§ After the end of their accounting period for the year nineteen hundred and fifty the enactments relating to the profits tax shall not apply 332 to any trade or business in which all the profits, after the payment of the requisite dividend on any preference preferred ordinary or any other fixed dividend capital and appropriate allocations to reserves, are either distributed to all the persons who at the end of the accounting period of such trade or business in respect of which the profits have been determined are employed in such trade or business or retained wholly for the benefit of such persons.—[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 the Clause is to exempt from Profits Tax those companies and organisations where the workers and the producers own the whole of the equity capital. The illustration I should like to give is that of the John Lewis Partnership, whose headquarters are in my constituency. That organisation has an irrevocable trust, which provides that the whole of the profits on the ordinary shares shall go to the workers. That is to say, all profits which are not needed for retention in the business for working capital or as reserves must be distributed among the workers.
Proposals in the Bill under discussion bear very hardly upon this kind of organisation. In the example I am giving, the effect of the increased Profits Tax on this company means that a fortnight's bonus payments which would have been paid to the workers cannot now be paid. This type of organisation, with its co-partner-ship scheme, has a very large proportion of its capital in the form of preference shares, and I think that is true of various other organisations in the country which have been formed for the same reasons as those of the John Lewis Partnership. Because there is such a high gearing of preference capital to ordinary shares, it means that the increased Profits Tax severely depletes the amount of money which otherwise would be available for distribution to the workers. In fact, the whole of this Profits Tax now falls upon the earnings of the workers.
I put it to the Chancellor of the Exchequer that he and other members of the Government have again and again urged the importance of increased work, of increased production and of the desirability of incentives. The effect of the proposals in this Bill is definitely disincentive, and I therefore urge once again that 333 Members of the Government should implement in actions in the House of Commons what they preach on the platforms outside.
§ Sir W. Wakefield
We have here a clear example of exactly the contrary to what Members of the Government have said in speeches in the country. They want extra production, they want extra work, they want to see incentives; and yet by means of proposals in this Bill, by which the extra Profits Tax is imposed, we are introducing a strong disincentive to workers in co-partnership organisations of the kind which I have illustrated. I hope, therefore, that this Clause will be favourably considered by the Committee and will have the sympathetic support of the Chancellor of the Exchequer.
§ Mr. Thornton-Kemsley (Angus, North and Mearns)
I am grateful for this opportunity of supporting this Clause, and to you, Major Milner, that you have seen fit to call it, because it embodies a new principle and one which has not been discussed on any previous occasion when the Finance Bill has been under discussion.
The present system of taxing company profits is based upon the conception that the earnings in an enterprise go partly to the workers and to the management in that enterprise, in the form of salaries and wages, and partly to the lenders of capital, in the form of dividends derived from profits.
Whilst this distinction between managers and workers on the one hand and investors of capital on the other is, in general, justified in the present organisation of our trade and industry, yet in the diverse pattern of our industry there are one or two exceptions. These occur where the workers in an enterprise share between them the whole of the profits of their labours. Cases of this kind are not at present numerous, but they are increasing, and they certainly ought to be encouraged in every way open to the legislature.
I hope that in a few minutes—fairly soon, at any rate—we shall be discussing a new Clause in the name of my hon. 334 Friend the Member for Flint, West (Mr. Birch)—[Profits Tax. Exemption of fixed preference dividends]. If that Clause is adopted its effect will be to end what the "Economist" called some weeks ago the "fantastic anomaly" by which equity shareholders bear the whole weight of the new 50 per cent. tax upon distributed profits, not only in respect of their own dividends but in respect also of the Preference dividends which rank in front of them. But in an organisation run on co-partnership, co-ownership, or profit sharing lines the anomalous effect of this taxation is seen in its most inequitable form. In such cases the whole burden of the taxation of profits falls upon the workers themselves.
Let me give for an example an organisation which is existing in this country at present and which I can use best as an illustration because I know it best—the John Lewis Partnership. Here let me divulge an interest. I am, in such spare time as I have from being a Member of Parliament, employed in a professional capacity to give advice and help on property matters in connection with the John Lewis organisation, and so I do know it from the inside. The John Lewis Partnership is essentially a producer cooperative society. It has 11,500 members sharing between them in one way and another the whole of the profits derived from the trading in some 20 department stores and about 40 specialist food and other shops up and down the country.
Since it is not essential to the idea of partnership that the workers should contribute capital, the proportion of equity capital has been deliberately kept as low as possible, and about 90 per cent. of the nominal capital takes the form of debentures and fixed interest preference shares. The whole of the ordinary capital is held by trustees for the benefit of all the workers, who share among themselves the real profits of their enterprise.
The sharing of profits is done in two ways. First of all it is done indirectly in the form of such things as a noncontributory pension scheme, welfare arrangements and collective amenities of various kinds; and secondly directly in the form of the distribution of the residual profits, which normally would go to the equity shareholders, in fixed interest bearing shares in the parent company. John Lewis Partnership, Limited.
335 It seems to me that there is a fundamental distinction between the normal public company and a partnership of this kind. The former, the normal public company, is a combination of owners of capital who normally take no active part in the business themselves, but who hire the workers in the business. The latter is a combination of workers who themselves do all the work necessary for carrying on their undertaking, but who hire the capital. In the former case the remuneration of the workers is fixed and the return on the capital varies with the results of the business. In the latter case the reward to the providers of the capital is fixed and the remuneration of the workers is the variable element.
§ The Economic Secretary to the Treasury (Mr. John Edwards)
Is it not true at the moment that the John Lewis Partnership are, in fact, dispersing their funds by way of bonuses, not by fixed interest bearing shares in the way the hon. Gentleman has described?
§ Sir W. Wakefield
I think the Economic Secretary has misunderstood. It is true that any distribution that is made is made by means of a bonus on earnings, not by way of interest, but that bonus distribution cannot be made because of the increased amount of money that is required to pay the tax on the preference dividend, which has got to be paid in any case. I do not know whether that answers the point that is causing anxiety to the Economic Secretary?
§ Mr. Thornton-Kemsley
Perhaps I could take the matter a little bit farther. If it were possible to know in advance the result of each year's trading the whole of the workers' remuneration would be paid upon a weekly basis, or a monthly basis if a salary were drawn instead of wages; but the hon. Gentleman will know that it is not possible to know in advance how the year's trading is going to work out, and part of the remuneration has to be deferred until the result of the year's trading is known, and when that is known it is issued as a general bonus to each worker in proportion to the salary or the wage that he or she earned in the previous year.
This deferred remuneration is as much a part of the worker's total income as is 336 his salary or wage, and quite properly therefore—and I think this was the point the Economic Secretary had in mind—it is allowable as a deduction in computing profits for Profits Tax purposes. On that I would have no quarrel with him at all. That is perfectly justified. The quarrel seems to me to lie rather with the inevitable consequence that the Profits Tax in these circumstances falls not upon the unearned dividends of the ordinary shareholder, but on the earned deferred remuneration of all the workers in the business. That in a nutshell is the case.
It is not possible for this consequence to be avoided since the arrangements are based upon irrevocable settlements in trust, under which the whole of the earnings of the business, so far as they are not required to be retained for the purposes of the business, must go to the workers, and they cannot possibly go anywhere else. The effect of this Clause is to exempt any company, of which the whole of the profits are distributed to all the workers, from the operations of the Profits Tax.
That there are not many such companies at present does not invalidate the claim that those that there are constitute a special case, which on the grounds of equity ought to be met by a separate provision of the law. It is for this reason, and because I believe from my own experience that experiments in co-partner-ship, shared ownership or producer co-operation—call it what one will—ought to be encouraged by Government action that I beg the Chancellor to accept this Clause.
§ Mr. Macdonald (Roxburgh and Selkirk)
In rising to support this Clause I promise to be very brief. I will try to confine my remarks to five minutes, for this is a subject on which I could speak at some length. I shall go further than the hon. Member for St. Marylebone (Sir W. Wakefield) and the hon. Member for Angus, North (Mr. Thornton-Kemsley), in that they were dealing with the John Lewis Partnership and schemes of a similar kind, and I shall deal with profit sharing generally.
We are all aware of the fact that during the next few years, if we are to secure the maximum production for re-armament and the maintenance of our standard of living, we have got to get complete understanding and 337 trust between capital and labour in this country, so that we can secure the maximum effort without the charge being made by many of the workers, "Why should I work harder in order to increase the boss's profit in which I do not share?"
I believe increasingly that this is the way to get rid of a great deal of friction, which may arise between capital and labour, and so prevent a maximum production drive. Large profits are certain to be made during the next few years by a very large number of companies, particularly those in the re-armament industry. I believe in substantial profits. I believe in them as an incentive, and I believe that they should be earned, if the yare earned, in free competition and not by a monopoly, and that they should be shared generously with those who help to create them.
During the last 60 years there have been many splendid voluntary schemes. We all know of those of J. & T. Taylor and of the South Metropolitan Gas Company, Vauxhall Motors, Bryant and May's and many other schemes, but unfortunately, in spite of the fact that these schemes have been so successful and have in every case increased production, we have to admit that owing to the opposition of a large number of industrialists on the one side and the suspicion of trade unions on the other only 2 per cent. of the working population of this country today benefit from these schemes.
It is vital to this country that as large a number of industrial workers as possible should benefit by such schemes, but we cannot urge voluntary schemes if people are not freely prepared to undertake them. In this Clause we get a splendid opportunity of giving an inducement from the Government in the cause of maximum production by telling those firms that introduce generous profit sharing schemes that they will receive a reduction in their distributed Profits Tax.
I would urge the Chancellor of the Exchequer to give consideration to this matter and, if possible, to give it a year's trial, so that we can get clear evidence of the greater production that will be achieved and the improved labour relations that will result. Profit sharing in industry is not the only thing which will produce the maximum production, but it is the corner stone in true industrial 338 relationship and partnership. I ask the right hon. Gentleman to give it the opportunity of proving itself to the country, and on a far wider basis than it does today under the voluntary schemes.
§ 8.15 p.m.
§ Mr. J. Edwards
With a good deal of what the hon. Gentleman has just said I find myself in agreement, but I think that he has misunderstood the Clause. The hon. Member for Angus, North (Mr. Thornton-Kemsley), said that this was a special case. I hope to show that it is not a special case at all. When I intervened to ask a question, I wanted to confirm what I thought I knew already, namely, that the particular case under notice, the John Lewis Partnership, paid out bonuses and that those bonuses were allowed as a deduction in computing the profits of the company for Profits Tax as well as for Income Tax. That is to say, that in so far as we are concerned with the profit sharing aspect of the case, there is no Profits Tax point of grievance on the bonuses as they are paid.
Both the hon. Member for St. Marylebone (Sir W. Wakefield) and the hon. Member for Angus. North, went on to develop the case in another way. If I understood them aright. they were saying that because the company must provide for fixed preference dividends and the Profits Tax at 50 per cent. appropriate to such dividends, and also Profits Tax at 10 per cent. on profits put to reserve, the amount of bonus which could be paid out under the profit sharing scheme was correspondingly less than it would have been had there been no Profits Tax. I think I have accurately stated the case.
I began by saying that this was not a special case; and this is not a point which arises only in relation to profit sharing schemes. Any company which has to pay Profits Tax at the higher rate on its dividends and 10 per cent. on its reserves can say that if it had not had to pay Profits Tax it would be able to pay correspondingly more bonus to its employees. Any company that pays bonuses could put forward the same case as was presented by both hon. Gentlemen. For those reasons it seems that we are here asked to accept a principle which we cannot accept.
Apart from the point of principle there are one or two other points which we 339 ought to bear in mind. I am advised that if anything like this were done it would open a wide door to avoidance of Profits Tax. That is a consideration to be borne in mind. There is also the limited point that in so far as anything like this were conceded we would do away with the incentive to put profits to reserves. A company, under the arrangement contemplated in the Clause, would pay no Profits Tax whether it paid out all its profits as dividends or kept them in the business. Fundamentally one must assert, as was asserted in the previous discussion on a similar theme, that the rate appropriate to distributed profits ought to apply to dividends, whoever the recipient should be. I must therefore resist the Clause.
§ Mr. Thornton-Kemsley
On the last point made by the hon. Gentleman, may I point out that it is only true if there is a special ratio between the preference shares and the equity shares?
§ Mr. Edwards
That remark rather anticipates the debate which may arise in a few moments upon another new Clause. There can be no denying that any company that pays these bonuses is in a position to say, "If we had not had to pay Profits Tax we should have had more money to distribute."
§ Sir Herbert Williams (Croydon, East)
I think that the Economic Secretary is right. I am a director of a company and we always give a bonus. We examine the fund from which we pay out the bonus to our workpeople and we say, "This seems appropriate." I have not the faith in profit-sharing schemes displayed by the hon. Member for Roxburgh and Selkirk (Mr. Macdonald).
What has happened to industries in which there have been profit-sharing schemes? There was profit sharing in the coal mining industry from 1921 and the industry was nationalised. There were profit-sharing schemes in a large part of the gas industry and that industry has been nationalised. There were co-partnership schemes in the iron and steel industry and that has been nationalised. Now only Mr. Taylor of Batley is left.
The suggestion that profit-sharing schemes make everybody contented is not true. Nowadays the distributed profits in most industries are so small in relation to 340 the sums paid out in wages and salaries that no substantial contribution can be made to the earnings of the work-people by any kind of profit sharing. That is why such schemes always leave me cold.
§ Mr. Heathcoat Amory (Tiverton)
In spite of those industries having been nationalised, more firms today practise profit sharing than at any time in our history.
§ Sir H. Williams
The bulk of them will probably be nationalised. I am sure that only a very small number are left. We have only to look at the Ministry of Labour Gazette which pubishes an annual return. About 2,000,000 people who were engaged in some kind of profit-sharing scheme are now the employees of nationalised undertakings and very few others are left.
The last Ministry of Labour report to which my hon. Friend has referred was for the year 1938.
§ Mr. Macdonald
The hon. Member for Croydon, East (Sir H. Williams), ought to visit a number of firms which have profit-sharing schemes and see the increased production and improved industrial relations which have been brought about. To speak in so scathing a way about such an important development is quite wrong. Profit-sharing schemes will be an integral part of future industrial relations.
§ Question put, and negatived.