§ Motion made, and Question proposed, "That the Clause stand part of the Bill."
§ Captain Crookshank
I hope that one of the Ministers will have something to say in justification of this Clause. The Clause refers to the Finance Act, 1937. In passing, I would point out that if anyone has to refer to the provisions in that Act dealing with the National Defence Contribution, they will find them quite easy to understand. It is an extraordinary indication of the change of draftsmanship in a decade. New Clauses today are almost unintelligible, whereas Sections in previous Acts are perfectly simple to understand. By Clause 23 of that Act, the amount of National Defence Contribution chargeable upon the profits arising from the business of a building society shall not exceed 1½ per cent. of the amount of those profits. Under this Bill, the amount of the Profits Tax chargeable on profits arising on the business of a building society, including any distribution charged which is a new addition, shall not exceed 3 per cent. of the amount of the profits. That is a considerable difference, and requires some justification from the Government as to why the change has been made. I would like to have from the Government some explanation of that point, and also an explanation of Subsection (2), because I do not understand exactly what it is meant to cover. It does not operate now under the N.D.C. arrangement of the 1937 Act, and to that extent it is something new.
§ Mr. Woods (Mossley)
I, too, should be grateful if the Chancellor would give consideration to this matter. It has been stated that this tax acts as a restraint on inflation by restraining the distribution of profits on capital. Some special law to deal with building societies is required. There is urgent need for savings for contributing towards the erection of houses. Building societies cannot look forward to big returns. There is no possibility of any big increase of revenue for them, because the rules of those societies tie them down to a specific sum. Building societies are not the only societies which need consideration. Societies registered under the Industrial and Provident Societies Act are in much the same position. There is no possibility of distribution of profits, because the interest rate is generally 3 per cent., or less.
That is not the whole story. These societies act, as a trustee savings bank acts, for a considerable percentage of the population. About 9 million members have investments in co-operative societies, and it may interest the Committee to know that at the end of 1945 the shareholdings in industrial and provident societies amounted to £238,450,000. In addition, the shareholdings of loan capital, and sums held on behalf of superannuation funds for employees, and so forth, represented another £72 million, making a total of over £310 million. The Chancellor should take note of the fact that less than 14 per cent. of that total is actually used in business. If it were a joint stock company, in the aggregate the only sum that would be available for this taxation would be that which is involved in business, namely, 14 per cent. of the whole.
The rest is invested, the bulk of it in Government securities. It is quite obviously a considerable advantage to the Government, especially as we are entreated to continue thrift and saving, and facilities are offered throughout the country to persevere with this great savings campaign and so help the Chancellor, but if no provision is made in the Bill for similar treatment for industrial and provident societies as for the building societies, the reverse of what the Chancellor desires will come about. There will be a distribution of capital and a refusal of societies to accept additional capital because of the increase in their taxation.
§ 10.15 p.m.
§ Mr. Keeling (Twickenham)
On a point of Order. As the hon. Member for the last five minutes has been discussing industrial and provident societies on this Clause which deals exclusively with building societies, may I ask whether we shall be in order in discussing co-operative societies for the next five minutes?
§ The Chairman (Major Milner)
I think that perhaps the hon. Member was getting a little out of Order in discussing industrial and provident societies, when this Clause relates to building societies.
§ Mr. Woods
I apologise. I contemplated putting down an Amendment, but I thought that if the attention of the Chancellor was called to this matter it would be much easier for him to deal with it because I know that he will appreciate the arguments which I have put forward. I hope that the Chancellor will give me some assurance on this matter when he replies.
§ Lieut.-Commander Braithwaite
I understood that the hon. Member for Mossley (Mr. Woods) was endeavouring to indicate that the machinery for dealing with building societies who advanced money in connection with the important matter of houses, if it were to operate successfully, would have to be somewhat widened. I think that the two speeches which have been made by the right hon. and gallant Member for Gainsborough (Captain Crookshank) and the hon. Gentleman opposite indicated quite clearly that there is rather more in this Clause than meets the eye in its complicated language. One hates to make further claims on the assiduity of the learned Solicitor-General, who has been on his feet so much lately, but are we right in our assumption that the real object of this Clause is to govern the Profits Tax which is to be extracted from the building societies, and which under N.D.C. of 1937 was 1½ per cent. and is now raised to a maximum of 3 per cent? If that is so, I think we would like a word of explanation as to why this rather arbitrary decision has been made. It seems rather like thinking of a number and then doubling it, whereas the whole afternoon has been spent in discussing how the tax would fall on profits made as such. On the face of it, it seems a pity that in our present troubles with regard to housing further taxation should be inflicted on organisations which have 1194 much to do in endeavouring to deal with this problem. If there is an explanation, I should be glad if the learned Solicitor-General would give it to us.
§ The Solicitor-General
As the hon. and gallant Member for Holderness (Lieut.-Commander Braithwaite) surmises, what is really done in this Clause is to double the rate of tax paid under the 1937 Act by the building societies. The rate under the 1937 Act was fixed by National Defence Contribution in the case of building societies by Section 23 (I) at the rate of 1½ per cent., without allowing for deductions of interest paid to members on deposit. The reason for that overall rate was that there was considerable diversity in the method of building societies in financing themselves. A great many of them took deposits on which they paid interest, and that interest was allowable as a deduction against their profits. Some, however, financed themselves by share capital, and the dividends which they paid out on their share capital were quite naturally not allowable as a deduction against Income Tax. The reason for the 1937 Act was this diversity in their methods of doing business, and it was sought to apply an overall rate in order to even out the position as between the different methods of financing.
We have endeavoured to introduce into this Bill an increase of the amount chargeable on building societies proportionate to the increase of Profits Tax over the National Defence Contribution. The hon. and gallant Member for Holderness says it is rather a toss-up. It is not entirely so; it is based upon the calculation that building societies have, over the last few years, distributed to their shareholders on an average of something like two-thirds of their profits. Of course the higher rate would be chargeable in respect of the distribution, and the lower rate in respect of profits not distributed. If hon. Members can follow me in this fairly simple arithmetical calculation, I think they will see how we get at our doubled rate of 3 per cent. as against 1½ per cent. If you take the two-thirds distributed, and apply to that fraction the 12½ per cent, rate—that is to say, the distributed profits rate of tax—and then take the undistributed one-third and apply to it the non-distributed profits rate of 5 per 1195 cent., the net result is a rate of 10 per cent.
In other words, if you take the case of a company which distributes two-thirds of its profits and apply these rates of tax, you will be doubling it—you will be taxing it at the rate of 10 per cent. instead of 5 per cent. [Laughter.] I must start again. Take a company which distributes two-thirds of its profits. You apply the 12½ per cent. rate to two-thirds, and the 5 per cent. to one-third. You will find that you are taxing them overall at the rate of 10 per cent. [Interruption.] The right hon. Member for the City of London (Mr. Assheton) has evidently not followed my point. It means that you have, in effect, raised the tax on building societies by doubling it—if they were taxed at 12½ per cent., having regard to their proportionate distribution, the tax upon them would have been doubled. That being so, what we now seek to do is to take the 1½ per cent. at which they were previously taxed under the 1937 Act and double it correspondingly. If they were taxed on the basis of 12½ per cent. and 5 per cent. on a two-thirds distribution of their profits, they would be paying a mean of 10 per cent., and we therefore take the 1½ per cent. and, applying the same factor to it, we double it, and say they should be charged at. 3 per cent. That is how we arrived at it; it was not just a shot in the dark. We have doubled taxation in their case as it would have been doubled if they had not been subject to this special limitation.
§ Lieut.-Commander Braithwaite
The explanation of the hon..and learned Gentleman shows the wisdom of the Committee in not parting with this Clause too hurriedly. It would be churlish indeed not to express our gratitude to him for the admirable and lucid explanation which he has given us. There was an occasion some years ago when, in this House, Miss Susan Lawrence expressed a desire for a blackboard to be placed at her disposal to explain a point. It was not necessary to have that done for the benefit of hon. Members tonight.
§ Mr. Stanley
We are extremely grateful to the Solicitor-General for his explanation. I noticed the other day that a noble Lord, in order to follow the mathematical calculations of a Member of His Majesty's 1196 Government, produced a slide rule. We on this side of the Committee, perhaps not the first time but on the second attempt, understood fully the learned Solicitor-General's explanation without any such extraneous apparatus. The Solicitor-General has given us a very complete explanation of what I might call the mathematical part of the Clause, but what he has not done is to give any justification for the increase.
Those of us who recollect the defence that the Chancellor of the Exchequer made of this tax earlier in the day will find great difficulty in marrying any part of that defence to the special circumstances of these building societies. They do not seem to fall within any of the categories on which he then justified his increase of this tax. A great many building societies have suffered almost as much as the widow and the orphan from the Chancellor's cheap money policy and, therefore, there was no necessity to hit them again in order to bring them to the same level of misery as he has been able to bring other sections. Nor can there be any question here of discouragement by this means of the payment out of extra sums and, therefore, aiding in the fight against inflation; nor can this be likely to bring in a very substantial sum.
We were not told the actual figure it would bring in. Perhaps the Solicitor-General will tell us what that figure comes to, but I cannot imagine it is very substantial, and, therefore, not essential in filling that gap left in the Chancellor's Budget by the total withdrawal of E.P.T. I must confess that, if the Solicitor-General convinced me that it was desirable and right that the tax upon the building societies should be made at all, he has not yet replied—and I hope he will now do so—to my point about convincing the Committee that it is right to raise the taxation on these bodies. We should be extremely grateful if he could, with the same lucidity as he explained the mathematical part of this Clause, now explain the ethical basis upon which it is based.
§ Mr. Dalton
I will say a word or two in reply to the right hon. Gentleman in a moment. I rise not merely to reply to him, but also to answer the query of my hon. Friend the Member for Mossley (Mr. Woods). I merely say to him that the question of industrial and provident 1197 societies is one which reasonably can be considered for equal treatment with the building societies between now and the Report stage. I say that without commitment one way or the other. We think the building societies in the past have been treated in a preferential fashion which was perfectly improper, and, therefore, we propose increasing the rate to 3 per cent., a margin which, I think, in all the circumstances, is reasonable. The shareholders in building societies—the persons concerned—are, on the whole, small people. That is one reason many of them fall below the Income Tax level, particularly since the recent increases in the allowances. Therefore, the maintenance of the preference is, in our view, fully justified, but, on the other hand, since we are moving up the rate, some forward movement of the rate on them is, I think, fair and broad justice. The case is met by substituting 3 per cent.—admittedly a low rate—for 1½ per cent. We have endeavoured to give effect to the general intention to increase the level of taxation, but to treat these societies preferentially for the reason which is familiar to the Committee and which is generally acceptable to hon. Members.
§ Clause ordered to stand part of the Bill.
§ Clauses 36 and 37 ordered to stand part of the Bill.