HC Deb 07 July 1959 vol 608 cc1199-225

As from the beginning of August, nineteen hundred and fifty-nine, and in relation to any trade or business carried on by a society registered under the Industrial and Provident Societies Acts, 1893 to 1954, or under the Industrial and Provident Societies Acts (Northern Ireland), 1893 to 1955, subsection (1) of section twenty-five of the Finance Act, 1958 (which provides for profits tax to be charged at the rate of ten per cent.), shall have effect with the substitution of the word "three" for the word "ten".—[Mr. Oram.]

Brought up, and read the First time.

Mr. A. E. Oram (East Ham, South)

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

Mr. Speaker

This Clause can also be discussed with the Clause (Exemption of building societies from charge to profits tax) standing in the names of the hon. Member for Huddersfield, West (Mr. Wade) and other hon. Members, although that Clause has not been selected.

Mr. Oram

We have tabled this Clause to give the Chancellor an opportunity of putting right what we consider to have been a wrong he did to the Cooperative movement in his Budget of last year. In that Budget he brought about changes in the application of Profits Tax. The rates had previously been 30 per cent. on distributed profits and 3 per cent. on undistributed profits. The right hon. Gentleman merged those two rates into a new rate of 10 per cent. That had a depressing effect on cooperative societies. It relieved the payers of Profits Tax generally of about £16 million of Profits Tax, but increased by £1¾ million the burden borne by cooperative societies. That seemed particularly onerous and ironical to us in the Co-operative movement, because the Chancellor in introducing this part of his Budget last year said that it was not his intention to gain more revenue from that tax change. The right hon. Gentleman has certainly been gaining over the past year a considerable increase in Profits Tax from co-operative societies.

Hon. Members may wonder why the effect has been different on co-operative societies as compared with other payers of Profits Tax. The reason is that, under the previous scheme, with the two rates of Profits Tax co-operative societies were charged exclusively at the lower rate of 3 per cent. for undistributed profits, because under that system it was recognised that a co-operative society is a two-fold institution. It is a trading institution seeking to pursue trade through its shops and factories. It is also, and to a very large extent, a small savings or thrift institution. It was because of that dual nature of a co-operative society that the previous arrangement had been arrived at.

What the Chancellor did last year was to abandon any recognition of the different financial nature of a co-operative society compared with an ordinary company, and he charged both kinds of organisation according to the same formula of Profits Tax. The right hon. Gentleman claimed last year—I have no doubt that he will again claim this evening—that at the same time as he did that he made what he called a concession to co-operative societies. He claimed that, by allowing them to deduct that part of their profits which they pay as interest on their shares as an expense against Profits Tax, he was giving them what he called a concession. One of the recommendations of the Royal Commission on the Taxation of Profits and Income was that that allowance should be made were the two rates to be unified.

My point is that the Royal Commission did not put forward that proposal in any sense as a concession to co-operative societies. In that part of its Report, the Commission made the point that cooperative shares are withdrawable on demand and, because of that, are always at par. They are not bought and sold on the Stock Exchange. Whenever a shareholder withdraws a £1 share it is always worth £1.

The Commission said that what are called co-operative shares are, in fact, closely comparable with the loan capital in an ordinary company. The loan capital in an ordinary company has been allowable as an expense against Profits Tax ever since the differential rate of that tax was introduced in, I think, 1947. Therefore, this provision brought in by the Chancellor last year, far from being a concession, was really only a bit of belated justice to co-operative societies in respect of their share capital.

During the Committee stage of the Finance Bill we debated small savings within co-operative societies, and an that occasion a number of my hon. Friends explained at considerable length the difference between their financing and that of ordinary companies. I have already made the point that the share capital of the societies is withdrawable and is therefore always at par, but there are many other differences.

A co-operative member is prevented by law from holding more than £500 worth of shares in a society. The Registrar of Friendly Societies requires hat the societies shall pay only a low fixed interest on their shares. There is the provision that voting power is not in accordance with the amount of capital held but in accordance with the principle of one person having one vote. I could list quite a number of important differences between the two kinds of trading organisations.

We are not complaining about these provisions of the Industrial and Provident Societies Acts. We welcome them. They are the very basis of our democratic method of trading. We pride ourselves on having 12 million shareholders and that not one of those shareholders has a very large holding. In fact, the average is only some £20 per member.

On the other hand, when it comes to providing capital for trading undertakings, these provisions which, in another sense we welcome, turn out to be a handicap, and mean that those methods of finance that are open to public companies—by getting subscriptions on the Stock Exchange and so on—are not open to the societies. We would not wish that they should be, but it means that they have to depend and will always need to depend very much on the amount they are able to plough back from their profits in any trading period.

One of our strongest objections to what the Chancellor did last year is that that ploughing-back operation has been made all the more difficult for society management committees. Indeed, by raising the rate of tax from 3 per cent. to 10 per cent. the right hon. Gentleman has made that operation three times more difficult.

I would remind the right hon. Gentleman, as I reminded him last year, that it is not just a question of how this tax affects co-operative consumer societies. It very seriously affects agricultural cooperative societies. They, too, have great difficulty in getting adequate capital, and they complain that this Profits Tax provision hits them very hard and prevents them ploughing back as much as they would wish.

I urge the Chancellor, therefore, to have second thoughts now, and to recognise, as he failed to recognise last year, that a co-operative society is a financial and social undertaking completely different from an ordinary company. If he recognises that, then he should also logically recognise that we cannot apply the same tax formula to two such different kinds of institution and expect justice to emerge as the end result. It is on those grounds that I believe that justice can be done only by restoring the position, as this new Clause seeks to do, to the situation existing before last year's Budget.

7.45 p.m.

Mr. Arthur Palmer (Cleveland)

I beg to second the Motion.

I agree with my hon. Friend the Member for East Ham, South (Mr. Oram) that it gives the Chancellor an opportunity to put right what many of us think was an injustice to the Co-operative movement, perhaps an unintentional one, brought about by the changes made in the taxation of profits in last year's Budget, and although our arguments are not exactly new they are none the less sound on that account.

In case it is thought that this is some kind of rather special pleading on behalf of a perhaps narrow section of the community, I would point out that the Cooperative movement is a very widely-based, far-flung and democratic organisation. Further, when I read from time to time the speeches made by hon. Members opposite in their constituencies, I find that they often say that they give full support to the ideas and ideals of co-operation.

However, in spite of the service in terms of words that is often paid to the principles of co-operation by people of all political complexions, I agree with my hon. Friend that there seems a lack of appreciation of the fact that the co-operative society is, in its nature, a very different kind of economic unit from a normal trading company. But, in asking the Chancellor to think again, I repeat that we are going far beyond special pleading on behalf of a particular economic interest, and are speaking on behalf of a vast number of British men and women and their families.

I am no financier. I am a simple engineer who, perhaps, does not always fully understand these things, but with an ordinary-style trading company I suggest there is bound to be a quite legitimate but distinct division between the owners or shareholders on the one hand and the consumers to whom the products are sold on the other. That is a quite natural and understandable division. They are not the same people.

Therefore, if profits are made by the normal type of trading company, they can be distributed either as dividends to the shareholders or retained, as they often are—and the one practice is not exclusive of the other—as financial assets of the business. But if these courses are pursued with wisdom, the results are bound to be advantageous to the shareholders and, in the majority of cases, will tend to increase the value of the holdings. Therefore, the case for taxing distributed and undistributed profits on the same basis may be at least logical if not always sensible in the case of an ordinary trading company, since in each case one is dealing with wealth which represents an appreciation in value to the individuals concerned.

But with a co-operative society we are dealing with a horse of a very different colour. A co-operative society exists not for the purpose of creating wealth for individuals but for mutual trading on an economic basis, and value comes to the member of the co-operative society only in direct proportion to his active participation in buying and consuming from the society. That is a very real difference. As my hon. Friend the Member for East Ham, South said, the money paid out in dividends on purchases from co-operative societies, and on money retained in the society for that matter, does not add anything to the share values because the member of the society cannot sell his share at an enhanced value. He can only put money in or draw it out. Therefore, it seems to many of us that it is a little hard that co-operative societies should be treated now for the purpose of taxation on their undistributed surplus on the same basis as ordinary commercial companies.

The proposed new Clause—and this is my final and sincere plea to the Chancellor—seeks, in the interest of justice, and in order to encourage a very desirable form of economic enterprise, to treat the co-operative societies for taxation differently because they are in fact different. I hope he will agree to adopt it.

Mr. I. J. Pitman (Bath)

I believe that I shall be in order in supporting not only this proposed new Clause relating to the Industrial and Provident Societies Acts but also the proposed new Clause (Exemption of building societies from charge to profits tax). One of the reasons why I plead strongly with my right hon. Friend the Chancellor of the Exchequer in this respect is that, very rightly, he has been reducing Profits Tax and removing the discrimination between tax on distributed profits and tax on undistributed profits; and on that basis, of reducing what I hold to be a bad tax, I hope that he will support the elimina- tion of that tax on co-operative societies and on building societies.

What the hon. Member for East Ham, South (Mr. Oram) has said on behalf of co-operative societies is so very true of building societies also. They really need to use their profits to build up their expansion and stability. The right hon. Member for Colne Valley (Mr. Glenvil Hall) and the hon. Member for Huddersfield, West (Mr. Wade) will be giving in great detail the difficulties which the building societies, with the co-operative societies, find in achieving the stability and expansion for which this House looks to them. If we wish to tax institutions it is much better to tax them at a higher rate of Income Tax qua institution than to make this ridiculous arrangement of discriminating between one kind of profit that is taxed and another kind of profit which is exempt from tax altogether.

The hon. Member for East Ham, South pointed out that loan capital is exempt in the case of the ordinary company. Why should it be exempt? What possible argument is there for saying of two people who are interested in the profits of a company and who have put up the capital for the development of that company, the one who should be exempt from tax is the one who has first call on those profits, namely, the lender of debenture money, the man who provides the building and charges the rent for it, who provides loan capital and so on, and that the people upon whom the tax should be levied are those who take the initiative and the risk, the entrepreneurs who are developing the business? It is a cockeyed and topsy-turvy arrangement that because, for the purposes of the Companies Act and for the protection of the creditors, an auditor is forced to draw a line between profit which ranks ahead of the interest to the creditors and profit which ranks behind the interest of the creditors, we should make that irrelevant differentiation the basis of taxation.

The whole structure of Profits Tax is based upon that wholly false premise, and in consequence we get a situation in which, shall we say, a very rich millionaire who is drawing out his money in debenture interest and in note interest, does not even indirectly pay a penny of this institutional taxation, whereas in a profit-sharing scheme the people in the works who are holding the shares which rank after the creditors are taxed.

If that is in essence a bad tax, why cannot we start to remove that tax for the benefit of the building societies and the co-operative societies which face this very real problem? By all means, if it is essential to introduce institutional taxation and to include co-operative societies and building societies as institutions trading for profit, we can, if the House so agrees, bring them in, but let us, at any rate, take the opportunity of these two new Clauses to found the taxation of institutions upon a sound basis. That can be done only if the Chancellor accepts these two Clauses and gives these two worthy bodies a chance of survival.

Mr. Donald Wade (Huddersfield, West)

Mr. Speaker has indicated that the proposed new Clause relating to the exemption of building societies from charge to Profits Tax may be discussed with this new Clause, and I should like to follow the hon. Member for Bath (Mr. Pitman) in referring to the subject matter of that Clause, which is supported by a number of right hon. and hon. Members in all parties.

The object of the Clause is to provide for the total exemption of building societies from Profits Tax on their surpluses. I have raised this subject before with partial success, but not to the extent of achieving the abolition of Profits Tax, and I can only hope that persistence will eventually triumph. I certainly support the observations of the hon. Member for Bath.

In view of the fact that these two Clauses are being taken together, it would be as well to point out that the problems of the building societies and the co-operative societies are not entirely the same. There are some distinctions which must be made. I do not wish to belittle the importance of the case that has been made for reducing the rate of Profits Tax on bodies such as the co-operative societies, but I think it should be made clear that building societies come into a special class of their own. This should be mentioned to avoid confusion and also for the reason that, whatever decision may be reached as to the liability of budding societies to Profits Tax, such a decision could not be regarded as creating a precedent in respect of other claims for relief. I know that that point is one which sometimes affects the Chancellor's mind.

8.0 p.m.

In previous debates, the different nature of building societies has always been recognised and on more than one occasion the observations of the late Lord Simon, then Sir John Simon, speaking on this subject in 1937, have been quoted. His remarks have gained almost the authority of a judicial decision. The particular statement I have in mind reads: 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 Corporation Profits Tax and from the first edition of the National Defence Contribution."—[Official Report. 14th July, 1937; Vol. 326, c. 1298.] That building societies should be regarded as being in a class on their own was acknowledged by the right hon. Member for Colne Valley (Mr. Glenvil Hall) on 16th July, 1947, when speaking in his capacity as Financial Secretary to the Treasury. He stressed the distinction between building societies and cooperative societies. I hope that those who are advocating the case for the cooperative societies will not misunderstand me. I am quite willing to support their case, but I think it only fair to make the distinction.

Other comparisons between building societies and other bodies have been attempted. Last year, when the subject was debated, the Paymaster-General contended that building societies were comparable with investment trusts. He appeared to use this as one argument to justify the continued imposition of the tax on building societies. This contention should not be allowed to go unchallenged. It is not really a fair comparison, and it would be very unfortunate if the decision of the Government on this subject to continue the imposition of Profits Tax on building societies were to be based on a misapprehension.

As I understand, an investment trust may take the form either of a joint stock company or a unit trust. In both cases, those responsible endeavour to make profits, and in both cases there are persons to whom such profits may be distributed. In the joint stock company, there is the equity shareholder. In the unit trust, there is the unit holder who, in many respects, is in a position similar to that of the equity shareholder. In both cases, there are persons who may receive not only profits in the form of dividends but also capital gains.

In building societies, the circumstances are entirely different. There is no one who may receive either dividends or capital gains. Unfortunately, the issue is sometimes confused by likening depositors in a building society to ordinary shareholders. There is, of course a fundamental difference. The Chancellor, in altering the method of calculating liability to Profits Tax last year, recognised this fundamental difference. Interest paid by a building society is now rightly deducted before arriving at the figure upon which Profits Tax is calculated, but the question at issue, on which the Chancellor must still be challenged, is whether any Profits Tax should be charged at all.

In the debate on 2nd July, 1957, I suggested that building societies had three characteristics all of which were relevant in considering whether it was right to impose upon them this liability to Profits Tax. In the first place, unlike the co-operative societies, a building society is not allowed to engage in trading activities, as Sir John Simon, as he then was, pointed out. A building society does not compete with commercial concerns. It is not permitted to sell goods or property except in its position as mortgagee. Building societies are debarred by Statute, by the Act of 1874 and subsequent Acts, from trade or commerce. It cannot, therefore, be argued that it would be inequitable to grant relief to building societies while continuing to impose the tax on trading companies.

Secondly, building societies play an important part in the savings movement and can rightly be regarded as a special form of savings organisation. Thirdly, as I have already said, it is not the function of a building society to make profits. In a building society's balance sheet, one finds no record of profits and no equity shareholders to whom such profits could be distributed. The first and third characteristics I have mentioned are all-important. It would be quite logical to remove the tax since there are no profits. It would not create any injustice to others because there are no others in a similar position to that of the building societies.

A building society, of course, may have a surplus, but this is not the same thing as profits. It is the duty of a society to use any surplus to increase its reserves and thus enable it to expand. Indeed, I should like to see more and more people able to borrow from building societies, as well as from other sources, to buy their own homes. I would rather see that than see building societies restricted and, as a result, having to ration the loans they are able to grant. We have seen that happening from time to time since the war. It is certainly illogical for the Government to lend money to the building societies to help them to expand while, at the same time, imposing a tax which has the indirect effect of restricting their expansion.

As I have observed already, the only question is whether or not the Chancellor should take part of these potential reserves as if they were profits. Since building societies do not make profits, the societies have always considered it unfair that they should be subject to this tax. That is their main ground of objection to it. Further, there is the effect of the tax on reserves. This is all the more important now that building societies have been granted trustee status. In the House Purchase and Housing Act of this year the Government have recognised the importance of reserves and the need for retaining an adequate reserve ratio. The Taxation Committee of the Building Societies Association and the Council consider that the ratio of reserves to total assets should not be allowed to fall any further. I agree with them in that.

The figures which have been supplied to me indicate that the change which the Chancellor made a year ago in the method of calculating liability to Profits Tax has not led to any increase in the reserve ratio. It may be that if the rate of Profits Tax charged on building societies had been retained at the concessional rate of 2 per cent. instead of being raised to 10 per cent. the reserve ratio might have been improved. But that, of course, is a hypothetical question because it was, in fact, raised to 10 per cent.

I do not wish to minimise the relief derived from the change which the Chancellor made in the method of calculating liability to tax, but it still remains true that substantial sums are being collected as a result of this somewhat anomalous Profits Tax. For example, in the year 1955–56, the amount paid in Profits Tax by building societies was £1½ million. That was under the old method of calculation. For the year 1958–59, the estimated figure, under the new method of calculation, is £1,700,000, which is rather more. It is true, of course, that it would be very much more under the old method of calculation. I give the figures merely to show by the comparison that, even under the new method, the total amount is rising.

It may be contended that, whatever the merits of the case, the Treasury obtains this revenue and it does not wish to lose it. In other words, the Chancellor may say that he collects this money and is jolly well going to keep it. That, at any rate, is logical. The tax itself is quite illogical. I would point out that it is only fair, I think, to recollect that it was largely due to fortuitous circumstances many years ago that the building societies were caught up in the Profits Tax net and furthermore that the money which the Treasury extract in this way would, but for this tax, be invested in Government securities by the building societies as part of their reserves. I should have thought that that was something which the Government should encourage.

I think, therefore, that the conventional arguments about not losing revenue scarcely apply in this case. I submit that from every angle there seems to be a very strong case for exempting the building societies altogether from this tax. I hope that before the debate is over the Chancellor will see fit to remove what the building societies have always regarded as an unjust anomaly.

8.15 p.m.

Mr. Frank Beswick (Uxbridge)

I want to return briefly to the Clause which stands in my name and the names of my hon. Friends. We are grateful for the incidental support which has been given to us by the hon. Members for Bath (Mr. Pitman) and Huddersfield, West (Mr. Wade), but I would, with respect to both hon. Members, suggest that the case for the societies registered under the Industrial and Provident Society Act is even stronger than that of the building societies.

I agree with the hon. Member for Huddersfield, West that there are some differences between the building societies and the co-operative societies. I suggest to him that one difference is that the co-operative societies are more democratically controlled. There is more member participation in the co-operative societies than in the building societies. There is an exercise in social responsibility with the Co-operative movement which is greater even than with the building societies.

I think that a case can be made on social grounds for the new Clause which my hon. Friend the Member for East Ham, South (Mr. Oram) moved so well. Both he and my hon. Friend the Member for Cleveland (Mr. Palmer) stated the facts extremely well. The figures are not in dispute. The change in the Finance Act about which we complain had the effect of relieving companies registered under the Companies Act of about £16 million a year, then imposed an extra burden on the co-operative societies of about £1.3 million, and even the building societies, about which the hon. Member for Huddersfield, West spoke, enjoyed a relief of about £1 million as a result of the change in last year's Finance Act.

My case is that when we are contemplating further reliefs, when the relief to companies registered under the Companies Act will be even greater this year, then we ought to be in a position not to penalise the Co-operative movement, but, at any rate, to return to the status quo. I agree that the experience that we have had since the change in the Act of last year does to some extent justify the flat rate of Profits Tax. It has become more and more apparent that the money ploughed back as undistributed profits in the ordinary company has had the effect of pushing up share values. It has increased capital values.

There have been tax-free profits and capital gains which have resulted, to some extent, from the favourable rate of Profits Tax previously applied to undistributed profits. But, as my hon. Friend the Member for East Ham, South said, there is no such thing as a capital gain in the Co-operative movement. There is no possibility of share appreciation. The case, therefore, for special treatment with regard to tax on surpluses or profits, call it what we will, is made out on that account.

The further point which I want to put to the Chancellor of the Exchequer is this. The Chancellor, for whom I have very great respect, always tries, it seems to me, to put before the British public an image of the sort of man he wishes to see and encourage. He tries to portray and create an image of a sturdy, independent and thrifty man. That is the type of individual we are given to understand the Chancellor wishes to encourage in the society which he wants to create. But what is the reality behind the image? He has not encouraged the sturdy, independent and thrifty man. It is the "wise guy", the "Smart Alec", the speculator, the clever operator in the City who has benefited from the changes in the Finance Bill. I do not want to get on to party political grounds. There is no reason why we should debate this matter as a party issue, because there are co-operative societies which in the past have been supported and today are supported by people of all political persuasions.

Even in that land of free enterprise, the capitalist heaven of the United States, the Co-operative movement is forging ahead. The co-operative societies there, especially in the farming areas of the Middle West, have resulted in the elimination of the middle man and of the credit usurers. They have enabled the farmers to bring down the cost of living and to give to the consumer a fairer price. I remember my attention being called to a fertiliser mill in the Middle West. Prices of fertilisers had been brought down by the efforts of the farmers who had banded together in a co-operative society. When passing this fertiliser mill, I saw a notice which read, "Farmers have paid for many mills. This one they really own."

That is the sort of thing that the Chancellor says he wants to encourage, that kind of self-help among people cooperating together in a way which is not only financially and economically advantageous but is also helpful to the creation of the character and spirit which we want to see in this country.

Is the Chancellor satisfied with the emphasis which he has placed on the Finance Bill? He has given all the help and encouragement to the type of individual that I should have thought he would not wish to encourage. The other day, my right hon. Friend the Member for Huyton (Mr. H. Wilson) went through a list of the people who have gained tax-free—

Mr. Deputy-Speaker (Sir Gordon Touche)

Order. The hon. Member is getting away from the new Clause.

Mr. Beswick

I can see why you think that, Mr. Deputy-Speaker, but I wish to emphasise that, although there are these hard facts and figures which have been emphasised by my hon. Friends, there is another side of the case which I am trying to put. There is a social side as well as an economic side, and I should have thought that it was the social side, in particular, to which the Chancellor should listen. I did not propose to pursue the other point at great length. I simply proposed to say to the right hon. Gentleman that, whereas it is undeniable that he has encouraged individuals in tax-free gains, he has done nothing for the movement that has helped to create this fine and valuable spirit in Britain. He has done nothing to help the Co-operative movement.

There have been other Clauses before the House in which the right hon. Gentleman has discriminated against the Cooperative movement. I therefore ask him to look at this proposal with the greatest sympathy that he can muster to see whether he can accept it, not only as a help economically to the nation, but also as a help in the creation of something which is probably even better than economic values—something which will assist the moral fibre of this nation, to which I know the right hon. Gentleman gives so much interest.

Mr. Amory

We have had an excellent debate on this subject. I disagree with practically nothing that any hon. Member has said, except the conclusions that some hon. Gentlemen have reached. I do not resent at all what the hon. Member for Uxbridge (Mr. Beswick) has said, although he has, perhaps, gone a little far and not been quite fair to the proposals I have made in the Budget. The reduction in the standard rate of Income Tax is of benefit to the Co-operative movement and to the building societies, too—in fact, to everybody.

In reply to the hon. Member for Cleveland (Mr. Palmer), I have no bricks to throw against the Co-operative movement or the building societies. The hon. Member for Uxbridge is quite right. It is not a party matter. The Co-operative movement spreads widely throughout our national life and in all its manifestations it makes a sound contribution to our economy, as it does to the economy of other countries. I have, therefore, no bricks whatever to throw against the Co-operative movement or the building societies.

The new Clause, moved by the hon. Member for East Ham, South (Mr. Oram), seeks to give co-operative societies relief from Profits Tax by reducing the rate paid by them from the current rate of 10 per cent. to 3 per cent. As the hon. Member said, the Clause raises issues with which hon. Members will be familiar and which we discussed fairly fully on last year's Finance Bill.

Reference has been made to the new Clause in the name of the hon. Member for Huddersfield, West (Mr. Wade) proposing that building societies should be completely exempted from the tax. I will refer to that presently. Part IV of the Finance Act, 1958, gave effect to the recommendations of the Royal Commission of the Taxation of Profits and Income for reforming the Profits Tax. That was the main reason why I proposed those reforms last year. I was convinced by the arguments of the Royal Commission.

The differential scheme of tax which had been in force between 1947 and last year was abolished and for chargeable periods ending after the beginning of April, 1958, the profits of companies and similar bodies were charged at the flat rate of 10 per cent. At the same time, effect was given by Section 26 (2) of the Act to the recommendation of the Royal Commission in regard to Co-operative societies. They were allowed a deduction in computing their profits for tax purposes, in respect of the interest paid on the shares, as the hon. Member for East Ham, South has said. The balance of the profits of societies was made subject to tax at the new uniform rate of 10 per cent. That is what is current now.

Under the differential scheme previously in force, co-operative societies were charged a tax of 3 per cent. on their profits without any deduction for the share interest which they paid. The present proposal would reduce the rate of tax from 10 per cent. to 3 per cent., but the societies would continue to be entitled to the deduction in respect of share interest which was allowed by last year's Finance Act.

I am well aware that if the supporters of the new Clause had sought to restore fully the position that obtained before last year's Finance Act, their proposal might well have been ruled out of order. Addressing my remarks to the Clause as it stands, however, it would not only put co-operative societies in a privileged position by comparison with other trading concerns, but it would, at the same time, give them more favourable treatment than they have ever enjoyed before. Hon. Members will not be surprised, therefore, to hear that I must regard that as an unacceptable proposition.

Hon. Members have been at pains to point out the differences between cooperative societies and other trading concerns. My reply must be that to the extent that that is so—and I agree that there are differences—the fact is already recognised by the existing law. It is true, as the Royal Commission said in relation to dividends on members' shares, that the distinction between a member and a mere creditor by deposit is a very fine one ". It is for that reason that societies are now allowed to deduct share interest in computing their profits for Profits Tax purposes. It is only the balance of their profits which are put to reserve that is charged to the tax and it would not be reasonable for one class of trader to be charged on such profits at 3 per cent. while others are charged at 10 per cent. when the two types of trader may well be competing against one another.

My whole aim in last year's reforms was, as far as possible, to get cooperative societies treated fairly relative to the other kinds of concerns with which they might be trading in competition. That is a reasonable proposition to put forward and a reasonable position to try to reach.

It has been suggested that the basis on which co-operative societies were chargeable before the flat rate was introduced was reasonable and that they ought not to be subjected to increased liability as a result of last year's reform. I own that I was disappointed when I found that it worked out that way. I admit that the reform which I proposed last year in the Profits Tax was a rough and ready one and that some people gained and some suffered. To obtain the position that I felt it right to obtain, however, I could not find any way in which those unevennesses in the effects could be evened out. I knew last year that it would work out disadvantageously and the figure which has been quoted of the extent—£1.3 million—is right. I would not, however, find a way in which that could be avoided while still aiming at the position in which there would be fair treatment between the co-operative societies and other traders of the same kind with whom they compete.

Mr. Beswick

The Chancellor has said that he could not find a way to remove this penalty of £1.3 million. Surely, if the tax were levied at the lower rate, it would do away with that effect.

Mr. Amory

I qualified my remarks by stressing the need for fairness to the other concerns with whom the cooperative societies would be competing. The same thing happened between one company and another. There were unevennesses of this kind, and one company had to pay more and another less according to their dividend distribution policy.

Mr. Oram

While it may be true that some companies were better off and some worse off, is it not true that all cooperative societies were distinctly worse off? In fact, they found themselves paying something like twice the amount of Profits Tax which they had previously paid.

Mr. Amory

I understand that was not literally so. Most co-operative societies found themselves better off, but some who had to pay more found themselves worse off. But I do not think that I can substantiate that in detail by quoting cases. If the hon. Gentleman thinks it is not so, perhaps he will write and take me up on that, and we will see. But that is my impression.

I think that under the differentials scheme which obtained co-operative societies were then probably treated about as fairly as could be worked out, but when once we abolished the differential scheme and went to a uniform scheme then, I think, the treatment which was proposed last year was in fact the fair treatment, if we were to treat them on the same basis as other concerns.

8.30 p.m.

Building societies are charged Profits Tax now at 10 per cent.—I was going to say on their retained profits, but I will now say on their surplus, in view of what the hon. Member for Huddersfield, West said—after deducting the dividends they put on their shares as well as on the deposit interest they pay, and also any Income Tax they pay in respect of such dividends and interest. Again, that treatment follows the recommendations of the Royal Commission, and it was fully considered last year. It worked the other way with the building societies and they were rather better off, not worse off, but that was not premeditated by me. That was the way it worked out if we gave them uniform treatment.

I will not follow the point made by my hon. Friend the Member for Bath (Mr. Pitman) which was on the rather wider question of Profits Tax, except to agree with him that it is largely, for good or ill, a tax on the equities of a business.

I have looked at the matter again. I fully acknowledge the part which the cooperative societies and the building societies play. After considering it again I can see no reason for departing from the view which all my predecessors have taken that the building societies should be subject to the tax like other companies and societies.

As regards the new Clause relating to the co-operative societies, my conclusion again is that given the existence of a flat rate of Profits Tax the present arrangements for charging—

Mr. Palmer

The right hon. Gentleman seems to be admitting that some kind of injustice was done to the co-operative societies. That is the general drift of his argument. If he is explaining our argument away on the ground that it would swing the pendulum too much in favour of the co-operative societies, then if 3 per cent. were too much of a swing, would it not be possible to have a percentage which would be just about right?

Mr. Amory

I am afraid I have not explained myself well, if that is the effect my words have had on the hon. Gentleman. I do not feel that there is any injustice in this system. I believe, on the contrary, that the proposals we made last year give fair treatment and justice between the co-operative societies and the companies and other concerns with which they compete. I do not think there is really any injustice, although there has been an additional burden on them. I do not dispute that, but that is not the same thing as doing injustice. Not at all. If it were, I should have a great many injustices on my conscience.

In conclusion, I will sum up by saying that, after looking into it, neither in the case of the building societies nor of the co-operative societies can I find anything unjust, unreasonable or unfair in the treatment which they were given last year, and I believe that the case for the reduction to 3 per cent. has not really been made out.

Mr. H. Wilson

It has been an interesting and, I think, a good-tempered debate. I think all of us were a little surprised at the drift of the Chancellor's concluding remarks. After admitting that last year he was trying to bring some relief in his tax changes, he admitted that, so far from their getting any relief, they have had to bear an additional burden. He then said that he did not think that it was an injustice but that that was just an additional burden for them to carry. Having already shown by the strength of his argument that he considered the burden to be unjust—

Mr. Amory

Oh, no.

Mr. Wilson

The Chancellor cannot make his speech again.

Mr. Amory

With the permission of the House.

Mr. Wilson

I am glad the right hon. Gentleman has got it right this time.

I do not want to go over the main arguments we had last year when the Chancellor made what many of us considered to be the highly retrograde step of unifying two rates of Profits Tax. At that time we warned him what the effect would be. We said that it would encourage, and not only encourage but reward, those companies which have been making fairly lavish dividend distributions against the wishes of successive Chancellors of the Exchequer while, at the same time, it would penalise all the private enterprise companies which had shown dividend restraint at the request of successive Chancellors of the Exchequer. We pointed out that that would be the effect. We said that this would reward the brewery companies, the property companies and the rest. That is exactly what has happened. This Chancellor, like many of his predecessors, has always had a soft spot for the brewery companies, the property companies and those whose services to the nation are a great deal less than some of our more productive organisations, and organisations covered in the Clause which we are now debating.

Our forecast of this particular change last year was that it would, of course, give a new incentive to increased dividend distribution, and that has certainly happened. A great deal of the boom on the Stock Exchange over the past few months has been caused by the Chancellor's action a year ago. It has not been that industry has been more profitable. We have had a long run of company statements which show that they made less profits. Many companies have been able to distribute more in dividends despite lower profits. That was predictable, and we predicted it, as a result of what the Chancellor set out to do last year.

The third development which we forecast was, of course, the great injustice that would be done to a whole range of undertakings which existed for service rather than for profit. I should be out of order to repeat all that we warned the Chancellor about in relation to the Mersey Tunnel fund, the local authorities, some of the charitable institutions and some of the institutions associated with various Nonconformist Churches. I think that the hon. Member for Huddersfield, West (Mr. Wade) had something to say about that last year.

I cannot go into all that on the rather narrow Clause that we are now discussing, but we issued a very strong warning as to what would be the effect on the co-operative societies. That our warnings were justified has been made clear by the Chancellor tonight. Even though he does not think this a wanton additional burden on these abodes and temples of thrift, he does not think that it is an injustice. This has just happened. He has gone ahead regardless of the warnings given, and he does not attempt to answer any of the arguments. He says, "I have listened to all the arguments and, on balance, I think this is right". That is typical of the Chancellor's replies and the only one that we get from him. He never attempts to deal with the points raised on the Finance Bill.

He says, "I have listened to all that you have to say and I have every sympathy with what you say, but I do not agree with the conclusion, and I am not going to do it." If he is really shaken by the arguments—if one can imagine the Chancellor being shaken by anything—he says, "I have considered it all, but, on balance, I think that what I have said was right." Is that the sort of argument to use in the House of Commons? He should tell us why he thought it right and why he considers the arguments put forward by my hon. Friends, with very much persuasiveness and eloquence, to be wrong. He has not done that tonight and he did not do it a year ago in relation to the co-operative societies.

I do not want to repeat the convincing arguments made by the mover and seconder of the Clause and by my hon. Friend the Member for Uxbridge (Mr. Beswick), who supported it, but I would draw attention to the remarkable speech of the hon. Member for Bath (Mr. Pitman) who, I thought, made a very powerful plea both on behalf of the co-operative societies and the building societies and dealt with many of the anomalies—the Chancellor would not consider them injustices—of the present

system of Profits Tax as between loan capital, debenture and equity shares and the rest. Without repeating what has been said, I want to underline one point that has been made for the co-operative societies which are very different from any private enterprise institutions

There was not room in the debate we had a week ago on take-over bids and some of the abuses of Profits Tax to include the co-operative societies, because one does not get the sort of abuse that we were then debating. Shares in co-operative societies are not traded on the Stock Exchange. They are not capable of capital gains. The same is true of the building societies, as I have said year after year at this Dispatch Box. Shares are bought from and sold back to the building society or the co-operative society at their par value and that makes a big difference. If there is a case for a Profits Tax in its present form it is that to some extent it takes back for society some of the profits made out of society, and this underlines the need for a fair system of tax.

On all these grounds, since we have no capital gains tax and the co-operative societies have to pay 10 per cent. Profits Tax in exactly the same way as a company in which large capital gains are possible, we consider the Chancellor, to coin a phrase, has "failed the nation" in the reply given to us tonight. The penalty for that he will find in due course. The Amendment is a token of the much broader argument we pursued last year, but it is one to which we attach great importance and about which we feel strongly. We are not prepared to accept the Chancellor's reply. We share his sense of injustice, even if he recoils from the use of the word, and we propose to express his and our sense of injustice in the Division Lobby.

Question put, That the Clause be read a Second time:—

The House divided: Ayes 194, Noes 217.

Division No. 162.] AYES [8.44 p.m.
Abse, Leo Bevan, Rt. Hon. A. (Ebbw Vale) Boyd, T. C.
Ainsley, J. W. Blackburn, F. Braddock, Mrs. Elizabeth
Albu, A. H. Blenkinsop, A. Brockway, A. F.
Allaun, Frank (Salford, E.) Blyton, W. R. Broughton, Dr. A. D. D.
Bacon, Miss Alice Boardman, H. Brown, Thomas (Ince)
Balfour, A. Bottomley, Rt. Hon. A. G. Burke, W. A.
Bence, C. R. (Dunbartonshire, E.) Bowden, H. W. (Leicester, S. W.) Burton, Miss F. E.
Benson, Sir George Bowen, E. R. (Cardigan) Butler, Herbert (Hackney, C.)
Beswick, Frank Bowles, F. G. Butler, Mrs. Joyce (Wood Green)
Carmichael, J. Irving, Sydney (Dartford) Roberts, Goronwy (Caernarvon)
Castle, Mrs. B. A. Janner, B. Robinson, Kenneth (St. Pancras, N.)
Champion, A. J. Jay, Rt. Hon. D. P. T Ross, William
Chapman, W. D. Johnson, James (Rugby) Royle, C.
Chetwynd, G. R. Jones, Rt. Hon. A. Creech (Wakefield) Short, E. W.
Cliff, Michael Jones, Jack (Rotherham) Silverman, Julius (Aston)
Clunie, J. Jones, J. Idwal (Wrexham) Silverman, Sydney (Nelson)
Coldrick, W. Key, Rt. Hon. C. W. Skeffington, A. M.
Corbet, Mrs. Freda King, Dr. H. M. Slater, Mrs. H. (Stoke, N.)
Craddock, George (Bradford, S.) Lawson, G. M. Slater, J. (Sedgefield)
Cronin, J. D. Lee, Frederick (Newton) Smith, Ellis (Stoke S.)
Crossman, R, H. S. Lee, Miss Jennie (Cannock) Sorensen, R. W.
Darling, George (Hillsborough) Lever, Harold (Cheatham) Sparks, J. A.
Davies, Ernest (Enfield, E.) Lever, Leslie (Ardwick) Spriggs, Leslie
Davies, S. O. (Merthyr) Lewis, Arthur Steele, T.
Deer, G. Mabon, Dr. J. Dickson Stonehouse, John
de Freitas, Geoffrey McAlister, Mrs. Mary Stones, W. (Consett)
Delargy, H. J. McCann, J. Stross, Dr. Barnett (Stoke-on-Trent, C)
Diamond. John MacColl, J. E. Swingler, S. T.
Dugdale, Rt. Hn. John (W. Brmwch) MacDermot, Niall Sylvester, G. O.
Ede, Rt. Hon, J. C. McInnes, J. Symonds, J. B.
Edelman, M. McLeavy, Frank Taylor, Bernard (Mansfield)
Evans, Edward (Lowestoft) MacPherson, Malcolm (Stirling) Taylor, John (West Lothian)
Fernyhough, E. Mahon, Simon Thomas, Iorwerth (Rhondda, W.)
Fitch, A. E. (Wigan) Mallalieu, J. P. W. (Huddersfd, E.) Thomson, George (Dundee, E.)
Fletcher, Eric Mann, Mrs. Jean Thornton, E.
Forman, J. C. Mason, Roy Tomney, F.
Fraser, Thomas (Hamilton) Mayhew, C. P. Ungoed-Thomas, Sir Lynn
George, Lady Megan Lloyd (Car'then) Mikardo, Ian Usborne, H. C.
Gibson, C. W, Mitchison, G. R. Viant, S. P.
Grenfell, Rt. Hon. D. R. Monslow, W. Wade, D. W.
Grey, C. F. Morris, Percy (Swansea, W.) Warbey, W. N.
Griffiths, David (Rother Valley) Morrison, Rt. Hn. Herbert (Lewls'm, S.) Watkins, T. E.
Griffiths, Rt. Hon. James (Lianelly) Mort, D. L. Weitzman, D.
Grimond, J. Moyle, A. Wells, Percy (Faversham)
Hale, Leslie Mulley, F. W. Wheeldon, W. E.
Hall, Rt. Hn. Glenvil (Colne Valley) Noel-Baker, Francis (Swindon) White, Mrs. Eirene (E. Flint)
Hamilton, W. W. O'Brien, Sir Thomas White, Henry (Derbyshire, N. E.)
Hannan, W. Oliver, G. H. Wilcock, Group Capt. C. A. B.
Hastings, S. Oram, A. E. Wilkins, W. A.
Hayman, F. H. Orbach, M. Willey, Frederick
Henderson, Rt. Hn. A. (Rwy Regis) Oswald, T. Williams, David (Neath)
Harbison, Miss M. Padley, W. E. Williams, Rev. Llywelyn (Ab'tillery)
Hewitson, Capt. M. Palmer, A. M. F. William, Rt. Hon. T. (Don Valley)
Hobson, C. R. (Keighley) Pargiter, G. A. Williams, W. R. (Openshaw)
Holman, P. Peart, T. F. Williams, W. T. (Barons Court)
Holmes, Horace Pentland, N. Willis, Eustace (Edinburgh, E.)
Holt, A. F. Price, J. T. (Westhoughton) Wilson, Rt. Hon. Harold (Huyton)
Houghton, Douglas Price, Philips (Gloucestershire, W.) Winterbottom, Richard
Howell, Charles (Perry Barr) Probert, A. R. Woodburn, Rt. Hon. A.
Hoy, J. H. Pursey, Cmdr. H. Woof, R. E.
Hughes, Cledwyn (Anglesey) Rankin, John Yates, V. (Ladywood)
Hughes, Emrys (S. Ayrshire) Redhead, E. C. Zilliacus, K.
Hughes, Hector (Aberdeen, N.) Reeves, J.
Hunter, A. E. Reynolds, G. W. TELLERS FOR THE AYES:
Hynd, H. (Accrington) Rhodes, H. Mr. Pearson and Mr. Simmons.
Hynd, J. B. (Attercliffe) Robens, Rt. Hon. A.
Agnew, Sir Peter Brewis, John Dodds-Parker, A. D.
Aitken, W. T. Brooman-White, R. C. Donaldson, Cmdr. C E. MoA.
Amory, Rt. Hn. Heathcoat (Tiverton) Browne, J. Nixon (Craigton) Doughty, C. J. A.
Anstruther-Gray, Major Sir William Bryan, P. Drayson, G. B.
Arbuthnot, John Bullus, Wing Commander E. E, du Cann, E. D. L.
Armstrong, C. W. Burden, F. F. A. Duncan, Sir James
Atkins, H. E. Carr, Robert Eden, J. B. (Bournemouth, West)
Baldwin, Sir Archer Cary, Sir Robert Elliott, R. W. (Ne'castle upon Tyne, N.)
Barber, Anthony Chichester-Clark, R. Emmet, Hon. Mrs. Evelyn
Barter, John Clarke, Brig, Terence (Portsmth, W.) Errington, Sir Eric
Batsford, Brian Conant, Maj. Sir Roger Erroll, F. J.
Baxter, Sir Beverley Cooke, Robert Finlay, Graeme
Bell, Philip (Bolton, E.) Cooper-Key, E. M. Fisher, Nigel
Bell, Ronald (Bucks, S.) Cordeaux, Lt.-Col. J. K. Fletcher-Cooke, c.
Bennett, F. M. (Torquay) Corfield, F. V. Forrest, G.
Bevins, J. R. (Toxteth) Courtney, Cdr. Anthony Freeth, Denzil
Biggs-Davison, J. A. Craddock, Beresford (Spelthorne) Galbraith, Hon. T. G. D.
Bingham, R. M. Crowder, Sir John (Finchley) Gammans, Lady
Birch, Rt. Hon. Nigel Cunningham, Knox George, J. C. (Pollok)
Bishop, F. P. Currie, G- B. H. Gibson-Watt, D.
Black, Sir Cyril Dance, J. C. G. Glover, D.
Body, R. F. Davidson, Viscountess Glyn, Col. Richard H.
Bossom, Sir Alfred D'Avigdor-Goldsmid, Sir Henry Goodhart, Philip
Boyd-Carpenter, Rt. Hon. J. A. Deedes, W. F. Gough, C. F. H.
Boyle, Sir Edward de Ferranti, Basil Gower, H. R.
Graham, Sir Fergus Low, Rt. Hon. Sir Toby Rippon, A. G. F.
Grant, Rt. Hon. W. (Woodside) Lucas, Sir Joselyn (Portsmouth, S.) Roberts, Sir Peter (Heeley)
Green, A. Lucas, P. B. (Brentford & Chiswick) Robinson, Sir Roland (Blackpool, S.)
Gresham Cooke, R. Lucas-Tooth, Sir Hugh Robson Brown, Sir William
Grimston, Sir Robert (Westbury) Macdonald, Sir Peter Roper, Sir Harold
Grosvenor, Lt.-Col. R. G. McMaster, Stanley Russell, R. S.
Gurden, Harold Macpherson, Niall (Dumfries) Scott-Miller, Cmdr. R.
Hall, John (Wycombe) Maddan, Martin Shepherd, William
Harrison, A. B. C. (Maldon) Maitland, Cdr. J. F, W.(Horncastle) Simon, J. E. S. (Middlesbrough, W.)
Harrison, Col. J. H. (Eye) Maitland, Hon. Patrick (Lanark) Smithers, Peter (Winchester)
Harvey, John (Walthamstow, E.) Manningham-Buller, Rt. Hn. Sir R. Stanley, Capt. Hon. Richard
Heald, Rt. Hon. Sir Lionel Markham, Major Sir Frank Stevens, Geoffrey
Heath, Rt. Hon. E. R. G. Marlowe, A. A. H. Steward, Harold (Stockport, S.)
Henderson-Stewart, Sir James Marples, Rt. Hon. A. E. Steward, Sir William (Woolwich, W.)
Hesketh, R. F. Marshall, Douglas Stoddart-Scott, Col. Sir Malcolm
Hicks-Beach, Maj. W. W. Maudling, Rt. Hon. R. Storey, S.
Hirst, Geoffrey Mawby, R. L. Stuart, Rt. Hon. James (Moray)
Hobson, John (Warwick & Leam'gt'n) Medlicott, Sir Frank Summers, Sir Spencer
Holland-Martin, C. J. Nabarro, G. D. N. Taylor, Sir Charles (Eastbourne)
Hornby, R. P. Nicholson, Sir Godfrey (Farnham) Taylor, William (Bradford, N.)
Horobin, Sir Ian Nicolson, N. (B'n'm'th & Chr'ch) Teeling, W.
Howard, Gerald (Cambridgeshire) Noble, Michael (Argyll) Thomas, Leslie (Canterbury)
Howard, John (Test) Nugent, Richard Thompson, Kenneth (Walton)
Hughes Hallett, Vice-Admiral J. Oakshott, Sir Hendrie Thompson, R. (Croydon, S.)
Hutchison, Michael Clark (E'b'gh, S.) O'Neill, Hn. Phelim (Co. Antrim, N.) Thornton- Kemsley, Sir Colin
Hutchison, Sir James (Scotstoun) Orr-Ewing, C. Ian (Hendon, N.) Tiley, A. (Bradford, W.)
Hylton-Foster, Rt. Hon. Sir Harry Osborne, C. Tilney, John (Wavertree)
Iremonger, T. L. Page, R. G. Turton, Rt. Hon. R. H.
Jennings, J. C. (Burton) Partridge, E. Vane, W. M. F.
Johnson, Dr. Donald (Carlisle) Peel, W. J. Vickers, Miss Joan
Johnson, Eric (Blackley) Pickthorn, Sir Kenneth Vosper, Rt. Hon D. F.
Joseph, Sir Keith Pike, Miss Mervyn Wakefield, Edward (Derbyshire, W.)
Kaberry, D. Pilkington, Capt. R. A. Wakefield, Sir Wavell (St. M'lebone)
Kerby, Capt- H. B. Pitman, I. J. Wall, Patrick
Kerr, Sir Hamilton Pitt, Miss E. M. Ward, Dame Irene (Tynemouth)
Kimball, M. Pott, H. P. Webbe, Sir H.
Lambton, Viscount Powell, J. Enoch Webster, David
Lancaster, Col. C. G. Price, David (Eastleigh) Whitelaw, W. S. I.
Langford-Holt, J. A. Price, Henry (Lewisham, W.) Williams, Paul (Sunderland, S.)
Leavey, J. A. Prior-Palmer, Brig. Sir Otto Williams, R. Dudley (Exeter)
Legge-Bourke, Maj. E. A. H. Profumo, J. D. Wills, Sir Gerald (Bridgwater)
Legh, Hon. Peter (Petersfield) Ramsden, J. E. Wilson, Geoffrey (Truro)
Lindsay, Hon. James (Devon, N.) Rawlinson, Peter Wolrige-Gordon, Patrick
Lindsay, Martin (Solihull) Redmayne, M. Woollam, John Victor
Linstead, Sir H. N. Rees-Davies, W. R. Yates, William (The Wrekin)
Lloyd, Maj. Sir Guy (Renfrew, E.) Remnant, Hon. P.
Longden, Gilbert Renton, D. L. M. TELLERS FOR THE NOES:
Loveys, Walter H. Ridsdale, J. E. Mr. Hughes-Young and
Mr. J. E. B. Hill.