HC Deb 29 June 1943 vol 390 cc1563-92
Mr. Clement Davies

I beg to move, in page 13, line 17, to leave out from "arrangements" to the end of the paragraph, and to insert: In addition to the ordinary annual contribution or premium payable under those arrangements. I deeply regret the necessity of moving this Amendment again in exactly the same form as I moved it in Committee. The Chancellor then said that he would give the matter his full consideration, that he wanted to do what was fair, and that between then and the Report stage he would see what he could do. The next Amendment on the Paper in the name of the Chancellor of the Exchequer sets forth the extent to which he is prepared to go. Perhaps it would be convenient if we could discuss my Amendment and the suggested alteration of the Chancellor's together. They hang together, and the subsequent Amendments in my name are all consequential.

Sir K. Wood

And the Schedule.

Mr. Davies

And the Schedule.

Mr. Pethick-Lawrence

Can we get that point settled? I imagine that it will be for the convenience of the House to adopt the course suggested by the hon. and learned Member.

Mr. Speaker

It seems to be a convenient course. It is a matter for the House.

Hon. Members

Agreed.

Mr. Davies

I have heard some very harsh statements about the Chancellor of the Exchequer to-day—that he is hardhearted, that his arteries have hardened, that he is stiff-necked, that he sticks his toes in, that he is adamant. From a long knowledge of the Chancellor, I know that not one of those descriptions can apply to him. I know of no one more warmhearted or more fair; his attitude on all occasions is cherubic, and almost angelic. We all realise that the voice that we hear in this House refusing Amendments which we put forward is the voice of the Chancellor of the Exchequer but that the hand that has written the refusals is the hand of the Treasury and the Inland Revenue Board; and the phrases that are used here apply certainly to the hand that has written out those refusals. I only wish that the Chancellor could have used upon the Treasury those powers of persuasion which are so effective in this House, but apparently he has succeeded only to a very limited extent. For a long time there has been a tendency for firms and companies to establish superannuation funds for the benefit of their employees when they reach the age of retirement. That is a practice which has increased, rightly, in popularity. Unfortunately, over a considerable time many employers have not been in a position to establish funds which will survive the fluctuations of business. Very often an employer says to his employee, "When you come to retire I shall pay you so much during your retirement." He intends to carry that out, but before he can do so business has gone against him: perhaps he becomes bankrupt, or the business is wound up; and nothing can be done, therefore, for the employee.

In order to get over that, many firms and companies have done one of three things. If they are in a sufficiently strong position financially, they set aside a lump sum to which they add from time to time and earmark it for the purpose of providing for superannuation, and that fund cannot be touched by anyone except the beneficiaries intended to benefit. Another method is to enter into an agreement with an insurance company and pay them a premium year by year, and they in turn make themselves responsible for the payment of the superannuation of the employees. Another method is, if they are able as they progress, that they put aside a certain sum in the hands of trustees who have to carry out the trust, and the fund cannot be used for any other purpose except to provide the pension. That is the position.

Where that money has in the past been taken out of profits of the firm or company it has been allowed in favour of the taxpayer and has been deducted from the assessable profits for the purpose of Income Tax. When the war comes we say, "Now we must distinguish between prewar profits and war profits, and in order to do so a standard is established as to what was the pre-war profit, and that has to be regarded as the standard for assessing profits." The difference between these two is called excess profits, and upon that the Excess Profits Tax of 100 per cent. is paid. For some time after Excess Profits Tax had been chargeable firms and companies still went on making provision for their employees by setting aside sums out of their profits for the provision of superannuation funds. It was legitimate and was held to be right by the courts, and then the matter was raised here in this House by a Question to the Chancellor of the Exchequer, undoubtedly one of those inspired Questions. The Chancellor then says, "When the chance comes for me to deal with the matter in the Finance Bill I shall continue a practice which the Treasury and the Inland Revenue Board regard as right, and I shall introduce a Clause into the Finance Bill which will change the position as accepted by the court and by the ordinary individual." He puts in Clause 22 of the Bill. In that Clause the Chancellor takes up the position of saying, "I shall not allow you to take a sum out of your excess profits and put it on one side in order to provide for the superannuation fund. If you do, I shall do two things. I shall disallow it for the purposes of assessing your excess profits, and I shall treat that sum as being part of your profits which are assessable, and I shall take the lot—100 per cent. But, in addition to that, you will have taken that money out of your pockets and have established a fund which will provide for your employees in the future, and therefore you do not require a similar sum to remain in the business, and I shall regard you now as having taken out of the capital required for the working of the business that very sum which you are now taking out of profits and putting on one side to provide for it." He catches you both ways. He says, "Because profits are to be regarded as though they have been paid out, I shall in addition, regard you now as having lessened your capital to that amount, with the result that in future your standard profit will be Less and your amount of Income Tax will therefore be increased." We thought that this was distinctly unfair, and that was the case which I put before the Committee and which the Chancellor said he would consider between then and the Report stage.

I suggested at the time that where they had gone wrong was that all the time they regarded this as a payment for back service. I pointed out that it could not be payment for back service. I want to emphasise that again. The contract of service is the contract under which the employee carries out the duties he is engaged to carry out. We will assume for the moment that there is no question of his getting any payment after his retirement and that it is an agreement between the employer and the employee for a wage. The employee works on for I he employer for, say, 40 years at that wage. The employer then loses the services of the employee, who retires. The next stage after his retirement is that the employer then establishes a fund for superannuation for his employees, and under that fund he reveals, for the purpose of calculation, the back service of the employees then still in his employ. The employee who has retired cannot possibly claim under that. He has no rights whatever. His agreement was merely for his wage as long as he was in employment and no more, and he has no claim upon the new scheme. The right to claim superannuation must depend upon the agreement and will date as from the date of the agreement. The purpose of revealing back service in such superannuation agreement or trust deed is in order to make the calculations on which the employee should pay in order to adopt a fair contribution as between those who have been in the service a long time and those who have just come in. The Chancellor of the Exchequer has said, "If you established this fund before February last, or if you entered into a binding undertaking before February last, to establish such a fund, I will allow you to treat it in a certain way. I have told you up to this time that I would not allow you to deduct it at all and that I would take the lot, but now I will allow you to deduct a twentieth of it each year for a period of 20 years. I will spread it over, and you can do one of two things. You can either spread it forward over 20 years or spread it backwards." That, shortly, is the amount of concession which the Chancellor is prepared to make, but he still retains the unfairness with regard to the capital sum. He says, "No, I will allow that on the profit, but I shall still regard you as having reduced your capital in your business by the amount you have taken out in profit in this particular year, and, by reducing your standard profit and excess profits in future, you will be calculated on that." That is the injustice which will persist.

Excess profits are due to the war situation. We have said that they should belong to the State and that no person should benefit by the agony of the country. We have said that they should be handed over to the Treasury. f that had been done consistently, no one could have moved the Amendment I have moved. But that has not been clone. That would have been right if it had been coupled with complete rationing and the stabilisation of wages and prices. By adding these three, you could have said, "Any profit over and above the standard profit belongs to the community and must he handed to the Chancellor." What happens now? Let me give an instance by taking the good old names of Jones and Smith. Jones says, "I want to play fair by my workpeople. Unfortunately, in the past I have not been able to set aside a sufficient sum to protect them in the future. I want to do that, and now I can do it out of my excess profits. I will not increase their wages unduly for the time being or give them bonuses, but I will take the long view and set aside a sum to provide for their superannuation." If Jones does that, he is doing the best he can and he is not encouraging inflation. The Chancellor says, "No, under the original Clause I will riot let you do it." Then he says, "I will let you do it now and allow you to spread the sum, for purposes of my E.P.T., over a period of 20 years, but I will penalise you to this extent—the amount you have used to establish that fund will be regarded as having been taken out of your capital." Smith says, "I will not do that; I will see the Chancellor does not get his E.P.T. I will increase wages and bonuses at the present moment and pay the whole lot away."

Sir K. Wood

Wait until he does it.

Mr. Davies

That is what is happening; he is doing it now. The Chancellor allows it and cannot question it. The Chancellor says to Jones, "I will not help you; I will encourage the other man." I should have thought that the Chancellor would have encouraged the man who took the long view, thinking that it was his duty towards his employees and industry. I cannot put the matter any clearer, and I hope that even at the eleventh hour the Chancellor will reconsider the question.

Mr. Tinker (Leigh)

May I ask the hon. and learned Gentleman a question? In trying to put his case clearly before the House he mentioned that certain firms were making such excess profits that they were paying bonuses and increased wages. Is the Chancellor aware of that, because, if not, there ought to be an examination of these cases so that he knows what is going on. Will the hon. and learned Member give the names of such firms to the Chancellor?

Mr. Davies

Does not the hon. Member know that wages have gone up since the war and that these are actually deductable from the gross profits in arriving at the chargeable amount?

Mr. Tinker

That is evading the point. There have been legitimate advances of wages, but I am talking about bonus payments. If such things are being done, the Chancellor should know about them so that he can deal with such cases.

Mr. Graham White

I beg formally to second the Amendment.

Mr. Summers (Northampton)

I was one of those who put down a number of Amendments to Clause 22 on the Committee stage of the Bill, and I had the opportunity of speaking in support of an Amendment which the hon. and learned Member for Montgomery (Mr. C. Davies) has now put on the Order Paper again. Since that discussion the Chancellor has had an opportunity of taking into consideration the views that were then put forward. We have had to-day from the hon. and learned Member for Montgomery a lucid exposition of the situation with which we are now faced, but there is one aspect of the problem to which he did not refer and which strikes me as being relevant to a full consideration of the matter. The question as to how these lump sums should be dealt with was disputed between the firms concerned and the Inland Revenue. The Treasury regarded these sums as relating to the back service of the employees and consequently took the view that they should be spread backwards over a number of years, as indeed they have power so to spread them. The effect of that was to deduct profit in the standard year and the year under discussion by a like amount, with the result that no benefit accrued from so spreading them. The contrary view was held by the firms, who contended that the term "back service" was a misleading term to use in respect of those sums, which were really more properly described as "solvency payments." This was based on the view that the amount which the beneficiary and the firm would contribute would, in the time between now and the date of a man's retirement, be insufficient to pay a reasonable amount, and some additional sum was required to bring up the payment which could be made available to that which it was intended to pay. The view was taken by the firms that the forward spread should prevail, and the matter was taken to the appeal tribunal which held that the firms' view was right and that the Inland Revenue's view was untenable.

They recommended that forward spreading should take place. It is true they recommended that it should only be for so short a period as six years, following Income Tax practice, and one may say, as I said in Committee, that that was possibly unduly generous. But it would be less than generous not to recognise that, in dealing with that point whether backward or forward spreading should be applied, the Chancellor of the Exchequer has given reasonable consideration to the principle and has admitted the merits of the arguments in favour of forward spreading and has so worded his Amendment as to spread these payments over a period of 20 years.

I should regard that period as a reasonable one, but there is one very serious defect in the proposal that the Chancellor has put forward in the light of the arguments put to him, namely, that the only people who will benefit from this Clause are those who have brought forward, or have undertaken to bring forward, a scheme prior to February, 1943. It seems to me that there are two good reasons why the position taken up by the Chancellor is untenable. In the first place, if it is possible to accept the argument of the appeal tribunal that forward spreading is the right method, as opposed to back spreading, there is no legitimate reason why that should be confined to firms which have started a pension fund during the existence of E.P.T. No one can say for how long Excess Profits Tax will run, and, if the argument is valid in respect of those firms, it seems equally valid applied to a firm which may find it desirable, as we all hope many will, to introduce a pension scheme next year, the year after or the year after that. We are all agreed, I hope, that the development of these pension funds is something to be encouraged, and I see no reason why that encouragement—or absence of deterrent, for that would be more exact—should be limited in this way.

In addition to that, I suggest that in the original Clause the Treasury has thought fit to challenge the opinion come to by the appeal tribunal. In this Amendment it is true he has supported forward spreading, but he has gone back to the Inland Revenue point of view, namely, back spreading, for everything after 1943, so that we are back in the original position to which some of us took exception in the original Clause, namely, that the first opportunity that presents itself to the Chancellor to restore the opinion of the Inland Revenue, despite the findings of the appeal tribunal, is again taken in respect of any further schemes that may be put forward. I suggest on broad grounds alone, quite apart from the merits of the case, that it ought not to be the practice to make statutory a departmental opinion against the findings of an impartial tribunal set up for the purpose.

I should like to ask the Chancellor to give an explanation of the meaning to be attached to Clause 22 (4): where arrangements are modified by subsequent arrangements so as to provide for new or greater benefits, the original arrangements and the modifying arrangements shall be treated for the purposes of this section as separate arrangements. There are two interpretations that could be put on the words so as to provide for new or greater benefits. I have in mind the case of a firm which made provision a number of years ago to deal with its staff, when they came to retire. on the basis of certain expectations, but those expectations were not fulfilled, and the fund is insolvent. The Sub-section might mean new or greater benefits than were originally intended, or new and greater benefits than the fund is now capable of paying. Clearly, if additional benefits to those originally intended are required to be treated separately I should raise no objection, but if it is to restore the solvency of a fund as originally contemplated and to bring up the payment it is now capable of making to the original intention, it strikes me as unreasonable to treat that particular situation as something entirely new. I refer to it, because this is an opportunity for clarifying what might be a doubtful point.

Sir A. Maitland

I think that there will be general agreement throughout the House that superannuation schemes ought to be supported in every possible way, and we should expect the Chancellor of the Exchequer to give such encouragement as he can. There may be a tendency to think of the matter in terms of avoidance of taxation. May I put the point as it applies to local authorities? I have an Amendment on the Paper which I understand is not to be called, and therefore with permission I may use it as an illustration to strengthen the argument which applies to industrial concerns. Local authorities are not concerned in their superannuation funds by any sort of evasion of Excess Profits Tax. They are bound to make arrangements under a special Act of Parliament. The main purpose of Clause 22 seems to be that there should not be any charge in a year which cannot be said to be spent in that year. The money spent in a particular year is actual cash from the trading department to the superannuation fund. It is permitted by local authorities, and it should be allowed in the case of industrial concerns to be part and parcel of their expenditure before Excess Profits Tax is arrived at. In the case of industrial concerns paying into superannuation funds, it cannot be said that it is done for the purpose of avoiding Excess Profits Tax. The payments are made by what would be rightly called model employers who are anxious to provide funds so that their employees shall be provided for in their years of retire- ment. The Chancellor, in rightly trying to prevent an evasion of Excess Profits Tax, is doing so at the expense of good firms whose main purpose is to look after their employees.

Mr. Benson

We are indebted to the hon. and learned Gentleman the Member for Montgomery (Mr. C. Davies) for his speech. I do not think I have ever heard a speech which sounded so reasonable and persuasive and was so completely specious. It was a masterpiece, and I enjoyed every word of it. He started with something which I doubt whether anybody would be prepared to challenge. That is that this House has decided once and for all that war profits shall revert to the State. I do not think anybody is prepared to challenge that as a general principle, and I do not think the hon. and learned Gentleman is prepared to disagree with the decision of the Chancellor that all these payments shall be added back for revenue purposes. He has moved considerably since the Committee stage, when- he was not prepared to admit that they should be added back. Now he has got so far as to suggest that he is in agreement that they should be added back. The gravamen of his complaint now is that the Chancellor's Amendment, which I regard as a very handsome concession, does not deal with the fact that if a certain lump sum is paid out and thereby reduces the amount of capital in the business, the standard is reduced. We have decided that E.P.T. shall be assessed upon a certain given basis, and in that basis includes consideration of the capital used in the business. If a certain amount of capital is withdrawn to establish a superannuation fund, if we are prepared to look at the situation factually, we must admit that it is legitimate that the standard should be reduced. It is not a case of whom benefits or whether this is a worthy purpose or not.

We have decided that E.P.T. shall absorb the profits which arise from war; then because the superannuation fund has a worthy purpose, that does not override that fact. If logically and factually the standard is reduced by a lump-sum payment for this purpose, there is no reason why the taxpayer, that is, the concern involved, should not pay the penalty of its own generosity. It is not generosity if it can avoid that penalty and put it on to the Exchequer. As I said in the discussion on the Committee stage, if we wish to establish superannuation funds, let us do it with our eyes open and not subsidise them by a back way. Another argument of the hon. and learned Gentleman was that it would be legitimate to reduce the standard if the E.P.T. were an absolutely perfect tax. But because the general principle of the E.P.T. has not been applied with complete perfection, the Chancellor of the Exchequer should make further holes in it and still further reduce its perfection. Surely that argument is merely saying that because we are not perfect we do not require to set ourselves any standard.

Another extraordinary argument of the hon. and learned Gentleman was in the illustration of Mr. Jones and Mr. Smith. Mr. Jones was a good, virtuous employer who looked ahead and provided a superannuation fund. Mr. Smith, on the other hand, threw out money open-handedly in largesse to his employees and encouraged inflation. Is there any truth in this antithesis? Can it be shown that the good employers who look ahead have not raised their wages and the extravagant employers are the ones who have not established funds? It is a purely theoretical construction which has no bearing on the situation. The arguments of the hon. and learned Gentleman are absolutely and completely specious from end to end. They are very clever attempts to make the Chancellor bear the burden of somebody else's generosity.

Let me turn now to the hon. Member for Northampton (Mr. Summers). He put forward two extraordinary arguments. The first was that because the Chancellor has gone so far as to make a point in time before which he will make a concession and after which he will not make a concession he is guilty of gross unfairness. The Chancellor's concession is a pure concession, not based upon logic, not based upon equity but based upon the fact that, as my hon. and learned Friend has said, he has a kind heart and that firms before this date had entered into commitments. The Chancellor has met them because they have made commitments, but does that mean that because certain firms have done this we shall leave the door open for ever? Not a bit. We are entitled to say to firms who have entered into commitments that we shall not penalise them beyond a certain point but that no firms shall enter into new commitments after they have been warned.

Then the hon. Member said another very extraordinary thing, that he was astonished that the Chancellor should make statutory a Departmental opinion. Who does the hon. Member think drafts Finance Bills? Does he think that all the opinions contained in these complicated technical Clauses are the Chancellor's opinions? Of course they are not. They are the Department's opinions. Nobody but an expert has an opinion on these highly complicated matters.

The Attorney-General

That is quite wrong. I do not want to boast of my antiquity, but I have been concerned with many complex Clauses for many years, and it is untrue to say that the Chancellor takes no interest in them. It is easy to explain a point of principle. I can think of many cases in which a Clause as put forward by the Department has been modified in view of the opinion expressed by the Chancellor, let alone the Law Officers. It is wrong to suggest that these Clauses come to the House in the form in which they first emerge from the Department.

Mr. Benson

I suggest that in connection with every highly technical problem it is really the Department's opinion. The Attorney-General: Well, I do not agree.

Mr. Benson

But the right hon. and learned Gentleman himself is a technician. At any rate, there is no objection whatsoever to the Chancellor or to any other Minister producing a Departmental Amendment or Clause. On the question of whether an impartial tribunal has decided that this is right or wrong, the tribunal has decided that that was the law and we are altering the law of the land as we are entitled to do. If the law was badly drafted and enabled people to be generous at the expense of the Treasury, I think it is time that it was altered.

Sir George Schuster (Walsall)

My hon. Friend the Member for Chesterfield (Mr. Benson) seems to have enjoyed making his own speech almost more than he enjoyed listening to the hon. and learned Member for Montgomery (Mr. C. Davies). I do not propose to follow him, and I wish to say only a few words. I should like to say at the beginning something which has not yet been said and that is to express my appreciation to the Chancellor, to the Financial Secretary and to the Inland Revenue officials for the very great trouble they have taken over hearing our views on this matter. We must all say that a very honest hearing has been given to our point of view, and although it has not been in all respects accepted we do appreciate that method of dealing with the matter. I do not propose to repeat the arguments of my hon. and learned Friend the Member for Montgomery, but only to say at the outset that I have remained convinced that there is justice in his arguments and that his speech has not been fairly characterised by the hon. Member for Chesterfield. But now that the Chancellor has made a substantial concession, I feel that we have got to accept the position that the Treasury and the Inland Revenue authorities consider that there is great danger in leaving a loophole for these lump sum payments and that they have accordingly decided to go no further. I am prepared to accept that view for the moment anyhow.

But I want to put one or two other points, because I think my right hon. Friend may be able to clear up certain doubts which remain in my own mind, and I understand that his own interpretation may be that which I want to put to him. Apart from the question of simple lump sum payments the whole question of calculating what is to be regarded as back service is an extremely complicated one, and I confess that I do not myself yet entirely understand Section 22. When we were discussing the matter before, I raised the question of the element of back service which might be attributed to certain payments which are made annually but which are regarded as higher than they would have been if the payer had joined the fund at the beginning of his service, although they have been calculated on a proper actuarial basis to give him the pension to which he is entitled when his service comes to an end, I put the point that if the practice of such annual payments which is to be attributed to back service within the meaning of this section is to be the subject of a separate actuarial calculation in the case of each individual—and there must be hundreds of thousands of individuals who might be said to be making back-service contributions—it would really mean that the scheme was unworkable. But I understand from certain conversations that it is not the intention of the Inland Revenue authorities to make separate calculations in the case of each individual, and that when an arrangement is made for setting up a fund, with an insurance company or otherwise, there would be the broad calculation of what represents back service pay. That sounds satisfactory; but I should like to mention a particular incident to my right hon. Friend. I dare say he knows about it. This general intention which I have mentioned was, I understand, indicated to certain representatives of the chartered accountants; but then one of them, who happens to be a friend of mine, had put before him on the very next day a query from an Income Tax inspector to an important company—it was in fact a company with a capital of £3,000,000 and an Excess Profits Tax standard of something like £250,000—which raised a question as regards a sum of £39 15s. 4d. paid in respect of a single individual and asking what portion of that sum represented back service payment. That looks as though the danger of inquiry into a mass of individual cases is not entirely averted, and I hope that my right hon. Friend will say something about that.

Next, on a point raised by my hon. Friend the Member for Northampton (Mr. Summers), I would like to ask the Chancellor of the Exchequer a question regarding adjustments which may be made in order to make the fund actuarially solvent. There are various ways in which the necessity of doing that may arise. It may be because the average life of the pensioners proves to be longer than was calculated at the beginning; or it may be because one has to take account of the fact that, owing to the eminently successful efforts of my right hon. Friend in reducing the rate of interest to be earned on investments, one cannot earn the rate of interest on investments which was calculated at the beginning; or it may be because the average pension is calculated according to the salary which the pensioner is earning at the date of his retirement and that the average salary on retirement has increased. Those are three possible ways in which it may be found necessary to replenish the fund. I understand that it is not intended to regard payments which are made for reasons of that kind into well-established funds as containing any element of back service or as coming under the meaning of the subsection quoted by the hon. Member. I hope that my right hon. Friend can give us a clear assurance on that point.

Lastly, I want to come back to the point I myself made when we were discussing this matter before, that no company or individual should be worse off as regards tax liability merely because he has taken action to set up a fund of this kind. We are on very strong ground in this respect. My hon. and learned Friend pointed out what a grave inequity would be created if a sum paid over to trustees for a pension fund is to be treated as having been taken out of the capital of the business and thus as reducing the company's capital standard. I strongly support that view. I know that it is argued that if it is possible to make a transfer of a lump sum of that kind, that is evidence that the money is not wanted in the business, and that it is drawn out of the business. I want to argue very strongly that the capital of a pension fund represents a very definite asset in the business. It has not been taken out of the business. I believe that the Inland Revenue authorities take the view that because it has been handed over to trustees it therefore no longer belongs to the business. But it has been handed to trustees only for a specific purpose—to be held for the benefit of the employees of the firm. The existence of such a fund definitely increases the value and the earning power of the firm.

I understand that another argument has been that you ought not to have an allowance twice over for a sum of that kind. If it is to be treated as still remaining part of the capital of the business, you ought not to be allowed to write it off over the 20 years and have that allowed as a deduction. But if the view is accepted that it is part of the assets of the business, there is nothing inconsistent with ordinary tax law in treating it as a wasting asset which can be written off over a period of years. If I spend £50,000 putting in a new piece of machinery, I have taken that money out of the working capital of my business, but it is still treated as part of my capital and I am in addition allowed to write off that £50,000 year by year, according to the life of the piece of machinery. On every ground we are entitled to argue that money paid over in that way to a pension fund should be treated as part of the capital of the business.

Even if logical or theoretical arguments can be found against it, I would urge that when we get on to this ground of E.P.T. we find ourselves affected by many considerations which do not allow ordinary logical lines of thought to apply. In fact we ought—and this has been put to us by the Chancellor—mainly to be influenced by one consideration: Is the particular line of action likely to lead to abuse or evasion of proper tax liability? I put it most strongly to my right hon. Friend that he should treat the money paid over into a pension fund as still remaining part of the capital of the business, and that if wise to undertake that he is not going to make a man worse off as regards tax liability because he has entered into an arrangement of this kind, he will be taking a point of view which is certainly not going to lead to abuse. I hope therefore that my right hon. Friend will see reason in my argument.

The Attorney-General

It might be for the convenience of this House if I made some observations now on this point, which is one of some complexity and raises rather difficult problems. It is right to say that two questions of what I may call principle have emerged in the Amendment moved by my hon. and learned Friend, of course, taking account, as we are, of the subsequent Amendments in the name of the Chancellor of the Exchequer, and the first point is whether spreading forward should be introduced as an option for future cases. The second question is whether there should be an 8 per cent, allowance on sums so paid, on the basis that they are capital employed in the business. As was made clear on the Committee stage, my right hon. Friend takes the view on the first point that, in principle and in fairness, a lump-sum payment of the kind which we are speaking about—I will not use the term "back service," because some people do not like it—should either be disregarded or should be spread back. So far as disregarding is concerned, probably everybody would agree that that is quite a fair way of dealing with the matter as compared with spreading back, where the effect of spreading back is to put down the standard period by the same amount as you put down the chargeable period. It is simply taking off the same sum in each of the two years. You say that you will not take any regard of it.

Where your spreading back may affect the standard period, whereas spreading forward would not, the taxpayer prefers the spreading forward. It is not one of those cases in which anybody is entitled to say that no other view can possibly be held than the view which one holds himself, but the view taken by my right hon. Friend, and which we all take, is that where you get a sum paid, in order that the beneficiaries may get the same benefits as they would have got if payment had been made, say from the time when they first came into the business, the logical course is to spread that back. For Income Tax purposes it was agreed that it should be spread, but it did not matter for Income Tax purposes whether you spread it backwards or forwards, unless you have regard to possible variations of the rate. As Income Tax generally goes up, people preferred spreading it forward, but it did not very much matter, because here was a permanent tax, and spreading it forward obviously caused less trouble and led to less reopening of things than spreading it back. But where you are concerned with the Excess Profits Tax, and where you have, as you must have, machinery for spreading payments which, though they fall in one year, relate to many years, it is important and necessary to consider whether in fairness and logic you ought to spread it forwards or backwards.

You have to consider what is the fair method of dealing with this problem as between a company which set up its fund and made its lump-sum payment before its standard year and a company which did not set up its fund or did not make its lump-sum payment until after its standard year, and you want to see that you deal reasonably and fairly as between them. But, as I say, my right hon. Friend's view, for the reasons which I have tried shortly to give, is that spreading backwards is the logical thing to do. Therefore, it would seem to point to spreading backwards. That was the result which we thought would be arrived at by the application of Section 33 of the Finance Act, 194o, which deals with this problem of spreading payments for Excess Profits Tax. However, some people thought they could produce an argument that there should be a spreading forward. The case we of know of came before the Board of Referees. They ruled in that case, though they did not lay down a general principle, that they thought the case was justified. My right hon. Friend then thought, as he always thought, that spreading backwards is the right and the logical principle. Not having so provided by Statute, as it turned out in the general words in the Act of 1940, he thought it right, after the discussion in Committee, to provide that the people who had entered into commitments or paid these lump sums before he made his statement in February, the actual date on which his intention was announced, and who might have entered them on the basis that they could spread forward, should have the additional option of spreading forward. We do not believe it is logical in principle, but as it has been held in a particular case that that was a result of the existing Statute, it seemed reasonable they should be entitled to spread forward.

My hon. Friend the Member for Northampton (Mr. Summers), who has been, if he will allow me, extremely fair on this point, when dealing with this matter on the Committee stage, did suggest that six years was probably too short a time. I think it must be recognised by everybody that it would not be a right result to enable a payment of this kind to be financed in effect wholly by the general body of taxpayers and that it should come wholly out of money which would otherwise come out of Excess Profits Tax. The hon. Member for Northampton suggested a period of 20 years, I think, which is roughly half a man's normal working life. Therefore, in spite of the appeals which have been mentioned, my right hon. Friend thinks it right to restrict the spreading forward to past cases so as to meet the demand in cases in which the person concerned has thought or been advised that the law entitled him to spread forward, and for the future to lay down the principle, which many people thought did result from the original Act, that either it can be disregarded or you can have an option to spread backwards.

I would like to say a word or two on this question of whether there is unfairness in my right hon. Friend's attitude in resisting the suggestion that these sums should be regarded as capital employed in the business. It is perhaps worth pointing out that if they were, the company or firm would of course get an allowance of 8 per cent, in respect of their Excess Profits Tax liability, while at the same time the money would be earning 3 per cent., presumably, for the fund, so that if one regards the superannuation fund—wrongly, in my view—as something so connected with the business, that it must be regarded as money used in earning profits, it would in effect be an 11 per cent. allowance instead of 8 per cent.

Sir G. Schuster

Surely the Attorney-General is wrong in saying 8 per cent. Should it not be 6 per cent.?

The Attorney-General

I think that on the whole it would work out at 8 per cent. What is to be regarded as capital employed in the business is to be decided by considering what capital is employed in earning the profits. Anybody would agree that the idea in essence is a perfectly simple one. In Excess Profits Tax you are comparing the earnings of one year with the earnings of another year, and if the earnings of the standard year are exceeded by those of the chargeable year, my right hon. Friend takes the difference. If a business has been expanded—money may have been raised or sunk in plant or extra buildings or whatever it may be, in order to expand the business—it is right that regard should be had to that, and that in comparing the profits of the standard year with the profits of the chargeable year you should realise that the profits of the chargeable year have got to take care of, to use an expression not infrequently used, the extra capital which has been sunk in the business and caused its expansion. That is the broad principle. How is it applied in areas other than this area which we are immediately considering namely, superannuation funds? Invested reserves are not, in the case of ordinary trading companies, as the House knows, regarded as capital in the business, for obvious reasons. It surely would be a very curious result if, while maintaining that principle, you said that the capital endowment of the superannuation fund was to be treated as employed in the business. In many case, not necessarily in all, I agree, this process which we are considering of setting up or putting on a new and expanded basis the superannuation fund will be financed out of reserves, out of invested reserves very often, not always. This is the lump sum. The annual profit takes care of the annual sum. In the case of the lump sum it will very often be said, "We have the money invested; we will transfer it to the trustees." It would surely be a curious position that hile these sums were invested and were there as reserves wholly under the control of the company, they were not regarded as capital employed in the business, but were regarded as capital employed in the business when they were transferred to the trustees of a superannuation fund.

Mr. C. Davies

Perhaps I had better put my argument in the form of a case. Let us say that the Westminster Company has a capital of £250,000. That is its standard capital, which it chooses for its standard year. Now, in 1943, it makes a profit above its standard profit; we will say that it is £30,000. The right hon. and learned Gentleman says that that £30,000 shall be deducted in future from the £250,000, and that the future capital shall be regarded as £220,000, although the capital is exactly the same as in 1937 for the purpose of the business and for earning the profits. At present, under the Clause, they are going to reduce that capital for taxation purposes to £220,000.

The Attorney-General

It is very difficult to follow these cases. If the one picture is that the £30,000 remains as capital employed in the business——

Mr. Davies

I have put it aside for superannuation.

The Attorney-General

If you did not put it aside for superannuation, would it remain as capital employed in the business? Would it be invested? If invested it would not be treated as capital employed in the business. [Interruption.] We do not need to say that people who hold the opposite view should be treated as mental. There is a prima facie case indeed that funds which are set aside in the hands of trustees for superannuation purposes are not capital employed in the business. I thought that that was a fairly plain and simple proposition. I was going to give a further reason why I thought that was the right view, by pointing out that Excess Profits Tax, as at present administered, does not treat invested reserves-£—which should have thought much more dubious —as capital employed in the business.

Mr. Davies

In the one case I put aside the £30,000 for a superannuation fund, in the hands of trustees; so I establish my superannuation fund. As the law stands, under this Clause, you will then say, not only is that capital not employed in the business, but I have reduced my capital that much in future. If I had put it in some other industry, my capital would have remained the same.

The Attorney-General

It is very difficult to deal with concrete cases at short notice, but, as I understand the position, if that £30,000 were invested as a reserve to the business, it would not be so treated, and then the same result would follow as happens here.

Mr. Woods

The right hon. and learned Gentleman refers frequently to these lump sums, declining to describe them as back payments. He leaves us in considerable uncertainty as to what he means by these lump sums.

The Attorney-General

I thought the discussion had been going on so long that everybody was familiar with what I meant. That was my mistake. The type of payment which may be made as a lump sum or as a series of payments, is this. A company desire to set up a superannuation fund. A number of their employees will be due to retire next year or the year after, or, anyhow, within 20 years, and have served the company for a considerable time. They desire that the fund should be such that they will be able to get exactly the same benefit as would be provided for by the annual contributions for people who have served the full time. They therefore make a payment, which was referred to for convenience as a lump-sum payment, into the fund in order that the man who retires next year who will have made a very small contribution to the fund—and the employers will have paid in a very small amount in respect of him —should have the same rate of superannuation as is paid under the scheme.

Mr. Douglas (Battersea, North)

There is nothing in the Clause about a lump sum.

The Attorney-General

This, I said, if the hon. Member would listen, is a sum which can be paid as a lump sum or paid in a series of payments. It is rather cumbrous to repeat every time "in a lump sum or series of payments," and it has been convenient in the discussion as a whole to refer to it as a lump sum. The hon. Member is right. Back service payments can be made by a lump sum—the Clause provides for it—or a man can make arrangements for payment in five, 10 or 15 years as the case might be. My hon. Friend the Member for Walsall (Sir G. Schuster) referred to the argument that it is unusual to treat as a capital sum a sum which you are entitled to deduct for the purpose either of Income Tax or Excess Profits Tax. He tried to assimilate the case of a sum like this to the allowances which are made to say, wasting assets such as machinery, but that is rather a long shot. It would be contrary to ordinary principles, first of all, to allow the annual deduction whether straight, backwards or forwards, and also to treat the asset as a capital asset. There are arguments on both sides, but on the whole we think that in allowing this, as we do, as a deductible expense, if the man wants it, it would be somewhat illogical to treat it as capital.

I want to say a word on the question on which many Members are interested as to whether you could describe this Clause as a deterrent to the setting up of these funds. Everybody agrees that you must not allow this fund or payments to be financed solely out of excess profits. On the other hand, you certainly do not want to deter the setting up of these funds in war time. It is true to say that, with the Clause as it stands, there is a financial advantage to people in setting up these funds now as compared with the position if they were set up before the standard period. Take the man who set up a fund of this kind in 1932—and we are not now dealing with lump sum payments but current payments—and a current payment of some £2,000 a year comes off his standard year and his chargeable year. Suppose he starts the same sort of scheme now, the £2,000 will be taken into account in his chargeable year and he will be able to compare the chargeable year with the standard year in which no payment is deducted.

Mr. C. Davies

You pay five and withdraw eight.

The Attorney-General

It is true to say that the man who sets up a fund now will in future get the current annual payment deducted and will not have his standard year weighted with a payment of this kind.

Sir G. Schuster

Will my right hon. and learned Friend please elucidate that, because I find it difficult to follow? If a fund was set up after 2nd February, 1943, payments will be adjusted backwards——

The Attorney-General

No, they can be disregarded altogether.

Sir G. Schuster

Payments will be adjusted backwards.

The Attorney-General

No, the only payment which can be adjusted backwards is the payment in respect of back services. I am now talking about current payment. In all these cases, in addition to what we call back-service payment, which is to get the fund started on a proper actuarial basis, there is an annual payment which takes care of the liabilities arising and accruing year after year. I am not talking about a lump-sum payment. I am talking about, say, £2,000 a year which a company pays in all future years in addition to, say, a lump sum of £50,000. It is quite simple. A company starts a fund in 1932 or 1933 and to get it started makes a lump-sum payment of £50,000, which we disregard, and then it keeps the fund solvent by a payment of £2,000 a year.

Mr. Woods

Will that be treated as a special sum?

The Attorney-General

I am assuming that the fund is set up. The proportion as between employer and workmen's contribution is quite irrelevant. The employer pays £50,000 down in order to look after back service, and in addition to that, in order to keep the fund going, he makes a contribution of £2,000 a year. That is in respect of current services of the men, and that £50,000 plus the £2,000 a year will, so far as calculations go, enable the benefits to be paid as the men come to their retiring age. If the fund was set up before the standard period, the £2,000, the current liability of the employer, is deducted in the standard period and is also deducted in the chargeable period. On the other hand, if a company decided to set up a fund of a similar kind and on a similar financial basis, subsequent to its standard period, the £2,000 a year, the current obligation of the employer to the fund, would, of course, fall to be deducted in the chargeable periods, but the profits of these chargeable periods would fall to be compared with the standard period in which there was no such deduction, because the fund had not been then set up. This matter has been considered with some care, and I hope and believe that the Excess Profits Tax structure with this Clause cannot in any way said to be deterrent to- the setting up of such a fund as this. It will give some, not great, slight advantage to firms which set up these funds in the year subsequent to the standard period as compared with firms which set them up before.

Sir G. Schuster

Take my right hon. and learned Friend's example of a fund set up before the chargeable period with a lump-sum payment of £50,000 down and £2,000 a year. I want to compare that with the position of a man to-day who is considering whether to set up a pension fund. If he says to himself, "I will pay £2,000 a year," that is all right, but we are concerned with the motive which will influence him in setting aside the lump sum of £50,000. It seems to me, if I have understood it, that, if he puts aside the lump sum, not only will he have that reckoned backwards, so that £2,000 a year is taken off his standard profits, but he will also have £50,000 deducted from his capital, which will reduce his E.P.T. standard. That is how it appears to me.

The Attorney-General

I was dealing with payments other than the lump-sum payment. The lump sum payment, of course, can be disregarded altogether, or it can be spread back.

Sir G. Schuster

It can be disregarded for one purpose, but it cannot be disregarded from the point of view that it is going to be taken off the firm's capital.

The Attorney-General

My hon. Friend is always assuming that it is taken out of the capital employed in the business. That does not in the least follow. The normal thing would be take it out of invested reserves. It is a very special and unlikely case that a lump sum would be taken out of the capital employed in the business. To summarise what I have said on the point which I think my hon. Friend has in mind, in the normal case, as we see it, this would be met out of invested reserves, which are not treated as capital employed in the business under the existing structure, and in any event we do not think it would be possible to regard a fund of this kind, the money in which is earning its own interest, as capital employed in the business for the purposes of Excess Profits Tax.

One of my hon. Friends asked whether I could state how we propose to regard certain cases that may arise. My hon. Friend the Member for Northampton referred to what I believe in this area are called deficiency or solvency payments, that is, payments made into a fund in addition to those originally contemplated, either because of the fall of interest rates or for one or other of the three reasons that he gave. We should not regard either lump sums or a series of sums paid into a fund to cover these contingencies as within the Clause. I was also asked by my hon. Friend about the possibility of a very elaborate analysis, possibly of a series of payments, in order to see whether the payment made in respect of some particular individual might have some back-service element in it. It is not my right hon. Friend's intention to indulge in such a detailed and meticulous analysis, and I am sure that he would be glad to have particulars of the case which my hon. Friend referred to. We do not intend that the annual contributions should be subject to analysis to see whether there is some possibly small back service element in them. The only cases with which we are concerned are those in which it is quite certain that the annual payment has, as it very often quite properly has, a substantial back-service element contained in it.

I am conscious that I have not satisfied all my hon. Friends. I am also conscious that I have been trying to deal with a very complicated matter and that I may sometimes have used the shorthand which is used by those who are particularly familiar with this type of subject, which has made my argument at times a little difficult to follow. If that is so I hope the House will be indulgent with me. To sum it up, we feel that we have made a reasonable concession and we are not prepared to go further on the lines indicated by hon. Members.

Mr. Rhys Davies (Westhoughton)

I said a few words on this Clause when the Bill was in Committee and I am hoping, conceitedly, that what I said may have induced the Chancellor to make a little concession. I see the right hon. Gentleman nodding his head, from which I take it that I succeeded.

Sir K. Wood

My hon. Friend always succeeds.

Mr. Davies

It seems to me, however, that the Chancellor has been using a steam-hammer to crack a nut. I would like to know how much taxation is involved here. Judging from what the right hon. and learned Gentleman has been telling the House, I should imagine that the administrative cost of implementing what we are discussing will be more than the total sum involved. One would imagine from the speeches delivered from the Front Bench that every employer is anxious, so charitably disposed is he, to give money away to superannuation funds in order to avoid taxation. I can assure the House that nothing of the kind is happening. I have been agitating for years to get pensions and superannuation funds started and I have never yet met an employer who was anxious to ladle his money into a pension fund in order to avoid paying taxation.

Mr. Benson

We have never had a 100 per cent. tax before.

Mr. Davies

The hon. Gentleman must remember that practically all who benefit from these funds are members of the working class. I do not like anybody taking the side of the Chancellor, the powerful instrument of the State, against the thousands of poor people who will benefit at 65.

Mr. Benson

Is the hon. Gentleman suggesting that any proposal which may benefit the working class shall be accepted in this House whether it is sound or not? Are we here simply for the purpose of ladling out money? Have we no responsibilities?

Mr. Davies

The State has accepted financial responsibility for tens of millions of money irrespective of principle. The State pays £7,000,000 a year as a subsidy to National Health Insurance and more millions still to Old Age Pensions. Members of all parties have been proud to have taken a hand in giving State subsidies to keep our poor old people in decent conditions. I do not understand the hon. and learned Gentleman the Member for Montgomery (Mr. C. Davies) when he speaks about investing those funds and regarding them as capital in the business. I always understood that once the contribution of the employer, whether by a lump sum, or an annual sum plus contribution, was made, it was handed over to trustees and then invested in Government or municipal corporation stock. The money is then clean out of the business and has nothing to do with it at all. That is the cleanest way to do it. I remember the Chancellor when he was a much younger man and I recall how he championed the National Health Insurance scheme. Perhaps he had better be reminded that he wrote some books about it and that they had a wonderful sale. It may interest the hon. Member for Chesterfield (Mr. Benson) to know that the right hon. Gentleman actually advocated subsidising from the Treasury pensions 'and benefits for millions of people, and I am not sure that it is not the case that he is there because he did that.

Finally, I hope sincerely the House of Commons will, irrespective of party, take the line of encouraging employers and employed to build up these funds to assist people who have worked all their lives to retire at 65 years of age and live in decent circumstances. Bank clerks, insurance clerks, co-operative employees —we are proud of the co-operative movement for what it has done in that connection—have these superannuations funds, but I want to see dockers, miners, engineers, all the manual workers in this country, enjoying exactly what bank clerks and insurance clerks are enjoying. Therefore, instead of the House trying to prevent employers putting down £50,000 or £100,000 to establish funds of this kind the State ought to encourage them in every possible way and remove taxation from any such funds. Before this war that is what the Chancellor of the Exchequer would have said if he had been sitting on this side of the House. That is what he used to say in days gone by, and I cannot understand him taking up his present attitude —only now, of course, he is at the Treasury and that makes a difference. I remember him longer on these benches, and I am hoping to live long enough to see him back here where he used to be. But if that should happen his superannuation is safe, anyhow. I am very glad that the Treasury have given way a little, and I am hoping that we shall live long enough to see these superannuation funds covering all working people.

Mr. Woods

I think the House and those in the country who are interested in superannuation will have to study very carefully the speech made by the learned Attorney-General to discover exactly what is indicated in the Amendments and concessions made by the Government. I hope that we shall have some statement which will put it in more simple language, so that the average person who is affected will be able to understand what is taking place. I can assure the Chancellor that there is a good deal of uncertainty arid misgiving concerning this present Finance Bill and the way it will affect superannuation funds. With the younger men being called up, the weight of industry—and especially is this true of the distributive industry—is falling on the older men who are fast approaching the retirement age. They have a feeling that something is being done which is definitely endangering these funds.

The Chancellor can easily dismiss it and say that where regular payments are made, and where there are quinquennial valuations and the fund is made solvent under the supervision of the actuaries, that may be taken as the contribution arid not a special sum. That would be a relief at any rate, but many of these funds are very old fashioned. They were started with a good deal of misgiving and timidity and if they are to be really effective there must be substantial improvement. They were made when the purchasing value of money was extensive compared with what it is to-day. There are many responsible employers and employees who feel that while half-a-loaf is better than no bread, if they are to have a superannuation fund so that the aged can retire, that retirement should be in comfort and not in want and anxiety. A good many concerns have no desire to exploit superannuation funds in order to "diddle" the Treasury and are acting in a perfectly legitimate manner. I am convinced that they feel that, as a result of these modifications, it will be increasingly difficult for them to make their schemes satisfactory to themselves and to their staffs, who have a right to demand peaceful retire-men after giving their lives to industry.

The Chancellor has made some concessions, but if he is not prepared to make any further concessions, perhaps he would give the House a pledge to watch this matter very carefully during the coming year. I do not want to get involved in the question of capital assessments but that matter will have to be watched. The House and the country would be behind the Chancellor in taking action against those who tried to evade Excess Profits Tax, but they would be equally unanimous in the desire to extend satisfactory superannuation schemes.

Reference has been made to municipal employees. I remember what concern there was some years ago when the Poor Law administration was taken over, and when it was found that municipal employees were covered only by voluntary schemes. Pressure was then applied, with the result that municipal staffs, including those administering the old Poor Law, were covered in a scheme. Many industries have demonstrated that responsible employers can carry on their business, pay trade union rates of wages and give decent conditions, and at the same time make provision for superannuation funds. The demand is now being made that if one group of employers can do this kind of thing, it should be done generally. I hope that the Chancellor will see that, whatever else happens as a result of the modifications in the Finance Bill, if there is any prejudice against further extensions of superannuation schemes, he will come forward with the necessary modifications in the next Finance Bill.

Mr. Douglas

I should like to be clear about one point. Is it correct that the arrangements under this Clause will not apply to local authority superannuation funds in respect of payments made into them to maintain their solvency as a result of the investigations made by the actuaries on the quinquennial valuation? That, I understood, was covered, though it was not expressly mentioned in what the Attorney-General said, where he instanced a cause of revaluation instituted by a fall of interest rates. I want to point out that the deficiency may be due to other causes. It may be due to an increase in the number of staff employed, so that the initial payment which was made when the fund was started is not sufficient to meet the demand which will ultimately be made, because of the growth of staff. The new staff which is taken on will be entitled ultimately to benefit in respect of what is called back service under this Clause. It seems to me that as it is drawn it is wide enough to cover a case of that kind and prevent payment on a revaluation from being charged as an expense in connection with tax.

The Attorney-General

As regards the position with regard to local authorities, it only applies if a local authority is paying Excess Profits Tax. If it is paying E.P.T., it is right that it should be treated in the same way as any other body. There is an Amendment later on the Paper to make it quite clear that a payment by a local authority under an enactment is on the same basis as payment made, say, by an employer under a trust deed or under a contract. I do not think I can give a specific answer as to how it will 'work out in some specific case. The assurance I have given about what are called deficiency payments on the three points raised by the hon. Member for Walsall will apply to local authorities if they are that sort of people.

Amendment negatived.

Sir K. Wood

I beg to move, in page 13, line 31, at the end, to insert: and (ii) if the person carrying on the trade or business so elects and the payment was made before the second day of February, nineteen hundred and forty-three, or was made in pursuance of an undertaking to make it given before that date, the provisions of the Schedule to this Act (Provisions as to back-service payments made before, or in pursuance of undertakings given before, the second day of February, nineteen hundred and forty-three) shall have effect in relation to the payment, and, where the payment is one of a series of payments, also in relation to the other payments.

Sir P. Bennett

I beg to move, as an Amendment to the proposed Amendment, in line 4, after "given," to insert "or of an enactment passed."

I move this Amendment in the absence of the hon. Member for Faversham (Sir A Maitland).

It is to put in order the point which the Attorney-General just mentioned, that whereas a firm gives its pension fund, a local authority is bound by Act of Parliament to do so. The Chancellor quite understands.

Sir K. Wood

I am prepared to accept it.

Amendment to the proposed Amendment agreed to.

Amendment, 'as amended, agreed to.