Clause 42.—(INTRODUCTION FOR COMPANIES ETC. OF CORPORATION TAX, IN PLACE OF INCOME TAX AND PROFITS TAX.)

HC Deb 02 June 1965 vol 713 cc1722-72

3.50 p.m.

The Chairman

We come now to a new section of the Bill. The first Amendment selected is No. 270, and I suggest that with it we take two further Amendments, Amendment No. 271, in page 50, line 10, to leave out "1965–66" and to insert "1966–67", and Amendment No. 272, in page 50, line 20, to leave out "1965–66" and to insert "1966–67".

Mr. Anthony Barber (Altrincham and Sale)

I beg to move Amendment No. 270, in page 50, line 4, to leave out "1964 and 1965" and to insert "1965 and 1966".

The purpose of this Amendment, unlike the Bill, is quite simple to comprehend. It is to defer for one year the operation of the Corporation Tax. Many of the arguments against and for this proposal raise issues which go to the very heart of the matter and concern the general principles lying behind the tax. It is not for me to say, of course, but I was wondering whether it might be for the convenience of the Committee, Dr. King, if we were to have the general discussion on the Corporation Tax at this stage rather than on the Question, That the Clause stand part of the Bill.

The Chairman

I am grateful to the right hon. Gentleman for raising that point so early. What he has said makes complete sense to the Chair. I hope that it will commend itself to the Committee that, in the debate on this first Amendment, we discuss the whole issue of the Corporation Tax, having a major debate upon it. I must, however, warn the Committee that, in that event, the Chair will be inclined to harden its heart to any debate when we come to the Question, That the Clause stand part of the Bill.

Mr. J. T. Price (Westhoughton)

On a point of order, Dr. King. Amendment No. 270 is, clearly, a wrecking Amendment. May I ask you to exercise your discretion to the effect that, if the Clauses themselves are objected to by the Committee, the correct course is to vote against the Clauses? Amendment No. 270 can have no other purpose than a purely wrecking purpose.

The Chairman

It will, of course, be possible for hon. Members to vote against the Clause when we reach that stage, and to try to wreck the Clause entirely by voting against it. But it is for the Chair to decide whether an Amendment is a wrecking Amendment. If the Chair had thought that this was a wrecking Amendment, it would not have selected it.

Mr. Barber

First, I shall say something about the background to this tax, and I shall then give the Committee the specific reasons why, even if the Corporation Tax were right in principle, it would, nevertheless, be desirable that its operation be deferred for one year. It is now more than six months since the Chancellor announced his intention to bring in a Corporation Tax. That was in November, within a few weeks of his taking office, and all that has happened since has shown that the scheme was put forward without the slightest idea of how it would actually work in practice. It is really incredible that, after six months of preparation, on the very day when we begin to consider the tax in Committee, the Notice Paper contains even more Amendments put down by the Chancellor to his own Bill.

The Committee can take it from me, after my four years' experience at the Treasury, that the incredible muddle into which the Chancellor has now got himself is not the fault of the Parliamentary draftsmen or of the Inland Revenue, but is the consequence of the right hon. Gentleman's own ineptitude and his determination to rush in and act this year regardless of the consequences. The views of the Royal Commission are well known—I shall not repeat them now—yet the Chancellor, after only a few weeks in office, chose to ignore them. In his Budget speech, the right hon. Gentleman had the effrontery to say that the Royal Commission baulked at the logical conclusion … a separate tax on the profits of corporations quite distinct from the Income Tax which is levied on distributed profits."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 255.] Of course, what Lord Radcliffe, Sir James Millard Tucker and the other members of the Royal Commission who studied these matters baulked at was the injustice and the folly of duplicating the charge to tax on the earnings of risk capital invested in companies. The right hon. Gentleman may say that the principle was already accepted in the concept of the Profits Tax which we have had for many years, but, of course, there is all the difference in the world between an overburden of 15 per cent., the rate of Profits Tax, and an overburden of 35 or 40 per cent., the rate of Corporation Tax.

The truth is that the particular type of Corporation Tax which the right hon. Gentleman has chosen is founded on his Socialist philosophy. It will have the inevitable consequence of discouraging investment in private enterprise, because, if the tax is ever put into operation, investors in private enterprise will bear a wholly disproportionate share of the national burden. Indeed, this was apparent from the answer given by the Chief Secretary on television yesterday evening.

Superficially, of course, the concept of a single tax for corporations is very attractive. If the whole of the tax law for companies could be embodied in 40 Clauses, as the Chancellor so naïvely believes, there might be something to be said for it. But, as I shall show, the right hon. Gentleman seems to be oblivious to the complexities and anomalies which he is creating.

The extraordinary thing is that, even if we are to have a Corporation Tax, the right hon. Gentleman has chosen just about the worst possible scheme. Not only is it inequitable, not only does it militate against the efficient use of our scarce capital resources, but the right hon. Gentleman, in his wisdom, has actually selected the one type of Corporation Tax which is now being abandoned by our major competitors.

What does the Chancellor hope to achieve? If his great aim is to have a separate tax on companies, which he can alter without affecting personal taxation, the existing Profits Tax is there to hand and available for that purpose. If he wanted to encourage companies to retain more profits, all that he had to do was merely to return to the position which existed before 1958, when we had a Profits Tax with differential rates. The blunt truth is that we are now presented with the Corporation Tax for the simple reason that the right hon. Gentleman, as his special contribution to the first 100 days of dynamic Labour government, committed himself in November to do it this year.

All this was considered by my right hon. and learned Friend the Member for Wirrall (Mr. Selwyn Lloyd) and my right hon. Friend the Member for Barnet (Mr. Maudlin,). I remind the Committee of the conclusion to which my right hon. Friend the Member for Barnet came. He said in his Budget speech of 3rd April, 1963: My predecessor"— that is, my right hon. and learned Friend the Member for Wirral— referred to the question of amalgamating Income Tax and Profits Tax into a single corporation tax. The Inland Revenue have discussed a scheme for this purpose on a confidential basis with certain experts drawn from outside bodies. As the Committee may well be aware already, these discussions have led to the advice from industry that schemes which have been considered for the amalgamation of the two taxes are not satisfactory. I accept this advice."—[OFFICIAL REPORT, 3rd April, 1963; Vol. 675, c. 466.] The Chancellor, however, has ignored the advice of industry. Now, in his innocence, the right hon. Gentleman complains because he is accused of being anti-business.

There is a salutary rule of law that, apart from the plea of insanity, a man is deemed to intend the natural consequences of his acts. The fact is, as I shall show, that the way in which the Corporation Tax has been contrived amounts to a vicious swipe at the free enterprise system. The particular method of taxing dividends and other distributions which the Chancellor has chosen inevitably imposes a penalty on risk capital. Together with the other aspects of the tax which we shall be discussing on later Amendments, I believe that unless the tax is dramatically modified, it will do untold harm to industry and commerce.

Mr. Harold Lever (Manchester, Cheetham)

Is not the right hon. Gentleman's case made, however, upon the assumption that the Committee passes Clause 43—

The Chairman

Order. Will the hon. Member please speak up, so that he may be heard?

Mr. Lever

Is not the right hon. Gentleman's case based upon the assumption that the Committee will pass Clause 43, which allows the taxation of dividends? That has not yet been decided. We are discussing whether to apply Corporation Tax to company profits. It does not necessarily follow that we should apply an Income Tax to company distributions. That depends upon the conclusion we reach on Clause 43.

Mr. Barber

Clause 43 is concerned with the Chancellor's proposal to arrange for companies, on the payment of dividend, to deduct tax at the standard rate and to account for it to the Inland Revenue. This, however, is an integral part of the particular type of Corporation Tax which the Chancellor has chosen. Under the Amendment, we are considering whether the whole of this Corporation Tax, including those proposals, should be deferred for a year.

When I say that the Chancellor is taking a swipe at the free enterprise system, what I have in mind is the sort of comment which has been made by responsible people all over the country and even in The Times, which during recent years can hardly be said to have been friendly to the Conservative Party. The Times wrote in its leader: The proposals suggest that the Labour Party not merely do not know how business works, but that they do not care. During the debate which we shall be having this week, and when we return after the Whitsun Recess, we on this side will give specific examples to show that the Chancellor is determined to knock private enterprise for six or, alternatively, that he has little idea of the consequences of his proposals.

4.0 p.m.

This afternoon, because we are having a general debate, I will give the Committee the hard facts of only one case, a case of which full details have been given to the Inland Revenue. First, however, let me state the consequences of the Corporation Tax in this case. As a direct result of the introduction of this form of tax, two British companies, which I propose to name, will next year find themselves unable to pay the preference dividends on about £7 million of capital which was raised on a perfectly legitimate basis.

The two companies concerned are Conch Methane Tankers Ltd. and Methane Tanker Finance Ltd. These two companies were formed in 1961 to finance the construction in British shipyards of two specially designed tankers to carry liquid methane from the Sahara to the United Kingdom for the nationalised gas industry. The two vessels, of over 20,000 tons gross and costing nearly £5 million each, are on charter for 15 years to the Gas Council. They began importing liquid methane last year.

The finance required to pay for each ship was obtained in a perfectly sensible and legitimate way: bank loans amounting to £1,400,000 repayable in six years, 8 per cent. cumulative redeemable preference shares amounting to £3,255,000 redeemable over 7 to 15 years and ordinary shares of £20,000. [Laughter.] The Chief Secretary to the Treasury laughs. Let him wait until he hears the story.

The preference shares were subscribed at par by leading insurance companies, British and overseas, and pension funds, and a high proportion of preference capital was necessary to enable the benefit of capital allowances to reach the charterers at a correspondingly low rate of hire for the ships. The principal advantage of preference capital is that the dividends, being payable out of taxed profits, cost the company in cash only the net amount thereof. In this way, it was possible to provide attractive terms for the nationalised gas industry.

Under the system of Corporation Tax which the Chancellor has chosen, the Income Tax deducted from all dividends must be paid in cash to the Inland Revenue under the next Clause. The whole basis by which these two ships were financed will be destroyed and within the first year of operation of this legislation the companies will be unable to service their preference capital.

The Chancellor of the Exchequer (Mr. James Callaghan)

I have not heard of this case in detail, but as the right hon. Gentleman has studied it will he tell me, as a result of his studies, whether this company was practising the kind of arrangement that the Public Accounts Committee condemned two years ago?

Mr. Barber

I will answer the right hon. Gentleman by telling him that the company obtained clearance from the Inland Revenue under Section 28 of the Finance Act, 1960. [HON. MEMBERS: "Answer."] I will read to the Chancellor the relevant Section. It states: Where—

1. (a) in any such circumstances as are mentioned in the next following subsection, and
2. (b) in consequence of a transaction in securities or of the combined effect of two or more such transactions,

a person is in a position to obtain, or has obtained, a tax advantage, then unless he shows that the transaction or transactions were carried out either for bona fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained, this section shall apply to him in respect of that transaction"—

Mr. Callaghan

Will the right hon. Gentleman now be good enough to answer my question? He knows that there was a Report from both sides of the House condemning certain practices that related to what sounds like this kind of arrangement. I have not had an opportunity of studying the case. The right hon. Gentleman has. I should like to know from him—it is a reasonable question—whether this is one of those kinds of arrangement. If so, does the right hon. Gentleman think that it is proper or does he not?

Mr. Barber

I will tell the right hon. Gentleman precisely what I think. I know, first, that no Committee of the House of Commons ever advocated a tax of that nature that the right hon. Gentleman proposes. [HON. MEMBERS: "Answer that question."] If the Chancellor wants to know a little more about the case, I will tell him this. Substantially, the whole of the benefit of that arrangement—I hope that the right hon. Gentleman will listen to this—was passed on to the gas industry and the terms were so good that they enabled the gas industry to dispense with Treasury borrowing to the extent of £9½ million. Now, in one fell swoop, with no transitional provisions, the right hon. Gentleman is making it impossible for these companies to honour their obligations. This is but one example of the achievements of the right hon. Gentleman.

Then there are the provisions concerning close companies. Obviously, at this stage, I do not propose to go into details, but does the Chancellor really understand the consequences of disallowing for tax purposes loan interest on a loan which is made bona fide by a participator? Do Treasury Ministers really think that the limitations on allowable remuneration in the computation of Corporation Tax are appropriate for some of the major public companies which are now brought into the net and described as close companies? If they do, I can only tell the Chancellor that he has simply no conception of the rewards which are necessary and appropriate in growing businesses.

Or—who knows—are we to have yet another batch of Government Amendments on close companies to add to the 170 which have already been put down?

Mr. Callaghan

Does the right hon. Gentleman want them?

Mr. Barber

The right hon. Gentleman asks whether I want them. The trouble is that we in the Committee have no idea of what is in his mind. Not only does the right hon. Gentleman hardly ever speak in our debates, but he does not even allow his deputies to tell us. Therefore, we on these benches, like the investing public, have to rely on inspired leaks to the Press.

The Daily Express this morning carried a story which was substantially the same as that which appeared in the Financial Times and in the Daily Mail. The Daily Express said: In Whitehall last night there were strong hints that the Chancellor will give way on other points in the Corporation Tax. These are likely to concern 'close' companies. It is a little odd that the first that we should hear of these matters is through inspired leaks to the Press.

While I am concerned with close companies, who is to determine whether a close company has distributed a reasonable amount of its profits? [Interruption.] The Chief Secretary will know that under the old Section 245—

The Chief Secretary to the Treasury (Mr. John Diamond)

It is the same as before.

Mr. Barber

I am very pleased to hear it. [Interruption.]

The Chairman

Order. Even if occupants of the Front Benches want to interrupt, they must do so in the conventional way.

Mr. Diamond

I offer you my apology, Dr. King.

Mr. Barber

The hon. Gentleman is sufficiently experienced in these matters to know well that the overwhelming majority of cases under Section 245, which concerns companies controlled by five or fewer persons, never reach the courts. They are settled by the special commissioners, who operate in an office at Thames Ditton. The great advantage of the present system, which, I understand, is not to apply in the future, is that a person can go there and the decisions which are given on this extremely important matter for family businesses are at least uniform; and on the whole, I think, most accountants and professional people would agree that they are extremely fair and realistic.

Now, I understand—I shall be glad to be corrected if I am wrong—that uniformity is to be thrown to the winds, simply because it is expected that there will be so many negotiations and appeals that the special commissioners will not be able to cope. Therefore, I understand, each individual inspector of taxes is to be the judge in the first instance.

Mr. Joel Barnett (Heywood and Royton)

The right hon. Gentleman will, I think, find that most accountants would much prefer to deal with the local inspector of taxes than with the special commissioners.

Mr. Barber

That is certainly not borne out by what has been said to me. The reason is perfectly simple. Whatever respect one has for the inspectorate, the fact is that it will be impossible for inspectors of taxes to avoid adopting a quite different approach to the problem from one district to another.

The truth is that the Chancellor of the Exchequer has evolved a delightful theoretical basis for taxing companies, but when one looks at the Clauses in the Bill it becomes apparent that again and again he could have given little thought to how it will work out in practice. As we shall show on later Amendments, he has totally ignored the experience of other countries which have a corporation tax. Now we have reached the ludicrous position in which this morning we pick up our newspapers and read this extraordinary report: In New York last night, it was reported that Mr. Wilson's Government were seeking further advice on Budget making, in addition to that from Dr. Balogh and Dr. Kaldor. I should have thought that this was, to say the least, a little late in the day.

The Government Amendments which appeared on the Notice Paper this morning show that the right hon. Gentleman has done nothing to meet the basic objections of those companies which pay foreign taxes. While the Prime Minister rightly boasts about the size of our overseas assets, the right hon. Gentleman sets about deterring overseas investment. If he thinks that a further dollop of transitional relief will restore the incentive to invest overseas, he is very much mistaken.

Let me read to the Committee one passage from a letter which was sent to the Chancellor of the Exchequer by Mr. Paul Chambers, Chairman of I.C.I. He said: Over the 15-year period"— that is, 1950 to 1964— against a direct outflow of £37 million, we had a direct inflow net of all overseas tax of about £120 million … This, I think, proves the contention that, even in the short term, the country benefits from our overseas investment. The Company certainly does, and our rate of growth and development will falter if it is checked. When you consider that our total exports during the fifteen years referred to were £930 million, and that much of this—though we cannot prove exactly how much—relates to products exported to fill in the manufacturing ranges of our overseas companies, I think it will be clear that even a pause in our overseas investment would be dangerous to us as exporters and would undoubtedly do the country's balance of payments more harm than good even in the shortrun. But, no, the Chancellor is determined to ignore all the advice from those who really understand.

This Amendment seeks to defer the operation of the Corporation Tax for one year. I would say this to the right hon. Gentleman: whatever may be the intrinsic merits of the tax, there is now so much confusion as to its effects and the matter is so complex that it is surely not unreasonable to ask for one year in which to consider its full implications. There is not a businessman in this country, and hardly an accountant, apart from the Chief Secretary, who approves of the present proposals. Nobody can seriously pretend that the serious Press is enamoured of these ideas.

Mr. Emrys Hughes (South Ayrshire)

The Daily Express?

Mr. Barber

Not the Daily Express.

Listen to what the business section of the Sunday Times has to say, not on the merits, but on the point with which I am concerned. But over and over again in the 226 pages of the Bill there is evidence of hasty and unconsidered drafting, of short-sighted concentration on tax-avoidance, without thought to the crippling side-effects of the remedies proposed, and of sheer, avoidable ham-handedness, leading to results quite opposite to anything the Labour Party and its supporters—let alone its critics—could really intend. If that is not enough, let me quote a short paragraph from this week's Economist: The alarming conclusion that emerges from this attempt to evaluate the economic effects of the corporation tax is that this major upheaval in our tax structure has been undertaken with virtually no attempt on the part of the Government to present the public with anything in the nature of a carefully argued objective and above all empirically substantiated case. It is not argued that such a case could be made out; but the issue turns on several questions of fact which the Government has not attempted to ascertain. There is, in fact, a grave suspicion that the corporation tax proposal is based on nothing more than the conjuncture of a desire to introduce a differential profits tax, the purely conceptual arguments of Mr. Kaldor's minority report of the Royal Commission on Taxation, and an overwhelming desire to demonstrate the Government's willingness for change. 4.15 p.m.

But I think that the most compelling reason for deferment is the fact that the Chancellor of the Exchequer does not understand what he is doing. The Chief Secretary told us during the Budget debate that as a result of the Corporation Tax In future, business life will be simplicity itself."—[OFFICIAL REPORT, 12th April, 1965; Vol. 710, c. 966.] To be fair to the Chief Secretary, I think that when he made that observation most of us who know him took it as a manifestation of his wry sense of humour, so I will not take him too literally.

However, the Chancellor of the Exchequer, when he wound up the Second Reading debate, was precise and specific, although I shall show that what he said served only to illustrate his ignorance of the provisions of the Bill. He said: I do not want to go into lyrics of praise of parliamentary counsel, but they have compressed into a mere 40 Clauses the whole of the taxation on companies, which is a remarkable achievement. There is no doubt about that. He went on a few lines later to say: The whole of the new tax is compressed in to a 40-Clause passage in the Bill. I ask hon. Members opposite to consider this seriously. It is quite an achievement …"—[OFFICIAL REPORT, 11th May, 1965; Vol. 712, c. 198.] Who told the right hon. Gentleman that? It was certainly not the Inland Revenue, and certainly not the Chief Secretary, who understands these things. To say that the whole of the taxation on companies is now compressed into a mere 40 Clauses is sheer nonsense.

What about the overwhelming majority of companies which wish to claim capital allowances? Where is the law concerning that matter? If we look at Clause 59, we are referred back straight away to no fewer than 75 Sections of the Income Tax Act, 1952. To take another example, anyone who wants to calculate what is left of double taxation relief still has to go back and consult 25 Sections of the 1952 Act. What about non-residents? Do they have to look any further than this Bill? Of course they do. They have to go back to a complete Part of the Income Tax Act, 1952. If the law concerning Corporation Tax were ever consolidated, the three matters I have mentioned so far would mean importing the substance of more than 100 additional Clauses.

But that is not all. If we want to find out how to treat premiums on leases, we are thrown back to the Finance Act, 1963. If there is to be a company re- construction, then, to determine the liability to Corporation Tax, we have to look at the Finance Act, 1954 and the Finance Act, 1964. Or if we were engaged in a transaction in securities, we still have to refer to the Income Tax Act, 1952, the Finance Act (No. 2), 1955, and the Finance Act, 1959.

What of banks, insurance companies and investment businesses? I will not go into greater detail, but all these businesses which will be liable for Corporation Tax must refer back to the provisions of other legislation.

Even where the Bill makes major changes in company taxation—for example, in the case of close companies—there are still innumerable references to the 1952 Act, which are not simply concerned with the transitional arrangements.

The instances which I have cited are only a small proportion of the references to other legislation. There are more than 300 such references in those Clauses and Schedules of the Bill concerned with Corporation Tax and they refer to no fewer than 28 other statutes. On top of all this, it is made clear in Clause 49 that we cannot begin to compute the income of a company for the purposes of Corporation Tax without taking into account the whole of the law and practice relating to Income Tax.

For all I know there may be good and sound reasons to proceed by way of references to other Measures, but for the Chancellor to stand at that Box and to tell the world that the whole of the taxation on companies has been compressed into 40 Clauses really is the most abject nonsense, and only goes to show that the right hon. Gentleman simply has no idea of the chaos and confusion which he has caused. The argument of simplification is sheer poppycock, and if the right hon. Gentleman does not know it everybody else who has studied the Bill certainly does.

Many of the serious practical consequences of this tax are only now beginning to be appreciated by the business community. The Chief Secretary said that the Finance Bill was going quite well. I must say that I wish one could say the same for those people in business, on whom our prosperity depends. The fact is that the Corporation Tax is not only ill-conceived and ill-considered: it strikes at the root of the free enterprise system. It is a product of Socialist theory, and incompetent execution, and if the Government resist this Amendment, the sole purpose of which is to give time for consideration, the country will know that as far as industry and commerce are concerned the Chancellor of the Exchequer either does not understand or does not care.

Mr. Callaghan

As this is by way of being a Second Reading debate—with due respect to you, Dr. King; I am not sure that it is, but it is by way of being such—I should like the opportunity, on the Corporation Tax, of making some observations straightaway in reply to what the right hon. Gentleman the Member for Altrincham and Sale (Mr. Barber) has just said.

I must say to the right hon. Gentleman that if this is to be the basis of the Opposition's attitude throughout our consideration of the remaining Clauses of the Bill, then we have very little to fear, because, quite apart from the spurious politics and the synthetic indignation, there were comparatively few points where reality broke in.

One of the tasks at this stage of the Committee's proceedings, and during the remaining stages of the Bill, will be to disentangle Conservative politics from the reality of business, because there is a growing and substantial difference between the two. I take the major attack which the right hon. Gentleman makes on me. Either, he says, I do not know what I am doing—[HON. MEMBERS: "Hear, hear."] Well then, if I do not know what I am doing what a lucky shot it was, in his words, that I am taking such a vicious swipe at private enterprise!

Which is it to be? The right hon. Gentleman really ought to make up his mind. Either this is a vicious, sinister Socialist attempt to undermine the whole foundations of the system under which we work, or else it is the consequence of a flip of the coin in the air. He does not know which side it has come down on; it has just come down this way!

Mr. Barber

The right hon. Gentleman will know, of course, that there are pugilists who just take a vicious swipe at someone when they are punch drunk?

Mr. Callaghan

Well, the right hon. Gentleman has not been here enough during the course of these debates to be punch drunk himself—[HON. MEMBERS: "Where has the Chancellor been?"] I must say, following the personal reference to myself, that I have sat in on the Bill—it was proper for me to do so in the circumstances—more than any other previous Chancellor on any previous Finance Bill. I have had to sit here and watch hon. and right hon. Gentlemen opposite, and note their absences. I would claim—indeed, I know—that I have taken a much deeper personal interest than perhaps others have done. I claim no particular virtue for that, but I say it because it is not right to say that I have disinterested myself in this matter. I have sat here hour after hour. We have had about 50 Divisions on this Bill and I have taken part in every one of them.

Now I come to some of the points made by the right hon. Gentleman. It really is interesting to see how the party opposite, once it gets into opposition, reverts to its old ways. No one would think, listening to the right hon. Gentleman's speech, that there was anything wrong with the tax system at all. Anybody would think, having heard it, that we have a perfect, precise, machined system here which is working day after day through its beautiful instruments.

For years before 1964 there was demand for reform of the tax system. I will quote one or two of the illustrations which were used, "A puffing Billy in an age of Beechings"; "pitiful stupidities of the present system"; "major changes are needed in Britain's tax structure"; "the fault is structural"; "root and branch reform is needed". These are judgments not by me, but by some of the right hon. Gentleman's supporters, by some of his research institutions, and I say to the right hon. Gentleman that we shall get further in these debates if we start from the assumption that was shared at least up to the time of the General Election, if not since, that a root and branch reform of the tax structure was needed. There is no doubt that there is a great need for reform of this sort.

I come to the next point. I have equally no doubt that separation of personal taxation from company taxation is one of the major reforms which are needed, and will be achieved by the Bill. Whatever refinements there may be between them, this is a system and basic structure which will bring our Income Tax and Corporation Tax systems nearer to the system of other countries. There will be differences in the manner of treatment of shareholders, but the basic separation is a concept which we shall share; and to that extent, and that is the extent we have claimed hitherto, we are bringing closer together the tax systems which exist.

I have no doubt equally that, though there will be transitional difficulties, once they have been overcome, it will be preferred by the great majority of companies in this country. Already, there are growing signs of that. Of course, there will be transitional difficulties. There always are when we have to reform a system which is pitifully out of date, a system of which people have been able to take very great advantage, which has operated equally and unequally on the just and the unjust alike.

There are bound to be transitional difficulties, but if we are ever to make reform in this country we can rely upon it that the Tory Party will come along and say either that it is wrong or that it is being done at the wrong time. It happens year after year whatever the occasion may be and that is what it is doing on this occasion. For that party it would never be the right time, whenever we chose to reform it, but when we do reform it there are always transitional difficulties. There are bound to be, with a system which has grown up over a long time. The question is, are we going to reform that ramshackle structure, and if we do, shall we get one which will bear a decent relationship to the practice and the growth of modern industry?

All we have heard about are companies which are the larger distributors of their profits; distributions which they will find it more difficult to make, or they will find it difficult to make substantial profits to enable them to distribute the same level of dividends to their own shareholders. I have had it borne in upon me time after time, by the F.B.I. and others, that companies will have to cut dividends. That is a perfectly reputable thing to want, not to want to cut dividends. I think that companies will have to get larger profits if they are to distribute the same amount in dividends and, at the same time, maintain their retentions at their present level.

These are companies that we have heard from. We do not hear of the great number of companies—perhaps it is natural that we should not do so—which will directly and immediately gain through the introduction of Corporation Tax, companies—I shall not name them, but they are household names—in this land today which stand to gain immediately and directly, which can, if they care to, either increase their dividends—I trust that they will not, because that is not the purpose of the change—or which will be immediately able to put away increases in their retentions, plough back into their firms, in order to modernise them, if they need to do so, or to expand, where it is appropriate for them to do so.

4.30 p.m.

It is well known to anyone who studies these matters that these are large companies as well as small companies. Many will be known throughout the land. I quite understand that those who now find that the level of profits they will need to make to maintain their dividend will need to be higher will say that they do not want this change. But that is really no reason why the Opposition should espouse their case bolus-bolus, irrespective of the benefits which are to be conferred by this tax change upon a large number of other companies. That is why I say to the Opposition that they are not representing industry as a whole when they make this case today.

There are large sectors of industry which know what the benefits of this change will bring.

Mr. John M. Temple (City of Chester)

The right hon. Gentleman has made an important statement. Is he basing it on a 35 per cent. Corporation Tax or a 40 per cent. Corporation Tax?

Mr. Callaghan

That is a fair question, but I cannot at the moment disclose the rate of tax that is to operate from next year. Broadly speaking, what I am saying would operate obviously on more companies at 35 per cent., but would still operate on a considerable number of companies at 40 per cent., whichever rate was chosen. There are four points, 36 per cent., 37 per cent., 38 per cent. and 39 per cent. each operating to a decreasing extent as one goes up. I think that it is an advantage in the new tax system and I fully accept that it will make manipulation more difficult. Perhaps I am wrong, but I do not think that any dispassionate observer will object to that.

Mr. Quintin Hogg (St. Marylebone)

What does the Chancellor mean by manipulation?

Mr. Callaghan

I will take one instance of this under our present tax system. It has always been the case that losses are supposed to be carried forward. We do not carry them back. That has been a standing rule for many years. By "manipulation" I mean a system under which a large number of companies, through the control of subsidiaries, have been able to employ the existing imperfections of the system to carry their losses backwards as well as forwards. They have been able to recover tax paid on profits made in earlier years and sometimes these "losses" are artificial, they are not genuine at all.

There are plenty of people in the City today who know their way round the Income Tax code like many of my constituents know their way to Cardiff docks, or to the steel works. They know how to use the existing tax code and they have found means of using it. These methods have drawn upon them the condemnation of the Public Accounts Committee. I asked the right hon. Gentleman about the particular company he was quoting and no doubt we will hear some more of it when we come to the details of this particular company and see what has happened there.

What is quite clear is that there are companies today who are and have been reclaiming taxation that they have never paid. That is what I mean by "manipulation". I do not take the view that the tax system should be so constructed as to make it absolutely equal, if it means constricting the growth or the expansion of companies or of individual progress. That would be a foolish view to take and there is nothing in the Bill which takes that view. Certainly, it blocks up some of the more glaring limitations and more glaring forms of avoidance, which are very technical, but which, to those who know and study them, have been an increasing source of repugnance. It blocks them up and I think that it is right so to do.

I would claim, on the other hand, that the introduction of this new taxation system is necessary in this particular field because the patching-up operations to try to avoid the more glaring examples of manipulation have failed. Everyone associated with the Income Tax system knows they have failed and knows that only a root and branch change will do. When I use the words "root and branch" I am quoting not from an official Conservative Party publication, but from a Conservative Party publication. I do not know how far it would commend itself, but I am quoting from Crossbow. [Laughter.] I do not know what the Committee thinks about Crossbow. This is Crossbow, not Cross-bencher.

The right hon. Gentleman raised the question of the small company. I think that it will be seen that the operation of this new system, with its deliberate intention to encourage retention rather than distribution, is bound to help the small company. I know we are not debating those Clauses, Dr. King, but as passing reference was made perhaps I can make passing reference to them, too, and say that I think there has been considerable misunderstanding about the operation of the Clauses in the Bill effecting what is known as the "close company".

I would sum this up by saying that at the moment any "close company" is liable to a direction from the Surtax Commissioners to distribute the whole of its profit. Under the new system, provided that a company distributes 60 per cent. of its profit it will not then be subject to a direction. That is not a tightening up of the provisions; it is a loosening of them. I think that there has been a good deal of misunderstanding about this particular point.

Sir Tatton Brinton (Kidderminster)

Is this last statement quite correct? As the close companies are defined under the Chancellor's Finance Bill far more companies are swept into the net than were included in the Surtax net. The definitions under the Surtax net were much less wide-ranging than the new definitions are. Many public companies with substantially over 25 per cent. of their capital, on the public, will now be included which would not have been before.

Secondly, when the Chancellor says, as he has said before, that Surtax companies in the past were liable to be called on to distribute or to pay tax on the w hole of their profits, this was so until, I think, the 1962 Finance Act, when the Surtax Commissioners had the right, if they found distributions to be too low, to exact tax on the whole profit. I think that it was the 1962 Act. The Chancellor introduces a new—

Mr. Diamond

The hon. Gentleman is wrong and he is making a speech.

Sir T. Brinton

This is a vitally important point.

The Chairman

Order. When an hon. Gentleman seeks to intervene he must intervene briefly. If he wishes to make a speech he must try to catch the Chairman's eye.

Mr. Callaghan

I have the point. I think that, with respect, the hon. Gentleman will find, when we get to those Clauses and discuss them in detail, that he is not correct in some of the things he has been saying. The first part of what he says was correct. In fact, more companies will come into this particular provision than have been so far. I prefer not to discuss, with the permission of the Committee, the whole basis of these at the moment, but I want to correct a misunderstanding that has somehow got around, I think as a result of circulars distributed and no doubt written in good faith, that this is a tightening of the provision. It is not. It is a loosening of the provision.

Provided that a company distributes 60 per cent., it is not open to challenge. Under the previous arrangement, it could well have been open to challenge. This is a relaxation, but perhaps we need not get into these detailed discussions now. We can do that when we get to the appropriate Clause, when either I or the Chief Secretary will be prepared to discuss the matter further. We shall be using the inspectors of taxes rather than the special commissioners for this purpose. The inspectors of taxes administer a great deal of the Income Tax Acts at present, and I have not heard many complaints about lack of uniformity in treatment of other matters, and I see no reason why, given the administrative instructions, there should be any lack of uniformity in the treatment of these companies either.

The right hon. Gentleman referred to overseas investment, and I shall touch on it in passing although we shall get to this Clause in due course. I think that the case about this—and I have said it more than once, and I shall go on saying it—is that overseas investment is clearly necessary and will continue. I have given the figures before, and no doubt I shall have to give them again. It is clearly necessary, and it will continue.

The new tax arrangements will make companies more selective in the type of investment which they choose to undertake, because they will have to take into account more the taxation provisions contained in the Bill. This is right, because a certain amount of overseas investment has been of an unsatisfactory character. We have been pouring out large sums of capital from this country to get returns which, on any normal basis of investment, would not be justified if they were undertaken under what I regard as a proper basis of taxation.

Mr. John Harvey (Walthamstow, East)

Would the right hon. Gentleman agree that even if one accepted that his argument might conveivably apply to new investments overseas, in trying to bring about the state of affairs which he would like to see he is whacking over the head a lot of existing investment that is immensely valuable to our economy?

Mr. Callaghan

No, I do not take that view. Let me quote what one company said. It sent me its accounts to enable me to see what its conclusions were. I think that the hon. Gentleman will see the case stated as fairly as possible in this company's report. It says: We do not appreciate the present measures. That is inevitable. It is a large company which will pay more tax, and it does not appreciate them. There are three main conclusions to be drawn from this. First, the international scope of the company will continue. Secondly, if it is in our opinion advantageous that additional investments should be made abroad and it is within our power to make them they shall he made. Thirdly, some new investment overseas will not take place. In effect, the Corporation Tax will make us more selective in the way our investments are directed. That is absolutely right. That is what we need today, at a time when we have going out of this country on capital account—and we have had for some years past—a flow of capital that is quite unjustified by reference to our balance of payments position. What is needed is that investment should be made more selective overseas in the future than it has been in the past. That is all I ask, and I think that that will be the consequence of this new tax system.

Mr. Robert Carr (Mitcham)

Would the right hon. Gentleman reflect for a moment about the effect of what I might call the high profit, the quick return, about which he has been speaking, on a developing country by private investment, because almost by definition that investment tends to give both a slower rate and a lower rate of return?

Mr. Callaghan

There is no doubt that a new tax system like this bears differently on different countries according to the rates of tax which are chargeable in those countries. In parts of the developing Commonwealth there is a low rate of Corporation Tax. Perhaps I might add, in parenthesis, because there may be some who do not realise this, that most of the Commonwealth countries already have a Corporation Tax system, starting with Australia and New Zealand and going through to India. It is true that if, as in India, there is a high rate of Corporation Tax, one naturally gets a different result from what one would get in. say, Nigeria where there is a lower rate of Corporation Tax.

It is because of these difficulties, and as a result of discussions with the F.B.I. and representative bodies that I have introduced these Amendments which will tend to give companies operating in countries where there is a high rate of Corporation Tax some transitional benefit over a period of seven years. That will undoubtedly make up for most of the deficiencies which they would otherwise suffer. Let us remember that the Overseas Trading Corporation has been in existence as an entity only since 1957— that is eight years. It has been under considerable challenge. I am now proposing these transitional arrangements which will last for another seven years.

4.45 p.m.

With regard to the basic point raised by the right hon. Gentleman about the effects on the developing countries, as I said to the House on Second Reading, the amount of private investment in these countries has been declining steadily year by year. It is, in itself, a serious factor that it has been going steadily downward, and because of our obligations we must keep the position of the developing countries very much in our minds. I must, however, emphasise that the basic consideration which this Committee must have in mind at all times is a favourable balance of payments situation for this country.

It would be unfortunate if we were to see large sums of money going into other countries while we were not ourselves balancing our own accounts. This must apply on Government account, as well as on private account, and I should like to make it clear now that I regard it as an essential obligation on me to see that Government expenditure overseas is reduced, as well as seeing that private expenditure overseas is reduced, if we are to get this balance without which the economy cannot be healthy. I accept that obligation, but, as regards the developing countries, we shall certainly keep the effect of the taxation changes on direct investment in those countries under review.

I intend to do that, taking into account the fact that the level of private investment has been steadily declining over the last few years. I would then see whether it might be appropriate and practical to take further measures, but we have a period of years to see the operation of this because, by some of the Amendments which have been put down, we are giving companies operating in these territories an oportunity to see how they get on. I think that some will find that the situation is not nearly as bad as they are inclined to think before this starts operating.

Mr. Raymond Gower (Barry)

The right hon. Gentleman has been talking about this as though it were a scientific process. Would not he acknowledge that on the information available to him all that he can do is to say what he thinks will be the effect of this new kind of tax on overseas investment?

Mr. Callaghan

There is sufficient evidence available to show that the level of overseas investment cannot continue at its present rate if we are to balance our payments. That must be the starting point here, and I need not emphasise it too much. Hon. Gentlemen opposite are only too ready on other occasions to make me try to balance our payments. I wish that it had been done earlier, and that we had not been confronted with the deficit which faced us. I would have been happy to have found a balance in our overseas payments.

I am starting from a situation where, with the best efforts that can be made, when we get outside the heat of the party battle, everyone knows that cutting down expenditure is a slow process. It is possible to run these things down, but one cannot chop them off. I am engaged in running them down over a period of time. I have to aim at this objective and that is why I said that this was a change in direction for this country. We have to make foreign investment more selective than it has been so far. That is the whole case that I am making, and that is what the Bill is intended to do.

I draw a distinction between investments and exports. Many people claim that there is a direct relationship between the amount of investment that one has overseas and the amount of exports that flow from that investment. I would say only—I agree that this is net a perfect argument—that what other countries do does not bear this out. There are other countries, among them some of the most substantial and successful exporters, who have not invested significantly overseas. Of course, it may be necessary to do so. A number of companies—I.C.I. is one; the letter which the right hon. Gentleman quoted showed this—find it necessary to invest overseas in order to climb over tariff barriers, because of the existence of the E.E.C. and for other reasons.

But there is very good reason for be lieving that when one invests in the developing countries, as distinct from the developed countries, unless one gets a comparatively quick return on one's capital, one finds, over a period of years, that the investment is not paying off, because local operators will be wanting to do that job.

This is a situation which it is not possible to measure tangibly, but it is one in which one has to get the best information which there is available. I am glad to see that a great deal of discussion has been stirred up about this, because we have proceeded automatically for years on the assumption that it is a good thing to invest overseas and that it is bound to bring exports in its train. I was talking to a distinguished Indian the other day who said, "It is very odd to hear the argument in this country that investment overseas adds to your exports. When they come to my country, they tell me that if we allow them to invest, and to put machines in, it will save imports".

Hon. MEMBERS

Both are true.

Mr. Callaghan

I have no doubt that both can be true—

Hon. MEMBERS

They are.

Mr. Callaghan

Both can be true, not are true. It is very odd—[HON. MEMBERS: "Oh."] Do not get indignant. This is not a subject on which you need to get indignant—

The Chairman

Order. I can assure the Chancellor that I am not getting indignant. I must ask him to link his remarks, interesting though they are, to the Corporation Tax.

Mr. Callaghan

I was wandering, but the eager faces opposite tempted me to do so. I had better bring my remarks to a close, as I have been speaking for some time.

I will deal, finally, with one suggestion of the right hon. Gentleman about duplication of taxation. The case which he made was that if one separates personal taxation from company taxation, one is levying double taxation: the State takes its toll at more than one point in a stream of money flowing through the economy. As my hon. Friend interjected when the right hon. Member said this, that is true, in any case, at the moment in relation to the Profits Tax. There, the State takes its toll in the first instance, but even if one does not accept that—and it is so—consider any citizen's private expenditure. That is taxed again after he has paid his Income Tax and/or Surtax. Every time he buys an article on which Purchase Tax is charged, every time he purchases, say, a packet of cigarettes, he is suffering under this argument, which I dispute, about double taxation.

Mr. Barber

I do not think that I can have made myself clear. I said that I accepted that there was an element of double taxation at the moment because we had a system of Profits Tax. But I went on to say that there is all the difference in the world between an overburden of 15 per cent. and one of 35 or 40 per cent. The right hon. Gentleman seems to be arguing that the extent of the double taxation does not matter two hoots.

Mr. Callaghan

If the right hon. Member is not arguing against the principle, I need not continue. If his argument is against the principle, we should discuss this further, but if he is saying that what is at fault is the amount of double taxation, that is an entirely different argument.

As I said at the beginning, it does not necessarily follow that there will be more taxation paid in the future than there has been in the past. It will depend entirely on the policy of the company. This new system will undoubtedly, in a few years, be the means of stimulating the small company by giving it greater rewards than at present by reducing its taxation burden overall. It will be the means of ploughing back, of enabling companies of all sizes to plough back more into new plant, new machinery and equipment than they can at present. It will be the means of enabling us to adjust the taxation system as between the individual and the company by separating the two and it will also be the means of enabling us to be more selective in our overseas investment. This is a reform which is long overdue, looked at by previous Chancellors, put on one side. It is claimed that it has never been the right time to introduce it. That is a given and axiomatic fact. We have now done so. I believe that in two or three years hon. Members will look back and wonder what all the fuss was about.

Mr. J. Grimond (Orkney and Shetland)

I look forward to the day when a statue to the Chancellor of the Exchequer is erected in the City of London. In the early part of his speech, he said something which I am sure he did not mean in the sense in which it may be taken. As it is important that we should not exacerbate feelings further, I will give him the chance to clear it up. The right hon. Gentleman appeared to say that he had taken a lucky swipe at private industry. I am sure that he did not mean to say anything so inept. I hope that he will take the opportunity to say that he has no intention of taking a swipe at private industry.

Mr. Callaghan

There is so much sensitivity at present that we had better not add to it unless it is absolutely necessary. I am sure that it is known in the Committee that in the terms in which I was using it—rephrasing what the right hon. Gentleman the Member for Altrincham and Sale (Mr. Barber) was saying—I was not opposed to private enterprise, or saying that I had taken a lucky swipe at it. I was trying to stand his argument on its head by means of debating dialectics.

I regard the making of profits by private enterprise as of the greatest significance in the present state of the economy. We need them. We need to encourage them—[Laughter.] Hon. Members opposite need not laugh or sneer at this. I am sure that large businessmen and companies do not sneer about it. I am trying to state our attitude. We want to make the approach as efficient as possible and to reward the efficient, enterprising firms. If they make profits, we shall try to see that they get the reward of the profitability.

Mr. Grimond

I propose to start from this degree of agreement. It is absurd to be against private enterprise. It is like saying, "Stop the world, I want to get off". We have to make our living from private enterprise, and even the Labour Party does not propose any further measures of nationalisation except steel. We must try to see how we can make our mixed economy, which is mainly based on private enterprise, work better.

Of course, there is a strong case for a Corporation Tax. If companies are better off under this tax and are able to invest more and improve their competitive position, this will ultimately rebound to the benefit of the shareholders. We all know that many shareholders considered that one of their greatest benefactors—though unintentionally—was Sir Stafford Cripps, because on the day that the moneybags were loosened, more came out of them because more had been stored up there under the Cripps view that one should not distribute.

The Chancellor underestimates the importance of dividends for different reasons. I take the view that we should spread ownership, responsibility and power more widely. I am not sure that I want merely to increase the power of certain private corporations by enabling them continually to plough back money. Government speakers sometimes say that directors would benefit from this. They are not involved, as they get their salaries, emoluments and other payments, all quite properly. But this gives them great power. It gives them the power to expand in all sorts of matters in which they might be unpractised and power to misuse capital instead of spreading it through the economy. I will not carry this too far. I agree that there is a case for giving them more to invest, but it can he carried too far. I think that the Chancellor underestimates the importance of spreading wealth, and dividends are one way of doing it.

5.0 p.m.

The right hon. Gentleman also underestimates—although I believe that he is aware of it—the flaw in the argument which he advances frequently, particularly about oil companies, that most of these companies do not raise new capital on the market. Many of them do, and I am told that it is extremely important for companies to be able to raise even a marginal amount of capital on the market. This means that a company can get better terms than if it goes to financial institutions. For this purpose, it is essential to keep the price of shares at some figure which, at any rate, reflects some relationship with the underlying assets and the earning ability of the company. As a result of the Bill, even oil companies will find it harder to raise money, and other companies—not the oil companies but smaller plantation companies—will be open to takeover bids.

Apparently the Chancellor thinks that he can stop all this, but I ask him to reflect upon it. It would be very damaging to this country and, indeed, ultimately it would be impossible, to forbid a number of sales of companies abroad. One can intervene in certain transactions, but one cannot make it a rule of policy if one hopes to remain a great international trading nation, and especially if one hopes to maintain, as the Chancellor does, a large amount of investment abroad.

Another criticism which I have of the Bill is that too much weight is put on tax evasion. I do not deny that it is a problem, but the main problem at the moment is to give an incentive to the economy in order to get it going more efficiently. I also feel that throughout the Bill there are many emotional appeals. The Committee constantly talks about the small man—the sort of home-grown dwarf, as opposed to the gnomes of Zurich. I admit that I use these terms, too. It is a common failing.

But let us be honest about it. Tax evasion is not done only by big operators in the City. All those people who know their way to Cardiff docks also know their way around the Income Tax system. I entirely agree that we should stop wholesale tax evasion, but let us put it in perspective. I should like more information on what the Government believe to be the size of the evasion, because there is a danger of doing considerable harm to the economy for the sake of stopping tax evasion. Nevertheless, I do not deny that the problem exists.

The Chancellor spoke about close companies, are [...] argued that he was conferring a benefit on them. This seems to be a dispute about language. If we deem everyone in the country to be liable for 100 per cent. Income Tax, and then we make them liable only for 5s. in the £, if they can make out a case for themselves, we may claim that this is conferring a benefit on them. But I am not sure that many people look at it that way; they would rather pay 8s. 3d. in the £ unless some reasons can be shown for their paying more.

I hope that the Chancellor will correct me if I am wrong, but it also seems to me that his proposal changes the onus of proof. Previously, the onus lay on the commissioners to go to a company and say, "Show us why you should not be more heavily taxed". As I understand the new proposal—and I shall be happy to be corrected if I am wrong—the Chancellor is laying it down that normally one distributes 60 per cent. unless one can make a case for not doing so. This changes the onus of proof, and it is an important change; in other words, they are regarded as guilty unless they can prove themselves innocent. But I accept that the rate for them is lower.

Incidentally, I also believe that the Chancellor has now brought in many new companies. I am told—I may be wrong—that B.P. may be a close company, and I am not at all certain about the position of the nationalised industries. [HON. MEMBERS: "They all make losses."] Some of them make profits. In any event, we can discuss this later. The regulations about participitors will also cause some anxiety. In some cases depositors are participitators.

The Chancellor yesterday tabled some extremely important Amendments dealing with the position of overseas companies, and I should like to get one point right as a question of fact. I understood him to say that private overseas investment had been declining. It is very difficult to get figures because one year there is the Montecatini affair and the next year there is some other big transaction, so that the figures cannot be compared.

Mr. Callaghan

We were talking about the developing countries and private investment in the developing countries.

Mr. Grimond

Figures which I have seem to show that private investment abroad has been slightly increasing, although not by very much. There is also a considerable amount of Government investment overseas, and I was glad to hear the Chancellor say that this provides as great a problem as private investment and that he will take steps about it. He also said that private overseas investment is comparatively unrewarding, but this is not so when we look at the total.

Obviously, some private enterprise schemes are rewarding and some are not. If one were to be unfair to the Government, one could say that the groundnut scheme was not rewarding. But should we stop all Government investment on that ground? Clearly not. We must look at the total, and from the total of private investment it seems that it has been extremely rewarding from the point of view of this country. It is not only that exports have increased.

Mr. Edmund Dell (Birkenhead)

Would the right hon. Gentleman say what are those figures which show that investment has been extremely rewarding?

Mr. Grimond

I did not realise that we were to have a Second Reading debate today. I have an enormous file on the subject here. I think that the Chancellor will agree that Bowaters, Shell, I.C.I., Dunlop, the Hudson Bay Company and others have been rewarding. There are masses of figures of rewarding projects.

Mr. Dell

May I put it to the right hon. Gentleman that 50 per cent. of our overseas investment is to countries which produce 18 per cent. of our exports?

Mr. Grimond

I do not think that we must look only at exports. We have to look at remittances and at the skill and "know-how" which British people bring to the overseas country. Many people are concerned about this problem. They are not saying that if we stop or slow down overseas investment, Britain will collapse. But they are saying that gradually big companies will tend to put more of their operations overseas. There will be fewer outlets for British skill and less use for the services of this country. There will be a tendency to go to America because the engineers have been trained in America. It is a gradual process.

I agree that we have a temporary problem. I am not sure that the Chancellor regards it as temporary. But if it is temporary surely it could be handled through the present machinery to a greater extent. I take it that he thinks that it is a long-term problem. I believe that in the long term there are arguments that overseas investments at least do as much good as any harm that we may suffer.

The Chancellor has brought forward proposals which will mean, I understand, that these companies will be put in the same position next year, the year after that and the year after that, as they are now, and that after that there will be a tapering off. I will come later to a point about the constitutional implications. If this is so, it seems to me virtually to say that this scheme of taxation will not apply to them. It is true that he said that they will not benefit from any diminution in the rate. But they are to have a standstill.

This is extremely important. I understand that during that standstill he expects a thorough investigation in the country of this matter, and that is sensible. I hope that at the end of it we shall know how these people reclaim taxes which they have not paid and how exports flow or do not flow. It is possible to argue that but for our overseas investments our exports position would be even worse than it is today.

Mr. Callaghan

It could also be argued that the reason that the country's export performance has not been better is that we have not had sufficient investment in this country by comparison with our main competitors and that my proposals would do something to redress that balance.

Mr. Grimond

We are to have a standstill for these companies. I welcome it. It is a good thing. But am I right in saying that they will be paid out cash by the Exchequer? If so, this is at new departure. These companies will presumably get a cheque. Very enjoyable for them.

Mr. Harold Lever

Surely they will first pay out money for tax and then will get a good deal of it back from the Inland Revenue for a period of time. But there will be no net loss to the Exchequer.

Mr. Geoffrey Lloyd (Sutton Coldfield)

We are in danger of getting into a serious misapprehension. The right hon. Member for Orkney and Shetland (Mr. Grimond) was under the impression that the Chancellor's concession announced in his Amendment last night would put the oil companies back into the tax position which they occupied before the Finance Bill. I do not think that this is the case at all, but the Chancellor let that statement go by as if it were a fact. I believe that the Amendment makes only a slight mitigation of his proposals. We should not be under a misapprehension.

Mr. Grimond

I plead guilty to having taken the debate into difficult and choppy water. It is difficult to know how wide one can go, and I take it that the Committee does not want a general debate on this subject. I understood from the Chancellor's Explanatory Note that he hoped to compensate the company for that degree of overspill which they would lose under his Budget proposals. To that extent they would be fully compensated for the changes which he has introduced in so far as they affect overspill.

Mr. Callaghan

This is a very complicated subject. Anyone who has seen the Explanatory Note will realise that. Broadly speaking, as a general theme they are compensated for overspill. They are not necessarily compensated for underlying tax.

Mr. Grimond

I hope that we are now clear. I do not want to cause the City any more anxiety than it feels at the moment and if the other expert, the hon. Member for Manchester, Cheetham (Mr. Harold Lever), is prepared to let it pass, we will pass on.

I want to turn to the constitutional implications of the Amendment. As we have proceeded through the Bill we have seen the necessity for dealing separately with current proposals for raising revenue and with changes in the structure of taxation, having an expert committee which can consider the latter. No Parliament can bind its successors. I may be out of order in putting the question to the Conservative Party but I will go as far as I can. Suppose this Amendment is passed. It simply postpones the application of the Corporation Tax. Would the Opposition regard that as binding? Suppose they were the Government next year, would they regard themselves as bound to go with this postponement?—[HON. MEMBERS: "No."] Of course not. They are saying that they do not want this tax at all, and the future is left open. That is the strict parliamentary procedure.

It also applies to the Chancellor's very welcome concession. He has projected forward seven years, but he cannot bind his successors. It is open to any Chancellor of the Exchequer to turn the whole thing upside down. In Parliament we understand that, but I am not sure that business understands it, and in all these matters we are dealing with business decisions and with people who must make decisions about long-term investments. It is, therefore, important to explain to them that all these things are intentions, but that they are not binding, and that they must take this into effect. I am sure that the Chancellor agrees that if the economic situation of the country were totally different, as it may be in the future, he would regard himself as open to vary these concessions.

It is worth making that point, and also making the point that we are in serious difficulties in discussing long-term tax changes in the context of an annual Budget in the Committee of the whole House. We ought to find some different machinery for discussing it. I have great sympathy with the Chancellor. If he consults anyone about his proposals and comes to the House with a cut-and-dried scheme, the House or the Committee object and say, "You ought first to discuss these things with us". If, on the other hand, he seeks to discuss it in that way, we say, "You are an ignorant so-and-so. You make proposals and then, after discussing them with us, you have to change them". We ought to have a specialised committee on the long-term structure of taxation.

The Chancellor said that one of the objects of this tax reform is to make business simpler. I hope that he is right. I think that it could be made simpler through the Corporation Tax, but I am not sure that the present proposals achieve this, and I look forward with some dismay to an even longer Finance Bill next year—although no doubt we shall have a fortnight between the end of this Finance Bill and the introduction of the next. The hon. Member for Cheetham will come back as forthright as ever, reinforcing the Government with powerful arguments to try to bolster up their weakening enthusiasm for the Capital Gains Tax and other measures.

I should have thought that one of the great advantages in separating personal taxation from corporation taxation is that there would be the possibility of lowering personal taxation. One of the difficulties of introducing the Corporation Tax now is that, for good or bad reasons, the Government have been forced to raise personal taxation. Therefore, I could not accept the view that the upshot of all this will be that personal taxation will remain at its present level or will be lowered. I fear that the upshot will be that it will be higher than it is.

Should there be such big tax changes at any one time? Certainly, I believe that the Chancellor has tackled more at one time than he might have done. This seems to tie up with our suggestion that some credit should be given for withholding tax on companies. I hope that the time will come when the Chancellor will consider this suggestion, particularly in view of the double taxation element which is involved here.

5.15 p.m.

I do not criticise the principle of the Corporation Tax. I am much more reassured about overseas companies, particularly when one considers the criticism which has been levelled by them against the Chancellor's action. As to close companies and the possibilities of tax evasion, I hope that when the Government come to deal with these matters the Chancellor will not be inhibited by the criticisms which have been made about his personal qualities, abilities and understanding of the Inland Revenue. Indeed, when I hear those criticisms I remember that, like his right hon. Friend the Chancellor of the Duchy of Lancaster, he comes out of the Inland Revenue stable. He is inclined to prick up his ears and bay when he smells a tax evader. I hope that he will not be inhibited from making further concessions when it is obviously wise and proper for him to make them.

Mr. Dell

I will follow the line taken by the right hon. Member for Orkney and Shetland (Mr. Grimond), because I want to know what evidence he has for his suggestion regarding the relationship between overseas investment and exports.

Mr. Grimond

The whole tenor of my speech was to emphasise that one should not look at exports alone. Some companies are able to produce figures to show that, overall, benefit is to be gained from investment of this kind. If they are wrong we shall find out next year.

Mr. Dell

Since the Chancellor's proposals were made I have, in the Budget Debate and on Second Reading of the Finance Bill, called for an inquiry into the effects on our balance of payments of overseas investment. Time and again I have urged that such an inquiry should be made. I have pointed out the need for far more information than my right hon. Friend the Chancellor has at his disposal on this subject. As a result of the Amendments which my right hon. Friend tabled last night, he has provided an opportunity for such an inquiry to be carried out and I hope that it will be carried out. We will then be able to thoroughly investigate the results of overseas investment on our balance of payments.

Many examples have been given, I.C.I. is one, of cases where the return to this country on our overseas investment is favourable. I perhaps know a little more about I.C.I. and its overseas investment than many hon. Members.

There is no doubt that the return on I.C.I.'s overseas investment has been entirely favourable. However, that does not mean that the general situation is favourable or that the general return to Britain on our overseas investment programme has been favourable.

We must consider whether we have had a return equal to the return we might have derived had the money been invested in the United Kingdom. I have done my best, on the basis of the information available—and, as I have said so often, that information is entirely inadequate—to make an assessment of the return to this country on our overseas investment. As a result of what I regard as a serious failure of the former Administration, this situation has never been properly investigated. At a time when we were investing overseas to an extent far greater than any of our main industrial competitors, the former Government made no real inquiry into the general effects on our balance of payments.

Now, as a result of the Chancellor's proposals and the investigations which are taking place, some figures have been produced, for example by the Federation of British Industries. However inconclusive the figures may be, they are helpful. As a result of investigations I have made, it seems to me that the balance of the argument is increasingly in favour of the case which my right hon. Friend the Chancellor is making.

I have found that there is very little relationship between the flow of investment and increasing exports—[HON. MEMBERS: "Oh."]—that is, taking the situation as a whole. When we consider certain companies—I.C.I., B.M.C., Leylands and others—we find that there is undoubtedly a relationship between the flow of investment and exports but, generally speaking, that is not the case. Consider, for example, the amount of in- vestment we have made overseas. About 50 per cent. of Britain's overseas investment, excluding oil, banking and insurance, was, according to the Board of Trade Journal, in Canada, South Africa, India and Australia. However, only 18 per cent. of our exports went to those countries.

Mr. Terence L. Higgins (Worthing)

Would not the hon. Gentleman agree that he is really talking about a statistical correlation in discussing the relationship between investment and exports? Since we are seeking such a correlation, should he not vote for the Amendment so that time is given to produce the relevant figures?

Mr. Dell

By tabling certain Amendments last night my right hon. Friend the Chancellor has given the Government time to make the necessary inquiries. I agree that the evidence at present available is inadequate. I am not suggesting that any firm conclusions can be drawn from it. I am, however, suggesting that what evidence there is tends towards the arguments of my right hon. Friend.

Let us take the point further and consider the annual flow of investment and compare it with the annual increase in exports to certain countries. It will be found that there is no relationship between the two and that year by year we have been investing large sums in Australia, Canada, India and South Africa without anything like a corresponding increase in our exports to those countries. That is not the whole of the matter. There are obviously other returns to us from our overseas investment; for example, in the form of terms of trade. I am merely saying that this is a vital question which requires investigation. As far as I can discover from the facts that are available, the evidence is in favour of my right hon. Friend's case.

Since I have argued in favour of overseas investment in previous debates. I welcome the fact that my right hon. Friend has tabled Amendments which will enable the Government to carry out a full inquiry into this subject. As the Government are now able to carry out such an investigation, I hope that they will not delay in doing so.

There is need for a greater amount of selectivity in our overseas investment. If one investigated specific cases of overseas investment I believe that it would be found—and this may even include the best examples like I.C.I. and the others I gave—that if the Corporation Tax in its existing form had been in operation previously, much investment would have been rejected because, on the evidence which would have been presented to the boards of directors, it would not have been found profitable. If the impact of the Corporation Tax will be to compel companies to be selective in their overseas investment, from the profitability point of view, benefit will derive to this country.

Mr. A. P. Costain (Folkestone and Hythe)

Is not the hon. Gentleman advancing an argument that companies should not invest in the developing countries in view of the high rate of taxation? Is that the object of the Government's present policy?

Mr. Dell

Hon. Gentlemen opposite should abandon the argument of the developing countries. Since the Chancellor produced his proposals they have deployed that argument time and again. Under successive Tory Administrations private investment in the developing countries fell year after year, yet nothing was done about it. [HON. MEMBERS: "No."] There is no point in hon. Gentlemen opposite trying to deny it, because the figures show that, in total, it fell annually. Indeed, if one takes account of the new money invested, after deducting the figures representing the reinvestment of profits made overseas, one finds that total investment overseas in recent years has been negligible. If hon. Gentlemen opposite intend to attack the Corporation Tax with that sort of argument about the developing countries they will get nowhere. They had better find a better argument.

Mr. Gower

Did not the hon. Gentleman hear the Chancellor's statement that, in future, companies in this country will have to be more selective? Is it not likely that, in being selective, they will find a more ready and profitable return for their money in the developed countries of the Western world rather than in some of the developing countries?

Mr. Dell

That may be so. The main reason why in the last few years private investment overseas has tended towards the developed countries rather than the developing countries is precisely because it has been found that private investment in the former is more profitable. There may be other reasons, political reasons, for the reduced amount of investment in the developing countries—

Sir William Robson Brown (Esher)

The whole reason.

Mr. Dell

If that is the whole reason, why did not the former Government give to investors who were prepared to invest in the developing countries the guarantee which many of them had asked for against the political risks of so investing? The former Government did not give such a guarantee, but I am glad to say that the present Government are looking at the matter. [Laughter.] I do not know what amuses hon. Gentlemen opposite. Is it not an advance that the Government are looking at the matter? I hope that they will be prepared to give a guarantee against political risks.

I do not believe that even if such a guarantee were given investment in the developing countries would improve all that much or that such a guarantee would be the answer to the problem. The main reason why there has been increased investment in the developed countries rather than the developing ones is because it has been found that it is more profitable to invest in the former rather than in the latter.

Sir W. Robson Brown

Would the hon. Gentleman define what he means by "the developing countries"? Is he talking of Africa and excluding India? Is he aware that any amount of risk private money has gone towards Indian development? Is he also aware that the situation in Africa in recent years—the political climate, and so on—has been extremely severe from the investment point of view, although it is much easier and more encouraging now?

Mr. Dell

I am not excluding India. If the hon. Gentleman wants my definition of "the developing countries" I could not do better than refer him to the list of 77 developing countries which he will find in a Schedule to the Final Act of the United Nations Conference on Trade and Development—and that list includes India. Including India, the value of our investment overseas in developing countries has been falling year by year.

I am surprised that hon. Gentlemen opposite, if they do intend to deploy this sort of argument, have not gone to the minimum of trouble to find out the facts. It is extraordinary how they argue without knowing the facts. Do they really believe that they are being just in spilling crocodile tears over the fate of the developing countries when they have not even made the minimum attempt to find out the facts?

Undoubtedly there are advantages in overseas investment. No doubt, as a result of it, we may be able to supply raw materials, machinery, improve our selling organisations overseas and so on. These are arguments which I have put to the Chancellor in previous debates on this subject. Nevertheless, one must accept that there is this disadvantage—that as a result of overseas investment, investment in this country may be lower than it should be. It is a question of balance and, to get to the facts, we need a thorough investigation. Only then will we find out the facts about the effects of overseas investment on our balance of payments.

5.30 p.m.

The fact is that we have a larger overseas investment than any other industrial country, with the exception of the United States of America. I believe that the reason is that a very high proportion of our exports have traditionally gone to the Commonwealth. The Commonwealth consists entirely of developing countries. Some of them are rich developing countries, some are poor developing countries, but they are all developing countries. They are all countries that want to industrialise themselves; all countries that demand that those supplying them should, instead of exporting goods to them, invest money in them and build up local industry. Incidentally, they are all highly protectionist countries.

They have told United Kingdom suppliers, "Instead of exporting goods to use we want you to build up investment in our countries. We want you to manufacture in our countries". As we have been so dependent on Commonwealth markets, we have accepted that argument, and have exported, for example, enormous sums to Australia and Canada, and to South Africa when that country was within the Commonwealth. We have built up industry there, but those investments have not been compensated by anything like the equivalent increases in exports. Our exports to those countries have shown very little increase over the years—

Sir T. Brinton

There is a great deal in what the hon. Gentleman has just said about the reason for the growth of investment in the great developed Commonwealth countries, but there is another side to the argument. Very often one has, as has my own industry—carpets—a very large market in, for example, Australia. That was a big and excellent export market. If we were to hold the market we had there, we had to accept the fact that the domestic establishment of industries in Australia forced us also to invest money there to start manufacture, but I do not think that we would have done so if they had not got off the ground first.

Mr. Dell

That is exactly the point. We have been so dependent on Commonwealth markets for our exports that when Commonwealth countries have told us, "You must invest in our country and manufacture here instead of exporting the goods to us," we have felt that there was no alternative. But, unfortunately, it is still true that those investments have not been followed by an increase in exports. Over the years, exports to Australia and Canada have been stagnant, and have not been increasing in anything like relationship to our investment overseas—

Sir Harmar Nicholls (Peterborough)

I am sure that the Committee is following the hon. Gentleman's point, and he is being consistent, but he is being critical of our overseas investment as general policy. Perhaps he will try to square that with the Prime Minister's boast in his great speech in America a few weeks ago, when he said: It is about time the world realised that a well-run shop does not put all its wares in the window. Our gold and convertible currency reserves are only a small fraction of the real reserves of our country. Like the United States, the United Kingdom is a country rich in overseas assets. In all, we estimate them conservatively to amount to something like £11,000 million. The vast bulk of this is privately owned … That was a boast. How does the hon. Gentleman support the Prime Minister with the sort of criticism he is now implying in his argument?

Mr. Dell

I am not criticising all overseas investment. If the hon. Gentleman does me the honour to read the speeches I made on the Budget and on the Second Reading of the Finance Bill, he will see that the arguments which the Prime Minister made in New York about £11,000 million of overseas assets were made by my own honourable self in the debate on the Budget, when I made certain representations to the Chancellor of the Exchequer. I know the arguments in favour of overseas investment. What troubles me is that the genuine arguments in favour of overseas investment have been exaggerated out of all proportion by hon. Members opposite who, first, seem to have no knowledge of the figures involved—as far as they are known—and, secondly, are prepared, for purely political reasons, to exaggerate the case beyond all bearing.

As a result of representations, my right hon. Friend has introduced most important Amendments which will delay the impact of the Corporation Tax on existing overseas investment. I welcome that action, because I believe that it will give an opportunity for a thorough investigation of the problems which is so necessary, and which should have been made by the previous Government. Meanwhile, where it is clearly profitable, overseas investment will continue, to the great benefit of our economy but, perhaps, subject to the rather more careful scrutiny that it should have, but has not always had in the past.

Mr. Geoffrey Llod

The hon. Member for Birkenhead (Mr. Dell) referred in rather denigrating terms to our overseas investment. He has been rather selective, and perhaps I might correct the attitude of the Committee to the subject if I were to point out that some of our most spectacularly successful investments have been overseas, particularly in the oil industry. Hon. Members may wonder why I refer to the oil industry, even though it has been so spectacularly successful, in terms of exports, but I know that the Chancellor of the Exchequer will agree that the relationship of the oil companies to foreign exchange and the sterling area is one of the most complicated financial problems one can have.

I remember being told when I was Minister of Fuel and Power that the value to the sterling area of the production by the British oil companies equalled the value of all the visible manufactured exports of the United Kingdom put together. I do not say that this is the case today, but that fact will give the Committee an idea of the magnitude of the contribution made to our balance of payments by this spectacular overseas investment, made many years ago and which it is necessary to keep going all the time. I am, therefore, sorry that the Chancellor in his new proposals for Corporation Tax has found it necessary to inflict a grievous wound upon the financial strength of the British oil industry, with its immense ramifications throughout the world.

It is important to state again what the Chancellor himself admitted as a result of an interchange earlier with the right hon. Member for Orkney and Shetland (Mr. Grimond), that while he has made certain concessions to the position of the oil companies he has by no means restored them to anything like the position they would have been in under the present tax system if the Finance Bill—

Mr. Callaghan

With respect to the right hon. Gentleman, I have been into individual cases, which I shall not propose to discuss, and can assure him that one cannot generalise in the way he has just done.

Mr. Lloyd

I accept that statement from the Chancellor, but I also have had some opportunity to go into individual cases. I know that there is one important case in which they have been much benefited, but there is another extremely important case where the benefit is very shadowy indeed.

Hon. Members have said in referring to overseas investment that there are other considerations to bear in mind. Having been Minister of Fuel and Power for four years, and Minister for Petroleum throughout the years of the German war, I think I should take the opportunity to testify to the immense strength that the oil companies gave to this country in its war effort—all the engineers who produced the secret weapons, those who constructed pipelines under the Channel. All that tremendous effort came from the enormous technical resources and resources of men and skill built up by these great investments—

Mr. Emrys Hughes

That applies to the miners, too.

Mr. Lloyd

Yes, but we are discussing overseas investment, now.

I was surprised that the Chancellor should have brought in the point about manipulation as a general defence of his Corporation Tax proposals. In preparing myself for this discussion, I have consulted at least two former members of the Board of Inland Revenue, and I am told that there are two methods of dealing with manipulation. One is what is called the "omnibus" approach, which is the only defence for the Chancellor's suggestion that Corporation Tax deals with it, and the other, which I am advised on high authority is the best and the right method, is to stop up that particular abuse. Admittedly this means more work for the Revenue, but it can be done. The Revenue does it continually and I do not think there is any particular reason why it should not have been done in this case. Therefore, it is not a good argument to bring in a particular case of manipulation as a justification for a widespread change of this kind.

The Chancellor referred to small companies, and he gave the impression with regard to both large and small companies that they had nothing to fear and that there had been a misunderstanding. All I can say is that there is a very great misunderstanding indeed. I have spent many hours with accountants from the Birmingham Chamber of Commerce who are expert in affairs of Midland companies, large and small. I have a great mass of information, with which I will not weary the Committee this afternoon—it may be appropriate later on—which expresses the great anxiety particularly of those companies which may fall within the net of the close company provision, as to what will be the effect on them.

If their fears are justified and if the 60 per cent. distribution was enforced, there are a large number of companies here which have grown from very small private companies to being actually launched on the market so that they become public companies, and which believe that they could never have made this progress under the much greater distribution that would have been enforced on them by the close company provision. If there is a misunderstanding, it is most important that it should be cleared up, because I am certain that there is great anxiety in the country not merely among people who, like myself, are not expert accountants, or the owners or directors of businesses, but among very able professional accountants, solicitors who are highly experienced and who have to advise, and those who have been engaged in discussions with the Revenue about some of these matters.

I want to leave these detailed questions for a moment and approach a more general question that was raised by the Chancellor. He said that he was putting forward this proposal as one which was in principle justified. He said it was based, as we have been told again and again by the Chief Secretary and the Economic Secretary, upon the complete separation of the company and the shareholder, and that his object in this Corporation Tax, which gives expression to that principle, was to encourage retentions. I want to put an argument to the Chancellor about this. We do not accept this complete severance between the company and the shareholder. I assert that it is not necessarily by any means the viewpoint that is taken by perfectly serious economists and financial students in this or in other countries. Secondly, it is not by any means accepted by the same class of serious students that the undue encouragement of retentions is the right policy in the interests of the growth of the economy.

I have a copy of the authorised English translation of the report of the Neumark Committee which, as hon. Members know, is the Fiscal and Financial Committee. This is an official translation published by the International Bureau of Fiscal Documentation in Amsterdam. It is perfectly clear from this document that there are experts of considerable standing not only in Europe but in the world who take a different view from the Chancellor's on the merits of the Corporation Tax. The right hon. Gentleman challenged us to produce a different view and this is what I am engaged in doing.

5.45 p.m.

In particular, this report deals with this very point as to whether or not there should be discrimination in favour of retentions. It says: Whatever it may be, this discrimination, given the current rates of taxation and personal income taxes"— this relates to Common Market countries— in the opinion of many people has an unfortunate effect on economic growth"— that is, undue encouragement of retentions has an unfortunate effect on economic growth— and this point rather than any argument of equity, has determined the attitude of legislators. In other words, legislators in the Common Market countries have not been influenced by any undue tenderness for the shareholder. They have been influenced by the fact that the policy which the Chancellor is putting forward is against the interests of the growth of the economy. The report goes on to emphasise that three Continental countries have been wanting to go in a contrary direction to that in which the Chancellor is urging this country to go.

I want to put to the Chancellor some of the reasons which I suggest are behind the thoughts of the experts of the Neumark Committee. The argument is really concerned with whether growth is best facilitated by a special encouragement of retentions or not. Everybody accepts that retentions play an important part in the growth of companies and, therefore, of the economy; but everybody also knows that companies grow also by the issue of shares and by raising capital on the market. The question is whether we ought to leave this as far as the Government and the Treasury are concerned, and regard these two processes as mutual, or whether special encouragement should be given to one of them. We know that the Chancellor wishes especially to encourage retentions. But the point is that the Chancellor has said that his system is specially suitable for what he calls the second half of the 20th century. It is exactly this point that I want to contest, because I think that he has unfortunately got caught in the current fashion of so-called progressive fiscal thinking of a few years ago, which does not take account of the most up-to-date developments in business.

The point I want to emphasise is the growing importance of the capital intensive industry. We see this very much in the Midlands. Of course, it is a characteristic of the oil companies and of I.C.I. In a capital intensive industry it is true that one wants to have retentions, but I suggest that it is also absolutely vital to go to the market. The reason, broadly speaking, is this. In a progressive capital intensive industry one's needs for increased capital increase so fast. One may say that they almost increase by geometrical progression over a few years, in a way which could never be satisfied even by a strong policy of capital retentions except in a very exceptional industry.

I have had 300 companies analysed to examine this effect. I have also taken out a list of 15 to 20 of the fastest growing companies in the country. I should like to give one or two examples and if necessary I will make this list available to the Chancellor of the Exchequer. One company which was spotted by a number of people is Elliott-Automation. Five years ago the capital employed was £7 million. Today it is £34.3 million. The increase is over £27 million. The aggregate of that which has come from retentions in the past five years is £3 million. To take Davy-Ashmore, a not so well-known company in this context, five years ago the capital employed was £7.4 million. At the latest date available it is £16.3 million. Only £2.7 million of the increase of £8.9 million came from retentions. All the rest of it in one way or another had to come either from rights issues or from going to the market.

To take a different industry altogether, Laporte had £16 million employed five years ago. Now the capital employed is £37 million, an increase of £21 million, of which £2.9 million came from retentions. The rest had to come from the market or in some other way. To touch upon my favourite industry, coming as I do from Birmingham—the motor industry—Leylands five years ago had a capital employed of £31 million and now it is £92 million. The increase is £61 million of which £15 million came from retentions. The Chancellor will therefore see that, although he may not agree with the argument, there is something serious to be considered here.

I should like to put additional points in amplification of these figures. Expansion by plough-back must inevitably be a relatively slow process. The money for expansion is being found at present-day values out of profits which have borne heavy tax. If money is raised by new issues of capital, a company is hire-purchasing its expansion. It is rewarding the person who lends the money by dividends and interest which fully reimburse him only over a long period.

To plough back heavily does not necessarily mean efficient use of funds. It could merely mean, as happened under the policy of the last Labour Government, the accumulation of balance sheet liquid resources which eventually catch the eye of the take-over king. He buys the company because the plough-back has not been efficiently employed, and I do not see that the Chancellor provides any safeguard against this but rather that he is especially encouraging it. The company which ploughs back inefficiently cannot look the market in the eye, but if the money is raised on the market its profitable use has to be demonstrated, otherwise the money will not be subscribed. There is a strong argument therefore for expansion to the greatest possible extent by new issues.

I put this point of view to the Committee as a counterpoise to the Chancellor's quite general assertion that his policy would be better for the economy. We should be well advised to submit this contention of the Chancellor's to careful analysis, and instead of bringing forward this fiscal reform as well as the Capital Gains Tax it would have been better if the right hon. Gentleman had delayed the Corporation Tax in particular for a year while all the complicated issues which are in the minds of the Committee today had the opportunity of being fully investigated by the Revenue and all the interests concerned.

Mr. Harold Lever

I follow the right hon. Member for Sutton Coldfield (Mr. Geoffrey Lloyd) on his last point to the extent that although there are two views about the desirability of a blanket encouragement to retention I feel passionately—if passion is an appropriate emotion to bring to bear on such questions—that the blanket encouragement of retentions of their profits by companies is not a desirable thing, for reasons which I shall adduce in greater detail on the relevant Clauses when I shall put forward my case against them.

I had the honour of addressing the Committee several years ago when Mr. Harold Macmillan was Chancellor of the Exchequer and I moved the abolition of the differential Profits Tax. I carried it to a Division in the late hours of the morning and the Leader of the Liberal Party, the right hon. Member for Orkney and Shetland (Mr. Grimond), was the Teller with me. We recorded precisely no votes whatever from either side of the Committee. Time has moved on and opinion is more evenly divided now.

When I say that I am against the general encouragement of retention, I mean that blanket and unselected encouragement is not only not desirable, but can produce mischievous results. I am not impressed by the many arguments that I have heard about the percentage of companies who go to the market. The figures are often misleading because most people think of the market for the purpose of computing their figures when they issue shares, but a company goes to the market for capital in the practical sense when it goes to its bankers and gets an overdraft for the expansion of its activities.

I cannot help congratulating my right hon. Friend the Chancellor upon his remarkable achievement this afternoon in reducing the temperature in which the Committee is considering these matters. It has been a rare feat of oratorical skill by the right hon. Member for Bexley (Mr. Heath) and his supporters that he has been able to elevate matters which are fundamentally matters of administration, common sense and business judgment to the level of ideological conflict. The whole of our discussions have been conducted on the very misleading basis that what we are discussing is a deep, fundamental difference between the parties. To this extent the Chancellor has had to be caricatured as an ogre who is exceedingly knowledgeable about tax, but malign, or as an ignoramus, stupid and pliable, because he gives concessions. I have dealt before with "Heath's fork". This is an enlargement or a particular description of that instrument.

But let us forget this ideological conflict. There is a very respectable body of opinion in all countries which favours the concept of a Corporation Tax and there has long been a respectable body, including myself, who have always favoured Corporation Tax, though I enter the caveat that I favoured it on a somewhat different basis from that produced by the Chancellor, as will emerge in this debate. There is nothing anti-business in it. Let us get it clear that many business-minded companies throughout the world operate under a Corporation Tax.

Let us come to the more serious aspects of the business. In so far as the Chancellor is affected by excessive attention to the dangers of tax avoidance and manipulation I cannot help recalling—I hope that it is not unfair to do so—what the late Aneurin Bevan said, and he cannot be accused of excessively Right-wing predelictions. I remember his saying to me, "Of course, everyone knows that the present system works because of the anomalies". These have acted in the past as something of a safety valve.

If my recollection of the minority Report of the Royal Commission is correct—I have not read it for quite a long time—Mr. Kaldor repeated, with approval, the ancient dictum that there is no obligation upon the citizen so to arrange his affairs as to attract the maximum amount of tax. Therefore, I do not think that we should occupy our minds too much with these questions.

6.0 p.m.

When we discuss these matters which have caused a great deal of public concern in relation to close companies, it is fair to make this point. I am not myself clear why the Chancellor and those who favour general encouragement to retain profits should find it virtuous, when a rich man holds shares in a public company, to tell that public company that it would be desirable that it should retain as much as possible of its profits and rather naughty and even mischievous that it should increase its dividend, yet, in the case of a close company, to imply the very reverse. The logic of it does not seem to me completely compelling.

Having said that, however, and having remarked that there has been widespread public concern about close companies, I agree with my right hon. Friend that a great deal of this concern will prove not to have been justified. I hope that the Committee will notice the careful language I have used, correctly, I think, in making my prediction. [Interruption.] I hear one of my hon. Friends say that all the concern will prove not to have been justified, including my own concern, no doubt. I have every confidence that this will be so.

At the moment, however, the reason for this concern is worth a moment's examination, and if we can eliminate excessive party—