HC Deb 23 October 1945 vol 414 cc1897-9
Mr. Dalton

Yes, if the hon. Gentleman will allow me, that was my next topic. This tax, E.P.T., at the rate of 100 per cent., is the perfect tax for a short war, but as the war period lengthens, and still more as we enter upon the post-war period, it becomes less and less satisfactory in its general character and incidence. They rate of standard profit in relation to which the excess for taxation purposes is calculated is based on a certain year, and as the date of that standard profit recedes, the tax becomes less and less equitable as between different businesses, and in particular, falls with increasing and unjust severity, as the years go by, upon businesses with a low standard. Moreover, once the standard profit has been earned, this tax encourages extravagant and wasteful outlay, and even downright dishonesty, since if this expenditure were not incurred it would be the Treasury and not the owners of the business who would take the money. Under those conditions this tax works against incentive and against efficiency.

These considerations apply particularly to E.P.T. at 100 per cent., but they apply in some marked degree to this type of tax even at lower rates; and I have carefully considered whether I could not now repeal the E.P.T. altogether and substitute for it a new tax on profits which would bring in substantially, it not precisely, equal revenue. I have considered in particular whether it would not be better to substitute for E.P.T. a flat-rate tax on all profits, irrespective of whether or not they were in excess of the profits of some standard year. Such a tax has considerable attractions at first sight, but is open to objections—some of them serious—one of which is that if such a tax were levied at a rate high enough to bring in nearly as much revenue as the E.P.T. for which it would be substituted, it would fall very heavily on businesses which are not now subject to E.P.T. at all but could not for that reason be exempted from the new substitute tax. I have therefore decided to retain E.P.T. for the present, but to reduce the rate as from the 1st January next to 60 per cent. The present rate is nominally 100 per cent., but is in reality 80 per cent., since a refund of 20 per cent. of all the tax paid has been provided for in previous Finance Acts. It is in fact a tax of 80 per cent. that we are dealing with, and I propose to reduce it to 60 per cent. I shall however continue to study the possibility between now and next April of alternatives to the Excess Profits Tax. Meanwhile, I am leaving the National Defence Contribution unchanged.

The Committee will, I am sure, appreciate that E.P.T. is a deduction for Income Tax purposes and therefore—this is a very encouraging thought to any Chancellor of the Exchequer—against any loss of Revenue due to lowering the rate of E.P.T. there is a gain of roughly one-half of this amount under the head of Income Tax. For every £ of E.P.T. revenue relinquished by lowering the rate of tax,9s. will come back in increased Income Tax receipts, and a bit more in Surtax.

It is nevertheless difficult to estimate with precision the cost to the Revenue of reducing the rate to 60 per cent. For the current year the 100 per cent. E.P.T. and the National Defence Contribution were estimated by my predecessor—and I judge the estimate to be fulfilling itself with considerable exactitude—to yield on war levels profits of £500,000,000, of which about £475,000,000 was E.P.T. and the rest National Defence Contribution. One-fifth of this £475,000,000 ranks for refund, so that the net yield, at war levels, of the 80 per cent, rate is about £380,000,000. That is at full war levels of profit in connection with war production. The change-over to peace-time conditions, which is now being accomplished, will mean a loss of Revenue from E.P.T. in any case, because the large war contracts, which have been one of the chief sources of excess profits hitherto, are, of course, tailing off, while expenditure on reconversion falls, under the present law, to be deducted in the calculation of excess profits. The best estimate I can make, with the aid of my advisers, is that the continuance of the 80 per cent. rate of E.P.T. would produce about £250,000,000. On that basis, the reduction of the rate to 60per cent., taken by itself, costs something of the order of £60,000,000, and since about half of this reappears in Income Tax under the fortunate arrangement I have already referred to, the net cost to the Exchequer is of the order of £30,000,000 a year. The reduction in the rate that I propose will not materially affect E.P.T. yield in the coming year, since the tax charged for any year is not assessed and collected until the following year. Therefore, the yield of E.P.T. during 1946–1947 will largely consist of tax chargeable at the war rate for the present year, and not at the 60 per cent. rate chargeable for next year. We shall therefore have no immediate sharp fall in receipts from this tax.

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