§ I have already made it plain, that it is our intention that an Excess Profits Tax should operate from 1st January of this year. At a time like this sacrifices should be equally borne. We are not prepared to see excessive profits being made as a result of the injection of rearmament into the economy. The new tax, which I propose to call the Excess Profits Levy to distinguish it from the Excess Profits Tax of the last war, will be general in its application and not confined to concerns on armament contracts. Details of the new levy will appear in the Financial Statement. I will, therefore, confine myself to giving the Committee a brief outline of the main provisions we propose, but before doing so I must tell the Committee at once that I propose to simplify the new levy and to avoid the delay, complications and waste of manhours involved in the old E.P.T.
§ The levy will apply to companies and other bodies, and will not extend to individuals and partnerships, who have to pay Surtax as well as Income Tax, which. I think, can well look after their problem. The new levy will be charged on the amounts by which current profits exceed standard profits. The normal standard will be the average of the profits of the three years 1947, 1948 and 1949. I am not prepared to bring into the average the profits of 1950, and still 1290 less those of 1951. The profits of both these years were inflated by the events following the outbreak of the Korean war.
§ If the profits of any one or two of the standard years were unduly low the company may instead bring into the average 8 per cent. on its paid up share capital. If the profits of all three standard years were unduly low, the company may take 10 per cent. on its paid up share capital. For new businesses set up after the middle of the standard period, the standard will be 10 per cent. on the paid up share capital. For director-controlled companies an additional 2 per cent. will be given. There will be a minimum standard of £2,000.
§ During the last war the Excess Profits Tax was allowed as a deduction in computing the Income Tax profits. This meant that the Income Tax assessments could not be settled until the Excess Profits Tax had been determined. I now propose to impose the new levy at net rates and not as a deduction in computing Income Tax profits.
§ During the last war the Excess Profits Tax was charged for the greater part of the period at 100 per cent. As, however, the E.P.T. paid was allowed as a deduction in computing the profits for Income Tax purposes, for every £100 paid in E.P.T. there was a reduction of £50 in the Income Tax bill. The same result would, therefore, have been achieved had the E.P.T. been imposed at 50 per cent., and no deduction allowed in computing the Income Tax profits. This is the line that I would propose taking on the present occasion.
§ At the end of the war the rate of the old E.P.T. was reduced by the right hon. Gentleman the Member for Bishop Auckland (Mr. Dalton) to 60 per cent. gross, which is equal to 30 per cent. net. I am glad to find one example of the right hon. Gentleman which I can follow. In my opinion this is the right rate at which to charge an Excess Profits Levy in peace-time—particularly having regard to the effect of a 100 per cent. E.P.T. in encouraging waste and extravagance. I propose, therefore, that the new Excess Profits Levy should be charged at 30 per cent. net.
§ To meet cases of hardship, I propose that a ceiling should be placed on the Excess Profits Levy chargeable. This 1291 ceiling will be 18 per cent, of the total profits; in other words, the Excess Profits Levy payable will be 30 per cent. of the excess profits, or 18 per cent. of the total profits, whichever is the less. [An HON. MEMBER: "Far too low."] Wait a minute.
§ During the last war, if the Excess Profits Tax was payable the Profits Tax ceased to be charged. We cannot be so generous this time. It would, however, be asking too much that industry should carry the Excess Profits Levy in addition to the Profits Tax at the present very high rates. I propose, therefore, that some compensating reduction should be made in the Profits Tax as a corollary of the introduction of the Levy. The present rates of 10 per cent. on the reserve and 50 per cent. on the dividend are equivalent, approximately, to net rates of 5 per cent. and 25 per cent. respectively.
§ I propose to reduce these rates to 2½ per cent. net and 17½ per cent. net. Profits Tax at these new rates will not be deductible in computing Income Tax profits. I have loaded the reduction, as the Committee may observe, in favour of those who increase their reserves. Thus we fulfil the promise we gave in our Election statement to reduce the tax on profits ploughed back into the business.
§ I can now sum up my proposals in this way. I do not think that they will disappoint hon. Members. On its standard profits a company will, from 1st January, pay 50 per cent., that is, Income Tax at 47½ per cent., together with Profits Tax at 2½ per cent. On any sums distributed it will pay an additional 15 per cent. (that is, the difference between the 17½ per cent. and the 2½ per cent.). On its Excess Profits it will pay 80 per cent., that is, Income Tax at 47½ per cent., together with Profits Tax at 2½ per cent., together with Excess Profits Levy at 30 per cent. On any sums distributed it will pay an additional 15 per cent.
§ The effect of the overriding maximum will be to ensure that in the case, for example, where one-third of the profit is distributed, the total tax bill—that is Income Tax, Profits Tax and Excess Profits Levy combined, will not exceed 73 per cent. of the total profit.
§ Taking account of the compensating reductions I have proposed in the Profits Tax, the net additional yield of these proposals will be about £100 million in a full year. The yield in the coming financial year will be small, about £1 million only.
§ Mr. Gaitskell
Is that over and above last year, or over and above what this year would have been apart from this?
This is over and above any previous total reached. It is an extra additional taxation of £100 million, extra to what we had before.
No definite time limit can be announced for the operation of the Levy, but it must continue during the period of the emergency. The proposal I have just made is designed to be just, and to produce a considerable revenue next year.