§ Sub-paragraph (c) of paragraph 13 of the Fourth Schedule to the Finance Act, 1937, as amended by paragraph 2 of Part III of the Eighth Schedule to the Finance Act, 1947 (which defines the expression "whole-time service director" for the purpose of the profits tax), shall be amended by the omission of the words "five per cent." and the insertion of the words "ten per cent."—[Colonel Hutchison.]
§ Brought up, and read the First time.158
§ Colonel J. R. H. Hutchison (Glasgow, Scotstoun)
I beg to move, "That the Clause be read a Second time."
In order to prevent a company getting rid of its profits by passing them over in the form of remuneration to its directors, it is at present enacted that working directors are not allowed to own more than 5 per cent. of the shares in their company. We believe that that is too strict a limitation and that it has shown itself to be too strict.
159 A man who owns 10 per cent. of the capital of the company, which is all that we ask for in the Clause, cannot in any way control the policy of the company, very little more, indeed, than can a man who owns 5 per cent. of its capital. It would mean an infinite amount of combination among other directors if they were to attempt to get control of the company's policy and so milk the profits in a way which the present Act intends shall be avoided. Consequently, we think that there is no really serious difference between a working director being allowed to own 10 per cent. of the capital and one allowed, as at present, to own only 5 per cent.
Surely it is desirable to encourage a man to have a reasonable financial interest in the concern in which he is working. That is the basis of the conception of profit sharing schemes, and I am not aware that the Government frown upon profit sharing as a method of interesting all classes of workers in the success of the concern with which they are identified. There are a number of quite small concerns, very often of a consultative capacity, in the case of which it would be easy for someone promoted from the ranks to hold 10 per cent. of the capital without becoming a very rich man. Concerns such as insurance brokers and market research specialists do not need a large capital, and an individual with a humble origin might easily hold 10 per cent. of the capital without in any way being a wealthy man.
We believe that the present Act is a deterrent against appointing as a director a man who already holds more than 5 per cent. of the capital, although the prosperity of the company might demand that he should be a director. That means that at present there is a deterrent against appointing as a director of the company in which he is working a man who has shown his quality and worth. If the man is a director, in the present situation there is a deterrent against his having a worthwhile holding in the company with which he is identified. We think that the present situation is wrong, and for the reasons which I have given we believe that it will be improved if the Clause is accepted.
§ Mr. Erroll
It must surely be agreed on all sides of the Committee that one of the most desirable methods of reaching the boardroom is by working one's way up from the bottom until one reaches a position in which one is invited to join the highest counsels of the company in which one has worked all one's life. In the case of very large companies it is not only possible, but often the fact, because there is no financial disincentive if an employee or a member of the staff is invited to join the board.
The difficulty arises, however, in the case of the smaller type of company, often the family concern. Here it is most desirable to encourage the promotion of the best type of executive to the board, and not to confine the direction of the company exclusively to members of the family who may hold large blocks of shares. Here the difficulty is that if an employee is promoted to the board and, because of his faith in the soundness of the company and its workpeople, he has already invested his savings in that company, the company will be penalised if by any chance he should own more than 5 per cent. of the share capital. if that happens, all his earnings are regarded as profit and are subject to a 50 per cent. Profits Tax. Not only is it hardly fair, but it is not in the best interests of the company concerned or of the country.
Our Clause seeks to alter that position by making it possible for the worthwhile, go-ahead employee to invest his savings in the company and then, when he becomes a member of the board, to be able to draw his salary from the company without penalising it through his own efficiency. As matters stand at present, he is compelled to invest his savings in other businesses when, surely, it would be far better, not only for himself but for his company and his country, if he could invest to a large extent in his own company, help his own organisation forward, and thus help the country even more.
§ Mr. J. Edwards
With many of the sentiments expressed by the hon. and gallant Member for Scotstoun (Colonel J. R. H. Hutchison) and the hon. Member for Altrincham and Sale (Mr. Erroll) we on this side of the Committee find ourselves in agreement. However, I do 161 not think either hon. Gentleman has demonstrated that the limitation which they seek to alter really impedes the promotion of executives. Both hon. Gentlemen asserted this, but I do not think the case they made can stand unless it can genuinely be demonstrated, and I do not think any evidence has been adduced to that end.
May I remind the Committee that it seemed perfectly right to those who introduced the Finance Act in 1937 that 5 per cent. should be the figure for whole-time service directors? Although it was debated in 1949, that has stood. I know it will be said by hon. Gentlemen opposite that I always plead it is difficult to draw the line. That is traditionally what Treasury spokesmen say, and I could find just as many examples from the speeches of right hon. Gentlemen opposite when they spoke for the Treasury as hon. Gentlemen could find in my speeches during the course of this Committee stage. Nevertheless, I must put that point of view again.
What is the point of the present limitation? It is designed to exclude those directors who are virtually employees and have only a minor stake in the equity capital of the company. A dividing line has to be drawn, and the present 5 per cent. limit in general achieves the right result. It may be contended—it may, in fact, be the case—that here and there one could produce an isolated example of hardship, but a similar contention might very well be put forward if the limit were raised to 10 per cent.
Moreover, I think it will be agreed that a 10 per cent. limit would be much more likely to cover directors who are in essence part proprietors of the business. We are here concerned to exclude people who are essentially employees, not proprietors. To go from 5 to 10 per cent. would blur the distinction. Therefore, I ask the Committee to agree that we should stay at 5 per cent., which has stood the test of time. We must not blur the distinction which is laid down in the present law, but it would be blurred if we were to go to 10 per cent. I ask the Committee, therefore, not to accept the Clause.
§ 9.45 p.m.
§ Colonel J. R. H. Hutchison
I found difficulty in the explanation of the purpose 162 of the existing legislation when the Economic Secretary said that it was to exclude employees who were not directors or closely identified in the policy of the company. I should have thought that it was the opposite type he sought to exclude by the present legislation and that individuals of that kind presented no danger of milking the profits of the company and should, in fact, have been encouraged. I found it very difficult to follow his line of reasoning, and I should have thought that the legislation intended exactly the reverse.
The hon. Gentleman challenged me to do something which was extremely difficult; to prove to him that this provision was acting to the detriment of the individuals for whom my hon. Friend and I were pleading. Of course, one can only do that by giving examples, either actual or hypothetical. I ask the hon. Gentleman to consider the case of a company with a small capital, but nevertheless doing quite important business of the type I have already instanced—consultative companies—where there is not a great deal of capital in plant and material and with a capital of, say, £1,000. The Government are, in fact, excluding any director who holds more than £50 of capital in that concern, which is a ridiculously low figure.
I still think that the Clause is a move towards reason and equity. I cannot pretend that it is a problem of paramount importance as compared with many of the other Clauses that we have already considered, and have to consider, tonight, and I shall not press it to a Division for that reason. I hope that some of the later and more important concessions for which we are looking may be made all the more easy by my acting in this way. Therefore, I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.