HC Deb 06 April 1965 vol 710 cc256-7
The Chancellor of the Exchequer (Mr. James Callaghan)

Many of the representations I have received have pointed out that at a figure of 35 to 40 per cent. the reduction in the rate of tax charged on company profits will mean that the value of investment allowances is diminished; some have suggested that the rate of allowance should be increased to compensate for this. It is, of course, true as a piece of arithmetic that the lowering of the rate of any tax does in one sense reduce the value of any relief given from that tax. But that is not a reason for increasing the relief every time the tax is reduced. The effect of the new system will be that company profits as distinct from dividends will be taxed at an appreciably lower rate than at present, and I do not feel called upon in these circumstances to provide a general additional benefit to industry by increasing the rate of the allowances.

I have been following with interest recent discussions about whether investment allowances are achieving their purpose. These allowances were introduced with the sole object of providing an incentive to investment; and they at present cost the Exchequer over £300 million a year. The Report of the Richardson Committee, the results of various pieces of private research, and now the recent report to the National Economic Development Council by the Management Consultants" Association, all provide evidence that the vast majority of firms look at the return on investment before payment of tax in judging new investment projects. If that is true, it means that investment allowances are not an efficient incentive. At the same time, it has been represented to me that, in order to foster modernisation and the growth of the economy, we need an incentive which gives a particular and positive stimulus to the adoption of new techniques of production. I should welcome further discussion of this subject so that we can consider whether here are better ways of helping industry. I have set myself the task of looking into the whole question in the forthcoming year.

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