixed for ordinary shares, why should it be reduced because the participating preference shares are entitled to take a dip into the amount. That is another point I want to put to the right hon. and gallant Gentleman who is to reply.

The last technical point that I want to raise is on the definition Clause, which deals with preference capital. Preference capital means, according to this, any Share capital carrying the right to dividends at a fixed rate payable in priority to all the dividends on some other class of share capital, whether or not it also carries the right to some further participation in profits. There may be some curious results from this definition, and I will give this example. I will take the case of Harrods (Buenos Aires), Limited. They have the following capitals: preference shares, £2,937,500; ordinary shares, £2,409,151; and deferred shares, £12,000; a total capital of £5,358,651. After paying the fixed dividend on the preference shares, the profits are applicable to paying a dividend of 16⅔per cent. on the ordinary shares, any surplus being divided as to 20 per cent. to the ordinary and 80 per cent. to the deferred. Apparently under the definition in Clause 9 these ordinary shares will rank as preference capital. During the standard period their maximum dividend would be 1¼ per cent., but it seems to me that, if profits permitted, they could receive up to 16⅔ per cent. per annum. I ask my right hon. Friend to be good enough to consider these points which, I can assure him, are put forward under the very highest professional advice from people who are deeply concerned with these matters, and I am sure that they will receive the attention that they deserve.

Lastly, I would say that I think the policy is perfectly right. It is pursuing a cheap money policy, which the Government rightly desire to follow. This is really a mild Measure compared with what is coming to us in the future. But whatever the Chancellor of the Exchequer feels obliged to bring before us in order to help to win the war, I am certain that the people of this country of all ranks, whether they have money or not, will be only too delighted to bear the burden.

5.28 p.m.

Mr. Levy (Elland)

I do not propose in the few observations that I intend to make to object to the Second Reading of this Bill, but I feel that it bristles with anomalies, injustices and inequalities. I merely mention them now, but on the Committee stage I shall certainly put down Amendments in order to try to make the Bill more workable. May I claim the indulgence of the House for a moment or two while I quote a paragraph that appeared in the "Daily Telegraph," on 17th May, and which, I think, is true? It says: It is true that provision is made for companies to appeal for special treatment in hard cases, but that is evidence in itself of official recognition that the plan as it stands is bound to involve anomalies and injustices. This scheme, like the original N.D.C., shows more enthusiasm for achieving the purpose than knowledge of practical business. It should be drastically amended. I propose on the Committee stage to put down some Amendments with regard to it. One or two businesses have been mentioned, and one could mention businesses which have been in the habit of paying very large dividends, and go on distributing them in the same amount. My right hon. Friend referred to businesses which have been losing money or have made very little profit and were, therefore, unable to pay up to the allowed 4 per cent. I am sure he has not overlooked the fact that there are many firms which have been making respectable profits and using them for development and research. That may now have to come to an end, because you will say to them that, despite that, they must not distribute more than 4 per cent. I hope the Financial Secretary will give me answers to some of my questions. The Finance Act, 1922, which amended previous Acts, dealt with public companies in which all the ordinary shares were in the hands of five people or fewer and whose profits ranked for Super tax. Even though the profits were not distributed, they were said to have been distributed, and it was an offence if that was not so. Therefore, under that Act, as I understand it, you have to distribute profits or commit an offence, and under this Bill if you do distribute profits, you then commit an offence, and some explanation is needed in order to reconcile these two Measures, unless something is to be done to nullify the 1922 Act or bring it into line.

My right hon. Friend also referred to paid-up capital shares, and I would like him to give me a clear definition on the point. I would ask him to give his attention to Clause 2, Sub-section (3) of the Bill, which says: In computing for the purposes of this Section the amount of the paid-up ordinary capital of a company at the end of any war period, there shall be disregarded…. I want to emphasise the point about paid-up ordinary capital. What is paid-up ordinary capital? Imagine a 5s. share which is issued at 10s. The 10s. in the books will be the capital and the paid-up ordinary capital on that. If we turn to Clause 9 for a definition of the ordinary capital, we find that it says: ….in relation to a company means the whole of the company's issued share capital…. Therefore, the paid-up ordinary capital on 100 5s. shares issued at 10s. is at 10s., but here it conflicts because the Clause says that the ordinary capital shall be the issued capital. I would like the Financial Secretary, when he winds up the Debate, to give to the House and the country a clear and concise definition of what it really means.

I appreciate the object underlying this Bill. Obviously, it is to conserve the capital in the companies and make it available, probably for the Government, whereas if no limitation was put upon it, these profits, if distributed, would go to millions of shareholders and be spent. I appreciate that object. We all agree that various measures are essential in war-time which, ordinarily, would not be brought before the House, but whether we are passing legislation in war-time or otherwise, I think every Member would agree that it is up to us to see that it is just and equitable for the whole of the population and all the companies. It is not fair that some companies should benefit and that others should suffer disadvantage.

Take the cotton industry. Just before the war I had the honour to take some part in the Committee stage of the Cotton Bill for the purpose of endeavouring to put the industry on its feet. It had made no profits at all. When war came along that Bill was put into cold storage. It is now considered that owing to the orders that it is receiving the cotton industry is making large profits. Some firms in the industry have an exclusive trade and can continue, but other firms, which were in the dumps because of foreign competition, particularly Japanese, and were in the hands of the banks, and are now getting on their feet, are being told that they must not have any profit. You start off by taking 60 per cent. and charge 7s. 6d. in the £ on the 40 per cent. which is left, and you say to the shareholders, who have been nursing the baby for years and years without any profit, "You must not have more than 4 per cent." Personally, I do not think that that is quite equitable, although I appreciate that this Bill does not belong to my right hon. Friend. It is only a child which he has adopted, and he may be able to find some other home for it.

I agree with the hon. Member below the Gangway who said he could not see anything to benefit the war effort so far. If you want to take away profits and put them into War Loan stock, why not say so? Distribute them in the shape of War Loan if you like. I see no objection, if a company is in a position to pay 20 per cent., to allowing it to distribute 4 per cent. and the balance in the form of War Loan stock straight away. Perhaps my right hon. Friend will give consideration to this point. There may be a reason why it cannot be done. I thank the House for listening to me; I hope I have not been too long, but I must say to my right hon. Friend that we are proposing to put down some Amendments for consideration, and I feel confident that if they are an improvement, he will be one of the first, if I know him at all, to accept them, providing they do not injure the Bill.

5.40 p.m.

Mr. Benson (Chesterfield)

This is a very, very mild Bill, and I was much surprised by the amount of heat it engendered in the hon. Member who has just spoken. It is not a taxing Bill; it is merely a Bill which limits the amount of dividend payment to what has been a maximum payment in the last three years. I am quite prepared to admit that there may be anomalies, but I doubt very much whether the Treasury will discover very many really terrible hardships. The hon. Member mentioned the cotton trade. That industry will benefit by this Bill. It is true that a large number of firms have been in a very bad way for a number of years and that they are in a good deal better position now and might, in the enthusiasm of the moment, pay fairly high dividends. But one of the difficulties of the Lancashire cotton trade is that its reserves have been used up. The effect will be to prevent the cotton trade from distributing, in dividends, cash which might be far better used for building up badly depleted reserves. There is one point on which the hon. Member has misunderstood the law. There is no legislation which compels or urges a one-man company to pay any dividend—

Mr. Levy

I was not referring to a one-man company. You can have as many debenture and preference shares as you like, which can be distributed among shareholders. I was referring to the ordinary shares where they are in the hands of five people or fewer.

Mr. Benson

What is commonly known as a one-man company was frequently formed for the purpose of avoiding Surtax. There is no compulsion under the 1920 Act, the 1927 Act or any other of the Finance Acts to distribute any dividend. The law merely says that the earnings of such a company, whether distributed or not, shall, beyond a certain point, be regarded as having been distributed. These companies were formed as savings boxes for the purpose of dodging taxes. They can still be savings boxes. I think there is something in what the hon. Gentleman the Member for East Wolverhampton (Mr. Mander) said with regard to private companies. One does not, for administrative purposes, want to bring in a vast number of small companies, but it might well be worth while bringing in all private companies over a certain capital. There is a number of very big private companies which are not subsidiaries which, of course, must be excluded and the right hon. Gentleman might consider between now and the Committee stage whether other private companies with capital above a certain limit should be brought in.

The hon. Member for Hastings (Mr. Hely-Hutchinson) went to the heart of a good deal of this type of legislation. He pointed out that with the imposition of various taxes, and now the limitation of dividends, there would be a possible tendency to defeat the object of the Government. I think that is true. We know perfectly well that it was true to a disastrous extent with regard to E.P.D. in the last war, and I do not see how, under the present system of private ownership, you can avoid the danger of destroying incentive to economy. If there is any sign that economy is not being followed, I hope the Government will take advantage of the legislation and powers which we gave them yesterday and take over the control of industry. If the same thing happens now as happened in the last war, when inside industry there was general extravagance, it seems to me that there is no alternative but for the Government to step in and take control to a much larger extent than they anticipate under the powers we are giving them. I think it should be made clear to industry that unless industry is prepared to play the game—I know the majority are—and if there is extravagance, the power of control will be used most ruthlessly.

There is one technical point which I should like to put to the Financial Secretary with regard to the case of a company not being an existing company. It is in Clause 2, Sub-section (2). There the rate of dividend is limited to 5 per cent. on the ordinary capital. The difficulty I see there is the possibility that in a new company the ordinary capital may be inflated. Share capital can be issued for considerations other than cash, and you may find, unless care is taken, that if you limit the ordinary share dividend of a new company to 5 per cent. you will get new companies formed with larger capital than the actual assets really warrant. It seems to me that on this point some control may be necessary.

5.48 p.m.

Mr. Hammersley (Willesden, East)

There appear to be two principles underlying this Bill which have received the general support of the House. They are the principles outlined by the right hon. Gentleman when he referred to the necessity for restricting purchasing power, and the difficulties which would arise by increased money getting into the hands of the people, causing competition for the purchase of goods and resulting in higher prices and inflation. Every one is very anxious that steps should be taken to prevent that kind of procedure. But are we quite satisfied that in fact this Bill really carries out our desire? As far as I can understand the Bill, if you have a very profitable company, which over a series of years has been making money and has in fact been paying out large sums in dividends, and, moreover, paying to its shareholders bonus shares, there is nothing in the Bill which prevents such companies paying equally large sums and indeed increasingly large sums when the bonus share distribution is taken into consideration. My comment is that it would appear that in the Bill there is some inequality between the treatment of companies and industries which have been very successful in the past and the treatment of companies engaged in trades which have not been so successful.

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