§ Subsection (3) of section thirty of the Finance Act, 1947, shall be amended so that the amount on which a distribution charge is payable is the amount by which the net relevant distributions to proprietors for any chargeable accounting period exceeds the profit for that period chargeable to profits tax reduced by the amount which after deducting income tax at the standard rate for the year in which the chargeable accounting period ends is equal to the total of the profits tax and excess profits levy payable for that period; and the proviso to the said subsection (3) and paragraph 1 of the Seventh Schedule to the Finance Act, 1952, shall be amended by substituting for the references to the amounts on which reliefs for non-distribution relief have been given for previous accounting periods references to those amounts reduced by the amount which after deducting income tax at the standard rate for the year in which the relevant accounting period ended is equal to the total of the profits tax and excess profits levy payable for that period.— [Mr. Stevens.]
§ Brought up, and read the First time.
§ Mr. G. P. Stevens
I beg to move, "That the Clause be read a Second time."
1803 This proposal affects distribution, for profits tax purposes. Profits Tax in its present form is effective from 1st January, 1947. There are undoubtedly bad features about the Profits Tax as about all taxes on profits, and it is one of those bad features that the new Clause proposes to remove.
It is usually thought that when a company pays dividends to its shareholders it recovers from them the taxes which have been charged upon the profits of the company, but that can only be true to the extent to which the aggregate of dividends distributed to the shareholders is equivalent to the profits which the company has made, and even that generality is not true. It is only partly true, because a company cannot recover from its shareholders the Profits Tax which it has to pay, the Excess Profits Levy, or the tax deducted from the dividends which it pays to them, or Income Tax applicable to the Profits Tax and the Excess Profits Levy which it has to suffer.
Let me give the simplest possible illustration, which is the only kind I can ever understand. Take the case of a company which has no Excess Profits liability. The company can only physically distribute to its shareholders by way of dividend a maximum of 70 per cent. of its profits. The balance of 30 per cent. is absorbed in Profits Tax, and Income Tax on the 30 per cent., which is not recoverable from the dividend. The present basis of the computation of Profits Tax ignores this anomaly altogether. It operates particularly harshly if, for example, a manufacturing company has accumulated reserves and invested those reserves in investments, and, subsequently, sells those investments at a profit which is not chargeable for Income Tax purposes; and it then distributes part of these non-taxable profits to its shareholders.
Again this particular anomaly, as I think it to be, of the Profits Tax acts very harshly in the case of a liquidation, if a company, from capital profits acquired in the past and not chargeable to Income Tax or to Profits Tax, or from reserves built up before 1st January, 1947, distributes on liquidation more 1804 than the paid-up share capital of the company. I do not wish to delay the Committee on a purely technical point, which none the less can and does inflict very severe hardship in a number of cases. The proposed new Clause seeks to limit the amount demanded for Profits Tax to the amount distributable as profit of the year to the shareholders after making provision for tax liability. I hope that the Economic Secretary will see the sweet reason of my argument and will accept the Clause.
§ Mr. Maudling
This new Clause is of considerable complexity. It appears to arise principally from the fact that Profits Tax payments do not rate as deductions in calculating profit for the purpose of Profits Tax assessments. They do not rank as distributions. Therefore, to the extent that a company has, out of its gross profit, to pay Profits Tax, the gross equivalent of what they have paid is treated as if it were put to reserve, though it is paid out in the form of Profits Tax. Therefore, prima facie it does not seem unreasonable that if at a subsequent time distribution should exceed current profits there should be clawed back an equivalent amount out of what has been treated as having been put in reserve.
A position like this would arise, of course, as the law stands in the case of a company which in any particular year makes a gross distribution equal to its full profits. Any company that seeks to make in a particular year a gross distribution equal to full profits and has to meet Income Tax, Profits Tax and distribution can only do this by having recourse to sources outside the year's profits.
§ 9.45 p.m.
§ Mr. Stevens
Would it apply to a company which made profits in years gone by and, having followed a prudent policy by placing profits to reserve, paid a dividend out of the resources of the past?
§ Mr. Maudling
Taking one year, as it stands obviously one cannot make a full distribution and pay Profits Tax without having recourse to some outside funds, be they reserves or something else. Assuming that that is so, surely it would be anomalous to deal differently with the case of a company which made less than 1805 the full distribution in 1947 but later brought up its post-1946 distribution to the total of the post-1946 profits by recourse to previously existing reserves. This is a complicated point. It is an argument for the law as it stands apart from the whole principle underlying the Profits Tax of the importance of putting to reserve and discouraging distribution.
I know that a number of distinguished professional bodies maintain that this feature of Profits Tax law is based on a fallacy in that it is assumed that the amount not distributed is available to shareholders in the form of reserves, whereas in fact it has to be paid in Profits Tax. That is an argument that is being considered by the Royal Commission at the moment. I ask my hon. Friend to await the conclusion of the Royal Commission on the point. I am advised that to accept the new Clause would cost some £3 million. That may not be an exact assessment but, obviously, it would be a large sum and therefore my right hon. Friend the Chancellor would certainly not be prepared to accept the new Clause at the present time.
But my right hon. Friend recognises that there are feelings among important bodies of professional people that this principle upon which the Profits Tax is based is wrong. He is glad, therefore, that the Royal Commission is to have the benefit of the opinion of professional bodies, and he would like to await the Royal Commission's Report. In that light I suggest that my hon. Friend might withdraw his Motion.
§ Mr. Stevens
I am not tremendously impressed with £3 million where justice is concerned, but I am impressed by my hon. Friend's statement that the matter is before the Royal Commission, who I feel sure will pay attention to our deliberations this evening. For that reason I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.