§ 3.40 p.m.
§ Sir John Mellor (Sutton Coldfield)
I beg to move, in page 4, line 46, at the end, to insert:Provided that in the said subsection (2) where the difference therein referred to or any part thereof represents sums paid or set aside for the amortisation of leasehold interests in land or of other wasting assets calculated upon an actuarial basis the reduction shall instead of being an amount equal to 15 per cent. be an amount equal to 20 per cent. of the said difference or of the part thereof as the case may be.I should mention that I have some private interest in this matter. This is a very modest Amendment. It is designed to secure that sums paid or set aside for the amortisation of leasehold interests in land, or of other wasting assets calculated upon an actuarial basis should be exempted from the increased rate of Profits Tax. I am asking for this modest relief in the hope that the Government may be agreeable to it. In asking for it I must not be taken as abandoning the claims I have pressed before that such sums applied to amortisation should be excluded from all taxation. The Committee decided last night that the 10 per cent. Profits Tax on undistributed profits should stand, and although I voted against that, I should not be permitted now to challenge the wisdom of that decision. For the purposes of this Debate, I must accept the position as it stands as a result of last night's decision. It is my purpose to endeavour to draw a distinction between the rather narrow and more special case which I am about to argue, and the more general case which was argued last night. In my submission, there is a clear distinction between taxing the generality of undistributed profits, and taxing the particular class of appropriations with which this Amendment is designed to deal.
My point is this. A company with a wasting asset has no option, in any real sense of the word, but is hound to make some provision for the amortisation of 396 that wasting asset. There are several professional accountants in this Committee, and I see the hon. Member for Blackley (Mr. Diamond), who made a contribution to last night's Debate, sitting opposite. I hope he will agree that if a company refrained from making due provision for the amortisation of wasting assets, it would be the duty of an auditor to comment upon it in his report to the shareholders. In my submission, that portion of the gross income which, according to proper commercial practice, should be applied to a sinking fund, is not really income in the true sense of the word, but is really a return of capital.
This is where I am endeavouring to distinguish between this special class and the generality of undistributed profits which we discussed last night. In my contention, such money is not only not distributed, but is undistributable. Take the case of a company requiring to find £100 a year for the amortisation of a wasting asset. It is a fact that, with the Profits Tax at the rate proposed, namely, 10 per cent., and with Income Tax at 9s. in the £ that company would have to earn £202. Therefore, I hope that the Committee will appreciate what a very grave burden it is upon companies which desire to conduct their business in a proper way to have to pay Income Tax and Profits Tax upon the amount they require to set aside for sinking fund purposes.
It would appear that the Government have not desired to discourage such a sound business practice until this question of the Profits Tax arose. I should like to refer to the Report of the Central Advisory Committee on Estate Development and Management. This committee reported early this year, and its report contained the following passage:The need for periodic redevelopment renders it very desirable that lessees should 'write-off' their buildings over the period of their estimated useful life … We recommend this practice and suggest that local authorities should advise its adoption by all lessees.Apparently the Government approved that recommendation, because the Ministry of Town and Country Planning sent a copy of that report to all local authorities.
Throughout the discussions which have taken place both on this Bill and upon 397 the Budget, it has been made abundantly clear by the Government that these taxes are not imposed for revenue purposes. We were told last night by the Financial Secretary that there is an estimated surplus of something like £300 million. It is not for the sake of revenue that these taxes are being imposed; it has been stated over and over again that they are being imposed to check inflation by reduction of purchasing power. No question of inflation can arise over putting money aside for sinking fund purposes, because it is frozen there unless and until it is used for replacement of the wasted asset. I believe that money set aside into a sinking fund fructifies in a far more useful way than it could ever fructify in the hands of the Government. The Chancellor of the Exchequer, on 17th November, in winding up the Budget Debate, said:Furthermore, the tax on undistributed profits is a good anti-inflationary measure, which will tend to stop people spending so much money at this moment in the capital goods market. They will put it aside, I hope, and invest it in Government securities."—[OFFICIAL REPORT, 17th November, 1947; Vol. 444, c. 941.]That is just what will happen when the money is put into a sinking fund. In nine cases out of ten it will go into Government securities and fructify in a way in which, I am sure, the Financial Secretary would not disapprove.
Continually, we are being told that the Government desire that industry should not distribute its profits to shareholders, but should plough them back into the business. The Financial Secretary said last night that it was the desire of the Government to prevent such money being used for "anti-social" purposes. I argue that if this money is put into a sinking fund it cannot possibly be used for any purpose which can be described as inflationary or anti-social. If it should be considered that the words, "sums paid or set aside," do not tie up the money into a sinking fund with sufficient certainty, I should be glad to have any suggestions which the Government would wish to make for ensuring that the money is tied up tightly. But what I want now is to get some acceptance of this principle. What real purpose can the Government have in mind in wishing to tax money which is to be applied, if the business is properly conducted, to a sinking fund? Surely, 398 they cannot wish to penalise sound business methods. I, therefore, hope very much that this Amendment will have a sympathetic reception.
§ Mr. Gammans (Hornsey)
I would like to support this Amendment. I should have thought that if there was one category of business about which there could be no argument, it was in regard to money which has to be set aside for amortisation of leaseholds. I hope no one will deny that leaseholds are a wasting asset or that any prudent landlord must set aside sufficient money each year to meet that wasting asset. The Government must make up their minds about the grounds on which they are justifying this increased tax. Last night, the Financial Secretary said that the main reason was to prevent inflation, and then went on to suggest another reason—that the Government wanted to collect a bit of money. Is it the one, or the other, or both? If it is anti-inflationery there can be nothing inflationary in owners of property setting aside money to meet their amortisation charges. There is certainly nothing anti-social in doing that. Indeed, if they did not do so they would be committing an anti-social act, because a large part of the property of this country, held on leasehold, would gradually become slum property because the money to keep it up and pay for it was not set aside each year. Therefore, whatever the argument of the Government may be on this matter I hope we shall not hear that argument from them.
If the idea is that the Government need more money, and that this is a sort of taxation on property, I would point out two things: first, that this tax applies only to companies, and not to private individuals. Straightaway, there is unfair differentiation between two classes of property owners. It is worth while remembering that of all the sections of the business community in this country which are working at a disadvantage property owners come near the top of the list. They are trying to maintain their property on prewar rents and they are not allowed to make any further charges for the increased cost of repairs. Quite apart from the general principle which we argued last night, when I voted against the Government, I hope we have succeeded in convincing the Government that 399 this is a special case. When it is considered that over £200 must be set aside to earn £100, I should think that that in itself was sufficient argument. We are not asking for this concession in a narrow sense; we are asking for something which is fair and reasonable, which is to the long-term interest of the country, and which is eminently sensible.
§ The Solicitor-General (Sir Frank Soskice)
I would like to deal with the Amendment under two headings. It relates to two separate categories of assets, one wasting assets and the other leasehold interests. May I deal first with the general category of wasting assets? Provision has already been made for that type of asset by special deductions for the purposes of computing tax. I refer to the Income Tax Act, 1945, and also the Finance Act, 1944. The 1945 Act was specifically designed to create a code of deductions in relation to various types of wasting asset and, broadly speaking, provides for initial and annual allowances against tax in respect of various categories of assets. They are industrial buildings—already widely defined—plant and machinery. The 1944 Act deals with scientific research, and the 1945 Act also deals with mineral rights and money expended on the acquisition of patents.
All these assets, which cover a very wide range, are brought within the scope of these two Acts, and special provision is made on what was considered to be a generous scale, for deductions against tax liability in the form of initial and annual allowances. Until the 1947 Finance Act, these allowances were not available against Profits Tax. Section 46 of the 1947 Act is specifically framed to make these Income Tax allowances available also against Profits Tax. The result is that if this Amendment is adopted with regard to wasting assets generally, there will be virtually a double allowance—the allowance provided by the 1945 and 1947 Acts, and the special allowance which would result from the adoption of the Amendment. That is why I hope that the Committee will agree that, with regard to that particular limb of the Amendment, the arguments advanced cannot be accepted. I might say, in passing, that I do not see how the hon. Member for Hornsey (Mr. Gammans) arrived at the figure of £200 upon an expenditure of 400 £100, but possibly he failed to make out the fact that Profits Tax is itself a deduction for Income Tax. I make the figure a good deal less. This is, however, not fundamental to my main argument.
The provision of funds for the amortisation of leasehold interests raises a very old controversy. It goes back to the report of the Royal Commission on Income Tax which was prepared and delivered in 1920. The Members of the Commission investigated the question of providing some system whereby an annual or some similar form of allowance could be made to provide for amortisation of sums set aside in respect of leasehold interests. They reported that, in their view, it was not feasible to do so, because if they gave an allowance in respect of wasting leasehold interests, they must recoup the Revenue in some way in respect of the allowance given to the owners of the leasehold interests. If the leasehold interest was disposed of, it was said that the sum paid must be taxable in the hands of the recipient. That was the suggestion made, and on that they tried to work out a system whereby that could be done, and they reported that it was impossible to do so.
§ Sir J. Mellor
I agree with what the hon. and learned Gentleman has said about the report of the Royal Commission on Income Tax in 1920, but they were concerned about protecting the Revenue. Is not the distinction now that the Government are not concerned with getting revenue, but concerned with preventing inflation, which was not the problem which confronted the Income Tax Commission in 1918?
§ The Solicitor-General
I do not want to travel beyond the scope of the argument which I am addressing to the Committee, but I think it should be remembered that all Budgets are to get revenue, and the way we are trying to relieve anti-inflationary pressure is to collect extra revenue to prevent too much purchasing power being available. The Committee may say that 1920 is a long time ago, but the question has since been considered.
The right hon. Member for the Scottish Universities (Sir J. Anderson), who was Chancellor of the Exchequer in 1944, in announcing his proposals for postwar taxation, dealt with this matter of lease- 401 hold interests. In his Budget statement, he contrasted the position of leasehold interests with the position of patents. I will state shortly what he said. He said that a similar issue arose in the case of leaseholds where the land was granted on payment of a premium in addition to the lease rent. The position of leasehold was much more complicated, and while he would like to propose operating the application of a similar principle to that which he had outlined for patent rights, he could say no more than that this subject also would be further considered. The matter which he had in mind was subsequently embodied in the Income Tax Act, 1945, and in relation to patent rights there is a section of the 1945 Act which provides that sums received on the sale of patent rights are in fact themselves taxable. It would not be possible to apply the same principle to leasehold interests.
The matter has been further considered since the right hon. Gentleman made his statement, and the result is that it has not been found possible to adopt any similar principle for the purpose of leasehold interests. The net result is that the Income Tax legislation does not provide any system of relief in relation to wasting assets in the nature of leasehold interests. If the Income Tax legislation does not contain such provision, it is not feasible or consistent that the Profits Tax legislation should do so either. Profits Tax is based on the old National Defence Contribution, and both the old tax and the Profits Tax are computed and assessed on Income Tax principles. It has not been possible to do it for one Tax, equally, therefore, as a matter of consistency, it cannot be introduced into the other Tax, even if it were feasible to do so.
To sum up: With regard to wasting assets other than leasehold assets, there is already provision made in other Acts—the 1944 and 1945 Act; so if this Amendment were adopted there would be a double relief afforded in respect of them. With regard to leasehold interests, the matter has been frequently considered since as long ago as 1920, and it has not so far been found possible to work out any appropriate system.
Would the learned Solicitor-General explain why it is feasible to make this allowance in the case of 402 industrial leaseholds, and not in the case of leaseholds generally?
§ The Solicitor-General
The question is practicability. In the Income Tax Act, 1945, in relation to expenditure, on industrial buildings and only on industrial buildings, there is contained a system of relief for expenditure on the construction of the buildings themselves. That is scarcely applicable in the case of leaseholds which ex hypothesi are already in existence, and in which there is a diminishing interest on the leasehold building itself. Therefore, the Income Tax Act, 1945, is designed for a different object as regards industrial buildings as against general leasehold buildings, and its scope is not such as to embrace a leasehold building. If relief is granted with regard to leasehold building, and no corresponding provision is made whereby the Revenue recoups itself from somewhere, as the years go by the Revenue is buying the leasehold building for the owner of it, or the leasehold interest for the owner of that interest.
§ Lieut.-Commander Gurney Braithwaite (Holderness)
I am sure that the Committee are indebted to the learned Solicitor-General for giving so much data on what is admittedly a somewhat complicated matter. It is clear that amortisation puts a rather different angle on this matter from that which we, were discussing last night. There is one specific point which I would like to put to the hon. and learned Gentleman. This Debate has turned naturally, owing to the framing of the Amendment, on leasehold interests, but it also refers to other wasting assets, and that is one of the matters which I wish to submit to the Government. The hon. and learned Gentleman said that the object of the Budget was twofold: revenue raising and a defence against inflation. I think he would not quarrel if I said that it also seeks to work out general defences for the economic position of the country at the present time.
One weakness in the present situation was explained to us by the hon. and learned Gentleman, who said that the Profits Tax is the heir of the old National Defence Contribution, which was first introduced in 1937 and had the limited objective of providing funds for rearma- 403 ment. Since then, a great deal has happened to the whole economic structure of the country, consequent upon a long, and exhausting war. I suggest that there is one aspect of the matter which ought to be looked at with considerable care between now and April. I do not think it can be dealt with now. I refer to the position with regard to amortisation of gold mines, primarily in South Africa, but registered in London. Surely one of the defences necessary at the present time is to look towards South Africa for the production of the gold which we shall need as we go along, as a backing for our currency. At the moment, our gold reserves are leaving the country at alarming speed and we all look to the time when that process may be reversed and the bullion position can be built up again and strengthened.
The hon. and learned Gentleman also told us—he appears now to be examining some book of reference which probably bears upon the point I am making, but I do want him to hear what I have to say—that there were other provisions for amortisation under other Statutes. All that being true, is it not time that we looked carefully at the impact of this kind of taxation upon what is one of the great assets of this country and the Empire, namely the gold mining industry in the Union of South Africa? A number of those companies are registered here. It is a problem. While not pressing this point any further at the moment, I suggest that it might be a matter for cogitation between now and April.
§ 4.15 p.m.
§ Mr. Eccles (Chippenham)
The Solicitor-General left the Committee under the impression that the Section of the Income Tax Act, 1945, which deals with mining properties covers all their expenses which may be classed as wasting assets. The hon. Gentleman was not with us when we were discussing that Act. If he had been, he would remember that we had a long argument because the mining industry did not feel that those allowances covered anything like the total expenditure of preparing a mine for production. Therefore, I think the point ought to be made again that sooner or later, if we wish to encourage mining in the British Empire, we shall have to tidy up that Section of the 1945 Act.
§ Sir J. Mellor
Perhaps I may say one or two sentences more. The Solicitor-General dealt with this matter with his usual courtesy and ability, but I regret that he took refuge in technicalities. There is a wider aspect of this matter, which I endeavoured to put forward. I know that he was on fairly safe ground in saying that it is provided that the Profits Tax shall be assessed on Income Tax principles and in referring to what the Royal Commission said, and so on, but he seemed rather careful to avoid the main point which was put to him that this taxation—so we have been told by the Government time and time again—is being imposed not to get revenue but to counter inflation. I am very sorry that he did not deal with my submission that sums put into a sinking fund cannot possibly have any inflationary effect. They are put there in accordance with sound business principles, which should be encouraged and not discouraged by the Government. I confess that I was disappointed with the Solicitor-General's answer.
§ Amendment negatived.
§ Mr. Eccles
I beg to move, in page 5, line 6, to leave out from "shall" to the end of the Subsection, and to insert:have effect from the thirteenth day of November nineteen hundred and forty-seven.The purpose of the Amendment is to alter the date at which the tax comes into operation. If not amended, the Clause will bring the tax into operation as from 1st January last, that is, it will be retrospective. We consider that to be bad in principle and we desire that the date shall be the day on which this increase in the rates of Profits Tax was announced.
Some companies closed their books for this year before the Budget was introduced. They held their general meeting, declared their dividends and distributed the dividends. Their shares have been bought and sold on the basis of those accounts and those distributions. Those companies also calculated a large number of commissions and bonuses which are payable in relation to the annual profits, and have made the payments in respect of those calculations. I particularly wish to draw the attention of the Financial Secretary to the Treasury to the fact that a large number of distributions of that kind will have been made to managements. The Chancellor of the Exchequer 405 made a most extraordinary statement when winding up the Debate on the Second Reading of the Bill. He said:Management is the technician, who does not share in the profits."—[OFFICIAL REPORT; 25th November, 1947; Vol. 444, C. 1921.]Of course, that statement is entirely wrong. A very large number of managers are given bonuses based upon the annual net profit.
The result of making this tax retrospective to 1st January last is that such calculations as I have mentioned will be upset. One does not know how they will now be treated. It is bad in principle to adopt retrospective taxation. If this practice continues, auditors will have to add the words "subject to future legislation" when they attach their certificate to annual balance sheets. Such a development would be thoroughly bad for the reputation and stability of British business. I feel sure that the Committee will therefore adopt our Amendment, which is fair and is in accordance with sound practice.
§ Major Haughton (Antrim)
I support what has just been said by my hon. Friend. I tried to deal with this point on the Second Reading, and I was greatly encouraged at that time by something which the Financial Secretary said earlier in the Debate. I am thinking particularly of companies which close their accounts and publish their balance sheets without qualification of any kind. Only one answer was put forward to the three questions which I put to the right hon. Gentleman during the Second Reading. Those questions were: Have the companies done anything wrong? Have they broken any law or order? Was there any reason why they should not publish their balance sheets, in the light of the Finance Act of 1947? The Chancellor replied very late in the evening that it was quite wrong to say that there had been no precedent for making it retrospective. I do not think that anybody on this side of the House said there had not been a precedent, but certainly there was no precedent in peacetime.
It is true that the Excess Profits Tax was made retrospective during the war, but if retrospection in taxation of this kind is to be established, uncertainty is bound to occur and confidence, which is so important in industry today, will be 406 damaged. I submit to the Financial Secretary that this is not a petty thing but a perfectly reasonable proposal which we are putting forward. The Amendment substantiates what I and my hon. Friends on this side of the Committee said when we argued this point on the Second Reading, and I hope, in view of the fact that many, many companies away back from September to midsummer, have published their balance sheets, that the Financial Secretary will concede this point and make the incidence of this tax date from the passing of the Resolution.
§ Mr. Selwyn Lloyd (Wirral)
May I reinforce what has been said by my two hon. Friends the Members for Chippenham (Mr. Eccles) and for Antrim (Major Haughton), and ask the Government very seriously to look at this again? As was said by my hon. Friend the Member for Chippenham, the various calculations will have to be remade and will have to be re-agreed with, the authorities and the Income Tax assessments will have to be reopened because all are affected by the Profits Tax liability. My hon. Friend also referred to the general unsatisfactory nature of retrospective legislation. Might I also suggest that this Subsection militates against two sound principles in regard to the levying of taxation? Firstly, there is the question of certainty in taxation.
The Solicitor-General will be very well aware of the importance which the courts have accorded to that principle in the past. If I may remind him—though I am certain he will not need reminding—of what Mr. Justice Rowlatt said on this matter in the case of Anderton and Halstead against Birrell in 1932 which was approved by Mr. Justice Lawrence, as he was then, in the case of Dodworth v. Dale in 1936. Both of these learned judges refused to allow the reopening of properly settled taxation assessments because of the principle that there must be certainty in taxation. Now we find the Government coming along and seeking to reopen a large number of properly settled taxation assessments.
The second principle against which this offends is that the collection and payment of taxes should be as simple as possible. This provision is going to involve a great deal more work for accountants and tax collectors and for the Inland Revenue authorities. In fact, it almost seems as 407 if the Government's intention is to make the real basic industries of this country accountancy and tax collection. The Financial Secretary and the Chancellor of the Exchequer must be aware of the vast arrears of work which are outstanding in the Inland Revenue Department. An immense amount of calculations have still to be made and agreements still to be given to various matters, and yet they propose to pile on to the already overburdened officials a whole new set of calculations in respect of matters which those officials firmly believe were agreed.
The only other matter to which I want to refer is the statement which the Chancellor of the Exchequer made on the Second Reading of the Finance Bill in regard to this matter when he said:Indeed, it has been quite a common factor that taxes upon profits put on for emergency purposes, as is this one, should be made retrospective. That has been the common practice of this House for that class of tax. I see no reason to depart in this case from that common practice."—[OFFICIAL REPORT, 25th November, 1947; Vol. 444, c. 1921.]That just is not the case. The precedents, so far as I have been able to discover them for this type of provision, are first of all, that with regard to E.P.T. in the Finance (No. 2) Act, 1939. My suggestion is that that was a different kind of tax, levied under different circumstances and made retrospective for quite different reasons. In the first place, the outbreak of war itself constituted a complete break in the economic or financial system, and everybody knew that all accounts would have to be reopened and reconsidered because of that complete break. Then there was also already in existence the Armaments Profits Duty from 1st April of that year which did cover a portion of the field, and, therefore, the fact of making the E.P.T. provision retrospective in the Financial Act (No. 2), 1939, rather simplified matters, because of the existence already of the Armaments Profits Duty.
That is the first precedent for this. The other class of precedent is where there has been deliberate avoidance of either actual or anticipated taxation on a large scale. In those cases provision has been made for retrospection, and I think everybody is agreed that that is right if there is a deliberate avoidance beforehand of actual or anticipated taxation. No one disputes in such cases that the taxes 408 should be made retrospective, but that is not the case here. I ask the Government to think again on this matter. It may be in their view that the 13th November is not the right date. At one time I thought 1st January, 1948, would be better, but it might be that 1st October, 1947, would be a better date. However, I ask the Government to look into this matter again and to promise that something will be done to meet our objection.
§ 4.30 p.m.
§ Sir Peter Bennett (Birmingham, Edgbaston)
I will not cover the ground already covered by my hon. and learned Friend, but I should like to ask the Financial Secretary to give this matter careful consideration. I am puzzled why 1st January is the date chosen by the Government. It was not the date of the original Budget; it was not the date of the Government's own financial year; and I can only presume that it has been chosen because it was felt it was the beginning of the calendar year, and as the event has taken place during the present calendar year, it would make a tidy arrangement if all accounts finished at the end of December and there was a full year's taxes.
Many industries do not base their financial year on the calendar. The industries with which I am connected very seldom base their year on the calendar. They base their year on when the summer comes to an end and when changes are made at the end of a summer to be ready for the next season. Consequently, the year ends with them at the end of July or August and this tidy arrangement of going back to the 1st January becomes very untidy. Reference has already been made to the fact that several industries take stock, and if they are prompt in doing so they get their balance sheets through and have it all dealt with as quickly as possible. Now they have this charge falling on them which will cause quite a considerable amount of work and a good deal of dislocation.
Perhaps I might correct the statement of the Chancellor of the Exchequer that the managements have no interest in this matter. I have just been signing several hundred cheques for bonuses to managements and technicians which are based upon profits. I could produce hundreds of people engaged in management who would say that they had an interest in 409 profits. If there had been no profits they would have had no bonus. The Chancellor is a fair-minded man and I am sure that he would not have said that deliberately. I am, therefore, giving him this evidence in order to prove that he is making a mistake. This only goes to prove the point we are making, that retrospective taxation hurts in many directions. I have no intention of penalising the people who have had bonus cheques, and I am quite sure the Chancellor would not put us in a position where that procedure would be illegal. I appeal to the Financial Secretary to meet us in this and to abide by the well-known British principle that we do not have retrospective taxation. I ask him to fix a date which will obviate the necessity for all these matters to be reopened and gone into again.
§ Mr. Walter Fletcher (Bury)
I wish to reinforce the remarks of the hon. Member for Edgbaston (Sir P. Bennett) in one particular. If there is an increasing doubt in the minds of the business world about retrospective taxation, the result must inevitably be that people will try to produce their balance sheets just after the Budget in order to be able to produce accounts which will have some certainty and will not have to be adjusted. The result of that will be a great concentration of work for the Revenue authorities and for the auditors at one particular time. Nothing could be worse from every point of view. At the moment, industries make up their balance sheets at a time that fits in with their type of business. In order not to have hanging over them this cloud of retrospective taxation they are bound to alter the date and concentrate on a particular time.
§ Mr. Jennings (Sheffield, Hallam)
Because the Chancellor says that there is a precedent for this case, that does not make the case any better. It is quite wrong to have certified accounts and audited figures and then to have the accounts reopened and commission agreements, reserve accounts and almost all one's closing figures altered. One hon. Member said that the Government seemed to be aiming to give auditors and accountants more work. I see two colleagues on the other side who, with me, should not object to that, but if we take a strictly professional point of view, we are very much against retrospective 410 taxation. It ought not to be done if it can possibly be avoided. The Excess Profits Tax was in a different category. There was an emergency and there had been large contracts before E.P.T. was imposed and some of the tax had come along before the Act. The position today is not quite the same. The fact that there is a precedent for it does not make the bringing in of another item on the same lines any better. I feel that it is a bad thing for the country as a whole to bring in retrospective taxation.
§ The Solicitor-General
I am sorry, but we feel that we cannot accept the Amendment. I will come straight to what I think is a consideration which will weigh with hon. Members opposite and possibly my hon. Friends. That is the amount that this Amendment would cost. The estimate is that at present profit levels the increase in Profits Tax should, in a full year, bring in .5 million. But the Profits Tax is a deduction against Income Tax and, allowance being made for the fact that it ranks as such a deduction, the net result will be no less than £47 million in a full year, which is a very substantial amount. The proposal is that the tax should not operate until 13th November, 1947. That means that some 8/9ths of that £47 million will be lost, or £42 million. Unless a very strong case can be made out for losing that amount of revenue, I feel the Committee would agree with me that the Amendment cannot be accepted. It may be said that the principal object of this Budget is to prevent inflationary pressure. A very substantial contribution to that will be to mop up £42 millions of purchasing power.
It is not as if there were not precedents for this type of retrospective legislation—and cogent precedents which come very close to this case. Several hon. Members opposite have mentioned them. Perhaps I might go through them in order to get them strictly in order. The first was the Excess Profits Duty in the first world war which was imposed by the Finance (No. 2) Act, 1915, in September, 1915, and was made to go back for 13 months to August, 1914. Then came the Excess Profits Tax of 1939 which was made to go back from September, 1939, to April, 1939. When the Excess Profits Tax was increased to 100 per cent.—admittedly 411 during wartime—that was made to go back from June, 1940, to April, 1940. It is not the case that retrospective taxation has been confined solely to wartime, because in the case of Income Tax there was an example in 1931—again in an emergency period—and there have been three wartime examples. What was done in those four cases is very much what is being done today. A Finance (No. 2) Act was passed in the autumn and in each case the Act was made retrospective.
The hon. Member for Edgbaston (Sir P. Bennett) asked why 1st January had been selected as the date. This is an increase of Profits Tax, and under the Finance Act, 1947, there is a very elaborate provision for starting that Tax as at 1st January, 1947, and cutting off any anterior period of an accounting year before the end of 1946. That is why this increase is made to date from the same time. There is also the consideration to be borne in mind that one of the objects of this tax, as was announced by the predecessor of the present Chancellor of the Exchequer in April this year, was specifically to recoup the Treasury to some extent for the loss which would be incurred as the result of Excess Profits Tax coming to an end as it did at the end of 1946, so that, as it were, this tax follows on logically as from that period.
It is said that there would be a great deal of extra work occasioned, and the hon. and learned Member for Wirral (Mr. Selwyn Lloyd) particularly mentioned the Inland Revenue authorities. So far as they are concerned, I can reassure him, because I am told that this particular retrospective effect will not impose any real extra burden on them. In fact, very few computations of the tax have yet been made but there would be a great deal of extra work if the year were broken when it was nearly run, and broken at 13th November. That would involve a great deal of adjustment in relation to the period before and after that year.
The position of companies affected by the tax has to be looked at too. A great many companies have to prepare their accounts with their taxation liabilities simply left provisional; the accounts have appeared and the amount of the company's liability to tax has not been 412 assessed at the date when the accounts are closed. So it is not an unusual experience for companies to close their accounts with the knowledge that subsequently, when the tax liability is ultimately assessed, they may possibly have to review certain items which have appeared in the closed accounts. Not only that, but it is not entirely irrelevant to point out that companies which close their accounts, for example, at the end of the year do not know what their Income Tax liability will be until they hear the Budget statement in the succeeding April, so that, in a sense, there is always a certain measure of uncertainty with regard to the tax.
Therefore, I seek to justify this tax on these general lines. I say we are not doing something for which there is no precedent. The Income Tax legislation affords ample precedent. It affords precedents in times of emergency and for that reason at this time, when there is urgent need to take up inflationary pressure, we are justified in this case in following those precedents. If we did not, as I pointed out by reference to the figures, we should be losing the effect to some considerable extent of the tax which we seek to impose from the point of view of its effect on inflationary pressure. Roughly speaking, the result would be this: supposing the tax remains retrospective, the yield in the current year will be about £2 million, and in 1948–49 we will get the bulk of the full year's yield of £47 million. Therefore, it will begin to operate with considerable effect.
Supposing the higher rates were only made to operate as from 13th November, there would be no yield in 1947–48, there would be only a very small yield in 1948–49, and only a year after that could this increase of the Profits Tax have any appreciable effect to relieve the inflationary pressure. That would be leaving it to a very late stage, and it would be losing a great deal of the advantage which we hope will accrue to the national interest by the imposition of this check on inflationary pressure. It is for that reason we feel we cannot accept this Amendment and postpone the tax in the way suggested.
It was suggested by one hon. Gentleman that companies which had closed their accounts before 13th November 413 should pay at the old rate, and companies which closed their accounts after, should pay at the new rate from a certain period. I should have thought that it would be unfair on the companies whose accounting periods closed after 13th November. It would be imposing a burden on them which would not be borne by companies that had the good fortune to close their accounts in March or June. Also, it is only from the 1st of the year that the tax begins, so that taking a company whose accounts closed in March, 1947, it is not as if that company has to bear the increased rate for the whole accounting year to March, 1947; it is only for the apportioned period from 1st January, 1947, to the end of March, 1947, or about a quarter of the year. So the burden of retrospection is not as serious as it might otherwise be.
For all those reasons, having regard to the fact that this is an emergency measure and that a great deal of its potency would be lost if we accepted the. Amendment, having regard to the fact that there is ample precedent and also the consideration of recouping revenue which comes to an end with the finish of the Excess Profits Tax, I would ask the Committee to say that we were right in adopting the course we have, and that there is good reason for rejecting this Amendment.
§ Mr. Assheton
I have listened carefully to what the Solicitor-General has had to say, and I do not feel at all convinced by it. My hon. Friend the Member for Chippenham (Mr. Eccles) and many other hon. Members on this side of the Committee have put forward most cogent reasons against this proposal. I have received a number of representations from accountants, and also from company secretaries and others in my constituency, all of whom feel that not only is this proposal an unfair one, but that it is a bad precedent. The Solicitor-General has told us that there have been precedents for the same kind of thing. It really is no good telling us that something which we think is wrong has been done before, and that therefore
§ it is right. If there are precedents, they are bad precedents, and the sooner we forget about them, the better.
§ A large number of companies make up their accounts to 31st March, a great many to 30th June, and some on other dates. All the companies which have made up their accounts, so far as this year is concerned, to 31st March or to 30th June, or since then, would have to reopen those accounts. In every case the profit and loss has been struck, the bonuses have been distributed to the managements, the profits have been divided amongst the shareholders and the dividends have been paid. If there has been an inflationary pressure, it has taken place already. That is in the past. In addition, shares have changed hands on the basis of those accounts and, what is more, amalgamations have been arranged on the basis of those accounts in more cases than one. There are even companies which have gone into liquidation since the beginning of the year, and what it is proposed to do about them, I just do not know.
§ For all those reasons it is quite clear that it is highly inconvenient that such a proposal as this should have been put forward. It is highly objectionable that retrospective taxation of any sort should be enforced, and although it is said by the hon. and learned Solicitor-General that it will not be any additional trouble to the Inland Revenue, I take leave to challenge that suggestion. We will see in another couple of years whether the Inland Revenue share that view. Of course it is an important point that a considerable amount of revenue will be lost, but the hon. and learned Gentleman pointed out that only a small part of it was in this financial year. Therefore, for all those reasons, I think we have no option on this side but to ask the Committee to divide.
§ Question put, "That the words proposed to be left out stand part of the Clause."
§ The Committee divided: Ayes, 243; Noes, 135.417
|Division No. 38.]||AYES.||[4.49 p.m.|
|Adams, Richard (Balham)||Awbery, S. S.||Barstow, P. G.|
|Allen, Scholefield (Crewe)||Ayles, W. H.||Barton, C.|
|Alpass, J H||Ayrton Gould, Mrs. B.||Battley, J, R.|
|Anderson, F. (Whitehaven)||Bacon, Miss A.||Bechervaise, A. E|
|Attewell, H. C.||Baird, J.||Berry, H.|
|Austin, H. Lewis||Balfour, A.||Beswick, F.|
|Bins, G. H. C.||Henderson, Joseph (Ardwick)||Peart, T. F.|
|Binns, J.||Herbison, Miss M.||Perrins, W.|
|Blackburn, A R||Hicks, G.||Poole, Cecil (Lichfield)|
|Blenkinsop, A.||Hobson, C. R.||Porter, E. (Warrington)|
|Blyton, W. R.||Holman, P.||Porter, G. (Leeds)|
|Boardman, H||Holmes, H. E. (Hemsworth)||Price, M. Philips|
|Bowden, Fig.-Offr. H. W.||House, G.||Pritt, D. N.|
|Bowles, F. G. (Nuneaton)||Hubbard, T.||Pryde, D. J.|
|Braddock, T. (Mitcham)||Hudson, J. H. (Ealing, W.)||Randall, H. E|
|Brook, D. (Halifax)||Hughes, Hector (Aberdeen, N.)||Ranger, J.|
|Brooks, T. J. (Rothwell)||Hughes, H D. (W'lverh'pton, W.)||Reeves, J.|
|Bruce, Maj. D. W. T.||Hynd, H. (Hackney, C.)||Reid, T. (Swindon)|
|Burden, T. W||Hynd, J. B. (Attercliffe)||Richards, R.|
|Byers, Frank||Irvine, A. J. (Liverpool)||Ridealgh, Mrs. M.|
|Castle, Mrs. B. A.||Irving, W. J. (Tottenham, N.)||Roberts, Emrys (Merioneth)|
|Chamberlain, R. A||Janner, B.||Roberts, W (Cumberland, N.)|
|Champion, A. J.||Jay, D. P. T.||Ross, William (Kilmarnock)|
|Chater, D.||Jeger, G. (Winchester)||Royle, C|
|Chetwynd, G. R||Jeger, Dr. S. W (St. Pancras, S.E.)||Scollan, T.|
|Cluse, W. S||John, W.||Scott-Elliot, W.|
|Cocks, F. S.||Jones, D. T. (Hartlepools)||Segal, Dr. S.|
|Collick, P.||Jones, P. Asterley (Hitchin)||Shackleton, E. A. A.|
|Collins, V. J.||Keenan, W.||Sharp, Granville|
|Colman, Miss G. M.||Kendall, W. D.||Shurmer, P.|
|Cooper, Wing-Comdr, G||Kenyon, C.||Silverman, J. (Erdington)|
|Corlett, Dr. J||Kinley, J.||Simmons, C. J.|
|Cove, W. G.||Lee, Miss J. (Cannock)||Skeffington-Lodge, T. C.|
|Cripps, Rt. Hon. Sir S||Leonard, W.||Skinnard, F W.|
|Daggar, G.||Leslie, J. R.||Smith, C. (Colchester)|
|Daines, P.||Lever, N. H.||Smith, Ellis (Stoke)|
|Davies, Clement (Montgomery)||Levy, B. W.||Smith, S. H. (Hull, S.W.)|
|Davies, Edward (Burslem)||Lewis, J. (Bolton)||Sorensen, R. W.|
|Davies, Harold (Leek)||Lewis, T. (Southampton)||Soskice, Maj. Sir F.|
|Davies, R. J. (Westhoughton)||Lipton, Lt.-Col. M.||Stamford, W.|
|Davies, S. O. (Merthyr)||Longden, F||Stewart, Michael (Fulham, E.)|
|Deer, G.||Lyne, A. W.||Strachey, Rt. Hon. J.|
|Delargy, H. J.||McAdam, W.||Stross, Dr. B.|
|Diamond, J.||McAllister, G.||Summerskill, Dr. Edith|
|Dobbie, W.||McEntee, V. La T||Sylvester, G. O.|
|Dodds, N. N.||McGhee, H. G.||Symonds, A. L.|
|Driberg, T. E. N.||Mack, J. D.||Taylor, H. B. (Mansfield)|
|Dumpleton, C. W.||McKinlay, A. S.||Taylor, R. J. (Morpeth)|
|Dye, S.||Maclean, N. (Govan)||Taylor, Dr. S. (Barnet)|
|Ede, Rt. Hon. J. C.||McLeavy, F.||Thomas, D. E (Abordare)|
|Edelman, M.||MacMillan, M. K. (Western Isles)||Thomas, Ivor (Keighley)|
|Edwards, Rt. Hon. Sir C. (Bedwellty)||Macpherson, T. (Ramford)||Thomas, I. O. (Wrekin)|
|Evans, A. (Islington, W.)||Mainwaring, W. H.||Thomas, John R. (Dover)|
|Evans, E. (Lowestoft)||Mallalieu, J. P. W.||Thurtle, Ernest|
|Evans, John (Ogmore)||Mann, Mrs. J.||Tiffany, S.|
|Evans, S. N. (Wednesbury)||Manning, C. (Camberwell, N.)||Titterington, M. F.|
|Ewart, R.||Marshall, F. (Brightside)||Tolley, L.|
|Fairhurst, F.||Mathers, Rt. Hon. G.||Vernon, Maj. W. F|
|Farthing, W. J.||Medland, H. M.||Walker, G. H.|
|Fernyhough, E||Mellish, R. J.||Wallace, G. D. (Chislehurst)|
|Foot, M. M.||Middleton, Mrs L.||Warbey, W. N.|
|Forman, J. C.||Millington, Wing-Comdr. E R||Watkins, T. E.|
|Gallacher, W.||Moody, A. S.||Watson, W. M.|
|Ganley, Mrs. C. S.||Morley, R.||Webb, M. (Bradford, C.)|
|George, Lady M. Lloyd (Anglesey)||Morris, Lt.-Col. H. (Sheffield, C.)||Wells, P. L. (Faversham)|
|Gibbins, J||Morris, P. (Swansea, W.)||West, D. G.|
|Gibson, C. W||Morrison, Rt. Hon H. (Lewisham, E.)||White, C. F. (Derbyshire, W.)|
|Gilzean, A.||Moyle, A.||White, H. (Derbyshire, N.E.)|
|Glanville, J. E. (Consett)||Murray, J. D.||Whiteley, Rt. Hon. W.|
|Granville, E. (Eye)||Naylor, T. E.||Wilkes, L.|
|Greenwood, Rt. Hon. A. (Wakefield)||Neal, H. (Claycross)||Wilkins, W. A.|
|Greenwood, A W. J. (Heywood)||Nicholls, H. R. (Stratford)||Willey, O. G. (Cleveland)|
|Grey, C. F.||Noel-Baker, Capt. F. E. (Brentford)||Williams, D. J. (Neath)|
|Grierson, E.||Noel-Buxton, Lady||Williams, J. L. (Kelvingrove)|
|Griffiths, D. (Rother Valley)||Oldfield, W. H.||Williams, W. R. (Heston)|
|Gunter, R. J.||Oliver, G. H.||Willis, E.|
|Guy, W. H.||Orbach, M.||Wills, Mrs. E. A.|
|Haire, John E. (Wycombe)||Paling, Will T. (Dewsbury)||Wise, Major F. J|
|Hal[...] Rt. Hon. Glenvil||Parker, J.||Woods, G. S|
|Hannan, W (Maryhill)||Parkin, B. T.|
|Hardy, E. A.||Paton, Mrs. F. (Rushcliffe)||TELLERS FOR THE AYES:|
|Harrison, J||Pearson. A.||Mr. Snow and Mr. Popplewell|
|Amory, D. Heathcoat||Baxter, A. B.||Boothby, R|
|Anderson, Rt. Hn. Sir J. (Scot. Univ.)||Beamish, Maj. T. V. H.||Bower, N.|
|Assheton, Rt. Hon. R.||Bennett, Sir P.||Braithwaite, Lt.-Comdr. J. G.|
|Baldwin, A. E.||Birch, Nigel||Bromley-Davenport, Lt.-Col. W.|
|Barlow, Sir J.||Boles, Lt.-Col D. C. (Wells)||Buchan-Hepburn, P. G. T.|
|Bullock, Capt. M.||Hutchison, Col. J. R. (Glasgow, C.)||Osborne, C.|
|Butcher, H W.||Jeffreys, General Sir G.||Peto, Brig. C. H. M.|
|Carson, E.||Jennings, R.||Pickthorn, K.|
|Challen, C.||Joynson-Hicks, Hon. L. W.||Pitman, I. J.|
|Channon, H.||Keeling, E. H.||Ponsonby, Col. C. E|
|Clifton-Brown, Lt.-Col. G.||Kerr, Sir J. Graham||Raikes, H. V.|
|Cole, T. L.||Kingsmill, Lt.-Col. W. H||Rayner, Brig. R.|
|Cooper-Key, E. M.||Lambert, Hon. G.||Reid, Rt. Hon. J. S. C. (Hillhead)|
|Crookshank, Capt. Rt. Hon. H. F. C||Langford-Holt, J.||Roberts, H. (Handsworth)|
|Crosthwaite-Eyre, Col. O. E.||Legge-Bourke, Maj. E. A. H.||Roberts, Maj. P. G. (Ecclesall)|
|Crowder, Capt. John E.||Lloyd, Maj. Guy (Renfrew, E.)||Ropner, Col. L.|
|Cuthbert, W. N.||Lloyd, Selywn (Wirral)||Ross, Sir R. D. (Londonderry)|
|Darling, Sir W. Y||Low, A. R. W.||Salter, Rt. Hon. Sir J. A|
|Digby, S. W.||Lyttelton, Rt. Hon. O||Sanderson, Sir F.|
|Dodds-Parker, A. D.||MacAndrew, Col. Sir C.||Shephard, S. (Newark)|
|Dower, Lt.-Col. A. V. G. (Penrith)||Macdonald, Sir P. (I. of Wight)||Smiles, Lt.-Col Sir W.|
|Drayson, G. B.||Mackeson, Brig. H. R.||Smithers, Sir W.|
|Drewe, C.||McKie, J. H. (Galloway)||Snadden, W. M.|
|Duthie, W. S.||Maclay, Hon. J. S.||Spearman, A. C. M.|
|Eccles, D. M.||MacLeod, J.||Stanley, Rt. Hon. O|
|Eden, Rt. Hon, A.||Macmillan, Rt. Hon. Harold (B'mley)||Strauss, H G. (English Universities)|
|Elliot, Rt. Hon. Walter||Macpherson, N. (Dumfries)||Studholme, H G.|
|Erroll, F. J.||Marlowe, A A H||Sutcliffe, H.|
|Fletcher, W. (Bury)||Marples, A. E.||Taylor, C. S. (Eastbourne)|
|Fraser, Sir I. (Lonsdale)||Marsden, Capt. A.||Taylor, Vice-Adm. E. A. (P'dd't'n, S.)|
|Fyte, Rt. Hon Sir D. P. M||Marshall, D. (Bodmin)||Thorneycroft, G. E. P. (Monmouth)|
|Galbraith, Cmdr. T. D||Maude, J. C.||Thorp, Lt.-Col. R. A. F.|
|Gammans, L. D.||Medlicott, F.||Touche, G. C.|
|Gomme-Duncan, Col. A||Mellor, Sir J||Vane, W M. F.|
|Grant, Lady||Molson, A. H. E.||Wakefield, Sir W W.|
|Grimston, R. V.||Moore, Lt.-Col. Sir T.||Ward, Hon. G. R.|
|Hannon, Sir P (Moseley)||Morris-Jones, Sir H.||Wheatley, Col. M. J. (Dorset, E.)|
|Harvey, Air-Comdre. A. V.||Morrison, Rt. Hon, W. S. (Cir'nc'star)||White, Sir D. (Fareham)|
|Haughton, S. G.||Mott-Radclyffe, Maj. C. E.||White, J. B. (Canterbury)|
|Head, Brig. A. H.||Mullan, Lt. C. H.||Williams, C. (Torquay)|
|Headlam, Lieut-Col. Rt. Hon. Sir C.||Neill, W. F. (Belfast, N.)||Willoughby de Eresby, Lord|
|Herbert, Sir A. P.||Nicholson, G.||York, C.|
|Hollis, M. C.||Nield, B. (Chester)||Young, Sir A. S. L. (Partick)|
|Howard, Hon. A.||Noble, Comdr. A. H. P.|
|Hudson, Rt. Hon. R. S. (Southport)||O'Neill, Rt. Hon. Sir H.||TELLERS FOR THE NOES|
|Hurd, A.||Orr-Ewing, I. L.||Commander Agnew and|
Question put, and agreed to.
§ Motion made, and Question proposed, "That the Clause stand part of the Bill."
§ 5.0 p.m.
§ Mr. Assheton
I wish to make only one small point. There is an aspect of this Profits Tax which has not yet been discussed and which I would like the Financial Secretary and the Inland Revenue authorities to consider carefully. It is that this tax has a distinct bearing on the capitalisation of companies for the future. The way the tax is drawn prejudices the issue of preference shares and encourages the issue of debentures and loan capital. I do not wish to enter upon a discussion of that subject, as it would take a long time, but I urge the Financial Secretary and the Inland Revenue authorities to consider the ultimate implications of that aspect, because it will have the result of creating an entirely unnatural capital structure for companies.
On the Clause in general, I would only say that during the Debates in April we on this side of the Committee exposed fully our objection to the Profits Tax. We have put forward a large number of arguments, which we do not think have been answered in the least. During the con- 418 sideration of this Clause we have objected to two particular points, upon which we have divided the Committee. In view of the circumstances, we do not propose to divide the Committee on the Clause itself.
§ Sir Arthur Salter Oxford University)
I wish to put one point in connection with this Clause with which I wished to deal yesterday when we were discussing the increase in the tax upon undistributed profits, but I could not develop that argument because of the restricted character of the Amendment which was then before the Committee. There are, in this Clause, great increases in two taxes which are quite recent taxes. We must remember that in addition to the 10 per cent. tax on undistributed profits and the tax of 25 per cent. on distributed profits, there is, in the background, also the ordinary Income Tax and Surtax. If we take these taxes in their cumulative effect—and we are making great additions now to the total—they make a great difference to the kind of calculation which any person who is deciding either upon a new venture or the extension of his enterprise, has to make before he takes his decision.
419 If private enterprise is to work successfully in the sphere still left to it, it is essential that when those who have the responsibility, acting with their own money and on the best advice they can obtain, come to the conclusion that a proposed course of action has a substantially greater chance of creating wealth than of losing it, the incentive to promote it should be such as to allow and encourage them to take that step. With the cumulative taxation which we now have before us, any person faced with that problem will have to say to himself, "I must remember that, heads I lose all that I lose; tails I gain only a fraction of what I gain." Certainly, it will not be worth his while to take a certain action unless, on the best calculation he can make, there is not only an odds-on chance, but several times as great a chance, of gaining as there is of losing.
If private enterprise is to work under these conditions, it is clear that in the case of a large proportion of the kind of extensions and ventures of enterprise that ought to be undertaken, the ordinary operation of that calculation will be to stop them from being undertaken, and undoubtedly the country's economy will suffer greatly. The Government's declared policy, and their practical policy, is to rely, for the greater part of our economy, upon the operation of private enterprise, and it is in regard to the export trade, to rely almost 100 per cent. on private enterprise. It is, therefore, of the utmost importance not only that incentives should be there, but that incentives should be of such a character as to induce the right decision in the bulk of average cases.
I realise that in present circumstances full effect cannot be given to what would be ideal from that point of view. I concede the case, in relation to our present financial position, for the increase in the tax on distributed profits so as to prevent the inflationary effect of more money being in the hands of shareholders, thus increasing their purchasing power. But there is to be said, about that 25 per cent. tax, that it is obviously the distributed profits which have an inflationary effect, which is a serious one at the moment. There is also to be said for that part of this Clause that in the nature of things the distinction made between distributed and undistributed profits, with a 420 specially high rate on the distributed profits, is related to a temporary critical situation, and is not likely to remain as a permanent part of our taxation system.
That is not at all the case when we turn to the increased tax on undistributed profits. That kind of tax is something which is not, in the nature of the case, similarly temporary; it might remain. As was argued with great force yesterday by my hon. Friend the Member for Chippenham (Mr. Eccles), that tax does not, in its net result, really give us any prospect of reducing the inflationary forces from which we are now suffering. Therefore, while purely from the point of view from which I have been speaking, both these taxes have some disadvantages, they are overborne in the case of distributed profits but are not overborne in the case of the increase in tax on distributed profits. I suggest to the Government that as soon as possible, and in relation to any changes in taxation which they make as soon as the present critical financial position has changed or eased in any way, they should bear in mind the extreme importance of securing that the private enterprise system, in the sphere in which it will operate, has a chance of working efficiently.
§ Mr. Benn Levy (Eton and Slough)
The tax on distributed and undistributed profits is a very important weapon for a Chancellor. Perhaps it will become the most important, weapon in the whole financial armoury against inflation. In my view, it is a weapon which is still capable of, and indeed urgently requires, a good deal of refining before it is fully effective. But the criticism I make of it is on diametrically opposite lines to the criticisms which have come from the other side of the Committee. These were advanced yesterday, and have been repeated today by the senior Burgess for Oxford University (Sir A. Salter) on lines which seem to me mutually contradictory.
One argument has been that this Profits Tax is a disincentive. It was argued yesterday on an Amendment that the additional 5 per cent. which we were discussing would, in fact, be a disincentive on retained profits. In other words, the view was that the extra 5 per cent., or indeed the whole pa per cent. tax on retained profits, will work as a disincentive, and that, as a result, companies will 421 not retain their profits. That argument ignores altogether the fact that the tax on retained profits is balanced by a bigger tax on distributed profits, so that there will still be, on balance, a tendency to retain profits rather than to distribute them.
§ Sir A. Salter
I think the hon. Member is referring to the argument of my hon. Friend the Member for Chippenham (Mr. Eccles), which was not that the increase in tax on undistributed profits would cause more to be distributed but that it would give companies a strong incentive to try to spend more money than they otherwise would upon current maintenance, or unnecessary painting, etc.
§ Mr. I. J. Pitman (Bath)
That is just not so. It is so for expenditure on capital account, but the whole point of the hon. Member for Chippenham (Mr. Eccles), and of all of us on this side of the Committee, is that it encourages expenditure on revenue account which expenditure is not subject to any licence whatever.
§ Mr. Levy
I will willingly answer that point in its turn. But it was made not by other hon. Members opposite, but by the hon. Member for Bath (Mr. Pitman) alone. In my submission, it was the only point of substance made from that side of the Committee. But I was answering first the points made by the hon. Member for Chippenham. As for the hon. Member for Bath, when he says that the effect of this tax would be to increase expenditure on revenue accounts, what he is really saying is that at some point there comes into operation the law of diminishing returns. It was noticeable that when he used an illustration, the only way in which he found it possible to drive it home was to ask the Committee to imagine that the tax was 17s. 6d. in the £ and not 2s. in the £.
§ Mr. Pitman
I mentioned 17s. 6d. as a reductio ad absurdum. The tax is not 10 per cent.; it is more than 10 per cent. because it is after Income Tax. The total tax is 10s. 1d. and the amount left with 422 the company is 9s. 11d. In other words, for 9s. 11d. a company can get £1 worth of revenue expenditure.
§ Mr. Levy
In fact, the extra tax is 1s. in the £. I know that the hon. Gentleman used the phrase reductio ad absurdum, but the significant thing is that it was necessary to make that illustration to drive his argument home. I do not think that anybody would suggest that this extra 5 per cent. tax is of such a magnitude that it will bring into operation the law of diminishing returns. I agree with the hon. Member who said that every step helps, but I submit that this very mild tax certainly does not push the thing over the border. All it amounts to is another 1s. in the £. So much for the arguments on the grounds of disincentive advanced by hon. Members opposite.
But, surprisingly enough, they also complain that this tax is not disinflationary. That argument has been advanced again and again. It follows, therefore, that if they complain that it is not disinflationary, they agree that it should be disinflationary. They agree that disinflation is desirable. If it is desirable, I do not understand how the senior Burgess for Oxford can say that it is also desirable to maintain incentives, because that is a direct contradiction. If we want more money available for the pursuit of capital goods, then we introduce incentives. If we want less money in pursuit of capital goods, then we introduce disincentives. Hon. Members opposite cannot seriously run both those horses at once, complaining in one breath that they want more incentives and in the next breath that they want disinflation. Hon. Gentlemen must make up their minds.
§ Mr. John Lewis (Bolton)
It is a disincentive not to distribute more profit by way of dividend but rather to put it to reserve.
§ 5.15 p.m.
§ Mr. Levy
Not necessarily. The important point is that I do not think that hon. Members opposite honestly believe that this tax is not disinflationary. Indeed, the right hon. Gentleman the Member for the City of London (Mr. Assheton) admitted yesterday that he could just conceivably see that it was possible to represent the withdrawal of £23 million from the capital market as a 423 disinflationary measure. If there is £23 million less available for the purchase of capital goods, that is disinflationary.
§ Sir A. Salter
I admit that if we increase a tax of this kind, it would have certain aspects which would be disinflationary, but there comes a time at which we must weigh the loss of incentive against the disinflationary effect. My argument was that this was a case where, taking the measure as a whole, the disinflationary effect was very small indeed, and in some cases, negligible, whereas the loss of incentive to other persons was very important.
§ The Chairman
I am afraid that we cannot have a discussion on the rightness or wrongness of the Profits Tax as a whole. The sole question on this Clause is whether there should be an increase in Profits Tax and not whether there should be a Profits Tax or not. I also hope that we are not going to have a repetition of the Debate which we had yesterday and that hon. Members will bear my remarks in mind.
§ Mr. Levy
I did not intend to repeat yesterday's Debate. I was going to argue, because it seems to be legitimate on this Clause, that the Profits Tax should be modified in certain forms and respects which I am coming to now. I agree that, partly owing to interruptions, I have been rather a long time in getting to that point, but the point I was trying to establish was that there is a basic difference between us on this matter. I do not dispute for one moment that hon. Members opposite want disinflation, but they do not want it at the expense of profits and capital. We on this side of the Committee also want disinflation, but we do not want it at the expense of food and social services.
There are two rather serious points for consideration. We have at present a differentiation between distributed and non-distributed profits. That differentiation may in fact act as an inflationary influence. If there is a lower rate of taxation on retained profits, for which there is obviously a superficial case, it immediately becomes in the interests of shareholders that trading surpluses should be put into retained profits and not distributed, and that the individual shareholder should derive his profit not in the form of 424 dividends, but in the form of capital appreciation. That is one of the serious defects which can only be remedied if, concurrently, there were introduced a tax on capital appreciation. But to have this differentiation as it is, is inviting inflation——
§ The Financial Secretary to the Treasury (Mr. Glenvil Hall)
Is not the remedy to step up both taxes as we are doing?
§ Mr. Levy
No. That is precisely the point which I am making. Unless it is counter-balanced by a tax on capital gains all that it does is to move money from the distributed profits pocket into the retained profits pocket, so that most trading surpluses are put into the latter and they are distributed really in the form of tax-free capital appreciation. It seems to me, therefore, that, although there should be a differentiation, that differentiation should be, not so much between distributed and undistributed profits, but between different trades and services. I think this solution of the difficulty is one which might recommend itself to the right hon. Gentleman the senior Burgess for Oxford University. It is one which has already been urged in the House on more than one occasion in the past by myself and others, and has been developed elsewhere, and I am perfectly persuaded myself that it is going to be, or ought to be, the main line on which we will have to tackle, not only this inflationary problem, but the whole of our economic planning.
I hope that both the Chancellor and the Financial Secretary will look again very seriously at this matter, which has been considered very carefully both by hon. Members here and by economists elsewhere. There are, in fact, no real practical objections against a differentiation between three classifications of industry; unnecessary industries, normal industries and essential industries. There would be no tax on the latter, a tax at a moderate rate, such as exists at present, on the middle group, and a tax of perhaps 75 per cent. on the other, and I very strongly recommend this course to my right hon. and learned Friend for his sympathetic consideration.
§ Mr. Gallacher (Fife, West)
I am sorry that it has not been possible to pass an Amendment to double the tax. I will not go any further than saying that on that aspect of the question. I am very 425 interested in some of the arguments which have been put forward in connection with various Amendments. It has been argued that this tax, somehow or other, would militate against production. All of us on this side of the Committee are for disinflation, but the very best method of securing disinflation and beating inflation is more and more production. I happen to be a Member of the House who has had the responsibility of talking to shop stewards and workers on this question of working harder and getting greater production. It is to the workers that we have to go for greater production, not the employers or the management, and the one thing that will keep the workers from putting their backs into the job is big profits, and the one thing which the workers are now demanding everywhere is that the Chancellor should cut into the profits of the employer. I know that from experience. I will take any hon. Member on the other side to a meeting of shop stewards—except the right hon. Gentleman the senior Burgess for Oxford University (Sir A. Salter). The Committee can imagine what would be the effect on the workers of a speech of the kind made by the right hon. Gentleman. By the time he finished they would be as muddled as he is himself.
I wish to say, in answer to the right hon. Gentleman the Member for the City of London (Mr. Assheton) that I have not had a letter from an accountant or any of my business associates against this tax, and I have a whole lot of associates who are very definitely interested in the question of production and upon whom depends the fate of this country. Not one of them has sent me a letter protesting against this tax, but I have had any amount of letters suggesting that the tax should be heavier. The right hon. Gentleman sneers at the Financial Secretary for talking about this money fructifying. I can quite understand that, when the right hon. Gentleman was in the Treasury, it did not fructify, but it is different today, and it is fructifying. I remember discussions in the House before the war on the terrible position of the population of this country, but did any hon. Member listen to the radio the other night and hear about the big increase in the birth-rate and the great decrease in the death-rate? Is it not fructifying there through the 426 influence of the Chancellor of the Exchequer? I suggest that hon. Members opposite should stop this foolish practice of trying to save money with rotten arguments.
§ The Chairman
On this Clause, the sole question is whether there should be an increase in the tax or not.
§ Mr. Gallacher
Any increase that is put on will receive the support of the workers of this country, and if it was doubled, it would receive double support. Hon. Members opposite have been moaning and groaning about this tax. I say to the Chancellor, "For heaven's sake, put them out of their pain and make it 100 per cent."
§ Mr. Harold Roberts (Birmingham, Handsworth)
We have listened to a lot of talk from hon. Members opposite in which there has been great use of the word "disinflation." The opposite of inflation is deflation. Hon. Members opposite are so very fond of talking about the evils of deflation that they do not like to use the word now, and therefore use the polite term "disinflation" for the same thing.
I rise to call the attention of the Committee to a point which I think is quite undefined but which is implicit in this Bill, and was, in fact, latent in the earlier Act. To raise the tax to 25 per cent. may be serious, as it seems to me that, in the liquidation of companies, there will be a capital levy of 25 per cent. imposed upon capital assets, and I do not think that is intended. I have read in HANSARD the Debate on 15th July, when the operative Clause was before the House, and I think its purpose was to deal with recently-earned profits which had not had time to fructify in dividends. I understand that the advice given from Somerset House was that, in the liquidation of assets, above 100 per cent. all capital put in was to be regarded as profits, and that will lead to some rather remarkable results. It would apply to capital appreciation and to a reserve fund built up over many years and fully taxed and which may have borne Surtax under the appropriate Statute, but which may now be treated as capital and again be taxed at 25 per cent.
§ Mr. John R. Thomas (Dover)
Perhaps the hon. Gentleman will give us some reference to where that directive is 427 contained, as I am quite sure that many Members of the Committee are quite ignorant of it?
§ Mr. Roberts
I am afraid the hon. Gentleman and I are at cross purposes. The position is that if a company is not thought to be distributing enough in dividends, it is the practice to make a direction, and to assess the company for Surtax.
§ Mr. Roberts
In point of fact, that interruption is really incorrect. That act is not confined to one-man companies, or anything like it, either in law or in practice. It extends, in law, to all companies, and, in practice, it applies to companies with a very considerable number of members. Profits accumulated over the years, and which may, in fact, have borne not only Income Tax but Surtax, will now be subjected to a levy of 25 per cent. on distribution.
§ Mr. J. R. Thomas
I asked the hon. Member for the information which he has. In answering my question, he referred to Surtax. I am not concerned with Surtax. He states that there will be a Surtax equal to 25 per cent. on companies going into liquidation. I ask him to give us the regulation, and not the understanding. A Government official cannot impose a tax by an understanding. Will he give us that regulation?
§ Mr. Roberts
I am afraid that the hon. Gentleman did not pay me the compliment of listening to me with care. What I said—and I will repeat it—was that I understand that Somerset House have directed the Inspectors of Taxes that that is a true construction of the law. I do not suppose the hon. Gentleman will say that they cannot do that. In my view, if they do so, they are correct. It is what the letter of the law says, and I commend it to the Treasury for consideration. Even though it cannot be dealt with now, it is an anomaly which ought to be dealt with, and I think the point should be brought to the attention of the public and of this Committee as soon as possible.
§ Mr. Charles Williams (Torquay)
I have deliberately taken no part in the Debate on the various Amendments to the Clause. I feel that we, as a Committee, have suffered during the discussion of this 428 Clause, which proposes an increase of taxation, from the fact that we have been unfortunate enough not to attract very much attention from the Chancellor himself. I am among those who have, from time to time, been attracted by appeals from a Chancellor to produce more, and things of that kind. I agree that, as far as this Clause is concerned, the doubling of the tax on undistributed profits will serve to absorb money which might otherwise be distributed in buying goods, but I do not think it is going to do very much to counter inflation, because the Treasury will no doubt proceed to expend it. However, I have no wish to enter into a complicated argument on that matter.
Many of us are very deeply disappointed at the way in which the Treasury have refused in any way to meet the position as far as undistributed profits put to reserve are concerned. That is a vital matter, and I ask the Financial Secretary to the Treasury to remember that in this case, we are not dealing with some great and wonderful individual, such as the particular Minister who issues many more permits for high priority steel than there is steel available. We are not dealing with that type of brilliant individual, but with ordinary individuals who have built up British trade and brought work to the people of this country.
I propose to emphasise three points in connection with the reason why I think, particularly at the present time, we should allow profits to be put to reserve and to be held for the time being. In many businesses today, as, for instance, in agriculture—and there is no reason why agriculture should not be considered in this connection when it is run on a considerable scale—the people concerned cannot buy new things which they want. They cannot develop or build. Surely, therefore, it is a practical thing for them to buy Government Stock, and wait until the time arrives when they can buy the necessary materials? That is one example of a business putting its income to reserve. That is a wise thing to do, and would help in the long run. There is another example. Very often a business is unable, at the present time, to develop because of the shortage of labour and materials, and because it is not able, by this or that permit, to get and do what is wanted.
429 I am not quarrelling with any of those facts, but I do say, that being the position with which we are faced at the present time, it is grossly unwise of the Chancellor, after all the appeals he has made for the development of the export trade, to do anything which, although it does not affect exports at the moment, will affect exports over a long period of time. I ask that this relief should be given purely from the point of view that it is absolutely essential not to take the short view of what is wanted at the moment, but to endeavour to enable British business today to lay aside adequate funds so as to be able to take the long-term view with regard to the development of trade and export in the future. I maintain that it is the long view which is essential.
I am disappointed that the Chancellor has not been here very much to help us in this Debate. If he had been, I believe that the whole position of this Clause would have been changed. I have nothing to say about the right hon. Gentleman the Financial Secretary to the Treasury, but I think that even he will admit that his right hon. and learned Friend has a slightly bigger grasp of the matter than he has himself. In those circumstances, I think it is a tragedy to be asked to pass this Clause which can do nothing but hinder the development of trade and industry, and which is a direct discouragement to the better employers in the country to try to build up their industry for the future benefit of both the country and those engaged in industry.
§ Mr. Glenvil Hall
May I begin by saying how sorry I am that my right hon. and learned Friend the Chancellor of the Exchequer could not be here for this Debate? He desired to be here, and he sent a message to say that he was delayed at another meeting. He means no disrespect to the Committee. On the contrary, he would like to have taken part in these proceedings.
I must, in any reply that I make, stick close to what is in the Clause. Quite a lot that has been said has roamed a little wide of it. This Clause does one simple thing. It doubles the tax which, up to now, has been levied on rates of profit. Many of the points about whether a Profits Tax is right or wrong, or whether it helps or hinders industry, are, in my 430 submission, quite out of Order in this Debate. [HON. MEMBERS: "No."] Therefore, I will not, except incidentally, touch on some of the points and arguments used—interesting or plausible though some of them were. The main criticism levelled against these proposals of my right hon. and learned Friend is that, in doubling the tax on undistributed profits, he was doing something which he should not have done. If I read the mind of the Committee aright, there was a general feeling that the Profits Tax should be raised. Hon. Members on both sides agreed that it should be raised on distributed profits on the ground that fresh inflationary pressure would be prevented. Hon. Members opposite can see no reason why any increase should be levied on that part of profits which are undistributed, on the single ground that those profits were kept, as it were, in the family, and put in reserve. Therefore, they did no harm, because they could not escape and become purchasing power in the ordinary sense.
Let me remind the Committee that a differentiation between distributed and undistributed profits was originally made in order to help industry. It was felt that at this juncture, after six years of war, when much of the equipment in industry was worn out, something should be done to help the managements to recondition their factories, workshops, and mills. I mention that because it has been implicit in much that has been said that the fact that there was a division does make a difference between the two forms of tax, as taxes. I want to underline, point out, and emphasise that the division was for that single purpose, and, in spite of that division, profits are profits. Therefore, whether distributed or undistributed, they are liable to taxation.
§ Mr. J. Lewis
Would my right hon. Friend agree that the greater the difference between the distributed and undistributed profits the greater inducement there would be to put profits to reserve?
§ Mr. Glenvil Hall
I will come to that. At the moment I am making the point that we are dealing here with profits. Therefore, my right hon. and learned Friend has every right, when he is increasing taxation in various directions, to tax profits, as profits. The fact that, in order to help industry, profits have been divided, and a differential rate introduced 431 is, in one sense, immaterial. All profits at this time in our history should bear some increase of taxation. My hon. Friend the Member for Eton and Slough (Mr. Levy) had some very interesting things to say. He thought this tax should be selective and profits divided into groups. Those from essentials should be, as it were, herded off from those from unessentials, and so on. He could not have thought very deeply about this matter because, in my view, it would be extremely difficult to differentiate between one industry and another in the way he suggested. He also asked my right hon. and learned Friend to consider, between now and next April, a capital gains tax. My right hon. and learned Friend is willing to consider any suggestion, even the one made by the hon. Member for Eton and Slough.
May I say finally that, in doubling this tax, my right hon. and learned Friend has three things in mind and three objects in view. By doubling the tax we double the gap between the rate which is levied on what is distributed and what is not distributed. Where, before, the incentive not to distribute was seven and a half per cent., it is now 15 per cent.
§ Mr. Oliver Stanley (Bristol, West)
Would the right hon. Gentleman say what it would be if he did not double the tax on undistributed profits?
§ Mr. Glenvil Hall
It would be bigger still. But I am trying to show that, in doing what has been done, we have struck a fair and proper balance in this matter. In doubling the tax on both types of profits we have doubled the gap between what is distributed and what is not distributed. In that sense, therefore, there is a greater incentive now than there was before to leave profits undistributed and put them to reserve. My right hon. Friend has, moreover, lessened the temptation to spend, on capital goods, at a time when we want to damp down expenditure of that type. Finally, it would be unfair, if we are increasing the taxation on beer, and on the Purchase Tax—and on almost every type of goods—to 432 leave profits out. The workers, who are today working hard to help the export drive, would feel that this Government had not played fair by the great mass of the people, and both the management and technicians, as well as the workers, might have something to say.
§ Mr. Gallacher
The workers look upon these profits as open disclosed profits or hidden and crypto-profits. They do not make any difference.
§ Mr. Glenvil Hall
I know that my hon. Friend the Member for West Fife (Mr. Gallacher), is an authority on anything "crypto." I am not so versed in these matters as he is, but there is no doubt a great deal in what he says. At any rate, I have given the reasons why it has been found proper to increase the tax by the percentages by which it has been increased. I hope that the Committee as a whole will realise that my right hon. and learned Friend has done the right thing.
§ Sir Frank Sanderson (Ealing, East)
Although it may be advanced that the argument put forward by the Financial Secretary to the Treasury has made a case, From his point of view, that the Purchase Tax should remain as it does in the Bill, I cannot understand how it comes about that, with his high principles and integrity, the Chancellor of the Exchequer should deem it wise and expedient to make this tax retrospective. I know of no argument which could be advanced in favour of making the tax retrospective, that is, to 1st January, 1947, and I can think of many reasons why it should not be. Has the Chancellor considered the position of those industrial companies which balance their books on 31st March, 31st June or, perhaps, 30th September?
§ Mr. J. R. Thomas rose——
§ Sir F. Sanderson
I shall not detain the Committee for more than a few minutes. If a firm of accountants knowingly drew up a company's accounts incorrectly, they would be subject to the severest penalties, but due to the incidence 433 of this tax being retrospective, all the accounts which have been drawn up and audited after 1st January last are incorrect in fact. What is the position of companies which have allocated their profits and made provision for reserves, taxation and dividends and have already paid their dividends out of the profits earned up to 30th June last? Surely, it means that during the present financial year they will be required to make special allocations for increased taxation in order to meet the retrospective portion of this Clause.
§ Mr. J. R. Thomas
On a point of Order. Is the hon. Gentleman in Order in discussing the retrospective effect of this tax, which, as I understand it, has already been dealt with on an Amendment on which a Division was taken?
§ The Deputy-Chairman (Sir Robert Young)
If it has already been discussed, it cannot be discussed again.
§ Sir F. Sanderson
It was discussed on an Amendment, but I understand we are now discussing the Question that the Clause stand part of the Bill.
§ The Deputy-Chairman
I beg the hon. Member's pardon. I thought the Amendment in question referred to another Clause. In fact, it related to this Clause which the Committee is discussing.
§ The Deputy-Chairman
I hope the hon. Member will not repeat what has already been said on the Amendment.
§ Sir F. Sanderson
No, Sir. I have no intention of repeating anything which has been said. I hope the Chancellor will give this matter his very serious consideration. I am sure he appreciates that to place a company's accounts in jeopardy and to put a heavy responsibility upon the accountants is a very serious matter.
I want to raise one other point to which reference has not been made. Take the case of a company which is financed primarily by the issuing of debentures and preference shares, and which has a very small nominal amount of ordinary share capital. The debenture holders receive a prior claim of interest.
434 The preference shareholders have a second claim, and the ordinary shareholders, namely, the equity holders take the balance of profits, subject, of course, to reserves. In a case of that kind it must be obvious that the whole weight of this retrospective Clause will fall upon the equity holder. I could enumerate companies which are in this position. They find that after meeting their debenture interest and preference dividend, they will not have sufficient to pay anything in respect of the ordinary shares, because of the special provision necessary to make in order to meet the charge of the retrospective taxation for the previous year. I ask the Chancellor to consider whether, if he cannot go the whole way, he can at least make the tax operative as from 31st March last. I cannot see how the operation of this tax as from 1st January last can be justified on any grounds, and I ask the Chancellor to consider this matter very seriously between now and the Report stage.
§ Mr. Jennings
I believe there are only one or two major issues which can be raised on this Clause. My hon. Friend the Member for Chippenham (Mr. Eccles) last night raised what I consider to be a fundamental issue with regard to the part of this Clause which seeks to increase the tax on undistributed profits. I think we are all at one with the Chancellor in his desire to mop up all inflationary money, and we agree that it is right he should do so. On the question of undistributed profits, however, we are getting on to rather dangerous ground. My hon. Friend the Member for Chippenham asked whether this tax would interfere with production. The hon. Member for West Fife (Mr. Gallacher) said that production was only done by the people employed in industry. A very important side of industry is to maintain up-to-date and efficient machinery, and if any burden is placed on companies' reserves, they are unable to buy up-to-date machinery and maintain production.
I am inclined to agree with my hon. Friend the Member for Chippenham that export production may be seriously affected. The Financial Secretary said a little time ago that the difference in the tax on the undistributed profits and on the distributed profits was for the purpose 435 of allowing industry to get some benefit in order that it could equip itself. I think that the time for that has not been long enough, and that there is still a lot of re-equipment to be done in industry. It is not the right time at the present moment; but if we deplete the reserves by doubling this tax on undistributed profits, obviously we shall affect the reserves of companies.
A great deal has been said about what reserves are for and how companies use them. There are thousands of companies—and I am not speaking of the huge concerns, but small limited companies, small concerns—which put away their earnings and have been in the habit of putting away money, in order to be able to keep themselves up to date. When one considers that a machine that cost, perhaps, £1,000 before the war, the written down value of which may be £250 today, would cost £2,000 today, one sees how necessary are reserves for re-equipment. I am sure that the Chancellor will keep his eye on the deterrent effects this tax will have on export production. I know that he will keep his mind on the effect the tax will have on the ability of firms to buy what they need in the interests of the export trade. I am sure he will give due consideration to that side of the picture.
There is the other side of the picture to which attention was drawn by my hon. Friend the Member for Bath (Mr. Pitman). It is a very important matter. If this tax is doubled on undistributed profits we shall have rather a temptation to make as much expenditure on the revenue side as concerns can possibly carry out. The hon. Member opposite may laugh, but there is a good deal to be done in industry.
§ Mr. J. R. Thomas
I certainly did laugh, because the hon. Member must know full well that companies are not allowed to put any sort of expenditure in their revenue accounts. Revenue accounts are subject to inspection by tax inspectors. They will be watched.
§ Mr. Jennings
The hon. Member and I happen to belong to the same profession, and I hope that he prepares his accounts in the same way as I do. I charge to profit and loss accounts only perfectly legitimate renewals. I am not alluding to any other expenditure outside that scope. So I hope that the hon. 436 Member will grant that I am right in my argument that there is a lot of expenditure that cannot be undertaken today but which is, nevertheless, needed to be undertaken. People may seek an opportunity to increase expenditure on revenue accounts. These are very important matters. It must not be forgotten that if we deplete reserves—and the Clause is only the thin edge of the wedge—by this tax on undistributed profits, we shall deplete the strength of companies which they will sorely need in order to maintain employment and to equip themselves in the future. It is a short-sighted policy, in my opinion, to strip a company of its reserves. These concerns are not, as has been suggested, all badly balanced, badly run companies. They are like the family company of which my hon. Friend the Member for Lonsdale (Sir I. Fraser) spoke yesterday that had been going for 150 years and had built up reserves in order to be able to maintain their trade. This tax on undistributed profits is a backward step.
The hon. Member for Blackley (Mr. Diamond) said that Socialism was the very foundation of the development of efficiency for the benefit of industry. If that is Socialism, and if that is what it stands for, one of the worst things we can do is to starve companies of reserves and make them unable to equip themselves when the time comes for re-equipment, and to render them unable to maintain their position in the industrial world. The immediate anxiety is the export trade, and I ask the Chancellor to keep his eye clearly on that matter. I am sure he will do so.
§ Major Peter Roberts (Sheffield, Ecclesall)
I want to put one point to the Chancellor. I have the advantage of knowing that the Financial Secretary to the Treasury and the learned Solicitor-General were on the Committee which dealt with this point. It is the question of how this 25 per cent. distributed profits tax is going to affect the interim income paid under the Coal Industry Nationalisation Act. This is a very important point. It deals, as the Financial Secretary knows, and, I do not doubt, as the Chancellor also knows, with a great deal of money which was allotted for valuation under that Act. It seems that a very unfair thing has happened—that this interim income, which was allotted on the basis of a cut of 50 437 per cent., is going to attract this tax also.
Let me remind the Committee of the basis on which this arises. The interim income was to be paid to the holders of colliery shares on behalf of their valuation units. It was considered by the Government, who took over the collieries, that it would take at least two years for the valuation to take place; and, therefore, they said they would give some interim income over the two years. However, in finding out what that income was they cut, by half, the standard income for one year; or, in other words, a 50 per cent. tax was levied upon that income. This devise was used to assist the Government in getting through their valuation proceedings.
The then Chancellor, when he brought this point up on the Second Reading of the Coal Industry Nationalisation Act, made it clear that in assessing this interim income he was taking into account all the facts with regard to the stopping of the trading of the companies. He said, in other words, that the proper income was 100 per cent. in a datum year, but that he was going to cut that down by half and give only 50 per cent. of that income over these years for various reasons. One was that there was not any risk; the companies had ceased to trade. Another very interesting reason was that the companies had no need to put any money to reserves of any kind, and would pay the whole amount straight through their accounts to the shareholders. This money which has to be—it most likely will have to be—paid to the shareholders, has already been docked 50 per cent., and is now to attract another 25 per cent. tax.
I am raising this point at this stage in order to get some idea of what the mind of the Government is on it. I appreciate that, without proper warning, it is impossible for them to answer it now, but by the time we reach the Report stage, I hope it will be possible to bring this matter forward again and for the Government to answer it fully. I want to ask the Financial Secretary if he can assist me at this stage by telling us what the Government's reactions are now to this matter, because there is going to be great hardship to the stockholders who are relying on this interim income which is to be cut another 25 per cent. If the Government can give some information now it will assist the discussion we may have on the Report stage.
§ Mr. J. Pitman (Bath)
I think there is a double justification for our speaking on this Clause. We have a new Chancellor with a keen and a fresh mind, and, therefore, we are right in calling attention to what we consider to be a bad tax because, not only may he act on it now, but there is the further possibility that he will think between now and the next Budget of what is the right way of taxing profits. Hon. Members opposite must get it into their heads that we on this side of the Committee do not object at all to a tax on profits at this time. It is the way in which it is done that we consider inequitable. It is inequitable in two ways—in degree and in incidence.
First, let me deal with the inequality of degree. Is the Chancellor really aware of the fact that the Profits Tax paid by a company depends, not on the quantity of its profits but on the capital structure which it happens to have? If it has a capital structure which consists solely of ordinary or other shares, then it will pay a very considerable Profits Tax. But if its capital structure is largely debentures——
§ The Deputy-Chairman
I do not know if I follow the argument of the hon. Member correctly, but I think he is going outside the limits of undistributed profits.
§ Mr. Pitman
This is not a Clause on undistributed profits at all. This deals with a Profits Tax. It is doubling the Profits Tax; it is on both; and the essence of my remarks is that this is a particularly inequitable manner of taxing profits, by doubling the Profits Tax. It is a bad double. The betting tax may be a good double, but this is a bad double, and I am arguing that it is inequitable in degree because it depends, not on the amount of profit that a company makes, but on how the company happens to have its capital structure set up. If there are a lot of debentures, or if it borrows money from the bank on overdraft, or if it has notes and quite a small capital structure—it may be only £100—then all it pays on its Profits Tax at the higher rate on distributed profits is very small because the capital is very small—and the lower rate on its undistributed profits. That seems to me to be a grave inequality in this tax.
This tax is also unequal in its incidence. We on this side feel that if debenture holders are to get a large slice 439 out of the profits, then they, too, ought to pay their share to the nation at the present time. But this tax falls solely on one class, of capital, and that is on what the hon. Member for Chippenham (Mr. Eccles) called "venture" capital. I call it entrepreneur capital. The Chancellor—in many ways quite rightly—gave us a lecture on the partners in industry the other day, when he mentioned labour, management and capital. He really ought to have said labour management, loan capital and entrepreneur capital. The incidence of this tax is particularly inequitable in that it falls solely on the entrepreneur capital. Whether the entrepreneur capitalist is a man who had the enterprise to launch it, or whether it is the man to whom that capital is later assigned, it ought still to be regarded as "entrepreneur" rather than "sleeping partner" capital. If whenever the entrepreneur sells his shares for the price which he considers right, it is then to be regarded as non-entrepreneur capital and treated accordingly, he will find great difficulty in realising the fruits of his enterprise. Surely, there is a much better way of taxing profits. If Income Tax were raised, it would fall on debenture holders and note holders, on the banks if they are lending at interest, or whatever it is, and on ordinary capital. What is needed, however, is a bigger discrimination in favour of earned income and a bigger discrimination in favour of undistributed profits.
The hon. Member for Eton and Slough (Mr. Levy) was very unfair to me in saying that I quoted 17s. 6d. and 2s. 6d. because my case was not made unless I did so. The trouble is that 9s. 11d. and 10s. 1d., which are the real figures, are rather harder to put over than round sums. But even getting £1 worth of revenue expenditure for only 9s. 11d., one has already entered the field of inflationary pressure. For that reason, as well as for the other two reasons—that is to say, because this tax is inequitable in degree and in incidence—it is inflationary in that particular sense. I have consistently made it clear that I regard this tax as on balance deflationary; but everybody can produce cases where the whole £47 million, for instance, might be left in cash at the bank, in which case it would be deflationary. I agree that, on balance, it is deflationary, but the effect of the high 440 rate of taxation on undistributed profits goes a long way and unnecessarily to cancel out the deflationary value, because by itself it is inflationary.
§ Clause ordered to stand part of the Bill.