HC Deb 08 December 1955 vol 547 cc566-86

3.55 p.m.

Mr. Roy Jenkins (Birmingham, Stechford)

I beg to move, in page 2, line 25, at the end, to insert: Provided that this subsection shall not apply in the case of any company whose profits in any relevant chargeable accounting period are less than ten thousand pounds. I am slowly gathering experience in the difficult art of moving comparatively minor Amendments just after half-past three in the afternoon. I am sorry that this one is not rather longer so that I could take a little more time reading it out while hon. Members were settling themselves down.

Mr. James Callaghan (Cardiff, South-East)

We cannot hear my hon. Friend. Let him read it again.

Mr. Jenkins

I do not propose to take advantage of my hon. Friend's suggestion that I should read it again.

This is a fairly simple and straightforward Amendment which is designed, like a whole series of Amendments which on previous Finance Bills we have moved from this side of the House or of the Committee, to try to get relief, at times in relation to investment allowance, at times in relation to initial allowances, and at times, such as this afternoon, in relation to the Profits Tax upon small businesses. The purpose of the Amendment, therefore, should commend itself not only to hon. Members on this side of the House, but to hon. Members on the Government side also.

At present, I understand, businesses, whether public or private companies, are exempt from Profits Tax up to £.5,000, provided that their profits do not exceed that figure. What we seek to do by the Amendment is to extend this provision to the sum of £10,000 so far as the new Profits Tax imposition is concerned. To this extent, what we seek to do is in line with the whole series of Amendments which we have moved in the past. Their purpose was to give a certain amount of preferential treatment to small—indeed, to the very small—businesses so far as the operation of the Profits Tax is concerned.

It is true that the Amendment does not single out and attempt to define small or family businesses, or whatever other term one might apply. The Chancellor would agree that it would be impossible to think of an effective definition which could be put into a Finance Bill. The way in which we seek to accomplish our purpose, therefore, is by putting forward a concession which will apply equally to all businesses but which, in the case of businesses other than very small businesses, would be of such negligible importance as to be hardly a concession at all, but which, in the case of the very small businesses, would be a concession worth having.

Why do we seek to do this in general and why, in particular, do we seek to do it at the present time? In general, the argument is that while my hon. and right hon. Friends on this side of the House take the view that the deleterious effects of a high burden of direct taxation, whether in the form of Income Tax or of Profits Tax, upon the health of businesses can be greatly exaggerated, there may be a case for saying that the present rate of taxation falls particularly heavily on small businesses which are endeavouring to build themselves up, as many small businesses have done in the past, into successful and big businesses. If, therefore, we can give them a little assistance, consistent with our general policy that there should be a fair burden of tax upon company profits, a good deal can be said for doing this.

4.0 p.m.

The Chancellor of the Exchequer knows the general case which we have argued and discussed with him in previous years. Why is there, perhaps, a rather special case at present? The point here is an obvious one. Most hon. Members would agree that the credit squeeze, whatever its virtues and its vices, falls more heavily upon small businesses than on large businesses. There is no doubt at all that large businesses have, on the whole, more liquid funds of their own available. There is no doubt, either, that they have a far greater range of opportunity of raising money from outside sources.

Moreover, I think there is very little doubt that banks, trying to carry out the Chancellor's policy—having to carry out the Chancellor's policy to some extent—prefer, if they have to make a choice, to offend their smaller customers rather than to offend their big customers. I am not blaming anyone for that, for if there is a policy of credit restriction and high interest rates it is inevitably the case that the small businesses suffer more under it than do the big businesses.

One likely result of this policy of restricted credit, if operated over a substantial period, will be the discouragement of the family businesses, and the encouragement of the trend, which there is in this country as, indeed, there is in other countries in an advanced economic state, towards an increasing concentration of activity among a comparatively few firms. There are disadvantages in such a development. I am sure that many hon. Members on the other side of the House, who so often talk about the great virtues of the family business, will recognise that, and I think that to some extent the Chancellor himself recognises it. The small businesses, many of which are playing an effective part in the general productive effort and in the export drive, are feeling the effects of the credit squeeze. My hon. Friend the Member for Wednesbury (Mr. S. N. Evans) has drawn attention to this on several occasions in the House.

There is no doubt that there is a real problem here, and what we are seeking to do in a small way is to offer some relief to small businesses, the least able to bear the present burden of taxation, which may in general be necessary, but which, combined with the credit squeeze, high interest rates and a restrictive attitude on the part of the banks, may do grave harm, and may, if continued for a long time, affect the future development and shape of our whole economy. This is a simple, straightforward Amendment. I do not wish, therefore, to make a long speech about it, and I conclude with the hope that the Chancellor will consider it very sympathetically.

Mr. Eric Fletcher (Islington, East)

I beg to second the Amendment.

My hon. Friend the Member for Stechford (Mr. Roy Jenkins) has moved the Amendment very ably, and I very much hope that the Chancellor will give it sympathetic consideration and approval. It is not, I think the Chancellor will agree, an Amendment which would cost the Treasury a great deal of money, and his acceptance of it would be in line with his general policy of encouraging small and deserving businesses and helping them in the difficulties that confront them. It does not seem to me that the Chancellor's acceptance of the Amendment would militate against his desire to fortify the Revenue by some additional income from the Profits Tax.

There is, as my hon. Friend has said, a great deal of difference between a large firm earning a substantial amount of profits year by year and a small, struggling company. It may be that the large company will be able to afford this additional burden of Profits Tax without any difficulty or embarrassment. Indeed, the comments in the financial Press after the Budget indicated that that would be so. The increased rates of taxation were considerably less than the City had expected, and large companies will not suffer any distress as a result. The small company, however, the struggling company whose profits are about £10,000 a year, will be acutely hit even by this increase in the Profits Tax.

We feel that the Chancellor would wish to show his sympathy with the small companies. It is his desire, we understand, that industry and risk undertakings should be as widely spread throughout the community as possible. It is obviously undesirable for our economy that industry should be concentrated in a few hands. It is desirable that small companies should be encouraged. They already have difficulties enough in these days of increasing competition, and in these days when is it so much easier for the larger companies to spend sums in advertising and in other ways which increase the advantages which are inherent in their very size. We think it is unfair that the advantage of the large companies should be exaggerated, and we believe that the Chancellor by this Amendment has an opportunity of evening out the inequalities.

I do not think the cost to the Revenue of this Amendment could be very great. The small companies undoubtedly are much harder hit, as the experience of all of us shows, in obtaining credit facilities from their banks than are the larger companies. Moreover, the Chancellor, as he himself observed in his Budget speech, by increasing the rate of Profits Tax on distributed income, as compared with undistributed income, is flying in the face of the Royal Commission on the Taxation of Profits and Income and is taking a step which is inherently bad and contrary to the recommendations of the Royal Commission. We hope that next year we shall hear more about the general recommendations of the Royal Commission.

We urge the right hon. Gentleman, in considering this Amendment, to bear in mind that by accepting it he will be doing something to alleviate the problem which affects the small companies, and to that extent will be in accord with the general and very authoritative principles of taxation laid down by the Royal Commission.

Mr. Donald Chapman (Birmingham, Northfield)

I hope very much that there will be a sympathetic response from the other side of the House to this Amendment. Before coming into the Chamber I had a look at what some hon. and right hon. Gentlemen opposite said on this subject when we debated it in 1951 and 1952. At that time the Excess Profits Levy had been started and Profits Tax had been altered. The present Minister of Supply, who was then a junior Minister, gave his blessing to a proposal precisely of the sort of this Amendment. He was talking at a time when Profits Tax was increased. It has just now been increased. He said: I should say, as I said on the previous occasion, that that is the time to give the small company greater concessions. The heavier the weight of tax the greater the need to give concessions or special help where special help is needed."—[OFFICIAL REPORT, 18th June, 1952; Vol. 502, c. 1214.] The circumstances he instanced are similar to the circumstances now, and the same argument applies now. I shall be sorry if hon. Members opposite are silent in the debate on this Amendment.

There have been some investigations recently which show how hard the credit squeeze is affecting the small businesses. Investigations have been made by one of our national newspapers. I can give an example, quoted in August this year, in an investigation carried out by the Daily Express. There was, as the Daily Express found, a small firm in Cheshire. A young man had taken over a business making sports goods and had built it up until he now gave jobs to about 20 other people. Whether he would come within the tax ranges of the Clause, I do not know, but he is the kind of person we have in mind. When the firm needed more money to expand and enter the export market, which I am sure is happening on quite a scale throughout industry, he raised the money by mortgaging his house. Then he obtained his first order, for £800, with more to come.

He now writes: This has been executed but, unfortunately, I will not be paid for three months. I have a promise of larger orders in future and the prospect of substantial orders from another source abroad. But I cannot afford to finance them, so I approached by bank manager. But the bank replied: 'No further credit can be granted in any circumstances.' That is precisely the complaint we on this side of the House make, and I hope that the Amendment will help to alleviate it. Our complaint is that the credit squeeze as applied today can do great harm where that harm should not be done.

The Amendment can help precisely that kind of case. If these people can have relief from the extra impositions this year, it will help them in the problem which they are all facing vis-à-vis the bank manager who has to apply the Government's policy for them.

There is also the case of the agricultural industry generally. That industry has notoriously been in difficulties about credit in the past. It has been the victim of the credit squeeze this year. We have found from investigation that a number of farmers are falling into difficulties because of the demands being made upon them to repay their capital liabilities to the bank and cancel their overdrafts. They, in particular, would also be helped by this small Amendment.

Captain J. A. L. Duncan (South Angus)

Can the hon. Member give any instances?

Mr. Chapman

I could not give one precisely, but the hon. and gallant Member could look up the series of cases which were quoted in the Daily Express. I know that there were examples from the farming industry. One was that of a lady who had taken out a mortgage of £25,000 on her farm and had reduced it to £17,000, but she was now in acute difficulty because the bank demanded immediate cancellation of a further proportion of that £17,000. The case was given in detail in the Daily Express.

Mr. Speaker

I may be wrong, but I believe that the Amendment refers to companies more than to individuals.

Mr. Chapman

I do not know how many of these examples are companies. I know that a number of farms are companies nowadays and I am quite sure that many of them would come precisely within the scope of our discussion.

The Amendment will help firms of the kind that I have been describing. The help is particularly needed because of the way in which the bigger firms are not hit by the credit squeeze at present. Here is a young man, starting a sports goods manufacturing industry, obtaining orders, showing ability, anxious to get on, and anxious to help our export trade and yet being denied credit facilities.

Let us, on the other hand, consider the brewing industry and how it is circumventing the credit squeeze. The annual report of Mitchells and Butlers Limited, the brewers in the Birmingham area, appears in The Times today. That company is far from feeling the effects of the credit squeeze in the way the small companies are feeling it. Indeed, it is not mentioned in the whole of the company's report. The report states: With the ending of building licences about a year ago we have been able to go forward on a large scale with overtaking arrears in the programme of repairs and improvements to the company's properties. We have applied £75,000 to this purpose from the repairs equalisation reserve which stockholders will remember was set up specifically for this purpose. Later, the report goes on to state that the capital expenditure which will be completed by 1957 by this brewery alone will total no less than £500,000.

4.15 p.m.

Here is precisely the case for the Amendment. Here is a large company, doing work which is useless to our export drive and our social requirements, able to spend £500,000 in the next two years in expanding and improving public houses whilst, on the other hand, there is a small firm of the kind which I quoted in acute difficulties in trying to remain in existence and contribute to our export drive because the Government's credit squeeze is now calling in overdrafts. This is going on all over the country as the Daily Express investigation shows.

Mr. E. Partridge (Battersea, South)

If it is in the Daily Express it is not to be believed.

Mr. Chapman

That is an interesting statement, especially as the Daily Express has given support to the other side of the House on many occasions, but the hon. Member should not blame the Daily Express in this case. The paper is not quoting cases which it has made up, but the names and addresses of people who have sent in reports of their own misfortunes as a result of the credit squeeze. These are Daily Express readers who have sent in accounts of their experiences, which the paper has published.

The credit squeeze does not hurt the big businesses which I have described, but the small businesses. It hurts them substantially. We on this side of the House believe that the Amendment, proposing a small relief costing not more than £500,000, would be of substantial help to a number of those who are getting into acute difficulty.

Mr. John Mackie (Galloway)

I hope that the hon. Member for Northfield (Mr. Chapman) will not interpret my few remarks as possible forthcoming support for him and his colleagues if and when they take the Amendment to a Division. In saying what he did about the effect of the credit squeeze on the small man—and I appreciate Mr. Speaker's intervention to the effect that the Amendment may be referring specifically to companies—the hon. Member raised a point of substance. I am not a reader of the Daily Express and, therefore, I cannot enter the list about the alleged facts and figures given in that journal concerning the difficulties in which farmers and farming companies have found themselves. But I think that the credit squeeze may not have been applied quite in the way that the Chancellor and those associated with him in the Treasury first intended.

I believe that, originally, it was intended to secure a global reduction and I am sure that the Chancellor intended that everybody, large and small, big capitalist or small capitalist, should all contribute their share towards a reduction. We must all sympathise with the difficulties of the banks and their managers in trying to secure the kind of reduction which the Chancellor intended. It may well be that the banks, in trying to carry out the Chancellor's desires, have had to get the money where they could and apply the squeeze where they thought the money would be forthcoming.

It may be that not only small men but big men have suffered from the desire of the banks to get the money where they could in order to conform with the Chancellor's very proper suggestion that there should be a reduction of credit and a general restraint of over-spending, particularly where it did not seem to take place in productive channels.

I shall certainly not support the Opposition in the Division Lobby if, for political reasons, they seek to divide the House. The hon. Member for Northfield described the Amendment as small, but it deals with a point which those who have suffered in this direction in the country as a whole will be very glad to know has been raised. I feel sure that the Chancellor, or whoever is to reply to the debate, will give it sympathetic consideration, and assure the House that the intention behind the policy of credit restriction is not that there should be any unfairness, but that all, great and small, large companies or small ones, or even private individuals, should contribute their fair share.

There should be no attempt to penalise some people because, in other cases, the banks may be so heavily involved. A few years ago, before the present tightening up took place, the manager of the National Bank of Scotland admitted to me that there were some cases in which the bank was so heavily involved that it was obliged to go on giving credit and could not get anything back. That is not the kind of thing which any of us wish to see, and I think that the moving of this small Amendment gives an opportunity to the Chancellor to say clearly what is the general intention behind the credit squeeze at the present time.

Mr. Austen Albu (Edmonton)

I must apologise for not being present when my hon. Friend the Member for Stechford (Mr. Roy Jenkins) moved the Amendment, to which I also have attached my name, but the reason, which I think is relevant to the debate, is that, as a member of the Parliamentary and Scientific Committee, I had been to see the electronic machine which is now being developed by Messrs. Lyons. This is an example of research and development which is extremely valuable, but which can be done only by a very large company. The arguments that I want to bring in support of this Amendment are not only the financial ones about the credit squeeze, and so forth, which have been so well developed on both sides of the House, but a point in connection with technical research and development.

We tend to think that all these new ideas, particularly in the field of electronics, are suitable for development only by companies with very large resources—companies which are able to raise very large capital sums in the market, or which have very large resources with which to undertake this development. This may be so in many cases; certainly, it is so in the field of nuclear energy, and in the case of the large-scale computer development which is being carried on by Messrs. Lyons and other firms. But it is by no means the case that all new technical developments are suitable only for development by companies with very large resources.

I think it is well known in this House that I am no friend of the small business, merely as a small business, and certainly not a friend of the family business, but I am extremely interested in making it possible for a man with a good new technical idea to be able to develop it and bring it to the point of production, even though he may not have at his back very large financial resources. It is undoubtedly the case, and I know a number of examples, that a man with few financial resources, who happens to be himself a scientist or well-qualified engineer, with a group of other engineers and technicians and a few skilled men, can develop a new type of equipment, employing some new scientific developments almost on a shoestring, but the shoestring must have reasonable width and strength.

What we are worried about in this type of case is that when it comes to getting the product on to the market and sold, the amount of the financial resources which a company of this sort has at its disposal will be insufficient, taking into account the present level of taxation and the credit squeeze. I have always held the view that it should be open to any man who has the capacity to develop something of this sort to be able to do it. I am very much against inherited wealth, and that is why I am against the family business, but I am very much in favour of helping any business which will supply something that is economically advantageous to the community; and many of these developments in the scientific field are extremely valuable as exports.

I know a number of examples of this type of application of electronics. In one case it was applied to printing machinery and developed by a very small firm. I know another example of a very small firm developing something in the field of what is called supersonics—very high frequency vibrations, which are generally produced electrically but in the case I am thinking about can be produced mechanically. These have application in a number of fields and can be used for machining purposes and chemical engineering in the production of emulsions, and other fields of this sort.

These appliances are quite capable of development by a handful of well-qualified men, scientists, engineers, technicians and skilled men in very small numbers, and they produce goods—of a type which the Government are trying to encourage at present—of a very high conversion ratio, and in which what has gone into the work is more brain than anything else. If these ideas are really novel—globally novel, in that they are not only novel in this country but in the markets abroad—they do provide an extremely valuable export of a most important type, and they themselves give rise to employment in this country in industries which are themselves scientific, because these firms do not as a rule make their own components, but buy them from somebody else in industries of a type which we want to encourage.

I am worried lest that type of development may be made almost impossible in future. It is not that I believe that the technical and industrial future of this country lies in the small firms, because, of course, it does not, as we all know, because the large firms with large credit resources and collective research and development are far more likely to produce large-scale results than the smaller firms. Nevertheless, there are small firms in this field, and I see sitting in front of me an hon. Friend of mine who has his own small company which, I know, has certainly used in its own business many of these new scientific and technical developments.

I am certain that some of these developments which firms are now applying are produced by a few men working on a small scale in their own field, and we ought to do what we can, without encouraging the transmission of wealth or nepotism, which I am entirely against, to give encouragement to men who are prepared to try to conduct research in their own businesses, and encourage them to get their projects to the stage of economic production, and, incidentally, also of economic sale, because the introduction of these projects into the markets of the world can sometimes be very expensive.

It is for that reason that we have submitted this Amendment. I am fully aware that the actual form of the Amendment may not be acceptable, and if it is not we should accept any alteration which the Government may like to make at any stage. I think that perhaps my hon. Friend the Member for Northfield has underestimated the cost. I think that it is probably quite substantial but, after all, not very substantial, probably in relation to the enormous sums which have been passed into and out of the Revenue during this year. I hope that the Government will give consideration, if not to the exact terms of the Amendment, to the suggestion behind it.

4.30 p.m.

Mr. Victor Collins (Shoreditch and Finsbury)

The Chancellor will be aware that, through the federation to which I belong, I am in contact with many of the small firms which this Amendment is designed to help, so anything I say in support of the Amendment will be derived from actual experience and knowledge of the people concerned.

There is one aspect of the matter which has not yet been mentioned, and it is that it is extremely difficult, even though no dividends at all are paid in a small business, to finance any really considerable rate of expansion at the present time. The reasons are twofold. First, in the main we have increasing costs which, even if the level of business remains exactly the same, need a higher degree of finance in order merely to hold the necessary stocks and to do the same volume of business. Secondly, immediately one begins to expand and gets more orders, they have to be financed, and the total of sundry debtors increases.

I could mention a number of firms who have discussed their difficulties and problems with me, normally the family business, the small limited company. They have said to me that they would not expand. This was not because they did not desire to get more profits but because the worry of being constantly short of capital, especially now when the bank manager worries them in addition, makes it not worth their while when they are already carrying on satisfactorily.

I feel sure that the Chancellor will say that many of these arguments apply to businesses of all sizes, but they apply particularly to a number of small businesses which cannot go on to the market for capital. In spite of the fact that we are talking about small businesses, this matter affects exports. As president of a trade federation, I have endeavoured on occasions to organise exports and to interest firms to undertake collective exports, by disseminating information on the types of goods which could be exported.

Only last week I was visited here by the partner in an American merchant banking corporation. The Chancellor will be aware of the system on which they work and of the tremendous help they are prepared to give to exports. This man pointed out to me that the import into America which he desired to encourage is at present only 1 per cent. of the total consumption of that product in America. He had just returned from Sweden where he had interested a number of small firms in working together to produce this product and they were expecting to make a total export of £1 million to the United States. That is not negligible. He asked me if a similar export from this country would be practicable in the industry with which I am concerned. He discussed finance and the help that would be given. I said that I would endeavour to do what I could to interest firms, but that the mere problem of having money owing for three months in making the goods and building up the exports was one with which small firms would not be able to cope and that, therefore, they would be disinclined to embark on such a venture.

Now £1 million from a small industry may not sound very much when our exports must reach hundreds of millions of pounds every month, but if what applies to one small industry can apply to many more, the resulting total would make a considerable contribution to our exports. Therefore, I ask the Chancellor to consider seriously this Amendment and, in any case, to let us know what would be the cost of this proposal to the Exchequer. If the Government cannot accept the Amendment, perhaps they would suggest some acceptable modification, or the right hon. Gentleman would give an indication of whether they will consider something along these lines in future.

The Economic Secretary to the Treasury (Sir Edward Boyle)

It is worth pointing out at once that this Amendment deals solely with the rate of distributed Profits Tax and, therefore, it could not affect the company which paid no dividends, to which the hon. Gentleman the Member for Shoreditch and Finsbury (Mr. Collins) referred.

Mr. Collins

I only mentioned that to show how difficult it was, even for a company which did not distribute dividends, to finance an expanding business.

Sir E. Boyle

I realised that and I was going on to say that in this debate hon. Members on both sides of the House have drawn attention to the general problem affecting small businesses today. I make no complaint about that, but it was worth while reminding the Committee at the outset of the scope of this Amendment.

The hon. Member for Stechford (Mr. Roy Jenkins), in his interesting speech, referred to the importance of small businesses having sufficient liquid resources at their disposal so that they could grow into big businesses. The hon. Gentleman the Member for Edmonton (Mr. Albu), whose realistic and unsentimental attitude to small businesses I respect, and to a large extent share, emphasised the importance of research and I am entirely with him on that point.

I have no quarrel with what was said about small businesses and their liquid resources. Indeed, as I think the right hon. Gentleman the Member for Battersea, North (Mr. Jay) will agree, it was largely on those grounds that I defended the reduction in the standard rate of Income Tax earlier this year. I could not help feeling that the hon. Member for Stechford this afternoon contradicted to some extent the argument he adduced just over a week ago in saying that we should have had an increase in undistributed Profits Tax as well. If he looks back at his speech of last Tuesday week the hon. Gentleman will see a certain difference in tone between that speech and the one he made this afternoon.

A number of hon. Members have talked about the credit squeeze. It would not be in order for me this afternoon to talk about it at any length on this Amendment except to say that just before the Summer Recess I replied to a debate on this subject initiated by the hon. Gentleman the Member for Wednesbury (Mr. S. N. Evans). I have not much to add to what I said on that occasion about small businesses, but hon. Members this afternoon seem to be suggesting that we should try to some extent to neutralise the effects of the credit squeeze by certain differential tax reliefs.

Hon. Members ought to think hard before advocating that, because there is an influential school of thought in this country—for example, the views of Professor Hicks—which says that it is no good thinking that the monetary weapon can do the whole job for us without the use of the budgetary weapon as well. It will be difficult for us to get on top of inflation if we make tax concessions which tend to neutralise the effect of the credit weapon.

Mr. Chapman

If the credit squeeze is acting contrary to our interests in exports it is important that we should bring in some contrary weapon.

Sir E. Boyle

In July, my right hon. Friend made plain the importance he attaches to exports, as the hon. Member for Northfield (Mr. Chapman) will remember. The hon. Gentleman talks about building licensing, which is outside the scope of this Amendment, but if he likes to send me any evidence he has, I will look at it, because I know how strongly he feels on that subject.

This Amendment covers a relatively narrow point in that it proposes that the increase from 22½ per cent. to 27½ per cent. in the rate of Profits Tax on distributed profits shall not apply where the profits of a company for a chargeable accounting period are less than £10,000. As the hon. Gentleman referred to that point, the actual figure would be £1¼ million in a full year.

The reason I must give to the House for rejecting this Amendment is a simple one, namely, that in considering this Amendment the House must look at it in the context of the Budget as a whole. In his Budget speech my right hon. Friend explained that in his view it was right and appropriate that … profits should make some contribution to the effort of restraint which is required of all sections of the community. Accordingly, he decided that … in present circumstances, when increased dividends may imply increased consumption,"— I would emphasise that sentence— there must be an increased tax on the profits which companies distribute. That is really the main point.

As I have explained to the House many times during the course of these debates, one of the prime objects of my right hon. Friend's Budget is to moderate consumption. It is my right hon. Friend's very understandable view that increased dividends have exactly the opposite effect and my right hon. Friend does not think that he would be justified in going against his policy to the extent of accepting the Amendment. That does not mean that we do not take serious notice of the points raised about small businesses. I am glad hon. Members have raised a number of points, and it is exactly because we realise the need of small businesses and realise the need for flexibility in our industrial structure that my right hon. Friend deliberately did not, in this Budget, increase the undistributed Profits Tax as well.

Mr. Douglas Jay (Battersea, North)

It is rather surprising that we have had so little support from the benches opposite for this very modest proposal in the interests of small firms. It seems that the support of the party opposite for private enterprise vanishes when firms below a certain size are being considered. The first "speech" we had from the benches opposite was from my colleague in Battersea, the hon. Member for Battersea, South (Mr. Partridge), who has now left us. He made the statement that the Daily Express is not to be believed. That was taking rather an extreme view. I should not go so far as that and I doubt whether the hon. Member for Southgate (Sir B. Baxter) would go that far. In this instance, the figures quoted from the Daily Express are probably based on fairly good ground.

Apart from that remark, the only speech we had from the Government side of the House came from the hon. Member for Galloway (Mr. Mackie) and he gave full support to our proposals in a most persuasive speech. It is, therefore, surprising, even in this case, when every speech has been in favour of the Amendment, that the Government are again turning it down in a rather peremphory fashion. The Economic Secretary said that the the cost was a discouraging argument from the Government's point of view. It is only £1¼ million out of £38 million which the Government have added to taxation on profits and that did not, therefore, seem a very impressive argument. So far in these debates we have had concessions from the Government—on baskets, for example—only when the Government have been pressed extremely hard by the Opposition, but in the great majority of cases we have had no concessions at all.

The Economic Secretary was not on very good ground in saying that it was inconsistent to put forward this Amendment and in other parts of the debate to argue in favour of taxation on profits generally. We have always been perfectly candid about this. If there is to be any taxation at all, taxation on business profits, particularly on those of the larger and middle-size firms—as experience has shown in this country and the United States—does not do nearly so much economic harm as used to be believed. If there are to be concessions we would favour having them on the personal earned incomes rather than on business profits.

But I do not think that for that reason what was said about the standard rate of Income Tax was inconsistent with this Amendment. When the general rate of tax is high, the Government should be more discriminating in favour of small firms. There are several reasons, particularly at the present time. The whole difficulty, of course, is that it is much harder for a small firm to expand, to grow and to invest than it is for the larger or even the middle-size firms.

In the first place, its profits are small, particularly at the start. Secondly, there is the difficulty, as everybody will agree, that the really small firm does not have sufficient influence with its bank in getting help from its bank to the extent that the large and established firm would be able to get that help. Thirdly—and I do not believe that this has been mentioned—where the small firm is new, as it very often is—at any rate, most of the new firms are small—it does not have big reserves built up in the past to enable it to expand without borrowing from outside. I have a case in my constituency of precisely such a small firm trying to get into the export markets in the first few years with profits of only a few thousand pounds. It found it extremely hard to raise even small amounts of capital.

4.45 p.m.

Whatever the Economic Secretary says about not blunting the credit squeeze by concessions with what he calls the budgetary weapon, I do not see what good can be done by preventing small firms getting into the export market. Lord Chandos, then Mr. Lyttelton, when he used to attack us from these benches, was very severe on the Labour Government for talking about budgetary weapons. He said that always showed a most hostile and spiteful attitude towards business generally. The Economic Secretary may be getting into trouble there, if he is not careful.

There is another reason why the case for the Amendment is particularly strong at present—on top of the acuteness of the credit squeeze. It is that the tax on distributed profits is being raised. It is not just that we are asking for a new concession for the small firms. We are asking the Chancellor to moderate an increased tax which they are being asked to pay. I agree with the Economic Secretary that as it stands the Amendment grants a concession only on distributed profits, but that arises from the formulation of the Bill and if he is willing to give a concession to small firms both on undistributed and distributed profits we should be quite happy.

A still further reason is that under this Government the value of money has been falling rapidly and it is not merely the value of wages and the purchasing power of social services that go down as that happens, but, in the case of small firms, if tax rates are left where they are and the value of money goes down, in some ways that means an increase of taxation. There is, therefore, a case on those grounds for the concession.

In general, we on these benches believe in a mixed economy. We believe in some public enterprise and some private enterprise. We are less doctrinaire than hon. Gentlemen opposite. We want to see enterprise of both sorts. I believe—and I think that I speak for most of my hon. Friends—that where there is private ownership in industry there will not be enterprise, unless there is a good deal of competition. One of the most powerful forms of competition is that of the new, growing and expanding firm. Therefore, we think that when there is high taxation on profits and when it is actually being raised, in the interests of competition and of combating monopoly—which the Government is slow to do in the monopoly field as well—there is at least a powerful case for a small concession of this kind.

Mr. B. T. Parkin (Paddington, North)

I have listened to the debate throughout and I venture to intervene at this late stage because I feel that the Economic Secretary has failed to appreciate some of the implications of the Amendment. Like my hon. Friend the Member for Edmonton (Mr. Albu), I shall not attempt to define what constitutes a small business, but I should like to define the type of business in the defence of which I shall speak for a few moments. It is the type of business which is run by what one might call "working partners." who use the structure of the private company as an accounting convenience to pay themselves as salaries whatever they intend to draw out of the company, and who use the company itself as a sort of savings bank for building up the resources of their business.

It is not therefore only a question of whether certain profits should be distributed or not. We are discussing, within the limits of the Amendment, the type of firms in which people decide whether such profits as are made are declared on paper or not; in other words, whether they seek to use all the devices open to them to spend the surplus available in one way or another in capital expenditure, equipment renewal and advertising on the one hand, or the building up of liquid reserves on the other. That is where the Economic Secretary's reference to what he called the context of his right hon. Friend's Budget overlooked the fact that the tendency in respect of small firms may he exactly opposite to what the right hon. Gentleman intended; to the extent that if this credit squeeze is to be effective, and if we need to combat inflation through the means suggested by the Chancellor of the Exchequer, then the first objective surely, so far as small business firms are concerned, is that they should use less credit.

They are not at the moment entirely precluded from using credit by the fact that the bank manager squeezes them because they, in turn, can to some extent keep their suppliers waiting—as, indeed, their customers keep them waiting—and we have in these circumstances the intervention of the black market financier or an increase in the number of private financial firms interested in discounting bills and granting temporary loans and so on, all of which is much more expensive, adds much more to the cost of the final product—and so may raise the cost of living—than would be the case if the bank, the proper function of which it is, were providing the credit.

I have in mind at the moment the case of the typical small private firm which is informed by its accountants that the preliminary totting up of the figures shows that it is in a favourable position this year. The firm has a meeting of its working partners, who are nominally directors of the firm, and they have to decide whether to increase their own salaries and pay the extra in Income Tax or Surtax, or whether to declare the surplus as a profit to the company, in which case it may be above the figure at which Profits Tax would be paid and into the range where Surtax would be paid, or whether to find sonic ways of spending the money.

There are many ways of spending the money. There are great temptations. They can say, whether they need to do so or not, that they will spend more on advertising because the Chancellor will pay for more than half of it. They will tend to say to one another, and, no doubt, the accountants will say to them, that they are positively foolish not to buy new cars. They may have old cars, but if they do not buy new cars while they have the chance, they will lose this opportunity of having more than half the cost paid by the Chancellor of the Exchequer in the present circumstances.

What they ought to do, of course, is to undertake a self-denying ordinance and say, "We are not going to spend any more on equipment for the moment. We are fully booked up with orders, and we will resist the temptation to buy another factory. We will put this money into liquid reserves, pay our suppliers more quickly, take our discounts and, therefore, be in a position not only to work more efficiently but actually to reduce the profits on our product and contribute something towards the stabilising of the cost of living and the cost of prices and to the anti-inflationary cause which the Chancellor is anxious to initiate."

Unless the Chancellor can offer some concession now, what I am asking is that he should consider most carefully, before his next Budget—if he really wants to put a check on indiscriminate investment and re-equipment through hire-purchase arrangements for machines which people do not really want, but which the Chancellor will help to pay for—at least giving an incentive to small firms not to draw money out and spend it on themselves, but to leave it in the firm, thus enabling them to pay their bills more quickly and so counter the tendency towards extended credit which is the result of the Chancellor's policy at the present time, and which I am sure is quite contrary to what he intended.

Amendment negatived.