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

§ Sir J. Mellor
I beg to move, "That the Clause be read a Second time."
I acknowledge that I have some private interest in this matter. The purpose of this Clause is to exclude from the scope of the Profits Tax income from rents which are restricted under the rent Acts. In my submission, the incidence of the Profits Tax is unfair upon the very small profits it is possible for people to make from restricted rents, and the imposition of it is inconsistent with the frequent declarations which have been made on behalf of the Government with regard to the purposes of the Profits Tax. It is instructive to look for a moment at one or two of these declarations. The former Chancellor of the Exchequer on 15th April 1947, in making his Budget statement, dealt with his proposal to increase from 5 per cent. to 12½ per cent. the Profits Tax on distributed profits, and said: The case for this increase of tax is threefold. In the first place, I must collect, as I indicated last year, some additional Revenue to replace, at least in part, the loss of Excess Profits Tax. I am sure it will be generally agreed that at no time did profits from restricted rents ever come within the scope of the Excess Profits Tax. The right hon. Gentleman proceeded: The second argument I have already given. Distributed profits have been too high and too inflationary. I am sure it will be recognised that profits from restricted rents have never been sufficient to be inflationary in any sense 1044 whatever. Then the right hon. Gentleman said: In the third place, this increase of Profits Tax does rough justice within the broad field of investment income"—[OFFICIAL REPORT, 15th April, 1947; Vol. 436, c. 84.] When anyone talks about doing rough justice he is really apologising for doing a great many injustices. The former Chancellor, later, in his second Budget proposals, said, on 12th November, 1947: … profits as a whole are still running at a very high level. I therefore propose to double the Profits Tax.…"—[OFFICIAL REPORT, 12th November, 1947; Vol. 444, c. 401] which he did. Again, the whole emphasis was that Profits Tax was to be imposed on profits because they were running at a high level. The present Chancellor, a fortnight later, speaking on the Second Reading of the Finance Bill, on 25th November last, said: So far as the non-inflationary effect of charging a double tax upon the undistributed profits is concerned, there seem to have been several different views expressed. But one thing is certain, that at least an extra 7½ per cent. of those profits will not be able to be spent on any capital improvement, because that will be taken away by taxation. …"—[OFFICIAL REPORT, 25th November, 1947; Vol.444, c. 1914.] Surely, the Government do not wish to stop money being spent on the capital improvement of property of the type with which we are concerned in this Clause for any financial reasons. It is true that they restrict and control such capital improvements but they say they do it because of the shortage of labour and materials. If they were available the Government should be the first to welcome money being spent on capital improvement, so that the homes of our people might be brought back into a more habitable and happy condition.
The Ridley Committee's Report, with the support of two of its members, the present Ministers of Pensions and Works, made it clear that a revision of legislation affecting rent restriction was urgent. We are still awaiting that revision. The Government have said many times that they cannot give time for it, but it seems rather intolerable that, while we are awaiting that legislation, the owners of properties who are suffering from these restrictions should be hit again by the Profits Tax. I know the Solicitor-General will not find it difficult to point to many 1045 other kinds of restricted income from one source or another which are also subject to Profits Tax, but it is a very poor argument to say that a wrong cannot be righted because many other wrongs will remain unrighted. We are faced with a mass of anomalies, but here is a wrong which can easily be righted. It is quite inappropriate that Profits Tax, in present conditions and at present rates, should be applied to income from restricted rents.

§ Mr. Gammans (Hornsey)
I beg to second the Motion.
Like my hon. Friend the Member for Sutton Goldfield (Sir J. Mellor), I wish to declare a small personal interest in this matter. It is not easy to defend the Profits Tax when the Government realise the necessity for encouraging enterprise in industry and attracting new capital to it, but I suggest that in the case of property it is easy to make out a special case for exemption from Profits Tax altogether. I but I suggest that in the case of property, should be completely exempt. I hope no one will pretend that it has been possible for a property owner or property company to make inflated profits. That removes one of the justifications which the Chancellor put forward for the tax. There are two very clear reasons why a property company could not make very inflated profits. In London and other bombed cities a vast amount of property was destroyed during the war, and income from it lost. For a year after Munich and at the beginning of the war there was difficulty in letting a lot of property in London, except at reduced rents. Also, there has been no additional property income.
On the other hand, there has been a great addition to expenses. Everything connected with property has increased—such as repairs, coal and wages. I therefore suggest that it is reasonable to regard income from property as being in a very special category, and it is on that that I base this claim. There would be no administrative difficulty whatever, and for the reasons which my hon. Friend and I have advanced I sincerely hope that the Government will be able to accept this very reasonable new Clause.

§ The Solicitor-General
I feel that the arguments that have been advanced are based upon a misconception. We are 1046 discussing whether a particular category of investment income should be excluded from the scope of Profits Tax, which, as the House knows, is the successor of the National Defence Contribution. In the case of the National Defence Contribution the position was, generally speaking, that investment income was not liable to tax. Certain types were liable, but, broadly speaking, investment income was not within the scope of that contribution at all.
The history of the matter is that the Finance Act, 1947, which reconstituted the National Defence Contribution into the Profits Tax, altered the tax in a material respect and brought within the scope all investment income, broadly speaking. The only investment income excluded was franked income, that is to say, investment income which has already borne tax. The new tax, as it took shape under the 1947 Act as the Profits Tax, was one not only upon trade receipts, but one which was intended to include investment income.
The proposal before the House is that we should select one particular category of investment income and, as I understand it, select it solely because it is subject to a limitation, and exclude it from the scope of the tax. It seemed to me that the hon. Member for Sutton Cold-field (Sir J. Mellor), who moved the Second Reading of the Clause, really gave the answer to his own argument. What possible justification is there for selecting that form of limited investment return and not equally excluding all the other categories that there are? Take the case of a company which, instead of investing its reserves in property which produces a rent subject to the Rent Restriction Acts, invests it in gilt-edged securities or in any fixed-income bearing securities. That company would have just as good a claim for saying that its fixed income arising from this fixed-return security should equally be excluded from the scope of the tax. The only way in which, as I conceive it, that argument could be put forward is to say that from the scope of investment income which is within the Profits Tax all income which is fixed in amount should be excluded.

§ Mr. Gammans
Is there not all the difference in the world between income from a reserve fund and the total income 1047 of a company? The right hon. and learned Gentleman referred only to the interest on a reserve fund, but in this case the total income of the company is affected and is restricted.

§ The Solicitor-General
The proposal is simply to exclude income when it forms investment income. It would add income arising from property subject to the Rent Restriction Acts to the exclusions which appear in paragraph 7 of the Fourth Schedule to the 1937 Act. The proposal is simply to differentiate in the case of a particular sort of investment income. Suppose that were done. Generally speaking, I think it would be correct to say that a company invests its reserves in one sort or another of fixed-income securities, for example, gilt-edged. If this proposal were accepted every company which has adopted what is after all a prudent and conservative course in selecting that kind of investment for its reserves could equally say that its reserves should be excluded, and it would have a grievance if some sort of preference were given to property subject to the Rent Restrictions Acts.

§ Sir J. Mellor
Section 32 of the Finance Act, 1947, to which the right hon. and learned Gentleman is referring, provides that income received from investments, or other property, shall be included in the Profits Tax except—and then there are three paragraphs of exceptions. I was proposing to add another exception, referring only to income from the other property

§ The Solicitor-General
Section 32 brings in income from investments and other property as distinct from income of a trading character and from trade receipts. It adds income from, as it were, static investments and static property to trading receipts and income already within the scope of the National Defence Contribution. What the hon. Gentleman desires is to exclude from that new category an income simply of a particular type, namely, rent which is subject to the Rent Restrictions Acts.
I do not really think I can add any further argument to that which the hon. Gentleman himself envisaged, that there is no case for distinguishing between this 1048 kind of income and all the other types of investment income which are selected by prudent companies in deciding what they will do with their reserves. They would have a very great grievance I should think if one selected this particular sort of income. The only case made for the proposal is that the income is subjected to a limit, but so are any gilt-edged security, various sorts of mortgages, and many of the more certain and conservative forms of investment. The more conservative it is, in the sense that it is gilt-edged, the more one finds that the return is subject to an upper limit.
I feel that no case can be made out for accepting the proposed new Clause. It would mean that, one would have radically to recast the Profits Tax, and to accept the principle that because there was an upper limit to an investment it should be outside the scope of the Profits Tax.