HC Deb 28 June 1951 vol 489 cc1671-96

Section fifty-five of the Finance Act, 1940 (which deals with the valuation for estate duty of shares and debentures of certain companies), shall be amended by the addition at the end of subsection (1) of the said section fifty-five, of the words "unless the personal representatives of the deceased elect that the value shall be estimated in accordance with the provisions of the said subsection (5) of section seven of the Finance Act, 1894, provided that no greater amount of estate duty shall be payable by any person or company by reason of anything contained in this section than would be payable under the law relating to estate duty apart from this section."—[Mr. Birch.]

Brought up, and read the First time.

7.45 p.m.

Mr. Nigel Birch (West Flint)

I beg to move, "That the Clause be read a Second time."

I must apologise for the fact that the drafting of the Clause is a little clumsy, but it has been difficult to get it in order owing to the fact that there is a danger of imposing a charge. However, after trying for some time it is in order at last.

Its object is to alter Section 55 of the Finance Act, 1940, which, I would say in passing, is rather like several of the Clauses we have had in this Finance Bill. That is to say, it is one of the Mr. Bloodsucker Taxgatherer Clauses, obviously devised by the Department of Inland Revenue to catch tax evasion, but devised without proper regard to what would be the ultimate consequences of such a provision. Those ultimate consequences are injustice to individuals and damage to the industrial structure of our country.

When Clause 55 was brought in in 1940 it was hardly debated at all on the Committee stage of the Finance Bill. It was a good illustration of what happens when we do not have an Opposition. There was also another overriding reason—it was debated during the week of Dunkirk. Its effect was to alter the basis of assessment for Death Duties for one-man businesses or businesses controlled by one man.

Previously the valuation of such businesses for Death Duties had been determined by the Finance Act, 1894, under which such a one-man business was valued at the notional price it would be likely to fetch in the open market, and Death Duties were paid accordingly. Under the 1940 Act that basis was altered and such businesses were valued at the net value of the assets. The Clause we seek to move gives the option to the representatives of the deceased owner of a one-man business either to be assessed under the Act of 1894 or under the Act of 1940. We had to give the option or the Clause would not have been in order.

The reason why I have moved this Clause is that under the Act of 1940 a substantial injustice takes place. Particularly today, with rapidly rising prices for machinery, buildings, land, etc., if a business is valued on its assets the value is very high indeed. It is far higher than its value if sold in the open market as a going concern, and much greater than the value of such a business if it had been a public company whose shares were dealt in on the Stock Exchange.

The reason for that is because the assets are valued in paper £s and the paper £. depreciating very rapidly, puts the price of the assets up in terms of those paper £s. It has been one of the principal claims to glory of the Government that, owing to the immense increase in Profits Tax, the rise in the physical value of the assets is not translated into a rise in the value of the business or in the value of its shares if dealt in on the Stock Exchange; because if we take the average Stock Exchange prices, it will be found that they have gone up by only a very small amount in proportion to the value of the rise in the physical assets in terms of paper £s. So if someone has their money in a public company whose shares are dealt in on the Stock Exchange, they are assessed for Death Duties at a far lower rate than if they own a small one-man business. That seems to me in principle wrong, and very wrong for the Socialist Party in particular.

The Socialists have given up many of their most cherished beliefs—there is only that old William Jennings Bryan, in the shape of the right hon. Member for Ebbw Vale (Mr. A. Bevan), who believes in the old silly stuff—but the one thing they have never given up for a moment is the plenary inspiration of the Stock Exchange. We have been told again and again that the price of a share on the Stock Exchange represents the absolute true value of that holding.

It is worth remembering that if, for the purpose of nationalisation, the shares in those companies that were nationalised had been valued on the basis on which these assets are now being valued, the compensation paid would have been at least two, and possibly three, four, or five times as much. We pointed out that the assets were worth much more, but we were told that that was ridiculous; there was the Stock Exchange value, and the Government could not do anything about it.

I will give an example which has been sent to us of the sort of way in which this works out. This illustration is of a one-man company, of which the chairman is 80 years old. He owns the business, but is rather old to do very much about it. It is reckoned that on an asset basis,

if the assets are valued, the business works out at about £3 a share and with the number of shares that he holds—that is to say, his holdings on an assets basis—it would be worth about £23,400.

But—and this is the point—the company is not at the moment doing particularly well. Last year it made a loss, and owing to the fact that it is now running actually at a loss, the shares would not be worth anything like £3 each. It is reckoned that on a fairly generous assessment they might be worth something like 25s. a share. If one values them at 25s. a share, which is what they are worth if the business is sold, the value works out, on the number of shares this man holds, at £9,750. Therefore the real value of the business, if it is sold, is £9,750. but the value, as it is assessed, is £23,400. Given the fact that the man bas certain other assets, the effect of all this would be that the death duties would be 25 per cent. in excess of the market value of the shares; whereas, of course. if the company had been a public company, dealt in on the Stock Exchange, such things would not have happened at all.

It is impossible at the present rate of tax for anybody to save against Death Duties at their present rates. The effect of the extra twist which this Section of the 1940 Act gives is that it is impossible for one-man family businesses—it is worth remembering that they still account for a very large part of the country's industry—to go on in the family. That is to say, any family is bound to sell the business or to bring it up and to sell the assets because it cannot conceivably put up, out of any profits or savings it might make, the inflated Death Duties with which it is charged.

It seems to us that this is an injustice and a bad anomaly, because the Government should not frame their taxation in such a way that they favour the large and discriminate against the small. In America, of course, taxation has gone much further than we have in discriminating between large and small companies, and taxation on large companies is considerably larger than taxation upon small companies. Here we have an instance where the taxation is far higher upon the small company than upon the large company. The effect of it gets worse every time the value of the pound goes down and taxation goes up. It was bad when it was brought in and was not discussed. It is far worse now, and I think the time has come when something should be done about it.

Sir W. Wakefield

I beg to second the Motion.

I wish to support the new Clause which has been put forward so clearly by my hon. Friend the Member for Flint, West (Mr. Birch). I sit on the Executive Committee of the National Union of Manufacturers, which is composed mainly of small and medium manufacturers, and, of course, amongst its members there are many with the kind of family businesses to which reference has been made.

There is a great and growing anxiety in these family businesses of the effect that Death Duties will have upon them because of the provisions of Section 55 of the 1940 Act, the effects of which have been so concisely and clearly described by my hon. Friend. There are many examples of very great hardship being caused by reason of the valuation of assets rather than of shares as between a willing buyer and a willing seller. The result is that the owners and principal shareholders of these family businesses are now, at a time when they ought to be concentrating to the full on increasing production and making their businesses more efficient, extremely anxious and worried about what is happening.

It is quite possible for an owner of a business, and for his widow and family, today to be left absolutely penniless. It is in fact possible, under the 1940 Act, for a business to be valued by the Inland Revenue and then, in order to raise the necessary money to pay Death Duties to the State, it has to be sold and there is indeed insufficient money to pay the Death Duties and to leave anything over for the family.

I have with me a letter from a most well-known firm of solicitors, in which the writer says: I have in the office several cases which are being dealt with under Section 55 of the Finance Act, 1940… In one case in which I am concerned, the deceased never had control, and is only brought into Section 55 by the very technical reason that for a short time within the three years before his death he had more than 50 per cent. of the income of the company. In this case the results are fantastic. Valuing the shares by reference to the value of the assets of the company, they come out at more than three times the actual price which could be obtained for the shares, with the result that so far as I can see the whole of the estate will be absorbed by the Death Duties, and the Executors will still owe "— a sum of money— for Death Duties. Under Section 55 of the 1940 Act, therefore, there is a personal liability on executors, which is a very serious position indeed. That is one example of the effects of the 1940 Act, which, I am sure, were never intended when the Act was passed.

I have also an article in the "Financial Times" of 7th September of last year, in which an example is given of shares in a private company being valued as between a willing buyer and a willing seller, at £2 10s.; but under the provisions of the 1940 Act and the necessity to value the assets, these shares were calculated to be £8 5s. each. That gives rather less than a 2 per cent. yield basis for non-marketable shares in a private company. It is quite fantastic.

8.0 p.m.

These examples are not just specially selected, but are indicative of the sort of thing which is happening throughout the country. It means the breaking up of these small family businesses and I sincerely believe that irreparable harm is being done to the national economy. I suggest that the Treasury should give the most sympathetic consideration to this Clause, which is merely a return to the position as it was before.

As my hon. Friend pointed out, when nationalisation takes place the Stock Exchange value is taken as a fair basis, and very often assets are worth two, three, four and five times the value of the shares quoted on the Stock Exchange. It seems only right that these private businesses should be assessed and valued on the same basis as the big public companies; that is to say, that the shares should be assessed at a value as between willing buyer and willing seller. If that were done many of the anomalies and grave difficulties with which we are faced at the present time would disappear.

There are several reasons why these private companies assessed for Death Duties in this way are hit more hardly than are people owning shares in public companies. I could give examples which show that there is likely to be a wide difference between the asset value of shares and their realisable value in these private companies, the serious effects of which we are now discussing, when, on account of death, shares have to be realised. If any part of the surplus represents appreciation of trading stock. such part on realisation or liquidation attracts Income Tax and will automatically be apportioned among the shareholders for Surtax purposes. These two taxes may amount to 19s. 6d. in the £. If, therefore, Estate Duty is paid on the value of stock, tax on the surplus may greatly exceed 100 per cent. Again, if any part of the surplus arises from assets subject to wear and tear allowances, balancing charges for Income Tax will on realisation be attracted.

A third point is that any part of the surplus representing profits accumulated since January, 1947, will, on liquidation, attract Profits Tax distribution charge up to, I suppose, 50 per cent. All these matters are very serious to these small private and family businesses. If the proposals and suggestions in this new Clause are carried out, many of the injustices and anomalies which now exist and cause such anxiety to our manufacturers will be removed, and I hope the Treasury will give most sincere and sympathetic consideration to it.

Lieut.-Commander Baldock (Harborough)

I believe there is in industry a field for all kinds of business administration and management; ranging today from, in certain cases, the State control of nationalised industry—for example, in the case of the mines—through the large public companies to the smaller public companies and private companies, down to partnerships and even single-owned companies. If we on this side of the House are prepared to accept the principle of nationalisation and State-run industries in certain cases, then there should be a change of heart on the part of the Government in their attitude towards privately-run concerns. That would seem to be only an equitable thing to ask.

In Leicestershire, in the hosiery and textile industries, there are a great many family businesses which have sprung up, because skilled workers have been able to raise a small amount of capital and acquire one or two machines. They have been able to build up from that into what are, in many cases, very satisfactory and efficient concerns. The ability to be able to climb that ladder is a most important thing in the general morale of industry. So long as it is known that people can step out from larger concerns and start up on their own, and ascend that ladder, there is bound to be greater enthusiasm and enterprise, as well as the possibility for varieties of managements, according to the type of business, the locality and the enterprise concerned.

I think also that the manual workers employed by the various concerns have their opinions about the different sorts of managements with which they wish to work. It is not everybody who wishes to work in a nationalised industry; indeed. judging by the reports of certain union leaders it is a diminishing number of people who wish to do so. It is not everyone who wishes to work in the largest kind of public company. Many people prefer the small concerns, where there is the intimate human relationship between the owner or the family running the business and the people who work in it. I would even venture to say that the majority of workers prefer that relationship, if they can have the other things as well.

Another point is that a great number of these businesses are owned by one man, or by a family, because the owners have in the past ploughed back the profits into the concern, and have not gone to the banks or borrowed money from the public. It is a poor reward for people who have consistently ploughed their profits back into the enterprise to find themselves treated in this discriminatory way when it comes to the payment of Estate Duty. Many of these businesses are the craft type of business which we all know is particularly difficult to maintain in these days. They are businesses which have been handed down in the family for perhaps five or six or more generations; and many of the people who work in them have been employed in the business for as long.

There may be only one or two firms in the whole country which specialise in a particular craft-made article, and it is only when something of that particular pattern is sought for that it is realised how hard it is to obtain. I believe these types of firms are inevitably broken up if the Estate Duty falling on them compels the family owner to relinquish the business. I think that type of highly skilled craft business ought to be considered.

If there is to be a differentiation of treatment between the family concern and the public company, as there is now, or between the man who owns a business and the man whose money is invested in a number of public companies whose shares are quoted on the Stock Exchange; and if we accept the principle of a differentiation between earned income and unearned income—which is accepted in our tax law—surely it would be reasonable to expect the same kind of bias in favour of people who earn their savings and put them back into their businesses.

But exactly the reverse is the case. Whereas if a man earns an income he receives tax discrimination in his favour as compared with the person whose money is invested, the income from which is unearned; the man who puts his money back into his company is discriminated against as compared with the man who invests his money in companies which he may never have set eyes on or with which he has never had any connection at all. Surely that is anomalous. If this type of craft industry, the small industry which is the ladder by which people can work their way up and by which, through enterprise and ambition, they can further their achievements, is crushed out of existence as a result of this process, there will be a great gap in the enterprise of this country in a few years time.

Mr. John Edwards

It is, of course, true that the general criterion of valuation of property passing on death is that contained in the old Act of 1894; namely, the market value at the date of death. But this test was found to be unsatisfactory in the valuation of shares and debentures in a privately-owned company. The hon. Member for Flint, West (Mr. Birch), said something rather scathing about Socialists nowadays, but it was not the Socialists who found this to be a defect. I think that the right hon. and gallant Gentleman the Member for Gains-borough (Captain Crookshank) was at the Treasury at the time when, in 1940, the Government thought it necessary to take these steps to strengthen the legal defences against avoidance of tax. I speak from memory, but I think that that is the substance of what Sir Donald Somervell said at that time.

While I admit that circumstances may change to some extent, I think that the factors which weighed with the Government in 1940 are still not irrelevant. The privately-controlled company is in a somewhat different position from the public company. Generally speaking, the market price of shares depends on a dividend record. The privately-controlled company, instead of paying dividends, applies its income to high remuneration or places the profits to reserve or, indeed, it may so fetter the shares of the company with restrictions as to make them virtually unmarketable in the ordinary way.

Mr. Birch

Surely, the whole point is that they are unmarketable. When the Inland Revenue assess the value of the company as a going concern, the fact that they have paid extra high salaries is all taken into account.

Mr. Edwards

That is the whole point. Market value, as the hon. Gentleman talked of it, will not actually affect the true value having regard to the real assets of the company. That was why the Government in 1940 thought it right to enact in Section 55 of the Finance Act a proposal to supersede the Finance Act of 1930, which they held to be defective, and to provide what was said at the time to be a more realistic basis of valuation in the case of shares and debentures in such companies.

The general aim and effect of the assets basis of valuation where a privately-controlled company is concerned is to get the same Estate Duty as if the deceased had carried on the business on his own account. It must be incumbent upon those who seek a change—those who seek to go back to the pre-1940 position—to demonstrate that in some way there is hardship on the people concerned with the companies that are caught by Section 55 that would not apply to the person running a business on his own account. If the position were in general as described by hon. Members in the examples they have given, then I should agree that this would be a matter of great moment. I think the cases they have given are exceptions, and I do not think they are generally representative of the whole field of the companies with which we are concerned.

8.15 p.m.

The hon. Gentleman who seconded the Motion reminded us of his connection with the National Union of Manufacturers. Of course, they have made great complaint about this. As the Chancellor has pointed out, I think as late as 6th February this year, these allegations have not so far been supported by evidence. However, because the statements continue to be made, my right hon. Friend thought it right that the Inland Revenue authorities should themselves make an investigation into this matter, and a sample investigation has been carried out. Perhaps I may give the House the main outlines of it, because it has a real bearing on the arguments advanced.

Shortly, the investigation threw up cases which applied over the whole field and would seem to indicate that there are about 100 cases a year which can be regarded as hardship cases, using that word in a particular way, namely, to describe any cases in which the Estate Duty on the total assets exceeded the non-trading assets so that some part of the duty would have to be found out of the business. I use the word "hardship" in that rather technical sense in which the inquiry has been conducted, and the report that we have been given shows that, in 60 per cent. of the cases, less than 25 per cent. of the business assets were required to pay the duty, and in only 17 per cent. would the duty swallow more than 50 per cent. of the business assets. Since the National Union of Manufacturers has been mentioned, I should say that only 19 per cent. were manufacturing concerns.

Mr. Selwyn Lloyd (Wirral)

When the hon. Gentleman says that in so many cases the duty has to be paid out of the business assets, surely it is impossible to value the consequences of that without knowing something of other circumstances?

Mr. Edwards

I entirely agree, and perhaps it is wrong to try to summarise when the full report is what hon. Members want to study, but perhaps I may say in passing that it is the intention of my right hon. Friend that this report shall be published as a White Paper, and we shall be able to study it in more detail.

All the same, I thought it would be worth while giving these outline figures, because that is the only way in which I could deal with the individual cases which have been quoted. We found only one case where a business had to be closed down because of this, and it was the case of a stockbroker. The general conclusion was that the investigation had failed to produce any evidence that manufacturing businesses were being broken up by Estate Duty. That is not to say that such cases could not occur; I have no doubt they could, but I think they would be exceptional. Nor has the investigation produced any body of evidence to suggest that Estate Duty, even if it does not close down a business, is a leading factor in squeezing out the family from control. There is no evidence which shows that.

Air Commodore Harvey (Macclesfield)

Can the hon. Gentleman tell us how many firms were selected and how the inquiry was conducted and what was the method used?

Mr. Edwards

I assure the hon. and gallant Gentleman that it was a representative sample inquiry for the whole field which is covered by Section 55. It is not taken over the whole field, but I think it is a big enough sample from which to draw conclusions. I am saying that the investigation which the Board of Inland Revenue carried out has failed to bring out cases of special relief for family needs.

No one else has produced any evidence; the National Union of Manufacturers have not produced any evidence, and no hon. Member who has made a statement on this matter has produced any evidence which can be regarded as evidence of this state of affairs. The conclusion at which we have arrived is that it is too early to consider any special relief for this class of person, and we are consequently entitled to take our stand on the very good reasons which led the 1940 Government to remedy what they thought at the time were defects in the law.

Lieut.-Colonel Sir Walter Smiles (Down, North)

I wish to ask the hon. Gentleman whether he has made any inquiries in Northern Ireland, because there we have a tremendous lot of private companies. I suggest to him that he get in touch with the Ministry of Commerce in Northern Ireland and ask for some evidence from them. Only last month a complaint was made to me about a business in Lurgan which had passed from the grandfather to the father and then to the son, and which was closing down for want of capital. It was a linen business. There is a fear, I believe, that the whole of the flax-spinning side of the linen business may be getting away from private hands and into public companies.

These one-man companies are suffering very badly. I discussed this matter with one of the ex-Finance Ministers of Northern Ireland the other day, and he was emphatic on this point of private companies. As I say, one of the suggestions I would make to the Chancellor of the Exchequer is that he should ask for evidence from Northern Ireland. As we all know, these small businesses are valued at Stock Exchange valuation, which is very different from the valuation which the Income Tax authorities make of a private business. I can think of one business of which I was an employee —I was never a director of it—which had a capital of £1 million. It had liquid assets of £1 million, and paid a dividend of 7 to 8 per cent. The Stock Exchange value of its shares was 22s., just above par value. If a shareholder with, say, £20,000 worth of shares in a private company dies, the whole of those liquid assets would naturally be taken into consideration.

Mr. J. Edwards

Is the hon. and gallant Gentleman talking about a company the securities of which are actually quoted on the Stock Exchange?

Sir W. Smiles

Yes.

Mr. Edwards

In that case, it is excluded from the operation of this Clause.

Sir W. Smiles

Exactly. That is the example I put. If the man had under £20,000 of these shares, the valuation would be approximately just over £20,000, but if he held the same value of shares in his own business, it might come to twice or three times as much. That is why I think the private company or one-man business will suffer compared with the man with the same amount of capital who holds it in a public company. On the one hand, it is a private company and the man is running the business himself, and, on the other, it is a public company in which the man holds shares.

I believe that this Estate Duty will put private companies out of business. I could name a whole lot of such companies in Northern Ireland which have been turned into public companies during the last four or five years. I think the family business should be encouraged, and that it is a great pity that the great cartels and public companies should shallow up everything in this land of ours.

Air Commodore Harvey

I think the Minister dealt with this matter very fairly. His Department have gone to some trouble to look into the matter, but I hope they will go into even more detail, because I believe this country will thrive when we have a larger number of small businesses to support the bigger industries. I have recently come into contact with large firms engaged on the re-armament programme who, because they are unable to cope with the work on hand owing to difficulties connected with the transfer of labour and the housing problem, are having to turn to the small companies to help them out. The workmanship of these small companies is excellent, and frequently their prices are lower than it would cost the bigger companies to do the jobs for themselves.

I deprecate the large companies or banks taking over the small concerns for one reason or another. Where one has the family all putting their backs into it, I think great results can be achieved. I ask the Chancellor to go into this matter in great detail. I think there has already been investigation of it in Northern Ireland. In the textile industry in Macclesfield, in my own constituency, we have many men who started off literally in a backyard shed and built up very fine businesses, perhaps employing between 40 and 60 men. They know every man who works in the business intimately and great results are achieved. They go abroad and secure orders, and they are exporting. I hope they will be given such treatment as will enable that type of business to thrive.

Sir Edward Boyle (Birmingham. Handsworth)

I wish to express agreement with my hon. Friend the Member for St. Marylebone (Sir W. Wakefield). If those responsible for Section 55 of the Finance Act, 1940, had realised what was going to happen in years to come as a result of that Section they might well have been surprised. This Section was designed originally to deal with what one might call old-fashioned tax-evasion, against which remedies had to be found —the case of a man turning his own assets into a private company. But we have now reached a position where that. Section bears most hardly on some perfectly genuine family businesses.

I want to be fair about this. I shall read the promised report with great interest when it appears. But ever since the issue of the Kinsey Report, I have, been suspicious of such investigations, because one sometimes finds that a great, deal of evidence has been built up on a rather small number of cases. But in any event, it ought to be possible to devise a system whereby the true tax-evader can be brought to book without harming the legitimate man who wants to pass on his business. We have surely reached an absurd situation when the duty payable on the assets of even a limited number of companies is greater than the total realisable market value of their shares.

I should also like to meet the point of the Economic Secretary, when he suggested that the present position does not penalise the director of a private company as against the man who is in business on his own account. Surely the point is this. The private company director often wants a member of his family to be associated with the business, so that it can be handed on. We should do all we can to foster the traditional private company which is passed on from father to son, particularly as the general structure of such a company, where the profits are regularly ploughed back, is surely a useful deterrent against inflation.

I hope, therefore, it will be possible to find some means whereby the tax-evader can be punished, without the traditional bona fide director of a small company whose shares are not quoted on the Stock Exchange being penalised as well.

Mr. Eccles

I should like to support what my hon. Friend the Member for Handsworth (Sir E. Boyle) has just said. We shall, of course, read with great interest this report. I was one of those who put a Question to the Chancellor on this point some time ago. I fully admit that the engineering industry with which I was in touch did not produce any evidence.

I began to consider why they did not and I came to the conclusion that the shadow of Death Duty hangs over these companies before the man dies. The damage is done not so much at the moment when the Treasury have investigated the business—that is when the shares of the company pass on death—but it is done before that because the man says to himself, "I have to provide against this taxation and I had better turn my small company into a public company." One sees constantly in the newspapers prospectuses of the issue of shares which are nothing more nor less than the anticipation of Death Duty.

8.30 p.m.

I put this to the right hon. Gentleman: we are short of savings. There are a great many new projects for which money is urgently required in this country to be put up in such a way that it is not inflationary. That is to say, we do not want to try to finance more investments than the genuine new savings can take care of; but, of course, if the proprietor of a private business comes to the City of London and says, "I am willing to sell my shares. I have a long record of profits. I will sell them on a 6½ per cent. basis,"or whatever it is, they look very attractive. This is an established business which is coming to the new investor and saying, "Will you give me some of your money?" The institutions, the insurance companies, the investment trusts and private people subscribe to these issues.

I do not think that at the present stage of our finances that is in the interests of the country. It would be better if these people kept the capital of their companies in the locker and did not come to the City of London and say to the new investor, "Will you take some of my capital?" I have experienced this in a business associated with my family. It has only been done in order to turn some shares which were quite unmarketable into War Loan or something of that kind which we could put on one side in order to pay the Chancellor when a death occurred.

That is not in the interests of the country today. We do not want to put into a liquid form capital which is well placed and which is doing its job pro- ducing goods. Though we shall read with great interest the right hon. Gentleman's sample, I am bound to say that if it deals only with the cases at the point of death. I think it will have missed the really important damage which Death Duties are doing to private companies.

Mr. Emrys Hughes (Ayrshire, South)

These arguments from the Opposition are too much for my credulity. The argument lying behind this new Clause suggests that the party opposite is the party of the small business man. There is nothing further from the truth. For example, one of the largest businesses in the City of Glasgow is run by Lord Woolton, and Lord Woolton is a pioneer of great business wiping out the small man.

Hon. Members know quite well that the development of modern industry is safeguarding the interests not of the small man but of the big trusts and cartels, as was said by the hon. and gallant Member for Down, North (Sir W. Smiles), wiping out the small man. The people responsible for this are the people whose interests are expressed by hon. Members opposite throughout these debates on this Finance Bill. The cartels and big trusts are represented formidably on the other side of the House. The suggestion that the party opposite stand for the preservation of the small business against the cartel and the trust is so much humbug and hypocrisy.

Mr. Selwyn Lloyd

The hon. Member for Ayrshire, South (Mr. Emrys Hughes), has made one of his characteristic interventions. I would ask him to consider this proposition upon its merits. We realise that that will involve him in mental processes with which he is not familiar. I ask him to consider the arguments for and against this proposition without talking so much about humbug and hypocrisy. Not even he, if he were to examine this proposition, could dispute that it would benefit the small business. Therefore, if it benefits the small business why does he not support the new Clause?

The Economic Secretary will admit that if this new Clause were accepted it would benefit the small business. I do not think there has been any dispute about it, but I gather that the Economic Secretary says there is no particular reason why in the present circumstances we should try to help the small business in this way. The evidence which his Department has gained is not sufficient to convince the Government that there is a case for helping the small business in this way. I gather that that is the burden of his argument, but I do not think anybody in any quarter of the House could possibly dispute that this proposition would assist small businesses. I hope that we have the hon. Member for South Ayrshire with us so far—that this would benefit small businesses.

I very much agree with what was said by my hon. Friend the Member for Handsworth (Sir E. Boyle), that this is a very good example of the fact that if we give a blank cheque to stop tax evasion or tax avoidance very often we catch a whole set of circumstances and conditions which we were not seeking to catch when the provision was originally brought in. One can conceive of circumstances in which a very easy method of tax avoidance would be to turn property into a private company. The property would remain very much in the same form, and it might be fairly easily realisable. Unless there is a provision of this sort it may be that substantial revenue would be lost. But, in fact, this blank cheque hits more people than was intended. We have a strong supporter of the small business with us in the hon. Member for South Ayrshire, and I hope that in all quarters we can start with the proposition which I have indicated.

What is the effect of this provision as it stands? As some hon. Members opposite have come into the Chamber since the debate began, I think it is necessary to state the case again. Under present circumstances, if someone who owns a business dies, that business is valued on the asset basis and not on the market value of the shares. In fact, the shares may be quite unmarketable. There may be no one who wants to buy shares in that business. It may be that the holding which is to be sold is only a 51 per cent. holding, and no one may want to become a part-owner in the business. If these shares are quite unmarketable the estate has to find the Death Duty from some other source, or else it has to dispose of the shares for what they will fetch—and I will give a practical example from my own constituency of what that would mean.

A man told me the other day that he considered that his business was worth so much on the asset basis but that if he died and there was a sale the amount it would realise would be something like a quarter of what he considered to be the asset value of his business. Hon. Members opposite must not be so disingenuous about this matter; there is case after case of this kind. I could give another example from my personal knowledge—and I know the facts and circumstances—where on an asset basis the business is worth so much but if one came to try to sell the shares one would get very much less for them. Anybody who has any knowledge of small businesses knows that that is a fact.

Mr. Booth (Bolton, East)

If that is the case, how is it that at present—and it is happening every week—companies with privately held capital are putting their shares on the Stock Exchange and those shares are being bought at a very heavy premium?

Hon. Members

They are not small companies.

Mr. Selwyn Lloyd

There are two answers to that. In some cases, of course, as my hon. Friends have said, they are not small companies. In other cases that is being done because the proprietors of those businesses realise that Section 55 is in existence and are seeking to avoid its consequences for the future. They are parting with their ownership of the business to members of the general public arranging for their shares to be dealt in upon what the hon. Member for Bolton, East (Mr. Booth), no doubt thinks is that pernicious institution, the Stock Exchange. They are doing that because of the threat of the Death Duty which is hanging over their businesses.

I think it is a thoroughly bad thing for people who have built up a business to be forced to divest themselves of the ownership, to spread the ownership among a whole lot of other people who will have only an investment interest in the concern. Every time we talk about people who hold shares in public companies we are told by hon. Members opposite that they are only members of the investment classes, that they are not the true owners, that they are only the rentier class who should be treated exactly the same as people who hold Government stock. In this Clause we are sticking up for those who own their own businesses. We think that if there has been a business built up in one generation, it is a very good thing that it should be handed over to the next generation if that can be done.

Mr. Emrys Hughes

The hon. and learned Gentleman does not believe that.

Mr. Selwyn Lloyd

If the hon. Member really thinks that, then he is capable of thinking anything at all.

I think I am right in saying that 80 per cent. of the business and industry of this country is still in the hands of small people. Personally, I would do everything possible to sustain the small businesses. I have moved year after year Amendments to increase the abatement of Profits Tax in respect of small businesses because I think that diversification of business and great diffusion of ownership are thoroughly healthy. I should like everybody to own his own business. Unfortunately, that simply is not possible, but I want to see as many as possible owning their own businesses, and running them, and passing them on to their families.

Mr. Emrys Hughes

Who bought up all the small newspapers?

Mr. Lloyd

Just because we have some aggregation of ownership is no reason why we should seek to make it easier for there to be more aggregation of ownership. The hon. Member for Ayrshire, South, is coming out as a defender of the small man. What about nationalisation? What about State monopolies? I do not like monopolies of any sort, whether State monopolies or otherwise.

Mr. Emrys Hughes

What about Lord Woolton?

Mr. Lloyd

I do not want to enter into a debate wider than that on this Clause, but I am delighted to find that even the hon. Member is showing some glimmer of sense on this question of the small businesses, and I am glad to feel that we shall have his support on this matter.

Coming back to the Clause, however, I do really ask the Chancellor of the Exchequer to appreciate this fact, that it is the shadow of the coming danger and the coming risk of Death Duty which are influencing these smaller companies. It really does mean that if one owns a busi- ness or has a controlling interest in a business that can be upset by the early demise of a senior partner, one cannot take certain risks, one cannot go in for certain developments, for all the time one has to remember this threat, and save every penny of loose cash in the family to keep the business in existence when the death occurs. I ask the Chancellor to remember that this is having a bad effect in many cases. We shall look with interest at this report which is to come. I am glad to think that the Government are sufficiently interested to have had this inquiry made. I should like to know very much more about the methods of the inquiry, and I hope that we shall have an opportunity at no distant date of discussing this matter again.

Mr. John Lewis (Bolton, West)

I have listened with great interest to what has been said from the benches opposite. There are certain factors that must be recognised in this matter. Every day one has evidence of small businesses, family businesses, applying to the Stock Exchange Committee for the issue of prospectuses with the object of converting the businesses into public companies, with the further object of getting quotations so as to turn their equities into cash to provide for Death Duty. Whether that is a good thing or a bad thing is, I maintain, a matter for debate.

In certain circumstances people do it in order to line their pockets. There are certain people who do that sort of thing even when there is no question whatsoever of there being any necessity to provide for Death Duty. There are certain people who go to get quotations for their shares and to turn their private companies into public companies, with the object of cashing in and of putting the money into their pockets. There are, on the other hand, those who have a strong sense of public duty and do not do that sort of thing, and whose main object is to turn their equities into cash to provide for the payment of Death Duty.

As I see it, it does have an inflationary effect in this sense, that whereas a private business may be showing 10 per cent., or 15 per cent, or 20 per cent., by the process of conversion into stock which is negotiable, perhaps on a 61 per cent. or a 7 per cent. basis, there is a much larger value placed on that business, and there is more money being subscribed for the shares. In that sense, I think it has an inflationary tendency.

8.45 p.m.

I, in common with hon. Members opposite, welcome this report which is to come, and I shall be interested to see what it says about this matter. There is obviously a case for consideration. I agree that in this particular matter there should be very careful consideration given to this question, because there is no doubt whatever that in certain circumstances people are being forced to turn their shares into negotiable instruments in order to cash in and provide for Death Duties. I shall not go further, except to say that I hope that this report, which we are anticipating will be out very shortly, will in fact deal with this question and suggest some means of overcoming a difficulty which I think is recognised on both sides of the House.

Mr. Walter Fletcher (Bury and Radcliffe)

The hon. Member for Bolton, West (Mr. J. Lewis) speaks with some authority on this subject, having, I believe, gone through this particular process not so long ago, in the same way as I was compelled to do a good many years ago with a family business of the fourth generation[Interruption.] The hon. Member for Ayrshire, South (Mr. Emrys Hughes) once told me that I had a fatal fascination, for him.

Mr. Emrys Hughes

I admire the hon. Gentleman more in his rôle of a typical small business man.

Mr. Fletcher

I think that the hon. Gentleman's eyesight must be failing. The type of business for which I wish to make a plea is in trade rather than in industry. There are a whole series of businesses which depend on goodwill value. Goodwill in nearly every case, whether in trade or industry, is most difficult to assess. In trade goodwill is inevitably created by honest and competent dealing over a good many years, which the man who wishes to buy tries first of all to assess, because he knows that he will then be going to a business which will treat him well.

In the distributive trade there is very often only goodwill, handed on from father to son who have learnt the technical side of the industry, and many of these businesses are far too small to get near the Stock Exchange—businesses of anything from £10,000 to £50,000, which are vitally affected by the Clause which we are discussing. In the aggregate they contain in them a greater fund of real technical knowledge and skill, which has made them the entrepôt centre of the world, than the big businesses. In the aggregate they formed the markets and the means by which our export trade has been developed overseas. Our merchant adventurers have been drawn from exactly that type of business.

It must not be thought that it is the big business which is primarily most important. If we go into any commodity dealing market we will find that the average amount of capital involved in the firms who know exactly what the manufacturers want and where to get it is very small indeed. The Chancellor of the Exchequer knows what I am talking about, for a very good reason. The East India business generally was developed by exactly that type of firm. He knows that insurance was built up by the small men originally, and it is extremely important that these small businesses who are compelled by the force of Death Duties to look to the future should be preserved.

I hope, therefore, that when we have seen and read this report, special consideration will be given to the small firm which is outside the categories of those which can provide for Death Duties by the method of floating themselves off. I hope that he will regard with some seriousness this plea for people who are not easily defended because they are too small—no reports of their annual activities ever appear in public at all but who are in the aggregate the seat of an enormous amount of knowledge and "know-how." They are the people to whom lip-service is sometimes paid but to whom the more practical tribute which we suggest would be even more welcome.

Captain Crookshank

Everyone who has sacrificed their dinner to listen to this debate will have been interested in the case which has been put up. My hon. Friend the Member for Flint, West (Mr. Birch) pointed out that it would be very difficult to get a Clause in order. It was only after several years that he was able to raise the issue in the form in which he wanted to raise it.

It is quite obvious, as the Economic Secretary pointed out, that in 1940 legislation was introduced and directed to dealing with what for some years past had been the problem of the avoidance of Death Duties. I am quite sure that at the time in 1940, when the Finance Bill was being discussed by the then Parliament, there were other pre-occupations which certainly did not allow of detailed debate as was the case with subsequent Finance Bills.

The fact that this question has not been discussable for one reason or another since makes it all the more important that the Chancellor of the Exchequer and his advisers should take a note of what has been said today. We all appreciate that there has been a sample investigation into a number of cases—a private Gallup Poll. We all have our views as to the value of Gallup Polls, and we can all have our views as to the value of sample investigations. The interesting point is that the Government had it at all, and evidently they must have thought that there was something in the grievances which have been expressed to them through different channels.

The Economic Secretary said that they had found no evidence of companies going bankrupt—I think that is the term to use in this case—because of having to find Death Duty money. He said they had only found one case of a business being closed down, but I wonder when the Treasury were doing their sample investigation whether they in turn asked for any evidence from outside people about the matter. When a sample is being taken, the cases which we had in mind might be in that part of the area not within the zone of the sample. It does not follow that they do not exist.

My hon. Friend the Member for Chippenham (Mr. Eccles) put his finger on to one of the difficulties of the sample problem, when he said that much of the damage was done to smaller businesses before deaths had occurred owing to the action they had to take in the common interests of all concerned in anticipation of Death Duties. That is a thing which possibly would not appear in a sample of cases.

The Government have accepted our point of view that there is a problem to be looked at. It is a fact that the smaller or medium-sized manufacturers in this country are responsible for something like two-thirds of the country's production. We all know from the experience of the war and of increased production then how much depends on the smaller businesses and smaller firms. Now that we are moving into a period of re-armament, it is very important to see that our reserves of industrial productive power are not in any way endangered by tax legislation devised for other purposes.

Having had this interesting discussion, I feel that if they had not previously been opened, the eyes of Ministers are now being opened to this problem and their successors in the next 12 months will have an opportunity of looking at it again. Having had the debate. I do not think it necessary to carry it any further tonight. We have shown to the satisfaction of anyone who has heard the discussion that there is a problem; that the 1940 Act, which was very properly designed to deal with the avoidance of Death Duties may have too wide a scope. Hitherto, avoidance Clauses have had to be further extended because of loopholes which have been found from year to year. Here we have the same thing the other way round, with the net going too wide, and we must see that in future it does not continue if the result is to hamper the development and the trade of our small companies and the small businesses.

Question put, and negatived.