NEW CLAUSE.—(Exemption from Profits Tax for certain professions.) (Hansard, 21 June 1948)

§ Mr. Niall Macpherson (Dumfries)
I beg to move, "That the Clause be read a Second time."
The Chancellor will have recognised the parentage of this Clause. He will realise that with an addition which is a part of 1079 the first sentence it reproduces Section 19 (3) of the Finance Act, 1937. The addition is: or as whole-time service directors of a body corporate, the business of which consists solely in providing such professional services, … The object of this Clause is to put professional consultants on the same footing whether they practise as individuals, whether they are in partnerships or whether they have incorporated themselves. At present partnerships and individuals do not pay Profits Tax, but professional men who are doing exactly the same work as are individuals or individuals working in partnership, nevertheless have to pay Profits Tax. I do not pretend that the numbers involved are large. In any one profession which has been brought to my attention they do not exceed 5 per cent. Even so, I wish to represent to the House that there is no reason why professional men, merely because they have incorporated themselves as directors of a company, should be penalised to the extent of something like 25 per cent. of their salaries, because that is what it amounts to if one first makes a deduction for the £2,500 allowance.
The fact of their incorporating themselves gives them an advantage—I hope that the right hon. and learned Gentleman will not use this argument—in limited liability. That of course is not likely to be of much use to them and was probably not the reason why they incorporated themselves in the first place. In all cases it is a question of people whose capital is rather their personal skill and their professional reputation than any funds they possess.
I would give the House a few examples of how this actually works. In the case of four whole-time service directors, holding all the shares of the company, and each drawing a salary of £3,000, each would then pay nearly £600 in Profits Tax. Suppose, as happened in another case I know, there are four whole-time directors holding all the shares, and four directors who are not shareholders in the company. The non-shareholders can draw any salary they like without paying Profits Tax on it. Take a third case, where there are three co-directors. A, who is the founder of the firm and built it up owns 80 per cent. of the shares: B, and C 1080 own 10 per cent. each. Of course, they get £2,500 exemption, and that may be shared equally in which case it would work out at £833 each. But it is surely likely in a case of that kind that the man who has founded and built up the firm will pay the salaries in full of his co-partners and bear the whole burden of the profits plus the tax on his own salary, which is written back then into profits.
Take another anomaly. If one man turns himself into a company his exemption is £2,500, but if there are 16 equal shareholders, all working directors, each drawing a salary, say, of £1,000, the exemption is only £2,500. In other words, their exemption is only £156 each. The whole thing bristles with anomalies as soon as it is regarded from the point of view of professional men joining together whose capital is their own personal skill. They are not producing anything except advice and yet on their fees, because that is what it amounts to, this Profits Tax is still applicable, merely because they have incorporated themselves into a limited liability company. I submit that the only fair way is to bring all the cases of professional men in this position into line together, as professional men, rather than to line them up along with the large industrial companies to which this Profits Tax was originally intended to apply.

§ Sir Stanley Holmes (Harwich)
I beg to second the Motion.
I can do so without any personal interest, because, although I have been a member of a profession for over 40 years, I have always been in partnership and therefore will not be affected in any way by this proposal. My hon. Friend has said that this applies to very few people in any of the professions, and that is quite true. In my experience the main reason why members of firms have turned themselves into a limited company has been in order to provide an income for the widow of the head of the firm or one of the important members. A widow is not qualified to be a member of a partnership, but she can become a shareholder if the partnership is turned into a private company.

§ Mr. Pitman
I should like to support the Motion. I think that hon. Members will remember how in a previous Budget Debate we tried to get an exemption for 1081 small partners from Surtax on their undistributed profits. It was made clear that the difficulties in that situation were confined, because of stock and other matters, to traders, but that they would not arise in the case of professional men. I would, therefore, make it clear that this new Clause excludes traders and also, under the terms of our wording which has been taken from the Act of 1937, professional men such as members of the Stock Exchange or even partners in Lloyds. I imagine that the proviso excludes them. Therefore, the new Clause covers only a very limited class of professional men who are professional men in the narrowest sense of the word. I have particularly in mind those professional men who are consultants to businesses up and down the country, and who advise on efficient management and Organisation and Methods within industry.
In the past, I understand that the Government have encouraged those partnerships—because really they are partnerships—to form themselves into limited companies in order that they may have this advantage in regard to Surtax which the ordinary company has but which is denied to the trading partnership. They form themselves into a limited liability company so that, when they do not distribute the whole of their profits and retain part in the business for the next year when there may be a loss, they do not have to pay Surtax on the undistributed part of their profits. We are most anxious that the principle which applies to Surtax should equally be applicable to Profits Tax.
The exemption which has been given for Special Contribution under the Tenth Schedule should apply equally to Profits Tax. These companies are formed largely at the request, and certainly with the approval, of the Inland Revenue Department. Having formed themselves in that way, it is very hard that they should be hit for Profits Tax only because they are set up as a company rather than as partners. The whole purpose of this new Clause is to give them this benefit which, I think, the Government intend that they shall have.

§ The Solicitor-General
I hope that the House will reject this new Clause. The position before 1947 was that the National Defence Contribution, which was the predecessor of Profits Tax, fell upon 1082 individuals and partnerships, but those individuals who could be said to be carrying on a profession were excluded from the scope of the tax. This new Clause proposes that not only individuals and partnerships which are carrying on a profession, but also companies which render professional services, should now be excluded from the Profits Tax. I would observe in passing that part of the new Clause is unnecessary because, since 1947, Profits Tax has not applied to individuals or partnerships. It only falls upon companies, so, in any case, that point of the new Clause is otiose.
Is there really any case at all for selecting companies which render the service of providing professional services from the ordinary run of companies which are included in those liable to Profits Tax? I can see no reason whatever. As I appreciated the arguments of the hon. Gentleman who moved the new Clause, it really was a criticism of the arrangements with regard to treating remuneration of directors, other than whole-time service directors, as a deduction far the purpose of assessing the Profits Tax. The hon. Gentleman said that, for one reason or another, he did not think these particular provisions had worked out well, but that they had produced anomalies. Whether they do or not, they produce precisely the same anomaly when we are talking about the company which renders professional services as when we are talking about the ordinary trading company.
Let us take two persons who carry on in partnership an ordinary trading undertaking. When they convert that trading undertaking into a company, why should they be any worse off than two persons who carry on a profession and turn it into a company? The equities are exactly the same, and there is no reason why we should prefer those who run a professional service to those who run a trading service, who have an equally good case, if they have any case at all, for being excluded from the Profits Tax. The Profits Tax is designed to cover all companies, and it covers all their trading income, and, with certain exceptions, all their investment income. There are no exemptions. It is now sought to make an exception solely in the case of companies which run a professional service.
Once one accepts the conception of a tax which is designed to impose a tax 1083 upon companies, there cannot be, for the reasons advanced in the course of the Debate, any discrimination as between companies which render professional services and companies which carry on a trading undertaking. After all, the reason was explained by the Chancellor of the Duchy of Lancaster in April, 1947, when he recast the National Defence Contribution into the Profits Tax and excluded individuals and partnerships from its scope. He said that the Surtax fell upon the earnings of partners and individuals, but did not fall upon the undistributed income of companies. That was the reason why he excluded partnerships and individuals from the scope of the tax.

§ Mr. N. Macpherson
The main difference is in the ambit of Profits Tax. In the case such as that which I mentioned, there is no purpose at all, and it is not indeed the practice, to build up reserves or to have undistributed profits. That is one of the main differences.

§ The Solicitor-General
I cannot see that that makes any difference at all. That is simply a matter for domestic arrangement in the company concerned. There are some companies, members of which render professional services, which might think it desirable to build up reserves; it is a matter for themselves. The reserves, if any, are not liable to Surtax, while the earnings accumulated by individuals and partnerships are, and that is why they are taken outside the scope of the tax. All companies, so far as this matter is concerned, stand on the same footing, and, for these reasons, I hope the House will reject the new Clause.