§ (1) If the gross relevant distribution to proprietors for any chargeable accounting period of a body corporate, society or other body include a preference dividend or preference dividends (as defined in subsection (2) of section one hundred and eighty-five of the Income Tax Act, 1952) and if the body corporate, society or other body has paid a charge for profit sharing in respect of the chargeable accounting period, the profits tax payable by the body corporate, society or other body shall be reduced as provided in the following provisions of this section.
§ (2) The difference between the profits tax which would have been payable if the preference dividend referred to in subsection (1) of this section were left out of account in determining the net relevant distributions to proprietors for the chargeable accounting period, and the profits tax payable for the chargeable accounting period apart from the provisions of this section, shall be ascertained, and the profits tax payable shall be reduced by such proportion of this difference as the charge for profit sharing bears to the profits as computed for profits tax purposes including franked investment income and after deducting the said preference dividends but before deducting the charge for profit sharing.
§ (3) For the purpose of this section "charge for profit sharing" means—
- (i) the cost incurred for the chargeable accounting period (including any dividend paid or provided) in respect of any profit
192 sharing scheme whereby the whole or part of the profits of the body corporate, society or other body is shared on a predetermined basis among all the employees of the body corporate, society, or other body who are entitled to participate in the scheme (not being less than three-fourths of the total number of the employees) and such sharing is made in addition to the payment to such employees of emoluments at rates not less than those generally prevailing in the class of trade or business to which the body corporate, society or other body belongs; and
- (ii) the contributions allowed as a deduction in computing the profits of the body corporate, society or other body (being a body corporate, society or other body having such a profit sharing scheme) for the chargeable accounting period for the purposes of the profits tax to any scheme for the provision of pension or other retirement benefits for the employees of the body corporate, society or other body or their dependants.—[Mr. Thornton-Kemsley.]
§ Brought up, and read the First time.
§ 11.30 p.m.
§ Mr. C. N. Thornton-Kemsley (North Angus and Mearns)
I beg to move, That the Clause be read a Second time.
The Temporary Chairman
I think it would be for the convenience of the Committee to consider with this new Clause the two new Clauses in the name of the hon. Member for Orkney and 193 Shetland (Mr. Grimond), "Tax relief for approved co-ownership schemes", and "Exemption from Schedule E income tax of benefits received under co-ownership schemes".
§ Mr. Thornton-Kemsley
The Chancellor of the Exchequer reminded the Committee just now that the only remission which he had been able to make as a result of his Budget was in the case of savings. I make bold to ask that the should make one further remission in the case of another socially desirable object, that of profit sharing. If I were asked to explain this long and rather complicated new Clause, I should say that it seeks to reduce the Profits Tax on distributed profits payable on the preference dividends of companies which share the whole or part of their profits among the workers by the proportion in which the profits which remain after the payment of preference dividends are used for profit sharing.
There is a very important qualification for relief, and I would draw the attention of the Committee to that, for as the Clause is drawn the profit sharing, to qualify for relief, must, first, be in accordance with a bona fide scheme. Secondly, the scheme must provide for the sharing of profits upon a predetermined basis among all the workers who are entitled to participate. It would thus rule out the haphazard distribution of bonuses at Christmas time or on other special occasions. Thirdly, the scheme must cover not fewer than three-quarters of the workers in the company concerned. Finally—and I am sure that all hon. Members will attach great importance to this—the profit sharing must be in addition to the payment of fair wages; that is to say, that wages must not be less than those which generally prevail in the trade or industry concerned.
The Committee will be aware that last November, at the beginning of the month, Profits Tax stood at 22½ per cent. By the autumn Budget the tax on distributed profits was increased by 5 per cent. to 27½ per cent. Now, by my right hon. Friend's Budget and this Bill, it is increased to 30 per cent. Taxation of this order, while it hits all productive industry, constitutes a heavy extra burden of taxation upon companies which are based upon the 194 principles of co-partnership and profit sharing. The Clause is designed to encourage the formation of such schemes, which I am sure all of us want to see, by removing the burden of Profits Tax from that part of the profit which goes to the workers under a bona fide profit-sharing scheme.
Hon. Members who are familiar with these matters will be aware that the charge for tax on distributed profits is made in such a way that all charges upon profits paid out on preference dividends fall normally on the equity shareholders. In companies in which the equity shares are held by or on behalf of the workers—I am assured that it is not uncommon—or, indeed, in the case of any co-partnership scheme which places the workers, as regards their share of the profits, on a par with the equity shareholders, it is the workers who have to bear a proportion of the tax upon the preference dividends. The Clause seeks to remedy this unfortunate and, I believe, unintended effect of the tax on distributed profits.
Let me try to explain the rather complicated way in which the Clause seeks to achieve these objects. I should say that none of us is wedded to the particular wording of the Clause. It is extremely complicated and I can only say that I am advised that simplicity would not achieve the object that we desire. My hon. Friends and I would be extremely happy if the Government tell us that they dislike the wording, but are sympathetic with the object we want to achieve, and that if we withdraw the Clause they will put down their own form of words on Report.
The Clause provides, first, that the tax on distributed profits shall be calculated in the ordinary way; and, secondly, that it shall be ascertained by treating the preference dividend as though it were not in fact a distribution of profits. The difference, as hon. Members will realise, represents the Profits Tax upon the distributed preference dividend. This would be reduced to the extent that the share of the profits goes to the workers.
One might at first blush imagine that, to take a simple example, a company making a profit of, say, £4,000 and having to pay £2,000 in preference dividends would have £2,000 left for 195 profit sharing provided it had a profit-sharing scheme under which the remaining profits went to the workers. At the rates now proposed, however, not less than £1,100 would be taken to cover the tax.
That is arrived at as follows: First, Income Tax at 8s. 6d. in the £ on £1,100 comes to £467; the distributed Profits Tax at 30 per cent. on the dividend of £2,000 is £600, and the Profits Tax at 3 per cent. on the undistributed £1,100 is £33, making a total of £1,100, as I mentioned. So the company has only £2,900 instead of £4,000 to divide and, since it must meet its preference dividends, only £900 will be left to divide among the workers. In larger companies, of course, the figures are proportionately larger.
It is true that the £900 which goes to the workers is not treated as part of the profits. That is allowed as a deduction in the ordinary course of events. The Clause has nothing whatever to do with that; that happens already. The profits distributed to employees are taxed not in the company's hands but, on the appropriate P.A.Y.E. scale, in the hands of the workers. The point of the Clause is that the lower payment of preference dividends by a company which has a scheme of profit-sharing reduces savagely and, as I think, inequitably, the amount of profit left to apply for distribution among the workers. It is that unreasonable reduction which the Clause seeks to mitigate.
§ Mr. F. Beswick (Uxbridge)
I am trying very hard to follow this rather complicated business. In the example which the hon. Gentleman gave he is assuming that the whole of the non-preference share capital is held by the workers. Assuming—as is most likely to be the case—that only a small proportion of the non-preference share capital is held by any form of co-partnership arrangement, how does the hon. Gentleman estimate the difference in the taxation for that proportion of the shareholding held by the employees?
§ Mr. Thornton-Kemsley
I gave a simple example because I thought it would make it easier to understand. The proposal can be examined in the light of day, when it appears in print. I cannot hope to 196 show anybody how the proposal works in detail, with this rather abstruse method of calculation, but it would work in the same way pari passu with a smaller distribution to the workers. In the example I have given, under the Clause as it has been drafted the amount left for profit sharing, instead of being reduced to £900 out of the original £2,000, would be reduced only to about £1,800.
I ought, perhaps, to declare an interest. It happens that since the war I have been associated with the John Lewis Partnership, in the capacity of consultant surveyor, and I have a seat on the property board. For that I receive a very modest retaining fee, but the fact that I receive that fee enables me to participate in the distribution of general bonuses because, as some hon. Members know, in the partnership scheme the whole of the profits—after the payment of fixed interest charges, amounting to rather less than 4½ per cent. on the whole of the capital investment in the partnership, and the usual provisions for reserves—go in one way or another to all the workers in the scheme. The workers are known as, and treated as, partners from the moment they join.
From my own experience of co-partnership and profit-sharing schemes in action, I would never claim that that is the only incentive to increased production, nor would I claim that it is a powerful incentive. Although, in some productive industries, bonus schemes have shown notable results, in the distributive trades the results are more difficult to assess. It is true that with co-partnership schemes, as I once heard Lord Bruce of Melbourne say—and in his early days he once worked for a company which had a flourishing co-partnership scheme in operation—companies running these schemes tend to attract the best type of workers.
I think that the great merit of profit-sharing schemes is that they are never found in isolation. Almost invariably they are accompanied, first, by generous provisions for the social security and collective amenities of the workers in the company, and, secondly, by sound and sensible arrangements for joint consultation between management and the managed. The reason is that in almost 197 every case they are founded on the rejection of the doctrine once described by J. R. Green, the great English historian, asthe social seventh between the employers and employed.They are founded on the principle that masters and men in any company, industry or trade are utterly dependent one upon the other. They are founded upon the recognition of the fact that man does not live by bread alone, and that he is very much more than a cog in someone else's machine.
I am proud that the Conservative Party believes that co-partnership and profit-sharing schemes should be encouraged. It has said so many times. It said so in those very words in the 1955 Election Manifesto. How could this be done by any other than fiscal means? I remember that some years ago, before we were in office, my right hon. Friend the Leader of the House addressed a meeting of the Industrial Co-partnership Association and warmly commended schemes of co-partnership and profit-sharing. The chair at that meeting was taken by my right hon. Friend the Minister of Agriculture, Fisheries and Food.
My right hon. Friend the Chancellor of the Exchequer himself wrote a book called "The Middle Way", which I re-read the other day, and his former Parliamentary Secretary—
Mr. H. Wilson
On a point of order, Sir Charles. We are being very patient. There are 70 members of the Government. Are we to have all of them invoked before the hon. Gentleman sits down?
§ Mr. Thornton-Kemsley
I have very nearly come to the end of what I wish to say. I could not bring all 70 members of the Government to my support, but I could bring one or two more. I was about to say that the former Parliamentary Secretary to the Ministry of Housing and Local Government, my hon. Friend the Member for Wallasey (Mr. Marples), wrote a book on co-partnership called "The Road to Prosperity."
I recall that the National Liberals, with whom I am associated, gave powerful support to the idea of profit-sharing in the Report of the Committee presided over by a former colleague of ours Sir Geoffrey Shakespeare, and on that Com- 198 mittee there were two members of the present Government. I do not forget that the present Prime Minister has spoken strongly in favour of co-partnership and profit sharing. The Government, individually and collectively, are deeply committed to the idea of support of co-partnership and profit sharing. Now is the time, here is the opportunity, to show that we mean what we say.
§ Mr. Arthur Holt (Bolton, West)
I am very glad to rise now after having had the assurance of the hon. Member for North Angus and Mearns (Mr. Thornton-Kemsley) that the policy of the Conservative Party as announced on numerous occasions is strongly to encourage co-partnership and profit sharing, but, in view of the lateness of the hour, I would not be really acting in the interests of the Committee if I commented at length on the new Clause put forward by the hon. Member.
I should like to speak for a few moments on the two proposed new Clauses in the names of my hon. Friend the Member for Orkney and Shetland (Mr. Grimond) and other hon. Members of my party. Those Clauses deal with two quite simple matters. The first of them has the object of putting ownership of shares and the propagation of the idea of ownership of shares on the same basis from a taxation point of view as bonuses given to workpeople. It is not a case of giving special tax concessions to encourage ownership, but merely to put them on the same basis.
At present, the taxation system works in favour of cash bonuses to workpeople, but does not encourage the giving or the assisting of buying of shares in the company in which the employee works. If a firm were prepared to give £10,000 to workers in cash that sum would not be taxable for the company. Its profits are arrived at after that £10,000 has been allowed for in the accounts. It is, as it were, a cost to the company. If, on the other hand, that company decided to pass over to its workers a similar value, but did not wish to give them cash, it would give them £10,000 worth of shares and the gross profits of the company would be increased to the extent of that £10,000. Therefore, it would pay a greater rate of tax.
The point of the second of these two Clauses is that when an employee receives 199 a cash bonus he pays tax on that money in accordance with the taxation applicable to his income. If an employee has a large income he may pay tax on that cash bonus at the full rate, but if he is only a small wage-earner he may pay little or no tax on it. On the other hand, if he receives an equivalent value in the form of shares in the company, receiving no cash at all, he is still assessed for tax as if he had received cash, although he has no cash with which to pay the tax.
Often, when an employee is offered shares, he thinks it is a fine idea; but he receives no money—only a piece of paper—and then receives a request from the tax office for tax on the shares as if he had been paid the cash. The second Clause which we have put down does not suggest that he should not be liable to tax at all, but suggests that he should pay tax only when he eventually sells those shares to another party.
We feel that in the two Clauses we have tried to deal with the problem realistically and without giving preferential treatment to co-ownership or co-partnership. Today, the taxation system works against them. We suggest that if the new Clauses were accepted, and the taxation system altered, it would put them on the same basis as a profits bonus. Where a company thought the right thing was to give the money away, it could do so entirely on the merits of the matter; but if it wished to retain the cash in the business for development and to make its work-people feel they had a closer tie with the company by giving them shares, it could do that, too—and there would be no difference in the taxation position between the two methods.
In supporting the Clauses I am fortified by the knowledge of what leading members of the Government have said about this kind of thing in the past, particularly the Prime Minister, in his first speech in the House after the General Election, when he said, granted in vague terms, as the major point in his speech on the Address, that the Conservative Party wished to welcome all forms of co-ownership, co-partnership and profit sharing. In our new Clauses we merely put one method on the same basis as another.
200 I hope that the Government will welcome this opportunity of telling the Committee exactly what their thoughts are on the matter. Hon. Members have suggested on various occasions in the last few years that the Government should examine the taxation position in relation to this kind of thing because it is not working satisfactorily, if the idea is to encourage it. I asked the Government whether they would start an inquiry into the taxation system in this matter to see how it could be altered. So far, we have had no reply from them on what they are willing to do and, even though he may not be in a position to accept these Clauses, I hope that the Economic Secretary tonight will take the opportunity of being frank with the Committee and saying to what extent the Government are prepared to consider alterations so as to encourage these methods. I would, in fact, be very willing to confine my remarks to those if I could be assured that they would enable the Economic Secretary to give a full reply. But if there are parts of this Clause which are not clear to him, no doubt there will be an opportunity of explaining them later on.
On the whole, I think that the Clause we have put down is fairly self-explanatory and does not need much explanation through lack of clarity. It is based entirely on there being a scheme put before the Commissioners, the general principles of which are laid down in subsection (2, a) of the first proposed new Clause in the name of my hon. Friend the Member for Orkney and Shetland, there being a limit of £200 which is the greatest benefit which can be obtained in any one year, to avoid any possibility that the scheme might be misused. Of course, there should be no possibility that such a scheme might be misused because the Commissioners could always withdraw their approval if the scheme were being used for objects other than those stated in subsection (2, a) of my hon. Friend's new Clauseto enable persons employed by a body corporate to acquire on favourable terms shares therein".It needs some encouragement to bring employees into this new field in which they have not been before, although at a time when the standard of living is rising, as the Lord Privy Seal said it would do in 201 the course of the next 25 years, many employees are likely to be interested in this kind of thing. If an employee gets a share at a time when the market is high and it drops in value by 5s. or so within six months, he will wonder whether this is such a good scheme, as this will be an entirely new experience for him.
Therefore, in the initiation of these schemes, I think there is a substantial case for the company offering these shares at considerably below their market price, and that is why we say in the new Clause "on favourable terms." Beyond that, I believe the whole idea will commend itself to them and will be a success.
From the Chancellor's point of view, there is no reason why he should not accept this Clause or something like it, even this year, because the cost to the Chancellor this year would be negligible. It has the merit of being a scheme which would tend to discourage consumer spending at the moment, and to increase saving and subsequently investment, and it will cost a considerable sum of money only if the idea grows. In that case it may in future years cost the Chancellor quite a sum of money, but he should be able to afford it in the future. This year, however, the cost will be negligible. I hope, therefore, that we shall have a favourable reply from the Economic Secretary.
§ Mr. Edward Short (Newcastle-upon-Tyne, Central)
I wish to support the new Clause in the name of the hon. Member for North Angus (Mr. Thornton-Kemsley), but I have a qualification. I want to make it clear that neither I nor any of my colleagues regard profit-sharing schemes as a substitute for Socialism. Industry today has completely lost its old handicraft aspect. It has become a social activity, a social function. Therefore, we believe that it should be subject to social control. In most cases we think that there cannot be proper social control unless there is social ownership.
Nevertheless, the profit-sharing scheme is better than the normal out-and-out capitalism. It goes some way towards meeting the Socialist criticism that the worker does not get the full reward for his labour. However, in a profit-sharing industry, the undertaking is not conducted primarily in the public interest. It is conducted primarily to make profit. That 202 is one of our criticisms of it. In a profit-sharing industry the industry is still controlled by a small group of directors; it is not conducted primarily in the public interest by the public; but I suppose that Sidney Webb, who was the father of most of our modern democratic Socialism, regarded any step towards collectivism as a step towards Socialism, and I think he was about right so long as we do not mistake the initial steps for the end product.
That is my qualification—that I think it goes a little way, but neither I nor my colleagues regard it as a substitute for the things for which we stand.
Having made my qualification, I want now to give the new Clause my support. There is in my constituency a firm called Bainbridge, Ltd., which is a very big and, I may say, good shop. For some years it has been a branch of the John Lewis Partnership. In the John Lewis Partnership the greatest part of the capital is preference stock subscribed many years ago. The partnership believes that it must keep faith with the lenders of the preference capital and, of course, it pays the dividend on the preference capital as it becomes due. That dividend takes each year £400,000. If the Finance Bill remains unamended, the Distributed Profits Tax on that £400,000 will be about £100,000; but that £100,000 itself, of course, is paid out of profits on which Income Tax has already been paid. That means that nearly £200,000 of trading profit is required to pay the distributed Profits Tax on the preference dividend.
There are no outside holders of any of the partnership's ordinary shares. Each year the partnership places some of its profits to reserve. That means that every year after the preference dividend is paid and after the distributed Profits Tax is paid, the whole of the profits are returned to the workers. There are in the partnership 12,000 workers whose average wage is the very low one of £7 per week. To pay the distributed Profits Tax £200,000 of trading profit is required, and that means that the workers who participate in the profit-sharing scheme lose the equivalent of two weeks pay each year—just over £14 each per year.
§ Mr. Beswick
Is there any reason why that wage should not be increased from £7 to £9 per week, so that no tax should be incurred?
§ Mr. Short
None whatever. I think that that is often a good criticism of profit-sharing schemes. It is a valid criticism of the rather "phoney" profit-sharing scheme of I.C.I. but less so of this one.
There are two safeguards in the Clause. One is that it must be a genuine profit-sharing scheme. The other is that the reduction in the Profits Tax must be proportionate to the extent to which the profits which remain after the preference dividends are paid are actually used in profit-sharing. It is because of these two safeguards that I feel I can support the Clause. I think that it is perhaps a good thing, subject to all the qualifications I made at the outset.
§ Mr. Raymond Gower (Barry)
I should like to support the Clause whch has been moved by my hon. Friend the Member for North Angus (Mr. Thornton-Kemsley). Two years ago, in the last Parliament, I had the honour of introducing a Motion in the House of Commons which I believe was the first Motion ever introduced on the subjects which we are now discussing. It was approved without a Division. It called attention in a limited way to the extension of schemes of co-partnership and profit-sharing in recent years and asked the Government to acquaint themselves with information about such schemes. At that time the then Minister of Labour, my right hon. and learned Friend the Member for Bristol, West (Sir Walter Monckton), through his Parliamentary Secretary, gave certain undertakings to provide such information in the Ministry of Labour Gazette.
It has been very obvious to me, as I am sure it has been to all hon. Members, that that was merely an inadequate beginning. All parties in the House of Commons recognise the value of these schemes. They are valuable in so far as they express good relationships in industry and represent good firms paying the best wages, providing the best amenities, observing all the best trade union standards and having the best joint consultation. All those things are prerequisites of any such scheme as those we have been discussing tonight.
It has been apparent that just to take note and approve of these things is inadequate. It seems to many of us that 204 Governments must now provide some fiscal incentives for the extension of these schemes. We have before us two very limited proposals for the provision of such incentives. Perhaps we should go further, but I hope that the Economic Secretary will be able to say that, though the Government may not adopt the wording of either of the proposals, they realise the need for some incentives, beyond indicating approval or providing information.
It is obvious that in our fiscal system greater incentives are provided for other schemes, such as arrangements for pensions, than for schemes of this kind. We deem these schemes as fully important in the long run as are pension schemes, though those should come first. We see no reason why incentives provided for pension and sickness benefit schemes should not also be available to provide for profit-sharing and co-partnership schemes. I believe that I speak for my hon. Friend the Member for North Angus as well as myself when I say that we are not attached to any particular formula. We have taken the opportunity tonight to put forward in a positive way the need for financial incentives.
As I have said, in the last Parliament, the Government accepted a Motion approving co-partnership, and the Opposition then signified its approval of it. On that occasion many Opposition hon. Members and many of my hon. Friends paid tribute to the work of the Co-operative movement in this respect. Co-partnership has been widely applied within the Co-operative movement; some of the best schemes exist as a result of the pioneer work done by co-operative societies. We have today many excellent schemes in this country. We had evidence that even in the bad years of depression the good schemes tended to survive. It was only the poorly organised, hastily created schemes which then came to an end.
We have now had more experience in this country of profit-sharing and co-partnership. These schemes can do a good deal to symbolise the new spirit that exists in the best of our industries today, and which is rapidly spreading. They can lessen the differences which formerly divided nations and peoples into employers and employed, and, by indicating 205 the advantages which accrue from a better relationship, contribute to our future industrial prosperity.
Mr. A. E. Dram (East Ham, South)
In moving the Clause, the hon. Member for North Angus (Mr. Thornton-Kernsley) confessed that a great deal of it was complicated and involved. That is certainly true of the second paragraph. On first reading it, I found it extremely difficult, and decided that it called forth the qualities required for the two pastimes of which I am particularly fond—chess, in seeing three or four moves ahead, and cricket, in keeping one's eye on the ball. However, having tried to do both things at the same time, I confess I was stumped and checkmated at one and the same time. Nevertheless, the general drift of the Clause was clear, and it is in line with the speech of the hon. Gentleman.
The hon. Member claimed that tax exemption for these schemes is justified because they are socially desirable. I believe that the test of whether a scheme is socially desirable rests on the extent to which the workers are enabled to play a part in the control of the enterprise. In the schemes which have been mentioned, rarely are the workers enabled to have any real partnership in terms of exercising control over policy.
Reference has been made to the John Lewis Partnership. John Spedan Lewis has written two books in praise of the organisation which he has done much to build, but when we study what he has put forward, and when we look beyond the self-praise which he was so lavish in bestowing upon himself, we find that the control of the enterprise remains very much where it always was, with a small handful of directors. Incidentally, whatever the financial advantages may be to the workers in the organisation, we find that the financial advantages to those who set the thing going, the small group of directors, are very much greater.
The I.C.I. scheme has been mentioned. I have examined it to ascertain when and how the workers will be able to control the policy of the enterprise. A study of the provisions of the scheme, about which we heard so much a couple of years ago, will show that it will take 400 years before the workers can accumulate sufficient shares to equal the equity shareholding of the ordinary shareholders at the outset of the scheme. From the 206 point of view of control and participation in policy-making in the organisation, many of these co-partnership schemes are scarcely worth the paper on which they are written.
Instead, I believe that social desirability as a test is to be found in those societies, to which the hon. Member for Barry (Mr. Gower) referred, within the Co-operative movement. He included them in the general category of co-partnership. I assure him that there is an essential difference in principle between those schemes which are organised within the Co-operative movement and those like the John Lewis Partnership and the I.C.I. scheme and so on which are not organised on co-operative lines.
In a co-operative society one shareholder has one vote and one vote only. In organisations in the Midlands which are organised in the Co-operative Productive Federation that is a fundamental principle. It results in the fact that on the board of directors are workers who are elected by their fellow workers on the factory floor. That is democracy applied to industry. That is something which is socially desirable. That is something which is worthy of tax concessions.
If the Clause had been worded and defined in that sort of way, it would have deserved much more whole-hearted support than it deserves in its present shape. In that sort of co-operative co-partnership, we are moving forward to a better form of industrial organisation. The Government would be well advised to accept, now or in some other form, tax exemptions which encourage that; but I must confess that I am only lukewarm in my support for the new Clause as it now stands.
§ Mr. Donald Wade (Huddersfield, West)
I shall not embark at this late hour on political philosophy, but perhaps I can summarise my point of view by saying that I think that the Socialists during the last half century have been in error in putting so much faith in the transfer of ownership to the State, rather than trying to remove the differences between the two sides of industry; the Conservatives have been in error in presuming that the alternative to Socialism is capitalism, as we knew it in the early part of the century.
207 The only purpose of these two moderate and modest Clauses is to remove the discouragement to co-ownership in the existing tax provisions. Perhaps I should distinguish between co-ownership and co-partnership. Co-partnership does not necessarily involve the sharing of ownership and the holding of shares, while co-ownership implies some holding of shares by employees. I do not suggest that the holding of shares is the only condition necessary to successful co-ownership schemes. Such a scheme is most likely to succeed where there is a sharing of responsibility through joint consultation, the sharing of profits and the sharing of ownership.
Unfortunately, intentionally or otherwise, the transferring of shares to employees is now discouraged. A firm might be considering adopting some co-ownership scheme. If it allocates profits to the issuing of shares, or the buying-in of shares which are sold at less than market value to employees, it will find that it cannot set off that money against profits for taxation purposes. It is not allowed; but if a mere cash distribution is made to employees that is allowed. It is part of the expenses of the business. Therefore, there is a deterrent to the adoption of the share-issuing type of scheme. Then again, the employee, if he accepts a certificate for shares which the firm may reasonably have sold to him at less than the full market value, or may have given to him, he will find that he is mulcted in tax. To raise the tax he has to sell the shares, or else he has to pay it from his wages. That is not a good start to the adoption of a co-ownership scheme.
We have worked out what we think is a simple and fair method of dealing with this problem. The employee will not pay tax on the value of the shares issued to him, or on the difference between what he pays and the market value. He will not be mulcted in tax at the time of the issue of the shares. He will, however, pay if eventually he sells the shares. We had in mind the possibility of tax evasion, and for that reason we set a limit of £200 in any one year. I hope that the Economic Secretary will not say that, for technical reasons, the wording of the new Clauses is not satisfactory.
208 If the Chancellor will accept these Clauses in principle, we shall be only too glad to hear any suggestions for bettering the wording. I urge the Chancellor and the Economic Secretary seriously to consider our proposals, because there is no doubt that at present adoption of the sharing of ownership, which I believe is a valuable contribution to harmony in industry, is being hindered by these tax difficulties. I hope that the Economic Secretary will indicate good will and genuine interest in this matter by accepting our proposals.
§ Sir E. Boyle
I hope that before I resume my seat I shall be able to show the hon. Member for Huddersfield, West (Mr. Wade) that we on this side of the Committee reciprocate the genuine interest which I know that he and a great many other hon. Members have in this subject. We have had a learned discussion during the past hour. Perhaps I might say to the hon. Member for North Angus (Mr. Thornton-Kemsley) that I do not possess, but have read, "The Middle Way." I do possess, but have not read, the work of J. R. Green. As for "man cannot live by bread alone", I think most of us feel that an interval of bed is desirable. Therefore I shall not be too long in my remarks.
The hon. Member for North Angus moved a Clause whose broad intention can be summarised as follows—I make no apology for repeating the purpose of the Clause because, as he said, it is a complicated matter. The intention of his Clause is that if a company which pays a preference dividend also pays a charge for profit-sharing, the difference between the Profits Tax payable under the existing law and the tax which would be payable if a preference dividend were left out of account shall be ascertained and the Profits Tax shall be reduced by such proportion of the difference as the charge for profit-sharing bears to the profits.
As the hon. Member said, this Clause has particular reference to the problems and the work of the John Lewis Partnership, to which another hon. Member referred in an interesting and fair speech. In the John Lewis Partnership group of companies, the original idea, I understand, was to make payments to employees out of dividends and preference shares held by trustees on their behalf. However, in view of the fact 209 that such dividends would be subject to Profits Tax at the higher distributed rate, this scheme has had to be abandoned, and any profit-sharing which takes place under the present arrangement is done by paying the employees ordinary bonuses. Any such bonus is allowable as a deduction in computing the profits of the group of companies for Profits Tax, and thus, so far as the existing profit-sharing scheme is concerned, there is not really, I think, any Profits Tax point of grievance.
What is troubling the John Lewis group—and this was raised by my hon. Friend the Member for St. Marylebone (Sir W. Wakefield) some years ago—is that the group has a very large proportion of its capital in the form of preference shares and the higher rate of Profits Tax payable on the preference dividends severely depletes the amount of money which otherwise would be available for distribution.
This brings up the very complicated point we have often discussed in previous debates on Finance Bills, and to which I myself have referred, namely, the problem which arises as a result of the incidence of Profits Tax on distributed profits of companies which have to provide for a high proportion of preference stock. I remember telling my hon. Friend the Member for Kidderminster (Mr. Nabarro) in the debate on the last Finance Bill in the autumn that that was why we felt unable to get rid of Profits Tax on undistributed profits altogether and concentrated the Profits Tax on distributed profits, because it would have been extremely unfair to have created great problems for companies of that kind.
I do not want to dilate upon the future of the Profits Tax, but I can assure my hon. Friend that we know the difficulties which the present Profits Tax structure causes to companies like the John Lewis Partnership, and, indeed, I think it is some evidence of our realisation that in this Budget we have increased Profits Tax on distributed and undistributed profits and have not concentrated the rise in Profits Tax on distributed profits only.
At the same time, as the Clause is drawn, it would obviously have very special relevance to the problems of the John Lewis Partnership. The Clause is designed primarily to assist one group of 210 companies with a particular capital structure. [Interruption.] It obviously would have special relevance to their problems. Therefore, while, as I say, we certainly take the greatest interest in this subject, my right hon. Friend would not like to accept this Clause tonight as it stands.
§ Mr. F. Beswick (Uxbridge)
Would the hon. Gentleman not say a word on what one may call the spiritual issues raised by the hon. Member for North Angus (Mr. Thornton-Kemsley), who waxed lyrical at the end of his speech about the enormous social advantages of that form of co-partnership? Would he say why he wants to encourage paying money in the form of shares rather than bonuses which employees may spend as they like? Why encourage this form of additional wages involved in this suggestion?
§ Sir E. Boyle
I would rather not get on to moral and spiritual issues at this hour of the night.
I have tried to meet the point of my hon. Friend's new Clause, and it is only fair that I should come to the Liberal new Clauses, which I shall deal with as concisely as I can. The first of what I may call the Liberal Clauses was intended to deal with the tax position of the company which sets up a co-partnership scheme. This Clause provides that if a scheme is approved by the Inland Revenue the company shall be entitled to a deduction in computing its profits for Profits Tax purposes.
In reply to the hon. Member for Bolton, West (Mr. Holt), I would say that the tax considerations which apply in cases of this description are complicated. It has been held by the courts, I understand, that if a company allots shares to its employees on favourable terms, that is, at below their market value, it is not entitled, in computing its profits, to deduct the difference between what the shares would have fetched in the market and what the employees paid for them. It seems probable that this decision would cover a case where the company made a bonus issue of shares out of accumulated profits and used some or all of these shares for an employees' share issue, or, indeed, used profits to pay up partly-paid shares already held by employees, and that in this kind of case also no deduction would be due to the company for the amount of profits which is applied in this way.
211 The position when a company buys shares for allocation to employees is, I agree, a more doubtful one, but if it were to buy them in a large block as a once-for-all operation, the sum involved would probably be held to be of the nature of capital, for which no tax deduction would be due. If, however, it did this year by year as a regular practice, its annual outgoings might certainly be held to be a deductible expense for tax purposes.
We have looked at this matter. The difficulty which the hon. Member for Bolton, West envisages is not one which has been found to arise in practice under recent schemes. This is not, so far as we know, a difficulty which has caused trouble. In these circumstances, my right hon. Friend does not feel that he can recommend the Committee to accept the Clause, which is, indeed, open to the objections that it seems to go further than is necessary and might involve the allowance as an expense of payments of a capital nature paid year by year. In view of recent legal practice, we do not think that the Clause is necessary and, as I have said, it might prove to go considerably further than is necessary or desirable.
The last point, which is raised by the second of the two Liberal new Clauses, is the suggestion that we should exempt the employees from any Schedule E liability in respect of shares which they receive on favourable terms under such schemes so long as they retain the shares. It is a Clause which deals with the position of employees. There is no doubt that the value of free shares, or the difference between the market value and the purchase price of shares for which the employees pay something, is an assessable emolument for Schedule E purposes.
The dangers of proposing tax exemption for any form of emoluments flowing to employees in respect of their work are fairly obvious and I need not dwell on them tonight. Whatever we feel about co-partnership, this can hardly be the right way to do it. There are many forms of wage payment or benefit in respect of which tax exemption has before now been sought. People have frequently suggested that overtime earnings, for example, should be exempted from tax, and all these suggestions have 212 had to be resisted on the ground that the Income Tax cannot distinguish between incomes according to the time when they were earned, the unpleasantness of the occupation, and so on. This suggestion would lead to perhaps wider results than the hon. Member intends.
§ Mr. Holt
The hon. Gentleman has missed the point. First, there would be no exemption from tax, and secondly, in relation to his example about overtime, no cash is received when an employee receives these share certificates. They are quite different from the overtime question. The employee would pay the tax only when he sells the shares; there would be no tax exemption.
§ Sir E. Boyle
What I said was that no doubt the value of these shares is an assessable emolument for Schedule E purposes. I tried to explain that there were, it seemed to me, real dangers about proposing tax exemption for anything that could reasonable be designed as an emolument. That would lead us into wider results than the hon. Member and his hon. Friend intended.
I am sorry that for the whole of my speech so far I have had to be somewhat negative in tone and I promise to the Committee that I will try to make up for that in the last two or three minutes. These are complicated matters and I have had to try to explain why I do not think any of the three new Clauses are in themselves satisfactory. I should, however, like to reaffirm categorically that the Government wish to encourage profit-sharing and co-partnership schemes.
The Prime Minister has been referred to. Perhaps I might also recall to the Committee what the Lord Privy Seal said upon this subject in June last year, almost exactly a year ago, in the general economic debate. My right hon. Friend said:We should like the House in the opening months of this Parliament and the opening period of this Government to find better methods of conducting our industrial relations and better methods of conducting our affairs generally. We believe we can get them if we have the advantage of the sincere help of hon. Members in all parts of the House. We shall offer in respect of profit sharing that the Inland Revenue will help any firm to get ahead that wishes to bring in a good scheme likely to help its workers. We shall offer, in dealing with the general economic situation, all the resources 213 of the Government. We cannot work without the help of the T.U.C., or without the help of the people, and, above all, we cannot work without the help of this House."—[OFFICIAL REPORT, 16th June, 1955; Vol. 54a, c. 801.]I can assure hon. Members that that pledge has been implemented, and that assistance has been given by the Inland Revenue during the last year upon this subject.
The help to be given by the Inland Revenue must be within the framework of the existing law. I have tried to explain to the two Liberal Members who have spoken that one of their Clauses does not seem to be necessary and that the other raises rather wider issues than the hon. Member who spoke to it realises. I re-emphasise what was said by my right hon. Friend last year. The Government, through the Inland Revenue, will give such assistance as they can to companies wishing to operate profit-sharing schemes, and I can assure hon. Members that we have by no means lost our interest in this extremely important subject.
§ Mr. Jay
The Economic Secretary's speech has been rather disappointingly negative, in view of the many statements we have had from the Prime Minister, the Chancellor of the Exchequer, the Lord Privy Seal and other Members of the Government in the past—perhaps even including the Postmaster-General. My advice to the hon. Member for North Angus (Mr. Thornton-Kemsley) is to bring his Clause forward in an improved form on Report, when he can give us a complete series of quotations from every Member of the Cabinet. Perhaps we shall then carry the matter further.
My feeling about profit-sharing and co-partnership schemes is that they are good as far as they go, but that they do not go very far. The Liberal Party has been here in very great force tonight. At one moment it appeared to have been joined by the hon. Member for Kidderminster (Mr. Nabarro).
§ Mr. Jay
Well, the hon. Member was applauding various Members of the Liberal Party from somewhere in their part of the House. The Liberal Party is a little inclined to think that the whole problem of the better distribution of wealth and incomes can be solved largely by these schemes. It seems to us that 214 it is going a good deal too far in thinking that. Even so, that does not mean that the schemes are not good in themselves. I believe that the proposal put forward by the hon. Member for North Angus is one of the most attractive and plausible that this Committee has had before it.
It is true that there is a technical flaw in the Profits Tax—which, in general, is a good tax—and that in the case of a company with a lot of preference capital it falls extremely heavily upon the equity shareholders. The hon. Member confined his suggestion to that sort of case, and also sought to safeguard the position by making the concession proportionate to the shares actually held by those benefiting by the co-partnership scheme. That is a considerable safeguard, and there is the further one, which is no doubt convenient from the point of view of the John Lewis Partnership, namely, that a high proportion of the employees have to be included in the particular scheme.
It is therefore rather disappointing that we have had nothing but a somewhat vague promise from the Economic Secretary. I suggest that the hon. Member for North Angus should try again on Report. If his Clause is brought forward then in an improved form, and we discuss it at a more appropriate hour, we may be able to give him our support in the Division Lobby.
§ Mr. Thornton-Kemsley
Whether or not I take the right hon. Member's advice, I have known my hon. Friend the Economic Secretary to be more forth-coming than he has been this evening, but I have been long enough a Member to know that once a Government have given their answer it does not do any good to go on pressing the matter in the same way at the same time. I therefore beg to ask leave to withdraw the Motion.
§ Question, That the Clause be read a Second time, put and negatived.