Clause 38.—(Undertakings and authorities which must be given.) (Hansard, 28 November 1945)

§ Mr. Walter Fletcher
I beg to move, in Page 33, line 3, leave out "directly or indirectly."
I think we all realise that these Clauses, which relate to E.P.T. refunds, represent part of the Chancellor's great desire to help trade and industry in postwar reconstruction. I do not think anybody is quarrelling with that intention in any way at all. I believe, however, that in this Clause the words "directly or indirectly" 1450 may lead to the frustration of what the right hon. Gentleman is trying to do. These words have very often led to misunderstanding, litigation, and confusion in the past, and at this time, when we all want to devote ourselves to getting on with the job, those are very unprofitable forms of endeavour. So that we may understand these Clauses I will try to draw an analogy which will make them fairly clear. During the war, at the request of the previous Government, we were all asked to use only five inches of water in our baths. These proposals are as if the Government were to come along now and say "The water situation is a little better. You may have another three inches of water, but you must make sure you use it specifically for ablutionary purposes which will be laid down and which are in the public interest in every way; and you must see to it that the three inches of water in no circumstances mix with the other five inches"—that is the five inches to which we were limited by the previous Government which was not so keen on inspection as this one. I believe it would be just as difficult, and will prove just as difficult, to implement all the strings tied to this Clause as it would have been to see that the five inches and three inches of water never got mixed up.
On this particular Clause, I believe that the effect of using the words "directly or indirectly" can be this. Any firm or company which over a number of years has created a reserve fund, may in any year on receiving a refund of E.P.T., take money from that fund, or, if earned in the ordinary way, may wish to pay it out. The words "directly or indirectly" can be construed to prevent them from so doing. I do not believe that that is the Chancellor's intention in any way. His intention is clear. He wishes this fund, which is for the purpose of re-equiping industry, not to be used for any other purpose. If he puts in, as he does here the words "directly or indirectly" they extend ad infinitum the range of what he can forbid, and to some extent it makes the rest of this Clause nonsense, because once you have used the word ''indirectly" the question expands in such a way that nobody can see its end. I suggest, therefore, that unless he can reassure me and my hon. Friends who have put their names to this Amendment, he 1451 should take out those words ''directly or indirectly," because I believe they have exactly the opposite effect to that which he desires.

§ Mr. I. J. Pitman
I would like to raise a point that is covered by this question of "directly or indirectly," particularly in regard to capitalisation. I would like from the Chancellor some information on this question of capitalisation of bonus shares, because bonus shares are not necessarily a means of extracting money out of a company; in fact, there is a very good case for saying that money cannot be extracted in that situation. Let me say at once that I, personally, am in complete agreement with the intention behind these proposals. But if we do capitalise the refunds in this connection, then we have in perpetuity, sterilised them so that they cannot be paid out in cash to anybody, because we then have the whole of the auditing profession and the ordinary book keeping procedure automatically stopping that particular amount of money going out. I would like to know whether the Chancellor has considered this particular aspect. It seems a pity to throw away what is one of the most easy and most effective permanent ways of stopping that money going out, in the manner in which we do not desire it to go.

§ Colonel Oliver Stanley
I hope the Chancellor will be able to give us some explanation of this point. I confess that the Clause as it is worded seems difficult to understand. We know exactly what is the Chancellor's intention, and we all agree with it. This money is intended to be used for capital purposes, and not to be devoted to dividends, but it appears to me that on a strict reading the Clause, as now drafted, would mean that once a company received this repayment, even though it used the repayment for capital purposes, if at any time after that it ever distributed something by way of dividend, it might be said that, indirectly, that dividend had been due to this capital repayment, and that therefore an offence would have been committed. Suppose they receive £50,000 and the whole of that money is spent in buying new machinery. In the first place it might be said that if they had not received this £50,000 they would have had to take the money out of their profits for the year and therefore their dividend ought to be reduced to that 1452 extent. Secondly, if as a result of the installation of this new machinery there is an increase in their production, their profits the next year increase, and they distribute an increased dividend, it might be said that that is indirectly due to the machinery installed as a result of the money received from this source. If we really pursue the full range of definitions of the word "indirectly" it seems to me that we shall get into an accounting morass.

§ Mr. Dalton
The difficulty here, of course, is to find a simple form of words which will convey a meaning that can be made to suit a number of rather different cases. I think the practical clue is to be found in the advisory panel which we propose to set up, a panel of persons of good business experience, including accountants, and so on. I could not accept this Amendment, because to do so would open the door wide to abuse. I do not say that the hon. Gentleman who moved it favoured these abuses. The Amendment is a natural peg on which to hang a Debate and to seek for elucidation, but to accept the Amendment would open the door very wide to all sorts of abuses, which as the right hon. and gallant Member for West Bristol (Colonel Stanley) has said, we do not want. It would make it easy to do a switch between two funds, to use a fund which before this scheme came into operation was primarily destined for re-equipment for dividend distributions, which is not what any of us would agree should happen. If the word "indirectly" was out that, of course, would be legal. On the other hand, I agree that the Clause as it stands is wide —it was deliberately widely drawn —but I hope that in practice no unfairness or unreasonable interpretation will arise, because it is to deal with such cases that this advisory panel is being set up. The panel will no doubt begin by handling certain initial cases, and as a result of that certain rules and practice will be followed in the light of their expert consideration of the problems of re-conversion as they come along. I hope that will be a sufficient assurance at this stage —the whole thing can be kept under review as we move on —for the hon. Member to be content, having raised the matter, not to press his Amendment.
1453 The advisory panel will be instructed to take a broad view. I said at an earlier stage of these discussions that I did not want to interpret "re-equipment" with unreasonable strictness. It was the right hon. and gallant Member for Gainsborough (Capt. Crookshank) who raised the point and asked whether re-equipment would include re-establishment of working capital and so on, and I said, "Yes, certainly." The word "development" was queried, and I was asked whether we interpreted it narrowly or broadly. I said that we would interpret it reasonably broadly, subject to the advice and guidance of the advisory panel. The advisory panel is the administrative key to this difficulty, I think. It is really impossible to get words in a Clause of this sort which will give us an assurance against abuse on the one hand and, on the other hand, give a perfectly clear statement in advance of how things will operate.
The complexities, and the variations of conditions between the different firms are such that I think we must leave it to administrative common sense, exercised through the people whom we shall appoint with this special function to perform. I hope that the hon. Member will feel that my statement has been sufficiently reassuring against any possibility of harsh or unreasonable treatment and that he will now withdraw his Amendment.

§ Mr. W. Fletcher
Can we have the terms of reference of that panel?

§ Mr. Dalton
They are not drawn yet. There is no desire to conceal them.

§ Mr. Fletcher
In drawing them, will attention be drawn to cases such as I have pointed out?

§ Mr. Dalton
Yes.

§ Mr. Fletcher
I feel confident that the Minister's statement will be read by the people concerned. I therefore beg to ask leave to withdraw the Amendment.

§ Mr. Dalton
I have no desire to hold anything back about this. We will go into the matter in due time.

§ Sir Wavell Wakefield (St. Marylebone)
I-beg to move, in page 33, line 41, at the end, to add: 1454 and shall lapse at the end of such five-year period. Subsection (4), as drafted, makes a postwar refund binding on all persons who, at any time within five years after the surrender date of the undertaking, carry on a business. From that it would appear that if there is a change in personnel after the five-year period, the undertaking lapses, but if there is no such change and there is continuity, the Subsection may be read to mean that the undertaking would apply indefinitely to the person who gave the under taking. It is suggested that the addition of the proposed words at the end of the Subsection would clarify the point. I hope that the Chancellor of the Exchequer will see his way to agree to the addition of the words.

§ Mr. Dalton
The hon. Gentleman need not be apprehensive about this matter. We are dealing with a transitional state of affairs and with a change-over from war to peace. We all hope that all the arrangements we are discussing now will terminate within a reasonable time. On the other hand, I doubt whether it is really wise to implant into the Bill at this stage, the wording that the hon. Member proposes. I shall be quite prepared so long as I hold my present office to look reasonably at these matters, but it is difficult at this stage to say just how long it will be necessary to get the turnover. There is no intention to linger on indefinitely. If we desired to bring about the result which would follow from permanent limitation, this would not be the way to do it. The proper way would be by a permanent Clause of a rather different character in some future Finance Bill. I have taken note of the hon. Gentleman's apprehensions and we shall bear them very much in mind, but I should be sorry to introduce words into the Clause at this stage. I should rather hope that we could leave it at this and keep the matter under review as we go forward.

§ Sir W. Wakefield
Is there not an anomaly as it stands now? If, after five years, a business is sold, the undertaking lapses automatically, but if after five years you carry on the business, the undertaking remains, and that seems to be rather an anomalous position. Might I hope that it will be investigated?

§ Mr. Dalton
I will look at the matter. I would rather not take these words tonight.

§ Sir W. Wakefield
In view of what the Chancellor of the Exchequer has said I beg to ask leave to withdraw the Amendment.

§ Sir P. Bennett
I beg to move, in page 33, line 41, at end, add: (5) Any person who has given such undertaking may submit proof to the Commissioners of Inland Revenue that a sum not less that the net amount of the refund has been expended by him since the seventh day of April nineteen hundred and forty-one in the purchase of equipment or alteration or re-equipment of premises for the purpose of the trade, in the purchase of trading and non-trade stock, or in the discharge of liabilities previously incurred for such purposes or otherwise for the purposes of the business and on the acceptance of such proof by the Commissioners which must be given or refused within three months of the submission thereof the undertaking will be satisfied and no further claim can be made on that person with, regard to the net refund under the next two succeeding sections. Provided that any such person may from time to time submit proof that expenditure for the above mentioned objects or any of them has been incurred in respect of a sum less than the amount of the post-war refund and on acceptance of such proof by the Commissioners the undertaking will be satisfied in respect of this sum. This Amendment is an attempt to clarify the Clause as at present worded, particularly as the words "directly or indirectly" remain, and leave taxpayers in some uncertainty. Taxpayers may consider they have made an expenditure to which refund may properly apply, but there is always a doubt as to whether that attitude will be taken by the Treasury. We feel that they may be challenged at any time within the five-year period, and that, in effect, this may be held to constitute a contingent liability. The Amendment suggests simple machinery by which this can be avoided, and any doubts in the taxpayer's mind relieved. It does it, as you will see in two stages. First, the whole of the amount can be cleared up, and, secondly, it can be done in stages. The taxpayer can come along from time to time, and show part of the expenditure and get that cleared, and can complete the lot by stages. That is the general intention.
1456 The Amendment also deals with one or two particular points which I brought forward in the Debate on the Budget Resolutions when the Chancellor said he agreed that restocking would be one of the purposes for which the refund might be used. It will be remembered, perhaps, by the Treasury that when the right hon. Gentleman the Member for the Scottish Universities (Sir J. Anderson) was Chancellor of the Exchequer, I put forward a question, which concerned many firms who had already started on their reconstruction and were actually taking over plant in Government factories, which they were converting and refitting for civil purposes. We had a direct assurance from the late Chancellor that expenditure which was then being incurred —before any definite decision such as that given by the present Chancellor was made—would be allowed when the time came for these credits to be repaid. Those are the points we have introduced into this Amendment. We have put the date as 7th April, 1941, which was, of course, the date when the late Sir Kingsley Wood first mentioned the question of repayment at a later date. We appreciate and agree with the statement made by the la Chancellor, by Sir Kingsley Wood and by the present Chancellor that the object of all these precautions is to prevent credits being used or dissipated in the form of dividends. We entirely agree with what the Chancellor said and the method he has adopted, but we suggest that the Amendment provides a simple way whereby the industrialist who is carrying out work for which the credit was granted may be able to obtain a clear certificate and finish the job, and not have the feeling hanging over him for five years that a question may be raised by the Treasury as to whether he is dealing with it in exactly the way the Treasury intended.

§ Mr. Dalton
The Amendment moved by the hon. Member for Edgbaston (Sir P. Bennett) is reasonable in principle and intention. As I have already said, I confirm the pledge that was given by my predecessor on this subject. In referring to the question whether firms could go on developing with an assurance that the refunds would cover past expenditure within a reasonable period, my predecessor said: I can give an unqualified answer in the affirmative. If a firm draws on 'its reserves 1457 or gets an overdraft in order to carry out development for post-war purposes "— and that is important — the fact that the obligation in connection with the development may be incurred now, that is to say, before Parliament has decided on the, terms of this legislation, will not in any way prejudice the firm concerned. It is important that that assurance should be given, because it is in the general interest that development should be undertaken as soon as it is physically possible. I hope and believe that in the more enterprising concerns in this country, like the firm for which the hon. Member for Edgbaston is responsible, that has been going on, and we do not want to do anything that will slow up that development. Much less do I wish to go back on my predecessor's undertaking. The exact words of the Amendment will not quite do, for various reasons which I need not go into now, because I am prepared to undertake myself to put down on the Report Stage words which will, I think, carry out reasonably what the hon. Member has asked for.

§ Mr. Eccles
The Amendment which the right hon. Gentleman proposes to put down on the Report stage will carry out the undertaking given by the late Chancellor of the Exchequer, which referred to capital expenditure for post-war purposes. There is a class of capital expenditure which would be covered, I believe, by the words of the Amendment now before the Committee, and I want to ask the Chancellor a question on the subject. I will give two instances. In the Rhodesian copper industry, at the insistence of the Government, the copper mines carried out very extensive capital works during the war in order that every ton of copper might be produced. To. do that they spent money which they could not obtain from existing reserves. They had no profits out of which to pay dividends during the war because, in the national interest, they spent everything they made on capital works. Is it not fair that mines of this kind should be able to set off against expenditure which was made simply at the insistence of the Government the Excess Profits Tax refund which they might get?
There is another example of the same sort. The Chancellor will know that Excess Profits Tax has fallen very heavily on large progressive farmers. Some farmers have made a profit a very large 1458 part of which has gone in Excess Profits Tax, but notwithstanding the fact that the balance left to them has been very small, they have developed their land and carried out large capital works very often at the instigation of the county agricultural committees. I know where a man has spent £15,000 of capital expenditure more than the whole of the net profit he received during the war. Is it not fair that a farmer who has to do that in order to keep up full production, and who has been patriotic in that way, should be allowed, if he has an E.P.T. refund coming to him, to set it off against capital expenditure already incurred and approved by the county war agricultural committee?

§ Mr. Dalton
I will be very glad to have a look at this. I must ask for notice, but as regards the two particular cases mentioned, I will certainly have a look at them.

§ Mr. Nicholson
Is not the moral of the whole thing how the money is spent, rather than how it is not spent?

§ Mr. Dalton
I am not sure it is as easy as that, and if I were to lay it down in that way, I might be charged with being unduly restrictive. I will give it careful consideration, in view of what has been said by the Mover of the Amendment. It might be better to say that it should not be spent in a limited number of ways, than to say how it should be spent. I will go into the matter again and endeavour to find words that will meet with general agreement.

§ Sir W. Wakefield
I would like to ask the Chancellor a few questions, but I do not expect answers now. Can the principal company of a group of companies supply part of its own refund in developing the business of a subsidiary? Can it use the refund of one subsidiary, to develop the business of another subsidiary? Can it use the refund of a subsidiary to develop its own business? Those are the three main points which I should like to have looked into. One further question. Does development include financing of stock, debtors and initial losses in new trade and in export? Would development include the improvement of the liquid position of an otherwise insolvent company? I do not know whether these points are understood.

§ Mr. Dalton
They will be noted in the Official Report and I will have a look at them.

§ Sir P. Bennett
On behalf of my hon. Friends and myself I should like to thank the Chancellor for the way in which he has received the Amendment and for the promise he has given. I am quite sure he appreciates our point of view, and realises that anything that he can do to remove uncertainty and give a feeling of solidarity in helping to finish the job, will help industrialists and help the national interest. I beg to ask leave to withdraw the Amendment.

§ Sir H. Lucas-Tooth
There is a question that I think should be considered if the Chancellor is proposing to redraft this Clause, and that is the propriety of excluding from the new scheme the creation of bonus shares. It is difficult to deal with this subject in the abstract, and perhaps the best way is to take a concrete example. Let us take the case of a company with £100,000 fully paid capital. Suppose that company receives an E.P.T. payment of £20,000. I am assuming that the £100,000 capital is precisely balanced by £100,000 worth of assets, which is a very simple case though it is none the worse for that. After receiving this £20,000, that money will duly be spent on some proper purpose, such, for example, as the purchase of machinery, and on the company's balance-sheet you will then have assets to the value of £120,000. On the other side of the balance-sheet you will have only the capital, the £100,000.

Hon. Members
Order.

§ The Temporary Chairman (Mr. Douglas)
I think the hon. Member is now going far beyond the scope of the Clause.

§ Sir H. Lucas-Tooth
I think, if I may develop my argument, it will be clear—

§ The Temporary Chairman
I really do not think that this comes within the scope of this Clause.

§ Sir H. Lucas-Tooth
I am only going to suggest that the proper way of dealing with a case of this kind is to allow this sum of money to be dealt with by the creation of bonus shares—

§ The Temporary Chairman
The hon. Gentleman is not in Order. This has nothing to do with the purpose of this Clause.

§ Captain Crookshank
Surely my hon. Friend is not completely out of Order, in view of the words which appear in Subsection (1,b): shall not be directly or indirectly distributed by way of dividend or cash bonus or capitalised for the purpose of issuing bonus shares or debentures … He was only amplifying the meaning of those words.

§ The Temporary Chairman
As I understand it, the hon. Gentleman was making quite another point, that after the money has been expended on some specific assets, bonus shares may be created, and I thought that was going beyond the scope of the Clause.

§ Captain Crookshank
In view of the words "directly or indirectly" which stand in the Clause, are not the hon. Member's references in Order?

§ Sir W. Wakefield
Further to that point of Order, was not the hon. "Member making the point that by issuing these bonus shares the company would be completely complying with what the Chancellor of the Exchequer wanted, namely, fixing an asset there permanently?

§ Sir H. Lucas-Tooth
The hon. Member for St. Marylebone (Sir W. Wakefield) has anticipated one of my arguments. It is precisely to that effect. It is that in order to carry out the Chancellor's intention, it would be very much better if he permitted the issue of bonus shares which are expressly precluded now in paragraph (b), and I submit, in that respect, that on the question whether this Clause should stand part, and particularly in view of the fact that the Chancellor has said he will recast the Clause, it is in Order.
In the case of the company to which I was referring, we had got to the point where, on the right-hand side of the balance sheet are assets valued at £120,000, and we have to find entries for the left-hand side of the balance sheet to balance them. As far as I can see, there are only three ways in which that can be done. The first and obvious way as simply to show the figure of £20,000 as 1461 balance of profit and loss account. Of course, if that is done, it will be open to the company at any moment to apply the money standing to that account for the purpose of a dividend. The only thing that precludes them from doing so would he the existence of the undertaking given. As soon as that undertaking goes, then it will be open to the company to distribute this money by way of dividend, and that is the one thing which, on both sides of the Committee, we want to stop. The second way in which this sum can be balanced is by a figure for a reserve. Again it would be perfectly open to the company, apart from the undertaking, to transfer the amount from that reserve and Lo apply it for dividend. The third way of dealing with this —and I submit with great respect the proper way of dealing with this; sum of money —is to capitalise it, to apply it as capital of the company. Then, by the normal process of the law, that money cannot be distributed in cash, because under the Companies Act, the company cannot repay capital to its shareholders without the sanction of the court. So that if the Chancellor wants to carry out the purpose on which we are all agreed, then much the most effective way of doing it is not to preclude a company from capitalising this money, but indeed to see that it does capitalise it and that it does so as quickly as possible.
For this reason I submit it is wrong to preclude the capitalisation of these sums. On the contrary, companies should be encouraged to do so, and, if I may say so, to add a controversial note at the end, I am not at all sure that the prohibition against capitalising this money is not derived from the unfortunate expression, "bonus shares," which has frightened the right hon. Gentleman into thinking that a result of what he is trying to do, might not be agreeable to his own supporters. I do not know. I am only speculating, but I do ask him to reconsider this Clause and to ensure that the genuine purpose which we all desire to be carried out should be carried out in the most effective way possible.

§ Mr. Dalton
I think it would be convenient if I replied now. There are certain limits to what I am prepared to do. I am not prepared to stultify this Clause and this condition. What was it Sir 1462 Kingsley Wood said when he made provision to deal with this evasion? He said that we desired this refund to be for the development and re-equipment of industry and not to be distributed for the benefit of shareholders whether by the payment of dividends, by the issue of bonus shares or debentures, or by any other means whatsoever. I am not going back on that broad principle. I have given certain undertakings in respect of certain speeches from the other side, to look into various matters arising here. But the general structure of this Clause must stand, and the general prohibitions must stand. The undertaking that I gave had nothing to do with bonus shares. It has to do with development work undertaken by active enterprising firms in a period of doubt. We desire to remove that doubt, and the undertaking I gave has nothing to do with bonus shares. The hon. Gentleman is now asking for a little more than I am prepared to concede. We might have a long discussion about bonus shares, about when it was reasonable to issue them and when not, but, broadly speaking, this Clause means the prohibitive use of this refund for this purpose, and to that position I must adhere. I do not want any misunderstanding about that.

§ Mr. Pitman
May I raise some other points? I sympathise and agree entirely with the Chancellor of the Exchequer's objectives, but what I would like to know is whether we may see the draft of the prescribed undertaking which companies have got to give. Will the Chancellor bear in mind that there is a great deal in what has been said on this subject of bonus shares? I guarantee to give the Chancellor an example of a bonus share issue which he would regard as highly proper. I think we want to know whether any concern would be required to give an undertaking not to pay in such and such a quite proper way and then go to the panel to be allowed to break that undertaking. This is something which we should be quite clear about, because it is a little difficult.
The other point I want to be assured about is whether he cannot make some distinction between fixed assets and current assets and fixed liabilities and current liabilities. It also does seem to me that the words "used" and "dealt with" in (a) are in need of more inter- 1463 pretations. The question of a farm has been mentioned, and if the money is used in the purchase of a cow and the cow calves so advantageously that the money comes back has the refund been "dealt with"? I think that guidance in such cases is a point that wants to be borne in mind. Finally, what I would like to know is if the right hon. Gentleman has had any experience to show that this scheme is likely to work. He had an instance of the same sort of thing over the administration to see that money borrowed is not used for insurance premiums. I would like to ask him whether he has from that previous experience found it is practicable to put your finger on a particular sixpence of a number of other sixpences and say how the particular one has been spent.

§ Sir J. Stanley Holmes (Harwich)
The Clause says- that a person who has received an Excess Profits Tax refund must give an undertaking, first, that the net amount of the refund will be used in developing or re-equipping the trade or business, and until so used will be so dealt with as to remain available for use when required for developing or re-equipping the trade or business. I want to ask the Chancellor what is to happen in the case of a retail tradesman, say a butcher or a grocer, who has paid during the war, the suitable amounts of Excess Profits Tax. He has no opportunity of spending his money by way of mechanical equipment. He can possibly treat his shop in an extravagant way, but after that there is nothing more that he can do with the money, and he is called upon to hold it in his business. Similarly placed is a merchant in London or Liverpool, or any other city. He has an office, and buys from abroad and sells here, or buys here to sell abroad. He has no equipment and no capital expenditure. He has paid heavy Excess Profits Tax during the war, and there is nothing on which he can spend the money. What is to happen to it? Has he to hold that money and invest it in national funds? Or what is he to do with it?

§ Mr. Dalton
There is no desire to keep the refund for ever. That would be absurd. This is one of the cases where firms must make their own propositions, and the decisions rest with them. That is where the panels will, I hope, as I said 1464 earlier, lay down fairly general rules. We certainly would not freeze, or take any such action. I myself could look, with the advisory panel, into cases where there was doubt.