HC Deb 14 June 1961 vol 642 cc431-551

3.42 p.m.

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

I beg to move, in page 23, line 6, at the beginning to insert: Subject to the provisions of section (Reduction of rate of profits tax on co-operative societies etc.) of this Act".

The Chairman

I think that it would be convenient if, with this Amendment, we discuss the next Amendment, in line 9, after "shall", to insert: in the case of any 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, be reduced from twelve and a half per cent. to three per cent. and in other cases shall". And also the new Clause in the name of the hon. Member for East Ham, South (Mr. Oram)—(Reduction of rate of profits tax on co-operative societies, etc.):

  1. (1) As from the beginning of August, nineteen hundred and sixty-one, 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, the rate at which the profits tax is to be charged shall be three per cent.
  2. (2) This section shall have effect notwithstanding any enactment to the contrary whether in this Act or elsewhere.

Mr. Oram

I agree with you, Sir Gordon, that it would be convenient to consider the next Amendment with this one and the new Clause to which you have referred.

These are alternative drafts by which we seek to achieve the same purpose. I am sure that I speak for my hon. Friends when I say that we shall be happy whichever of the alternatives the Government spokesman finds himself able to accept. The immediate necessity, as we see it, for moving this Amendment arises from the proposed increase, which will be brought about by the provisions of this Clause, in the rate of Purchase Tax from the present figure of 12½ per cent. to a proposed figure of 15 per cent. Although that is the immediate reason for our Amendment, I must remind the Committee that the origin of our complaint goes back to the Finance Act of 1958. It was in that Measure that, in our judgment, an injustice was imposed on co-operative societies in relation to the Profits Tax.

I think that it would be helpful if I remind the Committee of a little of the history of this matter. Before 1958, Profits Tax was charged at two alternative rates. At that time it was 3 per cent. on profits which remained undistributed and as high as 30 per cent. on profits which were distributed to shareholders. In 1958, the then Chancellor of the Exchequer decided to merge those two rates into a single rate of 10 per cent.

At that time we complained that this had the effect of increasing the amount of Profits Tax which co-operative societies would be required to pay by no less than £1⅓ million; and this at the same time that companies were paying a less amount of Profits Tax, I think to the tune of about f16 million. That appeared to us a gross injustice and it has been intensified. Last year, there was an increase from 10 per cent. to 12½ per cent. and this year it is proposed that there should be an increase from 12½ per cent. to 15 per cent.

When there were two rates under the previous system it was possible to recognise the differences of financial structure and of social purpose of differently taxed organisations. But when the two rates were merged into a single rate this was no longer possible without special provision. It was a special provision in respect of societies registered under the Industrial and Provident Societies Act that we sought, in 1958, to bring about, and also last year, and again we are seeking to do so this year.

I stressed that it was possible when we had two rates to differentiate between different organisations. It may be asked what I claim is the difference between an ordinary trading company and a co-operative society in respect of Profits Tax. I suggest that there is a most important difference which used to be recognised, but is recognised no longer. It is that co-operative societies make no profit distribution on capital to shareholders in any sense comparable with the distributions made by companies. The distributions which co-operative societies make are of two kinds. First, there is the familiar "divi" on purchases, which is recognised in law as not being a dividend in the sense of a company dividend. It is a deferred price rebate and has, therefore, nothing to do with the profit position.

The second distribution made by co-operative societies is a payment to their shareholders of a low fixed-interest payment on their shareholding. I stress that this is low and that it is fixed. It is about 3 per cent. It is fixed beforehand and does not vary according to the profit or surplus made by the society in any trading period. The Royal Commission on the Taxation of Profits and Income recognised that this distribution, this low fixed-interest payment to shareholders, is the equivalent of interest paid to holders of loan capital in companies.

I am quite sure that, again, we shall be told from the Treasury Bench—it has been stated on previous occasions—that when the two rates were merged in 1958 another change was brought about, and co-operative societies were allowed to reckon this distribution of interests as an expense before computing their profits for Profits Tax purposes. It has been claimed, and no doubt it will be claimed again, that this was, so to speak, a concession, a quid pro quo against the increase in charges that co-operative societies were expected to meet. I stress that that was no concession at all. It was something which ought to have been done since 1947, in my judgment, and was only a belated recognition rather than anything in the nature of a concession.

During yesterday's debate on the payroll tax quite a lot was said about that tax being a blunt instrument, about its not being possible for it to be used in a discriminatory way. In considering the Profits Tax as it is at the moment I suggest we have another example of a blunt instrument. It used not to be a blunt instrument. As I have explained, it used to be on two rates, it used to be in two forms; it used to be possible to discriminate; but it is no longer possible to use it in any flexible planning way.

What happened in 1958 was that a taxing instrument which had been flexible was made into a blunt one. Consequently, it is now no longer possible, in the ease of companies, to discriminate between profits which are distributed and profits which are undistributed, and, still more important from the point of view of the societies on whose behalf I speak today, it is no longer possible to discriminate between organisations which serve a social purpose and those which do not. In previous years we had a series of debates on a number of organisations which are adversely affected in a way similar to the co-operative societies. Local authorities, sports organisations, building societies, the Mersey Tunnel were examples.

I claim that the co-operative societies in this country and elsewhere are different from ordinary trading companies. They serve a social purpose which ordinary trading companies do not seek to serve, and whereas companies seek as their main purpose, or one of their main purposes, in life to maximise the profits which they distribute to their shareholders, co-operative societies do the reverse. They seek to keep at a minimum the distribution of profits or of interest to the holders of share capital. What they do is to try to maximise the benefits which the consumer members of co-operative societies derive from their co-operative trading, and throughout more than a century of existence co-operative societies, I suggest to the Committee, have been a most important thrift institution in this country.

Millions of people are now organised in this movement of ours. They are small people with small savings in their local co-operative societies. The average is no more than about £20 per member. These people, ordinary working-class and middle-class people, are not profit makers in any sense in which that term can ordinarily be used.

Therefore, I suggest that it is quite absurd to apply to them this Profits Tax. It is still more unjust to apply it to them in the unfair way, which, I suggest, was brought about when the change was instituted in 1958.

There is one other point which I want to make. That relates to another kind of co-operative society. I have been referring so far to the ordinary retail consumer co-operative societies with which I am most familiar, but one of the most interesting developments in agriculture since the Second World War has been the development of agricultural co-operatives. I know that there are many hon. and right hon. Gentlemen on the Government side of the Committee who are interested and actively engaged in supporting agricultural co-operative societies. I know that these societies are faced with a serious problem of capital accumulation.

Indeed, my hon. Friend the Member for Glasgow, Govan (Mr. Rankin), because he was lucky in the Ballot for Private Members' Bills, has been piloting through Parliament a Bill to raise the individual shareholding limit from £500 to £1,000, principally to facilitate the operation of agricultural co-operative societies—not so much, although the retail co-operative societies welcome the change, in their interests but in the interests principally of the agricultural co-operatives which, as I said earlier, have a particular capital accumulation problem.

The way in which the Profits Tax operates is a direct disincentive to management committees of co-operative societies to plough back into their societies the surpluses which they make, a direct incentive to them to pay it out in interest to their shareholders. It is absurd to have a tax operating in this way, contrary to good financial policy for co-operative societies.

I would urge the Government, as we have urged them on previous occasions, to have really serious second thoughts about this, chiefly from the point of view of hon. Members on these benches, because we believe that the 13 million consumer co-operative movement is unjustly dealt with in this matter, but also because it does represent a serious problem in the newly developing and promising agricultural movement as well. I am hoping that as a result of this debate today we shall get a more helpful answer on this matter than we have had in previous years.

Mr. George Darling (Sheffield, Hillsborough)

I rise to support this Amendment with some confidence on this occasion, partly because many hon. Members opposite have a very similar Amendment on the Notice Paper to exempt building societies from the operation of the increase in the Profits Tax. Admittedly, our Amendments go a little further, but we see co-operative societies and building societies in precisely the same position in relation to Profits Tax. I feel some confidence, also, because the Chancellor, during the debates that we have had on the Finance Bill, has, I think, given us good grounds for believing that in the interests of social justice these Amendments will be accepted. I shall come to that point in a moment.

I have no doubt that when the Economic Secretary replies he will tell us the old story, that money put to reserve in co-operative societies is in precisely the same situation in relation to tax as money which is put to reserve out of profits in companies and partnerships, and so on, and that the Government cannot discriminate between the reserves of trading institutions.

However, the answer to the Government's case as presented on previous occasions boils down to this, as my hon. Friend the Member for East Ham, South (Mr. Oram) has said, that the reserves of co-operative societies are quite different, because they cannot increase the shareholdings of co-operative societies in the same way that the reserves of private companies can increase the shareholding; nobody can get capital gains out of co-operative societies.

Therefore, to suggest that the two forms of reserves are the same is quite wrong. As my hon. Friend also pointed out, the shareholdings in co-operative societies are relatively small and represent the savings of ordinary people. They are not like the big investments of big financiers and investors. They are the accumulated rebates on purchases which ordinary members of co-operative societies have accumulated and they represent the savings of small people.

This is where I come to the point that I think that the Chancellor, in the interests of social justice, will support us. He will remember that when we were complaining about the fact that an imposition had been put on the ordinary people of the country in having to pay a National Health Service charge, in having to pay higher contributions for that Service, and so on, and that when we claimed that those higher conbutions were being used to give tax relief to Surtax payers, he denied this. He said that he was imposing the increase in Profits Tax for the purpose of providing him with an income to give to the Surtax payers.

4.0 p.m.

Some of this increase in Profits Tax will come from these small people. I put a Question down for Written Answer to elicit information and the Chancellor said that he would have £½ million a year out of the co-operative societies from this increase in Profits Tax. His previous statement therefore means that he will take £½ million a year extra out of the small savings of people in co-operative societies deliberately to give it to the Surtax payers. That is what the right hon. and learned Gentleman said. It is absolutely shameful and disgraceful that a special tax should be imposed on the ordinary investors, the little people in co-operative societies to be given, as the Chancellor admits, to Surtax payers.

During the course of debates on the Budget and on the Finance Bill the Chancellor has never given any indication that he has any interest in the welfare of wage earners. All his sympathy was devoted to the Surtax payers. The only point that the right hon. and learned Gentleman made on the ground of social justice was that the Surtax payers should have some relief. I admit that this increase in Profits Tax will be imposed also on companies but, as I have said, £ million a year will come from a tax on the savings of ordinary working people. It may be a small sum but, as my hon. Friend the Member for East Ham, South has said, it represents a burden on co-operative societies. I do not think that the Chancellor has seen this point before. I believe that if he had realised that this was precisely what he was doing he would have thought twice about levying this tax on co-operative societies.

At this stage, therefore, I ask the Chancellor to reconsider the matter merely in the interest of social justice and on the ground of what he himself said about the source from which he proposed to obtain money to help the Surtax payers. I ask him to agree with the Amendment that this increase of tax for this purpose ought not to be imposed on co-operative societies.

Mr. Percy Holman (Bethnal Green)

I do not often address the House or the Committee, but during the sixteen years that I have been a Member of the House I have found, in discussing co-operative societies with hon. Members opposite, only one Conservative Member who understood what co-operative societies were, their constitution and their nature. When we in the co-operative movement talk about shares, what do we mean? I put it simply to hon. Members opposite that this is more like a deposit account at a bank with withdrawal without notice in certain cases, with seven days' notice in other cases, and with a rate of interest averaging somewhat under 3 per cent. This is what we call shares in the co-operative movement, and this is far from the imagination and percipience of hon. Members opposite.

These shares, we are told, average in amount about £20 per member. The co-operative societies have about £250 million of so-called capital, part of which is used in their own business in retail societies and part loaned to wholesale societies. These are organised in precisely the same way as the retail societies, except that while the retail societies have individual members the members of the wholesale societies are the retail societies themselves and they pass the dividend back to the retail societies out of any surplus that they accumulate.

Only three things therefore happen to the surpluses of co-operative societies. First, something is put to reserve as a safeguard. Businessmen on the benches opposite can appreciate that. A company or any other organisation must put something in reserve against a possible bad day, just as the retail societies in South Wales had to do in the tragic circumstances of the 1930s when people were out of work and they were forced to take out their savings. Without reserves, the retail societies would have gone out of business, though they were supported by the wholesale societies and even by the Co-operative Union in many cases.

The major part of any surplus in a co-operative society goes back as dividend. Again, there is a great deal of misunderstanding of this term as it is employed in the co-operative movement. This is not a dividend on capital, but a dividend on the amount of purchases. If a member purchased £100 worth of goods in a year, and the dividend was 9d. in the £, he would receive the equivalent of 100 ninepences, usually payable half-yearly.

The third thing is the interest on deposit accounts which today averages under 3 per cent. per annum. There have been failures in the past, but today no co-operative society is allowed to become bankrupt. One can say of loan shares in the co-operative movement, therefore, that though the words are the same as those employed by private companies, the meaning in the movement is that £1 always remains £1. It is true that in present conditions that £1 yields rather less in purchases, particularly since the inflationary conditions of this year have come about and are likely to represent a loss in purchasing power of at least 4 per cent.

This steady increase in Profits Tax from 3 per cent. to 10 per cent. and to 12½ per cent. and now to 15 per cent. on non-profit making organisations for the working class ought never to have been allowed. The increase will mainly fall on the dividend on purchases and this further £½ million will make a total of £2¼ million which will be taken from these societies this year. An additional 9d. will be paid by each of the 13 million co-operators for the purpose, according to the Chancellor, of giving the £10,000a-year men a reduction of £1,000 in their taxation. This money is being demanded from co-operators to give men earning an amount of money beyond the comprehension of the majority of people an extra £1,000 in their pockets.

This is the effect and the reality of this imposition. Other non-profit-making organisations will also suffer additional taxation. This is for home buyers the last straw because it has forced the building societies to increase rates of interest for borrowers. This is another tragedy which ought not to have been allowed to happen.

It is my opinion that confusion, not so much among officials in the Treasury as among those who occupy the Government Front Bench and those who sit behind them, has led to this imposition being made when it ought not to have been imposed at all on co-operative and other non-profit-making organisations on exactly the same terms as those imposed on profit-making organisations many of which have equity shares that have risen to ten times and even more of their original value. This is a real injustice which mainly arises from the ignorance of the party opposite.

Mr. John Rankin (Glasgow, Govan)

We have embarked on a rather hard task today. I am certain that we shall move the heart of the Chancellor of the Exchequer a little. The important point is how far we shall guide his head. I hope that we can be effective in that regard. The right hon. and learned Gentleman has heard a strong case. We agree that perhaps there is nothing very new in what we are saying, but it is necessary to emphasise it because we have never before had the chance of putting it directly to the right hon. and learned Gentleman. We hope, as we are entitled to hope, that he will be more responsive than his predecessor was.

My hon. Friend the Member for Bethnal Green (Mr. Holman) said that Profits Tax has sharply increased on co-operatives from 3 per cent. to 15 per cent. over four years. Between 1958 and 1961 we have seen it make that jump. It was very proper of my hon. Friend to direct attention to that point. It has meant that the tax liability has increased from £750,000 to £2¼ million. In terms of £ s. d. that is not a negligible sum.

I hope that the Chancellor will say that it is negligible and that we are not complaining about much. If it is negligible in his eyes, although it is not in ours, he must concede our claim. While this steep rise has occurred in the application of Profits Tax to co-operatives, there has been a sharp decline in its effect on joint stock companies, because it has dropped steadily over the same period from 30 per cent. prior to 1958 to the present common meeting ground of 15 per cent. While the impact on the co-operative surplus has increased five times, the impact on the private investor has diminished by half. I feel sure that the right hon. and learned Gentleman will not find it easy to defend a situation which shows without qualification such a startling discrimination. I believe he thinks that the tax applies more or less fairly. The facts that we have stated show that it applies with complete unfairness.

4.15 p.m.

My hon. Friend the Member for East Ham, South (Mr. Oram) said that the co-operative movement is not merely a trading movement, but a thrift organisation. I subscribe to that; but it is also a great educational force. All these extraneous efforts are made possible by the purchasers—the women who shop at the co-op. They save as they buy. There are countless such women. My mother was one of them. In her own words, she never put a halfpenny by the store in her whole life. Everything that she saved was saved through the co-operative movement through buying in the society. As a result of the mere act and fact of trading she, a working woman, left a sum of money which surprised me.

Tremendous credit is due to her and the movement of which we speak today. It is a thrift movement, but it is also an educational movement. The movement is to be admired for the work that it does amongst young people in clubs—where woodcraft, for instance, is taught—and for the work it does amongst adults by lectures, debates, and so on. In view of the needs of this age, the Chancellor should seek to aid this, instead of trying to retard it, as he is doing, in penalising it by unfair taxation.

I emphasise that this organisation, this great movement, is not a way of making money out of money. There is nothing inflationary about it. It never creates values which are not backed by goods. This must be stated to its credit. There is no attempt at any time to falsify its capital, because capital to some extent is a subsidiary aspect of its work. It still carries on in much the same way as the Fenwick pioneers who started the organisation. From an accumulated surplus it buys consumer goods which are necessary to supply its members. It sells the goods to them. The little surplus which arises is apportioned to the members, and for the most part it is collected at the end of the half year.

In my own society, in south Glasgow, the board of management has to set aside a fortnight—five days in each week—to pay out the great mass of women who queue up to draw their dividends. Very little is left lying in the society. The total accumulated capital works out at about £20 per head. This is the organisation which the Government are attacking by this penal form of taxation. [HON. MEMBERS: "No."]. Yes, they are attacking it. They are attacking it most unfairly. Now that I have provoked a noise from the other side, later on the noise may formulate itself into speech. We may hear something which will show us that under co-operative influence even Tories can advance towards articulate speech.

There is one strongly contradictory situation about all this. Reference has been made to the fact that last Friday I, with the help of hon. Members on both sides of the House, put through the Industrial and Provident Societies Bill. [Interruption.] The hon. Member has the opportunity to make a speech. I have heard him speak before. There is no reason why he should not enjoy the experience again. Whether we can enjoy it is another matter.

On Friday, I completed the process of piloting a Bill through the House, and the purpose of that Bill, as has been said, was to provide the producer and consumer sides of the co-operative movement with more money. That was its simple object, and the Government backed me in that. I appreciate the support which I received from the Government Front Bench and from hon. Members on the back benches opposite. They were in favour of more investment in co-operation. Now, having allowed more money, in effect, to go from one hand, the Chancellor has decided that, with the other, he is to take away extra money. That is not consistent practice.

I notice that the right hon. and learned Gentleman is taking copious notes, and I assume that he is doing so because he realises that he has a good deal for which to account. He has to tell us why he claims that the co-operatives need more money while, at the same time, he is taking from them, in toto, £2¼ million a year. That is a difficult position to defend. I am certain that the easiest way for the right hon. and learned Gentleman to do so is to fling aside his defences and agree that those of us who have been supporting co-operation have a case based on solid rock and that he will give us what we are asking for.

Mrs. Harriet Slater (Stoke-on-Trent, North)

We are very disappointed that the hon. Member for Barry (Mr. Gower) has not risen, because apparently he disagrees with the comments of my hon. Friend the Member for Glasgow, Govan (Mr. Rankin). The way in which the hon. Member interrupted implied that he did not think that this was an unfair tax.

In the co-operative movement we feel that the tax is not only unjust but biased, and that if it were not for the name "co-operative", the taxes would not be applied. It is clear that it is biased because the amount has increased not steadily, but rapidly, since 1958, and the burden on co-operatives and friendly societies, not only retail but agricultural and other forms of co-operative and friendly society undertakings, has become much heavier.

The tax is unfair because the co-operative movement is a thrift organisation. It is an organisation which encourages small savings which the Chancellor and other Treasury spokesmen have repeatedly asked the public to increase. Throughout its existence, this organisation has encouraged people to save in a small, but nevertheless effective, way. The small savings in co-operative societies mount up. Nobody has yet made the point that co-operative societies also make a substantial contribution through their investments in Government and local authority loans, so that, in a way, by this tax, the Chancellor is taking out of his own hands money which would otherwise be invested.

These small savings are of considerable advantage to working people. I know of many families who, because wives are able to save through their dividends from co-operative societies, are able to reclothe the children in September after the summer holidays. It might be said that that is not the state of affairs in our society today, but it is true especially for the lower-paid income groups. Many children are able to have new shoes and new clothes in September after the long summer holidays simply because their parents have accumulated dividends in their co-operative society.

Many working-class families are able to spend money on holidays because of these dividends. Any member of a co-operative society can prove that by checking on the half-yearly returns of the amount of withdrawals of dividend and savings at holiday times. Many people are able to buy things which they need because of dividends which they have saved.

This increase will mean that once more the consumer will have to pay, because some of the dividends will be used to meet this tax. In another part of the Bill the consumer is to be called upon to pay in another way. It is becoming impossible to penetrate the minds of hon. Members opposite with the idea that there is some advantage in belonging to a co-operative society. We see the hackles rise and resistance grow just because of the name. The Chancellor has a chance, by accepting these Amendments, to be fair and unbiased and to help those people who, through a lifetime of membership of the co-operative movement, have shown that they are prepared to help themselves.

4.30 p.m.

The Economic Secretary to the Treasury (Mr. Anthony Barber)

The Amendment which has been moved, and the new Clause which goes with it, would reduce the rate of Profits Tax payable by co-operative societies to 3 per cent. as from 1st August, this year. They would allow the increase of rate from 12½ per cent. to 15 per cent. to operate in relation to co-operative societies for the four months from 1st April to 31st July. The second Amendment is only slightly different in that it would make the 3 per cent. rate apply to co-operative societies as from 1st April, this year.

Both Amendments and the related new Clause raise the same points of principle. The hon. Member for Glasgow, Govan (Mr. Rankin) rightly said a good deal about the work of the co-operative movement, but I am sure that he and every other hon. Member will agree that there are other more special considerations which we cannot ignore and which must be taken into account. As the hon. Member for East Ham, South (Mr. Oram) pointed out, in the fair speech with which he moved the Amendment, to judge the merits of these proposals it is necessary, without going into great detail, to consider briefly the history of this matter.

As I think the Committee knows, from the inception of the Profits Tax in 1937, when it was known as the National Defence Contribution, until the introduction of the two-tier system by the Labour Government in 1947, no special rules applied to the calculation of the liability of co-operative societies to Profits Tax. The 5 per cent. rate of charge, the rate appropriate to companies, applied, and although loan interest was deducted in computing the profits of co-operative societies, share interest was not deducted.

Under the Finance Act, 1947, which introduced the two-tier system, co-operative societies were made chargeable at the lower rate only, although the share interest was still not deductible in computing their profits. Then came the final Report of the Royal Commission on the Taxation of Profits and Income, in June, 1955, and the Commission's observations on this matter are so important that I should like to draw the attention of the Committee to two passages in the Report which bear directly on the matter we are now considering.

The first is paragraph 562 where, with regard to the general principles to be applied to Profits Tax, the Commission said: 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 the ownership of which is vested in the State and other corporations, or between corporations formed to serve public purposes and those formed to serve private purposes. It seems to us that only by an impartial distribution of the tax whenever and wherever profits are found can there be a fair balancing of costs and prices between the public and private sectors of industry and commerce. And if these factors are not balanced fairly the true relationship between these different activities in respect of their development is itself disturbed. Applying that principle, the Royal Commission recommended that when a flat rate of Profits Tax was introduced the co-operative societies should be taxed in the same way as other concerns, except, as the Committee knows, that the Commission also recommended that the share interest should be deducted as well as the loan interest, as in the case of building societies, and its recommendations in this regard are set out in paragraph 573.

The hon. Lady the Member for Stoke-on-Trent, North (Mrs. Slater) said that the Government were in some way biased against co-operative societies in what they are doing. I find it very difficult to understand why she says that. Does she consider that the Royal Commission was biased against co-operative societies for making the recommendations which have been carried into effect by a Conservative Government?

I do not think that it is either worthy or fair of the hon. Lady to make a suggestion like that, because, in the Finance Act, 1958, we gave effect to the Royal Commission's recommendations in regard both to the flat rate of Profits Tax, which was then fixed at the 10 per cent. limit, and to the allowance to co-operative societies of a deduction for their share interest. The proposals which we are now considering seek to restore the 3 per cent. rate of charge, while, of course, they do nothing to repeal the provisions introduced in 1958 under which share interest is deductable.

As the hon. Member for East Ham, South said, it is true that the dividend on shares, as opposed to the ordinary dividend, is different in kind from dividends paid by ordinary companies. The hon. Gentleman also said that I would say that this was a concession. I am prepared to say quite frankly that there is a difference in nature between the dividends paid by co-operative societies on shares and the dividends paid by ordinary trading companies. Therefore, quite apart from any question of concessions to co-operative societies, I think it right that they should be treated in this special way.

However, the over-riding objection to giving co-operative societies the special relief of Profits Tax which is sought in these Amendments is that it would be most unfair to their trading competitors. After all, their trading competitors are liable to Profits Tax at the full rate. They, like the co-operative societies, have built up their businesses out of taxed profits, and I do not believe that it would be equitable to give co-operative societies any more favourable treatment.

Profits Tax is levied on the profits of trades and businesses carried on by corporate and similar bodies, and there can be no denying that co-operative societies are carrying on trading activities, and that they are doing so with a view to making profits. There can be no doubt that they are carrying on their trade in competition with other enterprises, many of them small businesses, and, whatever the hon. Member for Sheffield, Hillsborough (Mr. Darling) may say about the relationship between Profits Tax and Surtax relief, I am sure that he will agree that there must be equity as between competing trading undertakings.

The hon. Member for Bethnal Green (Mr. Holman) referred to reserves, but, here again, it cannot be denied that if a co-operative society ploughs back part of its profits to expand its business it is doing what many of its competitors are doing, and under the present methods of computing profits for Profits Tax purposes the co-operative societies are rightly permitted to deduct their share interest, which is something which cannot be done by ordinary trading organisations.

Mr. Holman

Will the hon. Gentleman agree that one cannot make a profit out of oneself? Therefore, there is no profit arising out of mutual trading, and the reserve is merely an insurance against possible losses under certain conditions, of which I gave one example.

Mr. Barber

I am subject to correction, but if the hon. Gentleman is right in saying that the co-operative societies do not make a profit, they should quickly appeal to the House of Lords. If he is right, they would find that they would not be liable to Profits Tax, because that is a tax made only on profits on trading. I think that it must, therefore, be accepted that they like their competitors, make a profit.

Mr. Douglas Jay (Battersea, North)

Does the hon. Gentleman not see that the argument he has used about share interests of co-operative societies being of a special kind shows that their profits are a different form of profits from those of other trading companies, and that that invalidates his argument?

Mr. Barber

I do not want to waste time on this point, but if the right hon. Gentleman looks at paragraphs 570 to 572 of the Royal Commission's Report he will there find set out the reasons for treating dividends paid on share interest differently in the case of co-operative societies, and this has nothing to do with their trading activities, or with the nature of their profits or services. The treatment of co-operative societies is precisely in line with the recommendations of the Royal Commission.

The hon. Member for East Ham, South and the hon. Member for Govan contended that this was unjust. I suggest that to treat them otherwise than they are being treated would be most inequitable and would give them an unfair advantage over those with whom they are in direct competition, and for those reasons I ask the Committee to reject the Amendment.

Mr. Harold Wilson (Huyton)

The Economic Secretary is a continuing disappointment to us. His speeches are in themselves not only disappointing, but are becoming utterly predictable. It is not that he does not read very well. He does, but I think that any of us on this side of the Committee, if we had been given a pencil and a piece of paper before the hon. Gentleman rose to speak, could have written down word for word what he was going to say.

The hon. Gentleman's reply was very predictable. I have heard it from that Front Bench several times in the past few years. We thought that we would get something different from the new dispensation at the Treasury. I well remember the encomiums poured upon the Chancellor in the Sunday Times, last September. It was said that a fresh mind was being brought to bear, and that a new breeze was blowing through the Treasury which would get the country and the Treasury out of the rut. It was said that we would get some fresh ideas. But all we have got is the same turgid thoughts, expressed in the same terms as last year's.

What was remarkable about the speech was that instead of arguing the proposition that he was supposed to be arguing and dealing with the points made by my hon. Friends, the Economic Secretary read out yard after yard from the Royal Commission's Report. At one stage, I was not certain whether he was reading from the right page. His first quotation did not seem particularly relevant, and I thought that if he turned over the page he might find the bit that he was seeking.

It is extraordinary that he quotes from the Royal Commission to justify the Government's activities. Does he regard it as gospel? Does he agree with the conclusions in that Report? Last night he had the nerve—if I may use that term—to quote from the Radcliffe Committee's Report, which has been turned down flat by the Government. Now he gropes through the Report of the Royal Commission, trying to find a squalid little footnote with which he can agree, so that he can produce it in a debate. But the Royal Commission's Report has page after page of recommendations which have been turned down by the present Chancellor and his predecessors.

My hon. Friend the Member for Sowerby (Mr. Houghton), who has done some diligent research into the matter, could curdle the blood of the Economic Secretary, if he had any blood. He could quote a long list of recommendations—not merely footnotes—from the Report of the Royal Commission, which has now been available to us for exactly six years. They are recommendations which have either been ignored or turned down flat by the Government. Do not let us have any more of those arguments. Next time, I hope that we shall get from the Economic Secretary or the Chancellor a proper consideration of the points raised by my hon. Friends, and some attempt to deal with them. My hon. Friends have put their points very clearly.

It is evident that these related Amendments and the new Clause are designed to do two things. First, they seek to repel the attack made by the Chancellor on co-operative societies by increasing Profits Tax by 2½ per cent. I agree that the attack is not directed only against co-operative societies; it is a general rise of 2½ per cent. But the purpose of the Amendment, limited to co-operative societies, is designed to resist the proposal to extend the rate of taxation from 12½ per cent. to 15 per cent.

The second motive is to counterattack. Having, it is hoped, defeated the Chancellor, or held him on his proposal to worsen the situation, the Amendments seek to put the rate of taxation back to what it was before Lord Amory got at this problem in 1958, and to reverse the decision taken in that year, so that the co-operative societies would be paying at a rate of 3 per cent. The Economic Secretary was dimly beginning to perceive that there is a difference between co-operative dividends and dividends in ordinary commercial life, and that there is also a difference between co-operative shares and shares in ordinary commercial life, which fact my right hon. Friend the Member for Battersea, South (Mr. Jay) brought out. What he has not yet begun to see is that there is a difference in what he calls the profits.

This is a point to which he should devote some study. It would dawn on him if he thought hard about it. It follows not only from the arguments of my hon. Friends but from his own arguments that co-operative societies are not in business to earn profits. That is what he does not understand. They were originally created as a mutuality, for the purpose of providing a common service for their members. Some of the school textbook histories of co-operative societies refer to the Rochdale pioneers, but the co-operative principle goes back far beyond those days. As a Yorkshireman, I cannot give the palm to Rochdale. There was an extremely successful co-operative society functioning in Yorkshire in the eighteenth century, and before that there were co-operative societies in Portsmouth and Southsea and various other parts of the country.

Mr. James Griffiths (Llanelly)

Robert Owen.

4.45 p.m.

Mr. Wilson

He was more of the Rochdale period. I am going back to the days before his time. He was functioning in the nineteenth century. I am prepared to concede to my right hon. Friend the Member for Llanelly (Mr. J. Griffiths) any claims he wants for his part of Wales.

The plain fact is that many of the earlier co-operative societies did not have any dividends. That was a significant development of the Rochdale system. My hon. Friends know a great deal more about co-operative history than I do, but I think that the earliest societies were associations of workers who got together to buy a sack of flour at a commercial price and divide it among themselves, thereby making a saving. Where was the profit in that? The Economic Secretary would have brought in a squad of Income Tax inspectors to weigh out the flour and to say what profit was involved, and then go trekking off to another place to get a favourable decision.

The idea of these earliest societies was to provide a service, just as, for example, four or five people may decide that instead of paying bus or train fares to go on a journey they will share a car and so save some money. That is not a profit. That is providing a service. As my hon. Friend the Member for Bethnal Green (Mr. Holman) said, there is no identifiable profit, because one cannot make a profit out of oneself.

As my hon. Friend has shown, the co-operative movement is now an enormous, nation-wide social service, but with all its development it is still based on the original principle. It is true that a dividend is paid in respect of purchases, but that dividend is not of itself necessary to the co-operative principle; there can still be co-operation without any trade dividends being paid at all. The whole structure of the co-operative movement in relation to its capital is based on the principle of a group of partners getting together and providing a service for each other.

The shares pay very low rates of dividend. They are not shares in the sense that shares are understood in ordinary capitalism. One of the most important points, which my hon. Friends have stressed, is that these shares are not subject to gambling, or to variation in price on the Stock Exchange or anywhere else. They hold their value. They are flat-rate shares, always sold at par, and any transactions that take place in them take place direct with the societies and not through third parties.

Mr. Holman

The shares of co-operative societies are merely a form of loan to the societies. The Committee should appreciate that 30 per cent. of all the money put into them by their members is reinvested in Government or local government securities.

Mr. Wilson

I am grateful to my hon. Friend for that interjection. I was about to make that point.

In this sense, the co-operative movement has something in common with building societies. The shares are not subject to gambling. In other words, the holders of equity shares who, in the modern world, not only get their dividends at fairly high rates, but, in a few years, can almost certainly count on a capital gain, are in an entirely different position from co-operative society members, on whose dividends capital gains cannot be made. That is the argument for a different system of profits taxation.

Even if there were no other arguments, that argument alone should be enough. As my hon. Friend the Member for Bethnal Green has said, about 30 per cent. of the money of co-operative societies is invested in gilt-edged securities of one kind or another. It is invested in Government securities, local authorities, public boards, and other gilt-edged securities.

This should be something to please the Chancellor. It should not be something which gets him to reach for his fiscal pen and then try to extract more taxation. With all the wreckage which there has been in the gilt-edged market as a result of his and his predecessor's activities, he should be glad of a vast movement of this kind, which is doing something to support the gilt-edged market. It has suffered very heavy losses in the process.

The co-operative societies do not exist for the purpose of paying dividends on their shares. That is not their motive. As my hon. Friend the Member for Bethnal Green pointed out, the amount which they pay on their shares is comparable to a low rate of interest paid on a loan for the purpose of the societies' business. They are, therefore, essentially different. They do not exist for the purpose of paying dividends on shares.

There was some degree of justice in the system before 1958, when the co-operative societies were taxed at the lower of the two rates of the dual rate system, the same rate as the Profits Tax on undistributed profits—because these are, of course, undistributed profits. But once Lord Amory—I do not disagree at all, as a matter of history, that he was following the recommendation of the Royal Commission—unified the rates at 10 per cent., he put the co-operative societies on the same basis as the rest of industry and trade. The result was that what had been a 3 per cent. rate shot up to 10 per cent. Now, it is 15 per cent.

If one takes the average company distributing fairly fully up to its earning power, whereas that company was paying 30 per cent. on its distributed dividends before and is now down to 15 per cent., even after the Clause becomes law—in other words, on its distributed dividends it is paying half as much as it paid before—the co-operative societies, which previously paid 3 per cent., are now asked by the Clause to pay 15 per cent., or five times as much. In spite of this, the Economic Secretary tells us that everybody is being treated alike, that there is no injustice and that he is amazed that anybody should talk, as my hon. Friend the Member for Stoke-on Trent, North (Mrs. Slater) has done, about bias and prejudice in the Government's approach to this question.

Even if these arguments are not crystal clear, as they should be, to the Economic Secretary—I realise that it might take him a day or two to absorb them and to realise their meaning—they will, however, be crystal clear to the Chancellor, who, as we all know, has a ready and quick mind in these matters. We do not need to wait for a day or two for the Chancellor to take account of it all.

I hope that either the Chancellor will say that he accepts these arguments of my hon. Friends and will accept our Amendments or, at least, that the Economic Secretary will get up and say that he is so impressed by the arguments which have been put forward that now that he has read his brief and these bits from the Royal Commission Report, which he was told he must do, whether they were the right or the wrong bits, he will consider what has been said and will come back to us with proposals on Report.

If either the right hon. and learned Gentleman or his hon. Friend gives that perfectly reasonable response to this argument, we might, perhaps, agree to pass on—[Laughter.] Yes, pass on to the

next Amendment. I thought that when I was following a real, intellectual argument, I should strike oil with the hon. and gallant Member for Knutsford (Sir W. Bromley-Davenport). One thing that I have always found is that if the Government Front Bench is a little slow to see the sometimes, perhaps, difficult and complicated arguments, it is not long before one gets some reaction from the hon. and gallant Member. I look forward to seeing him in the Division Lobby with us.

Mr. Barber

The right hon. Member for Huyton (Mr. H. Wilson) is quite right in saying that my reply was somewhat similar to a reply given in earlier years. The right hon. Gentleman will, however, also admit that his own observations were not wholly dissimilar from those which have been made on previous occasions. We were, therefore, dealing with the same point.

The right hon. Gentleman referred at length to dividends. Even if no dividends were paid, Profits Tax would still be payable on the profits of an undertaking, whether a co-operative society or any other form of trading organisation. If it really is the case that these societies are not making profits, I find it is a little difficult to understand why, under the Labour Government, although they paid at a reduced rate, they were, nevertheless, liable to Profits Tax. Therefore, in the end, it is just simply a question of equity.

I realise that the right hon. Gentleman takes a different view from that of my right hon. and learned Friend. If I may put the matter briefly, the societies are trading. They are making a profit. They are operating in direct competition with other trading undertakings. Therefore, the view of my right hon. and learned Friend is that for Profits Tax purposes they should be treated in the same way.

Question put, That those words be there inserted:—

The Committee divided: Ayes 178, Noes 241.

Division No. 200.] AYES [4.56 p.m.
Abse, Leo Bowden, Herbert W. (Leics, S. W.) Chapman, Donald
Ainsley, William Boyden, James Corbet, Mrs. Freda
Albu, Austen Brockway, A. Fenner Craddock, George (Bradford, S.)
Allaun, Frank (Salford, E.) Broughton, Dr. A. D. D. Cronin, John
Allen, Scholefield (Crewe) Brown, Rt. Hon. George (Belper) Crosland, Anthony
Awbery, Stan Butler, Herbert (Hackney, C.) Cullen, Mrs. Alice
Benson, Sir George Butler, Mrs. Joyce (Wood Green) Darling, George
Blyton, William Callaghan, James Davies, G. Elfed (Rhondda, E.)
Davies, Harold (Leek) Jeger, George Price, J. T. (Westhoughton)
Davies, Ifor (Gowar) Jenkins, Roy (Stechford) Probert, Arthur
Davies, S. O. (Merthyr) Johnson, Carol (Lewisham, S.) Proctor, W. T.
Deer, George Jones, Rt. Hn. A. Creech (Wakefield) Pursey, Cmdr. Harry
Diamond, John Jones, Dan (Burnley) Rankin, John
Dodds, Norman Jones, Elwyn (West Ham, S.) Reid, William
Donnelly, Desmond Jones, J. Idwal (Wrexham) Rhodes, H.
Dugdale, Rt. Hon. John Jones, T. W. (Merioneth) Roberts, Albert (Normanton)
Ede, Rt. Hon. C. Kelley, Richard Roberts, Goronwy (Caernarvon)
Edelman, Maurice Kenyon, Clifford Robertson, John (Paisley)
Edwards, Rt. Hon. Ness (Caerphilly) Key, Rt. Hon. C. W. Robinson, Kenneth (St. Pancras, N.)
Edwards, Robert (Bilston) King, Dr. Horace Ross, William
Edwards, Walter (Stepney) Lee, Frederick (Newton) Royle, Charles (Salford, West)
Evans, Albert Lee, Miss Jennie (Cannock) Shinwell, Rt. Hon. E.
Fernyhough, E. Lewis, Arthur (West Ham, N.) Short, Edward
Finch, Harold Lipton, Marcus Silverman, Julius (Aston)
Fitch, Alan Logan, David Silverman, Sydney (Nelson)
Fletcher, Eric Loughlin, Charles Skeffington, Arthur
Foot, Dingle (Ipswich) Mabon, Dr. J. Dickson Slater, Mrs. Harriet (Stoke, N.)
Foot, Michael (Ebbw Vale) McInnes, James Slater, Joseph (Sedgefield)
Forman, J. C. McKay, John (Wallsend) Small, William
Fraser, Thomas (Hamilton) Mackie, John (Enfield, East) Sorensen, R. W.
Gaitskell, Rt. Hon. Hugh McLeavy, Frank Spriggs, Leslie
Galpern, Sir Myer MacMillan, Malcolm (Western Isles) Steele, Thomas
Ginsburg, David MacPherson, Malcolm (Stirling) Stewart, Michael (Fulham)
Gordon Walker, Rt. Hon. P. C. Mahon, Simon Stones, William
Gourlay, Harry Mallalieu, E. L. (Brigg) Strauss, Rt. Hn. G. R. (Vauxhall)
Greenwood, Anthony Manuel, A. C. Swingler, Stephen
Grey, Charles Mapp, Charles Sylvester, George
Griffiths, David (Rother Valley) Marquand, Rt. Hon. H. A. Taylor, Bernard (Mansfield)
Griffiths, Rt. Hon. James (Llanelly) Marsh, Richard Thomas, Iorwerth (Rhondda, W.)
Gunter, Ray Mason, Roy Thompson, Dr. Alan (Dunfermline)
Hale, Leslie (Oldham, W.) Mellish, R. J. Thomson, G. M. (Dundee, E.)
Hall, Rt. Hn. Glenvil (Colne Valley) Mendelson, J. J. Thornton, Ernest
Hamilton, William (West Fife) Millan, Bruce Wainwright, Edwin
Hannan, William Milne, Edward J. Warbey, William
Hayman, F. H. Mitchison, G. R. Watkins, Tudor
Healey, Denis Monslow, Walter Weitzman, David
Henderson, Rt. Hn. Arthur (Rwly Regis) Mort, D. L. Wells, Percy (Faversham)
Herbison, Miss Margaret Moyle, Arthur Whitlock, William
Hill, J. (Midlothian) Neal, Harold Willey, Frederick
Holman, Percy Oliver, G. H. Williams, D. J. (Neath)
Houghton, Douglas Oram, A. E. Williams, Ll. (Abertillery)
Howell, Denis (Small Heath) Oswald, Thomas Williams, W. R. (Openshaw)
Hoy, James H. Owen, Will Willis, E. G. (Edinburgh, E.)
Hughes, Cledwyn (Anglesey) Paget, R. T. Wilson, Rt. Hon. Harold (Huyton)
Hughes, Emrys (S. Ayrshire) Pannell, Charles (Leeds, W.) Winterbottom, R. E.
Hunter, A. E. Parker, John Woodburn, Rt. Hon. A.
Hynd, John (Attercliffe) Pearson, Arthur (Pontypridd) Woof, Robert
Irvine, A. J. (Edge Hill) Peart, Frederick Zilliacus, K.
Irving, Sydney (Dartford) Popplewell, Ernest
Jay, Rt. Hon. Douglas Prentice, R. E. TELLERS FOR THE AYES:
Mr. John Taylor and Mr. Lawson.
Agnew, Sir Peter Bullard, Denys Eden, John
Aitken, W. T. Bullus, Wing Commander Eric Elliot, Capt. Walter (Carshalton)
Allason, James Burden, F. A. Elliott, R. W. (Nwcstle-upon-Tyne, N.)
Arbuthnot, John Butcher, Sir Herbert Emery, Peter
Atkins, Humphrey Campbell, Sir David (Belfast, S.) Emmett, Hon. Mrs. Evelyn
Barber, Anthony Campbell, Gordon (Moray & Nairn) Fell, Anthony
Barlow, Sir John Cary, Sir Robert Finlay, Graeme
Barter, John Channon, H. P. G. Fisher, Nigel
Batsford, Brian Chataway, Christopher Foster, John
Baxter, Sir Beverley (Southgate) Chichester-Clark, R. Fraser, Ian (Plymouth, Sutton)
Beamish, Col. Sir Tufton Clark, Henry (Antrim, N.) Freeth, Denzil
Bell, Ronald Clark, William (Nottingham, S.) Galbraith, Hon. T. G. D.
Bennett, Dr. Reginald (Gos & Fhm) Cleaver, Leonard Gammans, Lady
Berkeley, Humphry Cooke, Robert Gardner, Edward
Biggs-Davison, John Cooper, A. E. Gibson-Watt, David
Bingham, R. M. Cooper-Key, Sir Neill Glover, Sir Douglas
Birch, Rt. Hon. Nigel Cordeaux, Lt.-Col. J. K. Goodhart, Philip
Bishop, F. P. Corfield, F. V. Gower, Raymond
Bossom, Clive Costain, A. P. Grant, Rt. Hon. William
Bourne-Arton, A. Coulson, J. M. Grant-Ferris, Wg. Cdr. R.
Bowen, Roderic (Cardigan) Courtney, Cdr. Anthony Green, Alan
Boyd-Carpenter, Rt. Hon. John Craddock, Sir Beresford Gresham Cooke, R.
Boyle, Sir Edward Cunningham, Knox Grimond, J.
Braine, Bernard Dalkeith, Earl of Grosvenor, Lt.-Col. R. G.
Brewis, John Davies, Rt. Hn. Clement (Montgomery) Gurden, Harold
Bromley-Davenport, Lt.-Col. Sir Walter Digby, Simon Wingfield Hall, John (Wycombe)
Browne, Percy (Torrington) Doughty, Charles Hamilton, Michael (Wellingborough)
Bryan, Paul Duncan, Sir James Harris, Frederic (Croydon, N. W.)
Buck, Antony Duthie, Sir William Harris, Reader (Heston)
Harrison, Brian (Maldon) McLean, Neil (Inverness) Roots, William
Harvie Anderson, Miss McMaster, Stanley R. Ropner, Col. Sir Leonard
Hastings, Stephen Maddan, Martin Russell, Ronald
Hay, John Maitland, Sir John Scott-Hopkins, James
Heald, Rt. Hon. Sir Lionel Manningham-Buller, Rt. Hn. Sir R. Sharples, Richard
Henderson-Stewart, Sir James Markham, Major Sir Frank Shaw, M.
Hendry, Forbes Marlowe, Anthony Simon, Rt. Hon. Sir Jocelyn
Hiley, Joseph Marples, Rt. Hon. Ernest Skeet, T. H. H.
Hill, Dr. Rt. Hon. Charles (Luton) Marshall, Douglas Smith, Dudley (Br'ntf'rd & Chiswick)
Hill, Mrs. Eveline (Wythenshawe) Marten, Neil Smithers, Peter
Hill, J. E. B. (S. Norfolk) Maxwell-Hyslop, R. J. Spearman, Sir Alexander
Hinchingbrooke, Viscount Mills, Stratton Stevens, Geoffrey
Hirst, Geoffrey Montgomery, Fergus Steward, Harold (Stockport, S.)
Hocking, Philip N. More, Jasper (Ludlow) Stodart, J. A.
Hollingworth, John Morgan, William Stoddart-Scott, Col. Sir Malcolm
Hopkins, Alan Mott-Radclyffe, Sir Charles Storey, Sir Samuel
Hornby, R. P. Nabarro, Gerald Studholme, Sir Henry
Hornsby-Smith, Rt. Hon. Patricia Nicholls, Sir Harmar Sumner, Donald (Orpington)
Howard, Hon. G. R. (St. Ives) Nicholson, Sir Godfrey Talbot, John E.
Hughes-Young, Michael Nugent, Sir Richard Tapsell, Peter
Hurd, Sir Anthony Oakshott, Sir Hendrie Taylor, Edwin (Bolton, E.)
Hutchison, Michael Clark Orr, Capt. L. P. S. Taylor, W. J. (Bradford, N.)
Iremonger, T. L. Orr-Ewing, C. Ian Thatcher, Mrs. Margaret
Irvine, Bryant Godman (Rye) Osborn, John (Hallam) Thompson, Kenneth (Walton)
James, David Osborne, Sir Cyril (Louth) Thornton-Kemsley, Sir Colin
Jenkins, Robert (Dulwich) Page, John (Harrow, West) Tiley, Arthur (Bradford, W.)
Johnson, Eric (Blackley) Page, Graham (Crosby) Turner, Colin
Johnson Smith, Geoffrey Pannell, Norman (Kirkdale) Turton, Rt. Hon. R. H.
Jones, Rt. Hn. Aubrey (Hall Green) Partridge, E. Tweedsmuir, Lady
Joseph, Sir Keith Pearson, Frank (Clitheroe) van Straubenzee, W. R.
Kerans, Cdr. J. S. Peel, John Vane, W. M. F.
Kerby, Capt. Henry Percival, Ian Vaughan-Morgan, Rt. Hon. Sir John
Kerr, Sir Hamilton Pickthorn, Sir Kenneth Vickers, Miss Joan
Kershaw, Anthony Pilkington, Sir Richard Vosper, Rt. Hon. Dennis
Kitson, Timothy Pitman, Sir James Walder, David
Lambton, Viscount Pitt, Miss Edith Wall, Patrick
Leather, E. H. C. Pott, Percivall Ward, Dame Irene
Leavey, J. A. Powell, Rt. Hon. J. Enoch Watkinson, Rt. Hon. Harold
Leburn, Gilmour Price, David (Eastleigh) Williams, Dudley (Exeter)
Legge-Bourke, Sir Harry Prior, J. M. L. Williams, Paul (Sunderland, S.)
Lilley, F. J. P. Prior-Palmer, Brig. Sir Otho Wills, Sir Gerald (Bridgwater)
Linstead, Sir Hugh Proudfoot, Wilfred Wilson, Geoffrey (Truro)
Litchfield, Capt. John Pym, Francis Wise, A. R.
Lloyd, Rt. Hn. Geoffrey (Sut'nC'dfield) Quennell, Miss J. M. Wolrige-Gordon, Patrick
Lloyd, Rt. Hon. Selwyn (Wirral) Ramsden, James Wood, Rt. Hon. Richard
Longbottom, Charles Rawlinson, Peter Woodhouse, C. M.
Longden, Gilbert Redmayne, Rt. Hon. Martin Woodnutt, Mark
Lucas-Tooth, Sir Hugh Rees, Hugh Woollam, John
McAdden, Stephen Renton, David Yates, William (The Wrekin)
MacArthur, Ian Ridley, Hon. Nicholas
McLaren, Martin Roberts, Sir Peter (Heeley) TELLERS FOR THE NOES:
McLaughlin, Mrs. Patricia Robertson, Sir D. (C'thn's & S'th'ld) Mr. Whitelaw and
Robinson, Sir Roland (Blackpool, S.) Mr. Michael Noble.
Mr. Glenvil Hall (Colne Valley)

I beg to move, in page 23, line 10, at the end to add: Provided that such increase shall not apply to any organisation recognised as a building society and registered under the Acts relating to building societies.

The Chairman

I suggest that it would be for the convenience of the Committee if we discussed, at the same time, the following two Amendments:

In page 23, line 10, at the end to add: Provided that this increase shall not have effect in relation to a building society. (2) In this section the expression "building society" has the same meaning as in the Building Societies Act, 1960, save that it also includes a society which is, or for the purposes of the Building Societies Acts. 1874 to 1960, is deemed to be, registered in Northern Ireland or any such unincorporated society as is mentioned in section seven of the Building Societies Act, 1874, and has its chief office or principal place of business in Northern Ireland. In line 10, at the end to add: Provided that as and from the first day of April, nineteen hundred and sixty-one, profits tax on any recognised building society shall only be charged on that proportion of the profits that arises from special advances as defined in the Building Societies Act, 1960.

Mr. Glenvil Hall

This Amendment seeks to exempt building societies from the additional 2½ per cent. Profits Tax which the Chancellor is imposing in the Bill. The other Amendments go a good deal further. They would exempt building societies from all payment of Profits Tax. Needless to say, I agree with that, but the Amendment I am however moving is a great deal more modest.

I have no doubt that the Chancellor has noted that these three Amendments are not the result of the feeling in one part of the Committee alone. The Amendments that we are discussing, apart altogether from another Amendment which was found to be out of order, have at least twelve names of Conservative Members attached to them in support. It should be noted by the Chancellor and the Committee that we are dealing with a matter which is not the concern of one party only but one in which members of all parties take an interest and seek to obtain change.

This is a modest proposal. All that those of us who have put our names to it are asking is that, if the Chancellor will not abolish the major injustice, he will not add to it by seeking to impose this additional 2½ per cent. This is not the first time that this matter has been ventilated in discussion on a Finance Bill. Like the Amendment dealing with co-operative societies, which has just been disposed of, the question whether it is right and proper to impose this tax on building societies has come up almost yearly. I put it to the right hon. and learned Gentleman that when hon. Members on both sides of the Committee feel so strongly about a matter there must be something in their view and an injustice which needs redressing. Hon. Members on both sides would not have co-operated in this way if there were not sound reasons for their so doing.

What are the reasons why some of us wish, if we can, to obviate the increase of 2½ per cent. now and why many of us would like to see the tax abolished altogether from building societies? The first point I make, which has often been made before, was made—possibly with less reason—when we were dealing with co-operative societies. It is that building societies do not make profits, and Profits Tax is a tax on profits and not on anything else. Individuals do not pay Profits Tax; only companies and organisations of that kind do. I think that it is established beyond dispute therefore, that building societies do not make profits. Not only do they not make profits, but they do not distribute any dividend or give any bonus at any time. They are in a peculiar and particular position. Not only do they not seek to make profits, but their surpluses go to strengthen, and are for the benefit of, the building societies concerned.

The first point that I would make therefore, is that building societies are in a peculiar and a particular position. Sir John Simon himself, when he was Chancellor of the Exchequer, over twenty years ago, recognised this fact. What he said then has been quoted many times and I will not weary the Committee by quoting it again. He said that building societies were in a class apart as far as tax was concerned. Proof of this, if proof is needed, is that they were brought specially within the ambit of this tax.

An ordinary trading concern is not mentioned by name in Finance Acts when Profits Tax is dealt with, but building societies actually had to be brought within the terms of the Acts as building societies, so that the tax should apply to them. There is a belief among some people that building societies do not pay Income Tax. It is a fairly widespread belief arising from the fact that those who lend money to building societies receive the interest on their money apparently tax free. It is only when, and if, they pay Surtax that the Inland Revenue deducts any tax from the interest which they receive on the money that they lend to a building society, and then not by way of Income Tax but only for Surtax purposes.

This does not mean that building societies do not pay Income Tax. They compound with the Inland Revenue for a special rate. This is fixed each year, and at the moment, I think, the agreed rate is about 5s. 5d. in the £. I have yet to learn that this does not cover adequately the amount of Income Tax for which they are liable. This is an arrangement which undoubtedly suits the Inland Revenue and, administratively, I have no doubt, it suits the building societies.

It arises from the fact that a very large number of people who put their money into building societies are small savers who, in any event, are not liable for Income Tax. This arrangement saves the Inland Revenue from receiving an enormous number of small claims for the repayment of tax. Building societies pay Income Tax under this arrangement and there is not the slightest doubt that the Inland Revenue does not lose by it.

For sixty years, and until comparatively recently, building societies did not pay income Tax. They pay it now, of course, as I have said, and, in addition, in comparatively more recent times they have also paid Profits Tax. As we have already been reminded this afternoon on an earlier Amendment, in 1958 a change was made on the basis of Profits Tax. In that year the old differential rates were abolished, the 3 per cent. tax on undistributed ploughed-back profits was got rid of, as, indeed, was the 30 per cent. levied on distributed profits, and a flat rate of 10 per cent. was instituted instead.

Even the distributed rate of 3 per cent. which was previously charged to the co-operative societies was not charged to building societies. Even then it was recognised that building societies were in a different category even from co-operative societies. They paid at a flat rate of their own of 2 per cent. Many people thought that this was a favour to building societies and that they should have been very grateful for it. In fact, it was no favour at all because, as I think many of us know, although they only had to pay at the rate of 2 per cent. they were not paying this on the net but on the gross.

5.15 p.m.

When assessed, building societies were not allowed to deduct the interest which they paid on what they had borrowed from those who invested with them. Building societies, of course, function by borrowing money at fixed rates of interest and lending it to those who wish to buy their homes. This borrowed money is, therefore, their raw material, without it which they could not exist.

An ordinary trading company is allowed to deduct its expenses on the cost of the material from which it makes its profits, but up to 1958 building societies were not allowed to do so. The result was that they paid far more tax than they should have done or that an ordinary trading concern in fact paid. During the years 1953–54 to 1957–58, building societies paid in this way over £6 million in tax instead of £1,700,000, an excess of over £4¼ million.

For several years attention was drawn to this matter in the House and attempts made by hon. Members on both sides to remedy the injustice. But the Chancellor of the day would not accede to the request. It was not until three years ago, when the basis was altered and a flat rate introduced, that the then Chancellor, the present Lord Amory, at last agreed to allow assessments to be made on the net rather than on the gross. At the time, many thought that this was a triumph for reason and justice. At the same time, however, the Chancellor turned round and gave building societies a slap in the face because, instead of the 2 per cent. tax which they had been paying on the gross, he made it 10 per cent. on the net. This, of course, made a very great difference to building societies. It made a difference to the co-operative societies, too, as we have heard, who were also treated in the same way.

It is sometimes asked why building societies which perform a useful function in the State should be treated in this way. A little while ago I heard someone say that he had formed the opinion that there must be someone in the Inland Revenue who, at some time had been refused a mortgage by a building society and had decided, at every possible opportunity, to take it out of building societies. That is probably untrue, but what the reason is I do not know. Perhaps the Minister will let us know. There obviously is a reason, but many of us are quite uncertain as to what it is.

What is the position today? It is that this year building societies collectively will have to find Income Tax at the composite rate of 5s. 5d. in the pound amounting to £31 million. In addition, they will have to find Income Tax at the standard rate on their surpluses equal to £9 million, making £40 million in all. If we add to that the Profits Tax at the present rate of 12½ per cent., the Chancellor will take a further £3 million, and if we add the 2½ per cent. now proposed making 15 per cent., there is another £750,000 added to this figure, making altogether, Profits Tax £3¾ of million, making, in total, nearly £44 million from building societies for the current year.

It might be said by some that if building societies pay at this magnitude, why should any of us worry very much if they have to pay another £¾ million. If some hon. Members argue that way—I hope that none will—I think that they must still agree that a halt must be called at some time, that this kind of thing has gone progressively upwards during the last three years, and that no one can see what the end will be. But there is a more serious aspect to the matter and one to which many of us desire the Chancellor to direct special attention. It is the effect of this mounting burden on reserves.

I would remind hon. Members—I hope I may be forgiven for doing it, but it is part of the case which has to be put—how building societies function. First, they have to borrow money. In doing that, they have to pay interest to those who lend it. Often, as I have said, and as we know, the lenders are quite small savers. The building societies re-lend such money to house purchasers, and, naturally, as they have themselves to live, they have to lend it at a higher rate than they are paying. The difference between these two rates is what is called the "surplus". The Chancellor would probably call it a profit, but it is known among the building societies as the surplus.

Out of that surplus the building societies have to find certain things. First, they have to find the interest to their lenders. Second, they have to find their management expenses. Third, they have to meet taxation. What is left over they want, naturally, to put to reserve.

The interest to lenders is to a certain extent, in fact very largely, outside the control of a building society. The building societies have to pay what rates will attract the money which they need. They are, naturally, in competition with other people who are also offering rates of interest in the same way. Therefore, they cannot borrow at too low a rate. The have, indeed, to pay the market rate for the money which they borrow. Management expenses are extremely low, relatively. Building societies are very efficiently managed and carry on in an economical fashion.

Those payments having been met, the mortgage rate has to be high enough to meet taxation and reserve provision. What shall the mortgage rate be? Naturally, the building societies like to keep their mortgage rates as low as possible because their job is to help people to own their own homes. The Government will tell us that they desire people to be home owners, and we all like to think that this country is rapidly becoming a nation of property owners, but it is impossible for small people to own their own home if the cost of buying their home is too high. An integral part of what they have to pay in buying their home is the rate of interest on the mortgage to the building society.

The matter thus resolves itself quite simply, so it seems to some of us, into a question of how little taxation can be imposed on building societies so that the mortgage rate shall be as low as is practicable and feasible and yet adequate reserves can be built up. It is essential that societies should each year place an adequate sum to reserve. The whole structure of the building society movement, and of building societies in particular, is based on and anchored to adequate reserves.

The question then arises as to what percentage of its total assets a building society should place to reserve. I freely admit that this is a matter of opinion. The United States, for example, does not charge tax on building societies until their reserves have reached at least 12 per cent. In this country at the moment the building societies aim at a level of 4.4 per cent., but they have nowhere near touched that, and, if the present burden placed on them in this way continues, they never will.

The 4.4 per cent. to which the building societies look as an adequate percentage of reserve is equal to 8s. 9d. in each £100. Actually, with taxation as it is, they are able only, particularly if the 2½ per cent. is imposed, to put aside a reserve equal to 5s. 9½d. per £100. This is a shortfall of the amount which they think adequate of about 3s. The burden of Profits Tax on building societies at the moment is equal to 2s. per cent. Therefore, of the 3s. shortfall at least 2s. is accountable for by the fact that Profits Tax is levied.

I will summarise briefly what I have been trying to say. First, building societies do not make profits. They do not pay dividends. They make no distribution whatever to any individual shareholder or other person. They are not trading companies in the ordinary sense of the term. They perform—I need not stress this—a very useful function in the State. Because of this the rates should be kept low to help as far as possible the small man. The stability of building societies has been endangered by the penal taxation which has been imposed on them. This kind of taxation is relatively new and it is only in recent years that taxation at this level has been levied on them. In view of these facts common justice surely dictates that a change should be made, and made soon.

When the previous Amendment was under discussion I noticed that the Chancellor was making copious notes, and I thought that meant that he would intervene in the debate. However, the Economic Secretary replied, and it may well be that he will reply to this debate. I have not the slightest doubt that he already has his brief and that it will contain a quotation from the Royal Commission. I should like the hon. Gentleman to know, before he reads it, that the building societies were not called upon to give evidence before the Royal Commission. Indeed, the Royal Commission gave nobody an opportunity to put the case for the building societies. It is true that the Royal Commission made the observation to which the hon. Gentleman alluded, but I think that most people who read it and who know anything about building societies realise that it was a grossly unfair inference to make and that building societies should not be lumped in with trading concerns, as would happen if a flat rate was imposed.

It cannot be said—this was one of the arguments used by the hon. Gentleman—that building societies are competing against anyone else. The hon. Gentleman made a strong point of that when referring to the position of co-operative societies. That may or may not be true about co-operative societies, but it is certainly not true of building societies. They are, as Sir John Simon said many years ago, in a class apart. They are quite willing, I am sure, to be taxed justly. What they object to is the injustice of the present penal burden which is placed on them, which they should not bear and which prevents their fulfilling properly, as they would wish to do, their function in the State.

5.30 p.m.

Mr. Nigel Fisher (Surbiton)

In supporting this Amendment I should, perhaps, declare an interest, as I have often done before, in that I am both a director of and an investor in a building society. The right hon. Member for Colne Valley (Mr. Glenvil Hall), in what, if I may say so, was an excellent and very comprehensive speech, quoted the late Lord Simon, at that time Chancellor of the Exchequer, and we should realise, as Lord Simon even then did, that building societies stand in a class very much by themselves.

They are not engaged in trade. They are not investment companies. They do not make profits in the commercial sense; and there are no equity shareholders to whom profits could be distributed in any form, either as dividends or as capital gain. They are in a category of their own as savings organisations. They are quite different from anything else.

Any surplus cash they may accumulate is retained as reserves and invested in gilt-edged or local government securities. That being so, to give total exemption from the whole 15 per cent. of Profits Tax, though it would technically cost the Exchequer over £3 million would not really cost that at all. The £3 million would go into Government stock, with the result that the real cost to the Exchequer would be only the interest on that sum and not the £3 million itself.

In this Amendment we do not even go as far as that. Indeed, with a moderation that almost astonishes me, all we ask for is exemption from the new rate of Profits Tax, and not from all of it. We ask my right hon. and learned Friend to mark the distinction which I think everybody in this Committee realises exists between building societies and ordinary trading organisations, by leaving building society Profits Tax at the present level—although we object to it—of 12½ per cent.

Technically, that would cost the Exchequer about £1 million but, again, it would actually cost the Exchequer only the interest on £1 million. In terms of money, therefore, this would be a very modest concession to make. I suggest that it would not in any way affect the anti-inflationary aspect of my right hon. and learned Friend's Budget. It would not make the smallest dent in the large above-the-line surplus of £500 million.

I recognise, as I think all hon. Members do—certainly those on this side— the importance of the Chancellor's anti-inflationary policy this year, and if the concession for which we ask were likely to have any inflationary effect on the national economy, I for one would not be asking for it. But it does not. The proceeds of any remission of Profits Tax will not be distributed to anyone. They will be saved, and invested in Government stocks—which are sadly in need of market support at the present time.

There is one claim that I do not propose to make in helping to argue this case. It cannot with truth be said that the recently-announced rise in the rates of interest charged by building societies to their borrowers is due primarily to the proposed increase in Profits Tax. That is, of course, a contributory factor, but I do not think that it is the main one.

The reason for the rise in interest rates—which is well understood in this Committee but which, judging from my mail, is not always understood outside—is that there has been a falling off in investment, due to relatively low rates of interest to lenders and an increase in withdrawals as a result of higher rates of interest being offered elsewhere. That is taking place at a time of almost unprecedented demand for mortgages. The combination of the two factors has meant that the societies have simply not had enough money to lend to borrowers.

The only way to get more money to lend is to pay a higher rate of interest to investors, and the only way to do that is to charge a higher rate of interest to borrowers. It is as simple as that though, as I have said, the higher rate of Profits Tax is a contributory, even if not the principal, factor in this state of affairs—

Mr. Donald Chapman (Birmingham, Northfield)

Would not the hon. Gentleman agree that the general amount of taxation of building societies—the whole taxation paid to the Chancellor—is causing unduly high rates having to be charged to borrowers?

Mr. Fisher

That is a very fair statement to make. The composite rate of Income Tax and Profits Tax taken together does put a very heavy burden on the building societies which is, in the end, reflected in the rates charged to borrowers. That is a fair enough argument.

I agree with the right hon. Member for Colne Valley that an even more serious aspect of this taxation is its effect upon the societies' reserves. Even before this Budget, taxation was such that the present ratio of reserves to assets—which is none too high, even now—cannot possibly be maintained at the existing level, and with the higher composite rate of Income Tax and higher Profits Tax now proposed the ratio of reserves to assets will inevitably fall still further. That is a rather serious position because, over the past thirty years, the surplus going to reserves, as a percentage of total assets, has already been almost halved.

In my view and, I think, in that of many other hon. Members, we should, in equity, exempt building societies completely from Profits Tax. It is not a suitable tax for them. It is for them an unjust tax, which came into existence only because of an historical accident, and it was never intended at any time to be a permanent feature of our fiscal system. This is also quite an inappropriate tax, and in the whole set up and circumstances of the building society movement it seems to me to be a totally irrelevant one.

So we think that it should be abolished, but we recognise that we cannot get blood out of a stone—and my right hon. and learned Friend has been rather stony in his response to many pleas for concessions in this Finance Bill—probably rightly; I do not criticise that. I merely say it in explanation of the fact that we are being very realistic and very modest. We are not by any means asking for the impossible. We are asking for a relief, as a gesture, the cost of which amounts to the interest on £1 million a year. In the context of the present national income and expenditure, that is so trifling an amount that I submit that my right hon. and learned Friend cannot with justice assert that it really makes any difference at all to the theme of his 1961 Budget. I hope, therefore, that he will be disposed to accede to our very modest request, and accept this Amendment.

Mr. Donald Wade (Huddersfield, West)

The right hon. Member for Colne Valley (Mr. Glenvil Hall) referred to the Royal Commission's Report, and in previous debates Government spokesmen have always quoted from it. I hope that today the Treasury Bench will not shelter behind some statement in that Report I am, of course, well aware of the tendency of hon. Members to quote the Royal Commission's Report when it appears to be favourable to them and to ignore it when it is not so favourable, but in this case I do not think that we should put too much weight either one way or the other on the observations in the Report.

The right hon. Gentleman has pointed out that the Commission did not ask for any evidence from the building societies, and that no such evidence was offered to it. I suppose that it was assumed that in considering profits, the Royal Commission would not be considering certain building society surpluses that are not strictly profits. It is true that the Commission, in its Report, drew attention to some anomalies in the basis of calculation, but I do not think that these special circumstances of building societies were fully considered.

If one is looking into the past, one must go into the history of just how it came about that building societies' surpluses were treated as profits and subjected to tax. The Chancellor will be aware, of course, that when the revised National Defence Contribution was introduced in 1937 a special rate was imposed on building societies, but it was intended only as an exceptional levy for a period of five years though, like so many of these exceptional levies, it lasted very much longer than was originally intended.

In 1947, when the National Defence Contribution was replaced by Profits Tax, building societies were again included. Having once been caught in the net, it was difficult for them to escape, though I believe that in 1947 they protested. The principle of treating these surpluses as Profits Tax has never been established and, I think, has never been really justified. Therefore, when we consider the latest increase in Profits Tax to 15 per cent., we must again consider whether this particular levy should be imposed at all.

No one questions the obligation to pay tax in respect of the interest paid by the building societies to those who invest. This is accounted for by the building societies to the Treasury by means of the composite rate, and that is perfectly right and proper. But what is in question is the imposition of a tax, both Income Tax and Profits Tax, on the surpluses which are necessary to maintain adequate reserves.

Several references have already been made to the importance of maintaining adequate reserves, and I do not intend to repeat them. But this is not just an academic question. If there were no tax on surpluses I believe that the latest increase of ½ per cent. on interest charged to borrowers would not have been necessary. The amount of tax imposed has a direct bearing on the amount of interest which borrowers who are buying their houses have to pay.

I do not suggest—and I do not think that any hon. Member would—that the increase of 2½ per cent. in Profits Tax is the sole cause of the latest increase of ½ per cent. in mortgage interest rates charged by building societies, but it was no doubt a contributory factor in the decision to increase the amount to be charged. There is the other factor of the fall in value of gilt-edged securities and the value of reserves of building societies and, for these reasons, it is right to consider whether this imposition is desirable.

I do not think that anyone would deny the importance of the rôle of building societies in the savings movement. Indeed, the nearest competitor to the building societies is the National Savings movement. It was suggested in a debate a year or two ago that a building society is comparable with an investment trust or an investment company. The point was made by the present President of the Board of Trade on 1st July, 1958—I shall not quote it but, for those who are interested, it appears in column 1108 of the OFFICIAL REPORT of that date—where he contended that building societies were comparable with investment companies, but I do not really think that that is a fair comparison. I do not think that we can regard them as competing with any industrial concern with equity capital. The fairest way to approach this is to say that if a building society had equity shareholders or if a building society competed with some trading concern—for example, some concern dealing in the retail trade—then in either of those cases there might be some argument for imposing a tax on its surpluses.

But neither of those conditions applies. There is no shareholder to whom profits can be paid and the building societies do not compete with any trading concern. It would seem, therefore, that the only possible justification or argument that could be put forward is that it is Government policy to make home buying more difficult. That might be logical, but it would be regettable and it is, of course, a matter for the Chancellor to decide.

5.45 p.m.

The task of building societies is certainly affected by the ruling interest rate and by Government policy towards interest rates, but I think it unreasonable that their task should be further aggravated by a tax on surpluses. If it is the object of Government policy deliberately to restrict and to make home buying more onerous, as part of the economic policy necessary at the present time, then the Chancellor should say so—and not contend that this tax can be justified on any merits as such.

If it is not part of the Government's policy to make home buying more difficult, surely the least they can do is to relieve the building societies from this additional increase of 2½ per cent. It may not be entirely logical to relieve the societies from this 2½ per cent. only. It would be more logical to relieve them from Profits Tax altogether, and as a long-term solution I would abolish both Profits Tax and Income Tax on the surpluses.

Having made these criticisms, I wish to put forward a constructive alternative. If the existing tax on surpluses—and I mean both Income Tax and Profits Tax—were abolished, I think that there would be a case for a reserves distribution tax. The building societies should be allowed and encouraged to reach an agreed reserves ratio, that is, between free reserves and total assets, and then it might be right to impose a tax on anything over and above the amount necessary to achieve that ratio. I believe that this is in operation in America and Canada.

I quote from an interesting article by Sir Bruce Wycherley in the Building Societies' Gazette in June of this year. Sir Bruce writes: As a result of the Budget proposals, societies would have to pay away more of their surplus in taxation than they would place to reserve. In a full year, for every £1 of surplus, no less than 10s. 9d. would be taken in taxation, placing an appalling burden upon the business of building up adequate reserves. He points out that to secure trustee status, building societies must achieve a certain reserve ratio. Sir Bruce then refers to conditions under the Act recently placed on the Statute Book and adds: …it must be realised that this sets a hard and fast limit upon overall expansion by the building society movement, unless margins become more flexible than at present. It is obvious that mortgage demand is not similarly contained. What is the solution? The simple way out is undoubtedly for Income Tax and Profits Tax relief to be granted on reserve appropriation. A society might be permitted to enjoy this concession until its reserve ratio reached a prescribed upper limit—perhaps 5 per cent.—above which appropriations would be taxed normally. May I interpose my own view here? I think that 5 per cent. is too low. I would suggest 10 per cent. or, at any rate, 7 per cent., but I agree with the principle contained in this suggestion.

I conclude the quotation: The Exchequer would forgo some revenue but get in return a correspondingly higher inflow of funds into gilt-edged; bearing in mind the new Trustee Bill, this might not be unacceptable. Whatever the Chancellor decides today—and I hope he will decide in favour of the Amendment—I hope that he will also consider this long-term solution on the lines of a reserve distribution tax.

There is very little further to be said that has not already been said by other speakers. It must be remembered that the building societies are required by statute to invest these reserves in trustee securities. They are, in fact, debarred by statute from investing in anything except first mortgages and trustee investments. So this in effect is a tax on potential reserves. The Government have already recognised in the Building Societies Act the importance of maintaining an adequate reserve ratio. It seems illogical that the Government should make it more difficult to maintain this reserve ratio and by their taxation policy take away from the building societies part of the money which would otherwise be invested as reserves. If the Government wish to encourage saving and maintain the flow of funds into gilt-edged securities, it is surely in the interests of the Treasury that no steps should be taken which would make this more difficult and so deplete the reserves.

I recognise that the request that has been made, namely, for relief so far as the 2½ per cent. is concerned, is not all that the building societies would wish for, but it would go some way towards meeting their plea, and I hope that we shall have a favourable reply from the Chancellor.

Sir Cyril Black (Wimbledon)

I ought to begin by declaring an interest in building societies, having been a director and a shareholder of a building society for some twenty years past. But although I am interested in the building society movement, which is one to which I have devoted a great deal of time over a good many years, I am bound to say that I find myself in almost complete disagreement with the three hon. Members who have so far addressed the Committee. I do not see how the Government, if they are going to adhere to any principle in this matter at all, could possibly make the concession which they are being asked to make by this Amendment.

I have always felt that there is little logic in favour of complete exemption from Profits Tax in the case of building societies, but in my view there is no logic at all in the suggestion that they should be charged at the rate of 12½ per cent. at a time when all other businesses are being asked to pay a rate of 15 per cent. What we shave been listening to, if the case put to the Committee is analysed, is really a form of special pleading, and I do not think we ought to adopt special pleading in preference to what I hope I may be able to show is sound principle.

It may be helpful if I could clear up one preliminary point on which I think a good deal of confusion has been caused as a result of an article which appeared in the Financial Times on this matter and which I am certain quite unwittingly contains what I believe to be a serious inaccuracy. The article was reprinted in other papers and has been given wide publicity, and I think that in one important respect it has misrepresented the facts of the case.

This is what the article said: Three years ago, the basis on which the societies are assessed for Profits Tax was changed and the result was to put them on exactly the same footing as trading companies and to increase their liability significantly. The last part of that statement I believe to be quite incorrect. I believe it to be the fact that the new basis of assessing Profits Tax on building societies adopted in 1958–59 relieved them of a good deal of the burden which they formerly carried and that as a result of that new Basis then adopted, they were required to pay in 1958–59 a much smaller sum in the aggregate in respect of Profits Tax than they would have paid if the basis had not then been changed.

It seems to me that there are four main arguments which have been advanced on behalf of the building societies in favour of either exemption from Profits Tax or a reduction in the rate to be charged. Perhaps I might mention those four arguments quite briefly and then say a little about each of them. The first argument is the one that has been mentioned by several speakers today, that building societies do not earn profits in the normal sense; secondly, that building societies provide a vitally important service to the public; thirdly, that building societies will not be able to maintain their reserve ratios if Profits Tax is levied at the proposed rate; and fourthly, that building societies will have to increase their rates to borrowers if Profits Tax is levied at the proposed rate.

Mr. Chapman

If one wanted, one could demolish all of those four arguments but, in fact, none of them has been advanced in this Committee today.

Sir C. Black

With the greatest respect to the hon. Member, these arguments have been advanced—

Mr. Chapman


Sir C. Black

—and the first argument particularly has been developed at considerable length. It is the argument that building societies do not earn profits in the normal sense. I suggest that none of these arguments is valid in the connection in which they have been used. Of course, some, at any rate, of these arguments could be used with quite equal force in support of a similar concession for other kinds of business activity, and my view is that in equity and in logic it would be quite impossible for the Government to make this concession to building societies without extending it to other somewhat similar and kindred types of business activity.

I should like briefly to examine the four arguments. I do not for one moment accept the argument that building societies do not earn profits. One may call the profits a surplus, a balance or by any other name, but, however one views the matter, using words in their ordinary sense, building societies earn a sum over and above their outgoings, including the interest paid to depositors and their shareholders, and that surplus is, of course, profit on which Profits Tax is levied.

While I may risk the displeasure of some Members who have already spoken, I feel that it is relevant in this connection to refer to what the Royal Commission said on this point at paragraph 563: The second principle that we advocate is that profits themselves ought to be arrived at by the usual objective tests and that artificial definitions of profits which depart from these tests do not serve any good purpose… 6.0 p.m.

If it could be established that the surplus, the balance, the profit of a building society was not the kind of profit which ought to bear Profits Tax, that argument would go further and could be equally well advanced to urge that the surplus ought not to bear Income Tax. If we accept the view which is, apparently, accepted by all who have spoken in the Committee so far, that the surplus is properly chargeable to Income Tax at the standard rate, it cannot in logic be argued that Profits Tax also ought not to be levied at the standard rate charged at the time.

I accept the second argument, that building socieies provide a vitally important service to the public. I need not spend time on that. But, of course, so do people employed in the export trade. So do a great many other business activities. If the Chancellor of the Exchequer had to try to classify various kinds of business activity and decide that some were more beneficial than others, that some rendered more important service than others, and there had to be a system of graduating the tax burden according to that decision, he would have very much the same problem in regard to Income Tax and Profits Tax as he has to some extent in regard to Purchase Tax. It seems to me to be quite impossible to charge the Government with the responsibility of trying to grade businesses for tax purposes according to the extent of the service they render to the public.

The third argument was that building societies will not be able to maintain their reserve ratios if Profits Tax is levied. This, of course, is inherent in any system of high taxation. The argument applies to a great many businesses other than building societies—that the present rate of taxation does not permit them to build up their reserves to the extent that they wish. I have sympathy with them, building societies and others, in that respect, but the remedy is to try to reduce further the general burden of taxation falling upon business and not to think that we can insulate one type of business transaction from the ordinary run of taxation burdens.

The fourth argument was that building societies will have to increase their rates to borrowers if Profits Tax is levied.

Mr. Fisher

I hope that my hon. Friend will not set up this ridiculous skittle merely in order to knock it down. No one in the speeches made so far has said that at all. In my speech, as hon. Members who were present will recall, I specifically said that it was not part of our argument and it was not a principal factor in the increase of mortgage rates. There is no point in arguing that one. No one questions it.

Sir C. Black

I have not confined myself to points which have been made in the debate today. I said that there were four main arguments, as I knew them, which had been advanced on behalf of building societies. This is one of them. As I have been pressed on the matter, I will read from the official publication of the Building Societies Association, May, 1961, in which, with reference to the increased Profits Tax, this sentence occurs: We are therefore forced to the conclusion that, if the burden of taxation continues to increase"— that is in special reference, of course, to the Profits Tax— the working margin will have to be expanded. Under present conditions this could only be achieved by some upward adjustment in mortgage rates. That is exactly what I have said.

Mr. Fisher


Sir C. Black

With all respect, the words may be different but the sense is precisely the same. What I wanted to say in that connection is that it seems to me most extraordinary for the Building Societies Association to have built up a case against the Profits Tax on the argument that, if the increase is levied, the rates to borrowers will have to go up, and then, in the week immediately preceding the occasion when the matter is to be debated in the House of Commons, to advise all its members to increase their rates without waiting to see what the outcome of this debate and the decision of the Committee would be. That is a rather extraordinary way of proceeding.

Mr. Fisher

Another skittle.

Sir C. Black

A good deal of scorn has been poured on what the Royal Commission said about this matter, but—I hope I shall not incur my hon. Friends' displeasure in saying this—I find what the Royal Commission said to be singularly compelling and convincing. I shall read only a short passage from paragraph 562 of its Final Report which, in my view, sums the matter up very well and confirms me in my view that it is right for building societies to bear the normal Profits Tax burden. The Royal Commission said: The main principle we wish to see adopted is that a tax on the profits of corporations should apply to all profits without distinction between corporations the ownership of which is vested in the State and other corporations, or between corporations formed to serve public purposes and those formed to serve private purposes. As I understand the matter, since 1959 that has been the principle on which the Government have worked. It is a principle which commends itself to me by its logic and its reason.

I must refer now to two other matters contained in the statements on this matter submitted to hon. Members by the Building Societies Association. One statement is that It is understandable, therefore, that the Royal Commission could not know of the convinced view of all building society men that societies were wrongly brought within the ambit of the Profits Tax provisions at the commencement, nor of the other relevant matters concerning the special position of building societies. That statement seems to me to go far beyond anything that can be justified. How can the Building Societies Association say that that is the convinced view of "all building society men"? It is not my convinced view. My convinced view is quite to the contrary, and a great many people with whom I am in touch in the building society world are certainly not of the opinion there stated by the Association.

Mr. Douglas Houghton (Sowerby)

Is the Temperance Building Society of which the hon. Member is chairman a member of the Building Societies Association?

Sir C. Black

Certainly, it is. The Building Societies Association is aware that in a former debate on a similar Amendment I expressed views directly contrary to the views advanced by the Association. Nevertheless, the Association sends a circular to Members of Parliament saying that it is the convinced view of "all building society men" that this relief from Profits Tax ought to be given. There are hundreds of building societies which do not belong to the Association. I do not understand how any organisation could make a sweeping, all-inclusive statement like that.

Further, the Building Societies Association in its circular says: In the year 1954–55 the amount paid by building societies in respect of Profits Tax was estimated to be £1¼ minion, and by 1958–59 it had risen to about £2 million. I have no doubt that those figures are correct, but, of course, they mean nothing by themselves, if we are not told—and the circular does not tell us—what was the amount of profits in those two periods on which the Profits Tax was levied.

It is like an individual saying, "I have a great grievance. In 1954–55 I was required only to pay £100 Income Tax. In 1958–59 I was required to pay £500 Income Tax." Whether the grievance is valid or not depends entirely on how much the individual's income, on which the tax was levied, had gone up between 1954–55 and 1958–59. To give figures in that way, without giving any information as to the growth of the assets and profits of building societies in those four years, is to present figures which may be accurate, but which are, in fact, meaningless when standing by themselves.

As a building society man, I should naturally like to see some relief to building societies in respect of taxation. I am perfectly convinced on that matter, but I suggest that we do not look at the matter from that point of view. We are not Members of this House as building society directors or building society investors. We are Members of this House representing the public and the nation at large. What we are being asked to do in this Amendment is something for which there is no logical foundation and which cannot be justified within the general framework and pattern of the tax system of this country.

Mr. Chapman

As the hon. Member for Wimbledon (Sir C. Black) said, this is the second time that he has delivered this same sort of speech in Committee on a Finance Bill and this is the second time that I have followed him in making that speech. While I respect the integrity which is needed to make a speech like that, when one is the leader of a building society, nevertheless it does not prevent, and I hope that it will not prevent, any of us from attacking the hon. Gentleman for his remarks.

When the hon. Gentleman talks in his lordly way, of building society men, he talks of them as if they were tycoons of industry. He should have said less about the men who run the building societies and more about the people who are borrowing from them and are paying the rates of interest on their houses. The whole trouble with the hon. Gentleman is that he regards building societies as businesses. That is his word, which he used all the way through. He said they were no different from any other businesses, that they were part of private enterprise and of the whole system of commerce and business. The difference between the hon. Gentleman and my hon. and right hon. Friends on this side of the Committee, and with other hon. Members on his own side as well, is that we do not believe that that is the correct description of a building society.

Sir C. Black

I am quite sure that the hon. Gentleman wishes to be accurate. The phrase I used about "all building society men" is not my phrase. It is a phrase which I quoted from the circular which has been sent to hon. Members by the Building Societies Association. If the hon. Member does not like it, his quarrel is with the Association, and not with me.

Mr. Chapman

I am not worried. The hon. Gentleman was talking about the running of building societies as if it is the gentlemen in charge who matter. I say that he must look at the bottom, instead of the top, in making his judgment.

Viscount Hinchingbrooke (Dorset, South)

Part of the Welfare State.

Mr. Chapman

It is not part of the Welfare State. I will come to what I think is the correct description, but I want to refute right from the start the whole attitude of the hon. Member for Wimbledon. He is not a worthy representative of the building societies in making these remarks. He is an isolated member of the Building Societies Association, and he is in splendid isolation on matters like this. He is talking totally against practically every other member of the Building Societies Association, and I can only wish that his own society, and any others with which he is involved, will be democratic enough to call him into question over some of the remarks he has made here and perhaps give him a little less power in the building society world. Democracy can operate outside this House, as well as inside it. Nevertheless, I concede again that it takes integrity to make remarks like those, and I respect the hon. Gentleman for having the courage to make them.

As has been said, what we are debating is the nature of building societies and the nature of their profits. What we are trying to advance on this Amendment is the argument that the building society movement is unique, and that, because of the quality which differentiates it so clearly from ordinary forms of business, to use the hon. Gentleman's own words, it should be classed differently when it comes to tax matters. We know from the years of debate that we have had previously that the Government's case is based upon the findings of the Royal Commission. Other hon. Gentlemen have read out the point in paragraph 562 which states that the principle should be that a tax on the profits of corporations should apply to all profits. That is the general recommendation of the Royal Commission.

It was with regard to the surpluses of building societies that the Government's case was best put, in my view, by the present Minister of Health, who was then Financial Secretary to the Treasury. Speaking on 2nd July, 1957, he said:

"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, whatever may be their character."—[OFFICIAL REPORT, 2nd July, 1957; Vol. 572, c. 955.]

I think that these are the twin pillars of the Government's case and the case of the hon. Member for Wimbledon, but we suggest that this is not a fair description of building societies. As distinct from the four points which the hon. Gentleman raised and knocked down for his own convenience, let us make two or three of the more important points which building society men are making on behalf of the building society movement.

6.15 p.m.

The first, and it is quite different from that which the hon. Gentleman made, is that it is not that they are performing, as he called it, special services. That is a meaningless phrase of his, and one upon which no one could erect a case for the remission of taxation. What we say is that building societies are doing a special, non-profit-making service in the present state of home purchasing. It is non-profit-making in the sense that there are no equity shareholders to whom the profits are distributed. There is no trading, and no distribution of the actual surplus.

The case is not just that they are performing a special service, but that they are performing a special service which is not in the normal run of business and commerce, is not profit making, and without equity shareholding, in the accepted sense in which those terms would be understood in commerce and business. It is that special difference, which the hon. Gentleman hardly ever mentioned, let alone even discussed, which is the key to the first point in the case for the building societies.

The second point in their case would be that they are formed not merely to facilitate the making of profits, but, in a way, although the word may be almost a dirty word to some hon. Members opposite, to do some form of social service. Because they do not make profits and have no distribution, in the end they perform a vital service in facilitating the surge of small savings through the building societies into the purchase of houses. It is our view on this side of the Committee, at any rate, that this is a second feature which enables us to differentiate the building societies from the normal run of commerce and business.

The Royal Commission never considered a point like this. It was considering in academic rigidity the simple definition of profits. It had not to take into account the social objectives of any Government. When we realise that building societies are not ordinary commercial organisations but have a social objective, the case for exempting them from normal commercial taxation is thoroughly made.

Let us consider the present position. People will very soon be paying an interest rate of 6½ per cent. I do not know what the saving on that would be if the building societies were relieved of taxation. My guess is that it would be about ¾ per cent., although it is a very difficult calculation to make. We can, at any rate, say that to relieve building societies from taxation would make a noticeable contribution to the cheaper purchase of houses and a smaller monthly mortgage burden on borrowers.

Mr. Glenvil Hall

Total taxation on building societies is £44 million.

Mr. Chapman

I know that it is about £50 million. I am trying to work out the difference which exemption would make with a 6½ per cent. interest charge to borrowers.

Mr. Wade

A distinction must be made between tax in respect of interest paid to depositors and the tax imposed on surpluses. I assume that the hon. Gentleman was referring to the remission of all tax on surpluses.

Mr. Chapman

Yes. This is a very difficult calculation to make, as I am sure the hon. Gentleman would agree.

Sir Harmar Nicholls (Peterborough)

In view of that intervention, does the hon. Member say that the figure of tax collected from building societies is £44 million or £50 million?

Mr. Chapman

The saving on interest charges is a very difficult calculation to make. All that we can say is that the remission of taxation on building societies would make a significant difference to the interest which would need to be charged to borrowers.

People who are going into the housing market specially need relief. What is happening as a result of the high price of land? I suggest that in the last four or five years the price of a newly-built small house has risen by anything from £500 to £1,000 as a result of the high price of land. Therefore, one is bound to ask the simple question: do the Government really believe in the protection of house purchasers from the full rigours of their difficulties?

When the present Minister of Health was at the Treasury, at the time of the credit squeeze, we used to receive letters about the high rate of interest charged by building societies. We used to send these letters to the Financial Secretary for comment. I can paraphrase the reply which was given in every case. It was, "It is not the policy of the Government to protect particular classes of borrowers from the effects of high interest rates". This is what we on this side want to know: do the Government believe in private home ownership and the purchase of houses by ordinary working people strongly enough to say that the business of buying a house ought to have more protection than is afforded in the normal way of commerce and business? Is it right that building society money should be subject to tax in the way that it is?

Is it right, moreover, that interest charges should fluctuate in the way that they do? Should not the interest on money borrowed for home purchase be kept at a set figure, as we in the Labour Party advocated at the General Election? And at a time when land prices are rising so rapidly, is it right that a further burden should be added to the cost of borrowing?

This brings me back to the difference between the hon. Member for Wimbledon and most of the rest of us in the Committee. We believe that the private purchase of small homes should be protected in the ways that I have indicated. We believe that the building society movement should be exempted from the definition of business and commerce, in contradistinction to what the hon. Member for Wimbledon said. We believe that this can be recognised as a social service in a small way quite separate from the normal workings of private enterprise and commerce. We say to the Government that it is time that they stopped following the hon. Member for Wimbledon, who is a lone voice in the building society movement and does not describe it as it wishes to be described. It is time that we found a basis of taxing building societies, if taxation is needed at all, on a unique basis which accords with its unique features as a movement.

I applaud what the hon. Member for Huddersfield, West (Mr. Wade) has said. If the Government still believe that, in present circumstances, they must found their case on the findings of the Royal Commission, let them examine the suggestion that he made, namely, that the Government should agree that they will consider in some future year the special problem of taxing building societies and will come forward with new ideas based possibly on the amount that they have in reserve and the free money which is available to them. That would be a good way of looking at the problem in a fresh light.

Mr. Barber

In view of the way in which the hon. Gentleman has castigated my hon. Friend the Member for Wimbledon (Sir C. Black), will he say whether he has any interest in the sale of houses with the assistance of building societies?

Mr. Chapman

Certainly. I thought that it was well known. I declared my interest last July, when we debated the price of land. My interest is well known. If I did not again declare it, it was only because I thought that it was well enough known. It was repeated several times upstairs during the Committee stage of the Building Societies Bill. But it does not alter my general view, nor make any difference to me. I am not dependent on that kind of business. That sort of intervention—although I think that it was made in good faith—underlines the fact that the Economic Secretary is not willing to discuss this issue on its merits. He must be willing to examine the nature of the building society movement and tell us whether he believes, with his hon. Friend the Member for Wimbledon, that it is merely part of business or commerce, or believes, with us, that it is a unique institution which needs unique protection from the full rigours of taxation.

Mr. John E. Talbot (Brierley Hill)

This is the first time that I have taken part in a Finance Bill debate. I claim to do so not from my knowledge and ability as an economist, but because I have twenty-five years' practical experience of the subject before us as manager of a small provincial building society. As such, I am paid and, therefore, I declare an interest.

I am concerned about this Amendment. I have listened with interest to what has been said. In my view, the problem before the Government is one not of logic, but of deciding whether the diminution of building society reserves by taxation has reached the point of danger, or whether they can continue to add burdens to building societies.

I listened with great interest to the speech of my hon. Friend the Member for Wimbledon (Sir C. Black). I regret that I cannot wholly agree with him. However, I follow him to this extent, and here I dissent from what was said by some hon. Members earlier. A building society is an institution carried on for profit. I should like to define it by combining, if I dare, the views of the hon. Member for Birmingham, Northfield (Mr. Chapman), with mine and to say that it is a profitable philanthropy. In other words, it seeks to make a profit of such a type as will discharge its purposes and enable its service to the public to be given at as low a rate as possible.

6.30 p.m.

That, the building society movement has succeeded in doing. I remember that when I first started in it, before the war, we managed on a 1 per cent. differential between the interest paid to investors and the interest charged to borrowers—4 per cent. and 5 per cent. respectively. What is the position today? Immediately before this Budget the margin had widened to 2½ per cent. We were paying interest to investors at 3½ per cent. and charging 6 per cent. to borrowers.

Whether or not it be the view of the Committee that the increase now threatened in mortgage interest rates is the direct result of this taxation, it is certainly the cause of this widening of the margin by ¼ per cent., which is the recommendation of the Building Societies Association, a recommendation to which I personally cannot see that there can be the slightest objection. In terms of the figures, that extra ¼ per cent. coming, for the most part, from young working men and women, will be required to pay this additional taxation.

This Amendment is designed to obviate the growing and, in my view, the anti-social erosion into building society reserves. It is illogical that Profits Tax should be imposed on organisations that are not profit-making in purpose. As I have sought to show, a building society is profit-making only in the sense that it seeks to cover its taxation and its administrative costs, and to put to reserve an adequate sum which will justify public confidence in it.

What is the good of issuing a certificate of trustworthiness to a building society if, when a shrewd accountant examines it, the balance sheet reveals that the reserves are not adequate? That, in an increasing number of cases, must result from present taxation.

A building society is a means of exchange whereby money is collected by an organisation to lend to the purchasers of property. Essentially, its stock-in-trade is cash. It is quite distinguishable from a public trading company, where the amount of cash is often an insignificant feature in relation to the real property of the company, its stock-in-trade and everything else which goes to make up the balance sheet of a company.

A building society is also open to competition in a very acute way from other forms of saving. It must budget for its administration costs, of which taxation is by far the greater item. Only then can it dictate what it can charge for the use of its money. In that respect it must proceed rather like the Government, by finding what it has to spend and then saying that that is the necessary amount which must be found. Before the war, a building society ran on a margin of 1 per cent. Now it has widened to 2¾ per cent. To what extent will this margin be increased if we have not yet reached the end of taxation on the societies?

This extra tax is being paid in two ways. First, by the reduction of reserves and secondly, by increasing charges to borrowers. The former method is a direct attack on the soundness and solvency of the movement. There is a shortfall of nearly one-third in the amount that is available and which the Building Societies Association thinks proper that societies ought to put to reserve, having regard to their ever-increasing liabilities.

To increase charges to borrowers is directly inflationary and is an addition to the cost of living. It is a tax second-hand on those members of the community who most need relief—young people buying their own houses. Therefore, it is wholly inflationary and will stimulate demands for higher wages, which I foresee being made in the near future.

I wish to quote figures to the Committee which do not come from my own society, but from a society doing extensive business in my constituency, the Brierley Hill and Stourbridge Incorporated Building Society. I wish to illustrate to the Committee the vast increase in taxation which has been taking place in the last few years. In 1956, this society paid £14,000. In 1960, it paid £20,000. In the same period its Profits Tax rose from £935 to £1,649. How can a movement go on being bled by taxation to the extent that those figures show and still expect to remain solvent and continue to render the service which it is giving to the community?

In my view, the Conservative Party has not been famous for its logic. I consider that our success has depended on the scientific and brilliant empiricism with which we approach problems and find solutions which are not confined in political strait-jackets. Despite what has been said by my hon. Friend the Member for Wimbledon, with his cold and forceful logic, I feel that there is a case for appealing to the Government to look at this problem from the point of view of what is to happen and where we are going. If the Government are satisfied to continue to impose this liability and to weaken a movement which is doing a valuable national service, let the risk be on their own heads. But I hope that they will not, and I sincerely beg them not to do so.

Even if they are not prepared to give us an answer today, I hope that the Government will think about this matter for a little longer and enable the building society movement, which is a successful combination of businesslike organisations, to go on giving this great service to the community without risk of danger to its reserves or peril to its financial position.

Mr. Harold Davies (Leek)

I think that the case has been made and I hope that the Chancellor will listen to the appeal voiced by the hon. Member for Brierley Hill (Mr. Talbot). I do not know whether I agree about the brilliant scientific empiricism of the Conservative Party to which the hon. Member referred, but I do know that the party gathered a lot of votes at the last election by promising to double the standard of living in twenty-five years. One of the first-class election cries of the party opposite, on which I congratulate it, is that it would build a property-owning democracy.

Let us lift that expression—"a property-owning democracy"—out of the common politics of the hustings for a moment and discover what is the truth. It is that young men and women all over Britain are turning to the building societies to help them to acquire their own homes. In a well-informed Committee such as this, comprising hon. Members on both sides who know all the facets of the argument, I do not desire to discuss the economics or to try to be didactic. I wish to touch upon one or two imaginative points. A little imagination is what is needed in Britain at present.

Looking at it from the imaginative point of view, I can see the demand increasing for all kinds of organisations which can lend money to young people or sometimes to middle-aged people and occasionally to old couples moving from a larger house to a smaller one. There is still a need for some organisation which would provide the necessary money. I hope that one day the State will have the courage to organise some form of lending which may even be in competition with the building societies. The situation today is, in my opinion, a betrayal of the cry we heard at the General Election about a property-owning democracy.

I hope that the Chancellor of the Exchequer will not make it necessary for the Committee to have a Division on this Amendment. I do not know how much the proposal would cost or whether the right hon. and learned Gentleman knows. In my constituency we have a virile and an excellent building society. In that part of Britain there are thrifty people with a lot of common sense. There the building society grew from very small beginnings. It was created by men and women who had no high-falutin' ideas about being tycoons of industry. They wanted to serve the local community, so that there would be a chance for ordinary people to own their houses.

Why cannot the Chancellor of the Exchequer apply to these people and these arguments, which have been advanced from both sides of the Committee, that brilliant scientific empericism about which we have heard. If ever there was a need for a little empiricism and a little imagination it is now upon this matter. I sincerely hope that the appeals which have been made from both sides of the Committee will have effect, because those who have spoken know of the housing problems which there are, and the pathetic letters which Members on both sides receive about housing problems. If there is any chance for human beings in Britain to find accommodation to ease the burden on local government building and on the problem of finding shelter, no Government should institute a kind of taxation which would impede that progress.

I sincerely hope that we shall not be given a direct "No" but that a promise of some kind will be made that this Amendment will be looked at. The Government could save a Division if they would give a concrete, constructive, imaginative answer to both sides of the Committee.

Mr. William Clark (Nottingham, South)

I am sure that the hon. Member for Leek (Mr. Harold Davies) will not object if, in following him, I point out that the State does advance money for the acquisition of houses. It does so through the Small Dwellings Acquisition Acts, so that point of his has been met.

I cannot agree with my hon. Friend the Member for Wimbledon (Sir C. Black) that a building society is a business. I do not think that one can say that it is, although, of course, the building societies have done a tremendous amount of work during the years of their history. I was rather surprised that my hon. Friend said that there should be no special pleading for building societies. I make no apology that I am making a special plea for building societies, although I have no interest in them whatsoever. If my hon. Friend says that we must not have special pleading for building societies, would he advocate the abolition of the composite rate for building societies?

Let us consider the amount of interest paid in 1960 by building societies which are members of the Building Societies Association. The gross amount paid was £125 million and the tax on that was £31 million, just about 5s. in the £ deduction, a tax at a compounded rate. If we did not have special pleading for building societies and increased that rate to the standard rate of 7s. 9d. the investors in the Temperance Building Society or any other building society would get much less money than they do at the moment.

Sir C. Black

I want to make it quite clear that the argument which my hon. Friend is developing is based on an illusion. There is no concession made by the Treasury, as I understand the position, with reference to the composite rate. The composite rate is the average for which the investors in building societies would be liable allowing for those at the top who are liable to the standard rate at 7s. 9d. and those at the bottom who are liable for nothing at all.

From the point of view of the Treasury, under the arrangement it gets all the tax that it would get if the tax were charged at the standard rate, but it avoids the trouble of dealing with many hundreds of thousands of repayment claims with which it would otherwise have to deal. There is no concessionary element, to my mind, in the composite rate.

Mr. Clark

One can always argue that in averages there is no concession. If we work out the average investment in building societies, some at the composite rate of 5s. and some at the standard rate, I am sure that the result must be an advantage to the building societies because they are delighted with the arrangement, and even if the taxation angle were not compounded the administrative work of the building societies would increase and that would increase the margin which, as my hon. Friend the Member for Brierley Hill (Mr. Talbot) pointed out, has increased over the past few years.

6.45 p.m.

I said that I had no apology to make for making a special plea for building societies. I think it is generally agreed on both sides that building societies are doing social work in this country in that they are borrowing money at one rate and lending it out at a higher rate and enabling ordinary people to buy their houses in this country. In doing that work they are performing a service to the nation, and I hope that the Financial Secretary who, I think, will reply to the debate, will be able to say something helpful and give us some helpful assurance for the future of building societies.

The question of the reserves in building societies has been raised. The total reserves of building societies in the Building Societies Association total £142 million; that is, on an asset basis of just over £3,000 million, roughly 4½ per cent.

In 1960 the amount of interest received by building societies belonging to the Association was some £149 million, and they paid out £94 million in interest to investors, but in addition to that they paid out £43 million in tax, £31 million at the compounded rate, £9 million was Income Tax or Surtax and £3 million was Profits Tax at 12½ per cent.

I do not suggest for one moment that the abolition of Profits Tax would necessarily mean an immediate reduction in building society rates because if we work out the figures, even on the Building Societies Association's statistics, we shall see that a reduction of £3 million would mean only ⅛ per cent.; the mortgage rate instead of being 6½ per cent. would be 6⅜ per cent. That is all the difference which Profits Tax abolition would make.

I and some of my hon. Friends had down an Amendment which was not called, and I regret that it was not called because the Amendment which has been moved is for the abolition of Profits Tax only at the increased rate of 2½ per cent., which is, to my mind—and here I agree with my hon. Friend the Member for Wimbledon—quite illogical. I think that if we are going to deal with Profits Tax to give building societies any concession then we should abolish Profits Tax altogether on building societies.

In saying that, however, we must remember that building societies have two types of business. They have the owner-occupier business and they have some commercial business, because under the Building Societies Act, 1960, a building society can lend a certain portion of its available money for special advances. Those special advances, are, to my mind, ordinary commercial business, and in that sense the building societies are competing with the rest of the money market throughout the country. To be logical, I would except any profit which a building society makes on special advances.

I hope that my hon. Friend will give some hope, if not for this year then for the future, because building societies should get relief. Again I make no apology for making a special plea for building societies, for I do not think that building societies are in the same class as any other business, and I hope that something will come out of this Amendment.

Mr. Maurice Macmillan (Halifax)

I support the Amendment. I apologise to the Committee and to the Chair for not having heard the whole of the debate, but I assure hon. and right hon. Members that this will not lead me either to repetitive argument or to detaining the Committee for long.

I have no expert knowledge of the building society movement, and in view of what has been already said, perhaps I ought to add that I have no interest in it and only the most tenuous connection with any building society. Such connection as I have with the movement has led me in the past, in a debate on the House Purchase and Housing Act, to develop arguments which were opposed not only to the Government, but the Building Societies' Association.

Now, all I wish to do is to tell the Chancellor that on this occasion I am supporting the Amendment and that the support for it is not confined entirely to those building societies which are members of the Building Societies' Association. It is supported, also, by a very large society which is not a member of that Association. That is my point and, therefore, there is no need for me, as the Member for Halifax, to pursue the specialist arguments which we have already heard.

I hope, however, that my hon. Friend the Economic Secretary can at least give us some assurances. My right hon. and learned Friend the Chancellor of the Exchequer, in his Budget speech, hinted at future reform of the taxation system. I hope that he will consider separate corporation and personal income taxes and also a single-tier corporation tax. If he does, these reforms surely will provide a fine opportunity for considering the whole position of building societies in the taxation system and for considering pleas such as those made by my hon. Friend the Member for Nottingham, South (Mr. W. Clark) to abolish Profits Tax on building societies, which we are not asking for tonight.

Meanwhile, the least that my right hon. and learned Friend can do is not to increase the Profits Tax in this Budget, to admit the problem, and to say that it is time to have a standstill. We cannot deal with all this now, but there is no need to exacerbate the problem and make it worse for the future, especially if the Chancellor seriously intends to carry out these reforms. I hope, therefore, that we shall hear not only about the present, but about the future from the Economic Secretary.

Mr. Geoffrey Hirst (Shipley)

We have had many debates in my time as a Member on the subject of building societies. I have taken part in a great many, but never have such strong persuasive arguments been put forward from all parties represented in the House, with the one exception of my hon. Friend the Member for Wimbledon (Sir C. Black). Were I in the unfortunate position of agreeing with my hon. Friend I should know that I must be emphatically wrong, because he seemed to put up one Aunt Sally after another only to knock it down. I should not be surprised if my hon. and gallant Friend the Member for Barkston Ash (Sir L. Ropner) has not already gone out to see whether my hon. Friend the Member for Wimbledon might not be appointed to the directorship of a skittle-alley.

Last night, shortly before midnight, I was giving my hon. Friend the Economic Secretary some bouquets. Now I stick some pins in him in advance, because I am not sure whether he intends to meet our views. My hon. Friend the Member for Nottingham, South (Mr. Clark) has said to my hon. Friend the Member for Wimbledon that it is illogical to argue that building societies should be assessed at 12½ per cent. instead of 15 per cent. Obviously, that Amendment can only be taken as designed to secure a gesture towards a final solution of this problem.

The case has been put year after year but we, by Government policy, are making the position more acute. The Conservative Party, for good reasons or bad, has increased Profits Tax by 50 per cent., which is an enormous amount. As my hon. Friend the Member for Brierley Hill (Mr. Talbot) said, in an able and forceful speech, Governments are playing their part in making difficult or eroding the possibility of building up the right amount of reserves that building societies should have. To that extent, Government action has had an effect on borrowing rates.

It has been argued that abolition of Profits Tax on building societies would mean a reduction of ⅛th per cent. in mortgage rates. My hon. Friend the Member for Nottingham, South is obviously a mathematician, but it is accepted that it would represent about £3 million. One thinks of the years daring which building societies have been paying this tax when they could have been adding to their reserves and, possibly, could have had more funds for lending. We are, of course, playing some part in eroding the social purposes for which building societies exist. No one would accept that ridiculous Royal Commission recommendation, based on hopeless premises for which no evidence was offered or given, that one can honestly compare the functions of building societies with ordinary commercial business.

I have no interest to declare as a director of a building society and I am pleased to say that I have no deposit or share in the Temperance Building Society. I have a little bit elsewhere, in societies which follow a policy more akin to my ideas. I hope that my hon. Friend the Member for Wimbledon will not be put out by that loss of business. People are inclined to speak about the business functions of a building society. I do not feel that they are business functions in the ordinary sense of those words.

Academically, I could not argue the point. I have not turned up the Oxford English Dictionary or, indeed, studied the Royal Commission's Report very closely on the point, but, obviously, in all our policies, throughout the years it has been clearly indicated that we accept building societies as organisations which perform a great social function, which should have the support of the House of Commons, and which should have greater encouragement in this respect from Her Majesty's Government than they have had over the years.

I shall be very disappointed if my hon. Friend the Economic Secretary, for whom I have a great regard and respect, has not been impressed by our arguments. We are a futile debating society if every case is answered in advance in a hand-out brief before the debate starts. It would be dangerous to the whole concept of our function in the House of Commons if that was thought by the public to be the case. We are here collectively to advance our arguments and, when those arguments are sufficiently conclusive, to convince the Government that the time has come, partly because of our own regressive taxation policies in this respect, when this matter should have more attention; and the day will come when, if nothing is done, our patience will not be as conspicuous as it has been on this occasion.

Mr. Barber

This debate takes my mind back to the many hours which the Committee spent in piloting through the 80-Clause Building Societies Bill last year. Many familiar voices from that occasion have been heard again today, including those of the right hon. Member for Colne Valley (Mr. Glenvil Hall), the hon. Member for Birmingham, Northfield (Mr. Chapman), who then played a leading part, my hon. Friends the Member for Wimbledon (Sir C. Black), the Member for Surbiton (Mr. Fisher), the Member for Halifax (Mr. Maurice Macmillan) and, in particular, the Member for Brierley Hill (Mr. Talbot) As a result of the work which we did on that Bill, I am under no illusion about the services performed by building societies.

The Amendment moved by the right hon. Member for Colne Valley and the one in the name of the right hon. Member for Huyton (Mr. H. Wilson) propose that the 2½ per cent. increase in the rate of Profits Tax should not apply to building societies, which would remain liable at the old rate of 12½ per cent. I say immediately to my hon. Friend the Member for Surbiton that this relief of 2½ per cent. on Profits Tax on building societies, if it could be taken in isolation, would not affect the theme of my right hon. Friend's Budget; but, as I shall have to point out to the Committee shortly, I do not believe that the position of building societies in relation to Profits Tax can be considered in isolation.

Before dealing with the main points, I should mention the Amendment in the name of my hon. Friend the Member for Nottingham, South which goes further, in that apart from the profit on special advances, under it building societies would be relieved altogether of Profits Tax. I might at the end of my speech, as it is a rather separate matter, deal with that distinctive feature of his Amendment.

7.0 p.m.

As the Committee knows, the present system of levying Profits Tax, which has been the subject of criticism this afternoon, dates from 1958. Under the arrangements made in accordance with the Finance Act, 1958, the differential scheme of Profits Tax was abolished and replaced by the flat rate scheme starting at 10 per cent., which was later raised to 12½ per cent. and is now proposed to be raised further.

Following the Report of the Royal Commission—I will not read it because several hon. Members have done that already—building societies were allowed to deduct their share interest as well as their loan interest in the computation of their profits for Profits Tax purposes. That was a new departure. But, again following the recommendation of the Royal Commission, the profits as so computed were to be chargeable to the flat rate of Profits Tax, which at that time, under the 1958 Act, was 10 per cent.

The right hon. Member for Colne Valley, in moving the Amendment, referred to the financial effects of the change which was made in 1958. It is very important that the Committee should realise just what the financial effects of that change have been upon the system to which objection is now being taken.

My hon. Friend the Member for Wimbledon is right in saying that the effect of the two changes made in 1958 was to reduce the building societies' Profits Tax bill by something like £500,000 or £750,000 in 1958–59 and 1959–60, and that it was only for 1960–61, with the increase in the rate of Profits Tax to 12½ per cent., that their Profits Tax bill, at about £3 million, approached what it would have been, calculated on the same profits, on the old basis.

The liability of the societies to Profits Tax at the new rate of 15 per cent. of their profits in 1961–62 is estimated at £4 million, of which only £700,000 is attributable to the increase in the rate of Profits Tax under Clause 27. That is why I told my hon. Friend the Member for Surbiton that this would have no significant effect upon the general theme of the Budget.

However, in view of what some of my hon. Friends, particularly my hon. Friend the Member for Shipley (Mr. Hirst), have said, I should like to say that this matter is not one on which my right hon. and learned Friend has lightly made up his mind. As I think some hon. Members know, he saw for the first time—because it is his first year as Chancellor of the Exchequer—a deputation of representatives from the building societies movement—I think it was from the Building Societies Association—and he heard and considered what they had to say. I can assure my hon. Friend and the Committee as a whole that my right hon. and learned Friend considered this matter afresh. Therefore, it is not just a case this year of following what has been said in past years and not having regard to the various arguments which are put forward. As has been pointed out, my right hon. and learned Friend has been glad to be present for a good deal of this debate.

But I must take issue with what was said by the right hon. Member for Colne Valley and some other hon. Members that building societies do not make profits like ordinary trading concerns and, therefore, should not be subjected to Profits Tax. It is perfectly true that there is no equity interest in their capital, that any surplus which is put to reserves does not enure for the benefit of their shareholders, who are entitled only to a fixed rate of interest, and that that serves to build up the business for the benefit of would-be home owners. All that is true. However, I agree with my hon. Friend the Member for Wimbledon—and I do not think it is irrelevant that the Royal Commission, after careful consideration, came to the same conclusion—that societies carry on a trade or business and that they make surpluses or profits, whichever one likes to call them. The difference between the shareholders of building societies and those of an ordinary limited company has already been recognised in arriving at their Profits Tax liability, because, as I have said, the share interest which is paid by the societies to their shareholders is allowed as a deduction, whereas the dividends paid by a normal trading company to its shareholders are not allowable for deduction in computing profits for Profits Tax purposes.

As to the surplus or the profit, the amount which the societies put to reserve after deducting all the outgoings by way of expenses and interest is a true profit and recognised as such by the Royal Commission. It is difficult in those circumstances to see why it should escape tax in the case of the building societies on any grounds of principle and logic, certainly as compared with an ordinary company. I do not think that one can lightly dismiss the view of the Royal Commission, but the passage has already been read to the Committee and I do not propose to read it again.

Before I come to the particular circumstances of building societies and deal with one or two of the points which have been raised, I will ask the Committee to consider for a few moments the repercussions of doing what is suggested in the Amendment. I should be less than frank to the Committee if I did not say that it is impossible to consider the position of building societies so far as Profits Tax is concerned in isolation. As my hon. Friend the Member for Wimbledon said, to concede what is asked for would make it impossible to adhere to any principle. If I may be bold enough to interpret what was behind the recommendation of the Royal Commission, I think that this was the difficulty which the Royal Commission faced and which, I should say on reading what it recommended, inevitably forced it to its conclusion.

My hon. Friend the Member for Wimbledon has had great experience, and he spoke contrary to his own financial interests. It was obvious that many other hon. Members who are intimately concerned with building societies took a different view. However, I hope that the Committee will at any rate consider that what my hon. Friend the Member for Wimbledon said should carry great weight.

The point that I want to make is that once a concession was given to building societies it would be virtually impossible to withhold a similar concession from other bodies which have no equity share capital and are not profit-making according to the definition of profit-making which has been assumed by certain hon. Members in the debate.

Mr. Douglas Jay (Battersea, North)

What bodies has the hon. Gentleman in mind?

Mr. Barber

A short time ago we were discussing co-operative societies. I also have in mind the nationalised industries and the public utilities, and also the Post Office, which will be paying Profits Tax under the new set-up. All these would have to be considered. One cannot consider building societies in isolation.

Referring to what my hon. Friend the Member for Wimbledon said, if there is to be some alleviation in the case of Profits Tax, why not in Income Tax also, because that is also charged in respect of the profits or gains of a trade or business? It is significant that the Building Societies Association has been pressing for some years on successive Chancellors of the Exchequer for the exemption of their surpluses from Income Tax as well as Profits Tax.

I have with me figures to show the possible repercussions under the Amendment of going further and dealing with other bodies. I will not trouble the Committee with the details now, but hon. Members may have them if they wish. I will merely say that even if it is right to provide whole or partial exemption from Profits Tax for building societies—I do not believe that it is—it would be impossible to shut one's eyes to the other claims which would be made on very similar grounds.

The right hon. Member for Colne Valley and the hon. Member for Huddersfield, West (Mr. Wade) and other hon. Members referred to the adequacy or inadequacy of the reserves of building societies. The first point to note is that, on the basis of the 1960–61 figures, Profits Tax at 12½ per cent. produces only £3 million from the societies, and the increase of 2½ per cent. would produce a further £½ million. When those figures are considered by reference to the total assets of the societies, which amount to something over £3,000 million, and to the total income from mortgages and investments, amounting to £150 million, I do not think that the tax is very burdensome. Of course for the building societies it would be desirable if it could be reduced or abolished, but I do not think that it is as burdensome as all that.

Mr. Hirst

My hon. Friend is comparing total capital and assets of building societies with one year's Profits Tax, but would he like to give the percentage of the amount of Profits Tax since it was introduced and which would have otherwise been available?

Mr. Barber

I was giving it in respect of one year because I was leading up to the point—

Mr. Glenvil Hall

The figures which the hon. Member has given of £½ million and the extra £250,000 are disputed by the building societies, who have their own ways of calculating these things and say that the figures are a good deal more.

Mr. Barber

I have some figures of reserves which have been mentioned on several occasions and which the right hon. Gentleman will not dispute. It is perfectly true that the ratio of total reserves to total assets has fallen in recent years. In 1960, it was 4.3 per cent. as compared with 5.7 per cent. in 1939, but, even so, the figure is little lower than it was in the mid-1930s. While it is perfectly true that it is very difficult to form any decisive opinion as to the amount of reserves which are required by the societies, the figure which is fixed by the House Purchase and Housing Act, 1959, as the minimum required to qualify a society for trustee status and the right of Government advances is 2½ per cent. Most societies, of course, are comfortably above that figure of 2½ per cent. The right hon. Member for Colne Valley said that the percentage of reserves should be about 4.4 per cent.

Mr. Glenvil Hall indicated assent.

Mr. Barber

The right hon. Gentleman nods assent. He can challenge me if he thinks that I am wrong, but I am informed that among the 29 societies with assets of more than £15 million, at the end of 1960 the general reserves ranged from 3.4 per cent. to 6.7 per cent. of the assets, while the average for all societies was 4.3 per cent., which was unchanged compared with the previous year despite an 8.9 per cent. increase in assets, and the average level of reserve ratios was broadly speaking, higher for the smaller societies than it was for the larger societies.

Mr. Glenvil Hall

That is understandable.

Mr. Barber

The right hon. Gentleman thought that they should aim at a ratio of reserves to assets of 4.4 per cent. Put briefly, my information is that the average for all building societies is 4.3 per cent., and it is somewhat higher for the smaller societies than for the larger. The reserve position of the building societies is not as serious as all that.

Mr. Wade

It is generally understood—this is my information from the building society movement—that it should not fall below 5 per cent. There is general concern if it does.

Mr. Barber

The hon. Member himself said earlier that it was very difficult to be decisive about this matter. He says 5 per cent. and the right hon. Gentleman says 4.4 per cent. and the facts are 4.3 per cent., or a little higher.

The building societies are continuing to expand rapidly. One has only to look at the figures. Between 1950 and 1960, total assets increased from £1,256 million to £3,166 million, and in the last three years the increases have been at the rate of 9 per cent., 11 per cent. and 8 per cent. respectively. This is a movement of some strength.

7.15 p.m.

So far I have dealt with the general considerations which are applicable to all three Amendments. My hon. Friend the Member for Nottingham, South (Mr. W. Clark) spoke briefly to his Amendment about which I should like to say something. However, first I want to say that my hon. Friend the Member for Wimbledon, who intervened when my hon. Friend the Member for Nottingham, South was speaking, was quite right—and I have made inquiries and confirmed this—when he said that the composite rate did not involve any concession of taxation. I ought to make that clear in view of the misunderstanding which arose.

My hon. Friend the Member for Nottingham, South proposed that as from 1st April this year, Profits Tax should not be charged on building societies except in so far as their profits arise from special advances as defined in the Building Societies Act, 1960. If I can refer to those many happy hours which we spent on that Measure last year, dealing particularly with the question of special advances, it would not be wise for me to go into great detail about what they are and I need only say that, broadly speaking, they are advances either to bodies corporate, on the security of freehold or leasehold land, or advances in excess of £5,000 made to individuals.

My hon. Friend was saying that it was possible to divide the business of a building society into two parts. He says that in so far as it makes special advances, a society is carrying on a business which should be subject to Profits Tax and, in so far as it is making what I might call ordinary advances, not exceeding £5,000, it is not carrying on a business in the normal sense of the word and that ought not to come within the scope of Profits Tax because it is really a public service.

In reality, the profits of a society from its ordinary business do not differ in any material respect from the profits which it makes from special advances. Both parts of the profit, or surplus, arise from lending money on interest, and they should not be dealt with differently for Profits Tax purposes. Another consideration is that special advances form only a small proportion of the total business of building societies, and the cost of the Amendment would not be far off the cost of complete exemption, which is about £4 million.

The right hon. Member for Collie Valley and my hon. Friend the Member for Surbiton and others referred to the effect of the Profits Tax increase on the rate of interest. My hon. Friend the Member for Surbiton went no further than to say that it was a contributory factor. He said that he did not wish to be misunderstood on that point. I want briefly to explain to the Committee to what extent it is a contributory factor. It would have been necessary for the societies to increase the rate of interest on mortgages only from £6 per cent. to £6 0s. 10d. per cent. in order to cover this increase in the rate of Profits Tax. Such a small increase of 10d. bears little relation to the increase of 10s. which the Building Societies Association has recommended.

I have tried to deal in some detail with the various factors involved in this series of Amendments. I agree with my hon. Friend the Member for Shipley, that this has been not only a useful discussion, but a discussion in which some very forceful speeches have been made. My hon. Friend the Member for Halifax, asked how building societies would fare in the event of any fundamental changes in the structure of taxation. I assure him that the special position of building societies will most certainly be considered if any fundamental changes are made in the structure of taxation, such as, for example, the amalgamation of Income Tax and Profits Tax.

I should be misleading the Committee if I ended on any other note than to say that what we have to do at this moment is to consider these Amendments before the Committee. In the light of what has been said, and the difficult issues involved which have cut across party, I hope that the Committee will take the view, that in these circumstances, there being differences of opinion, the Government are right to follow the advice of the Royal Commission, and that these Amendments will not be pressed, or, at the worst, that they will not be accepted by the Committee.

Mr. Houghton

The Economic Secretary has run true to form. He sits there patiently like an inverted Micawber waiting for something to turn dawn. His nostalgic references to the happy hours spent in debating the Building Societies Bill are not reflected in the happiness with which this debate has been conducted for the last few hours, if that is the sort of reply we are to get from the Treasury Bench.

Throughout the debate there has been only one speech in support of what the hon. Gentleman said, and that came from the hon. Member for Wimbledon (Sir C. Black). I am sure that the Economic Secretary would have wished for a different ally, and more of them. I cannot understand what attracted the hon. Member for Wimbledon to the building society movement twenty years ago if the speech we heard from him today represents his present attitude towards it. There was no feeling whatever in the hon. Gentleman's speech for the people who want mortgages and cannot get them; for the people who want mortgages and cannot afford to pay for them; or for the people who are not investing in building societies at the present time.

What has the hon. Gentleman to say to people who are asking for mortgages from building societies and are being told that there is no hope of getting them until September, October or November of this year? Yet these are the difficulties which confront the building society movement, and I was shocked at the boardroom speech of the hon. Gentleman. It was a financier's speech, and the hon. Gentleman has financial interests going far wider than the building society movement. I do not want to lose my temper. I had better pass from the hon. Gentleman to something else.

Royal Commission's recommendations are no substitute for original thought. There are plenty of recommendations of the Royal Commission which the Government have not accepted and upon which they have not pronounced independent judgment. Besides, the Radcliffe Commission began its work and reported in a different world from the present one.

My deepest emotions have been aroused by the arid contribution of the hon. Member for Wimbledon. I cannot get over it. This is not a debate on taxation. This is a debate on social policy. I think that what the Government will have to do is to define afresh their attitude to the main source of house purchase in Britain today, because that is what we are doing. I have no interest to declare, except that I am one of 6 million investors in building societies, and I am also one of 2½ million borrowers from building societies.

This is a matter of great public interest. In view of the recent increases announced in the mortgage rates of building societies, there will be widespread interest in the country today about what the Chancellor is going to do to arrest the difficulties which the building societies have in attracting money, and the prices they have to charge for it to those who wish to borrow money for houses.

The trouble with Britain today is that it is more profitable to invest in ice cream than it is to invest money in the homes of the people. That is what is fundamentally wrong with society today. It has its values all awry. The Government could be using the instrument of taxation to correct the distortions which misled public opinion is bringing about in some of our main social purposes.

Another thing which we must not overlook is the purpose of this increase in Profits Tax. No hon. Member said anything about that. What the Chancellor is doing is to drag the building society movement into his gamble of winning the hearts of the business men, because the reason for this increase in Profits Tax is that the Chancellor has decided to promise a higher standard of life to Surtax payers two years from now, and he is levying the additional Profits Tax to pay for it. The building societies have been sucked into this though they have no direct interest in the outcome of the Chancellor's adventure.

We cannot overlook that. What the Chancellor is doing, as it is Ascot week, is to back 400,000 favourites with other people's money, and part of it is building society money. We have yet to see whether the sacrifice which the building societies are asked to make, which means that their borrowers are asked to make, and the Chancellor's faith in his Budgetry strategy, will pay off in several years.

I think that it stands to common sense that this additional imposition on building societies will be an additional strain on their resources. It is not large, because the increase that we are considering is the marginal increase over and above the basic Profits Tax and Income Tax. But, so long as we follow for ever and ever the principle apparently laid down in the Royal Commissions' Report, wherever there is anything which can be called a profit, wherever there is anything which can be called a surplus, then the tax gatherer must go there and demand that something must be rendered unto Caesar. While that principle is followed, we shall never be able to use the instrument of taxation for the adjustment of social difficulties.

The Economic Secretary referred to about the daftest application of that principle that I know of, and that is to tax the Post Office as if it were a private business. It is ridiculous for the Government to go on taxing themselves, and it is ridiculous to tax the Post Office consumes to follow a principle of taxation to which the Economic Secretary seems to attach such importance.

The Government's task is to reappraise the position of building societies in Britain today. Have they anything better to put in its place? If not, let them facilitate the building society movement in the work that it is doing. Let them turn a deaf ear to the hon. Member for Wimbledon who is not a building society man. He is merely a building society director, and that is quite a different thing.

My associations with the building society movement go back many years, when one had to save up and put money into the movement, and not until one had a certain deposit in the movement could one go into the ballot to draw lots to build one's home. That was the origin of the movement. That was where this movement started, and that, in principle, is where it stands today, although its finances are on a much grander scale than they used to be. But to relate taxation to assets in this context is just ridiculous, and I am surprised

that the Economic Secretary should have attempted it.

I am disgusted with his reply and my hon. Friends are equally so. I hope that hon. Members opposite are also disgusted, and that they will go with us into the Lobby to show their disapproval.

Question put, That those words be there added:—

The Committee divided: Ayes 176, Noes 221.

Division No. 201.] AYES [7.30 p.m.
Abse, Leo Hirst, Geoffrey Paget, R. T.
Allaun, Frank (Salford, E.) Hocking, Philip N. Pannell, Charles (Leeds, W.)
Allen, Scholefield (Crewe) Holman, Percy Parkin, B. T.
Awbery, Stan Holt, Arthur Pavitt, Laurence
Bacon, Miss Alice Houghton, Douglas Pearson, Arthur (Pontypridd)
Benson, Sir George Howell, Denis (Small Heath) Popplewell, Ernest
Blyton, William Hoy, James H. Prentice, R. E.
Bowden, Herbert W. (Leics, S. W.) Hughes, Cledwyn (Anglesey) Price, J. T. (Westhoughton)
Bowen, Roderic (Cardigan) Hughes, Emrys (S. Ayrshire) Probert, Arthur
Boyden, James Hunter, A. E. Proctor, W. T.
Brockway, A. Fenner Hynd, John (Attercliffe) Pursey, Cmdr. Harry
Broughton, Dr. A. D. D. Irvine, A. J. (Edge Hill) Rankin, John
Butler, Herbert (Hackney, C.) Irving, Sydney (Dartford) Redhead, E. C.
Butler, Mrs. Joyce (Wood Green) Jay, Rt. Hon. Douglas Reid, William
Castle, Mrs. Barbara Jenkins, Roy (Stechford) Rhodes, H.
Chapman, Donald Johnson, Carol (Lewisham, S.) Roberts, Goronwy (Caernarvon)
Corbet, Mrs. Freda Jones, Rt. Hn. A. Creech (Wakefield) Robertson, John (Paisley)
Craddock, George (Bradford, S.) Jones, Dan (Burnley) Robinson, Kenneth (St. Pancras, N.)
Cronin, John Jones, Elwyn (West Ham, S.) Ross, William
Crosland, Anthony Jones, J. Idwal (Wrexham) Royle, Charles (Salford, West)
Crossman, R. H. S. Jones, T. W. (Merioneth) Shinwell, Rt. Hon. E.
Cullen, Mrs. Alice Kenyon, Clifford Short, Edward
Davies, Rt. Hn. Clement (Montgomery) Key, Rt. Hon. C. W. Silverman, Sydney (Nelson)
Davies, G. Elfed (Rhondda, E.) King, Dr. Horace Skeffington, Arthur
Davies, Harold (Leek) Lee, Frederick (Newton) Slater, Mrs. Harriet (Stoke, N.)
Davies, S. O. (Merthyr) Lee, Miss Jennie (Cannock) Slater, Joseph (Sedgefield)
Deer, George Logan, David Small, William
Diamond, John Longhlin, Charles Sorensen, R. W.
Dodds, Norman Mabon, Dr. J. Dickson Soskice, Rt. Hon. Sir Frank
Dugdale, Rt. Hon. John McInnes, James Spriggs, Leslie
Ede, Rt. Hon. C. McKay, John (Wallsend) Steele, Thomas
Edwards, Robert (Bilston) Mackie, John (Enfield, East) Stewart, Michael (Fulham)
Edwards, Walter (Stepney) McLeavy, Frank Swingler, Stephen
Evans, Albert MacMillan, Malcolm (Western Isles) Sylvester, George
Fernyhough, E. MacPherson, Malcolm (Stirling) Symonds, J. B.
Finch, Harold Mahon, Simon Taylor, Bernard (Mansfield)
Fitch, Alan Mallalieu, E. L. (Brigg) Taylor, John (West Lothian)
Fletcher, Eric Mallalieu, J. P. W. (Huddersfield, E.) Thomas, Iorwerth (Rhondda, W.)
Foot, Michael (Ebbw Vale) Manuel, A. C. Thompson, Dr. Alan (Dunfermline)
Forman, J. C. Mapp, Charles Thornton, Ernest
Fraser, Thomas (Hamilton) Marsh, Richard Ungoed-Thomas, Sir Lynn
Gaitskell, Rt. Hon. Hugh Mason, Roy Wade, Donald
Galpern, Sir Myer Mellish, R. J. Wainwright, Edwin
George, Lady Megan Lloyd (Crmrthn) Mendelson, J. J. Warbey, William
Ginsburg, David Millan, Bruce Watkins, Tudor
Gordon Walker, Rt. Hon. P. C. Milne, Edward J. Weitzman, David
Gourlay, Harry Mitchison, G. R. Whitlock, William
Greenwood, Anthony Monslow, Walter Wilcock, Group Capt. C. A. B.
Grey, Charles Moody, A. S. Willey, Frederick
Griffiths, David (Rother Valley) Mort, D. L. Williams, D. J. (Neath)
Griffiths, Rt. Hon. James (Llanelly) Moyle, Arthur Williams, Ll. (Abertillery)
Grimond, J. Neal, Harold Williams, W. R. (Openshaw)
Gunter, Ray Noel-Baker, Francis (Swindon) Willis, E. G. (Edinburgh, E.)
Hale, Leslie (Oldham, W.) Noel-Baker, Rt. Hn. Philip (Derby, S.) Wilson, Rt. Hon. Harold (Huyton)
Hall, Rt. Hn. Glenvil (Colne Valley) Oliver, C. H. Winterbottom, R. E.
Hamilton, William (West Fife) Oram, A. E. Woodburn, Rt. Hon. A.
Hannan, William Oswald, Thomas Woof, Robert
Hayman, F. H. Owen, Will
Henderson, Rt. Hn. Arthur (Rwly Regis) Padley, W. E. TELLERS FOR THE AYES:
Herbison, Miss Margaret Mr. Ifor Davies and Mr. Lawson.
Agnew, Sir Peter Arbuthnot, John Barter, John
Aitken, W. T. Atkins, Humphrey Batsford, Brian
Allason, James Barber, Anthony Baxter, Sir Beverley (Southgate)
Bell, Ronald Hamilton, Michael (Wellingborough) Pilkington, Sir Richard
Bennett, Dr. Reginald (Got & Fhm) Harris, Reader (Heston) Pitman, Sir James
Berkeley, Humphry Harvey, John (Walthamstow, E.) Pitt, Miss Edith
Biggs-Davison, John Hastings, Stephen Pott, Percivall
Bingham, R. M. Hay, John Powell, Rt. Hon. J. Enoch
Birch, Rt. Hon. Nigel Heald, Rt. Hon. Sir Lionel Price, David (Eastleigh)
Bishop, F. P. Henderson, John (Cathcart) Prior, J. M. L.
Bossom, Clive Henderson-Stewart, Sir James Prior-Palmer, Brig. Sir Otho
Bourne-Arton, A. Hendry, Forbes Proudfoot, Wilfred
Boyle, Sir Edward Hiley, Joseph Pym, Francis
Brewis, John Hill, Dr. Rt. Hon. Charles (Luton) Quennell, Miss J. M.
Bromley-Davenport, Lt.-Col. Sir Walter Hill, Mrs. Eveline (Wythenshawe) Ramsden, James
Brooke, Rt. Hon. Henry Hill, J. E. B. (S. Norfolk) Rawlinson, Peter
Brown, Alan (Tottenham) Hinchingbrooke, Viscount Redmayne, Rt. Hon. Martin
Browne, Percy (Torrington) Hollingworth, John Rees, Hugh
Bryan, Paul Howard, Hon. G. R. (St. Ives) Renton, David
Buck, Antony Hughes-Young, Michael Ridley, Hon. Nicholas
Bullard, Denys Hutchison, Michael Clark Ridsdale, Julian
Bullus, Wing Commander Eric Iremonger, T. L. Roberts, Sir Peter (Heeley)
Burden, F. A. Irvine, Bryant Godman (Rye) Robinson, Sir Roland (Blackpool, S.)
Butler, Rt. Hn. R. A. (Saffron Walden) James, David Roots, William
Campbell, Sir David (Belfast, S.) Jenkins, Robert (Dulwich) Ropner, Col. Sir Leonard
Campbell, Gordon (Moray & Nairn) Johnson, Dr. Donald (Carlisle) Russell, Ronald
Carr, Compton (Barons Court) Johnson, Eric (Blackley) Scott-Hopkins, James
Carr, Robert (Mitcham) Johnson Smith, Geoffrey Shaw, M.
Cary, Sir Robert Joseph, Sir Keith Simon, Rt. Hon. Sir Jocelyn
Channon, H. P. G. Kerans, Cdr. J. S. Skeet, T. H. H.
Chataway, Christopher Kerby, Capt. Henry Smith, Dudley (Br'ntf'rd & Chiswick)
Chichester-Clark, R. Kerr, Sir Hamilton Smithers, Peter
Clark, Henry (Antrim, N.) Kershaw, Anthony Spearman, Sir Alexander
Clark, William (Nottingham, S.) Leather, E. H. C. Speir, Rupert
Cleaver, Leonard Leavey, J. A. Stevens, Geoffrey
Cooke, Robert Leburn, Gilmour Steward, Harold (Stockport, S.)
Cooper, A. E. Legge-Bourke, Sir Harry Stodart, J. A.
Cooper-Key, Sir Neill Lewis, Kenneth (Rutland) Stoddart-Scott, Col. Sir Malcolm
Cordeaux, Lt.-Col. J. K. Linstead, Sir Hugh Storey, Sir Samuel
Corfield, F. V. Litchfield, Capt. John Studholme, Sir Henry
Costain, A. P. Lloyd, Rt. Hon. Selwyn (Wirral) Sumner, Donald (Orpington)
Coulson, J. M. Longbottom, Charles Taylor, Sir Charles (Eastbourne)
Courtney, Cdr. Anthony Lucas, Sir Jocelyn Taylor, Edwin (Bolton, E.)
Craddock, Sir Beresford Lucas-Tooth, Sir Hugh Taylor, W. J. (Bradford, N.)
Critchley, Julian McAdden, Stephen Thatcher, Mrs. Margaret
Cunningham, Knox MacArthur, Ian Thompson, Kenneth (Walton)
Curran, Charles McLaren, Martin Thornton-Kemsley, Sir Colin
Dalkeith, Earl of McMaster, Stanley R. Turner, Colin
Deedes, W. F. Maddan, Martin Turton, Rt. Hon. R. H.
Digby, Simon Wingfield Maitland, Sir John Tweedsmuir, Lady
Doughty, Charles Markham, Major Sir Frank van Straubenzee, W. R.
du Cann, Edward Marples, Rt. Hon. Ernest Vaughan-Morgan, Rt. Hon. Sir John
Duncan, Sir James Marshall, Douglas Vosper, Rt. Hon. Dennis
Duthie, Sir William Marten, Neil Walder, David
Eden, John Maxwell-Hyslop, R. J. Walker, Peter
Elliot, Capt. Walter (Carshalton) Mills, Stratton Walker-Smith, Rt. Hon. Sir Derek
Elliott, R. W. (Nwcstle-upon-Tyne, N.) Montgomery, Fergus Wall, Patrick
Emery, Peter Morgan, William Ward, Dame Irene
Emmet, Hon. Mrs. Evelyn Nabarro, Gerald Whitelaw, William
Fell, Anthony Nicholls, Sir Harmar Williams, Dudley (Exeter)
Finlay, Graeme Nicholson, Sir Godfrey Williams, Paul (Sunderland, S.)
Foster, John Nugent, Sir Richard Wills, Sir Gerald (Bridgwater)
Fraser, Ian (Plymouth, Sutton) Oakshott, Sir Hendrie Wilson, Geoffrey (Truro)
Gammans, Lady Orr-Ewing, C. Ian Wise, A. R.
Gardner, Edward Osborn, John (Hallam) Wolrige-Gordon, Patrick
Glover, Sir Douglas Osborne, Sir Cyril (Louth) Wood, Rt. Hon. Richard
Godber, J. B. Page, John (Harrow, West) Woodnutt, Mark
Goodhart, Philip Page, Graham (Crosby) Woollam, John
Gower, Raymond Pannell, Norman (Kirkdale) Worsley, Marcus
Grant, Rt. Hon. William Partridge, E. Yates, William (The Wrekin)
Grant-Ferris, Wg Cdr. R. Pearson, Frank (Clitheroe)
Green, Alan Peel, John TELLERS FOR THE NOES:
Gresham Cooke, R. Percival, Ian Mr. Edward Wakefield and
Grimston, Sir Robert Peyton, John Mr. Gibson-Watt.
Gurden, Harold Pickthorn, Sir Kenneth
Hall, John (Wycombe)
Sir Harmar Nicholls

I beg to move, in page 23, line 10, at the end to add: Provided that profits which have been certified by the auditors of a business and accepted by the Commissioners of Inland Revenue as solely attributable to export earnings shall be excluded from this section.

The Chairman

It might be convenient to discuss with this Amendment the new Clause in the name of the hon. Member—(Exemption of export earnings from profits tax): Profits which have been certified by the auditors of a business and accepted by the Commissioners of Inland Revenue as solely attributable to export earnings shall be exempt from profits tax. and that in the name of the hon. Member for Wycombe (Mr. John Hall)—(Allowance for export market development): In respect of that part of the sterling turnover of a business which shall be certified by the auditors of that business in a form acceptable to the Commissioners of Inland Revenue as being goods or services exported to a market to which that business or any of its associate businesses had not exported before the first day of May, nineteen hundred and sixty-one, goods or services to a value exceeding one thousand pounds, the amount of ten per cent. an the net value of such exports shall be granted as an allowance against total profits in the calculation of liability to profits tax.

Sir Harmar Nicholls

Yes, Sir Gordon. I shall discuss the Amendment and the first of those two new Clauses, and my hon. Friends whose names are added to the other new Clause will no doubt make their own references to that, if they catch your eye.

I am reminded that in the Budget debate—when we deployed most of the arguments that I have no doubt will be repeated in another form tonight—my right hon. and learned Friend the Chancellor said that if we kept our promise to produce this Amendment, he would look at it, and listen to us with care. I may tell the Committee that the Chancellor has already told me that he and the right hon. Member for Huyton (Mr. H. Wilson) have an engagement that takes both of them from the Chamber for the time being, and it is for that reason, and that reason alone, that he is not present to keep his promise to listen to our argument. I know that he will give careful thought to it when he sees it in print—

The Financial Secretary to the Treasury (Sir Edward Boyle)

If my hon. Friend will allow me to say so, the occasion is the centenary dinner of the Public Accounts Committee, which this Committee may agree might merit the departure for a time of my right hon. and learned Friend the Chancellor and the right hon. Member for Huyton (Mr. H. Wilson).

Mr. G. R. Mitchison (Kettering)

And, if the hon. Baronet will allow me to say so, the Public Accounts Committee being the Public Accounts Committee, its members are paying for the dinner themselves, individually.

Sir E. Boyle

Including, if I might say so, the Financial Secretary, who will probably not be able to attend.

7.45 p.m.

Sir Harmar Nicholls

It seems clear that the Chancellor is the only one who will not pay for his dinner. I am glad that he is able to go, because my father said that he had missed many a good dinner through not being asked, and I think that the Chancellor should be alert enough to avoid that.

We all accept—we on this side certainly do—that the effect of the Budget as a whole was completely sound. It has passed the test of all attacks on it by the Opposition, who have not been able to fault any feature in any real way. The purpose of the Amendment is not to criticise what my right hon. and learned Friend has done in the Budget, but something that he has not done. It is a constructive way of drawing his attention to something he should have done in that same sound Budget.

I believe that the most important words that the Chancellor used in his Budget speech were: The first and obvious need is a marked improvement in our balance of payments. He added: It is clear that for the necessary improvements in our balance of payments we must look mainly to the expansion of exports."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 797.] I applauded those words at the time. I hoped that they would form the main theme not only of the Budget speech, but of the Finance Bill, but though my right hon. and learned Friend used those words then, there is nothing in his proposals that are designed specifically and specially to help exports. This Amendment is a friendly and constructive attempt to rectify that omission. I really believe that something of this kind is an absolute minimum gesture if the Government are to rectify the impression now current in the business world.

I say that because in the business world there is a feeling of wonderment and some despondency caused by the absence from the Budget, good though it was as a whole, of anything likely to help our export development. For good reasons—and each reason has been separately explained during our debates in Committee—there are proposals that are actually a disincentive to exports. As I say, good reasons have been given for introducing them, such as the general fiscal policy of the Government being a coherent whole. All sorts of explanations have been given but, at the end of it all, these proposals are a disincentive to exports and represent the reverse of the words I have just quoted.

The 2½ per cent. extra Profits Tax is bound to be some disincentive to the placing of our exports in world markets. We have the cost increases that will certainly flow from the increased oil duty, and we have the limit of £2,000 placed on the allowance for motor cars used for business purposes. Those are three examples of Budget proposals that are bound in some way to act as a disincentive to the export cycle. I accept the fact that there may be other reasons that justify them but, in terms of expanding export markets, they are disincentives.

Our need to export is not a passing problem, but something that will be with us for the rest of the century, and we have to start now to pay special, careful and specific attention to the need to help our exports. It is mainly, of course, the manufacturers who must do their job well, to give good deliveries, and so on, but the Government must focus their attention on the whole subject and try to help. This Amendment suggests one of the ways in which the Government can help.

From the information that we have been able to cull from the financial Press and from other sources, the export trend since the Budget reflects a falling off because, if anything, the balance-of-payments position now is more worrying than when we had an economic debate about three months ago. There is evidence that the export credits facilities, which were well accepted and which carried some hope, have not played any big part so far in bringing about any improvement. Prior to the Budget we had this attempt to prepare the way to improved exports, but there has been no improvement since then.

The balance-of-payments position today is as it was before the economic debate and before the Budget. It is very worrying, indeed. It has been prevented from becoming really terrifying, not because exports have gone up but because, slightly, imports have gone down. Had there not been that slight fall in imports over the last two or three months, the worrying position about balance of payments would now be really terrifying.

I want to see exports go up. I am certain that, in the long run, it is only by getting extra exports, by the United Kingdom getting back, in terms of her share of world trade, to the relative position she had a few years ago, that we can be sure of maintaining our present standard of life. I want to see exports increase, and that is what the Amendment is designed to bring about. As far as Government action has anything to do with it, I believe this to be one way in which the Government can play some part in bringing about these extra exports.

What is the background that we should have in mind in considering an Amendment, and new Clauses such as these? The one that I have in mind, and which I lose no opportunity of asking other hon. Members to keep in mind, is that 30 per cent. of our exports today are done by only 40 firms—yet the Federation of British Industries has about 8,000 members. That statement itself, without any other explanation, shows that there is something wrong somewhere.

Why do not more of these firms go in for exports? I thing that the clear answer is that the trouble and risk in taking on exports is not worth taking as long as they have a good home market. Historically, United Kingdom industry is not naturally export-conscious. Industry in the Continental countries is export-conscious. We have a big population and were first in the industrial field so that for 100 or 120 years we never had the feeling that there was a need to be in the export market anything like so completely as that feeling in Continental countries. We do not have, as they have, firms which exist purely for export.

There are the two problems: first, that so long as there is a good home market why should firms take the extra risk and trouble to win export markets? and, secondly, the historical tradition whereby, psychologically, industry is not so keen on getting exports as are our competitors. We have gone a long way in dealing with the second point. We have had exhortation and publicity since the recent speech of the Prime Minister at Church House. That has gone a long way to make small and medium-sized firms more conscious of the need for exports. The historical problem is still with us, but to a large extent the exhortation and publicity have gone some way during the last month to rectify that.

Exhortation and publicity, however, are not enough to overcome the "trouble and risk" reaction to export trade. We may talk until we are blue in the face telling businessmen where they are to look for success, but we cannot talk the businessman into taking on a miserable deal if there is a good deal around the corner for him. It has to be made worth his while. When businessmen stop thinking in that way it will be a poor day for this country. I am not criticising them for having those views. It has to be an economic proposition which is put before them if they are to look at it. That is as it should be.

How are we to get over the problem? I believe that if this Amendment were accepted that would be a beginning. The Amendment would relieve that part of a firm's business which was export from 2½ per cent. of the tax. Next year we could follow on with the suggestion which is contained in my new Clause, that the firm should be relieved of all Profits Tax on exports. Then, with the extra inducement, we should get over the problem. What we are putting forward in this Amendment is, I believe, quite clear. It is that that part of a firm's business which, on an accountant's certificate, can be shown to be export business which has earned foreign currency and helped our balance of payments position would not be subject to the 2½ per cent. Profits Tax under the Budget proposals.

What are the arguments which are put against the Amendment? Arguments have been produced from the Treasury Bench in the Budget debate and in the economic debate. First, it was said that administratively this was an almost impossible thing to do. It was suggested that so many people play some part in a manufacture which is exported that it would not be possible to distinguish who is to have the benefit of the concession. I do not accept that. I am quite certain that it could be confined to the exporter who actually earns the foreign currency. It could be confined to the last one to take the risk of going into the export market.

If I were manufacturing bicycles, and someone provided the tyres to go on those bicycles, he would not be the one who took the risk in exporting the bicycles. He would merely send the tyres to my assembly point. I would be the one who took the risk. The one who exports the article would have the benefit of the concession. I believe that that should be done.

Something of the same sort is set out in the Australian scheme which will be coming into operation soon, if it has not already come into operation. I have no doubt that my hon. Friend the Member for Aberdeen, South (Lady Tweedsmuir) will deal with that, as she did in her speech on the Budget. Administratively, it could be done simply. With equity and fairness it could be confined to either the merchant or manufacturer who takes the risk of earning the foreign currency.

Sir C. Osborne

Surely this could help the vast number of people who make component parts. If, instead of pressing for this minor concession in taxation, my hon. Friend would ask the Board of Trade to take away the tariffs which protect the home market, so that it would be more profitable to sell abroad than to sell at home, he would not only help the direct exporter, but also those who make the component parts. Surely my hon. Friend is fiddling with the matter.

Sir Harmar Nicholls

I know that this is not the complete answer. This is only by way of a trial attempt, a guinea pig and a very small one. There are many things which my hon. Friend could bring forward on other facets of the problem which would be equally sound. This suggestion, small though it is, would open the way to something worth while in future. The one who earns the export by taking the risk should get the benefit of the concession. It could be carried out easily by administration. It would kill the argument that it is too difficult and complex to administer.

The second argument put forward against the proposal is that we would be breaking international agreements. I do not believe that would be so. I do not believe that to exclude from the 2½ per cent. extra tax in the Budget proposals that part of the business which is export would cut across international agreements. I do not know how Australia has done this if this much smaller proposal would he cutting across those agreements.

It could well be that the new Clause which I am asking that we should take into account next year could cut across international obligations. That is why I suggest that we should adopt this proposal this year. Because it is a new tax I do not think that it would be cutting across international obligations. We could use the next twelve months to argue through the channels which have to be used in order to get the bigger concession next year when the payment of all Profits Tax by exporting firms would be conceded.

The third argument used against the proposal is that if we give a tax concession like this, other countries will copy us and that as a result we shall be just where we started with no difference made to the position. I am not impressed at all by that argument. All I want is to get more of our firms into the export market. If these small inducements will get them there, whatever other countries do on an equivalent basis to the concession, we would be more than able to hold our own. I do not suggest that we should give concessions to one particular group of industries, but that we should try to get them all in. The proportion of 40 in 8,000 is not enough. We could use the inducement to get them in and later there would be no need for a tax concession. Once they were there, and found it easier to export, they would stay there.

The idea is to get them into the export trade. They could earn their profits after that. During the last few years I have taken the opportunity of looking at industry right across Europe and also in America and Canada. I have not been at all frightened by the position. The only country which left me a little nervous on the engineering side was France. I am sure that with our skill we have as good an opportunity of getting a fair share of the market as have Italy and Germany.

If more of our people could get into the market, they could stand on their own. From my knowledge of industry in the Midlands the money saved by way of tax concessions would be spent by adding more which would be paid in Marketing arrangements. If a small firm were to save £5,000 it would be found that a number of small firms could join together to make their marketing arrangements and so double that amount once they had this inducement, this priming of the pump, with which to start. If this will get our people into the export field, then once they have got over the newness of it they will soon earn the reward which this country must have if we are to have a healthy balance of payments position.

8.0 p.m.

There is evidence to show that more and more considered thought is being given to this way of thinking. Before the Budget, an ex-Chancellor, the present Lord Amory, said:

"I would even be prepared to look again at the most difficult question of a possible variation in Profits Tax related to the turnover of export businesses; though I am deeply conscious of the great difficulties of doing that, and it is a course of action that has never been favoured by the representative organisations speaking for industry. So, though I should be prepared to look at it again,…"—[OFFICIAL REPORT, House of Lords, 22nd March, 1961; Vol. 229, c. 1203.]

Lord Amory was well aware of the actions of the F.B.I. and the parts of industry about which my hon. Friend the Member for Kidderminster (Mr. Nabarro) just made some comment—

Mr. Gerald Nabarro (Kidderminster)

This is not a question of any part of industry which my hon. Friend alleges I represent.

Sir Harmar Nicholls

I did not say that.

Mr. Nabarro

In any case, I represent no part of industry in the House of Commons. I draw the attention of my hon. Friend to the fact that the whole of the Federation of British Industries, the whole of the National Union of Manufacturers and the whole of the British Association of Chambers of Commerce—

Mr. Jay

And the T.U.C.

Mr. Nabarro

Yes, and the T.U.C.—are united and unanimous in deprecating any particular instrument of the kind that my hon. Friend the Member for Peterborough (Sir Harmar Nicholls) is advocating.

Sir Harmar Nicholls

If my hon. Friend the Member for Kidderminster had been here during the Budget debate, and had heard the speech I made then, he would have heard me say what he has just said. Of course, I am aware that the views of the leaders of the National Union of Manufacturers, the F.B.I. and the Association of British Chambers of Commerce are on record. But I warned earlier that we would not only have to lobby the Chancellor; we would have to lobby those organisations as well. I do not think that they fully represent the point of view of all their members. I have not formed the views I am expressing merely as a result of reading the reports of the F.B.I., but as a result of having spoken to members of the F.B.I. and of other organisations.

When I joined the team to try to sell the need for this special export drive I attended meetings of chambers of commerce and met hundreds of the small firms. It was their questions and comments that have brought me to examine the whole position and to bring forward this Amendment. Whatever has been said by their leaders, I do not think that they necessarily represent the views of all the members for whom they are speaking.

I believe that we have to use the next twelve months in which to change their point of view. As I have said, I am certain that there is considerable thought and some weight of opinion in favour of the point of view that I am now expressing.

I have already quoted the words of an ex-Chancellor. Those words were uttered before this Budget and, after the Budget, I was interested to read the speech made by Mr. Tuke, the Chairman of Barclays Bank, who said: If a rough and ready formula were desired, it might be possible to provide for a rebate of Profits Tax in the same proportion as the Company's exports bear to the whole of its production. In other words, if 50 per cent. of a Company's production is exported, it would be relieved of 50 per cent. of its Profits Tax liability. This would probably over-state the amount of profit actually earned from the exports but at the same time it would understate the amount of effort put into the selling of the Company's products overseas I am certain that he is right. It would be a rough and ready way of doing it, but I am certain that it would encourage more people to enter the export market. I have quoted that extract as an example of considered thought, and not as a means of trying to prove that they are wholeheartedly accepting the arguments I am putting forward.

Now is the time to get away from the point of view expressed by the F.B.I. and accepted by successive Treasury Benches, whether represented by right hon. and hon. Gentlemen opposite or my right hon. and hon. Friends today. We are at the beginning of a new era and the Government must do something active and constructive that can be seen if we are to get back to a balance of payments position that will leave us healthy.

I am, therefore, asking the Chancellor to do this now. Goodness knows, exclusion of the extra 2½ per cent. Profits Tax from exports is modest enough, but I believe that it could be an experiment at a most appropriate time. The time is appropriate. I urge hon. Members to remember that when they speak in terms of Germany they should bear in mind that the problems of that country are exactly the opposite to ours. There is no fear that if we give a tax concession that she would in any way follow it. As I say, her economy and problems are opposite to ours, although I realise that in three or four years' time the position may be different. But now is the time to try this as an experiment, as far as Germany is concerned.

In twelve months or two years it may he seen that the theoretical administrative problem was not there and then would be a good time to think of taking the next step contained in my new Clause. I am asking for a promise from the Treasury that my right hon. Friend will look at this whole matter again. Whether my hon. Friends and I will want to think of pushing this to a vote depends on how the debate goes. I do not think that that will be necessary, for this is not the sort of thing that can be settled after a short debate, like other items in the Finance Bill. Therefore, if I get a promise that the Chancellor would be prepared to look at this again, that he recognises the special problems of the minute, and that he wishes to get industries to play an enthusiastic part in the export drive, we shall feel satisfied.

Lady Tweedsmuir (Aberdeen, South)

I support the Amendment so ably moved by my hon. Friend the Member for Peterborough (Sir Harmar Nicholls), and also the new Clauses. My hon. Friend dealt with this matter in detail, and I will be brief, because I know that we are running late.

I feel that the arguments which lie behind the new Clauses are not arguments that the Front Bench are likely to accept now. They go very far, because they ask for the relaxation of Profits Tax on all export earnings. What might be possible is that the Government would really seriously consider what is, in a way, really only a minor concession but one which would have a considerable effect, particularly on the smaller firms, which are hesitating whether to enter these difficult export markets. The proposal is that the extra 2½ per cent. Profits Tax shall not he imposed on these firms if they can show audited accounts to satisfy the Inland Revenue Commissioners that their business is going in exports.

The main argument against any kind of hidden subsidy for exports has always been that we have spent a great deal of effort over the years trying to persuade other countries to remove hidden or open subsidies of this kind. But I think that the point put to the Committee by the hon. Member for Peterborough was very significant, for we should be asking ourselves—and I use the words of my hon. Friend—why 30 per cent. of our export business is due to forty firms.

That situation cannot possibly be right. It shows that any inducement we can give is much more likely to help the smaller firms than the larger ones. One reason why the Federation of British Industries and other organisations have been against this proposal is that it is much easier for the larger firms.

The hon. Member for Peterborough mentioned that during the Budget debate I referred to some export stimuli which are about to be introduced by the Australian Government. Australia is one of our best customers, and also by tradition one of our oldest friends. I should like to ask how it is that Australia, for example, can introduce this kind of help and inducement to her exporters, bearing in mind international agreements and, indeed, the whole moral question of whether one should have a hidden or an open subsidy at all.

At the moment there is an 8s. in the pound deduction in Australia on the total amount spent by firms on export promotion. On 1st July this year that amount is to be doubled; it will be 16s. in the pound. Incidentally, this might interest the Financial Secretary. On 1st July also, if it is shown that between 1958 and 1960 a firm has increased its exports by an average of more than 8 per cent. of the total sales that firm will be given a total remission of the payroll tax.

I know that we have concluded a long discussion on this question, but that goes to show that some countries at present think it worth while to give inducements to their export industries. Australia is an interesting example because she is one of the old primary producing countries and is now becoming very quickly one of the greatest industrialised countries in the world. The only way in which Australia can hope to settle the enormous number of emigrants who are going to her shores is by increasing the potential capacity of her export earnings. Therefore, the Australian Government feel that any inducement that they can give to their exporters is worth while.

I do not think that it is generally realised what is being done in the export field. In Scotland the total export trade at this moment amounts to £320 million and the Scottish Council is hoping by various means to double this amount. That is good. Even in my own city of Aberdeen, which, like many other areas in Scotland, has struggled with unemployment, during the last year over 3,000 export documents were certified by the Chamber of Commerce, a 10 per cent. increase over last year. As hon. Members know, not all countries require these certified documents. It might well be said by those on the Government Front Bench that that only goes to show that no kind of export stimulus is required. But I would say exactly the apposite. I think it shows that there is a desire to export, and that we really must examine the problems of the smaller firms.

I was in New York last autumn and I had the chance to visit the Scottish Council offices there. I was told that the competition in that city from Continental countries to try to get business in America was stupendous. There was no question of the Scottish Council trying to promote the interests of Scottish exporters only. It had to promote the interests of British exporters, and that was very difficult. The smaller firms cannot possibly afford to send representatives to the big cities in places like Canada, to set up offices and travel from one side of that vast continent to another.

What we are suggesting in the Amendment, which, after all, is only one form of inducement to our exporters, is that small firms should not be given an active discouragement in the form of having to pay an extra 2½ per cent. Profits Tax. If we could relieve the smaller firm of this extra tax, it might make all the difference when a firm was wondering "Shall we leave this easy home market and take the risk and difficulties of the export market?" I make this plea for the small firm more than for anything else.

The whole object of this Budget, which we have debated for so many weeks, has been to do all we can to improve our balance of payments position. As has been said over and over again, the chief way of doing this is to encourage our export trade, and I believe that if we could give this concession this year, bearing in mind the example of other countries, we should give real and definite encouragement to the small firm to leave the easy home market and to enter the difficult export market.

8.15 p.m.

Mr. John Hall (Wycombe)

I confess that I was taken a little by surprise, entirely through my own fault, I am sure, when I learned that the new Clause standing in my name—(Allowance for export market development)—was selected for discussion with this Amendment. Therefore, I crave the indulgence of the Committee if I do not cover in detail all the points that I might otherwise have brought to the attention of the Committee had I been given a little more notice.

Like my hon. Friend the Financial Secretary, I also should be at the dinner of the Public Accounts Committee, but I hope that, all being well and with any luck, I shall get there in time for the coffee, so it will not be quite so expensive for me as it will be for him.

My hon. Friend the Member for Aberdeen, South (Lady Tweedsmuir) said that in her view the Budget was designed to help our balance of payments position and to help to increase our exports. One of the reasons that I put down this new Clause was that I found nothing in the Budget which was designed to help exports in any way at all. In fact, most of the provisions of the Budget make export more difficult and more expensive. My hon. Friend the Member for Peterborough (Sir Harmar Nicholls) drew attention to some of the taxes which make export more expensive—the fuel-oil tax, for example—

Lady Tweedsmuir

Perhaps I did not make myself clear. I said that the purpose of the Budget was to improve our balance of payments position, and it was just for the reason that the Profits Tax did exactly the opposite that this Amendment was moved.

Mr. Hall

I thank my hon. Friend for that correction. I misunderstood her.

The taxes to which my hon. Friend the Member for Peterborough referred—the fuel-oil tax, the possible imposition of a payroll tax, though that now seems a little uncertain, and even the vehicle excise duty—can hardly be regarded as an incentive to export. These things do not increase the chances of exporting. Indeed, they make it a little more difficult.

The Clause to which I have put my name is a little different from the Amendment and the proposed new Clause in the name of my hon. Friend the Member for Peterborough—(Exemption of export earnings from profits tax)—in so far as I am only asking for an allowance for export market development. I am being a little more modest than my hon. Friend. I am not asking for a special tax concession or incentive for all exports. I am asking for it only for these exports in new markets, and I do that for a very good reason. I appreciate that the Clause is loosely drafted, that one can shoot all sorts of holes in it and that it needs tightening up in many respects, but I put it on the Order Paper to give an opportunity for the subject to be debated.

It has been said that those firms which find it most difficult to export are the medium-sized and small firms which we wish to encourage to export. I do not think that there is any difficulty about the major industrial firms in this country. They have their own established markets and their own agencies, though I appreciate that they have their problems, including the problem which faces all British industry, and that is to produce goods at the right prices, in the right condition and on the right delivery dates. But for the small and medium-sized firm it is very different. It is a very difficult business to develop an export trade, especially in a market where the firm concerned has not been previously represented. If a medium-sized firm enters a market with no previous connections there, it has to look forward to a period of three to five years before it can make any headway or any money.

If I may quote some experiences of my own in this respect, I can think of a medium-sized company which started exporting at the behest of the Government because it was considered its duty to do so. For more than three years it had a struggle and a loss each year. But for the determination of that company to go on exporting until it made a success, it would have dropped that export business and concentrated on the much easier and more profitable home market. But it went on and, in time, managed to build up a reasonably good export business which is now reasonably profitable.

Many firms will not do that. Why should they? They find it much easier to sell on the home market. They know that, if they try to divert part of their production to export, they will upset their production facilities for meeting the home demand, which is very large, and they will do themselves a certain amount of harm at home by being unable to meet their home delivery dates in their efforts to meet export dates instead, and, at the end of the day, they may well be very little better off. Although it is true that, if they persevere, they may be able to establish a profitable market, many think that it is not worth while. I suggest, therefore, that we should make a special concession along the lines of the new Clause to which I put my name for those companies which are developing completely new markets.

It is not a very large concession for which I ask. I do not think that it would necessarily be very expensive. I do not ask for it necessarily in the form in which I have put it down. I hope that the principle will be accepted that, if a company is going into an export market to the detriment of its efforts and profitability on the home market, that should be recognised in some way.

I am sure that many of my hon. Friends, together, I hope, with hon. Members opposite, will add their voices in support of the effort we are making in this direction. I hope that the Minister will give very serious consideration to what we suggest particularly at this time, not only for the reasons given by my hon. Friend the Member for Peterborough but because the Budget by itself contains no incentive or encouragement for export at all.

I do not accept the view that the Surtax concessions, welcome though they are and welcome as evidence of overdue fiscal justice, will by themselves do very much to improve our opportunties and chances in the export market. I hope that the Minister will try to find some additional way of giving tangible encouragement to make the effort to those companies which do not now go in for exporting.

Mr. R. Gresham Cooke (Twickenham)

I have changed my mind on the subject of export incentives during the last two or three years. Previously, I took the view of the big battalions, of the F.B.I. and the National Union of Manufacturers, that we ought not to compete in incentives with foreign countries. Two factors have made me change my mind. First, there is the present disastrous fall in our invisible earnings. Shipping is now costing us more than we earn by shipping. British tourism, I think, earns less than British tourists spend overseas. There is the great fall in our earnings of interest from overseas. All this means that we must do more for direct exports from industrial production.

Secondly, after having seen it from the point of view of the big firms which make successful efforts, I have, during the last year or so, seen this matter from the point of view of the smaller firm. I have been trying to do some exporting for one or two of them, and extremely difficult it is. One can easily spend £1,000 in a market before one succeeds in selling any exports at all.

The major argument against having international competition in incentives is that we are bound by certain agreements not to embark upon it. It should be remembered that Germany and France, and Italy, I think, have a turnover tax and exporters in those countries receive a rebate of the turnover tax for successful exports. In my view, that is a direct incentive. It has been said that we have the Purchase Tax in Britain and when a company exports it does not have to pay Purchase Tax, and that has much the same effect. I do not regard that as a fair analogy at all. In the first place, the Purchase Tax is paid by the customer. In the second place, the Purchase Tax does not enter into costs, whereas the turnover tax does. When a German exporter has the rebate of part of his turnover tax, that is a contribution towards his profits which is not given to exporters in this country by the rebate of Purchase Tax.

I agree with my hon. Friend the Member for Peterborough (Sir Harmar Nicholls) when he says that a step forward ought to be taken. I associated myself with the new Clause spoken to by my hon. Friend the Member for Wycombe (Mr. John Hall) because it is intended to provide a small incentive to firms which have not yet made a large contribution in any export market—it being governed by the limit of £1,000—to induce them to go into new markets where they have not yet made the attempt.

The time has come for us to reconsider this matter. Whatever the F.B.I., the T.U.C. and the big bodies have said in the past, we ought, in this Committee, to say that our smaller and medium-sized firms which go out into the world seeking new markets should have some incentive, even the small incentive provided for in the new Clause to which I have referred.

Mr. Nabarro

This has been an intractable problem for the last fifteen years. It is well known that the Labour Government a year after the end of the war examined, with all the best advice available in the Treasury, the prospects for offering direct tax incentives to exporters. Not only did the Treasury examine it meticulously. Every major representative body in industry was consulted. With the strain on our balance of payments during the last twelve months, exactly the same process has been combed over again.

In my judgment, it is really valueless in this Committee to laugh off as insignificant the combined opinions of senior industrialists and business men in the grand council of the Federation of British Industries, the executive committee of the National Union of Manufacturers, the appropriate committees of the Association of British Chambers of Commerce, the Institute of Directors and many other representative bodies and agencies which voluntarily have been co-operating with the Chancellor of the Exchequer and the President of the Board of Trade throughout the country to try to devise a formula which would give the kind of fiscal incentive suggested by my hon. Friend the Member for Peterborough (Sir Harmar Nicholls) and, what is much more important—my hon. Friend did not use the word once in his speech—give it in equity, among manufacturers.

Mr. Gresham Cooke

Will my hon. Friend admit that the institutions he mentions and the councils thereof are largely dominated by the big firms, for which this is really not a very great problem?

Mr. Nabarro

On the contrary, my hon. Friend is not right.

Mr. Gresham Cooke

The F.B.I.?

Mr. Nabarro

My hon. Friend refers again to the Federation of British Industries. It is true that the grand council of the Federation of British Industries includes several representatives of large firms, but the National Union of Manufacturers represents 6,000 to 7,000 medium and small firms, and the constituent members of the Association of British Chambers of Commerce cater largely for the smaller firms. The Institute of Directors, with 35,000 members—[Interruption.] Does the hon. and learned Member for Kettering (Mr. Mitchison), who always sneers at a company director, wish to intervene, while sedentary?

Mr. Mitchison

I said, and I say again, that I regard the Institute of Directors as a joke.

Mr. Nabarro

I am sorry that the hon. and learned Member should do that. He happens to be a barrister. I regard defunct barristers as a joke. When the hon. and learned Member has his photograph taken for The Times election handbook, wearing full-bottomed wig, he is a bigger joke than ever.

8.30 p.m.

If I may now return to my dissertation on the representative bodies of industry, what has troubled all of them in examining this matter is how to secure equity as between firm and firm. It is true, as my hon. Friend the Member for Peterborough said, that the company that goes out and sells the goods abroad, finances them over long periods and accepts all the risks involved in selling in different parts of the world should primarily benefit from any tax rebate that may be given in this country under financial statutes. But only a relatively small number of firms directly export. My hon. Friend is a product of the Black Country. He knows hundreds of firms there, as I do, which produce castings, forgings and components in a huge and diverse variety, all of these goods contributing, directly or indirectly, to the production of finished goods that are subsequently exported.

As an example, let us take the famous Motor Corporation, the board of which my hon. Friend the Member for Twickenham (Mr. Gresham Cooke) adorns. He knows very well that that company manufactures practically nothing itself. [Interruption.] I am sorry; let me finish. It manufactures practically nothing itself. It buys nearly all the components for its motor cars, puts them together and assembles them. The firms which actually produce those components, the tyres, the wheels, the lamps, the starters, the electrical equipment and a large number of the components of these motor cars, may not themselves directly export but they contribute to the finished motor cars, a percentage of which cars, one-third or two-fifths, is subsequently exported.

The difficulty, and it has been an eternal difficulty, which has baffled the Treasury and every representative body in industry and the T.U.C. is how to give effect, in equity, to these few words which my hon. Friend so carefully puts into his Amendment—I am not talking about the new Clause, but the Amendment of my hon. Friend the Member for Peterborough—those words which say: Provided that profits which have been certified by the auditors of a business and accepted by the Commissioners of Inland Revenue are solely attributable to export earnings. That is the problem, how to give effect, in equity, to those words.

A company produces its accounts at the end of the year. To take an example, it has produced £1 million worth of engineering components, and has sent these components to 20, 30 or 40 customers. These customers will use these components for assembling into finished products, will export part of the finished product and sell the remainder on the home market. How can any accountant give us a figure which can be agreed with the Inland Revenue as to the percentage of the components from the originating firms, and of the profits from them, which is even more difficult, which shall rank for that relief referred to in this Amendment?

Sir Harmar Nicholls

My hon. Friend is being very fair, and one understands the problem as he puts it, but it is because the F.B.I., the Treasury and all the others have got bogged down in that sort of detail in the past that they have not been able to find the answer. I am saying that the firm or agent or stockholder who earns the foreign currency is the one who should get the tax concession. What my hon. Friend says about the component manufacturers is true, but they would not have taken the trouble and risks of exporting, and it is only the ones who earn the foreign currency who help the balance of payments position. These are the ones who, for the very reasons my hon. Friend outlined, I wanted to help.

Mr. Gresham Cooke


Mr. Nabarro

May I indicate, Mr. Hynd, that I have given way to my hon. Friend the Member for Peterborough, and that I am now giving way to my hon. Friend the Member for Twickenham? I should not like you to think that I had concluded my dissertation.

Mr. Gresham Cooke

Is my hon. Friend aware that the component manufacturers in the motor car industry, to take an example, have actually agreed to the direct exporters receiving this benefit, because the components manufacturers realise that they will get an indirect benefit in increased turnover which otherwise they would not get?

Mr. Nabarro

Perhaps my first example is not as apt as it might have been. It illustrates the difficulty. Take the case of the British farmer who produces the wool from the sheep's back, the wool that goes into a carpet manufactured in Kidderminster, where it is dyed and woven into one of those beautiful carpets which is subsequently exported. Is the producer of the wool from the sheep's back to require an auditor's certificate to the effect that as part of his total product has finished up in export goods he ought in equity to have the concession?

Sir Harmar Nicholls

That is another argument.

Mr. Nabarro

It is not another argument. I listened to my hon. Friend very quietly, with only one intervention. My argument is that taxation must be equitable and that we should not seek to discriminate between producer and producer, manufacturer and manufacturer, passionately anxious though I am to find some means of twisting or attuning our fiscal system to the needs of British exports with a view to furnishing a greater incentive. I do not think that my hon. Friend has the right formula. I know that my hon. Friend the Financial Secretary, in the purity of his fiscal sense, will support my view.

Sir E. Boyle

My hon. Friend the Member for Kidderminster (Mr. Nabarro) has put the case so well and from such a wealth of first-hand experience that there is not very much that I need add. It is always a matter of regret to me that my hon. Friend, when he is in one of his more rampaging moods, to use no more controversial a word, tends to have a crowded Chamber and is very well reported in the Press. Often his most valuable and constructive speeches are made on quiet occasions like this.

Mr. Nabarro

Read the Daily Telegraph tomorrow morning.

Sir E. Boyle

I will indeed. I should like to congratulate my hon. Friend on having made an informed and excellent contribution to the debate.

Before I come to the detailed argument of my hon. Friend the Member for Kidderminster, there are two important preliminary points that I should like to make. First, I stand by what I said in the Budget debate. When we are talking about the balance of payments and what we can do to help our exports, do not let us lose sight of the fact that the balance of payments of any country depends ultimately on its competitive performance over the whole field. I make that point because it is very important to remember the number of firms which make an essential contribution to our balance of payments, even if they do not themselves literally earn foreign currency.

The second point that I wish to make is this. A number of hon. Members have said that they feel that the Government have done nothing in this Budget and Finance Bill to help our export effort. Like my hon. Friend the Member for Aberdeen, South (Lady Tweedsmuir), they have gone on to say that one of the difficulties is that so many smaller firms are tempted away from going after exports by the lure of an easy home market. Whatever faults may be found with the Government, no one can say that this year the Government have neglected that problem. As we have explained again and again, in the Budget debate and when replying to the reasoned Amendment on Second Reading, the whole purpose of my right hon. and learned Friend's Budget surplus and of the two regulators is precisely to ensure that the home market does not become too easy.

My hon. Friend the Member for Peterborough (Sir Harmer Nicholls) has shown tonight and on earlier occasions in a number of vigorous speeches how strongly he feels on this subject. I appreciate his sincerity and obvious concern for the success of Britain's export effort. But I do not wish to mislead him or the Committee; for the reasons I am about to give, I cannot advise the Committee to accept the Amendment. I must say to my hon. Friend that, like Lord Amory, my right hon. and learned Friend and I have thought about this matter again, but I think that it is extremely unlikely, to say the least, that my right hon. and learned Friend will change his mind on this matter.

In the first place, my hon. Friend's proposal is contrary to the Government's policy and obligations in the international field. It has long been the policy of Her Majesty's Government to work towards the elimination of export subsidies and other artificial incentives to exports. I am not sure that it is always realised in this Committee that this policy has achieved a considerable amount of success.

For instance, let us consider the two main European competitors of the United Kingdom. Western Germany allowed her export promotion law to lapse at the end of 1955, and since then she has had no tax incentive scheme. In France, direct subsidies on exports of manufactures were finally brought to an end in February, 1958. I think that is significant. I think it fair to say that there has never been in France quite the same tradition as in many departments in this country of what one might call an almost religious reverence towards the principles of nineteenth century free trade theory. So far as I am aware, no open subsidy or incentives are now given in other European countries to help the exporters of manufactured goods.

Mr. Gresham Cooke

Would not my hon. Friend agree that the turnover tax in Australia is a form of incentive?

Sir E. Boyle

I have noted the point made by my hon. Friend, and I feel that in some respects it is a disadvantage that I am not a Board of Trade Minister and able to answer the detailed points about the Australian turnover tax and other points which have been raised. But I will try to discover the answers and write to my hon. Friends as soon as possible.

I was going on to say that there is the further point, which I think important, that we have to consider our obligations to O.E.E.C., to E.F.T.A. and to G.A.T.T.; and I will take each in turn. A decision of O.E.E.C., renewed as from 1st January, 1961, prohibits among other "artificial aids to exports" The remission calculated in relation to exports of direct taxes or social welfare charges on industrial or commercial enterprises. The E.F.T.A. Convention contains a similar prohibition, in relation to exports from one member State to another. Members of G.A.T.T. agreed last November to take steps towards putting into full effect a ban on export subsidies, including the export aids banned by O.E.E.C. on industrial goods. This ban is expected to come into force later this year.

Sir Harmar Nicholls

It was precisely on those grounds that I suggested that this would not out across international agreements. Before something can be remitted it has to be taken. I am suggesting that the 2½ per cent. extra tax is never taken. Therefore, it cannot be remitted.

Sir E. Boyle

I heard what was said by my hon. Friend and I think that if he looks at the OFFICIAL REPORT tomorrow at what I have said on the question of the O.E.E.C. decision he will see why I cannot, with respect, agree. A discriminatory remission of Profits Tax, or even of part of it, would be contrary to that decision.

I am quite certain, for reasons which I will explain in a moment, that Britain has been right to take this initiative towards the banning of export subsidies. I know that my hon. Friend has suggested on other occasions, and tonight, that we should move in exactly the opposite direction. But then we should find ourselves threatened by a subsidy race from which, in my view—this is the important point—Britain could not hope to benefit.

Quite apart from the loss of Exchequer revenue, I find it impossible to believe that a subsidy race would be likely to improve Britain's trading position. The reason is, as successive Presidents of the Board of Trade have pointed out in this Chamber, that Britain is more dependent than other countries on maintaining a high level of exports relative to our national income. We export such a large proportion of what we produce relative to nearly all our competitors that we could only gain from a free-for-all if, in order to subsidise exports, we were prepared to sacrifice revenue to a far greater extent than any hon. Member would consider reasonable. That is why I believe that the broad lines of the international policy which this Government have always supported have been the right ones.

I come now to some of the practical difficulties of my hon. Friend's proposal. The Amendment proposes that the relief should extend to profits…solely attributable to export earnings. It makes no attempt to define this phrase except as the amount certified by the auditors and accepted by the Commissioners of Inland Revenue.

In actual practice, in the case of those large numbers of manufacturers or dealers who sell both at home and abroad, it would be a matter of very considerable difficulty for them to divide their total profits between home and export. I recognise that some large concerns might be able to produce accounts of sufficient accuracy to allow a division to be made. But in many cases—here I am thinking especially of the large numbers of small or medium-sized firms mentioned in the debate—the requisite information simply would not be available, and the amount ranking for relief could only be a matter of more or less enlightened guesswork. I would indeed say to my hon. Friends that I think that we ought always in this Committee to think very hard before we suggest any reform which would put an extra administrative burden, and complicated administrative paper work on many hundreds of small firms.

8.45 p.m.

Thirdly, as my hon. Friend the Member for Kidderminster quite correctly said, I think that hon. Members should consider just how far my hon. Friend's proposal is inconsistent with the generally accepted principle of the impartial incidence of direct taxation. I am bound to say that I think his proposal would lead to a great deal of ill-feeling in the business world. It would cause dissatisfaction among those who did not get the relief, and who would in the long run have to pay more tax to make good the loss to the Exchequer. I suspect that there would be a good deal of dissatisfaction amongst some of those who got the relief if they suspected that their competitors were getting a greater benefit. I would also ask my hon. Friend to reflect on this point, that the main benefit from this proposal would tend to go to prosperous, well-established firms with an established market overseas, while a less prosperous concern trying to make its way, perhaps not very successfully, into an overseas market might get little or no benefit.

A further point, of course, is that a company which both manufactured and sold its products would get relief on the profits of manufacture and sale, in so far as they were attributable to products exported, but if the goods were manufactured by one company and sold by another, as quite often happens, the relief would be confined to the profits made by the selling company. The Amendment confines the relief to the actual exporter and there seem to be insuperable practical difficulties in trying to spread it more widely. But I am certain that, as my hon. Friend the Member for Kidderminster said, there would be immense dissatisfaction amongst sub-contractors and amongst makers of components who supplied exporters but did not export themselves.

Finally, one has, I think, to consider the repercussions of this Amendment and the claims for extension of the proposed relief which would certainly be advanced. In the first place, there are the invisible exports, highly important, as they can fairly claim, to our balance of payments, shipping, banking, and insurance. Again, the proposed relief would be of no benefit for exporters who are subject to Income Tax and Surtax but not to Profits Tax, and no doubt they would claim some corresponding form of relief as well. Indeed, once we have breached the principle of the impartial incidence of direct taxation, then the claims which might be advanced for other favourable treatment on some ground or another would be very numerous indeed.

The new Clause put down by my hon. Friend the Member for Wycombe (Mr. John Hall) is being considered with this Amendment. He explained to me that he wanted at least to have coffee at the P.A.C. dinner, and so I shall not speak at length tonight in reply to his specific suggestion, but I think that there are very great practical difficulties indeed about what he proposes. Even on the assumption that it would be practicable for exporting companies to keep records in future in such a way that exports to each market could be readily aggregated, it seems to me doubtful whether they could be made available for the past. Yet it is essential to the whole proposal of my hon. Friend that the markets, exports to which would qualify for relief, must be those to which the concerns have not exported in a past period; otherwise it would be open to any company to refrain from exporting to a particular market in the relevant period so as to Obtain the benefit of tax relief in respect of exports to that market in later periods. There are other great difficulties, as I see it, in his proposal as well.

For the reasons I have given, I must advise the Committee to reject this Amendment and the new Clauses which are being taken with it. As my hon. Friend the Member for Kidderminster quite rightly said, both sides of industry have long now been opposed to differential taxation of this kind. I can assure my hon. Friends who have spoken tonight that this really is a matter which the relevant Government Departments have gone into again and again. It is a very obvious suggestion—not, if I may so express it, a very sophisticated move, on the chess board of economic argument—to suggest that we should have some special incentive to exports.

We really have considered this most carefully. I cannot say to my hon. Friends that it is at all likely that the Government will change their views on it, but I have certainly listened to what they have had to say with great interest. I hope that they will forgive me if I say that I will look at some of the detailed points more carefully and write to give them individual answers.

Mr. Mitchison

I have listened with some amusement to this very full and interesting debate. I find myself in some difficulties. My first difficulty is that I cannot disagree with all hon. and right hon. Gentlemen opposite. Their common disagreement is so fundamental that I am bound to agree with one or other of them. It is a very healthy sign that some of these difficulties, which we well know exist in the Tory Party, are argued out in the open instead of being hidden within the walls of the 1922 Committee or some other place.

I am in another difficulty in that I have for once to agree with a very curious combination of people. One of them is the Financial Secretary to the Treasury and the other is the hon. Member for Kidderminster (Mr. Nabarro). When they agree, to have to add myself to the number is indeed difficult. The hon. Member for Kidderminster, who is now leaving the Chamber and whose manners I always regard as considerably worse than his intelligence, seemed to me to put this matter very fairly.

I entirely agree with what both the Financial Secretary and the hon. Member said. One could add other instances to those which they gave—for example, the spinner and the weaver who contribute to the finished cloth and the dyer and the finisher, and the rest. They are quite obvious, but I should like to take one particular point on which I find myself in complete agreement with the Financial Secretary.

The Financial Secretary said quite rightly that one can only tackle exports as part of the whole business of production and the increase of trade as a whole. The Government have been singularly unsuccessful in increasing production and in retaining the share which we formerly had of world trade. It is interesting that they should now recognise that it is due to that kind of default that our export trade has become difficult and has fallen back in the race with other countries.

This is not a matter that could be put right by breaking a number of international agreements, which appear to be the solution suggested by the Amendment and the new Clauses, and I should have thought that it was no answer to suggest that a number of other countries might have broken them. I thought that in this country we tried to keep to what we had undertaken to do, and that one of those undertakings was not to use discriminatory taxation to give an artificial stimulus to exports, which it seems to me is the fundamental principle which it is sought to break. The Amendment and the new Clauses seem to me wrong, foolish and unworkable. I do not know that one can say very much more about them than that.

I should, however, like to remind hon. Members opposite that although we on this side of the Committee have not done so this year, we have from time to time put forward proposals on rather different lines which, while for the reasons I have given I would not regard as enough, were more workable. They were directed towards investment allowances specially designed to give assistance to manufacture for export. Those who are now so fervently supporting exports voted against us on those proposals when they were made. Such, I suppose, is the party system, and there it is.

I do not regard this as a matter of dispute between small traders and large traders. Even if it were, I notice that the large traders who have turned down the proposal, on grounds with which I agree, are the very people who would benefit substantially and benefit more than the others from the particular remission of taxation that is proposed. I regard their condemnation of these proposals as having some additional weight for that reason.

I entirely agree with what has been proposed, but I hope that nothing I have said will serve to heal the rift in the Conservative Party.

Sir Harmar Nicholls

Before asking leave to withdraw the Amendment—[HON. MEMBERS: "Why withdraw it?"]—for reasons which I explained when I moved it, I should like to make a comment upon the last words of the Financial Secretary, which showed the difficulty. He said that because the proposal was not sophisticated and had no difficuties surrounding it, it was much too simple. It does not strike the Government sometimes that the simple, straightforward proposal may be the right one. Next time we will make one which is more complicated.

My hon. Friend the Member for Kidderminster (Mr. Nabarro) has been helpful. His point of view represents the official point of view of the F.B.I. and others. It is clear that we have to carry the battle on outside the House of Commons and get in among the F.B.I. and the others, and then they will be giving the sort of advice to the Treasury Bench which I think will be helpful. I want it to be known that for me the battle is certainly not ended. I beg to ask leave to withdraw the Amendment.

The Temporary Chairman (Mr. H. Hynd)

Is it the wish of the Committee that the Amendment be withdrawn?

Hon. Members


Amendment negatived.

Motion made, and Question proposed, That the Clause stand part of the Bill.

Mr. Nabarro

I should not like the Clause to pass without at least one hon. Member on the Government side criticising the increase, for the second consecutive year, in the Profits Tax. It represents this year a policy of switching direct taxation from industry to the corporation. The corporation or company has no vote in a General Election. There are many individuals who have votes in General Elections, and, there-fore, individuals are generally considered to be more important electorally than corporations.

But I am genuinely concerned about the continuous heaping of additional direct taxation on industry and the attitude of various Treasury Ministers to this matter. The extent of the increase is apparent when I say that in 1959 the then Chancellor of the Exchequer, the present Lord Amory, consolidated the Purchase Tax at a uniform level of 10 per cent. in respect of both distributed profits and undistributed profits and did not discriminate, as formerly, against distributed profits by a larger rate of Profits Tax.

In the following year, 1960, Lord Amory, who was still Chancellor of the Exchequer, put up the rate of Profits Tax from 10 per cent. to 12½ per cent., thereby, with the addition of the standard rate of Income Tax at 38¾ per cent., creating a situation whereby for the first time for several years the profits of industry were mulcted as an aggregation of Income Tax and Profits Tax by an amount in excess of 50 per cent. The total rate of direct taxation on industry in 1960 became 51¼ per cent., or a total of 10s. 3d. in the £ of profits.

This year the Chancellor's proposal in Clause 27 is to raise the level of Profits Tax from 12½ per cent. to 15 per cent. That, when added to the standard rate of Income Tax at 7s. 9d. in the £ 38¾ per cent., gives a total of direct taxation on corporations of 53¾ per cent., or 10s. 9d. in every £ of profits earned. That is an excessive level of corporation taxation. It does not give an incentive to additional exports or to additional earnings, and is at a higher level than at any time since 1955.

9.0 p.m.

The Chancellor has represented in earlier speeches on the Budget that the additional Profits Tax would be borne very largely by the equity shareholder, who has done rather well during the period since 1959. I agree that the equity shareholder has done rather well since 1959, but I do not agree with the Chancellor's interpretation that it is primarily the equity shareholder who will bear this 2½ per cent. additional Profits Tax.

On the contrary, a more correct interpretation of what now happens is that the capital of companies is mulcted by an amount of the additional 2½ per cent., in that the sum of money available for ploughing back into the concern for expansion purposes and for re-investment is reduced by a further 2½ per cent. It flows from that principle that the equity shareholder has his interest diminished, or is further mulcted. But the first consideration in the impact of the Additional Profits Tax, is surely that it is further taxation on the capital of companies, and is therefore to be deprecated.

I could not vote against the Clause tonight, because the Chancellor has made it perfectly clear that the £70 million additional revenue in a full year which he will derive from the additional 2½ per cent. Profits Tax to raise the level to 15 per cent. represents the increased sinews which have substantially enabled him to abate the Surtax on a scale with which the Committee has already dealt. Clearly, he has to find the money from somewhere.

I do not approve of his having done it wholly from corporation profits; but I should be out of order if I strayed into the subject of indirect taxation and other possible sources which have been available to him. I would have preferred a system whereby he dealt with indirect taxation, and brought into the ambit of indirect taxation certain things to which I referred in earlier speeches in Committee and which at present do not attract indirect taxation, without placing British industry at the further disadvantage of an added 2½ per cent. direct taxation.

The Federation of British Industries, whom I do not represent, although it was alleged a few minutes ago that I did, and the National Union of Manufacturers and other bodies in industry are in no way reticent in shouldering a very substantial burden of taxation and contributing generously to the Chancellor's revenue. But for many years they have been directing their attention to the Profits Tax and it has been a nasty setback to the majority of them that the Chancellor has decided to put up Profits Tax for the second consecutive year.

Immediately after the Budget, the President of the Federation of British Industries wrote to the Chancellor, on 4th May to be precise, and used this form of words concerning the Profits Tax: Your proposal for a further increase in profits tax raises the tax on company profits to a total of nearly 54 per cent. We do not believe that so heavy an impost can be justified. The discrimination between company and non-company profits will be widened and the capacity of industry to invest in the means of expansion will be reduced. We hope that the reduction of this tax will be given high priority in your future fiscal plans. The National Union of Manufacturers used this form of words in its memorandum following the Budget: It is naturally appreciated that any observations of the National Union of Manufacturers are unlikely, at this stage, to influence the Budget provisions, except to a limited extent, but it is felt that the Chancellor should be informed of the views of its members and of the concern which they feel. In particular, they fear that the increase in profits tax must inevitably result in a reduction in the amount of profit which can be 'ploughed back' into more up-to-date machinery and other capital equipment, while the increased taxation on oil and transport is likely to lead to a spiral of rising prices, especially as these increases will affect raw materials and services which are basic to industry. The third condemnation of this tax came from Sir Eric Vansittart Bowater, the Chairman of the Bowater organisation, international in character, who used these words: It is difficult to comprehend why a government whose declared policy is to encourage and stimulate British industries should now seek to implement taxes of the nature of the three to which I have referred. Of those three, Profits Tax was the last referred to.

I make a mild protest this evening on behalf of industry, cognisant of the fact that my right hon. and learned Friend has conceded a major relief of direct taxation affecting most industrial and commercial executives by his abatement of Surtax, but I do not believe that he has financed that in the correct way. It should have been done by a widening incidence of indirect taxation rather than by killing the goose which provides all the industrial golden eggs, whether for the export trade or for the home trade.

Finally, I wish to say a word on reform of industrial taxation, with special reference to Profits Tax. The Chancellor included in his Budget statement a pregnant section dealing with reform of taxation. While he could with justification point to certain operational and administrative difficulties arising from an amalgamation of personal Income Tax and Surtax into a single graduated scale of direct taxation on the individual—and most of us realise those difficulties, and hope that they will be overcome in the forthcoming year—no such difficulties could be envisaged in the amalgamation of Income Tax and Profits Tax into a single corporation tax to be levied per centum on profits of industry as recommended in the Report of the Royal Commission.

There is no possible objection to doing that, and the representative bodies of industry and commerce generally support it. The Royal Commission was undivided in its view as to the desirability of this reform, and whilst within the context of the relatively narrow Question "That the Clause stand part of the Bill" I shall not stray into wider issues involved in a reform of industrial taxation, I think that this is the appropriate moment to say to my hon. Friend that we hope we shall not have another Committee stage of a Finance Bill in 1962 without this very desirable reform of amalgamation of Income Tax and Profits Tax into a single scale of corporation tax, as recommended by the Royal Commission, being implemented in that Bill.

Mr. Jay

We ought to welcome back the hon. Member for Kidderminster (Mr. Nabarro) to our debates. I was beginning to fear that the Chancellor's Surtax reliefs had left him feeling that he no longer had any incentive to attend them. I want to make only one comment on the hon. Member's argument that an excessive amount of taxation is now being imposed on company profits, relative to personal income. The hon. Member has forgotten—or he omitted to mention—that both the initial allowance and the investment allowance are still in force, and that these benefit company profits and, in particular, investment by industry, which he apparently feared was being penalised.

Mr. Nabarro

Those were the very much wider implications to which I referred at the end of my speech, to which I considered it would be out of order to allude. There is a separate argument for offsetting Profits Tax by the withdrawal of capital allowances, but that would have no place in a discussion of the Question "That the Clause stand part of the Bill", when the Clause deals with Profits Tax.

Mr. Jay

I will not pursue this point, but I thought I ought to mention it so as to get the matter into perspective.

Secondly, our debates this evening on Profits Tax have shown very clearly how right Lord Dalton was, after the war, to introduce a differential rate of Profits Tax on distributed profits, on the one hand, and undistributed profits, on the other, and how wrong Lord Amory was to consolidate—as the hon. Member for Kidderminster put it—those two rates two years ago. This evening we have had the surprising spectacle of the Economic Secretary having to admit that because the Chancellor wanted to increase Profits Tax on the profits of industry generally he was compelled to impose this extra levy on co-operative and building societies.

The right hon. and learned Gentleman did not wish to do this. If he had had a doubt rate, as existed before, he could have done what he really wanted to do, which was to raise the tax on industry generally without imposing an unnecessary and illogical extra burden on co-operative and building societies. We have had the extraordinary spectacle of building societies being compelled, since the Budget, to raise their already extremely high interest rates charged to those borrowing money for building or buying houses—and we know what an extremely high burden those people already have to bear. Building societies have been compelled to raise the rate still further, just because the Chancellor wished to increase the tax on industrial profits.

The Economic Secretary admitted that the extra £500,000 which he obtained from the building societies was not a necessary part of the Budget. He did not wish to impose it, but he had to because there was no other way of increasing the Profits Tax. It has, therefore, been shown by these years of experience that the differential rate of Profits Tax had two great advantages. First, it was flexible. It was a regulator. It was possible to increase taxation on distributed profits without increasing it on undistributed profits, or vice versa, which the Government can no longer do; in this respect, by amalgamating the two rates they have thrown away a convenient method of regulating the economy. Secondly, the double rate enables any Chancellor to allow for the special position of co-operative and building societies and, no doubt, other non-profit-making bodies.

A great deal has been said on the question whether the surplus or profits which building and co-operative societies earn should be considered as a real profit and therefore subject to Profits Tax. That is largely a verbal question, but there are two clear distinctions between the ordinary commercial company, on the one hand, and co-operative and building societies, on the other. The dividend paid by the building or co-operative society is limited, and in most cases virtually fixed. That means that the share is in quite a different position from the ordinary equity share of an industrial company, where the dividend is unlimited. Secondly, the share itself is not bought and sold on the market, so there is no possibility of capital appreciation. These are two quite clear distinctions which, In my view, certainly justify the imposition of a lower rate of Profits Tax on the society, or whatever it is, where the dividend is limited in that way.

Therefore, this year's argument, and the difficulty that the Government have themselves got into with the building societies, show that Lord Dalton's solution was the right one. It is now quite clear that amalgamating these two rates into one, and following, I would say to the hon. Member for Kidderminster, the rather illusory object of simplifying taxation—which very often results in merely diminishing its flexibility and the ability of a Chancellor to do what he wants—have resulted in injustice being done to the building societies and to the co-operative societies.

Secondly, the Government have deprived themselves of a flexible regulator which they found in their hands. My main feeling about the Profits Tax, therefore, is a hope that one day—and sooner rather than later—we shall return to the differential system, whose value has been proved in the last few years.

9.15 p.m.

Sir E. Boyle

I seem to recall that two or three hours ago the right hon. Member for Huyton (Mr. H. Wilson) accused my hon. Friend the Economic Secretary of making a foreseeable speech on the subject of building societies. I am sure that the right hon. Member for Battersea, North (Mr. Jay) will not take it amiss if I say that, having re-read last year's debate on Profits Tax before this present debate, most of his speech tonight could have been fairly accurately anticipated by anyone reading last year's debate.

I should like to answer one or two remarks made by hon. Members. My hon. Friend the Member for Kidderminster (Mr. Nabarro) raised, perfectly properly, this point: is there any danger that putting up the rate of Profits Tax to 15 per cent. will mean that industry will be short of funds for capital investment?

I have two things to say on that. As my right hon. and learned Friend the Chancellor pointed out in the Budget debate, in view of the fact that he is retaining investment and initial allowances in respect of expenditure on new assets at their present rates, it is not likely that the increase of Profits Tax to 15 per cent. will have any serious effect on the level of capital investment. The second point that I would make is that, if we look at the general level of company profits, and company dividends and savings for the first four months of 1961, it is quite true that the increase in dividends and savings is less than it was for the corresponding four months last year, but I find it very difficult to believe that industry will be seriously short of liquid funds during the rest of this year.

I will go so far as to say that in this context I think that the Budget surplus and the very small overall deficit must be a help, because it will mean that pretty well the whole of private saving will be available to finance private investment—

Mr. Jay

Can the Financial Secretary give a figure for the increase in profits in the first four months?

Sir E. Boyle

Yes, I can. The increase in profits for the first four months of 1960 was 13 per cent., and for the corresponding period in 1961 it was 13 per cent. also.

My hon. Friend the Member for Kidderminster quite fairly said that although he would have liked to finance the future Surtax reliefs in a different way, at the same time he realised that my right hon. and learned Friend had chosen this particular method in his Budget. I should like to repeat what the Chancellor said in this connection in his Second Reading speech. He said: I was not prepared to make the cost of the Surtax reliefs for earned income a charge on next year's revenue without taking steps to increase that revenue to an extent broadly equal to the cost. Of the various courses open to me, I am the opinion that this increase in Profits Tax is the least objectionable."—[OFFICIAL REPORT, 4th May, 1961; Vol. 639, c. 1628.] I mention this because, in view of all that has been said about Health Service charges in connection with the Surtax reliefs, I was glad to hear the hon. Member for Sowerby (Mr. Houghton), perhaps accidentally, when we were debating Clause 11 last week, say that he, at any rate, understood clearly that part of the Chancellor's Budget speech.

Mr. Houghton

It was not accidental.

Sir E. Boyle

I was very glad to hear the hon. Member.

I shall not develop the point at any length, but I wish to register my dissent from what the right hon. Member for Battersea, North said about the new form of Profits Tax and the old. I shall not engage in prolonged controversy on the pros and cons of Lord Dalton's action or anything else, except to say that I do not agree that the Profits Tax in its present form is a worse regulator than it was in its old form. There are many real advantages in having a combined rate compared with two separate rates. To my mind, the very heavy discrimination against dividend distribution had great disadvantages for an economy like ours which should be expanding.

An interesting point was made by Professor Prest, a more recent economist than Lord Dalton, in his recent book on finance, in which he said that the combined rate has the advantage that equity shareholders cannot so easily get their capital appreciation through the growth in the goodwill and undistributed profits of the company. That is a point which should commend itself to hon. Members opposite. In my view, the balance of advantage rests in the new form we have had since 1958.

Mr. H. Rhodes (Ashton-under-Lyne)

I should like to support the hon. Member for Kidderminster (Mr. Nabarro) in protesting about this increase in Profits Tax. This year—[Interruption.]

Mr. Nabarro

On a point of order, Mr. Hynd. The hon. and learned Member for Kettering (Mr. Mitchison) has an infernal instrument in his waistcoat pocket, which sounds like an alarm clock. As we have many hours to sit as a Committee, could the hon. and learned Member be asked to withdraw with his alarm clock?

Mr. Rhodes

This is a year of very great difficulty, with many drains on businesses, what with shortening of hours and wages remaining the same, the incidence of time lost and the shorter working week, and the fact that the new contributions have to be paid this year. The fact that the charges have gone on oil and Profits Tax is, for a comparatively small private business which has ploughed the whole of its resources back for forty years in the hope of making itself a fine business, one of the most disappointing things I have experienced in the whole of my life. Since the war, I have been able to equate any inflation in terms of prices of the commodity I make. This year, I am failing for the first time and getting behind in the race with inflation.

Although hon. Members talk glibly about the investment allowance which may be received, the initial allowance in the case of secondhand machines and the rest, unless one is able to take advantage of the profit one is able to retain, and spend it on new machines, one cannot take advantage of investment allowance or the initial allowance. It seems that the idea in the academic mind is that we can load industry year after year. It is, perhaps, being misled by the sort of financial values on the Stock Exchange and the ratios of dividends to Stock Exchange prices and the rest.

This is the most dangerous year we have had since the war, and I am speaking from practical experience, as someone who has ploughed back practically the whole of his money earned in the trade. It seems ridiculous that hon. Members can allow small industries to be open to this imposition.

Mr. Nabarro

A jolly fine speech.

Colonel Sir Leonard Ropner (Barkston Ash)

In accordance with precedent and custom, I wish to declare my interest in the matter about which I wish to speak. I assure hon. Members that the notes which I hold in my hand have been made so that my speech may be brief, and not to enable me to make a long one.

I regret that an Amendment which was on the Order Paper in the name of several of my hon. Friends and myself was not selected, although I confess that I was not completely sure that it would be accepted by the Chancellor—at any rate in its present form. I appreciate his difficulties in exempting one industry—and one only—from the increase in the Profits Tax which will result from the passing of Clause 27.

But shipping is an exceptional industry. I know of no other industry in which such huge capital sums are involved and which is so completely open to world-wide competition. Although, even in that respect, flag discrimination and the trade reservations practised by the United States, and by an increasing number of other nations, is grievously handicapping the British Merchant Navy.

The Temporary Chairman

I am afraid that the hon. Member cannot use this particular moment to make a speech which he would have made if his Amendment had been accepted. He must speak about Profits Tax in general.

Sir L. Ropner

I was going to say, Mr. Hynd, that on this Clause another consideration of a major and, indeed, vital importance arises, for while British shipping already pays a high rate of taxation, the ships of other nations flying flags of convenience pay virtually no tax at all. It is true, of course, that while the rates of freights are low and profits of ships of every flag are practically non-existent—and that is the case today as it has been for some time past—the competitive position of British tramps, tankers and coasters is fair enough in so far as taxation is concerned, because no direct taxation is being paid.

But when rates of freight are high—as they have been and as they will be again—foreign fleets pay no tax, however high their profits, and that gives them an enormous advantage over our own fleet. Their owners—

The Temporary Chairman

I am sorry, but the hon. Member is speaking specifically about the shipping industry. His Amendment on that point was not selected and we are now discussing whether the Clause should stand part of the Bill.

Sir L. Ropner

I am talking specifically about the shipping industry.

The Temporary Chairman

That is just what cannot be allowed at this stage. I am sorry.

Sir L. Ropner

With respect, Mr. Hynd, I am relating my arguments to the incidence of Profits Tax. Although I do not wish to dispute your Ruling, I have sought advice from a quarter which is usually sound and acceptable and I want to make the point that I am relating my remarks entirely to the question of the increase of direct taxation. I do not think that you will find my speech either out of order or lasting for more than two or three minutes, Mr. Hynd. But my remarks have a direct bearing on the increase in taxation to the industry which I am discussing as an example of its effect on probably many other industries.

9.30 p.m.

I was saying that the owners of foreign fleets who pay no taxes at all in good times or in bad, are able to renew their fleets and build up large reserves to an extent which will gradually drive the Red Ensign from the seas. I hope that the Chancellor of the Exchequer read the first leader in The Times last Monday. I feel certain that if he did, he was distressed at what was said. Not so long ago British shipping made a substantial net contribution to the invisible exports of Britain, while last year this nation paid more to foreign shipowners than our shipowners were paid by foreigners.

The question at the head of the first leader was "What has gone wrong?". That which has gone wrong will be made even worse by the increased incidence of Profits Tax. It will place British ships at an even greater disadvantage in competing with vessels which in good or bad times pay no tax at all, and, in addition, it will place other of our industries at a disadvantage.

I shall support this Clause in the belief that the Chancellor of the Exchequer has real sympathy for the difficulties of the shipping industry and in the hope that between now and the Report stage he will find means of ensuring that British shipping can compete on more equal terms with its foreign competitors.

Question put and agreed to.

Clause ordered to stand pail of the Bill.

Clause 28 ordered to stand part of the Bill.