HC Deb 06 April 1965 vol 710 cc254-6
The Chancellor of the Exchequer (Mr. James Callaghan)

I now turn to Corporation Tax. The Corporation Tax is the most fundamental of the tax reforms in this Budget. It is a new landmark in our fiscal history, such as we have rarely been able to create in this country save under the stringent needs of war.

Our present method of taxing corporate bodies goes back to the days before the joint stock company, as we know it, existed, when the few companies that did exist were thought of as being in the nature of large partnerships. At that stage, Income Tax was virtually a flat-rate tax: it applied to the income of companies and individuals alike; and when a company distributed its income to its shareholders in the form of a dividend, a second lot of tax was not exacted. Since those days, there have been extensive changes both in the tax system and in the status and position of companies.

First, the personal Income Tax has become a graduated tax, differentiated according to the circumstances of each taxpayer, and made progressive by reduced rate relief at the lower end of the scale, and Surtax at the upper end. Secondly, company taxation has been altered by the introduction of Profits Tax, which is imposed on the whole profits of a company, whether or not distributed, and which is not repayable to shareholders. These changes have made obsolete the idea that companies and individuals should be treated for tax in the same way. By separating formally the two taxes, namely, the tax on corporations and the tax on individuals, we shall be bringing the tax system of the United Kingdom into line with reality and adopting what has become the general practice throughout the world.

Hitherto, any idea of reforming the Tax system by introducing a Corporation tax in this country has foundered because of the widely held view that to levy a separate tax on company profits which is distinct from, and additional to, the Income Tax levied on individuals would constitute "double taxation" of company profits. The Profits Tax already contradicts this argument. The truth is that only a part of a corporation's income is distributed to the shareholders in the form of dividends; the rest is not part of personal income and cannot be treated as such. The majority of the Royal Commission on Taxation came near to this view when it said: We accept the necessity for subjecting company profits to a special tax régime that is something more than a mere attempt to collect personal income tax in advance". But it baulked at the logical conclusion, which is that there should be a separate tax on the profits of corporations quite distinct from the Income Tax that is levied on distributed profits.

There then remains the question of how to frame the tax on company profits. As soon as it is divorced from the taxation of individuals, we are free to draw it up on principles most conducive to economic growth and efficiency. The two ways open to us of raising the same amount of revenue from corporations are, either to confine the tax to undistributed profits and levy it at a relatively high rate; or, alternatively, to impose a tax on the whole profits, irrespective of distributions, at a much lower rate.

The latter tax, in my view, has a much greater economic and incentive value than the former. A tax confined to undistributed profits penalises investment and growth; it severely handicaps the young and dynamic companies which must rely on ploughed-back profits for expansion. A tax on the whole profit has the opposite effect. It makes it possible to shift the burden of taxation in such a way as to relieve the faster-growing companies, which are generally low distributors, and thus enable them to expand even faster. It will place more of the burden on those companies which are high distributors. It gives a strong incentive to all companies to plough-back more of their profits for expansion. Finally, the incentives to cut costs and to raise efficiency through new investment are much stronger, and must be much stronger when a lower percentage of additional profits is taken in taxation than under the present system, where 56¼ per cent. of any additional profit would go in tax.

The present system is also unnecessarily complicated because of the existence of two taxes—Income Tax and Profits Tax —levied broadly on the same income, but according to different rules. It is a patchwork system and it is not standing up to the strains that result from the efforts of Governments to use the tax system for economic purposes. The result has been the growth of abuses and anomalies, such as recovery by companies or individuals of large sums from the Revenue by way of repayment of tax, although no corresponding sum has ever reached the Exchequer.

There are some important matters which I should refer to now.

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