HC Deb 01 July 1941 vol 372 cc1260-72
Major Maxwell Fyfe (Liverpool, West Derby)

I beg to move, in page 22, line 25, at the end, to insert: (a) shall not apply in the case of any trade or business if the person carrying on the same so elects and notifies to the Commissioners of Inland Revenue such election in writing on or before the thirtieth day of September, nineteen hundred and forty-one The effect of this Amendment is to give a right of election in the case of the present proposals, by which all borrowed money would be treated as capital—that is, to give the option to firms and companies not to treat all borrowed money as capital, but to allow the present position to obtain. The difference which is made by this Clause is that, whereas heretofore the borrowed money has been limited to certain defined items, coming down in the scale to the position where the securities are deposited for the purpose of securing a loan, where actually defined securities exist and are used for that purpose, under the present proposals there would be included advances in respect of stocks which are pledged to the bank under the ordinary method which exists in many businesses. It is true that in certain cases the effect is beneficial. That is so where the amount of the loan has been reduced between the relevant pre-war period and the present day, because there the business gets the advantage of allowances and certain statutory rates, which probably exceed the rates at which they are borrowed. They also get the pre-war ceiling increased by the amount of the additional borrowed money. But a very different position obtains where the amount of borrowed money is decreased. Then, the business loses the difference between the rate at which it has been able to borrow in the pre-war period and the statutory rate of 6 per cent.

To take one very simple example, stripped of all the usual attendant difficulties, there is the case of a business whose pre-war capital was £50,000, exclusive of advances of £100,000 which the business used for the purpose of carrying stocks or of assisting customers, and whose pre-war profits were £5,000, again excluding the interest of £2,000 which they would normally pay on the £100,000 advances. That business in 1941–42 has capital still of £50,000, but it no longer has any of these advances, and its profits are still £5,000. Under the present system the standard for such a business would be computed at £5,000, and the figure for the chargeable period would also be £5,000. That business would have no excess which would attract the tax. Under the proposals of this Clause the standard profits of such a business would be the £5,000, with the addition of £2,000 for interest, making £7,000. But there would have to be deducted from that figure £6,000 because of the decrease in capital owing to the disappearance of the advances, which would give an adjusted standard of £1,000. Against this one has to put the profits which, I postulated, have remained at £5,000, and in each case the business would be a sum of £4,000 which would attract the Excess Profits Tax. That is merely a matter of reducing the proposals to arithmetic. There cannot be any dispute on that; that is the way it operates in the case of a business which is decreasing its borrowing, and a business upon which I am laying special stress Which is decreasing its advances. The answer to that, as I understand it, is that a very small number of businesses are in that position, and it is really on this point that I would ask for the serious and sympathetic consideration of my right hon. and gallant Friend.

If he considers the case a priori, he has to face this position: There is a large number of businesses which cannot make advances for their stock because they had to carry large stocks in the pre-war period, or else they had to give facilities to their customers which brought them into the same position. To-day these businesses cannot get the stocks, even if they wanted to carry them, and owing to many circumstances, upon which I need not dilate, they have no longer the customers who are desiring the credit facilities which necessitated business borrowing. That is the class of business which is certainly to be found, to my own knowledge in Liverpool, in Bradford and district to a very considerable extent, and also in Leicester and that part of the country. I give these three parts where I speak from my own knowledge and from full inquiries which I have made with regard to the matter. I do not know, and perhaps my right hon. and gallant Friend will tell the House, whether he has had an opportunity of considering the various concrete examples which have been placed before him, but I suggest, whether you consider it as a matter of principle but bearing in mind the position which I have endeavoured to place before the House, or whether you examine the position in the industries in different parts of the country, you will find a large number of businesses which are in the position that their borrowings have decreased, and are therefore, about to suffer in the way that I have put forward in my example. The remedy that we suggest is that an election should be placed at the disposal of such businesses. I am sure that my right hon. and gallant Friend and the Chancellor of the Exchequer are desirous of assisting these firms and companies which were increasing their borrowings and assisting in the war effort with their expanding businesses. I am sure it is not the desire to penalise those who are placed in that converse and unfortunate position, and I ask, as I have said, for the sympathetic consideration of the Amendment which I have moved.

Sir Edmund Brocklebank (Liverpool, Fairfield)

I beg to second the Amendment.

The Liverpool Chamber of Commerce, which is a very active body, has been in communication with Members not only in Liverpool, but also with friends in London, and it has asked that we should support the Amendment. 1 beg leave, therefore, to support my hon. and gallant Friend in the Amendment which he has proposed to this Clause.

Mr. Hammersley

The Mover and Seconder of the Amendment have supported it on grounds which are relevant to businesses which for one circumstance or another have been forced to reduce the amount of borrowed money which they employ in their businesses. I would like to support it on slightly different grounds and to make the contention that the Bill without the Amendment might very well have the effect of working out most disadvantageously to those companies that, had endeavoured to deal with excessive capitalisation and had followed the advice of Lord Baldwin, who came down to Lancashire and advised them in most energetic terms to "cut out the dead wood" In order to bring the position of affairs to the attention of the House and to my right hon. and gallant Friend, I would like to give the position of two companies in identical circumstances. Company "A" and company "B" both engage £500,000 in their respective businesses, consisting of £250,000 in share capital and £250,000 of borrowed money. These companies are engaged in the same trade, and in the standard year their maximum trading profits are the same, namely, £24,000. But company "A" in its endeavour to deal with its financial position has entered into a moratorium scheme with its creditors, the persons from whom they borrowed the money, and as a result of a scheme of arrangement they do not pay any interest on the borrowed money. Company "B," of course, has to pay its interest—which, for the sake of the argument, is 4 per cent. — so that the trading profit, which is £24,000, for Income Tax purposes is reduced to £4,000. Company "A," therefore, is in the position of having to consider that it would be on a profits standard of E.P.T., whereas company "B," which is identical in every respect except in its financial operations, will probably elect to be on a capital standard. Subsequent to the standard years company "A" proceeds further with its desire to cut out the dead wood, and it puts to its shareholders and those who have lent money a proposal to convert loan-holders to shareholders in the company on the basis that the existing share capital is written down by four-fifths. This company "A" reduces its capital to £50,000 corresponding with the old shareholding of £250,000, and an additional £250,000 which corresponded with the old borrowed money, so that the company now has a share capital of £300,000. During this time company "B" makes no proposals to deal with its financial position, which remains exactly as before.

What is the position of these two companies, "A" and "B," prior to the passing of this Bill, in respect of excess profits? The Excess Profits Tax for company "A" would be the excess on the profit of £24,000 which it obtained in the standard year, plus an addition of 8 per cent, on the new capital which is employed in the business. That is £250,000 which has been converted from loan into capital. Thus there is an addition of £20,000 to its profit standard and Company "A" gets a profit standard of £44,000. The E.P.T. standard for company "B" is 6 per cent, on the share capital, which, on the £250,000 capital, is £15,000.

What happens if this Bill becomes an Act? Company "A," with the 8 per cent. allowance for new money which has been added to its profit standard, has this amount taken away. Its E.P.T. standard will be reduced from £44,000 to £24,000. Company "B" on the other hand, will have an increase of capital standard from £15,000 to £30,000. As a result of these proposals a company which has cut out the dead wood will lose £24,000 and a company which has stabilised its capital will have added to it £15,000 as their respective standard for excess profits. I do not think anybody in the House would really care to defend a proposal the effect of which was to penalise companies which have made great sacrifices in order to get on a low capital basis, compared with their competitors in the same trade who have stabilised and formalised their capita] structure perhaps by turning borrowed money into mortgaged debentures or things of that kind. I have sent my right hon. Friend specific example about specific companies, and I can assure him that this position will apply largely to the peculiar system of finance in the Lancashire cotton trade. I ask him to bear this argument in mind with a view to some ameliorating action.

Major Vyvyan Adams (Leeds, West)

Like my hon. Friend the Member for the Fairfield Division of Liverpool (Sir E. Brocklebank), I have received representations about this Clause, but unlike him they naturally come from Leeds and not from Liverpool. I cannot usefully add anything to the cogent arguments which have been advanced by the hon. Members who have just spoken, but this is a matter of great urgency. I have had examples given to me showing that firms will be seriously damnified in a way they do not understand unless this Amendment is accepted. I ask the Chancellor to give it sympathetic and practical consideration.

Captain Crookshank

The Clause itself is, of course, in the Bill, and the proposal with regard to borrowed money has been accepted by this House in Committee. What we are concerned about with regard to this Amendment is whether or not certain people should be able, within a certain time limit, to make an election that: they should not come under the Clause. It would be most unsound to invite the House to accept an amendment of that kind. If the principle of not dealing with borrowed money in the way in which it is dealt with in the Clause is wrong, then it would be wrong to have an election of time limit. Therefore, it is also unnecessary to have this proposal. The Clause in the Bill is either right or wrong, and no amount of electing to get within it or without it would be justified.

Hon. Members who have spoken have resurrected the whole original issue as to what should be the position of borrowed capital. With all respect, I am not sure whether the House will at this stage tolerate going over all the arguments once more, but if I may put it shortly, the view of my right hon. Friend is this: He has considered all the points which were raised in the Debate and the various representations which have been made together with the letter which has been sent to hon. Members. I have one myself. It is a letter which appeared in the "Times" on 16th June on this subject, and in addition Members have received a whole heap of literature. Despite it all my right hon. Friend feels that, generally speaking, the proposals which were contained in the Bill as passed through Committee were right. He feels that in these matters you have to look, so far as adjustment of percentage rates is concerned, at the profit earned as well as the interest which is paid. I know it is a little difficult and that it would be better if only we could have a blackboard set up, so that one could see the intricacies of the points put before the Committee. By and large, it does seem that if you are to raise the issue of the Clause at all—which I think is doubtful at this stage—there is. in effect only an artificial difference from the point of view of the purpose we have in mind as to whether the share capital or borrowed capital is employed in the business. That is the overriding consideration.

If it is said that the whole of that should be taken into account, there may be cases where it may not act advantageously to a particular concern as the alternative method which has existed up to now. There may be cases where the present arrangements are better than the proposed alteration, but even it that is so the fact still remains that un amended proposals which are in the law are unsound in principle by seeking to differentiate between two different types of capital. So far as the Amendment itself is concerned, my right hon. Friend does not feel that any such election as is proposed is in any way right or suitable to be inserted in the legislation, and for that reason I hope the Committee will not accept the proposal.

Mr. Benson

I am pleased that the Chancellor has refused to accept this Amendment. It is quite possible that in this Clause or any other Clause in the Bill there are anomalies and difficulties which could be put right if election were allowed, but I think it would be fundamentally unsound to allow the taxpayer any form of election of the basis of assessment. If two or more methods of assessment were open to the taxpayer, obviously those taxpayers having an opportunity to make an election would invariably choose the lesser burden, and the result would be that not only would the Chancellor lose money, but the minority of taxpayers to whom an election was open would gain at the expense of the other taxpayers. I maintain that election of the basis of assessment would be essentially unsound.

Sir H. Williams

In spite of the speech of the hon. Member for Chesterfield (Mr. Benson), and in spite of what was said by my right hon. and gallant Friend the Financial Secretary, the last word of wisdom has not been said on this matter. What is the problem? When taxation is so high, people will ultimately get to the stage where they think they are entitled to cheat the State if the State is behaving like Robin Hood. Ultimately, that stage will be reached. When an injustice is imposed upon people and when something is introduced to remedy the injustice and at the same time creates a new one, it is no good saying that the Clause is intended to remedy an injustice. Why should there not be an election of the basis of assessment? Many firms have been concentrated. The Prime Minister has recently concentrated the author of concentration; I am referring to the President of the Board of Trade, who has been bumped off the Front Bench. He was the author of the policy which has given rise to this Amendment. I think it is a very good thing he has left the Board of Trade. That is the first sign of improvement. It is no good the Chancellor looking horrified because I say things about Ministers who have not been successful. This Amendment arises out of the policy of concentration. As a result of this Clause, many people whose businesses have been prejudiced because of that policy will be made worse off. My right hon. and gallant Friend the Financial Secretary thinks he has solved the problem when he says, "Oh, well, this is this and that is that" That is not good enough. People are being subjected to grave injustices by the policy of concentration and the policy of restriction of sales—which may be necessary. Those policies produce these results, but Ministers do not like criticism. It is good for them to be criticised, because they are not doing too well in their jobs. It is these policies of restriction which produced the necessity for the Amendment which was so ably moved by my hon. and learned Friend. Ministers must not think that simply because they say certain things from the Front Bench, we shall be satisfied. Some of us are becoming a little impatient of a Government that is too complacent. I ask Ministers to pay a little more attention to the arguments that are presented to them from time to time.

Sir Granville Gibson (Pudsey and Otley)

I must confess that I am a little anxious concerning the point raised by my hon. Friend the Member for South Croydon (Sir H. Williams) —that is to say, the question of the firms which have been drawn into the nucleus firms in connection with the concentration of industry. No doubt in years gone by many of these firms have been carrying on their business with perhaps a limited capital, and have been borrowing smaller or larger amounts of money. Having been absorbed into the nucleus undertakings, there is in most cases no further necessity for the use of borrowed capital. I can quite understand that under this Clause there will be a definite advantage to those firms which are still borrowing money in connection with their business or are increasing the amounts, but those firms whose borrowings are reduced will suffer. It is the firms which are reducing their borrowings that will in most cases be worst hit, as will be the case with those firms which have been absorbed into the nucleus firms in the concentration of industry. What will happen to them? Through no fault of their own, their profits standard will be automatically lowered. I think this will be very unfair on them, and I hope my right hon. Friend the Chancellor of the Exchequer will give further consideration to this aspect of the matter. There are also other cases. I have in mind a firm that was working on quite a large amount of borrowed money, which borrowed money was regarded as capital under the standard. Owing to the fact that the firm is now working on a commission basis under the Government in connection with the administration of foodstuffs, there is no necessity for borrowed money, and the firm's standard is automatically lowered. I maintain that this is not fair. It is still doing the same bulk of business as previously, but its standard is lowered by £15,000 a year. I hope my right hon. Friend will give further consideration to the two matters I have raised.

Mr. Denman (Leeds, Central)

Will my hon. Friend tell me whether it will be a common occurrence that concentrated firms will be liable to the Excess Profits Tax?

Sir G. Gibson

It may not happen to any material extent in commerce generally, but in the boot and shoe industry the nucleus firms will be the large firms, and consequently, the firms absorbed by the nucleus firms will be small firms whose profits in the past have not been very large on the whole, although they were large to the firms individually. I want simply to make a plea for more fair and reasonable treatment for the small firms which have been absorbed and which now find, through no fault of their own, that their standard profits are automatically reduced as a result of the operation of this Clause, which has a result which I am sure the Chancellor never envisaged.

Mr. Hammersley

I should be obliged if my right hon. Friend the Chancellor would say a few more words on this matter. I appreciate that it is impossible to accept the Amendment as it stands, but I have sent to my right hon. Friend a series of cases which he was good enough to look into and which definitely show that the companies which, in the process of endeavouring to reduce their capital charges, have put themselves, by reason of the legislation—

Mr. Deputy-Speaker

The hon. Member must not make another speech. I allowed him to address an appeal to the Chancellor to make a special reply.

Mr. Hammersley

Am I not entitled to make another speech by leave of the House?

Mr. Benson

Did the hon. Member ask the leave of the House?

Mr. Deputy-Speaker

It is quite contrary to the general practice on the Report stage.

Sir K. Wood

I am glad to say a few words on this matter, because I realise that some of my hon. Friends are concerned about the operation of the Clause. Although I do not admit that in the main their apprehensions are justified, I will, of course, examine what has been said in the Debate and any cases that have been sent to me. I will not mention the names of the firms, but my hon. Friend the Member for East Willesden (Mr. Hammersley) has sent me one or two cases which have been examined. I will take one case in order to show that some of the misapprehensions are unjustified. The hon. Member sent me details of a particular company which, in 1936, made a scheme of arrangement of debts for £382,000. In May of the next year these debts were disposed of as follows: £28,000 paid in cash, £213,000 cancelled, and £141,000 allotted shares—giving a total of £382,000. Thus £354,000 of debts, on which no interest had been paid, ceased to be deductible as debts and capital for E.P.T. increased as the result of a purely paper transaction. Without a penny of fresh capital the company secured an increase of standard by £28,320.

I will examine any other cases which may be sent to me, but I should like to make two points before we finish with this particular Amendment. I think hon. Members will agree in the first place, as regards the Amendment which has been put down for the purpose of a discussion, that it would be impossible for me to allow the taxpayers to have an option. I do not think anyone would seriously press for that. Secondly, I believe it is also realised—I have heard nothing further about the Clause itself except commendation—that it was a wise thing to include borrowed money in the way that I have in the Bill. It is undoubtedly going to bring a considerable benefit to a large number of companies. Therefore I do not think that anyone would desire for a moment to see the Clause withdrawn from the Bill. The criticism as I see it, speaking in broad terms, because it is dangerous and unwise to deal with any particular instances given on the Floor of the House without being able to examine them carefully, is that the operations of the Clause will bear hardly upon certain companies— particularly the case where a company had a large amount of borrowed money in the pre-war standard period, which has either been reduced or abolished to-day. So far as I can follow my hon. Friend in the particular case he has given, there were some adjustments of that kind. I will give an example which does not deal with any particular case. A company might have had borrowed money of £100,000 in the standard period and have reduced that borrowed money to £50,000 to-day. Under the existing law this reduction in borrowed money would have made no difference to the assessment of capital employed in the business; but it is perfectly true that under the new proposals, and leaving on one side the saving in interest, the capital for Excess Profits Tax purposes would fall to be reduced by 6 per cent. —the rate generally applicable to reductions of capital.

That is an example, which has been given of the unfairness of this Clause. But is that the case? Is not the answer to the criticism that the new principle which we are adopting in this Clause is the right one, and that, in fact, there is no case for maintaining what was the previous illogical position, simply because in a number of cases the old position was more favourable than would be the case under the new proposals? In the ordinary type of case where it is urged that the new proposal would be harder, in point of fact what matters is that the amount of capital at stake in the business has been reduced. It is therefore only right if that is the case, as I think it will be found on a careful examination of all the details, that there should be some reduction in the standard for Excess Profits Tax purposes.

It is also well to remember one particular anomaly which can arise under the existing law. For example, if in the standard period a company has ordinary share capital of £100,000 and borrowed capital of £50,000 then, if the borrowed capital is changed into share capital, the law regards that as an increase of £50,000 in the capital employed in the business and grants an allowance of 8 per cent. on that increase, although, in fact, the total amount of money at stake has remained throughout at £150,000. The amount employed in the business is exactly the same, but owing to the operations of the old law there has been that allowance for increase. There has been some evidence that this change-over of borrowed capital to share capital has been used to reduce liability to Excess Profits Tax, but under the new proposals that will not be possible. In the example I have given to the Committee the capital would remain at £150,000 throughout, which is a true reflection of the real financial position. I gave that case to illustrate what this Clause means in general terms. I will examine with care and attention any cases which may be sent to me, but I submit that when you look at the matter on broad principles, apart from individual instances given to-day, not only is there a great benefit to trade and industry in the Clause we are now placing on the Statute Book, but the changes in the law, which may be otherwise affected by the proposals of the Bill, are on sound lines.

Amendment negatived.