Clause 33.—(STANDARD PROFITS FOR A FULL YEAR WHERE TRADE OR BUSINESS IN EXISTENCE AT BEGINNING OF STANDARD PERIOD.)

HC Deb 22 May 1952 vol 501 cc717-77

The Chairman

The first Amendment on this Clause is in the name of the Chancellor of the Exchequer and it is followed by 16 Amendments all linked with it. Perhaps it would be for the convenience of the Committee to have a general discussion on that first Amendment.

Mr. Boyd-Carpenter

If that is convenient to the Committee, it would be an admirable procedure to adopt.

Mr. Crosland

On a point of order. Which of these Amendments are you proposing to call, Sir Charles?

The Chairman

I am calling the Amendment in page 37, line 1, to leave out "section," and to insert "Act." That is the first of the series which will be linked with the 15 Amendments to follow.

Mr. Glenvil Hall (Colne Valley)

That takes us down to the Amendment in page 37, line 16, to leave out "ten." and to insert "twelve."

The Chairman

That is so.

6.15 p.m.

Mr. Crosland

Further to that point of order, may I take it that your Ruling, Sir Charles, that we should discuss all these together—which, if I may say so, is absolutely essential—does not preclude the calling of any particular Amendment?

The Chairman

No. All the Chancellor's Amendments will be called anyway. I was wrong in agreeing with the right hon. Gentleman the Member for Colne Valley (Mr. Glenvil Hall). The Amendments go as far as page 38, line 26.

Mr. Boyd-Carpenter

I beg to move, in page 37, line 1, to leave out "section." and to insert "Act."

The batch of 16 Amendments begin with this one and continue, dotted about among Amendments by other hon. Members, until we come to the Amendment in page 38, line 26, to leave out "a reference," and to insert "references."

Mr. Roy Jenkins

Are we discussing only the Amendments in the name of the Chancellor of the Exchequer?

Mr. Boyd-Carpenter

That is my understanding.

The Chairman

That is what I understood, if it is for the convenience of the Committee. I was asked what other Amendments would be called. I was going to call only the Amendment in the name of the hon. Member for Altrincham and Sale (Mr. Erroll) and his hon. Friends, in page 37, line 32, at the end, to insert:

(iii) no sum in excess of the amount by which the capital of a body corporate is reduced shall be treated as a sum paid by way of repayment of any of its share capital, and subsection (3) of section fifty-seven of this Act shall apply subject to this proviso

Mr. Crosland

The point I want to make, Sir Charles—because I had an uneasy suspicion that you might be taking this view—is in support of your calling the Amendment in the name of myself and my hon. Friends to insert a new subsection (2) at the end of line 7, on page 37. I entirely follow the argument that most of the Amendments on the Order Paper in relation to this Clause are irrelevant following upon the Chancellor's Amendment, but I think that my Amendment is concerned with an investment which is quite separate from that dealt with by the other Amendments. It is not strictly covered by the Chancellor's Amendments and raises a separate point.

The Chairman

I was advised that that Amendment was covered.

Mr. Crosland

I am bound to say that it is not covered, because the purpose of the new Government Amendments is apparently to exclude the very bad year of 1947 for ordinary companies by giving them the opportunity to choose 1948 and 1949. In the case of investment companies which are always one year behind, because their income is related to the payment of profits on the previous year, even if they exercise the option of 1948 and 1949 their income would be covered still by this particularly bad year of 1947. Therefore, I suggest they are not covered by the Chancellor's Amendment.

The Chairman

I beg the hon. Member's pardon. If I find I have made a mistake, I shall be quite willing to call his Amendment.

Mr. Jay

It would be well worth knowing what 16 Amendments are to be called.

Mr. Boyd-Carpenter

I will read the Amendments if the right hon. Member wishes, but they are in fact all the Amendments to this Clause in the Chancellor's name and the last one is on page 38, in line 26, as I have stated.

As hon. Members will fully appreciate, all these Amendments hang together and they all seek to put into this Clause, in respect of businesses which were in existence before the beginning of the standard period, a number of changes in the operation of the tax which were announced by my right hon. Friend the Chancellor when he introduced the Motion that Clause 31 stand part of the Bill on Tuesday night. That is their effect, and hon. Members will no doubt have noted that a set—I am glad to say a somewhat shorter one—of nine similar Amendments to the next Clause seek to do the same thing in relation to businesses which started after the beginning of the standard period. In that sense they are two comparable sets of Amendments.

Both sets seek to apply a number of the major changes to which my right hon. Friend referred, and some of them have already been discussed on previous Amendments. I think that the Committee would wish me to explain at this stage how they are effected. The main actual changes, as opposed to consequential and purely technical matters, are carried out first of all by the Amendments to page 37, lines 16 and 17, that is, the fourth and fifth Amendments in the name of my right hon. Friend. Taken together, those two Amendments increase from 10 per cent. to 12 per cent. the allowance in computation of the standard in respect of new capital and profits ploughed back into the business.

The other major changes are effected by the long Amendment to page 38, line 1, which is actually the thirteenth in the series of Amendments in the name of my right hon. Friend. As hon. Members will see, this leaves out subsection (4) of the present Clause and inserts a new subsection (4) and two new subsections after that-subsections (5) and (6). Paragraph (a) of the new subsection (4) makes a change in respect of one of the alternative standards. Under the Bill as it was originally drafted, a company could make use, if it so desired, of 8 per cent. of the paid-up capital in respect of two of the three standard years. Now that—under a subsequent part of this Amendment—the choice is given as to standard years, it is only necessary to give that 8 per cent. in respect of one year.

Paragraph (b) of that new subsection (4) gives the choice of 1946 or 1951 for the computation of paid-up share capital instead of, as under the original draft, taking 1949 in all cases. That is designed, among other things, to deal with cases where, for example, owing to nationalisation of certain assets of a company, there has been a big change in the scale of the company's operation during the period.

Paragraph (c) of subsection (4) is probably one of the most important of the changes. It introduces the new alternative standard which, as my right hon. Friend indicated on the Second Reading, the Government were considering. Under this new alternative standard, the alternative is given of an amount representing 8 per cent. of the assets of the company less depreciation as allowed for tax purposes. That alternative standard has been introduced, as my right hon. Friend explained, in order to deal with those cases in which nominal capital might prove to be an unfair standard.

Hon. Members will see that with two important variations this alternative adopts the standard used in the old wartime Excess Profits Tax. The two differences of substance are that, whereas under the war-time Excess Profits Tax 6 per cent. was allowed, under this provision 8 per cent. is allowed. In addition, borrowed money is treated quite differently, having been previously excluded but now being dealt with under my right hon. Friend's new Clause.

To complete the picture—though I shall not seek to anticipate it—what the new Clause does about borrowed money is to allow the interest payable plus 4 per cent. The new subsection (5) gives a new choice of any two of the years 1947, 1948 and 1949 as the standard years. That means that companies can select any two of those three years. They can select 1947 and 1949, 1947 and 1948, or 1948 and 1949, as they find appropriate to their particular situation.

That is designed to deal with the criticism which was made in many quarters that 1947 was an unfair year to take. In point of fact, taken over the businesses of the country as a whole, 1947 was very little behind 1948 or 1949; but we do appreciate that there are probably a number of individual cases in which 1947 was a very bad year, and those cases are dealt with by this Amendment, because companies for which 1947 was a very bad year can select the other two.

It was necessary to retain 1947 as one of the three years because, in the case of some companies, 1947 was the most favourable year of the three, and it would have been very wrong to have denied them the right to use that year, which appeared to be given to them under the Bill as it was originally drafted.

The proviso to subsection (5) adds the special provision as to standard years in respect of enterprises carried out in territories occupied by the Japanese. That gives them 1949 and 1950 as the standard years. It covers all enterprises carried on in those territories, and it is designed to meet the point that rubber and tin in particular, in Malaya—but a good many other industrial activities also—suffered very serious damage under Japanese occupation, and it naturally took them some time to get going again after the Japanese had been evicted.

The new subsection (6) provides for the calculation of the date from which profits ploughed back rank for an allowance. That obviously depends on the standard years chosen for each particular company, and the way it works out appears in a little table at the end of the subsection.

Those are the main Amendments as they operate in this group. The others are simply drafting, paving or consequential Amendments. I think the Committee will see that the total effect of this batch of Amendments, taken together, is to put into Clause 33—and, therefore, to apply to businesses existing prior to the beginning of the standard period—several of the very important alterations which my right hon. Friend announced on Tuesday night.

For the convenience of the Committee, I will recapitulate them. They are, the alteration in the standard year the special standard years for Japanese-occupied territories; the new allowance of 12 per cent. on new capital and moneys ploughed back, and the new alternative standard in addition to the profits standard. As I ventured to indicate to the Committee, the comparable provisions of the next Clause are being made to apply mutatis mutandis to new businesses, that is to say, businesses starting after the beginning of the standard period.

These are, of course, as was made clear during the debate on Tuesday, substantial changes. They have already been explained to hon. Members by my right hon. Friend, and reference has been made to several of them on more than one occasion. The Committee now has before it what are in a way the mechanics of their operation. The Amendments are in order to carry out those intentions and proposals which my right hon. Friend announced.

6.30 p.m.

The Chairman

When I was announcing the Amendments selected, I mentioned, apart from those in the name of the Chancellor, only the one in the name of the hon. Member for Altrincham and Sale (Mr. Erroll). I also intend to call the last one on this Clause, in the name of the hon. Member for Middleton and Prestwich (Sir J. Barlow), in page 38, line 33, at the end, to add:

(6) Where a body corporate's trade or business consist wholly or mainly of the production of raw natural rubber the preceding provisions of this section shall have effect as if the references to ten per cent. were references to twenty per cent. and the reference to eight per cent. were a reference to sixteen per cent.

Mr. Austen Albu (Edmonton)

Might I ask, Sir Charles, whether you intend to call the Amendment in my name, in page 38, line 26, at the end, to insert:

"for the purpose of this subsection a director means a director of the body corporate who throughout the whole of the chargeable accounting period worked full-time in the actual management or conduct of the trade or business of the body corporate."

The Chairman

No. I think that would he better considered in the definition Clause, the Amendments to which are printed on page 1438 of the Amendment Paper.

Mr. Clement Davies (Montgomery)

Would you kindly repeat, Sir Charles, which Amendments you intend to call?

The Chairman

I shall call all the Amendments in the name of the Chancellor of the Exchequer; the one on page 1422, in the name of the hon. Member for Altrincham and Sale and the one on page 1426, in the name of the hon. Member for Middleton and Prestwich.

Mr. Roy Jenkins

I did not quite follow what you meant, Sir Charles, by saying that the point raised by the Amendment of my hon. Friend the Memmer for Edmonton (Mr. Albu) could be better covered on Clause 57. I do not see any Amendments there which would in any way cover the point which is dealt with in the Amendment of my hon. Friend, to which he has referred.

The Chairman

I will have another look at it. I gather that it is a definition about a director, and this is not the right place for it to come.

Mr. Jenkins

It is not an Amendment merely to clarify the point about directors. It is intended to be an Amendment changing the present meaning of the Clause.

The Chairman

If I may, I will have another look at it.

Mr. Glenvil Hall

May I point out that the wording of the Amendment in the name of my hon. Friend the Member for Edmonton specifically refers to "the purpose of this subsection." For that reason, if for no other, I should like to suggest that it should be taken where it actually is on the Amendment Paper. It is not a definition and, therefore, part of the interpretation Clause. It is a clarification of the Clause under consideration, to which the Amendment is directed.

Mr. Albu

The interpretation Clause would make the Amendment very much wider.

The Chairman

Yes, but when I referred to page 1438 I meant that there was in the names of hon. Members another Amendment relating to directors.

Mr. Jenkins

But not on the same subject. The Amendment which we have down to Clause 57 has the effect of slightly altering the meaning of "director" in the whole of the Bill, whereas the Amendment of my hon. Friend the Member for Edmonton to Clause 33 has the effect only of limiting the meaning of "directorin its application to Clause 33.

The Chairman

So far as Clause 33 is concerned and the matter of definition there, I was not prepared to select the Amendment for that purpose.

Mr. Frederick Mulley (Sheffield. Park)

We have had a very comprehensive statement from the Financial Secretary. The Committee will be relieved to know that I do not propose to follow him by commenting on the many proposals which the Chancellor has put before us so late in our proceedings this week. If my hon. Friend the Member for Gloucestershire, South (Mr. Crosland), whose midnight labours on this subject are well known, is fortunate enough to catch your eye, Sir Charles, he will be able to cover those points better than I can.

I wish to confine myself to what is the most substantial change, namely, the choice of years—two of the three original standard years. In making comments on the subject of the levy, we have criticised it, among other reasons, because it means a reduction in the total amount of taxation to be borne by certain companies. The original proposals did seem as though the levy was designed to favour brewery companies, entertainment companies and the rather spiv-like concerns which were able to make large profits in the immediate post-war period.

I thought that point had been taken by the Chancellor in this alteration in that it does give some better balance for those companies which are expanding companies—export companies and others which have made efforts to respond to the national need by increasing their efficiency, securing overseas orders, etc. But while I am particularly glad that that point has been met, the original criticism remains that this levy is unduly favourable to breweries, entertainment concerns and the get-rich-quick companies that sprang up after the war.

I suggest to the Chancellor that he should look again at this point, because quite clearly if he recognises the point by now making possible a choice of two or three years, there is no case for retaining 1947 as a standard year. That will surely favour only those companies which were able, in the exceptional postwar period, to make large profits. They are the only companies which will have any incentive to chose 1947 as one of their standard years.

While in the ordinary course of events it is very unusual for a Chancellor of the Exchequer to make a fundamental change in his plans at this stage of the Finance Bill, I feel that this is an exceptional year because we have already had several fundamental changes in the character of this levy. It cannot be argued, as the Financial Secretary was inclined to do, that it would be unfair to those companies if some part of the remission of total tax which will ensue is taken away from them.

It would also assist the Revenue and certainly make the tax more acceptable to Members on this side of the Committee, because we are in a difficulty in this matter. In view of the very short notice we received of the fundamental changes in the levy, and their complexity, it did mean that it was rather late to put down an Amendment to the effect I have mentioned for discussion today. I ask the Financial Secretary to see that consideration is given between now and the Report stage to removing 1947 from the standard period.

Mr. Erroll

The change has made a considerable improvement, but there are nevertheless one or two organisations which will suffer, particularly many of the firms which were concentrated during the war, and which even in 1948 were only just emerging from that wartime concentration. They certainly had not got back into their full post-war stride. They are, of course, being helped by being able to choose 1948 and 1949, but it is not a complete help.

The case which is still the most hardly and unjustly dealt with is that of the bacon curing industry, which was concentrated for even longer than the textile firms in the north-west of England and which was only de-concentrated in October, 1949. If those firms have to take as standard years 1948 and 1949, it is a period in which they were concentrated for 21 out of the 24 months. So they really have a most inequitable basis for assessing profits under E.P.L.

They themselves would like to suggest the Chancellor's taking as their standard the first full year after deconcentration, and the Amendment which stands in my name and the names of some of my hon. Friends make that point. I know that it is very hard in general taxation of this nature to plead a particular case, but I think that there is one which is quite exceptional, because it was solely through the Government's action that these companies were not able to get going again until towards the end of the period. If something could be done to help them it would, I am sure, be in the interests of equity.

Mr. Albu

The difficulty we are in, I think, in discussing this whole series of Amendments is that we cannot really tell what the general effect is going to be. The Chancellor has told us that in a full year all the changes he is making are going to cost the revenue between £20 million and £25 million and that we have to consider that in relation to the charges that are being made in the National Health Service, the cuts being made elsewhere, and so on. We can consider the whole series of Amendments only as a form of general concession, not only to the critics, but also to those who dislike any form of taxation on company profits. Of course, on this side of the Committee we have had to distinguish rather carefully between those.

In regard to the alteration of the standard years, I think that we on this side of the Committee accept that as a reasonable change, particularly because it is a way of giving relief to those companies that were concentrated—I do not know about the bacon curing industry—but to the textile industry, for instance, and others. I do not know whether hon. Gentlemen opposite who have Amendments to include later years are going to press them. We shall assist the Chancellor in resisting those changes, for which there is no justification at all, if there is any justification for the levy at all, for the figures for profits are that in 1947 they amounted to £1,527 million; in 1948, to £1,537 million; in 1949, to £1,528 million—roughly similar figures—but that in 1950 they jumped to over £1,800 million.

So there would be a very considerable reduction in the yield of the levy if 1950 or a later year were taken, and though we do not like the levy at all, as we have to have it, and as there is a reduction, after all—even after the Chancellor's Amendments still there is an overall reduction—in the Profits Tax, we should certainly assist the Chancellor in resisting Amendments of that nature.

Let me come to the increase of the percentage allowed on new money and on profits ploughed back. I do not know what the justification for any particular figure—12 per cent., 10 per cent.—on new money may be, but of course one can see the advantage of increasing incentive to retain profits, which is, of course, the effect of increasing the percentage allowed on profits not distributed. As to the amount, I should have thought that the new money figure of 10 per cent. was, on the whole, not only adequate but more than adequate, but we are considering such a range of changes in the levy that it is extremely difficult to know what are the principles on which any change is made.

6.45 p.m.

From my point of view, the same doubts arise about the new subsection (4, c)—the inclusion of the asset values as one of the bases of the capital standard. I suppose this is a reasonable addition for old companies, although, of course, it has completely destroyed one of the claims the Chancellor made when he introduced the Budget—that he was greatly simplifying the previous Excess Profit Tax. This whole subsection, I imagine, will very greatly increase the difficulties that accountants and the Inland Revenue inspectors will have in computing the profits of standard years and the excess profits for purposes of tax. I think that this is one of the largest and most complicated subsections of a Clause of a Bill that ever could have been drafted. It seems to include so many things.

We on this side certainly welcome relief given to companies that were under Japanese occupation, included in subsection (5), and we shall certainly not oppose that. I think that this particular Clause is like the curate's egg. There are some parts of it which are certainly to be welcomed, but there are certainly others that seem to us—to me, at any rate—merely concessions to pressure, and not based on any set of principles whatsoever.

Mr. Ian Horobin (Oldham, East)

I do not propose at this stage to go over the whole of these changes, which have been summarised, from their mechanical point of view, by the Financial Secretary, except to thank the Chancellor for them. There is no doubt that, while all the fundamental objections to this tax remain, the changes do represent a genuine effort, for which those of us who are critics are very grateful.

I do want to make reference in a couple of sentences to one omission still, however, before I come to my main point. I still feel that no case has really been made out—it is too late, obviously, to argue it at length—for the omission of 1950. It is impossible for anybody reasonably to claim that trading profits made in 1950 can have had anything at all to do with re-armament. The only case for refusing to insert 1950 is that if we have got to have the tax we must get some money, and that if we do not omit 1950 we shall not. But it is a wholly cynical defence of what is being done.

The nearest approach to the argument based on defence was made in the last debate when it was said that it had something to do with the Korean war. But if we are to take the Korean war, why not the Great War? It has nothing whatever to do with the point. However, it is too late to go into that in detail. We merely note it as one more pock mark on this wretched corpse, and pass on.

The case I want to reinforce is a small but very important one, namely, that of the concentrated industries. We had one peculiar case, which, I confess, was new to me, referred to a moment ago. There are one or two other smaller instances where the relief by years will certainly not meet the full case—that of the egg packers, and so on. However, the primary one, of course, and the main reason for my intervening now, in the hope that it will be sympathetically considered, is the case of the textile industry, and I urge the Government, if they are going to err on this point, to err on the sympathetic side for an industry and a county which, above all others, is going through a hard time at this moment.

It is perfectly true, and I accept it at once, that the change in years will make a considerable improvement in this respect, but it is not true that it will deal with the whole case. It is well known to hon. Members who are interested in Lancashire that something of the order of 100 mills were closed by Government order. Taking the years 1948 and 1949, which were certainly better than 1947; in 1948 about 69 per cent, of the spindles in the closed mills were working, and in 1949 about 74 per cent. were working-an average of just over 70 per cent. Anybody who knows anything about business and cotton mills knows that when a factory is running at 70 per cent. profits cannot on any reasonable claim be called normal 'profits. I do not think there will be anything between us on that.

I have here figures with regard to the weaving section of the industry, of which I confess I know very little; we have none in my part of the county. They appear, on the face of them, to be even more extraordinary. In 1948 only about 38 per cent. of the looms that were installed were running, and in 1949 there were only 42 per cent. Those figures, I must admit, are not quite fair as they stand, because in any case since 1941, when the concentration took place, there would have been a falling off, so I do not base myself on a strict interpretation; but it is quite clear in spinning, and still more in weaving, that it is impossible to claim that simply by omitting 1947 we are dealing with Lancashire's case for special treatment owing to the concentration.

Those are general figures. I do not want to weary the Committee for any length, but it is extraordinary how they work out in certain cases. Some people seem to think it surprising that the cotton industry should be worrying about excess profits, because they are going to have great difficulty in earning any profits at all this year. But so weird are the results of this concentration that one group of mills in my area made profits in the first four months of this financial year which appear to be at least comparable—it is difficult to say because of these recent changes—with what would have been their standard.

I know of another mill which was peculiarly badly hit because through its very willingness to assist industry, it became a training centre and was the last mill in the whole district to be de-concentrated and, therefore, under this proposal it will be the worst-hit mill of the lot. However, I do not wish to weary the Committee with matters of that kind.

I submit that a reasonable case is made out for a very hard-hit and vital industry to say that, owing to circumstances entirely outside its control, this tax, in spite of the improvements which have been made in it, may be still an additional burden. I very much hope that whoever is to reply will say that if the Government cannot accept the Amendments in the name of the hon. Member for Altrincham and Sale (Mr. Erroll) and myself, at least they will consider this matter again between now and the Report stage. The sum of money involved can only be very slight and, as I say, if they are going to err at all, let them err on the side of generosity.

Mr. F. Blackburn (Staly bridge and Hyde)

I should like to support what has been said by the hon. Member for Oldham, East (Mr. Horobin) with regard to the textile mills that were closed from 1941 to 1946 because of the concentration of industry. The Financial Secretary said that the Amendments put down by the Chancellor all hang together, and I think the chief regret on both sides of the Committee is that we cannot hang them altogether. I know that the Chancellor has been endeavouring to meet the wishes of the Committee by putting down these 75 Amendments, but he would have met the wishes of the House much better if he had put down one Amendment to get rid altogether of E.P.L. and raised his finance by some other means.

If we have to have E.P.L., it is important that there should appear to be equity in the operation of the tax. The decision to alter three years to two years does, to a great extent, help those factories which were closed because of the concentration of industry, but it does not help them entirely, as has been made out quite clearly by the hon. Member for Oldham, East. Let us consider, as he did, the spinning mills. In 1947, they were still suffering from a shortage of skilled labour required to re-set and retool the machines which had been idle during the war years. As everyone will understand, a good deal of expense had to be undertaken by those mills in order to re-equip them and get them going again, and a good deal of non-productive work was involved in the initial stage.

The hon. Member for Oldham, East quoted certain figures relating to the number of spindles working in the mills which had been closed because of concentration. I think it is important that those figures should be stressed. The Chancellor and the Financial Secretary should examine those figures and see whether, even with the concession which has been made, justice is being done to those mills which were closed. The figures are: in 1947, 58 per cent. of the spindles; in 1948, 69 per cent.; and in 1949, 74 per cent. Everyone is aware of the high incidence of standing charges, and therefore, when the mills are not running to full capacity the profit is down. The profitability of the spinning mills declines sharply as the percentage of machinery running becomes smaller.

In the weaving mills the position is more or less the same. They also suffered from a shortage of labour. During the concentration, looms were often removed altogether from the mills. In other cases looms have been stacked in one part of the mill and the rest of the factory space has been used very often for storage purposes—for storage of food and other commodities—and in some cases light engineering has been carried on. Most of the mills did not obtain licences to run looms in those premises until 1946 or 1947, and then they met the following difficulties.

The looms had to be re-spaced, as has already been mentioned. If we compare the mills of today with the mills of the 1914–18 war, we can appreciate the enormous change that has taken place in them, in the re-spacing of looms in conformity with the Factory Inspectorate recommendations. That resulted in a smaller loomage per building, and there had to be building alterations. The stacked looms had to be overhauled and re-fitted, and this was difficult because there was a shortage of skilled over-lookers—or tackers, as we used to call them—and fitters for reconditioning. There was also a shortage of weavers. These were the difficulties which had to be contended with by the mills which were closed because of concentration.

In the weaving section, as has been pointed out by the hon. Member for Oldham, East, the figures are even worse than those in the spinning section. The figures which were quoted were only for a small cross-section of the industry, but they do indicate the general position in relation to the number of looms. Taking the percentage of looms running in relation to the number installed when closure took place in 1941, the figures are: 1947, 25 per cent.: 1948, 38 per cent.; 1949, 42 per cent. As has been pointed out, we have to take into account the fact that in any case there would have been a smaller number of looms because of re-spacing.

7.0 p.m.

They are an indication of the difficulties which these concerns are facing. The Chancellor has already, I think, seen these figures. He has been fully acquainted with the position, because these figures have been submitted to him by a joint communication from the Federation of Master Cotton Spinners' Associations and the Cotton Spinners and Manufacturers' Association. Therefore, the Chancellor is aware of the position of these mills which were closed from 1941 to 1946.

Perhaps one of the reasons why he has made this alteration in the years has been to meet the difficulties of these mills. I think that if he will look carefully into the matter, he will agree that he has not yet met entirely the difficulty with which these textile concerns are faced at the present time, and, as everyone knows, the textile industry does need all the help that can be given to it.

Mr. C. P. Stevens (Portsmouth, Langstone)

I share the views which have been expressed by the hon. Member for Oldham. East (Mr. Horobin) with regard to the effect or otherwise of re-armament on the profits of industry in 1950. Like him, I do not want to labour that point at length this evening.

I want to put in a special plea for those industries situated in the towns and cities of Great Britain which, during the war, were particularly the object of severe aerial attack. Their buildings and warehouses were razed to the ground and they lost their plant and machinery. When it came to rebuilding, they were faced with the usual difficulties of people trying to rebuild after the war—planning consent was difficult to obtain, building licences were hard to get, plant and machinery were difficult to obtain—and the consequence is that the task of rehabilitating these industries in the big cites of this country took a very considerable time.

It is certainly true to say that by 1947 full recovery had by no means been achieved. I doubt whether full recovery had been achieved by 1949. I think that it was probably not until 1950 that these rehabilitated industries were in full working order again. It may be that fact which accounts for the profits rising to £1,800 million in 1950, which was the figure, I think, which the hon. Member for Edmonton (Mr. Albu) gave, from £1,500 million in 1949. That increase, I feel quite certain, is in no small measure due to the fact that the rehabilitated industries did not really get going again until 1950.

It is true that the new standards will be a considerable help in these special instances of industries in the blitzed cities, but I suggest that here is a very special case, and I wonder whether, between now and the Report stage, the Chancellor will be good enough to look at these very special cases to see if he cannot make a special concession in respect of them.

Mr. Grimond

I, too, should like to urge the Chancellor to include the year 1950. As the hon. Member for Oldham, East (Mr. Horobin) has said, presumably the only reason he is against including it is that he would lose a lot of money. But, in the first place he has told us that this tax is not primarily a revenue raising tax, and in the current year the revenue it will raise will be comparatively small.

Secondly, it is outside the general design of his Budget. It is not designed to bring more realism into our economy, and it is not, I think, designed to deal with the financial difficulties which face us at the moment. Therefore, I suggest that there are reasons that might allow him to modify this tax which may not be open to him on taxes that are more an integral part of his general financial policy. It cannot be argued that companies in 1950 were benefiting from a re-armament drive.

I should also like to draw the attention of the Chancellor to the year 1946. The inclusion of that year might benefit only a few companies, but in my view, as I have said before, the consequences of this tax may be so bad that any small concession the Chancellor could give he ought to give with good will. There are certain companies, for instance companies which make goods for the garage industry which were affected by petrol rationing. Some industries were very severely hit by petrol rationing during the standard years. There are also companies which had not been re-tooled. They were still working with their wartime machinery and began re-tooling in 1947, 1948 and 1949.

There is one company, which I should like to quote, with a long history of financial difficulty, but it has of recent years brought out a patent which allows it to produce the best instrument of its kind in its particular line. It is now, I think, selling 40 per cent. of its output to the Government and about 35 per cent. is going to export. Presumably that is just what the Chancellor would like. But this company is going to be seriously hit by this levy, so seriously, in point of fact, that it is going to have to slow up production. The result will be that the re-armament programme itself will suffer. I suggest that there are other companies of other types which will be in much the same position and, although the inclusion of 1946 may not benefit many companies, there are no very strong reasons against it. It cannot be said that it is a re-armament year.

The Chancellor's concessions are very valuable indeed, and no one would want to underestimate them. He has given an alternative standard based on assets. I wonder if he could say a word as to the computation of those assets. There are companies who did not write up the value of their assets. Can they be accommodated?—presumably they can. He has given certain concessions on debenture capital, which are welcome because there was a time when companies were disinclined to raise new capital by issues of ordinary shares.

I believe, however, that even these concessions do not get over the fundamental difficulties from which large sections of the textile industry and other industries will suffer. The crucial matter is that it is going to hit developing companies and hit them very hard. If the Chancellor can broaden the basis of the standard years and make any more concessions on those years, it will benefit the economy as a whole.

Mr. Crosland

Your predecessor ruled, Mr. Bowles, that we should discuss all the Chancellor's Amendments at once. That may be desirable from a general point of view, but it is imposing a rather considerable strain on lay Members of the Committee who are not expert accountants, because the Amendments cover a very wide variety of topics.

I should like to begin by raising one or two points which concern local authorities. I do not want to go into this in great detail, because we shall have another opportunity at a later stage of the Bill of discussing it. I want, however, to raise one or two points in connection with them, particularly concerned with the Bristol Corporation.

Corporate bodies without share capital, of which the local authorities are an obvious sub-group, are grateful to the Chancellor for introducing the new standard. A large number of them, of which Bristol was one, would have been catastrophically hit by not having any alternative standard to the base-years provided in the original text of the Bill. Bristol Corporation made large electricity losses in 1948 and had they been on the original three-year standard they would have had a very heavy E.P.L. liability which would have fallen on the other non-nationalised operations of the Corporation.

There are two points which I should like to put to the Minister who is to reply concerning local authorities. The first point on which I ask for enlightenment is the case where the local authority has had its electricity undertaking nationalised. One would have thought at first sight that this case was covered by Clause 41, which discusses the transfer of a whole or a part of a corporate body's activities as a going concern, but it is not. It is specifically excluded from Clause 41 and the Tenth Schedule by the first paragraph of Clause 49.

That being so, what is the position of a local authority such as Bristol Corporation, which had its electricity undertaking nationalised at the end of 1948 and which chooses, as most of these bodies will do, the new net assets standard? If it chooses the net assets standard, it has a choice of dates—the assets as at the end of 1946 or as at the end of 1951.

I imagine that in this situation such bodies, being human, will choose the end-1946 standard. As I see it, if they do so —there may be a quite simple answer to it—they will have their electricity undertaking included in their net assets because they owned that undertaking at the end of 1946. Thus they will be allowed to make 8 per cent. on the whole of the electricity undertaking assets which they neither own nor operate at present. On the face of it, that seems a farcical result. I should be grateful for an explanation. The net assets of the large electricity undertakings were considerable sums, and 8 per cent. on them will make a great difference.

The second point on which I should like information is rather complicated and I am not competent to go into it in any great detail. This also concerns local authorities who choose, as most of them will, the net assets standard. For a definition of the net assets standard we are referred to the Ninth Schedule, and for most of the time in the Ninth Schedule we are referred to the Income Tax Act, 1945. The 1945 Act in its definition of net assets, which is largely employed for the purpose of the Ninth Schedule and the present Clause, does not include buildings and constructions more than 50 years old when the Act came into force.

I imagine this would not be a point of very great importance for a very large number of industrial firms, but it is a big one for local authorities operating public utility services, such as docks, a particularly important point for Bristol, a very large part of the construction of the docks being over 50 years old. On the face of it, it is very curious, and the sums involved will be considerable if the assets are not to be considered assets from the point of view of the definition of net assets in Clause 33. I should be grateful if that point could be cleared up.

I want to make a few points on the new 12 per cent. figure, not as it affects an under-distribution of profits but as it affects the issue of new share capital. The first thing to be said is that we now have a great confusion over these permitted percentages. A number of different percentages apply to various things. We have 8 per cent. on paid-up share capital in the case of a company choosing this option for one of its two standard years; 10 per cent. on paid-up share capital where the company chooses that standard as at the end of 1946 or the end of 1951; 8 per cent. on net assets; 14 per cent. for director-controlled companies; and now 12 per cent. for both under-distribution and new issues of share capital. It is not at all clear why the figures of 8, 10 and 12 per cent. have been chosen. It would be interesting to hear from the Government why these particular figures were chosen.

7.15 p.m.

What is the logic of increasing the figure allowed on new issues of share capital from 10 per cent. to 12 per cent., as has been done in the Chancellor's latest batch of Amendments? I imagine the answer will be that what we are above all concerned with is the possibility of expansion, and, therefore, the possibility of raising new capital. The answer would presumably be that we are deliberately seeking a rather higher allowance in the case of new capital and that we are not so interested in giving a generous allowance to existing paid-up share capital and that, in the jargon of the economists, bygones are bygones.

I can see that it is logical to have the same figure of 12 per cent. for both under-distribution and new issues of share capital. Clearly, undistributed profits and new issues are the two obvious sources from which new expansion can be financed. Nevertheless, it would be interesting to be told why the Government did not select a single figure for all three things, under-distribution, new issues of share capital and existing paid-up share capital at end-1946 or end-1951, and why the differential has been introduced.

It is not self-evident why the figure has been raised from 10 to 12 per cent. It is true that the figure of 10 per cent. allowed where new share capital was issued came in for a great deal of criticism in the financial Press, where it was held to be inadequate to attract the new capital which most industries wanted. The argument was that even if the whole of the 10 per cent., which was allowed was distributed, or if it was made clear that it would be distributed, the maximum gross dividend which the 10 per cent. would give was 7.4 per cent. once we had allowed for a full 15 per cent., as it then was, Distributed Profits Tax on 100 per cent. distribution. That figure will be altered—I have not done the calculation —now that the Distributed Profits Tax has been raised from 15 per cent. to 221 per cent.

The argument was that the maximum gross dividend which would be possible before E.P.L. came into play would be quite insufficient to attract new capital, at any rate in those industries where yields on shares are already extremely high. The argument was used very obviously in the case of textiles. Considering what textile shares are yielding now, it was argued that this was quite an insufficient yield to attract the new capital which the industry and other industries similarly placed might want.

I am rather suspicious of the argument. I am particularly suspicious of it when it comes from Conservative hon. Members or a Conservative Government. The argument that industries the shares of companies in which are now showing a very high yield, because the industries are somewhat depressed, should be put in a very favourable position for getting new capital is completely inconsistent with their general bias in favour of the price system.

I have heard eloquent speeches from the Secretary of State for the Colonies in which he has objected to all our methods of control over new investment and has said that this control should be swept away and that we should rely on the control exercised by an effective rate of interest policy. That is a perfectly consistent attitude, but if we decide that the direction of investment should be deter- mined by the rate of interest or by monetary policy, it follows that industries the shares of companies in which are very depressed—if we are to adopt this sort of market attitude—ought not to have these new capital resources at all. I do not think—[Laughter.] This is not my argument and I do not believe in it.

Mr. Horobin

Turn it the other way round and it will make sense.

Mr. Crosland

The argument is perfectly clear. Industries like textiles, which are at present depressed and where profit expectations are not very favourable and as a result textile shares are depressed and showing a very high yield, should according to orthodox monetary theory not have a high claim on new capital resources. This is a perfectly familiar textbook argument which has been given to the Committee time and time again by the more orthodox, monetary experts in the party opposite, and it is inconsistent with the general criticism in the financial newspapers of the 10 per cent. standard.

The whole case of hon. Members opposite is that marginal investment should be choked off by monetary policy and not by fiscal controls or whatever term one might use for them. What I should like to know is whether there is any evidence that 10 per cent. of new issues of share capital is not a sufficiently generous figure to allow the amount of investment which the country can afford, while choking off the marginal investment, which the Chancellor has tried to discourage in his Budget.

It would be interesting to know what the reasons were for making it 10 per cent. originally and then raising it to 12 per cent. Is there any evidence that the original figure will not be sufficient to make possible the level of investment which the Chancellor wants and, at the same time, choke off the additional investment which he said firmly he did not want during this rearmament period?

My own feeling is that most of the changes which we are discussing are wholly desirable and are all moves in the right direction. I should be very grateful, however, for some explanation why this extra generosity is being given in respect of new share capital.

Mr. G. R. Mitchison (Kettering)

The Committee will probably agree that, from a practical point of view, this Clause and the Amendments we are now considering are fundamental to this part of the Bill and of extreme importance. I always regard economists with undiluted respect, and Chancellors of the Exchequer with both respect and sympathy. My sympathy was heightened about two hours ago when the Chancellor of the Exchequer's moral basis slipped away unwept and unsung, and another Election pledge disappeared at the same time unhonoured. I cannot go back on that matter, but two of the reasons why we were urged to accept this part of the Bill was that it was moral and simple.

I have said all I have got to say about the disappearance of that moral basis, and I am going to suggest in a moment or two that there is a distinct element of immorality in some of the Amendments we are now considering. Simple, they certainly are not.

Mr. R. A. Butler

Would the hon. and learned Gentleman ever regard immorality as being simple?

Mr. Mitchison

Sometimes it has an attractive simplicity, just as morality has an attractive simplicity. Simpler kinds of finance are prima facie more moral than the complicated ones, and that is a point I propose to develop in a minute. For the moment, I should like to turn to this question of simplicity.

It is quite true that an election pledge is broken, but in another sense, if ever there was an election Bill, this is it. There are seven elections in these Amendments and several more if we could refer to another Schedule it incorporates. Obviously I cannot discuss that now, but I have never known such a Bill for electing. I do not know what the Chancellor wants to encourage, whether he feels there is not sufficient ratiocination in City companies, or whether it is on more philosophical grounds that he is determined to prove that, even in the field of taxation, the exercise of free will has a moral value. I cannot tell, but I say, in all seriousness, that it is a distinct criticism of the tax if it is going to be so varied in form that its incidence is going to depend on elections.

The Chancellor is a most moral man, but he would share some of my moral objections to the roulette table. He would be the first person to recognise that in all these elections there is an element of the roulette table, which one wants to get out of, or the whole, in fiscal provisions. Such a sort of thing makes me wonder whether this is really a simple tax—if I may go back for a moment to what we were first lead to believe.

I am disposed to welcome the general effects of these Amendments. I think they are a bit better than the original Budget. They have not got very much to do with it, and this must be about the first time that a Chancellor has introduced a new tax in a Bill and then, by amending the Bill, substituted another new tax. That is what this seems to be doing.

Apart from this question of elections, I have been listening to the very interesting, eloquent and able speeches which the Committee have heard, and I hope my hon. Friends and hon. Gentlemen opposite will not think I am offensive if I point out that they have been log-rolling in a bare-faced way. They began with bacon and ended with Bristol, and in the interval they touched on cotton, or industries in the blitzed towns and on some obscure form of Kirkwall patent connected with the garage trade. That is what we get when we have complicated taxation like this, and the criticism of such taxation is that, in its exceedingly difficult and abstruse calculations, it involves every one of the trades, the corporations and so on about which we have heard and which are in some special difficulty.

I am not an economist and am never likely to be a Chancellor of the Exchequer, but I have always understood that one of the virtues of taxation was that it should be, in one respect, like the law—it should not only be fair but apparently fair. It is a pretty bad state of affairs that, in discussing the most important part of the Bill, we have to provoke members of this Committee at once to get up and log-roll. It would have been very much simpler to have left the original Profits Tax and increased it or graduated it, instead of landing us in this quagmire of special interests, special cases, percentages, elections, and general expectations of one kind or another.

I have been thinking about these percentages. The trouble about tossing up is that there are only two sides to a coin and there are far too many percentages to be accounted for that way. I thought of the Chancellor or the Financial Secretary drawing them out of a hat, which is one way it could have been done, but I could not explain them that way. One sees the approximate reason for some of them, but why select one of these numbers more than another? Twelve was mentioned just now. I do not think I have got them all yet, but as far as I can make out, they are 4, 8, 10, 12, 14 and 15.

7.30 p.m.

The study of numbers is very interesting, and I came to the conclusion that the Treasury had a perverse hatred of prime numbers. That seems to be the only possible explanation of this selection. It is true that they might safely have included 9, but notice that they left out 5, 7, 11 and 13—and I cannot see why they should. No doubt we shall be told by whoever replies what are the real economist's or Chancellor's reasons for these percentages, but unless he makes it quite clear I shall adhere to my previous impression that the Treasury do not like prime numbers.

Mr. Roy Jenkins (Birmingham, Stechford)

The Chancellor's new proposals have had a rather modified welcome from his hon. Friends. The hon. Member for Oldham, East (Mr. Horobin) said that they were an improvement. I am not quite sure what an improvement to a "lunatic nightmare" results in.

Mr. Horobin

They are still lunatic. but he has pulled a few straws out of his hair.

Mr. Jenkins

I hope the Chancellor is pleased with that warm tribute from his hon. Friend. On the whole, I think we are prepared to give him a slightly warmer welcome, because we approve of most of the changes which are down here. I certainly think he has gone far enough. and in one respect a little too far. He has gone far enough so far as the standard years are concerned, and I should like to say a word or two about the argument addressed to the Committee by the hon. Member for Oldham. East and the hon. Member for Orkney and Shetland (Mr. Grimond).

It would have been a great pity to have admitted 1950 as the standard year, because we must not have an Excess Profits Levy which is purely a piece of window-dressing; something which takes 28 Clauses, or whatever it is, of the Finance Bill, which will cast an immense burden of work on the Inland Revenue, but which really does absolutely nothing; something about which the party opposite can say, "We are carrying out our pledge in our Election manifesto, but in such a way that it will not hurt anybody."

I do not think that 1950 should be included even in the case of concentrated companies. We have put down an Amendment which is covered by the Chancellor's new proposals, and our Amendment related specifically to concentrated industries. But that only proposed that they should be allowed to take the average of 1948 and 1949; it did not include 1950. Even in that case, if 1950 is included, they would be put in a better position than if they had never been concentrated at all, and that would seem to be inadmissible.

The hon. Member for Oldham, East said the argument for putting in 1950 was that re-armament had not really started; that it could not be tied up with the Korean War; that one might just as well tie it up with the Great War, or any other war. That is not a good enough argument. What we are dealing with, if this Excess Profits Levy has any justification, is not merely the situation provoked by British re-armament, but the situation provoked by the whole change in the world situation, and by world re-armament brought on by the war in Korea. We are talking about something brought on by the Korean war situation. We had another excess profits tax to deal with the last war and the Great War, so there is a very direct connection between the two points.

There is one detailed question I wish to put to the Financial Secretary. When dealing with companies which are basing their standard on their paid up capital, why are they given the choice between 1951 and 1946? He indicated to us that it was to deal with the companies which had been affected by nationalisation. There was a point of real difficulty there which was brought out a good deal in the financial Press at the time. One can quite see in the case of a company like, say, Thomas Tilling, putting in 1951, dealing with what was a very anomalous position. But I am not quite clear why 1946 had been put in as an alternative, and I should be grateful if whoever replies could answer that.

As my hon. Friend the Member for Gloucestershire, South (Mr. Crosland) said, we are puzzled by these different percentages which have now been put in, and I certainly find it very difficult to see that there is any strong argument for allowing a company 12 per cent. on money which has been subscribed for shares since the beginning of the first standard year. What is the argument for giving 12 per cent. on money which happens to have been subscribed since a date in 1948 or 1949, while in the case of a company which is taking its capital standard as a whole only 10 per cent. is given on old money? That seems a very odd and anomalous position.

If there is to be a difference between 10 and 12 per cent., probably the logical way to do it would be to give 12 per cent. for all under-distribution of profits; to give a real incentive, a bigger incentive to companies to plough back and not to distribute. I certainly would support the 12 per cent. on under-distribution, but I should not have thought there was any logical case at all for having 12 per cent. on new money subscribed while having 10 per cent. for old money subscribed, particularly as it goes back three years. Not should I have thought, apart from the illogical position, that it was necessary to give this concession which will now contribute slightly to the net loss of revenue which all these changes are making.

Mr. Glenvil Hall

I have no desire to curtail this debate unduly, particularly as I notice my hon. Friend the Member for Sowerby (Mr. Houghton) desires to speak. As the Committee knows, he has an expert knowledge of Income Tax law, and it would be a pity if on this very complicated subject we failed to have the benefit of a speech from him.

We are here dealing with 42 Amendments in all, 17 of them put down by the Chancellor himself. That alone emphasise the description of the E.P.L. by the hon. Member for Oldham, East (Mr. Horobin). He is a near neighbour of mine, and when the solidarity of Oldham was broken at the last Election I, for one, was very disappointed. I did my best, with others, to try to keep him out. I may say, however, that my disappointment is now tempered by the knowledge that on that side of the House we have at least one hon. Member who can use words in their true meaning and who can let his own Front Bench know exactly what he and his friends think about one of the main Government proposals.

If these 17 Amendments which the Chancellor is moving are in the nature of straws, as the hon. Member said, it is a poor comment on the party opposite that they, and, indeed, we, should have to go through all this labour in order that this levy can be made workable. It shows the astonishing muddle into which the Chancellor has got himself through implementing the Prime Minister's almost casual promise, made for election purposes, that something of this kind would be done.

There is little that I can add to what my hon. Friends have said. I understand that the Financial Secretary is to reply. If I may say so, we had rather hoped to hear from the Minister of State for Economic Affairs, because there is a rumour that we may not have his presence with us for very much longer. It would be a pity if, like Gladstone, he disappeared without anyone knowing that he was going. When Gladstone went, it is said that as he left for the last time he stood at the door and took a long look at the Chamber in which he had spent so many hours of his life. No one realised at the time what a dramatic occasion it was. I hope that if and when the Minister of State for Economic Affairs is translated, he will give us due notice, and that in the meantime—and particularly on this Bill—we may have the benefit of his advice as often as possible.

I make no reflection on the Financial Secretary, of course, who has already made one speech on this series of Amendments. If the hon. Gentleman is to speak again, I want to tell him, as well as the Chancellor, that, at any rate on most of the Amendments covered by the debate, we do not intend to divide the Committee. On the other hand, our attitude to the Amendment in page 37, line 16, depends entirely on what the Financial Secretary has to say. That Amendment, which has been dealt with so ably by my hon. Friend the Member for Gloucestershire, South (Mr. Crosland), my hon. Friend the Member for Stechford (Mr. Roy Jenkins) and my hon. and learned Friend the Member for Kettering (Mr. Mitchison) is the one to leave out "ten," and to insert "twelve."

We cannot see why the change from 10 per cent. to 12 per cent. is being made. I listened with a fair amount of care to what the Financial Secretary said and I realise that he had a very large acreage to cover, which he did with very great ability and lucidity, but nevertheless, it is not clear to me why this change is being made from 10 per cent. to 12 per cent. I have tried to discover from my hon. Friends whether they had caught the reason, but I find that they, too, feel that he had not made it clear.

I understand that the change is to bring the percentage into line with what was done in the 1914–18 war and also into line with the Excess Profits Duty which was levied during the last war. If that is so, it is an explanation, but it is surely no real reason. I would say, therefore, that while we shall not oppose these Amendments, because we think that if we had to have this levy, these are improvements and simplify it, we do want to know why 12 per cent. is being inserted instead of 10 per cent. in subsection (2).

I hope, therefore, that the Financial Secretary will tell us quite definitely why the change has been made, because on the explanation he gives depends whether we on the Front Bench invite our hon. Friends to divide on that series of Amendments.

7.45 p.m.

Mr. Boyd-Carpenter

We have had a very agreeable debate on these Amendments, not least, I think, because the underlying note of most of the speeches has been that the more hon. Members dislike the Clause, the more they welcome the Amendments. That has certainly given us an interesting debate, which has been confined mainly to points of practical importance and of a constructive nature. I will endeavour to answer as many of them as I can.

The hon. Member for Stechford (Mr. Roy Jenkins), in his very interesting, and if he will allow me to say so without causing him undue damage in his party, very helpful speech, raised the question why we put in the alternative dates of valuation of 31st December, 1946, and 31st December, 1951. The reason is that which I gave, perhaps unduly briefly, in moving the Amendment—that it is to take care of the case in which, mainly owing, I think, to nationalisation, a substantial proportion of the company's assets have departed from it since 1946.

Normally speaking, if that has not happened, a company will almost certainly take the 1946 valuation for this very evident reason—that whereas, on asset values they will get 8 per cent., they will get 12 per cent. On the new money. Normally speaking. therefore, they will wish to take 1946, but we have to deal with cases where, mainly owing to nationalisation, there has been a substantial change in the size of the assets of the company. Consequently, we give them that alternative.

Mr. Roy Jenkins

The difficulty I see in allowing a choice between 1946 and 1951, rather than simply stating 1951, is that it enables most companies, to get 12 per cent. on any money subscribed between 1946 and 1951 instead of 8 per cent. to 10 per cent. I cannot see any possible justification for that.

Mr. Boyd-Carpenter

That is part of the general 12 per cent. argument, if I may put that way, to which the right hon. Member for Colne Valley (Mr. Glenvil Hall) referred, as, I think, did the hon. Member for Gloucestershire, South (Mr. Crosland). If I may, I will deal with it when I come to their speeches. The hon. Member for Sheffield, Park (Mr. Mulley) criticised the retention of 1947 among the standard years and said that in his view the only firms which did relatively well during that period were those who cashed in on the post-war boom. With respect, I think that is an excessive generalisation. If one consults the figures, it will be seen that there are a substantial number of companies which did better in 1947 than in 1948 or 1949, but to generalise from that, as he has done, is unwarranted.

It is perfectly true that there are probably some companies in that category but it is the experience of hon. Members that in all competitive and industrial and commercial life, businesses have their ups and downs. In fact, as I have said two or three times before, the general total of profits over the three years is astonishingly level and there is a very small variation among them. My right hon. Friend gave the figures on Tuesday night, and we think it would be unfair to deprive those companies for whom 1947 was a relatively good year of the advantage which they can get from its inclusion. It is a matter of balance, however, and the hon. Gentleman's point will be borne in mind.

Mr. Mulley

As a result of choosing 1947, a number of companies will pay less in total company taxation than they have done hitherto. That was my first point. Secondly, does not the hon. Gentleman agree that companies which are now making substantially less than in 1947, or which made less in 1948 and 1949 than in 1947, are not the kind of companies which need to be encouraged and have not made such a great contribution to our economy, either in rearmament at home or in exports abroad, by increasing their efficiency. That was the basis of my argument.

Mr. Boyd-Carpenter

I would not like to generalise, as the hon. Gentleman does. A company may be in a period of transition in a particular year. It may be laying down new assembly lines for a new model of its product, and it may do that in one of the standard years. Simply to say that 1947 was better than 1948 does not carry with it the implication which the hon. Gentleman attaches to it. He will appreciate that there are inevitable ups and downs in the industrial prosperity of individual companies, and that the particular year in which the up or down takes place does not necessarily carry the connotation which the hon. Gentleman attaches to it.

My hon. Friend the Member for Altrincham and Sale (Mr. Erroll) put in a most moving plea for the bacon industry, which he maintained was unique in his constituency. I do not think that my hon. Friend is quite right in saying that the fact that bacon was concentrated previously—incidentally, dietically that is a most disagreeable state of affairs—makes it unique. In the course of the debate we had other examples of concentrated industries. One cannot say that bacon has a special case of its own.

I agree with the hon. Member for Edmonton (Mr. Albu) that we must take the general effect of these Amendments together. They are, as my right hon. Friend explained at the outset, part of a set of coherent proposals for dealing with some of the difficulties which might arise under the tax. I agree with the hon. Gentleman that whether one approves of them or not they stand together.

The hon. Member for Stalybridge and Hyde (Mr. Blackburn) referred to the difficult position of certain parts of the textile industry which were re-organising after wartime concentration during some of the standard years. We appreciate their difficulty, which I think will be helped by a number of proposals in these Amendments and by subsequent Amendments, in particular by the alteration in the overriding maximum which we wish to put into effect in Clause 37. I have no doubt that the general effect of my right hon. Friend's proposals will be to make the position of these mills better than it would have been under the tax as originally presented. The same remarks apply to those hon. Members who have raised the position of the blitzed cities. We hope that the various adjustments we have made will cause the impact of the tax upon them to be less serious.

The hon. Member for Gloucestershire, South referred in particular to the case of the Bristol Corporation. His hon. Friend the Member for Bristol, South (Mr. Wilkins) was good enough to give me notice that this particular point, which is both interesting and important, would be raised. As I understood one part of the argument of the hon. Member for Gloucestershire, South, it was that the treatment of Bristol might be too favourable. That, I am bound to say, is an unique criticism, during all the criticisms that we have had on this tax. It confirms the high standard of honesty which has been maintained by the city of the merchant venturers, but I do not think that the unusual criticism is really justified.

The hon. Gentleman took the point that the city of Bristol had lost its electricity plant under nationalisation—I must comment that that was not my fault—and therefore a valuation of its assets in 1946 would include an asset which was no longer with them, even in the last part of the standard years. I believe that even under the proposals for which right hon. Gentlemen opposite were responsible compensation was made available to some extent. I believe it was the extent of the liabilities outstanding on the electricity enterprise. That compensation, such as it was, would no doubt be employed by the city in some other directions. They presumably added it to the assets of the city.

In any event the city would have available to them the alternatives which are given. In particular, they would be able to take advantage of one of them, that is to say, the 8 per cent. of the assets. I do not think that Bristol would suffer unduly under that head. I do not suppose that the hon. Gentleman is desirous of pressing too much the point that the city may have been unduly favourably treated.

Mr. Crosland

I fully agree with the Financial Secretary on this point. I was not pressing the case of Bristol Corporation, but I think they are being too favourably treated, if my argument is right. I do not think the hon. Gentleman's answer can be right as he put it. When these electricity undertakings were nationalised, there was, in the case of local government undertakings, no capital transaction at all. The British Electricity Authority became responsible for the interest charges on the stock concerned. There was no capital transaction, and that would have the effect of reducing the 1946 position of the city. The net assets would be the same.

Mr. Boyd-Carpenter

The exact effect in the case of any particular city would depend upon the amount of liability outstanding on its electricity account. I do not know what the figures were in the case of Bristol. It would depend on how much liability was outstanding. I think that is the point. There would undoubtedly be some compensation to the city, unless there were no liabilities outstanding at all. I do not want to go too far into this subject. I took a strong view at the time, as representing a town with a very progressive power station. But that is an old story.

Mr. Glenvil Hall

I think there was some allowance made, although not in full, for severance. That may mean some additional loss which fell upon the city of Bristol.

Mr. Boyd-Carpenter

Some additional compensation in respect of severance. in any event, that is not a grievance arising out of the tax. We are now on the suggestion that the city has been unduly favoured, but that was certainly not the line taken by those who have written to the hon. Member for Bristol, South. We will, of course, look into that whole aspect of the matter which has been so helpfully and courteously put forward. We wish this tax to be fair, neither unduly favourable nor unfavourable, to an ancient city like Bristol.

Mr. W. A. Wilkins (Bristol, South)

The position has been changed by the tabling of a proposed new Clause.

Mr. Boyd-Carpenter

This is a good example of the relief which these Amendments will give in these difficult cases. I think the only fear of the hon. Member for Gloucestershire, South is that they may be treated unduly favourably.

The hon. Member also asked why we had the various percentages: 8 per cent. on the net assets, 10 per cent. on the nominal capital and 12 per cent. on the new capital. Those figures were not, as was suggested by the hon. and learned Member for Kettering (Mr. Mitchison), due to some dislike within the Treasury for certain types of digit. The 8 per cent. on net assets is inserted in what hon. Gentlemen will appreciate is an alternative standard, introduced with the intention of dealing with particularly hard cases where the capital actually employed is greatly in excess of the nominal capital. We feel, therefore, that there is no need to go quite as far as the 10 per cent. on nominal capital.

This is an alternative, designed to take care of particularly hard cases where there is a big disparity. The figure of the war-time E.P.T., which is in some ways comparable with this system, was 6 per cent. There was criticism that it was unduly low and we felt, in the circumstances, that 8 per cent. was right for this alternative.

8.0 p.m.

The 10 per cent. which was in the original proposals is for the nominal capital in the standard period. It is, of course, to some extent a matter of judgment what is, on the consideration of a mass of figures, the right figure to insert. However, we thought that, on the nominal capital basis, 10 per cent. was a proper figure and nothing we have heard in our consideration of the various representations has altered that.

Then there is the matter dealt with by this specific Amendment of the 12 per cent. of what I may call new money, because it applies to both profits ploughed back and equally to capital newly raised. Hon. Members will recall that the 10 per cent. was provided simply as an alternative in respect of a business which is not reaching the profits standard and which, therefore, ex hypothesi was not doing particularly well. It was to some extent a rescue provision.

The 12 per cent. for new money is not a rescue operation at all. It relates to moneys ploughed back or new capital raised by up-and-coming and expanding businesses. And if 10 per cent. is right as a rescue operation in the case of firms not doing particularly well, it seems reasonable to provide a higher standard of relief for expanding industries.

This tax has been criticised on the basis that it is hard on the progressive industry, and it is with a view to relieving that to some extent that we have made this 12 per cent. provision in respect of new moneys. Hon. Members may or may not take the view that those are right figures, but I hope these considerations indicate that these figures are part of a definite plan for the application in, I think, an improved form of this tax.

Those were the major issues raised in the course of this discussion. The Amendments moved some little time ago do, I think, in the general expression of opinion of hon. Members, constitute in greater or lesser degree an improvement in the provisions in the Bill. As my right hon. Friend explained on Tuesday night, they are designed to deal with difficulties which we thought might arise in the operation of the tax and they are inspired by the desire to see that this tax does not hamper the continued expansion and efficiency of British industry.

Mr. Jay

Can the Financial Secretary tell us whether the reason he has been given such an unfair amount to do is due to the fact that the Minister of State, like everybody else, is opposed to this tax?

Mr. Boyd-Carpenter

I am glad to be able to reassure the right hon. Members for Battersea, North (Mr. Jay) and Colne Valley. If, as I hope, we proceed to subsequent Amendments on this Clause, hon. Members will have the pleasure of hearing my right hon. Friend in the immediate future.

Mr. Crosland

If I may intervene briefly once again, I want to say something about the case of undertakings which have progressed from being a body with no share capital to being nationalised industries. I do so, not necessarily to elicit a further answer from the Financial Secretary, but to put the difficulty on the record.

The position seems to be that all the local authorities concerned will choose the net assets standard. They will also choose the end 1946 assets standard. When the electricity undertakings were nationalised at the end of 1948, no capital transaction took place between the British Electricity Authorities and those bodies in the case of the local authority undertakings. No compensation stock was handed over, but the British Electricity Authority became responsible for the interest charges on that section o1' the stock of the corporation concerned.

Mr. Boyd-Carpenter

Perhaps the hon. Gentleman will allow me to add the fact, to which his right hon. Friend referred, that there was in some cases—I am glad to say in one specific case—compensation for severance.

Mr. Crosland

Of course they took over liabilities. I am talking of the case where assets exceeded liabilities, which was not uncommon. In that case it might be that a local authority which, since the end of 1948, has not operated its electricity undertaking at all, can include in its figure for net assets at the end of 1946 a matter of £2 million, £3 million, or more, on which it is apparently allowed 8 per cent. I cannot find any provision in the Bill which would prevent this from happening because, in the cases where a nationalised industry took over going concerns, they are specifically excluded from the operation of Clause 41 by the operation of Clause 49.

I am sorry if I gave the impression that Bristol is being too generously treated. It is, however, a genuine point because, if I am right about this, Bristol would stand to lose.

Mr. Boyd-Carpenter

It is a log-roll in reverse.

Mr. Crosland

Yes, but we may be in a position where the same electricity assets are now allowed two amounts of allowance against E.P.L., one in the case of the local authority concerned and the other in respect of B.E.A.

Mr. Houghton

My few remarks call for no special reply from the Financial Secretary, so nothing will be lost in making them after his reply to the debate. However, it seems to me worth while to put on record that the history of the Excess Profits Tax is now repeating itself. When the first Excess Profits Tax was introduced, the Finance Act consisted of 11 Clauses and one Schedule but, in the Finance Act, 1940, what was later to become an administrative and legislative monstrosity, was already taking shape. We see now that the Chancellor first introduced into this Bill an Excess Profits Levy which he hoped would be simple and streamlined and would be rid of many of the bugbears of earlier legislation.

This set of Amendments shows the course that this Bill is taking. It means that for as long as we have an Excess Profits Tax we shall be discussing anomalies, the difficulties of particular interests, the hardship of the incidence of the tax on the special circumstances of individual companies, and so on. I suggest that the hon. Gentleman should take counsel of his right hon. Friend the Chancellor to see whether, in pursuing these proposals in the Finance Bill this year, they should register their determination to bring this form of taxation to an end much earlier than perhaps the Committee is expecting.

I suggest that, because there can be no end to trouble in this Committee as long as we have this Excess Profits Levy. What astonishes me is that the Chancellor should have learned so little from the experiences of his predecessors. One wonders what influenced his mind to go ahead with proposals which would so obviously come unstuck in a most serious way when they were closely examined by all those primarily interested in its effect.

I am sorry to pour cold water on the Financial Secretary's enthusiasm for the tax and the gusto with which he sails into its complexities and difficulties, but I warn him that he is saddling the whole of industry, the accountancy profession, the Inland Revenue Department and the whole community with a noxious tax, unfair tax, and one which will lead to further abstruse Amendments and new Clauses as time goes on.

Mr. Stevens rose—

Mr. Houghton

I have finished what I had to say, and I do not think that the hon. Member would have assisted me in my concluding remarks.

I think it is obvious to the Committee where we are all getting to, and perhaps it is worth reminding the Committee of how we started on the same course as we did on two previous occasions, although both of them were in war-time. The right hon. Gentleman and the Financial Secretary will regret that they ever wrote into the Conservative manifesto a pledge to introduce a form of taxation on such lines as these.

Mr. Stevens

By what authority does the hon. Member speak for the accountancy profession?

Mr. Houghton

I have yet to learn that any Member of the House is barred from expressing an opinion on any matter before the Committee. Does the hon. Gentleman deny that this new levy will impose fresh burdens upon the accountancy profession? Is he suggesting that we can express an opinion only if we have some direct professional representative capacity in the matter? That intervention was not only irrelevant and stupid, but was impertinent.

Amendment agreed to.

Further Amendments made: In page 37, line 3, leave out from "commenced," to end of line 7, and insert: on or before the first day of January, nineteen hundred and forty-seven, be half it profits for the standard years.

In line 8, leave out "standard period," and insert "first of the standard years."

In line 16, leave out "ten," and insert "twelve."

In line 17, leave out "ten," and insert "twelve."

In line 19, leave out "during the standard period," and insert: after the beginning of the first and before the end of the second of the standard years.

In line 21, leave out "ten," and insert "twelve."

In line 23, leave out from first "of," to "and," in line 25, and insert: so much of the standard years as precedes the receipt or payment bears to two years.

In line 28, leave out "ten," and insert "twelve."—[Mr. Boyd-Carpenter.]

The Deputy-Chairman

The next Amendment to be called is that in page 37, line 32, in the name of the hon. Member for Altrincham and Sale (Mr. Erroll).

Mr. Roy Jenkins

On a point of order, Mr. Hopkin Morris. When Sir Charles was in the Chair, my hon. Friend the Member for Gloucestershire, South (Mr. Crosland) raised the question of the Amendment which appeared in his name, in page 37, line 7. We made submissions to Sir Charles, whose view was that the Amendment was covered by the Chancellor's Amendment and was not in fact valid, but his decision was that he would reconsider the matter and would call the Amendment.

The Deputy-Chairman

I am afraid we have passed that Amendment and cannot go back to it now.

Hon. Members

Oh.

8.15 p.m.

Mr. Glenvil Hall

We noticed your omission of the Amendment, Mr. Hopkin Morris, and we came to the conclusion that in order to make progress and not to muddle the Committee—and, goodness knows, we have in all conscience been muddled with this very long series of changes, which were referred to by the hon. Member for Oldham, East (Mr. Horobin) as "straws"—we would let it go by.

But, surely your predecessor in the Chair definitely agreed that the Amendment in question was one that should be called, and as it is one of the few that we have on the Order Paper—it is the second Amendment standing in the name of anyone on this side out of about 50—may I put it to you, not only as a point of substance that the Amendment should be discussed, but also as one of fairness to Members on this side who have put down very few Amendments to these Clauses, that we should, therefore, in view of your predecessor's decision, be allowed still to discuss it.

The Deputy-Chairman

I am very sorry that there is no possibility of doing that now. We have passed it.

Mr. Ralph Assheton (Blackburn, West)

May I say a word to that point of order?

The Deputy-Chairman

May I say. first, that we have gone past it, and that the only method of discussing it now would be on the Motion that the Clause. as amended, stand part?

Mr. Jay

Further to that point of order. The reason why we passed the Amendment was that although we were observing the Amendments as we passed that point, we thought, Mr. Hopkin Morris, that you were taking the Chancellor's Amendments in a series first and would then return to this one. There is a misunderstanding, obviously, of some kind, but we have a clear recollection that your predecessor in the Chair agreed after some discussion to take the Amendment, on which we wanted to put forward our views.

Mr. Assheton

I do not know whether I can help to clear up the misunderstanding. The hon. Member for Gloucestershire, South (Mr. Crosland), in whose name the Amendment appears, had a word with me about it, and I understood from him that he did not want it to be called. The hon. Member is not here now, but I think that that was his view.

The Deputy-Chairman

There may have been some understanding between various hon. Members, but I am bound by the decisions we have reached and we have gone past that part of the Clause. The only possibility of discussing the Amendment now would be when we come to the question that the Clause, as amended, stand part.

Mr. Erroll

I beg to move, in page 37, line 32, at the end, to insert: (iii) no sum in excess of the amount by which the capital of a body corporate is reduced shall be treated as a sum paid by way of repayment of any of its share capital, and subsection (3) of section fifty-seven of this Act shall apply subject to this proviso. It sometimes happens that a company may wish to make arrangements with its shareholders for the reduction of its share capital, and in satisfaction, on securing the agreement of its shareholders, it may either make a distribution in cash or elect to make a distribution of its assets.

For the purpose of my Amendment, the cases which most commonly arise are those where the shareholders are other companies which have an interest in the principal company. The reduction in the capital of the principal company is the result of an agreement whereby certain assets or cash may be more usefully employed by the receiving companies who may be shareholders in the principal company. This Clause takes account of the fact that capital of a company may be reduced and where it is reduced the standard is reduced accordingly by 10 per cent.

That is accepted in a later Clause where the shareholders are satisfied by means of a cash payment, but the difficulty arises where the shareholders receive assets or valuable consideration in a form other than cash. It is laid down in Clause 57 (3), that in such cases the amount so transferred will be regarded as having a certain cash value and the capital reduction standard of the principal company will be reduced by an amount equivalent to the cash value of the assets transferred and not by the actual reduction in capital agreed upon with the courts in the total capital of the principal company.

It may well arise that a firm distributing its assets to subsidiary companies in this way may have its standard lowered by a considerably greater amount than is in fact justifiable. It will he borne in mind that a company can only have its capital reduced on application to the court and with the consent of the court, so that the amount of reduction agreed upon will be a fair, true and proper amount. I submit that it would be highly improper if the value of the assets transferred in satisfaction to the shareholders were to be written up to a nominal cash value by the Commissioners and that sum used as the notional amount by which the capital had been reduced.

It is only right that what applies one way should apply the other way. That is the basis of my Amendment. The matter becomes even more important where the related companies may themselves have their shares quoted on the Stock Exchange and those shares may rise in value as a result of the transfer of the assets. They may rise in value by a greater amount than the capital of the principal company has been reduced. There is a danger that the Commissioners might take the rise in the Stock Exchange value of the shares of the receiving companies as the cash value of the valuable consideration so transferred.

That, of course, would be manifestly unfair because they would not have taken into account the amount by which the shares of the principal company would have fallen as a result of the reduction of capital and the transfer of the assets. This might not happen, of course, but it is the sort of thing which can easily happen. I felt that, as the sums of money involved could be very considerable in the case of some of the companies likely to be affected, it was advisable to move this Amendment in the hope that my right hon. Friend will accept it and thus safeguard the position and prevent a manifest unfairness from occurring.

The Minister of State for Economic Affairs (Sir Arthur Salter)

Perhaps I ought to start by saying that I am not rising for the reasons suggested by the right hon. Member for Colne Valley (Mr. Glenvil Hall) or the right hon. Member for Battersea, North (Mr. Jay), the suggestion in each case being without foundation. I rise for the modest purpose of commenting on the Amendment before us and on the remarks of my hon. Friend the Member for Altrincham and Sale (Mr. Erroll).

I had some difficulty, on seeing the Amendment on the Paper, in understanding precisely what was the point it was desired to correct. It was only as I heard the explanation of my hon. Friend that I began to realise what he really desires to achieve. I think his Amendment is based in some respect on a misapprehension. This Clause does not do quite what he thinks, nor I think would his Amendment serve the purpose he has in mind. The Clause as it stands deals with changes in share values. Any sum paid to the shareholders in excess of the actual capital repaid is not treated as a reduction of capital; it is treated as a distribution of profits under the Ninth Schedule and, in order to meet the point my hon. Friend raised, he would have to make an Amendment to that Schedule.

That could be a reason for my suggesting that this Amendment should be rejected, but if the purpose were a good one, I would have suggested an Amendment on the Report stage. But the grievance is not a real one at all. We are not dealing only with changes in the capital structure, the nominal structure, of a company.

The main position is that in imposing Excess Profits Levy, everyone realises that we cannot simply take the standard profits and the excess profits without some allowance for changes which may have taken place in the meantime in the capital resources of the company in question. What matters is not just changes in the capital structure of the company, but changes in the real capital resources of the company. An amount is distributed to shareholders in the sense of the Schedule.

Supposing, for example, that investments are given to shareholders which are either without diminution of share capital or in excess of the diminution of share capital, that is a distribution of profit. It reduces the earning assets of the company. It must be assumed that the excess profits shown after that operation at x pounds would have been x plus so many pounds had that transaction not taken place.

In fact, this is the exact converse of the arrangement made in the case of new capital resources, secured, for example, by the ploughing back of profits in the period in question; in that case an appropriate allowance is made by the increase of the standard. This is the precise converse of that, the reduction of the standard because the earning assets have been reduced. I think, therefore, that apart from the fact that I do not think the Amendment serves the purpose my hon. Friend apparently had in mind and what he put as a grievance was not a real grievance, I am afraid I must ask that the Amendment should be rejected.

8.30 p.m.

Mr. Erroll

I should like to have some time in which to study the explanation given to me by my right hon. Friend. In the meantime, I beg to ask leave to withdraw the Amendment, and I shall table another Amendment on Report if the matter is not quite cleared up.

Amendment, by leave, withdrawn.

Amendments made: In page 37, line 37, leave out from second "the," to second "and," in line 38, and insert "relevant date (as defined in subsection (6) of this section)."

In line 41, leave out "ten," and insert "twelve."

In line 42, leave out "ten," and insert "twelve."

In page 38. line 1, leave out subsection (4), and insert— (4) A body corporate may, if it thinks tit, elect either—

1. (a) that its profits for one of the two standard years (to be specified in the election) shall be taken for the purposes of subsection (1) of this section to have been an amount equal to eight per cent. of the average amount of its paid-up share capital in that year: or
2. (b) that an amount equal to ten per cent. of the amount of its paid-up share capital at the end of the year nineteen hundred and forty-six or the year nineteen hundred and fifty-one (as may be specified in the election) shall be taken for the purposes of this section to be the amount arrived at in its case under subsection (1) of this section; or
3. (c) that an amount equal to eight per cent. of the amount by which at the end of the year nineteen hundred and forty-six or of the year nineteen hundred and fifty-one (as may be specified in the election), the value of its assets, computed in accordance with the provisions of the Schedule (excess profits levy: computation of value of assets and liabilities for purposes of capital standard) to this Act exceeds the amount of its liabilities so computed, shall be taken for the purposes of this section to be the amount arrived at in its case under the said subsection (1);

and the preceding provisions of this section shall have effect accordingly: Provided that where an election is made under paragraph (b) or paragraph (c) of this subsection, subsection (2) of this section shall not apply to sums received or paid before the end of the year specified in that election. (5) Subject to the provisions of this Act, the standard years for the purposes of the excess profits levy shall, in the case of any body corporate be the years nineteen hundred and forty-seven and nineteen hundred and forty-eight, the years nineteen hundred and forty-seven and nineteen hundred and forty-nine or the years nineteen hundred and forty-eight and nineteen hundred and forty-nine, as the body corporate may elect: Provided that where, at the beginning of the period of charges to the excess profits levy, the main part of the body corporate's trade or business was carried on in territory which, at any time during the years nineteen hundred and forty-two to nineteen hundred and forty-five, was under Japanese occupation, the body corporate may, if it thinks fit, elect that the standard years shall be the years nineteen hundred and forty-nine and nineteen hundred and fifty. (6) The relevant date referred to in subsection (3) of this section is, where an election is made under paragraph (b) or paragraph (c) of subsection (4) of this section, the first day of January immediately following the year specified in the election, and in any other case, the date specified in the following Table opposite the years which, in the case of the body corporate, are the standard years

TABLE
Standard years		Relevant date
1947 and 1948	…	…	1st July, 1947
1947 and 1949	…	…	1st January, 1948
1948 and 1949	…	…	1st July, 1948
1949 and 1950	…	…	1st July, 1949

In line 24, after "if," insert "the references to twelve per cent. were references to fourteen per cent."

In line 26, leave out first "reference," and insert "references."

In line 26, leave out, "a reference" and insert "references."—[Sir A. Salter.]

Mr. Albu

I beg to move, in page 38, line 26, at the end, to insert: for the purpose of this subsection a director means a director of the body corporate who throughout the whole of the chargeable accounting period worked full-time in the actual management or conduct of the trade or business of the body corporate. In the whole course of the proceedings on this Bill, anxiety has been expressed about the small developing companies which are likely to be affected by the levy. This has been particularly the case in areas such as Lancashire, where there is unemployment at the present time and where it is quite obvious there must he some diversification of industry. We all want to see new and vigorous companies expanding and being encouraged to go' and start up business in those areas.

I think we all welcome the assistance that has been given to these smaller companies, partly in the Bill itself in its original form and partly in the Amendments. In fact, very considerable concessions have been made if one includes all the director-controlled companies. In Clause 30, concessions are made to such companies in the Profits Tax whereby the total number of directors is increased to four and the total amount of the allowance allowed to directors is increased to £7,000.

In this Clause we have substantial reliefs for these small companies which are enabled to take as their profits standard based on assets employed, or on the capital standard for a single year, instead of the 8 per cent.—10 per cent. and whose standard based on their paid up share capital, either before or after the standard period, rises from 10 to 12 per cent., while that on distributed profits goes up from 12 to 14 per cent.

In addition, of course, there has been the raising of the minimum profits standard, in the Amendment which the Chancellor of the Exchequer will move on Clause 35, from £2,000 to £5,000. We are entirely in favour of giving this concession if the effect of it is to assist the type of companies we have in mind and to be a direct incentive to their efficiency and initiative. But I suggest that on this Clause the concessions really go very wide indeed, because of the use of the word "directors" in the description of the companies which are to receive this benefit.

Director-controlled companies can include a large number of persons who play no active part in the management or direction of the company. Our argument is that this is not the right way to give this batch of concessions, which are very substantial indeed when they are added to the amendment the Chancellor has made to the figures for ordinary companies. Some of my hon. Friends have already commented on the figure of 10 per cent. as the rate on new money, and of course to these companies it will be the substantially higher figure of 12 per cent.

The purpose of this Amendment is to restrict the concessions that are given to these smaller companies to companies in which the directors play a continuous and active part. This is not a new idea. There are quite respectable precedents for doing this sort of thing. For instance, in the not very lamented Excess Profits Tax introduced in the second Finance Act of 1939, a concession was given to working proprietors, who were defined as proprietors who over one-half of the accounting period were in full actual management or conduct of the trade or business. And the expression "proprietor" meant, in the case of a company, a director who owned not less than one-fifth of the shares of the company.

Under the previous Government, in the Finance Act of 1948 in the case of the Special Contribution, concessions were given to a working director who was defined as a director of a private company, being a company in which the directors had a controlling interest and worked full-time in the actual management or conduct of the business of the company.

We ask that this range of concessions, giving an extra 2 per cent. on the profits standards for the purpose of the Excess Profits Levy, should be restricted in a very similar way to the restrictions made in the instances I have just quoted. I think it important to make this clear distinction. I cannot see why the profits figures that are now allowed for ordinary companies are not perfectly adequate for ordinary director-controlled companies where the directors are not themselves active working managers or actively participating.

It is very important to make this distinction, because I think that there is a good deal of confusion about the effect of profits as an incentive to increased output, increased efficiency and so on. It is obvious that the profits can provide no real incentive to directors or shareholders who play no part in the business.

I am not arguing the question whether or not they are sufficient to attract risk capital. That matter has already been referred to by my hon. Friend the Member for Gloucestershire, South (Mr. Crosland), who put forward the view that the amounts already allowed for ordinary companies were quite adequate for that purpose. If we are to go further and give a concession to smaller and expanding companies—to people who put in their own money and try to develop and build up their own companies—I think we must be careful not to carry the concession too wide. It is for that reason that I move this Amendment.

The Parliamentary Secretary to the Ministry of Civil Aviation (Mr. R. Maudling)

The companies to which this particular provision refers would, no doubt, be mainly small companies; but it is not because they are small companies that this particular additional percentage is granted. There is a specific reason, and I hope that when I have been able to explain it I shall be able to persuade the hon. Member for Edmonton (Mr. Albu) to withdraw his Amendment.

The point is that the assessment for the Excess Profits Levy is based on the Profits Tax assessment, with certain Amendments contained in the Eighth Schedule. For Profits Tax purposes, all director-controlled companies are subject to very strict limitations on the amount that can be treated, for the purposes of tax assessment, as directors' remuneration. In the case of people who are not working substantially whole-time there is no allowance, and there are substantial limitations for the working directors.

It is because of this limitation for Profits Tax purposes, which applies also to the assessment for Excess Profits Levy purposes—which does not apply to companies which are not director-controlled—that this particular additional percentage has been added, and it is because the limitation applies to all companies that are controlled by their directors and all such director-controlled companies suffer the limitation that, in my submission, all such companies should receive the benefit of this additional 2 per cent.

If the hon. Member's Amendment were accepted, it would mean that a proportion of the companies would suffer the disallowance of directors' remuneration but would not get the benefit of the additional 2 per cent. I hope that the hon. Gentleman will agree that I have made that clear and that he will, therefore, withdraw his Amendment.

Sir Frank Soskice (Sheffield, Neepsend)

I am sure that we feel the force of what has been said. Nevertheless, it still remains the fact that the indulgence given to director-controlled companies by Clause 33 (5) is very valuable. I quite agree that one has to take into account what the hon. Gentleman has said—the counter-balancing disadvantages which impinge on director-controlled companies under the Profits Tax provisions applicable for the purposes of assessing profits for Excess Profits Levy—but if the hon. Gentleman says that there is that counterbalancing disadvantage and one should be generous in one's provision under subsection (5), perhaps he would give some idea how the compensating advantages and disadvantages work out in terms of figures.

True, for the purpose of Profits Tax, there is a limit on the amount to be treated as a deduction when it is paid out to directors; but nevertheless, forming a first-blush view opinion of it, it would seem that to increase the amount which can be taken for the purpose of computing the standard profits for director-controlled companies—as under Clause 33 (5)—an unduly valuable advantage is being conferred upon companies, if it is to be so widely conferred.

The only thing that my hon. Friend seeks to do is to confine this valuable advantage to those director-controlled companies which he has described. I quite agree that there is the disadvantage which the hon. Gentleman has mentioned but is that an answer to the argument advanced, which is to the effect that, as subsection (5) reads at present, a director-controlled company is a company the directors of which have control of it in the ordinary and unlimited sense?

8.45 p.m.

Surely there is a strong case for saying that if we are to advantage particular companies, then we will choose words in our provisions limiting the advantage to those companies which we have in mind. These are companies which, in effect, are worker by the persons who control them, as directors. They are companies which formerly, perhaps, represented partnerships—persons who had built up their business—and which have since gone over to being companies and are now worked in substance by the directors, who spend their whole time in the business.

I hope I have done justice to the hon. Gentleman's argument, but it seems to me, in spite of what he says, that there is great force in the argument of my hon. Friend the Member for Edmonton. It seems that, at the moment, the definition of a company which is to have this indulgence made in its favour is a great deal too wide, and what my hon. Friend wanted to do—to limit the category of directors who could be considered to come within the subsection for this purpose—is perfectly reasonable. What is sought by his Amendment is to use a phrase which has been used in another context and to limit the directors to those who work full-time in the actual management of the company.

Speaking for myself, and bearing in mind the object of the Amendment, as explained by my hon. Friend, I hope that the Parliamentary Secretary will give the Amendment further consideration. As the subsection is worded it travels far too wide, in spite of the consideration to which the Parliamentary Secretary has called attention.

Mr. Maudling

I will certainly look with care at what the right hon. and learned Gentleman has said, but I would point out that the wording of the Amendment is considerably wider and more far-reaching than that of Clause 30, which contains the Profits Tax provision of a similar nature. For that reason, the Amendment as it is worded is not acceptable. I will look at it again, but I still maintain that the purpose of covering all companies of this type and of giving this concession to all director-controlled companies, on the principle that they all suffer limitation of profits, is correct. I think that principle stands, but I will look into the comments made by the right hon. and learned Gentleman and his hon. Friend.

Mr. Albu

I do not think the explanation which the hon. Gentleman has given is satisfactory. We are all well aware that in the calculation of profits these companies are restricted in the ways which he described, but, of course, he is giving a very valuable concession here, and our view is that it goes very wide unless there are restrictions in the way which we have suggested. For that reason, I cannot withdraw the Amendment.

Mr. John Edwards (Brighouse and Spenborough)

I think the Parliamentary Secretary to the Ministry of Civil Aviation is always very clear and brief, but on this occasion I did not find him completely convincing. We are all familiar with the time-honoured device of saying. "Of course, we will look at it again." We have to have regard, however, to the spirit in which that is said, and nobody can suggest that the Parliamentary Secretary was at all encouraging. He said, of course he would look at it again, but he gave the impression that in his considered judgment, which appeared almost final, he could not yield on this point. In view of that, we must accept it that he is rejecting the Amendment.

It is the advantage of having a degree of precision in these matters which I think is important here. I need not deploy all the arguments again, but unless the Parliamentary Secretary is prepared to say, in a sympathetic and forthcoming way, that this matter will be reconsidered and that he will do his best to see whether he can meet us on the Report stage, I am afraid we can do nothing but divide the Committee.

Mr. Maudling

I always listen with attention to arguments adduced by the hon. Gentleman, and I shall certainly consider what he and the other hon. Gentlemen opposite have said, and I shall discuss the matter with the Chancellor, but my authority, as the hon. Member for Brighouse and Spenborough (Mr. J. Edwards) will appreciate, cannot possibly go beyond that. I must say that I am not myself yet convinced, but I will consider carefully what has been said and discuss with my right hon. Friend the arguments put forward in support of this Amendment. I do not think that the hon. Gentleman can really expect me to go any further.

Mr. J. Edwards

May I press the hon. Gentleman just a little farther? That means that, as far as it lies in his power, he will give us an opportunity to discuss the matter on the Report stage in the light of the discussion we have now had?

Mr. Maudling

I will discuss the matter with my right hon. Friend. I cannot possibly go further.

Mr. Roy Jenkins

Do we understand that the Parliamentary Secretary still stands on the principle that it would be quite wrong to define director-controlled companies differently for the purposes of this Clause than for Clause 30? Does he still stand on that? I think he made rather a point of that. If he still stands on that principle—I am not sure whether he shook his head to indicate he did not—but if he still stands on that principle it will be very difficult for him to look sympathetically on my hon. Friend's Amendment, and I do not think that we can expect very much from his promise to look at the matter again between now and Report stage.

Amendment negatived.

Sir John Barlow (Middleton and Prestwich)

I beg to move, in page 38, line 33. at the end, to add: (6) Where a body corporate's trade or business consist wholly or mainly of the production of raw natural rubber the preceding provisions of this section shall have effect as if the references to ten per cent. were references to twenty per cent. and the reference to eight per cent. were a reference to sixteen per cent. The Committee will recall that a large number of companies in Malaya and elsewhere in the Far East were unable to operate in any way during the occupation by the Japanese in the period from 1942 to 1945. The Chancellor of the Exchequer has made provision, I am glad to say, to bring in the years 1949 to 1950 for them, because it is obvious that those companies that could not operate during the war took a long time to resuscitate their estates afterwards, and their products of rubber and vegetable oils, and so on, are of immense value to this country in dollars.

I am delighted with, and thank the Chancellor for, those concessions, and, on behalf of all rubber growers and people who will benefit, I thank him for remedying what was originally in the Bill a gross injustice. We hoped, of course, that he would grant this industry complete exemption, but, being practical people, we thank him for small mercies and greatly appreciate his action.

The object of the Amendment is to meet an injustice which the Chancellor has not met in the other way. I refer in particular to companies situated largely in Indonesia with registrations in this country—companies that could not gain possession, and, in some cases, have not yet gained possession, because of political troubles and upheavals in that country. Many of those estates had been only partially restored to their owners in 1948 or 1949, and the standard years of 1949 and 1950 will be of no use to them whatsoever. For that reason they will have to fall back on the alternative standard of the percentage of issued capital.

The value of these estates for a planted area is probably an average of about £50 an acre, which represents the value of the factories, the equipment, the bungalows, the housing and all the welfare of the natives. But costs have increased so much since these companies have started that now the cost of replanting the rubber alone is probably £100 an acre, and as rubber has to be replanted approximately every 30 years it is most important that the replanting should be done as it becomes due.

Under the present method of E.P.L. these companies will not have the profit to devote to that purpose. It is therefore most important that, in common justice, these companies, some of which are not yet back in the hands of their owners, should have a considerably higher percentage standard. That is the object of this Amendment. I agree that its wording could be substantially improved, but I hope my hon. Friend will see the point of the argument and will do something to remedy this injustice, which is a very real one to a substantial number of London companies.

Mr. Maudling

The position of the rubber industry in relation to E.P.L. is one of very great importance, and my right hon. Friend has introduced a number of Amendments designed to assist it, in company with a number of other industries similarly affected. I will certainly convey to my right hon. Friend the very friendly remarks of my hon. Friend.

The Chancellor has done two major things to help the rubber companies operating in the Far East. There is, in the first place, the opportunity given to them to have the standard years of 1949 and 1950, which will undoubtedly be of very great assistance indeed to the industry taken as a whole, though obviously some companies will benefit from this concession less than others. In addition to this concession, there is the special overriding maximum of 10 per cent. for overseas companies as opposed to 15 per cent. for borne companies. This, my right hon. Friend believes, will in practice be a very valuable concession for companies operating overseas. In these circumstances, in view of the concessions my right hon. Friend has already made, I regret to say that I must ask the Committee to reject this Amendment.

Sir J. Barlow

I am rather sorry that the Chancellor has not been able to make some concession in this respect. At the same time, as my hon. Friend has said, the industry as a whole has had considerable concessions. In spite of what has been said, I hope the Chancellor will think about this again before the Report stage, because there is no doubt that it is a very grave injustice to a certain number of companies which cannot take advantage of the present concessions. With that pious hope, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Motion made, and Question proposed, "That the Clause, as amended, stand part of the Bill."

9.0 p.m.

Mr. Horobin

I want for a moment to raise a point which I took the liberty of informing the Chancellor I wished to have cleared up. It is one of fundamental importance in the effect of this Bill on industry, and as this Clause with its standard years and alternative standards really determines the net effect of this tax, this seemed an appropriated stage on which to raise it.

It arises out of the effect of this tax on growing firms. This, as we all know, will in any case be very considerable. I have a particular case in my part of Lancashire where it is true that the new standard years will make a difference of probably £5,000 a year to their benefit in the net effect on their standard rate of profits; but they will, as nearly as we can calculate at the moment, be paying out of about £60,000 profits in the last year something like £45,000, all told, in direct taxation. That will put an enormous pressure on the moneys available for development.

This firm—and it is typical of many—is of enormous importance in that area, because it is exactly the kind of firm which we want to attract in Lancashire. It is not a cotton firm at all. The importance of it—and I commend this to right hon. and hon. Members opposite—may be indicated not only on the financial side, the figures of which I have given, but in its effect on employment. In 1946–47 it employed 20 men; it is now employing 450. The real point of the effect of this tax on growing firms is not only its financial effect but its enormous effect on the employment available to our workmen.

The point I want to have cleared up is this: There appears to be a considerable difference of opinion as to the net disincentive effect of this tax upon industry. A figure as high as 85 per cent. has been calculated. An hon. Member says that that figure is quite wrong, and I believe that it is challenged by the Chancellor of the Exchequer. It is very important that those of us who are unhappy about the tax should not over-state our case, and I am sure that the Financial Secretary or the Chancellor of the Exchequer will agree that if it can be shown that the figure is not as high as that which has been quoted in the responsible Press—for instance in "The Times"— it would be useful to take this opportunity of showing that they are wrong. It is not disputed that the effect is heavy, but if it is as heavy as that, I think that it will be agreed that it is criminal.

It is very possible that those who have made this calculation are in fact, incorrect. I will try, in a couple of sentences, to put to the Committee how that figure is arrived at, so that the fallacy, if there is a fallacy, can be shown. The argument, in short, is exactly the same argument as that which was put up by the Colonial Secretary in defending the Chancellor's remissions of Income Tax. The Chancellor made a great improvement by this three-decker tax by making none of these taxes affect any of the others, so we have to calculate each separately or none. If we take the normal business practice of distributing one-third of the profits and paying two-thirds tax, it is very simple to calculate what is the rate of tax which we are dealing with on the extra moneys earned in any one year.

That is the essence of the disincentive effect of the tax—not the total tax on the total income but the extra tax on the extra income. That was the argument deployed at great length, and, most of us thought, with great substance, by the Colonial Secretary, and it is the argument suggested here.

What is the extra tax on the extra income which will affect business calculation as to whether it is worth while taking extra effort, taking extra risk putting in new equipment, and so on? The suggestion is that it is calculable as follows. First, we have Income Tax, which is 45 per cent. Second we have the Profits Tax. It is an easy calculation that if one is distributing one-third that is an average of 10 per cent. That represents 55 per cent. deducted.

The E.P.L. for ordinary developing companies such as the one which I have described, which are developing but not developing so fast that they get off the maximum, nor have any of the extra reliefs because they are operating overseas, etc., will be 30 per cent. on all their extra profits. In the nature of things that must be the figure to take when they are considering the extra income coming in in any one year, otherwise it would not be excess profits over the standard, a fortiori.

So the submission is that the extra tax on the extra income is 45 per cent., plus 10 per cent., plus 30 per cent., which makes 85 per cent. That calculation may be wrong. I understand that my hon. Friend the Member for Chelmsford (Mr. Ashton) thinks it is wrong. I cannot say categorically that it is correct, but it is highly important that it should be corrected if it is wrong.

Is the net disincentive now levied by the tax of the order of 85 per cent. on all extra earnings, or is it not? It is not disputed that it is heavy and that it must be something in the nature of two-thirds, but if the calculation that it is something in the nature of six-sevenths is correct, everybody will agree that the disincentive effect of the present taxation is terrific and very dangerous, not only to the proprietors but also to the employees. If there is a fallacy in the argument, I hope it will be pointed out to us and to the country.

Mr. Peter Roberts (Sheffield, Heeley)

Would it not be even more disincentive if the company was employed in the export trade and was trying to export?

Mr. Horobin

That may be, but I was trying to keep the calculation as simple as possible and more or less in round figures. In some cases it may be even more in others, because of special reliefs, it will be less. What I want to know is: Is there a fallacy in the argument that in the case of a normal developing company, without special reliefs and not on the maximum, the extra tax on the extra income can be 45 per cent., plus 10 per cent., plus 30 per cent.? Is that right or is it not? If it is wrong, can we be shown how it is wrong, and if it is right, can we be told how it can be defended by anybody who believes in incentives to industry?

Mr. Boyd-Carpenter

I can respond to the speech of my hon. Friend the Member for Oldham, East (Mr. Horobin), without unduly trespassing on the time of the Committee. Apart from expressing, as he has already made clear, his dislike for the statute in general, my hon. Friend really confined himself to the question of the calculation in "The Times."

I think I can best deal with the matter in this way. First, we start on the basis that, as a result of the Amendments which the Committee has put into the Clause, the general burden has been reduced, since the net extra yield of Profits Tax and E.P.L. taken together is an additional £75 to £80 million instead of £100 million.

Then, if one takes what is, according to the figures, the average distribution rate, a distribution of one-quarter of a company's profits, the position is that as a result of the Amendments the maximum rate of tax on the marginal profits which can be paid at all three tax points, Income Tax, Profits Tax and E.P.L., is reduced by these changes from 71¾ per cent. to, in round figures, 70 per cent. Then, if it happened to be a company operating overseas, it drops to 65 under the Amendment dealing with overseas companies.

The case on which I think the leading article concerned concentrated is somewhat unrealistic. It takes the excess profit in isolation from the remaining profits, and then proceeds to assume that the whole of that excess profit, less only the tax payable, was distributed in dividends, which I think any hon. Member will appreciate is a highly unrealistic assumption. Continuing that unrealistic assumption, the figure on that slice—and I stress "on that slice"—would be 85½ as against 84½. That is because the distributed rate of Profits Tax has been partly restored from the 17½ per cent. proposed in the Bill as it stood to 22½ per cent.

I would stress that the example, though of theoretical interest, is of no real practical significance. I do not suppose any hon. Member is aware of a case in which the whole of the excess profits, subject only to the tax falling upon it, is distributed in dividends, nor I think would any responsible person feel any undue sympathy with a company which so conducted itself.

The example is really very misleading because it ignores altogether that because of the improvements in the standards, in the percentages, etc., which I will not again inflict on the Committee, a much bigger slice of the profits will he relieved from E.P.L. altogether and the parts which will come under E.P.L. will be reduced. Take the simplest example of a company with a profit of £5,000. On the minimum standard, that is, the marginal rate of undistributed profits, there will be a reduction from 80 to 50, and after the distribution of profits if taxed. the maximum marginal rate comes down from 84½ to 64.

My hon. Friend will appreciate, however one considers the theoretical possibilities, that what we are concerned with is how this tax will operate on an ordinary, reasonable company and, whatever my hon. Friend may think of the tax, I think he is forced to the conclusion that we have made it much better in the last two or three hours.

Sir F. Soskice

I intervene in this debate, not with the desire of prolonging the discussion on this Clause, but because it may be of assistance to the Committee if I indicate briefly in summary form what are our views upon it. I should like to put in brief form our opinions on the changes that have been introduced. To begin with, the new standard years of two instead of three is a change, which, on the whole, we think is for the better, and the reasons given in support of the change justified it being made.

Similarly, we feel that a case has been made out for the companies that are in territory which the Japanese once occupied. That is a change also for the better, for which a case has been made out in the course of our discussions.

9.15 p.m.

We cannot share the same view with regard to the capital assets provisions. It may be that in some ways the change in that regard introduces a greater measure of equity, but we cannot help thinking that that advantage is very heavily outweighed by the very great administrative complexity which must attend upon these new provisions. They are exceedingly complex, and they will put a great and, we think, an unnecessary burden upon the authorities who have to administer them. Even if they are an improvement in some respects in making the tax more equitable, we think that the change ought not to have been introduced because it makes the administrative problem very nearly intolerable.

I have one other point to put, which we think has not been justified in the debate, and that is the increase in the capital standard. There may or there may not be a justification for it, but, if there is, we do not think any of the arguments we have heard from the Government Front Bench have given that justification.

Perhaps I might state in summary form the criticism which we have of the Clause in its changed form. On the general issue of this Clause, I do not think I can add anything to what has been said in expressing our opinion. We dislike this Excess Profits Levy. We think it wasteful, and we have criticised it in other ways, but we accept it as better than nothing. We would much prefer the Profits Tax to be used to achieve the purposes which the Government seek to achieve by the Excess Profits Levy.

There is only one other point I should like to make. Owing to some misunderstanding, an Amendment which was down in the name of several of my hon. Friends dealing with investment companies was not called. Possibly that might justify me in saying one word to show why we put the Amendment on the Order Paper. We had in mind the position of investment companies whose interest, derived from investments, does not find its way into their profit-and-loss accounts until, as it were, a year late. For that reason, we thought it proper to put down an Amendment which would take account of that fact and would give the investment companies the right to switch back one year.

In the changed form of the Clause that Amendment would now be inappropriate, in view of the Amendment which the Government have introduced, but I call attention to the point and express the hope that the Government will bear in mind the reasons which actuated us in putting down our proposal, which had been carefully thought out, and will give consideration to the point we raised.

Mr. Baker White (Canterbury)

I wish to raise one point of substance which is of importance to the agricultural community. Clause 25 clearly affects the position of marketing boards. This Clause also might well apply adversely to them, although it is not intended to do so. There is anxiety in the agricultural community on that point. I do not want to press the point now, but I ask my hon. Friend the Financial Secretary to look at it before the Report stage, to see if anything can be done to alter the Clause and remove that effect.

Mr. Boyd-Carpenter

I think my hon. Friend will find that in a later Clause there is reference to the subject, but I will certainly bear in mind what he has said.

Clause, as amended, ordered to stand part of the Bill.