New Clause.—(EXEMPTION OF BUILDING SOCIETIES FROM CHARGE TO PROFITS TAX.)

HC Deb 02 July 1957 vol 572 cc933-72

(1) Profits tax, including any distribution charge, shall not be chargeable for any period after the thirty-first day of March, nineteen hundred and fifty-seven, upon the profits arising from the business of any building society and accordingly the last chargeable accounting period of any building society shall end on the thirty-first day of March, nineteen hundred and fifty-seven.

(2) No distribution charge shall be levied, either by way of the application of section thirty-five of the Finance Act. 1947, or otherwise, in respect of any distributions made by a building society after the thirty-first day of March, nineteen hundred and fifty-seven.

(3) For the purpose of this section the expression "building society" means a society regulated by any of the Acts regulating building societies, or a society registered under the Industrial and Provident Societies Acts, 1893 to 1954, which carries on a business of such a nature that it could have been established under any of the Acts regulating building societies, and no other business.—[Mr. Wade.]

Brought up, and read the First time.

Mr. Wade

I beg to move, That the Clause be read a Second time.

I assume that the proposed addition to the Ninth Schedule, which appears at the end of the Notice Paper, in page 59, line 47, at the end to add:

PART V
Building Societies (Profits Tax)
Session and Chapter	Short Title	Extent of Repeal
10 & 11 Geo. 6, c. 35.	The Finance Act, 1947.	Section 42.

will be taken with this proposed new Clause, as it is consequential. I am pleased to say that between forty and fifty hon. Members of all parties have added their names to this proposed new Clause and many others have expressed their support.

At the outset, I should make it clear that I have no personal interest to declare, but, like other hon. Members, I am aware of the invaluable service which building societies perform. I am not asking for any special favours for them. I should like to draw the attention of the Committee, and in particular of the Financial Secretary, to that point for a few moments. Building societies perform a dual function. They encourage personal saving and, at the same time, facilitate the extension of home ownership by making loans on mortgage repayable by instalments. There are approximately 3½ million savers with money invested in building societies and there are about 2 million borrowers.

In considering whether there is any justification for the imposition of Profits Tax on building societies, there are three general propositions which I suggest are relevant, and which I hope will be accepted as non-controversial. In the first place, it is clear that building societies cannot be brought into any general category of taxpayers. They are similar in many respects to the trustee savings banks, but they differ in that their primary task is to lend money on first mortgage, mainly to assist owner-occupiers to purchase their houses.

Building societies must be regarded as being in a special class of their own, and I hope the Economic Secretary will accept that. This has been recognised by Parliament for a long time. In 1937 the late Lord Simon, then Sir John Simon, made the following remarks as Chancellor of the Exchequer: Building societies stand in a class by themselves. They are not in competition with retail traders. They are not engaged in ordinary trade activities. They play an important part in the solution and treatment of the housing problem. They have constantly been regarded by Parliament as entitled to consideration on those grounds. They were, indeed, from the beginning exempted from the Corporations Profits Tax, and from the first edition of the National Defence Contribution."—[OFFICIAL REPORT, 14th July, 1937; Vol. 326, c. 1298.] 5.45 p.m.

To attempt to include building societies in any particular category of taxpayers will merely confuse the issue, and I suggest that to contend that relief ought not to be granted to the building societies because it might open the door to others would be unfair.

The fairest way to approach the subject is to regard a building society as a distinctive form of savings organisation. If, therefore, the Chancellor—as I hope he will—thinks fit to relieve building societies from the burden of Profits Tax, no precedent will be set which will affect any other body. That is my first proposition.

My second proposition is this. A building society, as the late Lord Simon indicated, is not engaged in, and indeed is not allowed to engage in, trading activities. A building society is not permitted to buy and sell goods or property, except in the position as mortgagee. Furthermore, it is not an investment company. It is rather interesting to note that if, for example, there is a fall in the value of the invested reserves as a result of a fall in value of Government securities, that is not regarded as a loss which can be set off as against other income for tax purposes, as I presume would be the case if it were the business of a building society to buy and sell investments.

Building societies are, in fact, debarred by statute, namely, by the Act of 1874 and subsequent Acts, from trade and commerce. Their functions are limited by statute and they are only allowed to invest in first mortgages and trustee securities. That is my second proposition.

Thirdly—and this may perhaps be a little more controversial—it is not the function of a buildnig society to make profits in the generally accepted sense of the term. If we examine a building society balance sheet and accounts we do not find the word "profits" There are no profits, distributed or undistributed, and there are no equity shareholders to which such profits could be distributed if they were made. There may be, and should be, a surplus. There may be a balance carried forward or a surplus put to reserve, but there are no profits as such.

The fact that an investor in a building society may technically hold shares has given rise to some misunderstanding. The use of the term "shares," though well understood by those who have studied the origin of building societies, is to me somewhat misleading. The holding of shares merely indicates that a saver has put his money into a particular account at a building society. Some building societies have both share accounts and deposit accounts. Others have share accounts only, but there is no difference in principle.

The money which an investor puts into a building society is the commodity which the society requires to enable it to carry out its function of lending on mortgage, and the interest paid to the investor is the price which the society pays for this commodity. Since the building societies are anxious not to charge their borrowers any higher rate than is absolutely necessary—and I am sure, or at least I hope, that the hon. Member for Dunbartonshire, East (Mr. Bence) will agree with that—they do not pay any higher rate of interest to investors than the circumstances of the time require.

What happens to the surplus? After meeting the cost of administrative expenses, which is comparatively small, and after allowing for tax which is considerable, any surplus is retained for reserves, and every sound building society must hold these reserves. It would be inaccurate to class them as undistributed profits. The expression "undistributed profits" implies a deferred distribution, but in the case of building societies there are, as I have already explained, no equity shareholders to whom such distribution could be made. So we have the interest which is the reasonable price for the commodity and which, in fact, is determined very largely by competition for savings.

That is a statement of my own view, but I can call in aid some remarks which were recently made by the Paymaster-General in addressing the Building Societies' Association. He had some very polite and generous things to say about building societies, which is only natural, since he was a guest of the Association. However, I shall not quote those, although I agree with what he said. I wish to quote the right hon. Gentleman merely on the subject of interest because a consideration of interest is vital to the case we are now making as to whether there should be Profits Tax, and, if any, how it should be calculated.

On 17th May, when addressing the Building Societies' Association, the Paymaster-General, after stating that savings are now derived from a large number of people who save in small quantities. said: What must be the rôle of the building societies in all this? Clearly, one of your first and most important functions must be to continue to attract the savings of the people, and, to do that, you will have to pay the market rate. I find that a great deal of criticism of building societies is founded on the abysmal ignorance of the financial facts of life. The fact is that money is a commodity, and, like any other commodity, it has a price. If you want it, you have to pay the going rate, and I understand the way in which building societies work is to attract savings from one set of people and pass them on in the form of loans to other people who want to build houses or to buy houses. There we have it clearly put that savings are the commodity and interest is the price.

I shall come later to the question of assessment for Profits Tax, but all I want to establish at the moment is that shares in a building society bear no resemblance to shares in a trading company. They are not saleable, they are not quoted on the Stock Exchange and there is no possibility of the holders of these so-called shares making a capital profit. Furthermore, the money invested in share account can be withdrawn at any time at par on short notice. Thus, we have under consideration here a distinctive form of savings organisation. I suggest that it must be considered by itself on its merits.

I come now to the way in which this savings organisation is, in fact, taxed. Although a building society has the nature of a savings organisation, it suffers tax under three heads. In the first place, it pays over to the Revenue tax in respect of interest paid to investors. Building societies pay interest not tax free but free from liability for tax to the recipient, and the appropriate amount of tax is paid over by the building societies to the Revenue. Secondly, building societies pay their own Income Tax. This is paid on the balance arrived at by deducting outgoings from income. There is no special relief as far as Income Tax is concerned; for example there is no relief on the first £15 of interest. It is interesting to note that, in the United States, allocations to reserve are not taxed until the total reserves reach 12 per cent. of the total savings invested in the society, but there is no similar relief in this country.

In the third place—and this is the burden of my complaint—building societies are subject to Profits Tax. It is calculated by taking the total interest received from borrowers, together with the total income from investments. From this, management expenses are deducted, but no deduction is made for the interest paid out to investors either on deposit account or on share account. If a comparison were made with a trading company, this would be equivalent to assessing Profits Tax on the amount received for goods sold after deduction of overheads, but without any deduction for the cost of the materials purchased, the money invested in a building society being equivalent to the materials purchased by a company. In a trading company, that would clearly be anomalous.

Hon. Members may ask how this came to pass, how building societies came to be assessed for Profits Tax at all, and why the tax was calculated in this very peculiar way. To provide the answer one must go back over a period of twenty years. The imposition of the tax on building societies is, I think, partly fortuitous because if all the moneys paid into a building society had been called deposits and not shares it is possible that societies would never have been charged Profits Tax at all. As the late Lord Simon pointed out in 1937, building societies were not liable to corporation tax or to the first National Defence Contribution, but, when a revised scheme of National Defence Contribution was announced in 1937, building societies learnt, to their consternation, that it was proposed to place upon them a charge which was quite out of proportion to the total yield of contribution. The result would have been very serious indeed had it not been modified.

The Building Societies' Association pointed out the gravity of the situation to the then Chancellor, Sir John Simon, who received a deputation. The case which the Association put to the Chancellor then can be summed up very briefly under five heads. First, building societies exist for two purposes, namely, to encourage thrift and to lend money on mortgage for house purchase, mainly, though not exclusively, to owner-occupiers. Second, savings can be invested in a building society in the form of either shares or deposits. Third, the majority of investments take the form of shares, but the proportionate division between shares and deposits varies greatly from society to society, and many have no deposits at all. That was important, because of the difficulty in distinguishing between shares and deposits. Fourth, the largest working expense of a building society consists of the interest paid to investors for the use of their money. Fifth, shares in a building society bear no resemblance, other than in name, to shares in a company, being, in fact, investments of savings to which interest is added periodically, somewhat similar, one sees, to the case of the trustee savings banks.

These points were fully discussed in 1937 with the Chancellor and his advisers. The Chancellor accepted the view that his scheme must be modified to meet the special circumstances of the building societies. He accepted also the principle that there should be no distinction between shares and deposits. But, instead of regarding interest on both as a working expense, he proposed that the interest on neither should be allowed, and to offset the consequences of this illogical decision he fixed a lower rate of contribution, namely, 1½ per cent. instead of 5 per cent., which he considered would result in a fair contribution by the building societies but which was regarded by the societies as a contribution rather than as a tax.

Although the Association did not accept the justice of the Chancellor's decision, no further representations were made to him for two reasons, which are, I think, relevant today. Firstly, the building societies did not wish to ask for complete exemption from a contribution specifically in aid of national defence at a time of imminent crisis. Secondly, they had in mind that the contribution was to be levied for five years only. I sometimes think that it would be an interesting subject for research to ascertain how many new taxes were intended only to be temporary when introduced. At the end of the five-year period, the National Defence Contribution was continued, and, in view of war-time conditions, objections were not raised at that time.

In 1947, the N.D.C. was replaced by Profits Tax and, in spite of very strong representations made to the Chancellor, it was decided that the new tax should be imposed on building societies, and the rate was fixed at 1½ per cent. I have examined the reasons given by the right hon. Member for Bishop Auckland (Mr. Dalton), who was then the Chancellor, for introducing the Profits Tax at that time, and I do not find any convincing reasons for including building societies, still less the method of assessment. Nevertheless, the tax was introduced and was imposed on building societies.

6.0 p.m.

Mr. Donald Chapman (Birmingham, Northfield)

Was it not 3 per cent. in 1947? The hon. Member said 1½ per cent., but I think it was raised from 1½ per cent. to 3 per cent. in 1947.

Mr. Wade

I think the hon. Member will find that it was fixed at 1½ per cent. Shortly afterwards it was increased to 3 per cent., and then it was increased to 6 per cent.

In 1952, Profits Tax was reduced to 2 per cent., but the yield steadily increased. As the amount paid in Profits Tax has grown, the ratio of reserves to assets has fallen. Under the heading of assets I include properties held in mortgage and investments. It seems to me that it is of great importance that the ratio of reserves to assets should be maintained, and grave concern is felt at the fall in this ratio from 6.3 per cent. to 4.5 per cent., because 5 per cent. is regarded as the minimum below which the percentage of reserves should not fall.

It is surely a vital matter that there should be adequate reserves to provide against the possibility of a fall in the value of property or against economic conditions which might result in some borrowers being unable to maintain their payments, and this concerns all building societies.

The effect of Profits Tax varies with different societies, but, on average, this tax is taking 30 per cent. of the surplus. In some cases, as much as 75 per cent. of the surplus is taken, and even 100 per cent. might be taken; such cases are not unknown.

Let me again make a comparison with a trading firm. If a comparison were made with a commercial concern and the surplus were regarded as profits, the rate of tax would be anything up to 100 per cent. of the profits—and that is profits which are not intended to be distributed. The nature of the anomaly is brought out strikingly if one takes the figures of the Profits Tax yield. In 1947, 6 per cent. produced £1,349,000, and in 1956 2 per cent. produced £1,900,000. In other words, 2 per cent. in 1956 produced more than 6 per cent. in 1947. In 1957, it is expected that 2 per cent. will produce £2¼ million. I should add that the building societies suffer even more than those figures indicate, since in 1947 the Profits Tax was allowed as a deduction for Income Tax purposes and it is not allowed now. That Income Tax relief was abolished in 1952.

The increase in Profits Tax yield cannot be accounted for by an increase in the excess of income over outgoings. The enormous increase has occurred in spite of the fall in the ratio of reserves to assets. The explanation, as I see it, lies in the fact that the tax is not based on any net balance. It is, in fact, in the nature of a turnover tax rather than a Profits Tax. It is not surprising that building societies are concerned at this growing burden, since the tax is eating into their surplus at an alarming rate. The societies have not yet thrown the burden on to borrowers, but, personally, I do not see how they can refrain from doing so much longer.

What are we to do about this? What is the remedy? If one accepts the view that the protests of the building societies are justified, the question arises, what should be done to remove these anomalies? As I see it, there are two possible remedies. One is to alter the method of assessment on the lines suggested by the Royal Commission on the Taxation of Profits and Income. I refer to the Final Report. The case for some reform is overwhelming. Paragraph 577, on page 171 of the Report, concludes with the words: … we have tried and failed to find any principle that would account for or justify the basis of charge as it stands today. While pointing out the absence of any sound principle justifying the existing method of levying Profits Tax on building societies, the Report, in my humble opinion, does not take the subject to its logical conclusion and point out that building societies are not institutions for which this tax is appropriate.

It would undoubtedly lessen the burden if this tax were imposed only on what the Royal Commission refers to as "the retained profit," but if at some future time a flat rate of Profits Tax were introduced and if this were applied to building societies, even though only on this so-called retained profit, the amount taken from the surplus required for reserves would, or at least might, be a serious imposition, and I think that the building societies would still be justified in claiming that the Chancellor was imposing a penalty on thrift.

The alternative solution which I advocate is to relieve building societies altogether from Profits Tax. As I have already submitted, this would not be creating any undesirable precedent and it would not be putting the building societies in a privileged position; it would merely be bringing them more into line with savings banks. The object of the new Clause is to relieve the building societies altogether from Profits Tax, but it would not, of course, alter their liability to Income Tax. I hope that the Chancellor will regard this as a matter of urgency since it is essential that the ratio of reserves to total assets should be maintained at a proper level.

I have tried to consider whether there are any reasonable arguments which could be put forward for maintaining the tax. It might be contended that the tax has been imposed for many years and must, therefore, continue, but that is clearly an inadequate reason for justifying it, and I hope that hon. Members on the Government Front Bench will not be so conservative as to allow this consideration to affect their decision. It might be contended that the Chancellor must keep a tight rein on the collection of revenue in order to maintain his Budget surplus, but that argument scarcely seems consistent with the views expressed when we discussed Clauses 10 and 12. The Chancellor has already recognised the need for some relaxation and he has also made it clear that he wishes to encourage personal saving.

Again, it might be contended that the removal of the tax would be inflationary in its effect, but I do not think that that contention can possibly be valid. It may or may not be relevant to some categories of taxation, but it cannot apply to Profits Tax on building societies. The abolition of Profits Tax would not lead either to increased dividends or to an inflated capital value of shares. The practical question at the moment is the maintenance of reserves and the result of removing the tax would be to enable building societies to maintain proper reserves and to safeguard them from the necessity of increasing mortgage rates in order to maintain those reserves.

We are faced with a very curious paradox. One of the reasons which the Chancellor has put forward for his Budget surplus is the necessity for maintaining a high level of compulsory savings. Some of this, although it may be only a small proportion, is achieved by putting a tax on the voluntary savings collected by building societies. Thus, in order to maintain his total of compulsory savings, the Chancellor is taking away part of the potential capital reserves of an important savings organisation. I am not suggesting that this is deliberate on the part of the present Chancellor. He has inherited a tax which I think is an unfortunate and harmful tax, but I believe that the time has come to remove it from building societies.

Sometimes a case for relief is put on the ground that a tax is unjust. Sometimes it is put on the ground that a tax is causing unfortunate and harmful economic consequences. Both arguments apply here. I hope that the Chancellor and his economic advisers will recognise this and will agree at the end of the debate that the case has been proved and that the new Clause should be accepted. I am sure that if he does he will not regret it.

Mr. Cyril W. Black (Wimbledon)

I beg to second the Motion.

I begin by doing what I have done on a former occasion, that is, declaring an interest in this matter. I believe that it is within the knowledge of hon. Members that I am a director of a building society. I have informed the House and the Committee of that on a former occasion, but to avoid any possibility of misunderstanding I do so again now.

I should like to express my personal appreciation, which I think all hon. Members interested in this matter will share, of the extremely clear, comprehensive and very convincing speech made by the hon. Member for Huddersfield, West (Mr. Wade). He has deployed with singular skill the arguments in support of exempting building societies from the incidence of Profits Tax. He has dealt with the matter so fully that he has relieved subsequent speakers of the need to make some points which otherwise they would have been inclined to make.

The point has been made that building societies are not profit-making bodies in the ordinary sense of the term, that trustee savings banks are exempt from Profits Tax and that by that analogy it is reasonable to argue that building societies should be similarly exempt. It has also been pointed out that building societies have no equity shareholders, in fact no shareholders at all, using the term in its generally accepted sense.

A great deal of interest has been raised in this new Clause and much powerful support has been forthcoming for it. The Investor's Review said recently that Informed opinion agrees that the levying of Profits Tax on building society surpluses is not justifiable. The Daily Telegraph has said: On the facts as now set out (in the building Societies Association memorandum) and in the light of the movement's urgent need to build up reserves, this tax exemption plea should surely be accepted. I want now to draw to the attention of the Committee a point which has not been made so far in this discussion. It is that during the period of the past four or five years, in which taxation generally has been reduced, building societies have been subjected to an increasing burden of taxation. In 1952–53, the standard rate of Income Tax was 9s. 6d. in the £, while the composite rate of Income Tax payable by building societies was 5s. 2d., with a Profits Tax of 2 per cent. in addition.

In 1956–57, four years later, the standard rate of Income Tax has been reduced by 1s. to 8s. 6d. in the £. Larger personal allowances have been granted, and other reliefs in taxation have been given to very large sections of commercial undertakings and individuals, but the composite rate payable by building societies has risen to 5s. 4d., while the Profits Tax has remained unchanged at 2 per cent.

6.15 p.m.

In a period of four years, therefore, in which there has been a substantial measure of relief to the great body of taxpayers of almost every sort and description, the burden of taxation on building societies has actually undergone an increase. Certainly, building society people cannot understand why they have been singled out for this exceptionally unfavourable treatment. I believe that the case which the hon. Member for Huddersfield, West has made for complete exemption is overwhelming. But if it be that the Chancellor feels that at this stage it is not possible to grant complete exemption, at the very least he ought to tell the Committee, here and now, that he intends without delay to alter the completely unjust and indefensible basis on which Profits Tax is at present levied on building societies.

The point has been made that building societies have no shares in the ordinary sense of the term. The money that they have from members of the public who invest with them is money in the form of loan capital. It carries a fixed rate of interest and, although one talks loosely of building society shares, the point has been sufficiently made that they are not shares at all in the ordinary sense of the word. To make the computation on which the Profits Tax is based by omitting the interest on the loan capital is to follow a procedure not adopted on the case of limited companies and, as far as I am aware, not adopted in the case of any other kind of business undertaking.

The present method can and does result in the most absurd anomalies. It is possible to have two building societies paying precisely the same amount in Profits Tax but in one case the Profits Tax represents only 50 per cent. of the surplus, after payment of interest to investors, whereas in the other case the Profits Tax represents 100 per cent. of the surplus. Therefore, this is a tax which is based on such a completely indefensible principle that its incidence bears no relationship at all to the net profit or the net surplus of a society.

The hon. Member for Huddersfield, West made the point that the Royal Commission had made it clear that in its judgment the present basis is completely indefensible and ought to be altered without delay. If the Chancellor is not prepared to go the whole way, he should at least concede the principle of allowing interest paid to investors to be brought in as a charge before arriving at a sum on which Profits Tax is based. If he were then to say that Profits Tax should be charged at 3 per cent., instead of 2 per cent., to bring it into line with the rate of Profits Tax charged to limited companies in the case of undistributed profits, there might be some merit and reason in that course. If that course were adopted, it would bring some sense, at any rate, into the method of charging Profits Tax. Incidentally, it would give a considerable measure of much-needed relief in Profits Tax to building societies in the total amount that would have to be paid.

There is only one further point I want to make before completing my speech. The building societies, at existing rates and contrary to much popular belief, are operating on a margin which is so small that they cannot continue to operate upon it for more than a strictly limited period. I invite the Committee to look with me for a moment or two at how the building societies use the money they receive in the form of mortgage interest.

The normal rate of mortgage interest charged by societies today is 6 per cent. If we take the unit of £6 interest which is received on £100 of mortgage, the breakdown of the figure is as follows. Three pounds ten shillings go to the investors of the society. That represents a rate of 3½ per cent., which is the lowest rate at which the societies can maintain the funds entrusted to them by investors and attract even a modest amount of new investment. In existing conditions that is an irreducible figure to the investor.

The tax, including the Profits Tax, amounts to £1 14s., and apart from the relief that we hope to get today from the Government it is a figure which obviously cannot be controlled in any way by the societies themselves. The management expenses amount to only 11s., and I do not think that anyone with a knowledge of the movement will say that the building societies are extravagant in the offices that they occupy or that they pay excessive salaries or wages. They do not do either of those things.

The remaining 5s. out of the £6 represents the amount available to add to reserves. But to maintain their reserves —not to increase them—in terms of a percentage of their total obligations they need a surplus not of 5s. but of 8s. Therefore, on the present inadequate margin, their reserve ratios have been falling for a number of years past, and must continue to fall as long as the present inadequate margin stands. If the Government are prepared to concede the case and relieve the societies of 2s. in the £6 per £100, which is all we are talking about, the building societies will then be left with a surplus not of 5s., but of 7s., which, even then, is not quite sufficient to enable them to maintain their reserve ratios.

I believe that this is a case which is irresistible in terms of logic, and it is a case which, if conceded, would bring in the long run considerable benefits to the Treasury and to the nation. I hope, and with expectation, that we shall get an enlightened and sympathetic reply today.

Mr. Harold Wilson (Huyton)

I rise to associate my right hon. and hon. Friends with the new Clause moved by the hon. Member for Huddersfield, West (Mr. Wade). I agree entirely with what has been said by the hon. Member for Wimbledon (Mr. Black), namely, that the hon. Member who moved the Motion did it with such clarity, and gave such a wealth of detail, much of which is familiar to many hon. Members, that none of us needs to repeat the facts or the figures.

In any case, in so far as there were any lacunae in his presentation, the figures given by the hon. Member for Wimbledon as to the make-up of the £6, have filled in the gaps. I think, however, that someone on this side of the Committee should indicate why we think it is right that the Chancellor should accept the Motion, and that I propose to do merely by underlining one or two of the points made by the hon. Gentlemen who have spoken.

One thing that is clear from their speeches, and from one's general knowledge of the building societies, is that what we are talking about is not a profit but a reserve. It is different, for a reason that I want to stress again in a moment, from the reserves of ordinary public companies with whose affairs we tend to deal for so great a proportion of the time we spend on the Finance Bill each year.

A building society is not, as the hon. Member said, a trading company. There are no profits. As he said, it does not trade in land, in property in the real sense of the word, and it does not buy and sell shares. Therefore, if a tax is levied, as it is at present, that tax must fall somewhere. That tax must fall either on the householder, the one who takes out the mortgage, or on the lender, or it may fall, as was suggested by the hon. Member for Wimbledon, and as it has been falling for some time, by leaning on the reserves and forcing the companies to take a chance on the reserves, which none of us wants to see happen.

However, as the hon. Member for Wimbledon made clear, it can fall on the reserves only for a certain period, at the end of which the incidence will have to be directed either to the householder or to the lender. I do not think that any of us wants to see this fall upon the householder. In this property-owning democracy about which we used to hear so much in the time of the former Prime Minister, we know that as a result of the Government's financial policies the householder is already paying very high interest rates indeed on mortgage payments.

Those of us who are involved in buying houses through building societies are only too well aware of that, even though the real cost of the Government's financial policies may have been disguised from some householders by the fact that many building societies, instead of automatically increasing the rate, have spread the period of repayment further and further, indeed almost into the twenty-first century.

As a result of the Government's monetary policies, which I do not propose, perhaps to the relief of the Committee, to expatiate upon at any length tonight since I had one or two words to say about them in a letter to a newspaper this morning, the householder is already paying what many people will consider to be an excessive rate of interest to the building societies, though, as the hon. Member for Wimbledon made clear, that cannot be laid at the doors of the building societies. It must be laid at the door of the Government's monetary policies.

Mr. Ellis Smith (Stoke-on-Trent, South)

They supported it.

Mr. Wilson

That may well be true. I would like to join with my hon. Friends in a long discussion on the monetary policies of the Government, but I would be ruled out of order if I did so at this stage.

Then one might ask: if it is not to fall on the householder should it fall on the investor? It cannot fall on the investor. Investors are most important to building societies in a highly competitive market, extremely competitive at the present time, with the pull of various forms of borrowing, with the great, and so far insatiable, demand for capital not only in this country but all over the world. With this highly competitive pull it would be impossible for the building societies to pass on this tax to the lender, because he would simply go elsewhere. That being so, he has to be attracted, and, therefore, the tax must ultimately fall, to the extent that it does not fall on the reserves, on the householder.

We have had from the hon. Member for Huddersfield, West a clear historical account of this form of tax on building societies, going back to the National Defence Contribution, to Sir John Simon and all that, and I do not intend to repeat it. What is clear is that at present, as a result of various historical developments—almost historical accidents—we have a hotch-potch system of taxation of building societies which defies any logical analysis.

6.30 p.m.

When the Royal Commission considered this point in its final Report, it said, in paragraph 576: We have been unable to extract any firm principle from these varying arrangements or from the final result. As a method of imposing tax they seemed to us to be somewhat lacking in dignity. I am not quite sure why it chose that particular word; we could find other words in which to describe it. The Report Roes on to explain how this began, in 1937.

I think that the hon. Gentleman is probably right, and that if the building societies have never used the word "shares" in their original constitutions, probably they would have escaped the 1937 National Defence Contribution and would probably have escaped taxation today. If they had used the word "deposit" or the term "loan stock," or other words of that kind, this historical chapter of accidents might have been avoided. Of course, it has been the case for a long period of time, and the Governments of all parties bear their share of responsibility, and we take our share of the responsibility, for it.

The Royal Commission goes on to say: This is a marked departure from the only general principle that we can advocate, which would require that such societies should be chargeable to Profits Tax on the whole of their profits, subject only to the deduction of interest on deposits, including such payments as are equivalent to such interest. It then goes on with its recommendations. I am quite sure that it would be possible by going into more detail from the Report of the Royal Commission, by analysing further points made by the two hon. Members who have spoken, and by quoting some facts and figures which I gather have been circulated to most hon. Members, to prove this case right up to the hilt. I do not propose to do so, because I think it has already been done by previous speakers, but I want to mention one point to which they have alluded in order to underline it.

Both hon. Members referred to the peculiar nature of shareholdings in building societies. I want to go rather further and suggest to the Committee that this particular form of holding shares is one which is quite distinct from the rest of capitalist industry and one which is to be commended and encouraged by this Committee. I remember that when I first read anything about building societies, twenty or rather more years ago, I saw a very authoritative article—perhaps dm hon. Gentleman himself may remember it —in the Economic Journal, about 1935, by Sir Harold Bellman, in which he set out the whole economic organisation of the building societies.

One thing which struck me then, and has struck me ever since, is the fact that shares in building societies are not bought or sold on the market. If one holds shares and wants to get rid of them one must sell them back to the society, and if one wants to buy shares one must go to the society for them. The whole of the vast Stock Exchange machinery which applies over so much of capitalist industry does not apply here at all.

There is a historical reason for this. They did not develop in the first instance as in any case a capitalist development, as we understand capitalism in this country. Historically and socially, building societies are in the same main stream of thrift ventures as co-operative societies, local municipal savings banks and the rest, and were never intended to be capitalist organisations. But because there cannot be these dealings in the shares, this has, in my view, not only desirable social results but also economic consequences, which have a real bearing on the new Clause which we are discussing.

There can be no question of undistributed profits arising which may affect or increase the value of the shareholder's property. If one reads the very complicated chapters of the Royal Commission's Report on the question of undistributed profits, company reserves and all the rest of it, one sees the enormous difficulty which we get into in asking, "Does the individual shareholder own these undistributed profits. Have they any value for him? Ought they to be taxed when they are increased, even though he himself gets no benefit from them?" That is one of the most complicated and thorny problems not only of fiscal economics, but of tax law.

This does not apply in the case of building societies. If the building societies reserves are increasing, there is no question at all of a shareholder being a richer man in terms of spending power or in terms of his potential spending power. There is certainly no question of a take-over bid developing. No one can come along and say, "Your shares are really worth more than your directors have suggested, and we shall now make a bid for them."

There is, therefore—and this is extremely important—no question of capital gains so far as these shares are concerned. Most of us on this side of the Committee have come to feel over the last few years that our tax system has really been so eroded by the prevalence of capital gains, particularly in equity shares, that many of us believe it will never be possible to get a rational tax system in this country until that problem has been dealt with in one way or another. That is one of the central themes of the minority Report of the Royal Commission.

I do not want to argue that tonight, because I should be out of order if I did so, but I would go further than the reasons which have been advanced by both the hon. Members who have spoken in commending this new Clause to the Committee. Not only is there a case in equity, not only is there a case in social justice and economics as far as building societies are concerned, but, speaking for myself, at any rate, I should like to go further in deploying this argument.

I believe that the prevalence of capital gains has such a serious effect both on our tax system and, indeed, on our social and economic structure that we ought to be ready to give a very special encouragement in fiscal terms to a form of private enterprise—because, for the most part, it is private enterprise, apart from the very important Co-operative Building Society—special encouragement to existing and possibly new developments in industry which preclude from their operations dealings in share and uncovenanted capital gains.

It is for that reason, as well as others put forward by the two hon. Gentlemen, that I would join with them, as I am sure all hon. Members on this side of the Committee will do, in pressing the Financial Secretary to announce that he will accept the new Clause, if not in these words, possibly in a form of words which he can produce for the Report stage. If he is not prepared to do that, I must tell him that it will be our duty to press the matter in any way that is open to us.

Mr. Powell

The three speeches which have been made on this new Clause have, I think the Committee feels, traversed the ground very thoroughly and in very considerable detail, and it might perhaps be convenient if I now interposed in the debate.

I think I should imitate my hon. Friend the Member for Wimbledon (Mr. Black) by declaring an interest as a member of two building societies myself, but I doubt whether there are many hon. Members in any part of the Committee who, at some time or another, have not participated in the building society movement; certainly there is no one who would not pay tribute to its great importance. But its great importance as a channel of private savings should not blind us to the essential difference between the operations of the building societies and those of the organisations which form part of the National Savings movement, which, of course, lends to the nation the savings which it obtains from the public.

The building societies, however important and admirable their operations, are engaged in the business of lending money upon mortgage. Therefore, in the nature of things, what my hon. Friend the Member for Wimbledon (Mr. Black) described as their net profits, or net surplus, form a natural subject upon which Profits Tax should fall, as it falls upon the profits of other corporations, public or private.

Indeed, the whole weight of the arguments which have been addressed to the Committee has been directed not to what the Clause would include, to the exemption of those net profits or net surplus from Profits Tax, but to the exemption from Profits Tax of the distributions, whether by way of dividend upon deposits, or dividend upon shares. The whole of the argument to which the hon. Member for Huddersfield, West (Mr. Wade) and my hon. Friend addressed themselves, relating to the effect of taxation in its present form upon the reserves of building societies, of course relates to the fact that at present taxation falls upon the distribution as well as upon what is retained. It is from that cause that these great anomalies, to which attention has been drawn, follow.

The arguments which the right hon. Gentleman the Member for Huyton (Mr. H. Wilson) directed to the question of the nature of shares, as they are probably mis-called, in building societies lead to the same conclusion.

Mr. Wade

I endeavoured to show that building societies were institutions for which Profits Tax was not appropriate.

Mr. Powell

Yes, but the most effective arguments which have been addressed to the Committee, those relating to the effect upon the reserves and those relating to the nature of the distributions on shares in building societies, lead to the conclusion at which the Royal Commission arrived, and not to that which is embodied in the Clause. The Royal Commission started from the very clear principle which is quoted in paragraph 562 of its Report: The main principle that we wish to see adopted is that a tax on the profits of corporations should apply to all profits without distinction between corporations … It is of the nature of equity in the imposition of taxation that these profits, this surplus, should be treated as liable to Profits Tax, like any other profits or surplus thrown up in the course of business.

The Royal Commission came to the conclusion, as the Committee has already been reminded, that there was a general resemblance between the interest on building society shares and the dividend, so-called, of industrial and provident societies. Accordingly, the Commission recommended that only the retained profit should be taxed. This recommendation of the Royal Commission was one of a whole series which the Commission made. some very far-reaching and of great importance, relating to Profits Tax.

Mr. Chapman

The Financial Secretary is now trying to lead the Committee on the lines of the Royal Commission's remark about taxing all profits, however made. Does he not realise that many of us do not go all the way with the Commission at that point? We then say that building societies are also a very valuable small savings institution and that, therefore, we do not regard their profits at that point as profits in the purely commercial sense. We regard them like those of small trustee banks and, therefore, more liable to be relieved of tax.

Mr. Powell

I remind the Committee of the essential difference between their operations and those of the trustee savings banks. Trustee savings banks lend to the Government, to the National Debt Commissioners, the savings they collect. Building societies engage in the business of lending on mortgage. It is a mortgage business, however valuable.

Mr. Glenvil Hall (Colne Valley)

The point is what do the building societies do with the surpluses? In what do they invest them?

Mr. Powell

The point has been made several times that the surplus forms the necessary reserves of the building societies, but so, of course, do the profits subject to Profits Tax of all businesses go to form the necessary reserves of those businesses, what-ever may be their character. The general weight of the argument on the new Clause leads to the conclusion of the Royal Commission, that Profits Tax should properly and naturally be restricted to what my hon. Friend called the net profit or the net surplus.

As I was reminding the Committee, that recommendation is one of a whole important complex relating to Profits Tax generally on which my right hon. Friend the Chancellor of the Exchequer has not reached his conclusions as a whole and from which he believes it would be wrong to separate a single change in Profits Tax to be made in isolation and separately from any conclusions which may be reached on the whole of those recommendations.

I therefore say to the Committee that my right hon. Friend does not reject the recommendation of the Royal Commission, to which attention has so frequently been drawn, but he regards it as right to take it in connection with the whole of the Commission's recommendations on Profits Tax to which consideration is still being given and to which effect clearly cannot be given in the ambit of this year's Finance Bill.

6.45 p.m.

Mr. H. Wilson

Will the Financial Secretary tell us how much longer this consideration will continue? This Royal Commission's Report has been in the hands of the Government for more than two years. During that period, any time any aspect of Profits Tax has been debated we have had this answer. We had it in the autumn Budget from the Lord Privy Seal, and it was given again last year. Consideration of the Report is becoming a device for stalling. Since the Chancellor has had plenty of time in the three or four months he has been at the Treasury to consider what we regard as a proposal much more dangerous than anything before the Committee tonight—all the fantastic provisions about overseas trade corporations—surely the Chancellor has had time to consider this part of the Commission's Report.

He has not hesitated to take other parts of the Report out of context and to apply them when it has suited him, or suited certain interests. I do not see that it would involve consideration of all aspects of Profits Tax to accept this proposal. Certainly, the Financial Secretary has been very skilful in riding off Amendments and new Clauses, especially the latter, by saying that the Chancellor will consider the matter in some way or other. If this urgently necessary Clause were accepted, it would be a very powerful stimulus and spur to the Chancellor to get on with the job of considering Profits Tax as a whole.

Mr. Powell

I remind the right hon. Gentleman that over the last two years very considerable and major recommendations of the Royal Commission have been put into effect. It does not lie in the mouth of the right hon. Gentleman to complain that other proposals are not being put into effect this year when he has been engaged in previous sittings of the Committee in opposing the implementation of one of the most important sections of the Royal Commission's Report.

Mr. Wilson

I do not want to delay the debate, but this point should be raised. The hon. Gentleman knows perfectly well that on overseas trade corporations we had 29 pages of new legislation of a kind never previously seen in this country. The House of Commons has a very real duty to discuss that legislation in great detail. My only twinge of conscience is that we let it go through far too quickly. The hon. Gentleman is misleading the Committee with his last statement about the Royal Commission. Since 1955, there have only been two or three minor anti-avoidance or anti-evasion devices, largely brought about under pressure from this side of the Committee and mostly inadequate in their application.

Sir Herbert Butcher (Holland with Boston)

I view the remarks of my hon. Friend the Financial Secretary with profound dissatisfaction. I cannot help feeling that he is entirely missing the importance of the part which the building society movement plays in this country. Before I go further, I should conform with the practice of the Committee and disclose a personal interest as a director of a building society. My hon. Friend himself disclosed his personal interest.

Members from all parts of the Committee have made it clear that they regard the building society movement as unique. I remember the first time that I went to the board room of the building society of which I am a director. One of my fellow directors said to me, "Remember, when you come here you do not come to make a profit, but to hold the balance level between the borrowing member and the lending member." That is the duty of all boards of building societies.

My hon. Friend the Financial Secretary endeavoured to draw sonic distinction between the trustee savings movement and the building society movement, both of which are closely associated with individual thrift in small items, protesting that the principal purpose of he building societies was to lend money on mortgage. Of course, to some extent it is. An hon. Member with his logical mind might follow some of the money lent by the trustee savings bank a little further. Where does it find its ultimate home? It passes from the Government coffers to the local loans board, front there it passes to the local authorities, and from there it is borrowed by ordinary men and women in the country under the Act dealing with small loans. Where is the logic in endeavouring to make an arbitrary distinction between the two cases?

As hon. Members have made abundantly clear, there are only a few sources from which the Profits Tax can come. First, it can come from the borrower. Every director of a building society knows, and regrets, that the present rates of interest are so high. I will not cross swords with the right hon. Member for Huyton (Mr. H. Wilson) on the exact implications of Government policy, but the fact remains that if the building society movement is to attract enough money to go on lending, it cannot charge less than it is charging at the present time, nor can it pay any less if it wishes money to come in. As my hon. Friend the Member for Wimbledon (Mr. Black) so clearly pointed out, the money can therefore come only from reserves.

Why do building societies need reserves? They need them partly to offset any possible fall in the value of property and partly to offset any diminution in their investments. The building society is unique in that whereas people who have invested their money in certain forms of Government loans have lost nearly half of it, for every £1 they put into the building societies they can withdraw £1 whenever they wish in complete safety and security.

It is not good enough for my hon. Friend to say that he is not prepared to deal with this small and minor point of the building societies' liability to Profits Tax because the Chancellor is not in a position to deal with Profits Tax as a whole. This Report is not a new Report received only this year; it is two years old, for it was presented to Parliament in June, 1955. There are only four paragraphs dealing with building societies and their liability to Profits Tax. Every one of those four paragraphs points to the anomalies. The first paragraph, No. 574, refers to the special arrangements. Paragraph 575 gives the history. Paragraph 576 uses the words which have already been quoted to the effect that the Royal Commission was unable to extract any firm principle from these varying arrangements or from the final results. As a method of imposing tax they seem to us to be somewhat lacking in dignity. The concluding words are, but even so, we find it difficult to assign any particular validity to the various adjusted figures that have been entered on the Statute Book from time to time. The last paragraph, paragraph 577, points out that only the retained profit ought to be taxed, and concludes: We have tried and failed to find any principle that would account for or justify the basis of charge as it stands today. By his refusal to make any amendment in the law my right hon. Friend desires to collect taxation on a basis for which the Royal Commission has tried and failed to find any sound principle. I do not think that that is a position consonant with the dignity of the Treasury.

Mr. Lipton

The Financial Secretary made one remark with which I must confess that I am in agreement; he described the building societies as primarily engaged as money lenders on mortgage. When I made a comment in a similar vein a little while ago and it was reported in the Sunday Pictorial, I was amazed by the volume of correspondence which I received from all over the country, from borrowers from building societies, complaining very bitterly of the treatment which they had received from the building societies concerned. I know that the principal villain of the piece is not the building society movement but the Government.

Nevertheless, one point has not been stated in the debate on the new Clause, namely, what advantage will accrue to the building society borrower from the acceptance of the new Clause? The hon. Member for Wimbledon (Mr. Black) mentioned that if the Government were to grant the concession which the new Clause seeks to obtain it would make a difference in the differential of 2s. The differential is the difference between the interest which a building society has to pay to investors and the amount which it has to charge to borrowers. The difference is 2½ per cent. all told, including Income Tax and Profits Tax, administration and the amount put to reserve. Of this 2½ per cent., 2s. is to be the amount saved by the building society through this concession, and that 2s. will be added to the reserves. What the borrower would like to have explained to him is what difference it will make to the very high rate of interest—in some cases more than 6 per cent.—which he has to pay if one-tenth of 1 per cent. of this differential is transferred from the Income Tax and Profits Tax allocation and put to reserve.

The fundamental cause of the difficulty is that the building society has to compete with the Government in obtaining popular savings. There can be no difference of opinion about that. The Government are issuing 4¼ per cent. tax-free National Savings certificates and are issuing Premium Bonds, and they have embarked on a policy of credit restriction. All these things are having an adverse effect on the operations of the building societies, because it is forcing them to pay a higher rate of interest in order to borrow the money which they can then advance to people who want to buy houses. They are in the dilemma that they have to engage in short-term borrowing for long-term advances.

It has been suggested that building societies should switch to issuing stocks and shares. In effect, that would mean that the bulk of the capital required by the building societies would have to be provided by stocks and shares and not by the savings deposited with them. The building society movement prides itself on the fact that the present system has the merits of flexibility for both investors and borrowers. The borrower would like to see a little flexibility as far as he is concerned, because the flexibility on which the building society movement prides itself has been a flexibility which constantly increases the rate of interest which borrowers have to pay.

A large number of people are trying to buy their own houses, but they are in the difficulty that whereas in 1951 they paid 4 per cent. interest, now, after five or six years of Conservative administration, they have to pay 50 per cent. more, at least 6 per cent. That is why numerous cases have been brought to my notice, and no doubt to the notice of other hon. Members, in which people have had another twenty years added to the period during which they have to repay the mortgage or loan which they have obtained. There are a large number of other points to which I should like to refer, but time does not permit.

7.0 p.m.

Building society contracts enable the building societies to alter their rates of interest at any time for whatever reason and irrespective of whether the Bank Rate goes up or down. So far from having a property-owning democracy, we have a system under which fewer people have a chance of owning their own houses, because if we compare the advances that the building societies were able to make in 1956 with those that they are able to make in 1957 we find that there is a drop of £60 million or so.

The main snag from the point of view of the average borrower is this. If he gets a loan from a building society he can never be sure what he has to pay and for how long he will have to pay it. That is the principal grievance of the average borrower against a building society. To what extent one-tenth of 1 per cent., which the new Clause seeks to obtain, will help the borrower in the circumstances is something which will have to be explained on another occasion.

I have the feeling that the building societies have ceased to perform the function for which they were originally created. The time has come when a Government-sponsored plan ought to be introduced under which people can buy their own houses with a maximum deposit of 5 per cent., instead of the 10 or 20 per cent. which is now required, at a guaranteed rate of interest, so that the borrower knows exactly how long he will have to pay and what he will have to pay.

In the meantime, the Government are primarily responsible for the difficulties in which building societies find themselves. They have created a situation in which the building society movement can no longer serve the purpose for which it was originally devised. We shall be driven to having some kind of State-sponsored scheme to enable people to buy their own houses. In the meantime, the attitude adopted by the Government towards this Clause shows that they are not very interested in encouraging house ownership. For that reason, I shall be very happy to join the supporters of the Clause in the Division Lobby when the time comes to vote upon it.

Mr. Nigel Fisher (Surbiton)

In supporting this new Clause, I, like other hon. Members, must declare an interest, both as a director and an investor in a building society. It is not really a financial interest because, even if my hon. Friend accepted the Clause, I cannot imagine that it would have any effect at all on the remuneration of directors, and certainly it would have no effect at all upon the rate of interest paid to investors. Its only effect would be to put this money into reserve for investment in the gilt-edged market. [HON. MEMBERS: "Oh."] Certainly. We have to do that. We have to invest in trustee stocks. No building society wants to do that at the present time but it has to do so. I should have thought that that argument alone would have induced my hon. Friend to be more generous, because if ever there was a time when Government securities needed support in the market, that time is the present. I am surprised that my hon. Friend has not taken a more lenient view from that purely material point of view. This tax should never have been levied on building societies. It is a quite inappropriate tax. It is a tax on total revenue from borrowers, less overheads, without taking into account the money paid out in interest to investors, which is an absolute essential if a building society is to function. The interest paid to investors is the stock in trade of a building society, which uses money as other undertakings, use goods.

The raw material in building societies is the money that they get from investors. A building society could not advance any money to a would-be house purchaser without the investors' money, for which it has to pay. In any other undertaking, the cost of raw materials is deductable before tax. The building society is the one exception that I can think of where the cost of raw materials cannot be deducted before tax is levied. That seems a thoroughly anomalous and ridiculous position.

I do not want to go into all the arguments because I think that the hon. Member for Huddersfield, West (Mr. Wade) made the case crystal clear in his opening speech. I would only say that I was surprised that the Prime Minister did not deal with this matter last year when the theme of his Budget on that occasion was savings. It is beyond dispute that building societies make a major contribution to savings and to thrift, and I should have thought that that would have been the most appropriate Budget, which did encourage other forms of saving, in which to encourage building societies, too. That opportunity was missed. There is no reason why it should be missed again.

In equity there is the strongest possible case for removing this tax from the building societies altogether. That may be too optimistic a hope in the light of my hon. Friend's reply. I was very disappointed with that reply, because I thought that the argument he used was frivolous and almost an insult to the intelligence of hon. Members of this Committee. I do not think that I have ever heard from my hon. Friend, whose power in debate and whose high intellectual calibre I much respect, a weaker case in answer to a serious debate and in answer to serious speeches by the hon. Member for Huddersfield, West and my hon. Friend the Member for Wimbledon (Mr. Black).

Mr. H. Wilson

While I thoroughly endorse what the hon. Gentleman has said, I think that it is fair to mention that he has not been present during some of the earlier debates on the Committee stage.

Mr. Fisher

I will not follow the right hon. Gentleman on that point because it is quite true that I have not been present all the time.

I understand that to remit this tax would cost about £2¼ million a year. If the Chancellor thought that this was too much, I should have thought that an honest answer. I should have thought that the only honest answer that my hon. Friend could have given us on this subject, if he decided to reject this Clause, was to say that his right hon. Friend had decided that he could not afford the concession. I think that one must always have a certain amount of respect for a Chancellor who comes honestly to the Committee and says, "Within the framework of this particular Budget and in this context I am afraid that I cannot meet this request".

If that were a serious argument of the Chancellor it would deserve respect, but I do not think that the answer which we have had today fell into a serious category at all. If the Chancellor thinks that £2¼ million is too great a sum, I would urge him to meet us half way and allow us to charge our raw material, so to speak, before tax. If we were allowed to deduct the interest which building societies have to pay out to their investors before tax is levied, I would regard that as a fair compromise, a half-way house which would personally satisfy me, and which I think might satisfy other hon. Members, at any rate as an earnest of good intentions for the future.

I believe that concession would cost about £1¼ million per annum. I do not know whether the hon. Member for Huddersfield, West intends to press this matter to a Division, but unless we hear something rather more valid in the way of argument from my hon. Friend than we have heard so far, and unless he can give some indication that this matter will be taken seriously, if not this year definitely next year, and unless he can meet us half way as I have suggested, then I can only say that for my part I feel—and no doubt other of my hon. Friends feel the same—that I would find it impossible to go with him into the Government Lobby.

Mr. Glenvil Hall

I do not intend to detain the Committee for more than a few minutes, because all that can be said in favour of the Clause has been said very well by previous speakers. What has astonished me has been the reply made by the Financial Secretary. It was unworthy of him; indeed, it was unworthy of any Minister of any Government. The hon. Gentleman completely ignored the whole of the arguments brought forward in support of the Clause. He went on assuming quite glibly that we were here dealing with an ordinary corporation. As has already been said by the hon. Member for Surbiton (Mr. Fisher), he did not even say that the Chancellor could not afford the concession on this occasion, as is normal on the part of Treasury spokesmen at that Dispatch Box. For argument, he relied upon the fact that the Chancellor was considering the whole of the Profits tax legislation with a view to making alterations at some time in the future.

That is not good enough, particularly when we are considering this tax which is unjust to building societies. They should have been relieved of it some time ago possibly while the Labour Government were in office. At any rate, the time has certainly now come when they should be given this relief, not to put money into the pockets of those drawing dividends but to strengthen the financial structure of building societies, who perform a real function in the State by assisting many thousands of small people, to whom their integrity and strength means a great deal. We have been shown beyond question—certainly, the Financial Secretary did not question it—that this tax lessens the stability of building societies. On that ground, if upon no other, the hon. Member should accede to the request that has been made this evening.

The hon. Member made a great point of the fact that building societies differed materially from savings banks. Indeed they do, but they are similar to savings banks in one particular—and it was the very one that the Financial Secretary stressed as showing the difference; they lend their surpluses to the Government. They have to invest them in trustee securities, and any organisation which, perforce, now has to invest its surplus in gilt-edged securities should have the good will and support of the Government, in view of the extent to which gilt-edged securities have suffered on the market.

I hope that when we make a decision upon the Clause hon. Members opposite will not rely upon what the Financial Secretary has said. if I judge the Committee aright, the feeling of hon. Members on both sides tonight is so strong that the Government must take account of it, and accept this Clause.

Mr. Sydney Silverman (Nelson and Colne)

They will not.

Mr. Glenvil Hall

Putting party affiliations aside—this is not a party issue; it is a question of doing justice—I hope, therefore, that we will all support the Clause in the Division Lobby.

Sir Lancelot Joynson - Hicks (Chichester)

Building societies have achieved a great many things in the history of this country, but they have achieved one thing this afternoon which was never expected, even by them, namely, the uniting of hon. Members on all benches together against the Government. The hon. Member for Brixton (Mr. Lipton) may say that building societies have had their day, and that we need a different sort of organisation, and the right hon. Member for Huyton (Mr. H. Wilson) may praise the building society system and say that he wants to see its principles extended in other spheres; nevertheless, we are all united in the one view that we want this Clause.

Hon. Members

Hear, hear.

Mr. H. Wilson

On a point of order. In view of that very clear demonstration, Sir William, and in the hope that some hon. Members will get to bed at some time tonight, and that we will meet the timetable which has been indicated for this Committee stage, is it not monstrous to debate this matter hour after hour, with the unanimity which exists among hon. Members, without the presence of the Chancellor of the Exchequer, who alone can give authority to the Financial Secretary to repair the dreadful speech that he made an hour or two ago?

The Deputy-Chairman (Major Sir William Anstruther-Gray)

I cannot accept that as a point or order. The Government are represented on the Front Bench by a representative of the Treasury.

Mr. Wilson

That is our complaint, Sir William. We are complaining about the answer we got from the Treasury representative.

Would you be prepared to accept the Motion, "That the Chairman do report Progress and ask leave to sit again," in order to give us a chance to hold up proceedings long enough to enable the Chancellor to be brought here? I am quite sure that we require the Chancellor's authority. I do not blame the Financial Secretary; he made the best speech available upon a shockingly bad brief, against which he should have made a much better fight in Treasury Chambers this morning. We must have the Chancellor here. I would, therefore, like to know whether you will accept the Motion.

Mr. S. Silverman

I hope that my right hon. Friend will not think it presumptuous on my part if I attempt to lend any additional arguments to the weighty one which he has already advanced to you, Sir William. This seems to me a classic example for the Committee reporting Progress. One has only had to listen to the debate as it has proceeded over the last hour or hour-and-a-half to see that the Committee is very largely of one mind, and that the argument has gone almost exclusively one way.

It is certain that the Financial Secretary, who has been acting with great courtesy and consideration in a difficult position, is unable himself to accede to the general desire of the Committee. I see that the Chancellor has now arrived, so perhaps his hon. Friend can do so after all. Perhaps there is no longer any necessity to move any Motion The Chancellor is here and the Committee has virtually made up its mind upon a series of arguments which are really quite incontrovertible and which the hon. Member never attempted to controvert. The real question is whether or not the Committee, on this Bill, is entitled to have its way.

7.15 p.m.

The Deputy-Chairman

Some problems solve themselves. I am not prepared to accept the Motion to report Progress.

Sir L. Joynson-Hicks

After that slight hiatus in my speech it is only fair, now that my right hon. Friend has joined us, that he should hear me say that I think that hon. Members from every party have already expressed themselves as being in favour of the Clause. There may be reasons for objecting to the drafting of the Clause, and there may be difficulty in introducing the whole of its provisions straight away, but even if there are any such valid reasons we nevertheless want—and we see no reason why we should not have—something in the form of the recommendation of the Royal Commission.

The hon. Member for Huddersfield, West (Mr. Wade) has put the arguments so very well and clearly that it is not necessary to go over them all again. On the face of it, this is a misnomer. How can we have a Profits Tax upon an organisation which is debarred from making any profits? We know how this matter arose. It started through the response made by building societies during the war, when they joined in the National Defence Contribution. That was a gesture of patriotism, made to help the country. It was one which the building societies were proud to make and which their members were proud to have the societies make on their behalf.

After the war, the National Defence Contribution was changed into a Profits Tax, and there was then no logical ground upon which that tax could be attached to building societies. It never should have been done, it was wrong to do it, and now we have an opportunity to right that wrong. If we cannot make good the past, we can at least prevent a wrong from being continued in the future.

There is one other thing I wish to say about the remarks of my hon. Friend the Financial Secretary on the question of the reserves. It has been made abundantly clear that for the time being this tax is being borne out of the reserves of the building societies. We know that the reserves are in Government securities almost exclusively. My hon. Friend did not answer the question put to him by the right hon. Member for Colne Valley (Mr. Glenvil Hall) about the reserves of building societies; but the answer is that although, at present, the reserves do not represent more than about 5 per cent. of the assets, in round figures, the societies probably have about 10 per cent. of their assets in gilt-edged stock and cash, and, therefore, they are supporters of the gilt-edged market.

They are investors in Government stock as much as, or, at any rate, parallel with the trustee banks. Therefore, in charging this tax as it has to be charged against the reserves, the Government are deliberately precluding the investment of reserves in gilt-edged stock, and consequently support of the gilt-edged market. They are frustrating their own policy of compulsory saving.

I feel exceedingly strongly that a case has been made out on the lines already mentioned for the acceptance of this Clause; or, if my right hon. Friend cannot give us the Clause in full, then at least for something which implements the recommendations of the Royal Commission.

The Chancellor of the Exchequer (Mr. Peter Thorneycroft)

It may be convenient if I say a word about this now. I apologise to my hon. Friends if I did not hear the discussion, although I think I can claim that during the debates on the Finance Bill as a whole I have been a fairly consistent attender. The Clause goes considerably wider than the recommendation of the Royal Commission and I am bound to say that in that wider form it could not in any circumstances be accepted. Nevertheless, there remains the narrower point whether the Profits Tax is charged on distribution as dealt with in the Commission's recommendation.

I see most formidable difficulties in dealing with this in isolation from other factors affecting the Profits Tax as a whole. It is probably linked with other recommendations and with the general question of Profits Tax. Nevertheless, I am quite prepared to look at the matter and to examine it between now and the Report stage. I make no promise that I can, in fact, get over the difficulties which I envisage and which I should like to consider further. But I will certainly examine the matter and study the arguments which have been advanced. I do not think that any great moral issue is involved. This is simply a point of what is right or wrong in taxation practice, as was stated in the Report of the Royal Commission.

I can make no promise, but I will examine this in the days ahead to see whether any satisfactory solution can be found.

Mr. H. Wilson

Not having been present to hear the debate—we understand why, because the right hon. Gentleman cannot be in the Chamber the whole of the time—the Chancellor is not in a position to say whether or not any moral issue is involved. Had he been able to hear the debate, he would have heard some powerful arguments advanced not only on economic but on social grounds, and I think in one or two respects even the word "moral" would have been appropriate. But the right hon. Gentleman can judge that when he reads the debate tomorrow.

We welcome the fact that so quickly after he entered the Chamber the right hon. Gentleman has thrown over the Financial Secretary—[HON. MEMBERS: "No."] Yes, quite clearly. Had the Financial Secretary said what the Chancellor has just said when he spoke about an hour or an hour-and-a-half ago, it would have avoided the necessity for a lot of speeches from hon. Members on both sides of the Committee, and I should not have felt disposed to say the exact words which I used when I followed the hon. Gentleman. We welcome the fact that the Chancellor has shown this degree of responsiveness to what is clearly the expressed will of hon. Members on both sides of the Committee.

I wish to be sure about what the right hon. Gentleman said—no doubt the deputy Chief Whip, who has arrived a little late in the day, is representing to the Chancellor the strong feeling on the other side of the Committee on the matter, on which, no doubt, he was fully briefed by his very competent Parliamentary Private Secretary before he even entered the Chamber. But I wish to be clear about this, I think I have understood it aright. The Chancellor will look at the question between now and the Report stage without committing himself. He says that he can see formidable difficulties about taking it in isolation, but from what he said I think there is an indication that we may hope—I do not ask the right hon. Gentleman to commit himself—to see something on the lines of the recommendation in paragraph 577 of the Royal Commission's Report rather than a straight acceptance of the Motion moved by the hon. Member for Huddersfield. West (Mr. Wade).

Since the Chancellor has already approached the matter with some degree of prejudice in what he says, perhaps I may remind him of what the Royal Commission actually reported, because this has a real bearing on his consideration of the matter between now and the Report stage, and because the Financial Secretary cannot see this divorced from the whole broad question of Profits Tax to which the Chancellor and his two predecessors have been giving unremitting attention for a matter of two years with, apparently, no results except bad ones. The Royal Commission did not suggest that this was tied up with the whole of the remainder of the question of Profits Tax, and if the Committee will bear with me, I should like to read this one sentence.

The Royal Commission said: We were impressed by the general resemblance of the interest on building societies' shares to the 'dividend' of industrial and provident societies. … Accordingly, we recommend that only the retained profit should be taxed: at the flat rate if our proposals are accepted, or at the undistributed rate if profits tax continues in its present form. In this we are proposing a change in the method of assessment of building societies under the present law, but we have tried and failed to find any principle that would account for or justify the basis of charge as it stands today. Only the Financial Secretary, apparently, is capable of finding that principle. Clearly, the Royal Commission felt this could be decided on its own because obviously there could be no final consideration of the question of Profits Tax without taking a decision one way or the other on the majority recommendations of the Royal Commission on amalgamating the two rates of Profit Tax. Obviously, any consideration must involve a decision about that, and, obviously, the Royal Commission knew that. It said that so far as building societies were concerned if there had been no decision, if Profits Tax continued in its present form, then its recommendation for building societies should be put into effect at the lower of the two rates in force for Profits Tax purposes.

7.30 p.m.

The Chancellor obviously had not given enough thought to the problem until he found this revolt on his hands this evening. I hope that when he is thinking this matter out between now and Report he will recognise that he can decide the matter without having to go into the whole broader question of Profits Tax. We count on him to come back on Report with a proposal to give effect to the Report of the Royal Commission. We would like him to go further and to accept the proposed Clause.

We must warn the right hon. Gentleman that we shall get a lot of support in the Committee on the matter and that if he does not come forward on Report with such a proposal we shall feel it our duty to table one and to have it debated, and to press the Government to allow enough time to see that it is debated on Report. The feeling expressed in all parts of the Committee makes it clear that there is a very strong demand for this reform, so it will not be possible, on Report, to postpone decision further.

Sir H. Butcher

I would express to my hon. Friend the Financial Secretary and my right hon. Friend the Chancellor of the Exchequer the appreciation felt by the Committee at the promise which has been given. We also appreciate the speed with which those two good friends of ours, the Financial Secretary and my right hon. Friend, have moved in this matter to meet the wishes of the Committee. I believe that a solution satisfactory to all will be secured.

May I conclude by saying that I hope that in matters of this kind the Treasury Ministers will not only listen to the advice of their officials, but also to the wise words of the Government Whips?

Mr. Wade

I thank the Chancellor of the Exchequer for the assurance that a new Clause will be introduced on Report. I am pleased that he has promised to consider this very serious matter between now and then. I hope he will appreciate that this is a very urgent and serious matter from the point of view of building societies. In view of what the right hon. Gentleman has said. I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.