§ Where industrial buildings (as defined by section eight of the Income Tax Act, 1945) plant and machinery are valued as assets for the purpose of assessing estate duty, the scale in accordance with which duty is to be charged on such value shall be the same as that applicable to the agricultural value of agricultural land under subsection (1) of section twenty-eight of the Finance Act, 1949.—[Sir W. Wakefield.]
§ Brought up, and read the First time.
§ Sir Wavell Wakefield (St. Marylebone)
I beg to move, "That the Clause be read a Second time."
The purpose of this Clause is to give financial relief where the death takes place of the principal of a small private business, partnership or private company controlled by one person. Sections 46 to 59 of the Finance Act, 1940, provide for valuation by assets for the purpose of Estate Duty. This type of valuation may bear hardly on a family. Where the owner of a controlling interest dies, and the valuation of his business made on assets might amount to £100,000, it might happen that the business had been making small or no profits, and when put up for sale to realise cash for the payment of Death Duties it might bring in only £50,000 or £60,000. This Clause does not apply to public companies and private companies not controlled by one person. In their case, Estate Duty is 1669 calculated in share valuation and not on assets.
I am asking for sympathetic consideration for the Clause, because I think it is contrary to the national interest that businesses should be sold up resulting in a complete change in the essential character and direction of the whole concern. It is surely wrong that a proprietor fearing that at death something of this kind should take place, should have to put his business up for sale and that he should have to find cash to provide for his family before his death. It is also wrong that a man whose whole attention ought to be concentrated on the running and operation of his business should have to have a personal anxiety in what is to happen to his family when he dies.
The imposition of Death Duties at their present heavy scale, I suggest to the Committee, is onerous on manufacturing businesses, because in such businesses there are usually large fixed assets required for the business—factory buildings, plant, and machinery as well as current assets. It is very often impossible to liquidate such fixed assets, as easily as current assets in a trading business can be liquidated. We all know that there are inflated prices at present and, therefore, that additional capital is required for the replacement or modernisation of equipment and machinery.
I hope that the Solicitor-General will convey to the Chancellor of the Exchequer my suggestion that a committee of inquiry be established to go into the whole situation. I hope that such a committee, if set up, would inquire into the effect on small businesses and firms of the present heavy and penal taxation. I believe that if such a committee of inquiry was set up, and the facts were obtained, it would cause anxiety to the Government, because I think it is—
§ Sir W. Wakefield
I will not pursue the point about setting up a committee. I was only suggesting that it was one of the ways by which the facts could be established if there was any question of a dispute about the points I am raising.
What I wish to emphasise is the importance to the national economy of the medium and small-sized businesses 1670 and private companies. Much of our export trade and business is done by this kind of concern, and the value of the family business tradition, with its skilled knowledge and close personal contact between management and workers, is a national asset which ought to be preserved and not destroyed. I suggest that everything ought to be done to encourage and help this kind of business instead of the opposite, which now happens.
The value of this kind of business to the nation was shown during the war, when the importance of having small units, flexible and able to turn their productive capacity to the needs of the nation, was amply demonstrated. Unless this penal taxation ceases these small firms will not be able to exist. That is the purpose of this Clause, because with penal Estate Duties we shall not get a development of great and successful firms from small beginnings, such as we have had within the last 50 years. With these high rates of Death Duties and taxation it is no longer possible to plough back profits into reserves to enable Death Duties to be paid and the business to continue under the same management.
The proposal in the new Clause would mitigate this burden upon industry. The proposal has a precedent. In 1925, when the Death Duties were increased, agricultural land was exempted from the increase, so as to maintain in the agricultural industry the capital invested in it. I am suggesting that the exemption from increased duties thus accorded to agricultural land has been maintained, so that the rate of death duty has been at 55 per cent. of the general rate. I would like to suggest that the working equivalent to land of the private manufacturer is his factory plant and machinery. These assets have already been defined for Income Tax purposes, and from an administrative point of view there should be no difficulty in the working of this Clause. I conclude by asking for the Government's most sympathetic consideration of the Clause. By acceding to it, I believe they will help to preserve a great national asset instead of destroying such assets, which is the case under the present legislative position.
§ Mr. Odey (Beverley)
I do not propose to detain the Committee very long tonight on this point, but I do not think that the Chancellor of the Exchequer, 1671 when he increased the Death Duties last year, realised the effect which the increase would have upon the economy of this country. I am not concerned this evening with the position of the individual in relation to the Death Duties, but I would like to remind the Committee that two-thirds of the industrial activity of the country is represented by small concerns which are privately owned—private companies or partnerships, or individual businesses.
Let me take as an illustration an estate which is a company, and which is worth £120,000. The head of that company, who owns 80 per cent. of that concern, dies. It is probable that the cash immediately available in that concern is £15,000. For Estate Duties that estate is called upon to pay the sum of £50,000. That means to say that that private company, which has been built up very largely, I have no doubt, by the efforts of the man who has died, has to be realised suddenly.
It is the submission of my hon. Friends and myself that the effect of this legislation, of these high rates of Death Duties, will be to break up private companies which have been the foundation of the economic prosperity of this country. The sooner this point is brought home to the Chancellor of the Exchequer, the better it will be for the future prosperity of the people of Britain. What we propose in this Clause is that in a case of that kind the estates should be treated as agricultural land is treated in a similar case.
The reason for this Clause is that out of these high Estate Duties, the position of the private companies has become precisely the same as the agricultural estate; and what we are seeking is that the plant, and assets, of these private companies should be treated in the same way as agricultural land. The valuation of agricultural land has been unchanged since 1925 and, as a result, is assessed at 55 per cent. of the general rate. We ask for similar treatment for the plant, premises, buildings and estates of private companies.
§ The Solicitor-General
I am sorry to say that I cannot advise the Committee to accept this proposal. The hon. Member for St. Marylebone (Sir W. Wakefield) 1672 referred to Sections 46 to 59 of the Finance Act of 1940 and, by that reference, I assume that he intended to deal with Section 55, which provides for the special net assets basis for valuation—the assets of small companies. This Clause proposes that the assets of these small companies and partnerships should be valued at very nearly as low as half as that applicable in other cases for estate duty purposes. This Clause wants a valuation as in the case of agricultural property, and that, as I have said, is practically half the rate.
The assumption put forward is that these small companies are of such preponderating importance in the national economy—it was put as representing two-thirds of the national industrial activity—and that, owing to the Estate Duty on which their plant and machinery was based, they are being driven out of business. I cannot accept that assumption. I am informed that, so far as their importance in the national economy is concerned, something less than 10 per cent. of the total industrial profit belongs to this group; the small and medium-sized "family" businesses. I am referring to businesses making between £2,000 and £10,000 a year. If one takes that group, then something under 10 per cent. of the total volume of industrial profits belongs to it. There is a long-term tendency for industry to be concentrated in the hands of large public companies.
We are talking simply about Estate Duties, and there is little evidence that this, in any appreciable sense, is accelerating the process. What is causing it is that the degree of capitalisation in industry is growing ever greater, in terms of the amount of capital employed per worker, and private companies cannot command the volume of capital required on the present scale of capital industrialisation. A number of these small companies are having outside capital brought in to provide the needs of modern industry.
If one is looking at the position from a purely tax point of view, there is another tax provision in the tax code which has a much greater influence upon them than the Estate Duty valuation basis. That is the provision in the 1922 Act which says that if a company—broadly speaking, a one-man company—controlled toy not more than five persons does not distribute a reasonable amount 1673 of its profits, the profits are treated for Surtax as income of the persons interested. Everybody is familiar with that provision. It is because of the provision that if a private business is very successful and expands, it is, in the long run, converted into a public company, because it is only by converting it into a public company that the obligation to pay Surtax upon the undistributed profits of the company can be avoided. No doubt, so far as the tax position is concerned, that would result in a tendency for private companies gradually to be converted into public companies.
So far as the economic reasons are concerned, I stated, a little earlier, that private persons, generally speaking, cannot, from their own resources, command the necessary volume of capital to capitalise their resources on a scale appropriate to modern conditions. That being the answer which I make to both the reasons advanced in favour of these proposals, there remains very little to commend them. It is a rather sweeping proposal practically speaking, to halve the Estate Duty chargeable upon the assets of the small companies.
§ Sir W. Wakefield
The Solicitor-General is under a misunderstanding, I think. It is not suggested that the rate of duty as applicable to agricultural land should apply to the whole of the assets of these partnerships or private companies, that is to say, the current assets, stock-in-trade, and all the rest. It is only proposed to apply such reduced rate of duty to industrial buildings, to plant, and to machinery.
§ The Solicitor-General
I do appreciate it because the new Clause clearly specifies it. The proposal relates only to industrial buildings, plant, and machinery. If I seemed to imply that it extended further, then my language was ill-chosen. Even applied, as it does, to the buildings, plant, and machinery—the fixed assets of these small companies—the suggestion that the Estate Duty on them should, broadly speaking, be halved is a very sweeping one and no case could be made out for that special provision in the case of these small companies.
Agricultural land has been valued on a different basis for many years past for special reasons. But no such reasons exist in the case of the small companies to which we have been referring. 1674 There is a general tendency for them to be enlarged into large-scale public companies. That is a tendency which will not be really affected by this proposal and I think the Committee ought to reject it on the grounds that no case can be made out sufficiently strong for this special treatment of the assets, or those parts of the assets of the small companies we have been discussing.
§ Mr. Selwyn Lloyd
I make no apology for speaking, because I do not consider it is my fault that we have to discuss a complicated matter of this sort at 1.25 in the morning. This is really a matter of some importance. Although I agree, in some ways, with what the Solicitor-General says, I am disappointed he does not seem to appreciate the gravity of this problem. One of his hon. Friends, the Member for Edmonton (Mr. Albu), earlier in the day, talking on the Profits Tax, said that the smaller companies were in a rather special case. I am sorry to hear that the Solicitor-General does not take that view. He does not seem to appreciate the seriousness of the problem facing many small businesses.
One reason he gave for taking no action seemed quite deplorable—the fact that small companies were having constantly to expand into larger businesses. He seemed to think it was a good thing, and he was quite prepared to permit it to continue. I think that is a bad thing, because the more small businesses there are the better. There is really a very serious problem here. I have a constituent who came to see me about a particular case, and who said that it would be quite impossible to realise, for the shares in his company, on a forced sale, anything like the break-up value. That man knew that when he died—and he was over 60—the business must be broken up. I do not think that that is a good thing for businesses or the people employed in them or the country.
The effects of the 1940 Act have gone far beyond what they were intended to go owing to changed circumstances and the incidence of taxation. I therefore hope that the right hon. and learned Gentleman will give us some comfort and will cause some consideration to be given to the very great difficulties which many of these companies face. [Interruption.] I gather that the levity below the Gangway is not directed at my arguments, but at 1675 some of my colleagues. Most of the hon. Members opposite seem to be more or less awake, which is perhaps just as well. I seriously ask the right hon. and learned Gentleman to give at least an undertaking to have this matter examined.
§ Lieut.-Colonel Sir Walter Smiles (Down, North)
I would just like to call the attention of the Committee to one example. The argument of the right hon. and learned Gentleman did not convince me at all. A man I know very well, who has been in business in Blackburn and in Northern Ireland since he was 20 years old, called on me about three weeks ago and said it was proposed that he should turn his business into a public company. He said, "I do not want to do that. I have a family of two sons and two daughters and I would very much sooner keep this business as a private business. The Estate Duties prevent my doing such a thing and it is necessary now, if these duties are to be paid when I die—and I am just over 60—that I make provision for my family."
That is one business that I know very well and the Clause that my hon. Friend the Member of St. Marylebone (Sir W. Wakefield) has moved certainly fits exactly what that man told me. I believe it would be a very dangerous thing if all these private businesses were swept away. I know several of them, such as big textile machinery manufacturers who export all over the world, and their shareholders' and directors' meetings consist of exactly the same people. I feel it would be a very bad thing for the economy of this country if everyone goes into a big limited liability company that does not "feel" anything and the smaller private businesses are swept away.
§ 1.30 a.m.
§ Mr. Lyttelton
I hope the Solicitor-General will give us an undertaking that he will look again at the matter, which he has really dismissed much too lightly. Two things are happening now with small businesses, and the first one is this. Take the case of a man with his money invested in a £100,000 business. With his earnings taxed he might get, with his family, £2,500 a year, but if he sells the business and severs his connection with it he has £100,000 free capital. Thus the pull against people remaining in the 1676 family business and towards their selling is becoming ever stronger. On top of that we have the very serious matter of Estate Duties which cause the companies to be broken up and, as sales are forced, they are often sold at quite a small fraction of the break-up value. It is difficult to prolong a discussion at 1.30 in the morning, but the right hon. and learned Gentleman has shown that the Government have no appreciation of this very serious problem.
§ Mr. Erroll (Altrincham and Sale)
I should like to impress on the Government the importance of looking at this matter seriously. They are obviously not in a mood to accept the Clause, but I would assure the right hon. and learned Gentleman that this is a serious matter for a number of small businesses. On almost every occasion when a new public issue is made, converting a private company into a public company, the reason given is the problem facing the family because of anticipated Death Duties. It is a serious matter that the whole character of a prosperous small business should be altered on the death of either the owner or the principal proprietor. The situation arises largely through the incidence of Death Duties. The fact that these small companies may represent only a small proportion of the total profitability of industry in this country is nothing by which to judge. They are a valuable element in our industrial complex: they should be encouraged, not trampled down by lack of foresight by the Government.
§ Sir W. Darling
The Solicitor-General has impressed me with the idea that it is the desire of the Government to accelerate the closing of small businesses. He seemed to think that there was a degree of inevitability about this process, and was rather inclined to encourage it. That is a deplorable thing. Although they make up only about 10 per cent. of the national balance sheet they are an important part. There is an intimate relationship with the staff; in many cases members of the staff have become directors or private shareholders. These businesses are of a very different character from the large corporations and they should be encouraged. The small business of today may well become the large business of tomorrow. The Government should encourage the greatest variety of businesses dealing with every aspect of 1677 production throughout the country, under a personal leadership.
The Government have expressed the view that fiscal policies should be used as controls, but I cannot believe that they have deliberately determined to use the fiscal policy to break up the small businesses of the country. They seemed to say, "It is inevitable that these small businesses should be destroyed, so let us hasten the day by refusing to accept this Clause." In effect, they advise people like myself to realise our capital, to sell a business which, say, brings in £10,000 a year and to take £100,000 capital and to live extravagently without caring what happens in the future. As my hon. and gallant Friend the Member for Down, North (Sir W. Smiles) has discovered, people of my age are encouraged to do that.
Surely the last thing the Government would want to tell the small shopkeeper, the small industrialist, the small manufacturer and his employees is that they are determined to squeeze them out of business as quickly as they can manage it. I hope that no such message will go from the Treasury Bench this morning and that the Government will look at the situation again, will call before them a dozen or so people in these circumstances and will reach a different conclusion.
§ Colonel Crosthwaite-Eyre (New Forest)
I cannot let the right hon. and learned Gentleman's speech pass without challenge, because his argument was based on two points which were incorrect. First, he said the real issue was not to do with Death Duties but to do with the fact that the small businesses could not raise the necessary capital. His second argument was that under the 1922 Act no small business could carry on because it could not retain profits because they would attract Surtax. In effect, the right hon. and learned Gentleman wrote off the whole of our arguments by drawing these two particular red herrings across the trail.
When he makes those statements he must make them with authority. Is it not a fact today that the banks have lent more to industry than in any other period in our commercial history, and that it has never been so possible for small businesses to get credit? If the right hon. and learned Gentleman insists on his statement will he please say in 1678 how many cases small businesses have not been able to carry on because they could not get the necessary working capital? I challenge him to produce any case or evidence to substantiate what he said. I challenge him, and I do not mind saying that he cannot do it.
Can the right hon. and learned Gentleman now state whether there is any case where the 1922 Act has destroyed a small business and made it go into either a public company or amalgamate with a joint store? The two arguments he has produced are entirely fallacious and he cannot substantiate them with one single instance. They are typical arguments produced by the Treasury Bench when they want to avoid a matter of great principle. They try with great skill to drag in any exterior argument which they cannot substantiate. I think it a great pity that a Law Officer, a man whose judgment should be respected, makes use of arguments which he knows he cannot substantiate when challenged.
The real issue, and a simple one, is that if we do not have some such Clause as this we shall find that in all small towns and market communities family businesses and individual enterprise will die out. More and more of these towns will become the preserve of the Co-operative Society and Marks and Spencers. I hope the Solicitor-General or the Minister of State will now produce some more valid arguments than we have heard so far.
§ Question put, and negatived.