HC Deb 07 April 1941 vol 370 cc1315-20

I now come to the Excess Profits Tax. The general principle of the tax commends itself to all sections of opinion but there have been many representations regarding the ill-effects of the 100 per cent. rate. It has been represented with much force that the taking away of the whole of the excess profit endangers production and that a greater war effort would be ensured by a lower rate of charge, which left some of the excess profit as a reward for the extension of business activity and the risks necessarily involved. It has also been urged that the 100 per cent. does not allow a trading concern to make those reserves, out of current profits, which are essential to the efficient carrying-on of its business.

From the standpoint of the revenue which it yields me, I cannot afford now to make any considerable changes. The charging of the Excess Profits Tax at the rate of 100 per cent. is dictated, moreover, by wider issues of policy than purely fiscal considerations. It is directed primarily to taking the profit out of war and ensuring that in war-time, when the whole nation has to bear sacrifices, the increased production which the war requires will not become the means of enrichment that it did in the last war. Nevertheless, anomalies and hard cases which would have to be borne, with the tax at a lower level, often become inequitable at the 100 per cent. level. I have, therefore, given very careful examination to the question whether amendments are called for with the object of ensuring, with more accuracy than at present, that the profit we are taxing really is an excess profit. It is one thing to "take the profit out of war"; it is quite another to tax a business in such a way as to leave it worse off at the end of the war than it was at the beginning. It certainly seems that there are provisions in the tax which did rough justice when it was at the 60 per cent. level, but are not easily defensible at the 100 per cent. level.

Where increased profit arises from the extension and development of a business, involving the introduction of fresh capital, the existing allowance for new capital calls, I consider, for review. In the case of the ordinary trading company which employs increased capital of its own in developing and extending its business, an addition is made to the basic standard of 8 per cent. on the increase of the capital, but there is no analogous allowance in respect of borrowed capital. Interest on the borrowed capital is allowed as a deduction in computing the profits, but there is no allowance for the business risk involved in the extension or development.

I propose to meet this by providing that for the purposes of the tax, increases of capital and the capital of new businesses shall be computed by reference to the total capital employed, whether owned or borrowed. The interest paid on the borrowed capital will no longer be allowed as a deduction in computing the profits, so that the trading company which extends or develops by means of borrowed capital will gain to the extent that the rate allowed on increase of capital, which is 8 per cent., exceeds the rate of interest paid on the capital. A similar principle will be followed in computing the substituted standard.

These proposals regarding borrowed capital are directed to encouraging industry to undertake such development and extension as the war effort requires and I propose to confine them to the general field of industry. The same considerations do not apply to the case of financial concerns where borrowed money is in a very different position. I, accordingly, propose to exclude such financial concerns as banks, assurance businesses, investment businesses and building societies.

I have one further proposal to make which is directed to removing an inequity arising from the 100 per cent. rate. It relates to one special field of industry, namely, those concerns that are engaged in developing wasting assets. The concerns I particularly have in mind are those engaged in producing metals and oils urgently required for munitions of war. These concerns are called on to provide a much greater output than in peace-time and this increase in output represents an anticipation of the future output and profit of the industry. The copper, tin or oil that would normally be produced some years hence, and would then yield a profit that would not be subject to Excess Profits Tax, is being produced to-day solely in order to meet the war-time demand, with the result that the whole of the profit is taken away by the Excess Profits Tax, for the profits standard which determines liability to the tax is a profit corresponding to the prewar output. I propose to give an allowance by way of recompense for the loss of future profit entailed in the using up of the assets in the present national emergency. I will ask the Committee to await the introduction of the Finance Bill for the detailed scale of allowances, but I may say that it will be given only in the case of those industries which are engaged in producing metals and oils specially required for providing munitions of war. These proposals will operate as from the date on which the 100 per cent. rate was imposed, namely, 1st April, 1940. There are other matters in regard to which certain amendments of the Excess Profits Tax law will be proposed, all of which are covered by the general Resolution relating to Excess Profits Tax, but they are minor in character and their explanation and consideration can best be undertaken when the Finance Bill is available.

These two proposals, however, do no more than remedy the particular grievances that the 100 per cent. rate allows no margin of profit either on business extension carried out with borrowed capital, or on largely increased output of metals and oils required by the war effort. Industry, in general, will still be subject to the 100 per cent. rate of tax and the whole of the excess profit will continue to be paid over to the Exchequer. This means that industry will not be in a position to set aside any of the excess to provide for the post-war problem of adjustment to meet peacetime conditions.

This is perhaps the most serious effect of the 100 per cent. rate on the economic wellbeing of industry. I, therefore, propose to treat part of the produce of the 100 per cent. rate as a reserve to be made available to industry at the end of the war for the purposes of reconstruction. My proposal is that at the end of the war, subject to such conditions as Parliament may then determine, 20 per cent. of the net 100 per cent. tax paid should then be refunded. The conditions would be intended to assist industry to undertake the essential task of reconstruction and readjustment, and to reabsorb the mass of the nation as quickly as possible into profitable peace-time employment. The conditions I have in mind would be somewhat as follow: —The ban upon bonus shares would be continued, and any necessary steps would be taken to prevent the money from being dissipated in dividends, and generally it must be assumed that the money would require to be expended for suitable purposes, among which I may mention the replacement of obsolete or unsatisfactory machinery by up-to-date machinery; the scrapping or adaptation to new uses of redundant installations; the extension of the export market; and, in the case of farmers, the improvement of the fertility of the land; and the promotion of good business. The amount of the 20 per cent. Excess Profits Tax repaid will, of course, fall to be treated as a trading receipt and thus come under the charge to Income Tax, so that the fund actually available to industry on this concession will be the 20 per cent., less whatever Income Tax is due.

Under this proposal the 100 per cent. tax will continue to be paid in full in the ordinary course as and when it is due. Owing to the scheme of Excess Profits Tax under which repayment of tax paid for one accounting period is made, where there is a deficiency below the standard of profits in another accounting period, it will not be possible to determine the net amount payable under the 100 per cent. rate until after the war and the settlement of Excess Profits Tax liability. Therefore, the matter is essentially a postwar one, but I propose to include in the Finance Bill a provision requiring the Inland Revenue after the war to make the necessary calculations in order that the amount repayable in any case, provided that the necessary conditions are fulfilled, may be accurately computed and paid.

Sir William Davison (Kensington, South)

Is the Income Tax to be postponed?

Sir K. Wood

I am sure that the Committee will agree that the granting of this credit to Excess Profits Tax is in the national interest, for it will provide industry with a valuable reserve at the end of the war, forming a useful and an-important contribution towards meeting post-war problems and conditions.

THE "GAP" In 1941–42.

I must now return to the problems of the new financial year. I have already explained earlier in my speech that, in relation to our handling of the problem of inflation, we must concentrate upon what I have called domestic expenditure, and the estimate which I have given for that is a figure of about £3,700,000,000. Against this formidable total I expect that revenue, on the existing basis of taxation, will amount to £1,636,000,000. In addition, we have the receipts and savings which will accrue from the miscellaneous sources that I have previously described —extra-Budgetary funds, the investment of business depreciation, renewal and sinking funds, the other savings of companies and institutions, and the private savings of individuals. It is difficult enough in the strange times through which we are passing to estimate with confidence the total of domestic expenditure and total revenue for the whole period of the year. It is certainly not less difficult—it is indeed more difficult— to estimate with confidence the monetary resources which will come to the Exchequer from the various sources of savings and receipts which I have just named, but I have applied my judgment to that matter with all the care that I can command.

For the moment I assume, for the purpose of the calculation, that private savings will not exceed the rate at which they are now running, and upon that basis—which is a basis for calculation only—I think it would be unwise to assume that the Exchequer will receive from these sources as a whole more than £1,600,000,000, towards which private savings of individuals, if continued at their present rate, would contribute rather less than one-half. In any such calculation there is, and must be, a margin of error. Yet it is essential not only that we should act on sound principles, but also, for Budget purposes, that we should evaluate their results in terms of money to the best of our ability on the facts available at the time. Accordingly, I draw the general conclusion that the potentially dangerous gap, to the closing of which we must bend all our energies, is of the order of £500,000,000. I do not, of course, mean that a failure to cover the whole of that gap exactly would necessarily have serious consequences of an inflationary character, but, if Budgetary policy is to play its proper part in the closing of that gap and in the stemming of any torrent of inflation, we must deal promptly and adequately with the situation, not only in order to enable us to make our full war effort, but to ensure reasonable conditions and prospects after the war.