HC Deb 10 June 1959 vol 606 cc1055-63
Mr. Diamond

I beg to move, in page 21, line 45, to leave out "three thousand" and to insert "two thousand seven hundred and fifty".

The Temporary Chairman

It would be convenient if the Committee also discussed the Amendments in page 22, line 1, to leave out "five thousand" and to insert "four thousand five hundred"; in line 3, to leave out "seven thousand" and to insert "six thousand two hundred and fifty"; in line 4, to leave out "nine" and to insert "eight"; and in line 6, to leave out "two thousand" and to insert "one thousand seven hundred and fifty".

Mr. Diamond

Mr. Blackburn, you have, as usual, conducted our affairs with such competence and speed that one is caught a little unaware sometimes when moving an Amendment.

This Amendment describes its purpose clearly. It is partly to ask the Government why they have in mind this increase in the limits of directors' remuneration for Profits Tax purposes and also to suggest that although, perhaps, a small increase would not be inappropriate, having regard to the passage of time, they have gone too far, as usual, in looking after directors.

The Clause gives a Profits Tax benefit to a company which is director-controlled inasmuch as it permits the company to charge against its profits for Profits Tax purposes a remuneration for its directors greater than was previously charged. It is well understood that where a company is virtually under the control of its directors some arbitrary limitation has to be put on the remuneration which is allowable for the purpose of this tax, otherwise it would be within their powers to regard the whole of the profits made, if necessary, as their remuneration and therefore escape Profits Tax completely. We all understand that principle, and we understand that it is perhaps necessary from time to time to revise those rates upwards slightly.

Why has it been thought necessary to go as far as this today? Since the rates of directors' remuneration were first provided, the Profits Tax has been altered. The rate of Profits Tax has been effectively reduced and we have one rate instead of two rates. In other words, there is less tax to pay and less of a burden on a company which decides to pay its directors a greater remuneration than that permitted for this purpose.

The Committee will well understand that nobody is preventing a company from paying its directors what it wants to pay them, but if it pays directors above a certain amount in certain circumstances, then part of it should be regarded as not having been made for the purpose of Profits Tax payment. That is one reason why the limit should have been reduced rather than increased.

Another reason which I am bound to draw to the Committee's attention is that directors pay a smaller effective rate of tax than most of the rest of the community. They pay a smaller effective rate of tax because directors in this position have opportunities for enjoying tax-free benefits to a much greater extent than others. It is inevitable that this should happen. I am not suggesting that there is anything particularly wrong with this. It is inevitable that it should happen. Competition between one company and another brings it about. The fact remains that the employee has no benefits of this kind. He has to pay tax on the amount he has been paid. The rate on which he is taxed is the real rate of his income. The rate on which the director pays tax is not the real rate of his spendable income, the income which accrues to him in the benefit which he draws from his occupation.

That being the case, it is inevitable that we should look much more closely at the remuneration which is allowed to directors. Although this is purely a taxation provision, it is a sign that the Government are encouraging directors to draw more out of director-controlled companies than previously. Our Amendments seek to raise a discussion on this and to suggest that the Government are going too far in this direction.

The Economic Secretary to the Treasury (Mr. F. J. Erroll)

I was interested in listening to the remarks made by the hon. Member for Gloucester (Mr. Diamond) to hear that he did not quarrel with the principle enshrined in earlier legislation that some part of the whole-time director's remuneration should be regarded as remuneration and not as profits from the enterprise in which he was working and which he was controlling. The difference between us, therefore, is simply whether the amount should be raised and, if so, by how much. I imagine that if the Opposition had felt that the amount should not be raised at all they would have preferred to vote against the Clause, instead of which they have chosen an alternative method of registering their views—that of proposing Amendments which would reduce the increases which we have proposed in the Clause.

They thereby accept that there is some merit in making an increase. Their only dispute is over the size of the increase. That being so, I think that the figures which I can give to the Committee will show that what we have proposed is the right course of action. In the first place, we are not suggesting that there should be any increase in the maximum figure, namely, 15 per cent. of profits up to £100,000, which would make the maximum amount of remuneration for which this relief will be applicable £15,000. It is only in the alternative method, where the profits are not big enough to give what is believed to be an adequate amount of remuneration—a principle which was accepted in the 1952 Finance Act—that there is any difference of opinion.

It is here that we have suggested in the Clause that there should be an increase of varying amounts. We propose that the first working director should have the maximum figure raised from £2,500 to £3,000, that is, an increase of 20 per cent., whereas the Amendment would raise it only to £2,750. In the case of the second, third and fourth directors the increase is from £1,500 to £2,000, an increase of 33⅓ per cent.

The present limit of £2,500 was laid down in 1947 and confirmed in 1952, but during the period 1952–58, during which there was no increase in the limit, the average weekly earnings of weekly wage earners increased by no less than 43 per cent. It is surely not out of line to permit an increase of 20 per cent. for the first working director and 33⅓ per cent. for the second, third and fourth working directors. It seems a reasonable adjustment to make in the light of the general movement in the levels of remuneration.

7.0 p.m.

As regards relief from Profits Tax, the hon. Member for Gloucester referred particularly to the fact that Profits Tax rates had changed. I accept that, but what is at stake is the principle whether this additional remuneration should attract Profits Tax in addition to Income Tax and Surtax in the hands of the director. The rate of Profits Tax in these circumstances is not relevant to the principle.

The fact that Profits Tax is now at the single rate of 10 per cent. means that the amount of actual relief to any company will be rather less than it might have been a year ago. The maximum relief to any one company will be only £200, that is to say, the increase in the maximum from £7,000 to £9,000, calculated at the rate of 10 per cent. Two thousand pounds divided by ten gives a maximum relief of £200 to any one company, so no one company can benefit very greatly.

We estimate that there are about 35,000 director-controlled companies who will benefit to some extent and that the average will probably be about £85 per company. Therefore, the sums of money involved are not very great. There is no massive benefit to be handed to a particular type of company or a particular class of individual, whether he is over-privileged, as the hon. Gentleman rather suggested, or whether he is saddled with a greater share of responsibility than any other members of the community have to bear. That is not a matter which need be argued at present. The Clause is a move in the direction of equity. The figures we have selected are borne out by the facts, and the Amendment proposed by the hon. Member for Gloucester should accordingly be resisted.

Mr. Houghton

We on this side of the Committee are not fully convinced of the justification for going as far as the Government propose. The Committee must bear in mind that we are dealing solely with director-controlled companies. The need to put a limit on the amount chargeable against taxable profits in respect of directors' remuneration has been accepted on both sides of the Committee, because, being director-controlled, they can do pretty well anything they like and can arrange their remuneration to suit themselves. It may not on any commercial basis necessarily be fair remuneration for services rendered. It is obvious that some limits had to be placed on what can be charged against the profits of a company for remuneration of directors, or they could have arranged their affairs to attract the least amount of Profits Tax. There may be a point at which the liability of the individual director for Surtax would cancel out the advantage he might receive in any other direction, but in many of these companies that point would not arise.

The Economic Secretary suggested that the proposed increases are not out of line with what might be regarded as appropriate increases having regard to changes in the level of remuneration since the last increase was made. As my hon. Friend the Member for Gloucester (Mr. Diamond) pointed out, these companies are to have the benefit of the reduction in Profits Tax made last year. The Economic Secretary said that things must be kept in their proper compartments and that this was a question of equity. I have no doubt that the hon.

Gentleman will discount my reference to the fact that these companies will also have the benefit of the reduction in the standard rate of Income Tax in the Bill.

One must look at the position of these companies in relation to the burden of taxation having regard to the fact that they are director-controlled, that they can arrange their remuneration in any manner they please and that they are to a certain extent artificial organisms. In view of the reduction in Profits Tax last year, in view of the reduction in the standard rate of Income Tax this year and in view of the reliefs which directors, in common with others, have received for Surtax purposes and in earned income relief, do we now need to go this far in relieving them of further taxation? My right hon. and hon. Friends and I think that we do not. That is the difference between the two sides of the Committee.

As the Economic Secretary pointed out, our Amendments indicate our willingness to go some way, but not all the way envisaged by the Government's proposals. It is a matter of judgment of what is right and fair, and one can argue it indefinitely without getting any nearer to agreement because, despite figures and cross-references, there is in the end a composite judgment whether these companies are being treated fairly. I do not want to suggest that they are perhaps more favourably placed than most taxpayers to arrange their affairs so as to attract the least taxation, but I think that we all recognise that many of the directors of these companies are in various ways very happily placed indeed.

In those circumstances, I can only say that our judgment falls short of that of the Government and that we propose to indicate that in the usual way.

Question put, That "three thousand" stand part of the Clause:—

The Committee divided: Ayes 207, Noes 167.

Division No. 126.] AYES [7.7 p.m.
Agnew, Sir Peter Barber, Anthony Biggs-Davison, J. A.
Altken, W. T. Barlow, Sir John Bingham, R. M.
Amory, Rt. Hn. Heathcoat (Tiverton) Barter, John Bishop, F. P.
Arbuthnot, John Batsford, Brian Body, R. F.
Armstrong, C. W. Bell, Philip (Bolton, E.) Bossom, Sir Alfred
Ashton, H. Bell, Ronald (Bucks, S.) Bowen, E. R. (Cardigan)
Atkins, H. E. Bennett, F. M. (Torquay) Boyd-Carpenter, Rt. Hon. J. A.
Baldock, Lt.-Cmdr. J. M. Bennett, Dr. Reginald Braine, B. R.
Baldwin, Sir Archer Bevins, J. R. (Toxteth) Braithwaite, Sir Albert (Harrow, W.)
Balniel, Lord Bidgood, J. C. Brewis, John
Browne, J. Nixon (Craigton) Henderson, John (Cathcart) Page, R. G.
Bryan, P. Henderson-Stewart, Sir James Partridge, E.
Butcher, Sir Herbert Hill, Rt. Hon. Charles (Luton) Peel, W. J.
Campbell, Sir David Hill, John (S. Norfolk) Peyton, J. W. W.
Carr, Robert Hirst, Geoffrey Pike, Miss Mervyn
Cary, Sir Robert Hobson, John (Warwick & Leam'gt'n) Pilkington, Capt. R. A.
Clarke, Brig. Terence (Portsmth, W.) Holland-Martin, C. J. Pitman, I. J.
Cole, Norman Holt, A. F. Pitt, Miss E. M.
Cooper-Key, E. M. Hornby, R. P. Pott, H. P.
Cordeaux, Lt.-Col. J. K. Hornsby-Smith, Miss M. P. Powell, J. Enoch
Corfield, F. V. Horsbrugh, Rt. Hon. Dame Florence Price, David (Eastleigh)
Craddock, Beresford (Spelthorne) Howard, Gerald (Cambridgeshire) Price, Henry (Lewisham, W)
Crosthwaite-Eyre, Col. O. E. Hughes Hallett, Vice-Admiral J. Prior-Palmer, Brig. O. L.
Crowder, Sir John (Finchley) Hughes-Young, M. H. C. Ramsden, J. E.
Crowder, Petre (Ruislip—Northwood) Hutchison, Michael Clark (E'b'gh, S.) Rawlinson, Peter
Cunningham, Knox Hylton-Foster, Rt. Hon. Sir Harry Redmayne, M.
Currie, G. B. H. Iremonger, T. L. Remnant, Hon. P.
Davidson, Viscountess Irvine, Bryant Godman (Rye) Renton, D. L. M.
D'Avigdor-Goldsmid, Sir Henry Jenkins, Robert (Dulwich) Ridsdale, J. E.
Deedes, W. F. Jennings, J. C. (Burton) Rodgers, John (Sevenoaks)
de Ferranti, Basil Jennings, Sir Roland (Hallam) Roper, Sir Harold
Dodds-Parker, A. D. Johnson, Dr. Donald (Carlisle) Ropner, Col. Sir Leonard
Donaldson, Cmdr. C. E. McA. Johnson, Eric (Blackley) Russell, R. S.
Doughty, C. J. A. Jones, Rt. Hon. Aubrey (Hall Green) Scott-Miller, Cmdr. R.
du Cann, E. D. L. Joseph, Sir Keith Sharples, R. C.
Duncan, Sir James Kerr, Sir Hamilton Shepherd, William
Duthie, W. S. Kirk, P. M. Simon, J. E. S. (Middlesbrough, W.)
Eden, J. B. (Bournemouth, West) Lambton, Viscount Smithers, Peter (Winchester)
Elliott, R.W.(Newcastleupon Tyne, N.) Leavey, J. A. Spearman, Sir Alexander
Errington, Sir Eric Legge-Bourke, Maj. E. A. H. Speir, R. M.
Erroll, F. J. Legh, Hon. Peter (Petersfield) Spens, Rt. Hn. Sir P. (Kens'gt'n, S.)
Farey-Jones, F. W. Lindsay, Hon. James (Devon, N.) Stanley, Capt. Hon. Richard
Fell, A. Lindsay, Martin (Solihull) Stevens, Geoffrey
Finlay, Graeme Lloyd, Maj. Sir Guy (Renfrew, E.) Steward, Harold (Stockport, S.)
Fisher, Nigel Loveys, Walter H. Steward, Sir William (Woolwich, W.)
Fletcher-Cooke, C. Lucas, Sir Jocelyn (Portsmouth, S.) Storey, S.
Freeth, Denzil Lucas-Tooth, Sir Hugh Stuart, Rt. Hon. James (Moray)
Gammans, Lady Macdonald, Sir Peter Taylor, William (Bradford, N.)
Garner-Evans, E H. McLaughlin, Mrs. P. Temple, John M.
George, J. C. (Pollok) Maclean, Sir Fitzroy (Lancaster) Thompson, Kenneth (Walton)
Gibson-Watt, D. MacLeod, John (Ross & Cromarty) Thornton-Kemsley, Sir Colin
Glover, D. McMaster, Stanley Tiley, A. (Bradford, W.)
Glyn, Col. Richard H. Maddan, Martin Turton, Rt. Hon. R. H.
Godber, J. B. Markham, Major Sir Frank Tweedsmuir, Lady
Gower, H. R. Marlowe, A. A. H. Vane, W. M. F.
Graham, Sir Fergus Mathew, R. Wade, D. W.
Grant, Rt. Hon. W. (Woodside) Mawby, R. L. Wakefield, Edward (Derbyshire, W.)
Grant-Ferris, Wg Cdr. R. (Nantwich) Maydon, Lt.-Comdr, S. L. C. Wall, Patrick
Gresham Cooke, R. Molson, Rt. Hon. Hugh Ward, Rt. Hon. G. R. (Worcester)
Grimston, Hon. John (St. Albans) Morrison, John (Salisbury) Ward, Dame Irene (Tynemouth)
Grimston, Sir Robert (Westbury) Mott-Radclyffe, Sir Charles Webbe, Sir H.
Grosvenor, Lt.-Col. R. G. Nairn, D. L. S. Webster, David
Harris, Frederic (Croydon, N.W.) Neave, Airey Williams, Paul (Sunderland, S.)
Harrison, A. B. C. (Maldon) Nicholls, Harmar Williams, R. Dudley (Exeter)
Harrison, Col. J. H. (Eye) Nicholson, Sir Godfrey (Farnham) Wills, Sir Gerald (Bridgwater)
Harvey, Sir Arthur Vere (Macclesf'd) Nicolson, N. (B'n'm'th, E. & Chr'oh) Wolrige-Gordon, Patrick
Harvey, John (Walthamstow, E.) Noble, Comdr., Rt. Hon. Allan Woollam, John Victor
Hay, John Noble, Michael (Argyll)
Heald, Rt. Hon. Sir Lionel Oakshott, H. D. TELLERS FOR THE AYES:
Heath, Rt. Hon. E. R. G. O'Neill, Hn. Phelim (Co. Antrim, N) Mr. Brooman-White and
Mr. Chichester-Clark.
NOES
Abse, Leo Callaghan, L. J. Evans, Albert (Islington, S.W.)
Ainsley, J. W. Carmichael, J. Finch, H. J. (Bedwellty)
Allaun, Frank (Salford, E.) Champion, A. J. Fitch, A. E. (Wigan)
Awbery, S. S. Chapman, W. D. Fletcher, Eric
Bacon, Miss Alice Clunie, J. Forman, J. C.
Balfour, A. Coldrick, W. Fraser, Thomas (Hamilton)
Bence, C. R. (Dunbartonshire, E.) Collick, P. H. (Birkenhead) George, Lady Megan Lloyd (Car'then)
Benson, Sir George Cronin, J. D. Gibson, C. W.
Beswick, Frank Cullen, Mrs. A. Gordon Walker, Rt. Hon. P. C.
Blyton, W. R. Darling, George (Hillsborough) Greenwood, Anthony
Boardman, H. Davies, Ernest (Enfield, E.) Grenfell, Rt. Hon. D. R.
Bowden, H. W. (Leicester, S.W.) Davies, Harold (Leek) Grey, C. F.
Bowles, F. G. Davies, Stephen (Merthyr) Griffiths, David (Rother Valley)
Boyd, T. C. Deer, G. Griffiths, Rt. Hon. James (Llanelly)
Braddock, Mrs. Elizabeth Delargy, H. J. Hale, Leslie
Brockway, A. F. Diamond, John Hall, Rt. Hn. Glenvil (Colne Valley)
Broughton, Dr. A. D. D. Dodds, N. N. Hamilton, W. W.
Brown, Thomas (Ince) Donnelly, D. L. Hastings, S.
Burke, W. A. Ede, Rt. Hon. J. C. Hayman, F. H.
Burton, Miss F. E. Edwards, Rt. Hon. Ness (Caerphilly) Henderson, Rt. Hn. A. (Rwly Regis)
Butler, Herbert (Hackney, C.) Edwards, Robert (Bilston) Herbison, Miss M.
Butler, Mrs. Joyce (Wood Green) Edwards, W. J. (Stepney) Hilton, A. V.
Hobson, C. R. (Keighley) Moody, A. S. Smith, Ellis (Stoke, S.)
Holman, P. Morris, Percy (Swansea, W.) Sorensen, R. W.
Holmes, Horace Mort, D. L. Soskice, Rt. Hon. Sir Frank
Houghton, Douglas Moss, R. Spriggs, Leslie
Hoy, J. H. Moyle, A. Steele, T.
Hughes, Cledwyn (Anglesey) Mulley, F. W. Stones, W. (Consett)
Hunter, A. E. Neal, Harold (Bolsover) Strachey, Rt. Hon. J.
Hynd, J. B. (Attercliffe) Noel-Baker, Francis (Swindon) Stross, Dr. Barnett (Stoke-on-Trent, C.)
Irving, Sydney (Dartford) Oliver, G. H. Swingler, S. T.
Isaacs, Rt. Hon. G. A. Oram, A. E. Sylvester, G. 0.
Jay, Rt. Hon. D. P. T. Oswald, T. Taylor, Bernard (Mansfield)
Jeger, George (Goole) Owen, W. J. Taylor, John (West Lothian)
Jenkins, Roy (Stetchford) Paling, Rt. Hon. W. (Dearne Valley) Thomas, Iorwerth (Rhondda, W.)
Jones, J. Idwal (Wrexham) Palmer, A. M. F. Thomson, George (Dundee, E.)
Kenyon, C. Pannell, Charles (Leeds, W.) Timmons, J.
Key, Rt. Hon. C. W. Parker, J. Ungoed-Thomas, Sir Lynn
King, Dr. H. M. Paton, John Usborne, H. C.
Lawson, G. M. Pearson, A. Viant, S. P.
Lee, Frederick (Newton) Prentice, R E Warbey, W. N.
Lee, Miss Jennle (Cannock) Price, J. T. (Westhoughton) Watkins, T. E.
Logan, D. G. Probert, A. R. Wheeldon, W. E.
Mabon, Dr. J. Dickson Proctor, W. T. White, Mrs. Eirene (E. Flint)
McAlister, Mrs. Mary Pursey, Cmdr. H. White, Henry (Derbyshire, N.E.)
McCann, J. Rankin, John Wilkins, W. A.
MacDermot, Niall Redhead, E. C. Willey, Frederick
McInnes, J. Reid, William Williams, David (Neath)
McKay, John (Wallsend) Reynolds, G. W. Williams, Rt. Hon. T. (Don Valley)
McLeavy, Frank Robens, Rt. Hon. A. Williams, W. R. (Openshaw)
MacMillan, M. K. (Western Isles) Ross, William Willis, Eustace (Edinburgh, E.)
MacPherson, Malcolm (Stirling) Silverman, Jullus (Aston) Woof, R. E.
Mahon, Simon Silverman, Sydney (Nelson) Yates, V. (Ladywood)
Mann, Mrs. Jean Simmons, C. J. (Brierley Hill)
Mayhew, C. P. Skeffington, A. M. TELLERS FOR THE NOES:
Mellish, R. J. Slater, Mrs. H. (Stoke, N.) Mr. Short and Mr. Poppiewell.
Mitchison, G. R. Slater, J. (Sedgefield)

Clause ordered to stand part of the Bill.