FINANCE (No. 2) BILL

HC Deb 02 June 1965 vol 713 cc1773-912

Again considered in Committee.

Question again proposed, That the words "1964 and 1965" stand part of the Clause.

Mr. Lever

I was dealing with the alarm and anxiety which has been expressed in the Committee and outside in relation to close companies. I expressed the hope that this alarm would prove to have been unjustified when we have finished our efforts in the Committee; but it is right that I should say that the alarm was absolutely justified by the wording of the Finance Bill itself.

I have already explained that I do not regard a great many of these matters as party political issues at all, but as matters of good sense, administration and business judgment. I think it right to say that the close company provisions, when I first read them, caused me to think—if I may paraphrase—"I do not know what they will do to the political enemy, but, by heaven, they frighten me".

Being alarmed myself, I can understand that the alarm expressed by right hon. and hon. Members opposite and by people in the country generally would seem to have been justified by the mode of presentation.

Sir Kenneth Pickthorn (Carlton)

The hon. Gentleman will remember, and I think that he should remind the Committee, in all fairness, that the Duke's soldiers utterly conquered the enemy.

Mr. Lever

That is entirely in point. I have no doubt that a similar result will occur here. They will be utterly conquered, and conquered even by our argument rather than by any fiscal or physical violence exercised against them.

What were our complaints? First, we thought it somewhat extraordinary that a Bill which brought in a Corporation Tax and justified it on the ground that we wished to encourage retentions took to itself what, on its wording, were the most Draconian powers for coercing companies into paying dividends that had ever been seen in a piece of British financial legislation. On the one hand—this matter was raised by the right hon. Member for Altrincham and Sale (Mr. Barber)—we noticed that the onus of proof was put upon the taxpayer to justify the retention of funds in his company and not paying 60 per cent. out of profits.

However, I hope that the Chancellor, now that he has considered this matter fairly, will produce an Amendment which I at least will welcome. I should not rebuke him for it, whatever the right hon. Member for Bexley (Mr. Heath) may say about his putting down yet another useful Amendment. The more useful, conciliatory and constructive Amendments my right hon. Friend puts down, the better.

The right hon. Member for Bexley may have a different view, because one by one as these Amendments register the public are coming to realise that however interesting, exciting and enjoyable the emotional oratory in this Committee may be, the reality is that the Chancellor, dealing with a complex and difficult subject, is necessarily not able to publicise all his proposals before he makes them to the House of Commons because of the confidential nature of the Finance Bill, and that he is openmindedly receptive to all the criticism which he receives from all quarters, both inside the House of Commons and outside it, and is ready to meet legitimate complaints when they arise.

Mr. Gower

Might it not also be inferred by some people that the Chancellor is trying to plug the gaps in a rotten dyke?

Mr. Lever

I do not accept that at all. My right hon. Friend the Chancellor has throughout acted in the best of good faith. He has put forward proposals. When a legitimate and logical case has been made against them, he has made every effort, sometimes even when he has not been convinced, to meet any reasonable grievance which is felt concerning them.

Mr. Edward Heath (Bexley)

Of course, we do not question the Chancellor's good faith. Is not the hon. Member's argument slightly weakened, however, by the fact that all the representations made to the Chancellor on the Corporation Tax by individual companies were made before the Bill was published and that the Amendments that the Chancellor has now put forward cannot possibly be in response to anything that has been said in this Committee because we have not yet discussed those Clauses of the Bill?

Mr. Lever

The Chancellor has shown by his past conduct that I am justified in hoping that as we come to those Clauses of the Bill, useful, constructive and fairminded Amendments will, one by one, make their appearance and remove the kind of grievance and anxieties which I have felt and will continue to some extent to feel until the Committee, by accepting those Amendments, removes that anxiety.

The first thing that troubled me and many business folk outside, as well as many right hon. and hon. Members, was the contrary to the practice of the Inland Revenue in the past, it looked as if a company would be compelled to pay a dividend and that if it did not wish to do so and felt that it needed money for the legitimate expansion of its business, it would be compelled to prove its case instead of the Inland Revenue being compelled, as was always the case in the past, to discharge the onus or proof.

I hope that my right hon. Friend removes this provocative, unjust and anxiety-creating onus change. I hope that the onus of proof will be restored to the Inland Revenue. It is not as great a matter as it seems in words. I agree that in practice there is not so much to be attached to it. Practice, however, means practice before the Special Commissioners, who are a model of judicial im- partiality although they are the Special Commissioners of the Inland Revenue.

For everyone who chances his arm before the Special Commissioners, however, there are thousands who settle their cases under a misguided concept of what their rights and their risks in this matter are. It is, therefore, utterly important that although sophisticated people like my hon. Friend the Chief Secretary to the Treasury realise that there is not all that importance to be attached to the onus of proof, the average member of a board of directors of a company regards it as one of the bulwarks protecting him from an oppressive exercise of these unusual and coercive powers. It is of the highest importance that the onus should be restored to its original position. The Chief Secretary and the Government cannot have it two ways. If it is unimportant in practice, let it be put back where it was before. Let the unimportance which has been so reassuring to company boards be restored.

Secondly, most unfortunately in the words used—I shall not recite them, because we have not yet come to the Clause—a different verbal test was put upon the board of directors in respect of justification of these retentions from the very well-understood test which prevailed under the old law. I am sure that the Chancellor of the Exchequer had no intention of altering the standards merely because the words had been altered and that this was an oversight, an error or an unintentional non-repetition of the exact words used on previous occasions.

I am fortified in this belief because the White Paper, I recall, used more or less the old words and the Chancellor himself on Second Reading used the old words. The old words were much more comforting to me and, I think, to most business men who had to interpret them. They said, in effect, that if a business man was required reasonably, for the purpose of expansion and development of his business, to retain profits, he could not be compelled to distribute them. In those circumstances, as the words have been used by the Chancellor twice and have been used, I think, in the White Paper—I hope that I am not inaccurate in supposing that more or less the words required are used in the White Paper—why not let us have them in the only place which really matters, namely, in the Bill itself? So let us have them back at the earliest possible moment.

The other matter, which is, perhaps, even graver—and it would be wrong for this to escape comment from this side of the Committee—is that there are in the regulations concerning close companies provisions which can be described only as penal, oppressive, harsh and unjustifiable. I have not the slightest doubt that because this description is the only description that can fairly and honestly be applied to those provisions, many citizens, business men and even politicians on the benches opposite in good faith believed that the Government had rather savage intentions towards private profit-making industry. It is only right that I should say it.

If that exaggerated view was taken of these provisions, the Government have only themselves to blame. [HON. MEMBERS: "Hear, hear."] I am not saying anything hostile to the Government, because I am a loyal supporter of them. [Interruption.] It is helpful to a Government to defend them from the more serious charge by making them plead guilty, however reluctantly, to the lesser charge.

There are two charges against the Government. One is that they intend harshly, oppressively and unjustly to deal with private companies, because that is how the wording of the Clauses of the Bill appears in the eyes of every sensible person who can read and understand. That is what the words mean if taken literally. If the Government were guilty of that charge, I should not be standing on these benches defending them.

The Government are guilty, not of that charge, but of a lesser charge of presenting these matters in the Finance Bill in a manner which is likely to be so understood, although I have not the slightest doubt, and I never have had, that the Government would make the necessary Amendments and corrections to put these matters in order. [Interruption.]

I do not know why the Chief Secretary should say that that is unhelpful. He can please himself. In the eyes of informed opinion, one possibility is that the Government will be convicted for these iniquitous provisions in the close company legislation. They should never have appeared. Informed opinion will convict the Government of having mistakenly, in their legitimate anxiety to get these things moving, put down these provisions in a form which had to be amended later, or it will convict the Government of the more grave charge of wishing to injure industry.

Mr. Diamond

My hon. Friend must have misheard a sotto voce comment which I made to myself if he thought that I said he was being unhelpful. What I said was, "Very helpful". I repeat that my hon. Friend's comments on this occasion, as on every occasion—

The Temporary Chairman (Sir Herbert Butcher)

I should be grateful if the hon. Gentleman would address the Chair.

Mr. Diamond

I beg pardon, Sir Herbert. I was only repeating that what my hon. Friend had said on this occasion, as on previous occasions, was most helpful. I only add that if he, with his great knowledge both of the law, and, in particular, of Income Tax law, has completely misread and misunderstood the Clause, it is quite understandable that other less well-qualified people should do the same.

Mr. Lever

I cannot ask for a more generous statement than that.

I do not want to be touchy about this, because I took it upon myself in advance of any assurances from the Government to tell everybody I knew within reach that since the Government are a fair-minded, reasonable Government, as I firmly and most sincerely believe them to be, and since my right hon. Friend the Chancellor is a fair-minded and reasonable man and his Chief Secretary has those qualifications and also great knowledge of the subject, all these matters would be put into order before we finished the drafting.

I am sure that when we come to deal with the Clauses on close companies, what now appear as threatening matters—not merely the onus of proof on Surtax and Income Tax, not merely the question of the tests for justifying coerced distribution, but, much more serious, matters like the definition of participators, the charging of loan interest to profits and matters of that kind—will be dealt with by the time that the Committee has finished its labours.

Mr. Daniel Awdry (Chippenham)

May I put this point again to the hon. Gentleman? If the Government do not meet the hon. Gentleman on these points, does not he agree that there is a quite strong case to postpone this Clause until they have been discussed over the next year?

6.30 p.m.

Mr. Lever

The hon. Gentleman is making hypothetical assumptions which are the reverse of those which I would make. I might just as well say to him that if, to my entire satisfaction, the Government meet the points which I have raised, right hon. and hon. Members opposite should apologise for the maligned intent so repeatedly and loudly assigned to the Government.

Irrespective of the example given by the right hon. Member for Altrincham and Sale, I would ask the Government to look again at the question of preference dividends and the penal operation of the Profits Tax in that regard. While I welcome the Chancellor's statement on overseas investment, I feel that he has gone a long way to help those companies affected by this new rate of tax. I should not have charged the tax in this way. I should have brought in a high rate of Corporation Tax and virtually no withholding tax and then we would not have had these problems about overseas companies and investment allowances. I wrote about this in articles before the election which, unhappily, did not appear to be as convincing as I thought they might be. As my right hon. Friend has decided on this kind of Corporation Tax, I think that he has demonstrated in the most effective and practical way that he is not hostile to overseas investment and is not narrow-minded or politically unable to see the difficulties.

I must say a few words about overseas investment. It is no good lamenting the lack of overseas investment in general without qualification. Although I am in favour of overseas investment, a precondition of it is that we make the necessary exports to finance it. If we do not have an export surplus, we cannot conceivably have overseas investment in balance for any length of time. All that we should be doing would be borrowing money with our left hand and lending it with the right hand. That is not a sensible policy.

What I lament is not so much the decline of overseas investment as the decline of exports which makes it impossible for the Chancellor of the Exchequer to allow the present level of overseas investment to continue. We are all in favour of overseas investment and exports, and we all lament the decline in exports and in our overseas investments, but we must get our priorities right, even in lamentation.

I am very grateful to the Chancellor for reducing the discussion to its proper level. As I said before, this is not a matter for ideological conflict. I should like to pay tribute to the right hon. Gentleman, since I have criticised pretty severely and without restraint many of the things that he has done. As I have said before, I am Vice-Chairman of the Wider Share Ownership Council. I am sure that those who attended the conference at the Treasury with me when we put our view to the Chancellor of the Exchequer would say that, by turning out with his entire Treasury staff, the Chief Secretary and the Financial Secretary, my right hon. Friend showed tangibly and by his manner of approach that he was a fair-minded and constructive Chancellor.

Do let us end this fairy tale about my right hon. Friend being the bogy of business. It cannot be in our country's interest that this concept should get abroad or that it should have wide and destructive currency. I am very grateful to him for his fine and moderate presentation of the Government's case.

Mr. David Price (Eastleigh)

The hon. Member for Manchester, Cheetham (Mr. H. Lever) has once again performed that act which he performs with such superlative skill, namely, to attack the Government and to rip their Bill to pieces, but to do it with utter political fidelity. It is something which many of us would admire in a distracted marriage. If more fighting husbands and wives were to follow the example of the hon. Gentleman, I am sure that there would be far fewer cases in the divorce courts.

Secondly, the hon. Gentleman went through a devastating list of criticisms of the Bill to such an extent that the intervention of the Chief Secretary made me wonder whether I was sitting in the Committee of Ways and Means or looking through the looking glass at the high farce taking place over the meaning of words. The hon. Gentleman, having gone through this devastating catalogue of criticism, proceeded to say, "But, of course, all this will come right". My right hon. Friend the Member for Bexley (Mr. Heath) intervened and pointed out that we had not yet reached the details of the Clauses in question, but the hon. Gentleman said, "My hope is eternal and so is my confidence in the Treasury Bench".

From the country's point of view, I sincerely hope that the hon. Gentleman's faith is rewarded, but I suspect that the odds are not in his favour.

Mr. Harold Lever

I expressed that hope only in relation to the close companies and not in relation to questions like the retention of profits in respect of which the Government's policy is fairly clear.

Mr. Price

If there is a complete reversal of Clause 72, I shall be delighted to shake the hon. Gentleman by the hand and to say that in one matter at least hope has been rewarded. Certainly, there is not much else left of this Government. As we go through this bad Bill which has succeeded a bad Budget, we reflect on the fact that this Administration, unlike good wine, does not improve with keeping.

One of the justifications used by the Chancellor of the Exchequer for introducing this Corporation Tax was the manipulation which, he said, had been going on under the old Income Tax code. My right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) made some observations on this.

May I put this to the Treasury Minister who is to reply? If the Income Tax code is so muddled, so imprecise and so imperfect, why have the Government based nearly all the rules for the Corporation Tax on the existing Income Tax principles as embodied in Clause 49? I remind the Committee of what subsection (1) of Clause 49 says: … the amount of any income shall for purposes of corporation tax be computed in accordance with income tax principles, all questions as to the amounts which are or are not to be taken into account as income, or in computing income, or charged to tax as a person's income, or as to the time when any such amount is to be treated as arising, being determined in accordance with income tax law and practice as if accounting periods were years of assessment. This is very relevant to the Amendment. I understood the Chancellor of the Exchequer to say that the existing Income Tax principles were unsatisfactory. Therefore, as he is basing his Corporation Tax on the current Income Tax structure, Income Tax principles and the Income Tax methods of assessment, if he is right in his charge, the whole matter must be sorted out again and a much larger Bill than this will have to be presented which covers the whole scope of the Income Tax Act, 1952.

For the Chancellor of the Exchequer cannot have it both ways. Either the principles of our Income Tax code are unsatisfactory and muddled and an evader's paradise, as he suggested—if that is so then there is every reason why the Government should support us in this Amendment to defer—or, if, on the other hand, they feel that the Income Tax principles are sound, as they have suggested in Clause 49, then that argument used by the Chancellor for introducing the Corporation Tax is entirely irrelevant.

The Chancellor said that overseas investment had to be more selective. He suggested to the Committee that a certain amount at least of our overseas investment to date had gone either into the wrong countries or into the wrong enterprises. The hon. Member for Birkenhead (Mr. Dell) was pleading for more information. Surely if the Government are to put a great five-year plan before the country they should be capable of answering the question I now wish to put to them.

In what countries, or in what fields of activity, has this country been having excessive overseas investment? Has it been in mining? Has it been in tea? Has it been in rubber? In what countries has it been? I believe this is a very fair question to ask, in response to the Chancellor saying that we should be more selective. It is right to ask in what respect we should be more selective. In what direction does he want to see us investing and in what direction he does not want to see us investing?

Or is it simply to be an injunction to invest less overseas? The argument of the hon. Member for Birkenhead seemed, broadly speaking, to be this: in the under-developed countries we do not get as good a return for investment as we do in the developed countries, and, therefore, we should be encouraged to put our money into the developed? Is that the argument of the Chancellor? May be it is a softening up for the final capitulation of the Prime Minister when he leads us into the Common Market.

The Chancellor struck me, in some of his comments on how overseas investment ought to be going, as imagining that we live in a purely free trade world where there are no political barriers to trade. The fact is that it is the experience of many of us, certainly on this side of the Committee, and, I suspect, one or two on the other, that many a company has had to invest abroad in manufacturing plant in support of its investment and in support of its current market there, not because it wanted to.

In the ideal world of no political barriers and no nationalism it would be reasonable to suppose that a firm could make its product cheaper in British and sell it, let us say, in Australia, cheaper than manufacturing it there; but I know from my own experience that this is not so in the world as it is. Let us take the case of Australia, where one had the choice, of either losing the market one had built up over many years, or investing out there. But one could more cheaply in Britain manufacture the particular product I have in mind, and ship it all the way to Australia, than produce it locally out there.

The Tariff Board in Canberra, however, was only interested in protecting indigenous infant Australian industry. This illustration is applicable over a whole range of other countries. Therefore, I insist that there is not a simple statistical correlation between exports from this country and the return on investment capital exported from this country. The thing is a good deal more subtle than that.

6.45 p.m.

The Chancellor made a great point of the previous Conservative Administration's inability in carrying out tax reform. I am not against tax reform, but I must confess to the Committee that the more I have studied tax reform the more I have found that one starts by being attracted to the idea, but the more one goes into it in depth the more one comes to the almost inevitable conclusion that most of the alternative taxes recommended by academics have at best only marginal economic advantages over existing taxes.

To my mind those marginal advantages are usually substantially outweighed by the confusion and uncertainties which they are likely to cause not only to the business community, but, I believe, even to the tax inspector himself. To my mind, changes in the structure of taxation must not only appear attractive to a senior wrangler, but they must also make sense to the ordinary businessman, to the ordinary taxpayer, to the ordinary accountant and to the ordinary tax inspector, and whatever may be true or not true in politics I believe that in taxation it is the case of the devil you know you prefer, because people deploy their arrangements over a long period of time on the basis of the current structure of taxation.

A further thought I have had on radical tax changes is that what most people mean when they say, "We want a radical change in our taxation system" is that they want to pay less tax. This is the element in which the country wants radicalism; they mean they want lower taxes, and if the Chancellor were offering business Corporation Tax at a rate of 10 per cent., whatever would be the anomalies and the nonsenses in it, we would all accept it because we would be paying really substantially lower taxation. So I would ask right hon. and hon. Members opposite to take in mind that when people do ask and agitate for tax reform it is really lower taxation they are agitating for.

None the less, I personally believe that there are certain fields in which it would be right to change some of our taxes—though it would be quite out of order, I fear, to pursue that theme on this Amendment. So I merely make the point that I do not think that this Corporation Tax is the right way to do it. In respect of this tax we on this side of the Committee—indeed, the hon. Member for Cheetham, too—are, I think, being a little unfair to the Chancellor of the Exchequer in critising his responsibility for this new tax—or, indeed, criticising any of his colleagues on the Treasury Bench. Because those of us who have studied tax reform proposals in the last decade or so have no difficulty in identifying the authorship of this new Corporation Tax. It is so clearly signed with the creative genius of Dr. Nicholas Kaldor. Those of us who have studied and taken seriously the minority Report of the Royal Commission have found there the blueprint for this new tax. I am not surprised at what has happened. I think it is unfortunate, though, that the harassed Chancellor of the Exchequer who has divided responsibility with the Chief Secretary for running the economy, and all the emotional family problems within the Government which that split responsibility must produce, has got to come here to defend this new tax.

I was much attracted to the idea of the right hon. Gentleman the Member for Orkney and Shetland (Mr. Grimond), that we should defer the study of this tax rather longer; it should be taken out of the Finance Bill and put into a separate Bill, that we should discuss it in a Committee to which the author of this tax could come to explain the many features which clearly have escaped, at this stage of play, the comprehension of the Treasury Bench.

I am not alone in my criticism. One can read it in any responsible newspaper. As the Committee will recall, it was the Economist of 1st May which headed its article on the Corporation Tax with these words: It is more and more apparent that Mr. Callaghan's new system of taxation is a mistake. Later in the article, we read this: The awful truth is that the most complicated tax change in recent British fiscal history is being introduced under an air of half expectation, even among some of its godfathers, that it may conceivably prove to be the most almighty danger". Well, Sir Samuel, this is Dr. Kaldor running true to international form. The Prime Minister, in one of those many advertisements that were endorsed with his photograph on the run-up to the General Election said this: We must streamline our tax system so that those who earn money will get a better deal. We welcome people getting reward for their work. The more one studies this Bill the hoarser is one's laugh at those remarks. My only complaint with my right hon. Friend's Amendment is that it is only to defer this Corporation Tax for one year. As far as I am concerned, in the form in which Dr. Kaldor invented it, the Corporation Tax should go permanently into limbo.

Mr. Christopher Rowland (Meriden)

The last time I spoke in this Chamber on this subject was during the Second Reading of the Finance Bill, when I discussed the effect of the Corporation Tax upon overseas investment. On that occasion I had the honour to be interrupted three times by the Chancellor of the Exchequer and, although he is not here at the moment, I should think that if I were interrupted three times tonight by the Treasury Bench I should have failed in my desire to convey my general approbation of the announcement made last night on this particular subject.

What the Chancellor has proposed is that the overspill arrangement should not only be extended in time from two years to three years in one category, and from five to seven years in total, but more importantly that there should be full relief for the first three years instead of a somewhat grudging partial relief for the first two years. I believe that the right hon. Member for Altrincham and Sale (Mr. Barber), in his speech earlier today, was grudging and churlish in not conveying the pleasure of people on both sides of this Committee at the concession which the Chancellor is proposing. I trust that as a result of this the Chancellor will find, however trying his candid friends may be, that they are preferable to his ungenerous opponents.

There are five advantages I can see at a quick examination of the Chancellor's proposals on this particular front. The first, and I think it is the most important one, is that he has given time for further examination of the long-term effects of this tax on overseas investment. Under the original proposals time was very limited, because even in the first two years the relief was not full relief. Now we have at least three years of full relief during which this subject can be examined more closely. It gives us time to decide what we can afford as a nation in this particular field. It gives us time to examine more carefully the rôle of private investment, particularly in the underdeveloped countries as part of our general aid programme. It also gives us, and this is very important, time to assess the importance of overseas investment in sustaining and in a sense protecting the market for British exports.

When I spoke on this before, the Chancellor suggested that I had not given enough facts to prove that there was a correlation. I said then, and I say again, that we need more facts. My hon. Friend the Member for Birkenhead (Mr. Dell) said this earlier and I was pleased to note that last night, speaking in the Commonwealth Affairs debate, the Prime Minister himself said: Within any given total of investment, there is an important distinction between direct investment, which creates new assets and which very often helps our exports, and that kind of investment which simply increases portfolio investment".—[OFFICIAL REPORT, 1st June. 1965; Vol. 713. c. 1650.] I believe that the representations which have been made from all sides of this Committee and outside are beginning to have an effect on official thinking. We need a real study to find out whether there is a connection between exports and investments overseas.

The position as it was three weeks ago during the Second Reading debate was, as I put it then, that we had sentence first and verdict afterwards. Now, as a result of last night's concessions, we have sentence suspended and verdict being determined. I think this is a significant advance.

The second reason I applaud what the Chancellor is proposing is that it now puts overseas investments on all fours with investment in this country for at least three years. We have had a long, almost theological argument about whether there was bias in favour of overseas investments, as the Chancellor has said, or whether it was neutral or whether he was instituting a new bias against overseas investment. Whatever the rights or wrongs of those arguments, I believe that as a result of last night's concessions the Chancellor has removed, for at least three years, the potential bias against overseas investment.

The third reason I welcome the proposal is that it will stop for at least three years the possibility of cheap take-overs of British assets overseas, particularly of companies which have tended, for various reasons, to distribute a high proportion of their profits in dividends. This is a threat which has been deferred for some years to come. My fourth reason for welcoming the proposals is that under the proposed concessions new investment will still be deterred because new investment will have no profit record on which overspill can be computed. I think the effect of this will be to make new investment, as distinct from existing investment, much more selective.

Fifthly, the Chancellor has begun to recognise that there should be some distinctions in the field of overseas investment between different categories of investment. He has made distinctions already in these proposals between direct investment and portfolio investments. Many of us have asked him to do that and now he is doing so. He has made another less important distinction, namely, between investment in Commonwealth countries and investment in non-Commonwealth countries. Now we have established there can be this degree of sophistication in the incidence of Corporation Tax I hope that the Chancellor, in the years to come, will feel free to move on to try to establish some distinction between investment which helps British exports and investment on which there can be very little evidence that exports are helped.

I believe that this distinction could be drawn. Clearly this is something which the Chancellor and his advisors will have to look into.

Mr. William Shepherd (Cheadle)

Will the hon. Gentleman say why a simple device of exchange control could not achieve all these aims? Surely it is not terribly difficult to do it by this method which is already well established and effective.

Mr. Rowland

If the hon. Member had been at the Second Reading debate when I was speaking he would have heard me say this. I suggested that there might be some direct controls which would have this effect. I am only underlining what I said before.

Having praised the impact of the Chancellor's proposed concessions, I would make three reservations. The most important is that the concessions will still be transitional. They are much better than they were and, in particular, they give us much more time in the opening three years to review the whole subject, but they are still transitional. What I hope is that by the granting of time we, on both sides of this Committee and as a nation, can decide whether or not we should go on investing to the same extent in the years to come. At the moment I reserve judgment on this. It is still transitional and not permanent and I hope that, if it is proved that it should be permanent, it will be made permanent.

My second reservation is that, perhaps by accident, companies which are increasingly successful will not get the full effect of their successes, because their relief will be granted on the three static base years. I should like to ask the Chancellor or his colleagues whether they would care to look at the possibility of a moving average on which relief could be based.

The third reservation, which relates to the second one, is that the proposal still hits new investment recently made but not yet come to full fruition, because there are no figures on which overspill can be granted. These are comparatively small points, but I trust they may be dealt with in future Budgets.

I have one or two comments to make about the presentation of the Chancellor's concessions. The document which hon. Members were given last night contains some references to shareholders. It says that there are certain companies operating overseas whose shareholders are likely to be adversely affected by the introduction of the Corporation Tax. It also says that companies operating overseas might find it necessary as a result to reduce their dividends, and this might cause hardship to the shareholders. Speaking from these benches, I was surprised to find such public solicitude for shareholders, because it is not only they who are affected by these concessions. I think that the main advantage of my right hon. Friend's proposal is that it helps the companies, as distinct from their shareholders, and this is a meaningful distinction in the modern world.

During my Second Reading speech I referred to the possibility that companies would continue to pay out dividends to the same extent as before to their shareholders, at the cost of cutting retentions. I think that it was the retentions point which worried me more than the dividends received by shareholders. Many of the companies about which we are talking employ vast numbers of people overseas. They are integral parts of the economies of the countries in which they operate, and it was in that sense, more than solicitude for the shareholders, that I was concerned that we may be embarking on courses which may be undesirable.

7.0 p.m.

My second small point about the presentation of the proposals—and this is not really my right hon. Friend's fault, but is due to the way in which the Press has treated it—is that there have been references to the Government giving away £60 million over three years in concessions. They are not giving anything away. They have only decided not to take it. I should not like to think that we had started giving money to shareholders in dividends, or to companies in retentions. Those are two small points on the presentation which I hope my right hon. Friend will bear in mind.

The right hon. Member for Altrincham and Sale referred to this proposal as a "dollop of transitional relief" in what I think was probably intended to be a deprecatory comment. I think that this is a major concession to the fair representations which have been made to the Chancellor by hon. Members on both sides of the Committee, and by people outside. As I trust that my right hon. Friend is going to be in office for many years to come, I trust also that he will treat with equal fairness the evidence, if evidence there be, that there should be permanent relief for overseas investment which can be shown to be of benefit to Britain. Now that in the space of two or three weeks these fair concessions are being made, I hope that in the space of two or three years further concessions will be made if they can be shown to be fair.

Mr. Henry Brooke (Hampstead)

The speech of the hon. Member for Meriden (Mr. Rowland) was a gallant effort to make the best of the Chancellor's last-minute concessions, but it left me with the impression that he was still seriously worried about the provisions of this Bill and what it might do to the economy if it were not further amended. I think that his anxiety is shared by the majority of those present in the Committee.

I go back to what the Chancellor said in his speech a couple of hours ago, when he stated that when a country was in balance of payments difficulties it was necessary for it to be selective in its overseas investment policy. I would have thought that that was so axiomatic a statement that it was almost a platitude. So far as I am aware there is no difference of opinion between the two sides of the Committee on the necessity, in present circumstances, to be selective in our overseas investment policy.

But what the Chancellor failed to show was that this Corporation Tax was in any way an ideal method of establishing selection. Nor did he attempt to answer the question put to him by my hon. Friend the Member for Walthamstow, East (Mr. John Harvey), who asked why it was necessary, in order to control future overseas investment more closely, to hit so hard at existing companies trading overseas. In this debate we have not so far had a trace of an answer to that question from the benches opposite.

To judge from previous speeches by the Chancellor, I gather he feels that up to now the tax system has been too favourable towards overseas investment compared with investment at home. In other words, he thinks that companies trading at home have not been fairly treated in relation to companies trading overseas, and, to correct this discrimination which he thinks he has detected, he means to punish those who are trading overseas. Surely what the Committee must have regard to is whether British companies trading overseas are treated fairly in matters of taxation relative to foreign and other competitive companies trading overseas.

It is no satisfaction to an oil, mining, or any other company to be told that a meticulous examination has shown that the taxation imposed on it must be assimilated in some respect with the taxation it would have to bear if it was operating in Britain, if the effect of that is to tax it more severely than similar companies, which are subsidiaries of American or other foreign concerns, are taxed. All these British companies are trading in highly competitive fields, and if the right hon. Gentleman cares about the future of the economy, he must have regard to that.

Nor is it enough for the right hon. Gentleman to reply that he must be performing an act of fairness because he is now seeking to assimilate our tax system to that in use in America and a number of other countries. What matters is the rate of tax, the application of the taxes, and the flexibility of the taxes. If anybody starts making a serious comparison between the new system of company taxation embodied in the Bill and the system of taxation to which American and other foreign companies are subjected, he will find that there is a rigidity and a severity in the Bill which is by no means matched by the taxation imposed on foreign companies which will be competing with ours overseas. This is the essential point, and this is the point to which, I hope, the Committee will give careful regard in our future debates.

I propose now to address myself directly to the Amendment and to tell the Committee why I shall vote wholeheartedly in favour of it, so that there may be longer time for the Government to think. We must not concern ourselves only with what British companies will do, and how they are going to fare under the Bill. There are many foreign-owned businesses in the United Kingdom. We have here many high-profit-earning companies which are subsidiaries of American and other foreign companies.

It seems to stand out a mile that, the moment this Finance Bill was published, any alert foreign-owned company in this country will have ordered its tax advisers to study what the effects of the new taxation system on it would be likely to be, and how it could lessen its tax liability. In other words, it will divert its energies to seeing whether it can manipulate its affairs so as to reduce its tax liability. In his speech today the Chancellor took great credit for his argument that the Corporation Tax would discourage manipulation. But in this field it will encourage it. So far as I can see, the subsidiary of an American or other foreign company trading in this country will be able under this Bill to attract to itself specific tax advantage if it changes its status from that of a subsidiary to that of a branch of its parent company. At present, as a subsidiary, about 56 per cent. of its profits is payable in Profits Tax and Income Tax. If it converts itself or gets its parent company to convert it from a subsidiary into a branch, the only United Kingdom taxation to which it will then be liable will be Corporation Tax at a rate between 35 and 40 per cent.

That means that, if it makes this change, it will very substantially reduce its liability to United Kingdom taxation. I cannot tell—nobody but the Inland Revenue can tell—what will be the loss of revenue to the United Kingdom Exchequer if every foreign-owned company in this country sets about making this change. Will it be £15 million, £20 million, or £25 million? Of course, the shareholders elsewhere will have to pay tax to their own Exchequers, but the United Kingdom Exchequer will lose. I would certainly argue that we should postpone the coming into force of the Corporation Tax for a year until we know what alternative and additional taxation the Chancellor proposes to impose on British citizens, in order to make up for this large loss of tax from foreign companies which, by this Bill, he is jettisoning.

This concerns, of course, not only loss of tax. The Chancellor said that the basic consideration for the Committee must be our attaining a favourable balance of payments. If he is throwing away tax hitherto paid by foreign companies in this country, that is not only a loss of many millions of pounds to the Exchequer; it is a loss of many millions of pounds to the balance of payments. On that account, too, the Committee deserves an explanation of the special action which the Chancellor intends to take in order to seek to remedy the direct damage which he is doing not only to the United Kingdom Exchequer but to the United Kingdom balance of payments by these ill-considered changes.

Mr. William Baxter (West Stirlingshire)

I think that there is a great deal of validity in the point made by the right hon. Member for Hampstead (Mr. Brooke). I am not in a position to say whether the Chancellor has this in mind when framing his tax proposals, but I know that this advantage to a company in this country which is converted into a branch, rather than a subsidiary, can work both ways. The advantage could be not unlike the advantage which Northern Ireland gives to industrialists seeking to set up industries in that country. As a representative of an area now scheduled under the Local Employment Acts, I would say that if American or French industrialists could be attracted into the area and some other of our depressed areas by special tax concessions, it might be a good thing in the long run.

Mr. J. Bruce-Gardyne (South Angus)

Would not the hon. Member agree that the Chancellor is doing precisely the opposite by removing or shading down investment allowances which would attract firms into areas in Scotland like those which he and I represent?

7.15 p.m.

Mr. Baxter

I am answering the point made by the right hon. Member for Hampstead, by showing that if firms altered their definition of companies in this country when this method of taxation is brought in, it could work both ways. I think that the right hon. Member recognises, as he has said, our grave problem of the balance of payments. There can be no doubt that it must be brought into focus, irrespective of how we do it. We must try to bring the balance of payments to a more realistic state of affairs. If the curtailing to some extent of the outflow of money for the industrialisation of other parts of the world would help, it seems to me that it might be a very good thing.

If this tax had been introduced some years ago and investments in overseas countries had been made more selectively than they have been in the past, certain industries which I seek to represent would still be in existence. They would have been helped if a more selective method of promotion of foreign investment had been operating. I would illustrate the point by instancing the foundry industry, or the clothing industry or cotton mountings.

The right hon. Member for Bexley (Mr. Heath) was President of the Board of Trade when I took up one of these problems with him. The problem was that financiers from this country had financed the establishment of a business in Australia and New Zealand. Because of this, the business, which used to be in my constituency, has gone out of existence. This has happened in the manufacture of clothing for India, that of shawls for the Indian market. The Banton Mill operated for many years, but when the industry, financed by British capital, established in India itself—there may be some justification for this—the people of that village ceased to have jobs.

Sir Arthur Vere Harvey (Macclesfield)

Is not the hon. Member taking a very narrow view of the whole issue? He quoted Australia, but if B.M.C.—or Nuffield as it was until 12 years ago, when it started making motor cars—had not gone to Australia, General Motors would have had all the business. Remittances have come back in the form of dividends and orders for equipment worth considerable sums. The hon. Gentleman cannot draw the conclusion that because his constituency lost a foundry and it went abroad, that is a bad thing for the country. France or America may have set up a foundry and Britain have got nothing at all.

Mr. Baxter

I cannot agree more. It is true that this must be balanced, and I would be the last to say that we should not have overseas investments. But I would suggest that this should be a little more selective than it has been in the past. It is not unreasonable to expect a Government agency to do some research and give some advice as to the desirability or otherwise of certain industries being established—

Mr. R. Gresham Cooke (Twickenham)

rose—

Mr. Baxter

I had not finished with the previous interruption. It might not be at all unreasonable, but I agree that this is not what the Chancellor has said. One of the things which disturbed me about his speech was that investors have to look for the most profitable investment.

Sir A. V. Harvey

Is the hon. Member saying that the Government—Whitehall—should be the agency to advise which industries should go abroad? If that were the case, the country would be bankrupt in five years.

Mr. Baxter

That is a matter of opinion. When I wanted a development certificate for certain developments in my business, I had to go to the Board of Trade to justify it. Every firm which seeks to develop in Britain in the development areas has to go through this mill of going to the Board of Trade in London. Even we in Scotland have to come to London. I do not say that this is necessarily right or wrong, but if there are faults in the method we adopt for the exportation of money—whether they are in the Board of Trade or the Federation of British Industries—I think that they can be overcome.

Whether it will be very profitable should not be the only criterion of the development of a business abroad. Some financiers find it more profitable to develop abroad. Many industries in this country, including some in my constituency, have gone to the wall, and this has necessitated great financial help from the Government—a vicious circle—to try to establish new industries in those areas.

Sir Harmar Nicholls

The hon. Member is surely unfair when he uses the analogy of the industrial development certificate. That certificate recognises that it may be introducing inefficiency into a business, but the Government are prepared to do that to overcome a domestic social problem such as unemployment in an area. But to inject inefficiency when competing with other industries abroad would be the height of folly.

Mr. Baxter

I am astonished to hear any hon. Member suggest that the basis of the Local Employment Act is bringing inefficiency into business by directing certain industries to areas where it is necessary to provide work.

All these questions, domestic or international, must be related to a balance of what is in the best interests of the nation. I do not believe that the only criterion of foreign investment should be the profitability of the investment. It may be in the best interests of the nation in the long run that certain investments abroad, which do not show an immediate profitability, should be encouraged. It is not sufficient to make profitability the only criterion of foreign investment from the national point of view. From my own point of view as an investor, of course, it is not unreasonable, because I want as much profit as I can get.

By and large we must take whatever steps are necessary to deal with the balance of payments. I believe that the Chancellor is trying, in the Finance Bill, to deal with the all-important question of the balance of payments.

Sir T. Brinton

One of the stated objects of the Corporation Tax is to encourage retention and to discourage the paying out of dividends. Some hon. Members have queried this principle, and I am inclined to agree that it is a false principle. When we are interfering with the overall conduct of business in this country by insisting on higher retention, we are diving into a very complicated subject.

The question how much a company ought to pay out is initially one for decision by the board of directors, and there are many instances in which a company ought to pay out very heavily. Let us take the example of a limited company which has the job of being management consultants. What need has the company for heavy retention? The capital of the company is in their heads. It is not primarily in fixed assets, expensive machinery or buildings. They do not require heavy retention. For the general economic good of the country and the benefit of the shareholder, such a company might reasonably be expected to pay out nearly the whole of its annual profit.

At the other end of the scale we have the type of enterprise which requires heavy fixed investment and possibly heavy working capital if it is to expand. By the nature of its business, it requires heavy retentions. This is particularly true in a developing industry in which the type of machinery is changing quickly and obsolesence is rapid. Retention would be advisable.

The Government have decided that it is a good thing to retain. In some instances this is so, but in others it is not. We cannot have a fixed rule about it, and a system of company taxation should not seek to encourage retention or to encourage pay out. It should hold the balance even, as the old system did.

In dealing with close companies the Government have made a nonsense of their own logic, if logic it is. They have set a standard for close companies by which the pay-out should be 60 per cent. I must assume that they regard it as a reasonable standard. The Chancellor gave many reassurances that this proposal would not be administered with an iron hand, and we must see how it is administered, because the method of administration could well vary from time to time according to the temper of the Chancellor or of any of his successors. In the meantime, we have this standard. Apparently the retentions which are so good for non-close companies become very bad for close companies.

I am in favour of holding the balance evenly between retention and payout, and I do not favour providing tax incentives one way or the other, because of the difference in structure between various types of enterprise. But if there were a case for encouraging retention in one area of enterprise and discouraging it in another, surely the Chancellor's standard ought to be set exactly the opposite way round to that in which he has decided to set it. Surely the companies which require retention are the small companies which are unable to go to the market for increases in capital. Surely they need to retain more of their profits than do large companies.

This would be the logic of the situation if we were not bedevilled the whole time by the obsession of the Chancellor and his advisers with the idea that somebody may get away with some tax. Very much of the Bill has been cast by people in the frame of mind of saying, "Find out what George is doing and stop him doing it". This is the wrong attitude of mind for a responsible Minister to have when managing the finances of the country.

Sir Douglas Glover (Ormskirk)

Did my hon. Friend use the name "George" on purpose?

Sir T. Brinton

It is part of an old family joke which existed long before the unfortunate age in which that name achieved such prominence.

If we compel close companies to pay out 60 per cent. unless they can show good reasons why they should not do so, we shall handicap their operations considerably. We have a proposed system of taxation which states that money which is ploughed back into a company will have borne tax of 40 per cent. whereas money paid out will have borne in total a tax of 64 per cent. which is a very heavy incentive to retain. But a close company is discouraged from doing so.

I intervened during the Chancellor's speech and my intervention was, I regret to say, excessively long, because I was trying to obtain enlightenment on a difficult point. I am not certain that the Chancellor or the Chief Secretary grasped the point which I was making. I am a director of a close company, a private family company, and we have had experience of the present method of administering Surtax. The situation now in relation to Surtax directions on private companies is that the Commissioners, if they consider that too little has been paid out, may say to the company, "You have paid out too little. We shall surcharge you". But they can surcharge only on the amount which they maintain that the company should have paid out—not on 100 per cent. of the profit. This rule was introduced when the Surtax umbrella was taken away by the Chancellor in 1962. Companies are no longer liable, as they used to be, to a surcharge on the whole of their profits.

Mr. Diamond indicated dissent.

Sir T. Brinton

That is so. I have been the toad under the harrow.

The Chancellor suggested that he is giving some concession by limiting the liability to a direction, both for the purposes of Surtax and for the purposes of Income Tax, which will be chargeable to 60 per cent. of the profits. In practice he is giving no concession at all, since it is extremely unlikely that many companies would be asked by the Commissioners to pay out more than 60 per cent. of their profits.

7.30 p.m.

Mr. Diamond

It might help the hon. Member in his argument, which I followed on his earlier intervention, if I confirmed my rather discourteous shake of the head. The 100 per cent. still applies and has never been altered. The removal of the umbrella did not affect the Special Commissioners' powers, which were related to 100 per cent. and not to part of 100 per cent.

Sir T. Brinton

This is a very important point, and I must pursue it. In theory, if the Special Commissioners considered, and were prepared to state case, that 100 per cent. profits should have been paid out, they could surcharge on 100 per cent., but is that very likely or will it happen in many cases? Does the reduction to 60 per cent. mean that a one-man company could get away with retaining 40 per cent. profits in the company? I imagine that that is not the case. It is important.

Mr. Diamond

It is an important point. I hope that it will be convenient to the Committee if I deal with it at some little length when I wind up the debate.

Sir T. Brinton

I should like to know how it will work and how the rule will be administered. It appears that in future companies will have to establish their right, by stating their case, to retain more than 40 per cent. of their profits. This was not the case before now. Companies distributed what they thought was the right distribution and were subject possibly to the Commissioners' demanding that they should pay out more. But the onus was on the Commissioners to establish a case, in reason, for a higher pay-out. In future the company will have to establish a case for a lower pay-out. This is a handicap to the smaller private company and the close company.

The close companies will include many which thought themselves well beyond the reach of the tax inspector in making their investment decisions—because that is what it amounts to. The Revenue will have ever-increasing influence in the conduct of the company's financial affairs. I am certain that this is not welcome to my hon. Friends, and I do not think that it should be welcome to hon. Members opposite. This is an attempt to separate companies from their shareholders and to regard the shareholder as quite incidental to the existence of the company, as though the company itself had some physical existence apart from the people who compose it as members.

This is indicated by references, at several places in the Bill, to what are normally known as members of a company as "participators." I draw attention to this, because it underlies the philosophy behind the Bill. In future the shareholders, the owners of the company, are not to be regarded as owners but merely as a not-very-desirable element in the conduct of the company's affairs. This is putting a wrench in the door which will finally open to the suggestion that companies belong either to those who manage them or to those who work in them, or preferably to the Government, and certainly not to the people who at present are the owners. I draw attention to that. It may appear a small point, but I believe that it illustrates the whole basis of thought behind the Bill.

Having already discussed Capital Gains Tax, we are now discussing Corporation Tax. Both taxes are designed to force the company and the shareholder apart and to force a different outlook on the part of companies. The Corporation Tax will hit the smaller and close companies. In this connection, I need only remind the Committee of a rather tactless intervention that was made at an earlier sitting by, I think, the Economic Secretary. When one of my hon. Friends said that the Corporation Tax would hit the family company, a Government Treasury spokesman commented, "A very good thing, too". That is what lies behind this legislation.

Mr. A. E. P. Duffy (Colne Valley)

I will not follow the main theme of the hon. Member for Kidderminster (Sir T. Brinton) because I do not believe that the real test of the Corporation Tax is its effect upon the small or close company. The real test is the effect it will have on the efficient company, and I am sure that many small firms and close companies are efficient and progressive.

I will deal with the possible impact of the Corporation Tax on the efficient and progressive company. While some of the points with which I will deal have been raised in the Committee, attention should be drawn to them again, particularly the suggestion of my hon. Friend the Member for Westhoughton (Mr. J. T. Price) that Amendment No. 270 is nothing more than a wrecking proposal.

When my hon. Friend made that remark it was indignantly denied by hon. Gentlemen opposite. However, when the right hon. Member for Orkney and Shetland (Mr. Grimond), in one of his typical speeches, in which, after endeavouring to make some of my hon. Friends feel slightly awkward, he turned to the Opposition benches and asked whether the Conservatives would have introduced a Corporation Tax if the Amendment were accepted and if they had regained power I did not hear a single "Yes" from the benches opposite when the right hon. Gentleman asked that question. It is fair to say, therefore, that it is a wrecking Amendment.

Mr. Stratton Mills (Belfast, North)

Surely one can accept the principle of the Capital Gains Tax without having to put down an Amendment?

Mr. Duffy

I am not talking about the Capital Gains Tax.

Mr. Stratton Mills

The same thing applies.

Mr. Duffy

Not necessarily. I agree that one can support the principle of such a tax in that way and I could develop this point at some length. I hope that the hon. Gentleman will be good enough to listen to the case I am making.

Mr. Gower

Would not the hon. Gentleman agree, if he considers that the Government will be in office next year, that it would be no great hardship to them to defer the introduction of this type of tax so that longer consideration could be given to it? I trust that he also realises that when the right hon. Member for Orkney and Shetland (Mr. Grimond) asked whether a Conservative Government would introduce such a tax my hon. Friends obviously could not commit a future Government. The hon. Gentleman knows quite well that that is the position under the terms of our constitution.

7.45 p.m.

Mr. Duffy

I prefer to take the view propounded by the right hon. Member for Orkney that there is nothing definitive about this innovation; that there is nothing binding about it, except its introduction. Its effect could be altered by any future Government and I should have thought, in view of that, that there might have been a little more enthusiasm on the benches opposite for some form of Corporation Tax.

My right hon. Friend the Chancellor was right when he said that because the present tax system is neutral—as between the company and the individual, savings and spending, domestic and overseas investment, and so on—there is an overwhelming need for a root and branch reform of the tax system. Some of the reforms are obvious, but we must consider this matter not only in the light of what is said in the Committee but in the light of what is being said outside about our discussions, about the intentions of the Government and the criticisms of those intentions, because I regret to say that much opinion outside is based on misrepresentation, for which some hon. Gentlemen opposite have been responsible.

We need reform to provide greater flexibility in our tax system for Chancellors of the Exchequer. We need reform to stimulate growth, because Britain has an inefficient asset productive structure. Among the developed countries we are responsible for one of the lowest percentages of investment. As most hon. Members recognise, there must be a correction of the bias in favour of overseas taxation. However sensitive some hon. Gentlemen opposite may be about overseas investment, they must accept this need. There is an obligation on the Chancellor—and the same could be said of a Conservative Chancellor had the Tories won the last election—to check the flow of capital overseas, especially in the face of our chronic balance of payments weakness.

My main concern is to raise a few points on the specific issue of growth. The possible effect of the Corporation Tax—and I concede that this is theory; I mention that so that hon. Gentlemen opposite may not find it necessary to intervene at this point—and, one hopes, the total effect of it will be to make investment by individuals less attractive and investment by companies more attractive. This obvious doubt arises. Are businessmen sufficiently rational economic creatures to realise what this is all about and what the author of the Clause—I use the word "author" since hon. Gentlemen seem to insist on its use—has in mind. In other words, will business know how to use the differential tax system to its best advantage? In cases where business men cannot use it to their best advantage, should we be concerned about their survival?

I asked this question in a slightly different context on Second Reading. It needs to be asked again. As well as considering whether business men who cannot use the Corporation Tax to their best advantage should gain our concern for their survival, so we must consider whether companies which retain profits are necessarily efficient and expansionist. Or will it, as the right hon. Member for Bexley (Mr. Heath) put it on Second Reading, make for the survival of the fattest? [HON. MEMBERS: "Hear, hear."] I understand the continued support for that doubt, but no research shows a correlation between the rate at which companies retain profits and the rate at which they grow. I should be interested to know from hon. Gentlemen opposite about any research which supports their view.

Neither is there any evidence of any correlation between distribution and growth. I should like to say that there was, because that is the argument I wish to support. Experience in this country since 1958—compared with experience before that date; and I take the year 1958 in view of the change that occurred in that year—as well as German experience suggests the tendency for companies to grow out of their own resources. One can reasonably argue that the balance of advantage lies at present with the Corporation Tax from the point of view of stimulation and growth.

To complete our disillusionment in the concept of all business men being economically rational men, we were told recently by the National Institute for Economic and Social Research, as well as by N.E.D.C., that when most directors of companies are deciding whether to invest, it is usual, except in the most sophisticated companies, for them to calculate returns on a pre-tax basis. In other words, they ignore taxation when making investment decisions.

The next question, therefore, is one which hon. Gentlemen opposite must ask themselves. Are these types of business men—those with real responsibility for the management of the economy and, therefore, for the standard of living and future of the country—to be defended by hon. Gentlemen opposite, especially at the expense of reform?

Mr. Gresham Cooke

The whole basis of the case against business men which has been put forward for years by certain hon. Gentlemen opposite and others is that they spend too much time looking into tax matters; that they waste a great deal of time doing that. I cannot, therefore, understand why the hon. Gentleman is saying that they do not pay sufficient attention to tax matters.

Mr. Duffy

That may be so, but not necessarily for the right reasons. I believe that progressive business men are not afraid of the Corporation Tax and are able to cope with it.

Mr. John Biffen (Oswestry)

Would the hon. Gentleman say what there is about the Corporation Tax proposals which will, as it were offer specific and selective encouragement to what he calls the efficient business section of the community?

Mr. Duffy

I was not basing my remarks on the business men in the efficient business section of the community. I will not be thrust into doing so. I was merely pointing out that efficient business men will see the possibilities which the Corporation Tax will open to them for investment.

Mr. Biffen

Would the hon. Gentleman recall that he prefaced his remarks by saying that he wished to concern himself not with the small or large companies but with efficient companies?

Mr. Duffy

I did, but I also want to see some of the smaller and close companies coming into this category. I want to see them efficient as well. I am concerned not only with efficient companies and efficient businessmen but with the help that the Corporation Tax can give to them to stimulate efficiency and create growth.

I put it to hon. Gentlemen opposite that some of them give the impression—I hope wrongly, because it is a damaging impression—that they are anxious to preserve the inefficient businessman. Similarly, some hon. Gentlemen opposite are saying that there is no case for selectivity in overseas investment. I regret that the right hon. Member for Hampstead (Mr. Brooke) is not in his place, because he seemed to think that this was such an easy matter that the concept bordered on complacency.

So far as I know, there is no machinery in the sterling area for selectivity; that exchange control does not begin to operate except at the borders of the sterling area. I should have thought that there was an inescapable obligation on any Chancellor to do something about overseas investment, and that is the purpose of Clause 79. I will not say more about that. Enough has been said on it by my hon. Friends, some of whom speak with considerable authority.

Sir Harmar Nicholls

The hon. Gentleman says that his hon. Friend the Member for Birkenhead (Mr. Dell) spoke with authority, but his hon. Friend, who first raised the issue, spoke with authority about I.C.I. He said that as far as his knowledge went, and it was intimate, that company had passed that test, and the answer was favourable. He only thought from a superficial look that the result for the others would be unfavourable. In other words, the hon. Gentleman's authority passed the test; it was only his guesswork which failed.

Mr. Duffy

I believe that I said "with some authority", because I am sure that my hon. Friend would be the first to accept his limitations—and there are considerable limitations when one speaks of overseas investment.

Outrageous claims have been made today and previously about some aspects of investment. Those claims cannot be sustained. The best work done on the subject, and the best-known research into the possible effect of investment, suggests that none of us can speak with precision for or against overseas investment. That is as far as I want to go. In the circumstances, I think that my right hon. Friend's announcement last night of his intention to extend the transitional period will broaden the basis and widen the scope of operation. As the right hon. Member for Orkney and Shetland has pointed out, we are given a further period in which to think about these matters.

Looking at the strategy of the Corporation Tax, it must be remembered that this tax is not altogether out of line with some international practice. It is appropriate to the needs of our economy. Nevertheless, I trust that my right hon. Friend will look very carefully at any steps he may take in the near future that might blur the outline of this strategy.

It is not merely that it is important that the country should see what we are trying to do here, and that the trade unions should see what we are attempting so that my right hon. Friend the First Secretary can get his package deal and his incomes policy moving, which is something of which none of us can be unmindful. It is also important that my right hon. Friend should bear in mind that any steps he takes that might smack of concession are likely to be misrepresented by the party opposite as weakness. Some newspapers have described last night's announcement as a retreat, but the same newspapers will demand that my right hon. Friend should go further in that direction; in other words, retreat still further.

Last night, we have had an example of the insistence with which the Opposition treat every such move or concession as a weakness, when the right hon. Member for Bexley immediately complained that the Committee would have less than 24 hours in which to consider my right hon. Friend's statement. We know, of course, that the announcement relates to Clause 79, which we shall not take before Whitsuntide. It is therefore possible that we shall have, not 24 hours', but three weeks' notice.

It is all of a piece with the carping criticism coming from the other side, and notably from the Opposition Front Bench. The right hon. Member for Altrincham and Sale (Mr. Barber) complained of the number of Amendments there have so far been. One would have thought, as the Leader of the Liberal Party said, that the Conservative benches would have welcomed the Amendments, and would have recognised our constitutional function to get or give Amendments where they are possible and desirable. One might think of it as being one way of showing our productivity.

The right hon. Gentleman complained that the Amendments were making for confusion, but some of the confusion—perhaps most of it—that may have come forth so far has arisen from the irresponsibility of right hon. and hon. Members opposite, some of which irresponsibility has more than bordered on the mischievous. I was strikingly reminded of that this afternoon when my right hon. Friend the Chancellor of the Exchequer, answering a query by the Leader of the Liberal Party, assured the Committee of his belief in the significance of profit, and was immediately jeered at by the other side, notably by the hon. Member for Harwich (Mr. Ridsdale). I do not know of any hon. Member on this side who does not share my right hon. Friend's view, and I should have thought that for national reasons hon. Members opposite would have been glad of such an assurance. Instead of that, my right hon. Friend is misrepresented.

Finally, we are asked now to discuss this insincere Amendment No. 270 in which my hon. Friend the Member for Westhoughton has shown—and the right hon. Member for Orkney and Shetland confirmed it—the Opposition do not really believe. They are not interested in the Corporation Tax, which means that they are not interested in reform.

Mr. John Harvey

The hon. Member for Colne Valley (Mr. Duffy) spoke of the lack of interest on this side of the Committee, but he should have looked at his own benches—

Mr. Duffy

rose—

Hon. Members

Sit down.

Mr. Harvey

I hope that the hon. Member will not mind my not giving way, but there are a large number of hon. Members who wish to join in the debate, and I hope to be able to satisfy him that we are by no means disinterested.

In the prelude to the General Election campaign, the Labour Party, in its manifesto, said: Labour is ready. Poised to swing its plans into instant operation. Impatient to apply the New Thinking that will end the chaos and sterility. The whole of our complaint about Corporation Tax, and about so many other aspects of the Budget, is that it is not new thinking, but no thinking.

We are faced with a situation in which the Chancellor is having to bring in a number of Amendments as the debate proceeds. Whether or not the hon. Gentleman refers to them as concessions is irrelevant, because the thinking is being done—to the extent that it is being done at all—as we go along from day to day. That is the reason for this Amendment, suggesting that the whole exercise should be put back for at least 12 months, so that the thinking the nation was led to believe had been done, may in fact be done, before we plunge into any innovation.

My concern is primarily with the effect of the tax on overseas investment and on overseas trade. This afternoon, the Chancellor of the Exchequer said that not all overseas investment is desirable. That may well be true, but who is to decide what is and what is not desirable? A great deal of overseas investment is necessary, let alone desirable, to our own future interest—investment in raw materials that are vital to our industry; investment in oil—that is certainly vital to our future.

Whatever arguments we may occasionally have in this Chamber about the importance of coal to our island economy, nothing alters the fact that oil is of increasing importance, and that for any party claiming to be a party of the future the importance of oil must be undisputed. Therefore, the securing of adequate reserves of oil all over the world for our own interests and the interests of British companies involved in international trade is absolutely vital.

8.0 p.m.

Our complaint of necessity, therefore, is that the Chancellor, in being worried about the degree of current overseas investment, is using the same blunt instrument on all types of investment, whether they exist already or whether they might be the investments of tomorrow. He is using the same blunt instrument on the desirable and the necessary as on what he may conceive to be the undesirable. But what may seem undesirable to us at any given moment may be very desirable to another country.

The Federation of British Industries, in a recent report, said: The F.B.I. inquiry confirms the all-important economic facts that economic growth is a process of increasing interdependence with other economies; that a country's prosperity depends on the prosperity of other countries, and that its own self-interest, let alone is international obligations, must now preclude national solutions of economic problems which do not take full account of their effect on other countries. It may well be that some of those investments which today seem less desirable because there will be no great immediate return on them are, nevertheless, socially the most desirable investments that we could be making. That is especially true of investments in developing countries. One hon. Member opposite argued that investments in developing countries have been going down in recent years. But the question that is also relevant is the total stake that Britain has in the investment field in so many of these countries, and it is colossal.

We must remember, therefore, that we are looking to a future in which the expansion of wealth in these countries will be fundamental to the expansion of our own wealth here. An American said two or three years ago, "Anyone who invests in India today is a sucker and anyone who does not invest in India today is a sucker", and both propositions can be argued with equal validity.

The Chancellor spoke of Corporation Tax applying in many countries of the Commonwealth, such as India and Australia. But he did not tell us how Corporation Tax is combined with private taxation in those countries. We are concerned at the hurried introduction of Corporation Tax by the Government who are seeking to give the impression that they have done their thinking and that they really have plans to put before the nation which are novel, but which have not been thought out, which cannot do what are claimed for them and which may do great damage.

In substantiation of that let me quote from the Economist: 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. There is the danger therefore that Britain's most valuable scarce resource—its capacity for change—has been recklessly squandered. It is because many of us on this side of the Committee, and I suspect quite a few on the other side as well, believe that the Government have not thought out the implications of this tax, are altogether in too much of a hurry to apply it, have not thought out the damage that it could do to the economy, and that there are no landmarks by which to be guided in formulating this tax that this Amendment is the right Amendment and the exercise should be put off for at least 12 months.

Mr. Bruce-Gardyne

The tax which we are discussing has been attributed to various parental hands. One of my hon. Friends suggested that we had only to look to Mr. Kaldor. Of course, there is no doubt about the authorship of this tax. But we have to ask ourselves why, in view of the occurrences to other Governments whom this gentleman has advised in the past, the Government should have shown such a masochistic tendency as to accept his advice on this occasion.

I suspect that the reason is the one suggested by the hon. Member for Colne Valley (Mr. Duffy), that the attraction of this tax was that, together with the Capital Gains Tax, it would constitute a double-barrelled attack on the investing public and on the shareholder and thereby make it easier to satisfy the rather old-fashioned views of the T.U.C. and obtain their agreement to an incomes policy.

Mr. Duffy

I am sure that the hon. Gentleman would not want to misrepresent me. I did not mention the Capital Gains Tax. I was thinking specifically of the Corporation Tax and I was thinking then, as I am now, that the Corporation Tax could play a positive rôle. I would not want it to play other than a positive rôle in policy making.

Mr. Bruce-Gardyne

I know that the hon. Gentleman thinks that the Corporation Tax has a positive rôle to play. This is where we disagree. I agree with the hon. Gentleman that it was part of the Government's device for obtaining consent to an incomes policy which has already virtually disappeared without any trace, and this tax is all we are left with.

I felt that the initial reactions of many leading businessmen, from the F.B.I. and elsewhere, to this Budget were astonishingly ignorant and naïve. However, they have soon learned its real implications. As my hon. Friend the Member for Kidderminster (Sir T. Brinton) has pointed out, this tax is designed to divorce the company from its shareholders, to insulate the board room decisions on investment from the judgment of the Stock Market, and to discourage the public firm from raising the money that it needs from the market where its investment record and judgment can be fairly and properly tested.

The position in the case of the small companies, with which my hon. Friend the Member for Kidderminster was particularly concerned, is precisely the opposite. We have had today an assurance from the Chancellor that he does not really mean to hurt and that, in fact, in some extraordinary way this 60 per cent. requirement for distributions is a concession for the close company. I think that we had the final answer to this from the hon. Member for Manchester, Cheetham (Mr. Harold Lever). As I understood it, his argument was that he felt that he should vote for the Government tonight because he was satisfied that they had not the faintest idea what they were doing. This is absolutely correct.

The Chief Secretary said on Second Reading that he would like to emphasise that a small growing firm has virtually no other means of increasing its equity capital except from retentions. It is particularly the young growing firm that needs this help, and therefore I suppose it has now to distribute 60 per cent. of its retentions. The Chief Secretary appears to be shaking his head. We have been told that there will be a certain amount of rethinking about this, and high time, too, but, unfortunately, meanwhile, the whole of industry and the City are plunged into uncertainty because we do not know how the various Clauses affecting close companies will be adjusted as these discussions proceed.

The sort of results that we can expect are already all around us. I noticed the other day that a substantial public company, Wiggins Teape, decided that it had to postpone its annual general meeting because it did not know where it stood in its tax position as a result of the confusion created round the Corporation Tax.

Mr. Diamond

Does the hon. Gentleman suggest that confusion should continue for another year in accordance with the Amendment which he is supporting?

Mr. Bruce-Gardyne

No, I suggest that we postpone the application of the tax for a further year so that hon. and right hon. Members opposite can get their ideas sorted out and not come here with ideas which, clearly, they have not had time to think about properly.

Earnings Investment Trust put out a statement the other day explaining that not only had it to postpone its annual meeting, but it could not even declare an interim dividend because it was in the position that unless it distributed 90 per cent. of income it was liable not to qualify as an investment trust whereas if it did distribute it, because of the increase in the distribution, it would be caught for Corporation Tax a year earlier. In other words, it is a case of, "You double your money and you takes your choice".

There is another aspect of this matter which is particularly worrying. We have all drawn attention to the appalling complications of the Bill. The large company can employ accountants and others on its staff to advise it through the intricacies of the Bill, but the small company faces great difficulties in dealing with these complications. I was talking the other day to a constituent who runs a small private company. I said to him, "I suppose that you qualify as a close company within the terms of the Budget". He said, "Yes, I think we do, but I have discussed it all with my accountants. We have been used to the dangers of changes in the Surtax. It makes no difference to us." I said, "Of course it does. Whereas, before, the onus of proof rested with the Inland Revenue inspector it now rests with you."

It may be that hon. and right hon. Members opposite cannot understand the Budget themselves, but it is true that many small companies, playing a vital rôle in producing the dynamic society of which we have heard so much from the Government, simply do not know how they will be affected by this tax. They do not know that they are liable to find, come next year, that they will be required to pay Income Tax and Surtax on dividends which their shareholders receive. They cannot follow the complications of the Bill, to which the many Amendments put down by the Chancellor have only added.

My conclusion is simply that I support the Amendment, above all—and I make no bones about it—because I believe that if we delay the application of the Corporation Tax for a year by that time we shall have a different Government and we shall be able to put the thing on a different and a sensible basis.

8.15 p.m.

Sir Cyril Black (Wimbledon)

The Chancellor of the Exchequer, in his speech earlier today, attempted to defend the proposals for the Corporation Tax by two main arguments. He said that there was a large body of opinion in the country which was in favour of the reform of the tax structure and he was undertaking that reform, and that there was still a good deal of tax avoidance of the kind which he regarded as undesirable and reprehensible and that in his opinion his proposals will do something, at any rate, to deal with that. But it seems to me that the Chancellor has to discharge a considerably larger burden of proof than that.

The Chancellor must show that the evils which will arise from his proposals, if carried into effect, will be less than the evils which he is seeking to cure. It is because most of us believe that the evils which his proposals will create will far exceed the evils which he is trying to cure that we think that, at the least, the implementation of these proposals should be delayed for a year in order that more and better thinking may be done about them.

We have had a long and interesting debate and I do not intend to delay the Committee for long, but I want to mention six obvious evils which arise as a result of these Corporation Tax proposals. The first is that there is a real danger that if the proposals are implemented tens of thousands of small companies will be put out of business. At the very least the difficulty of small companies in competing with large companies will be gravely aggravated as a result of these proposals.

I know that the Chancellor argues that Corporation Tax is levied upon companies and that Income Tax on the profits which are distributed as dividends is levied upon the shareholders and that it is wrong to relate the one to the other. This impresses me as an extremely naïve and completely unrealistic view of the matter. The fact is that under these proposals the smaller the company and the smaller its profits the larger will be the percentage increase in the taxation of those profits in the form of Corporation Tax and Income Tax.

If we assume a distribution of all the profits—which I agree is an unusual state of affairs—by way of dividend in the case of a company with a £2,000 a year profit, under these proposals the increase in Corporation Tax and Income Tax, compared with Profits Tax and Income Tax under the old system, means a total increase in taxation of 67 per cent., whereas when we get to a company with a profit of £50,000 a year the percentage increase in its tax bill is only 20 per cent.

If we assume the more normal case of a distribution of 60 per cent. of the profit—which is apparently what the Chancellor looks upon as normal and desirable—the increased tax burden on the £2,000 a year profit company goes up by 41 per cent., and in the case of the £50,000 a year profit company by only 2 per cent. Therefore, whilst small companies at present may be finding it more and more difficult to compete with their large and powerful competitors, this in many cases will be the final deathblow to them.

They will not be able to maintain their position in a strictly competitive world with this enormously increased tax burden compared with the tax burden falling on their larger competitors. It is an astonishing application of Socialist doctrine that the smaller the company and the smaller the profit the larger is the percentage increase in the tax burden, and, conversely, the larger the company and the larger the profit, the smaller is the percentage increase in the tax burden. This is a great condemnation of the Chancellor's proposals.

Obviously, if these proposals are implemented, small companies will be wound up and other small companies which, under the existing tax arrangements, would be incorporated and brought into being will not be formed, and the owners of smaller businesses will prefer to trade as partnerships because, in nearly every case, the tax burden on them will by that means be much less.

There are at least two powerful objections to that retrograde development which must inevitably take place under these proposals. First, in a modern democratic and industrial State such as ours, nothing has contributed more, perhaps, to the improvement in the standard of living of the people and the prosperity of the nation than the development of the limited liability company. Anything likely to put the clock back in that respect and give advantage to the partnership over the limited liability company is essentially a retrograde and reactionary development.

In the second place, companies are subject to all the safeguarding provisions of our company law. They have to conduct their business according to strict rules laid down under the Companies Act which they neglect at their peril. Very few, if any, of these safeguards apply to partnerships. But, under these proposals, we are likely to have more partnerships and fewer companies, fewer safeguards for the business community and more people whose operations will be removed from the scope of our companies legislation. For these reasons, I believe that the effect of the Chancellor's proposal will be wholly bad.

The rules regarding close companies are, in many cases, literally ludicrous in the results which they produce. Inevitably, many companies will be forced into liquidation because the outgoings they will have to bear in future, including the Corporation Tax, will exceed total income. I give one simple illustration to put the point beyond misunderstanding. This is not a fantastic case. It is a quite normal example, and there are thousands of similar cases throughout the country. A small close company has a share capital of £5,000. It owns a property worth £25,000 which brings in a net income of £2,000 a year. The company has a mortgage of £20,000 on the property, not from a bank—the Committee will note that the mortgage is more than 50 per cent. of the value of the assets—so that the interest on the mortgage does not rank as a charge for computing the Corporation Tax liability.

The Company has £2,000 coming in. It has to pay mortgage interest of £1,400 a year, assuming a 7 per cent. rate of interest. It has a Corporation Tax liability of £800, if we assume a 40 per cent. rate calculated on £2,000 a year net income. Thus, the inescapable outgoings for mortgage interest and Corporation Tax are £2,200 a year, yet total income is £2,000. The shareholders are effectively deprived for all time, or so long as the company continues, from deriving any return on their equity investments, and, unless they are willing to put their hands in their pockets and provide £200 a year to make up the shortage, the company will be forced into liquidation either by the operations of the mortgagee or by the operations of the tax collector. Could anything be more ludicrous than a proposal which produces such a result?

As I understand it, the proposed Corporation Tax is intended to supplant the Profits Tax of 15 per cent. which is to be discontinued. But there is nothing in the Bill that I can find which would enable back losses for Profits Tax purposes to be set against future liabilities for Corporation Tax. What is the Government's intention here? Do they intend that the back losses for Profits Tax purposes shall not be capable of set-off against future liabilities for Corporation Tax? We ought to have a clear answer.

These Corporation Tax proposals make the raising of capital by loan much more attractive than the raising of capital by the issue of shares. Except in the case of close companies in which respect there are certain limitations, interest on loan capital is set off as a charge on profits and the Corporation Tax is levied only upon the resulting net figure, whereas, of course, if the further capital is raised by the issue of shares there is no avoidance of the Corporation Tax by the dividends on the shares.

It is a bad development that people should be constrained for fiscal reasons to finance their businesses on the largest possible scale by borrowings instead of by fixed capital. If the country ever, unhappily, runs into a depression or a conditon of slump, we may find ourselves in the same position as the United States in the slump of the early 1930s when large numbers of businesses foundered merely because they were capitalised on the basis of excessive prior charges and no adequate equity capital.

These Corporation Tax proposals will discourage enterprise, and they will do this in several ways. I ask the Committee to bear with me when I quote from my own experience as a businessman. We learn a good deal from our own contacts with the business world, and I see no reason why I should not draw upon my experience to illustrate the point. I am chairman of two groups of companies which are engaged in property development. They buy sites. They put up buildings. They let the buildings. They do not sell the buildings. They mortgage the buildings when they are up and they keep them as a permanent investment.

I shall be quite frank with the Committee about my position. Under these proposals, it will be much more profitable for me not to carry out further developments and not to carry on the normal business of my companies. The general view of property developers, with which I do not disagree, is that, if one puts up a new building, with all the risk, the trouble and the delay involved in such an operation, one can expect a yield of between 8 and 10 per cent. on the capital outlay. If it does not turn out too well, one hopes to get 8 per cent. If it turns out to be more than average successful development, one perhaps gets 10 per cent.

8.30 p.m.

The fact is, however, that if I invest my funds in buying the well-secured preference shares in other people's companies, which I can buy to give a yield, at present market prices, of over 6½ per cent. a year, which is franked income because it has borne the Corporation Tax in the company that pays out the preference dividend which I would receive, that 6½ per cent. of franked income in the hands of my companies is equivalent to at least an 11 per cent. yield on any properties that I build.

Inasmuch as I cannot rely on being able to put up buildings on which I can depend upon getting a yield of 11 per cent., I can depend upon getting my income on well-secured preference shares where the dividend may be 50 or even 100 times covered. If I look at the interests of my shareholders in this matter, I will not, if this Corporation Tax is imposed, embark upon any further operations which have been the normal activities of the company if by doing nothing, by taking no risk, by sitting back and leaving the sites undeveloped I can get a better return for my shareholders than by carrying on the normal business of the company.

If these proposals have, as I have satisfied myself they will have, these consequences, what a wise thing it will be for us to save the Chancellor of the Exchequer from the position in which shortly he will find himself if this tax is imposed in the form in which it is expressed in the Bill. Let us save him, if we can, from his own folly and give him time to think, because, obviously, he has not thought enough yet.

Mr. Barnett

Hon. Members will know that I have not always agreed with the Government in the different aspects of the Finance Bill, and there are many Clauses on which I hope to be able to speak yet. It is, however, true, and the Government should recognise it, that businessmen are unhappy. They are confused, but it would be rather surprising were they not confused, especially when one sees, reads and hears some of the utterly irresponsible stuff that is written and spoken by hon. Members opposite, by professional people who should know better, and by the Press, who certainly seem to be going about their job in a way which is hardly conducive to helping the nation and businessmen generally to understand the position. Much of the comment is both ill-informed and very often is deliberate misrepresentation.

I should like to give hon. Members some examples of a professional organisation making comments which are certainly not of a technical nature. I feel strongly about this one, because it happens to be my own association. In a memorandum, my association has said much with which I could agree. I say advisedly, however, that it has made unprofessional, exaggerated comments, because in its preamble it says that the Bill represents a vicious attack … the most unfortunate piece of fiscal legislation".

Hon. Members

Hear, hear.

Mr. Barnett

I thought that hon. Members opposite would say "Hear, hear" to that, but let me finish. My association uses words like "irrational prejudice".

A similar association, the chartered institute, says similar things as regards the technical aspects of the Bill but does not find it necessary to make that sort of comment. I wonder whether this has not something to do with the fact that on the Front Bench opposite sits a member of the executive council of my association. I am very sorry to say this.

Hon. Members

Withdraw.

The Temporary Chairman (Mr. Thomas Steele)

Order. I hope that the hon. Member will now relate his remarks to the Amendment and the Corporation Tax.

Mr. Barnett

I appreciate that right hon. and hon. Members opposite will not like what I am about to say, but—

The Temporary Chairman

I am not concerned with whether right hon. and hon. Members like it. All I am concerned about is that it should be related to the matter under discussion.

Mr. Barnett

I will endeavour to do that, Mr. Steele, but this has been a wide-ranging debate and we are discussing whether we should extend the beginning of Corporation Tax for one year. In deciding whether we should do that, we are entitled to ask—

The Temporary Chairman

Order. I quite agree that that is what we are discussing, but the hon. Member was rather discussing the Bill.

Mr. Barnett

With respect, Mr. Steele, we have been discussing investment abroad, Clause 43 in respect of retentions, and all sorts of things. I am restricting myself to whether it would be helpful to delay the commencement of the tax for 12 months. I am attempting to prove that some of the comments that are being made, both in the Committee, in the House and elsewhere, certainly are not conducive or in any way helpful to persuading hon. Members to delay the effect of the Bill for a further 12 months. I was about to say—

The Temporary Chairman

This is where the confusion arises. The hon. Member keeps talking about the effect of the Bill. We are dealing with the Corporation Tax.

Mr. Barnett

Thank you, Mr. Steele. The Corporation Tax aspect of the Bill is what I am dealing with. I am endeavouring to show that some of the comments which have been made on the tax by professional people who should know better have been unworthy of them.

With much of what my association and others hive said, I agree. I can agree sincerely with some of the things that the hon. Member for Wimbledon (Sir C. Black) said—for example, on the question of loan interest. I agree that this sort of thing should not have been included in the Bill. I am confident that when we deal with the Amendments, my right hon. Friend the Chancellor of the Exchequer will make the appropriate concessions. But to make the sort of terms that have been used is unworthy of a professional organisation. I feel very sad about it, because the chartered institute, dealing, for example, with Clause 69 as it affects the Corporation Tax, comments that it regrets that it has been decided to retain the limitations as presently imposed for profits tax on the remuneration, loan interest, etc. … I agree with my own association's comments, but why was it necessary to make this sort of attack by a professional organisation which was supposed to be dealing purely and simply with technical matters?

Mr. Norman St. John-Stevas (Chelmsford)

Would it not be more appropriate if the hon. Member addressed his strictures to the publishers of the document which he has in his hand rather than inflict them upon us?

Mr. Barnett

The hon. Member can put his strictures where he likes. I intend to put mine where I like. I feel very strongly indeed about it. I am glad that I have said it, and I do not retract one single word of it.

Mr. Geoffrey Hirst (Shipley)

rose—

Mr. Barnett

If hon. Members opposite wish to intervene I shall be glad to give way.

Mr. Hirst

We are not concerned with your association in the slightest bit.

The Temporary Chairman

Order.

Mr. Barnett

Thank you, Mr. Steele, I appreciate that you are not a member of my association.

The hon. Member for Shipley (Mr. Hirst) may not be concerned with my association, but I should have thought that all hon. Members and the country would be disturbed when a professional body made attacks other than attacks of a technical nature. As I say, I do not retract one word of what I have said.

The Press has been particularly ill-informed in its comments. It seems to be hell-bent on stirring it up. I include the correspondence columns of the "heavy papers", as they are described. The Financial Times, The Times and The Guardian have published correspondence which, frankly, I should have thought the editors would have been well advised to leave out [HON. MEMBERS: "Oh."] Hon. Members opposite should appreciate that what I am saying is that some of the letters published have shown such abysmal ignorance that they could have been written by them.

Mr. Gower

Surely the hon. Gentleman is not suggesting that this Committee should act as a sort of censor of his own association and of the Press? Is he making such an absurd suggestion?

Mr. Barnett

The hon. Gentleman should listen. I was not suggesting anything of the sort. We are discussing an Amendment which, if passed, would carry forward for one year the commencement of the operation of the Corporation Tax. I am saying that if we were to do that and allow to continue some of the comments which have been made it would not help to improve the rather confused situation which exists. [HON. MEMBERS: "What about the Amendment?"] Hon. Members opposite are shouting from a reclining position, "What about the Amendment?" The debate has ranged very widely, but I intend to stick particularly to the question whether we should extend the commencing date of the Corporation Tax by one year.

Some of the reasons which the right hon. Member for Altrincham and Sale (Mr. Barber) gave for postponing the implementation of the Corporation Tax were almost exactly the sort of points which have been raised throughout the debate. For example, points have been made about the loan interest aspect of close companies and the amount of remuneration, which I agree is too low. I would certainly want to see it higher. Points have been raised about the effect of the Clause dealing, for example, with the onus provisions as affected by Sections 245 and 247 of the Income Tax Act, 1952. These are things which, I hope, we will be able to amend.

But if we are to get these concessions—and I hope that right hon. and hon. Members opposite really want them—and if we are to have a situation in the country and among businessmen which I should have thought all hon. Members would want, it does not help to make ill-informed comment and completely to misrepresent the whole purpose of this part of the Bill.

It is said that this is a very complex Bill and that the Clauses affecting Corporation Tax are so very confusing and that the matter should have been left over or dealt with in another way. It is suggested that we should have another year to consider it. The Income Tax Act, 1952, has 510 pages. We have had 13 years—I do not use that phrase in any political sense—in which to absorb and understand this Act. I willingly confess that I do not know every word of it. I suggest that, perhaps, even the right hon. Member for Bexley (Mr. Heath) does not know a word or two of it. For example, Sections 127 to 130 are extremely complex Sections relating to the commencement provisions which will no longer apply under the Corporation Tax.

8.45 p.m.

One would think, to listen to some of the words which have been poured forth in this Committee and elsewhere, that we have had the simplest possible tax system. Anybody who had anything to do with Income Tax before this knows that we have had, and still have, a very complex system. Anybody who has listened to me in the debates we have had here will know that I want to see a very much simpler one. I think that this is a very modest start; I hope that we shall do much better yet; but to suggest that what we have now is something very complex, and that what we had before was something very simple, is utterly to misrepresent the case.

I have, as I say, my own disagreements about some of the effects of the Corporation Tax, and I have every hope, as I say, that these will be amended in due course, but if hon. and right hon. Members opposite are to go on misrepresenting the case as they are doing and confusing themselves and others, one year's delay would be positively harmful.

Mr. St. John-Stevas

The hon. Member for Westhoughton (Mr. J. T. Price) some time ago and the hon. Member for Colne Valley (Mr. Duffy) more recently referred to this Amendment as a wrecking Amendment. It is, of course, nothing of the kind. It is a saving Amendment, because it will give the Government some time to think out the implications of this tax, implications which, this debate has made abundantly clear, had not been thought out before the Bill was introduced. It is quite clear that there has been insufficient thought behind this Clause; there has been inadequate preparation; and above all, there has been no sustained effort to obtain evidence of the need for this tax or to work out what its effects are likely to be.

The Chancellor referred earlier to the transitional difficulties which the Clause had raised, but what has become clear in the course of this debate is that there are fundamental difficulties which have never been adequately considered on the Treasury Bench. We do not know whose fault this is; whether it is the fault of the inadequate research services at Transport House, or because under our constitution the party in opposition has to make do with very inadequate research facilities indeed. The point of this Amendment, however, is to allow that research to take place now: better late than never.

Another reason for the moving of this Amendment is the quite extraordinary moment which the Government have chosen to introduce this new tax. No one thinks that the tax system is perfect, but this is surely a very curious time to introduce a radical revolution of this kind when we are facing a grave financial crisis, a deficit overseas, and a crisis of confidence induced by the actions of the present Government. Furthermore, it is being introduced at a period when above all we need a tax system to encourage competition and efficiency—and those are the two things which this new Clause does nothing to bring about.

We have heard some weighty arguments against this tax, but one has heard very little in the way of argument for it. We have heard a lot of declarations of faith from Government spokesmen; we have heard hardly any reasoned argument for the change.

I want to deal first with the effect of the Corporation Tax on overseas investment. The Chancellor said that a favourable balance of payments must be a first priority. We all agree with this. What he failed to demonstrate was how this tax will in any way help to improve our balance of payments problem. He said that we must make foreign investments more selective and that was the whole case for this tax as regards overseas investments. Not one piece of evidence has been produced to show how this tax is going to work selectively. In fact the major criticism of the tax, from the overseas investment point of view, is that it is totally indiscriminate. It will deter overseas investment of all kinds. The objection that can be raised to this tax is precisely this, that it is a blanket tax applying to all companies irrespective of the circumstances in which they may be operating.

To take one example, although many could be quoted, the situation of British Petroleum and the situation of Shell are totally different. This tax will affect them in very different ways to the detriment in particular of the British Petroleum Company. The effect will be to discourage overseas investment indiscriminately and it is an extraordinary situation that a Government which came in pledged to increase investment, particularly in the under-developed countries, and which has for so long affected an attitude of moral superiority on this point, should be dealing investment overseas such a serious blow.

In a number of respects this Corporation Tax will positively worsen our balance of payments situation. Much of investment overseas goes into the actual promotion of exports. We do not have exact figures for it. One example of this was touched on in an intervention by my hon. Friend the Member for Kidderminster (Sir T. Brinton) when he pointed out that in the carpet industry there was a large export trade with Australia and that when domestic production grew up after a time, in order to maintain that market it was necessary to manufacture on the spot. That is precisely the sort of remedial treatment, when sales are going down because of domestic competition in an overseas market, that is made much more difficult by this Clause.

There is also the extremely important position of the E.E.C. As long as we are excluded from the E.E.C., and certainly we shall be excluded as long as the present Government are in power, it becomes vital for us to beat the tariff barriers which are raised against us, by investing within the community itself. This Clause will be a major obstacle to that kind of investment. There is another point that will again be harmful to our balance of payments, arising directly from this Clause. Companies trading overseas are now faced with a threat of penal taxation of anything between the rate of 41 per cent. and 65 per cent. on profits which they transmit to this country. While this uncertainty lasts they will not transmit those profits and if, as seems likely, this rate of taxation is penally high, they will not transmit them at all.

Those are some reasons for opposing this Clause, because it will have a harmful effect on our overseas investment. All these arguments are equally applicable to the situation today or that in seven or 10 years' time. The absurdity of the attitude of the hon. Gentlemen opposite is that they expect us to treat a temporary concession as though it were a major revolution in their attitude. The hon. Member for Meriden (Mr. Rowland) said that we should be deeply grateful for these changes. All that we and British industry have got is a suspended sentence. Why should be be particularly grateful for that? The guillotine is on the way down. It has been temporarily suspended, but the head of industry is still on the block.

If we turn to the home scene, we see that the impact of this proposed Corporation Tax will be equally disastrous. First, it will impose, or is likely to impose, extra burden of taxation on industry. It will make it extremely difficult for the great companies, which are the mainstay of our industrial effort, to maintain their dividends. That is not something to rejoice over, as some hon. Gentlemen opposite seem to imply. It is quite deplorable.

The Chancellor spoke about a high distribution of profits as though that was something immoral, and it was matched by sentiments expressed by hon. Gentlemen opposite that high profits in themselves are immoral. But both these things are perfectly justifiable within the context of our economy. High profits are an indication of efficiency, and a high distribution of profits can be extremely useful in attracting capital, especially risk capital, into new industries.

The Chancellor said that some companies would undoubtedly benefit from Corporation Tax as it is laid down in this Clause. He did not specify which companies would benefit. One thing that is certain is that not only the old-established companies will suffer. The ones which will suffer much more are the new enterprising companies which are trying to break into new fields of endeavour. The effect of the Corporation Tax will be to freeze British industry into a much more rigid pattern than was imposed under the old system.

The third count of the indictment against the Corporation Tax is that it is entirely irrelevant to our economic needs. It does nothing for investment. On the contrary, it reduces the investment allowances. If the Corporation Tax runs at the minimum rate of 35 per cent., investment allowances will go down by more than one-third. It will reduce the money available for investment, because if the great established companies are to keep faith with their shareholders and maintain their dividends—and this is certainly what they should do, because it is on the basis of their dividends in the past that thousands, and perhaps millions, of investors put their savings into these companies—they will have to do so at the expense of the money available for investment in the company itself.

The Corporation Tax does nothing to increase efficiency. It may, in fact, discourage rapidly growing companies from distributing their profits. I suppose that some argument can be made for that, but at the same time this tax will provide a shield behind which inefficient companies will be able to shelter, because competition in dividend distribution, which is one of the essential checks of the market, and one of the things which divides the inefficient company from the efficient one, and exposes efficiency and inefficiency to investors, will be seriously interfered with.

No case has been made on its merits, nor has it been attempted to make one on its merits, for this tax. It can be justified only on the ground of change for change's sake, which is a sillier doctrine even than that attributed to the Bourbons.

We have had echoes during the debate of the absurd theory that there are somehow two completely distinct entities, the company on the one hand and the shareholders on the other; that these entities are totally separate; that they are creatures inhabiting different planets and that there is no identity of interest between them. This is to mistake speculation for investment and to confuse speculators with shareholders. Of course there is an identity of interest between a company and its shareholders. Both have an equal interest in seeing that company prosper and grow. It is the fundamental objection to, just as it is the fundamental justification put forward for, this tax, that it ignores that basic community of interest, which is a fact of industrial and commercial life.

That is not the least of the reasons for opposing this tax. If we can get rid of it altogether, all the better. If we cannot do that, the best we can do is to postpone it so that the damage which it will undoubtedly do will be deferred until the last possible moment.

9.0 p.m.

Mr. Biffen

The Corporation Tax has been widely discussed and I do not wish to prolong the discussion unduly. Therefore, I hope that I will compensate in brevity for what may be the lack of novelty in what I have to say.

There are two points upon which I should like to touch. One is the argument that the position of overseas investment has necessitated the introduction of the Corporation Tax. I regard this argument with a great deal of suspicion, not least because, when the Chancellor first announced the Corporation Tax, last November, he made no reference whatsoever to the fact that it would be of some assistance to our overseas situation.

It seems to me extremely curious that a Government who are supposedly pledged to planning and selectivity should have chosen this weapon as inducing a greater degree of selectivity in our overseas investment. In some senses I welcome the fact that they think, on this occasion, that a Whitehall decision is best replaced by a generalised industrial decision cast throughout the economy, but I doubt whether this argument does much to sustain support from their own benches. Remarks made by the hon. Member for West Stirlingshire (Mr. W. Baxter) suggested that he, for one, was not convinced that the case for selectivity had been particularly well argued by his own Front Bench.

The point about Corporation Tax which I am sure is fundamental to this particular sort of tax is that it is designed to increase retention and discourage distribution. It is quite nonsensical to argue—as has been argued by a number of hon. Members opposite—that the Conservative Party is putting itself in the position of being the root and branch opponent of any sort of Corporation Tax. It is at least arguable, to say no more, that there is more similarity between the tax system which we are abandoning and the German form of corporation tax than between the German form of corporation tax—the Neumark, European, E.E.C. type of corporation tax—and the Corporation Tax which the Government propose to introduce.

It is the whole logic of increased retention which, I think, should be challenged now. I should like to give one quotation which discusses the whole question of the growing divorce between shareholders and managers: Nevertheless, the virtual absence of shareholder control does mean that the boards of large firms are almost wholly autonomous. They exercise enormous power without being responsible to anybody. That is a quotation from "Industry and Society", published by the Labour Party in 1957. We should think long and hard before we take any steps which will increase the enormous power which is being exercised without responsibility to anybody.

The philosophy behind this kind of Corporation Tax is a design to widen the gulf between modern and contemporary industrial management and the shareholders. It is designed so that shareholders shall ultimately wither on the vine. If that is the philosophy of hon. Members opposite—and there is plenty of evidence to show that it is their philosophy—then this kind of Corporation Tax should be fought bitterly and thoroughly.

The hon. Member for Manchester, Cheetham (Mr. Harold Lever) attempted to chide my right hon. Friend the Member for Bexley (Mr. Heath) on trying to introduce an ideological conflict into the debate. But on what subject should we have ideological conflict unless it is one of this character, and where better to have it than on the Floor of the Committee? The ultimate significance of this Corporation Tax is that it is a calculated piece of Socialism. It is designed, further, to insulate management from the shareholders and ultimately to give Whitehall a better position from which to take over the function of management.

It is quite clear that if the logic of this tax is followed through, and if Whitehall is given greater influence in the policy for investment, then a great deal of the future finance of companies will come from retained profits or from investment allowances which will be more selective. I am sure that this is the intention of hon. Members opposite. They have already indicated that they are totally dissatisfied with the working of the present investment allowances.

For these reasons, an Amendment designed to postpone the working of the Corporation Tax for a year is the least for which we could hope. I sincerely hope that the vote on the Amendment will be the precursor to the eventual death of the Corporation Tax as at present conceived and, indeed, of the Government.

Mr. Diamond

We have had a most valuable debate which has centred around an Amendment—

Mr. John Peyton (Yeovil)

Does the right hon. Gentleman mean by rising to speak that he thinks that the debate has concluded? Many hon. Members on this side of the Committee still wish to speak, and hon. Members on his own side of the Committee have only just finished speaking.

The Temporary Chairman

Order. The hon. Member for Yeovil (Mr. Peyton) has been long enough in the House to know what is the general procedure. The Chief Secretary rose in his place and I called him. That does not necessarily mean that the debate is finished.

Mr. Diamond

The debate has been going on since about 3.30 p.m. I have listened to every speech with the greatest care and interest. As many of the points are being repeated and some of them are based on misunderstandings, I thought that it might be convenient if I tried to remove some of the misunderstandings. If any hon. Member feels a desire to continue the debate afterwards, that is a matter which is not within my control.

I should not have dreamed of intervening at this stage had we not had a very full-run discussion on an Amendment which is appropriate for a discussion of the whole of the Corporation Tax, as I fully recognise. I hope that, by and large, I may deal with general questions which hon. and right hon. Gentlemen have raised affecting Corporation Tax rather than the narrow question of the Amendment. As hon. Members have made clear, this is not a wrecking Amendment. It would not have been selected by the Chair if it had been a wrecking Amendment. It is an Amendment with a view to postponing the tax for a year in the firm hope that in the course of that year the Conservative Party will become the Government and will kill the Corporation Tax. It is in no sense a wrecking Amendment. I am merely repeating what several hon. Members have said.

I have listened carefully to every speech, and I want to try to answer the criticisms which have been made on many of the broad questions. I hope that some hon. Members who have asked a number of very detailed questions will feel that they fall more naturally to be discussed on the Clauses dealing with specific points.

My right hon. Friend early took the view that this was a major change, although in the course of this Measure we wanted to leave undisturbed as many of the principles of tax computation as possible, so that business men and others who were affected would have the minimum disturbance compatible with the reform. Notwithstanding that, he took the view that here was a major change as to which it was right that there should be the greatest possible advance notice of as many of the general principles and as many of the major details as could be given. Over the past six months, therefore, he has made statements to give the whole of the business community and all others affected the greatest possible information so that they could understand what is intended and consult their own interests and make representations. Many representations have been made and continue to be made right up to the present time—and, indeed, will be made after today.

Mr. Stratton Mills

And being ignored.

Mr. Diamond

No. We all listen very carefully to them. It is the Government's intention to find out as carefully as possible the effect of these wide-ranging changes on individual taxpayers in order to make sure that within the broad intent of the reform there is no individual injustice and no individual hardship. We shall continue to do that. We realise that it is fair game for right hon. Members on the Opposition Front Bench to have fun. This is not the first time that right hon. Gentlemen on the Front Bench, and hon. Members on other benches, have had political fun. But we intend to pursue our inquiries, to listen carefully to everything which is said and to all representations made, and to endeavour to make the legislation as perfect as possible at the first go. It is beyond the hope of any one of us that legislation should be so perfect that in years to come no adjustments and alterations will be needed—just as, when right hon. Gentlemen opposite were in Government, although they had the framework of the Income Tax law which had been in existence for nearly a century, each year and sometimes twice a year a Finance Bill was introduced containing many adjustments to relate the tax code to the needs of the day. We will listen carefully to what hon. Members have to say. We will turn a deaf ear to the insults and listen to the content of the speeches to obtain whatever benefit we may to improve the Bill.

I do not think that we are going to help to remove the uncertainty—and uncertainty has been the general complaint of hon. Gentlemen opposite and others—if we refrain from completing our legislation. Indeed, it is only when we come to detailed consideration of this kind that we can have the full benefit of the considered views of all hon. Members.

I will restate some of the major principles. They have already been stated by my right hon. Friend in his Budget speech, I again referred to them at some length in my contribution and my right hon. Friend spoke fairly fully in this debate. The major purpose of the reform is to encourage the efficiency of industry and business. One cannot make individuals who are inefficient efficient. One can only encourage them towards efficiency and give them the tools to achieve it.

The greatest need for every business man in making his business more efficient is to have the wherewithal for additional growth and investment. We are, therefore, framing a tax structure under which a business man will, out of his realised profits, have 50 per cent. more cash available for investment and plough-back than he has under the present system. That is the first stage.

9.15 p.m.

Under the proposals, and comparing like with like—a 35 per cent. Corporation Tax rate which would produce the same as the existing rates of Income Tax and Profits Tax—there would be left, after striking the profits and paying the Corporation Tax, to each proprietor—and I mean the company, the individual, the business or whatever it is—almost exactly 50 per cent. more in cash with which to reinvest, to buy plant, new premises and so on, than under the present system.

Sir K. Pickthorn

rose—

Mr. Diamond

I will give way to the right hon. Gentleman. First, let me say that I cannot think of a single method by which the Government could encourage keen, growing businesses—particularly young businesses, which cannot go to the market and get capital—and assist industry more than that.

Sir K. Pickthorn

Is not the hon. Gentleman strangling himself with his own vocabulary? When he refers to "each proprietor" and says that each one will have so much more money to do desirable things, what does he mean by "proprietor"? How does he fit that with his doctrine that shareholders and companies are and must be increasingly and wholly—his word was "absolutely"—different from the company? What or who is this "proprietor"?

Mr. Diamond

I am grateful for that intervention, because it enables me to make the position clear. I was referring to the ownership of the business. If by the use of the word "proprietor" I did not make the position clear, it might help if I say that I was referring to the company; the proprietor. I did not want to be misleading.

Sir K. Pickthorn

It was not misleading.

Mr. Diamond

I used the word "proprietor" thinking that it would be an easier term than "corporation".

Mr. Percy Grieve (Solihull)

Are not shareholders proprietors of a company and is not the market the best judge of whether a company is so go-ahead that it requires money? Would not the best way to advance efficiency in industry be to make the obtaining of capital dependent on the machinery of the market?

Mr. Diamond

I hope that hon. Gentlemen opposite will be good enough to allow me to make my speech. I will be glad to deal with all these matters. I hope that the Committee will not think me discourteous if I continue with my remarks without being interrupted all the time.

Having explained the position so far, the question is immediately asked: if this is the greatest possible encouragement to young and growing businesses, why not let them go to the market? I gave a detailed answer to that question on an earlier occasion, but I will repeat it shortly. The facts are that new cash is achieved on the market for the purpose of reinvestment in corporations to the proportion of approximately 9 per cent., according to the latest figures.

The test is a simple one—the position before the two-tier Profits Tax was removed. Previously we had a system which encouraged retention and that was replaced by a single-tier Profits Tax which removed that encouragement to retention. Therefore, there was further distribution, and the rate of growth of dividends went up by 50 per cent. as a result. Therefore, according to the theology of many hon. Members opposite, one would have expected that as a result of the profits being distributed wise shareholders would have reinvested their dividends selectively with the best possible companies. That is how to achieve the best possible results. Unfortunately, they put their dividends into their pockets or into their bank accounts. It is no good hon. Members saying that this is non-sense, because I have checked what I say and I shall give the figures again.

I was challenged on the figures when I made it clear that prior to the removal of the two tiers, 8 per cent. of all the investment in equities came from new cash on the market, whereas in the period after the removal the figure rose to 9 per cent. There was an increase from 8 per cent. to 9 per cent.—practically no difference at all. Those figures were challenged, and I have had them very carefully rechecked. The answer is, in the period prior, 8.1 per cent., and in the period subsequent, 8.6 per cent. I gave round figures of 8 per cent. and 9 per cent., but if we come down to decimal points we find the answer is not a whole per cent. increase but a half per cent. increase.

That was the effect of removing the deterrent to distribution, and it demonstrates quite clearly (a) that the majority of equity capital, as one knows—the fresh money—comes from the realised profits of companies themselves, and (b) that the two-tier Profits Tax system was some encouragement to retention, and when that system was removed the philosophy of hon. Members opposite was given full rein, and the removal did not work.

We had the situation in Germany to demonstrate this even more clearly. For years, the Germans have had the most ample encouragement to distribution by having a very heavy rate of tax on retained profits and a very light rate of tax on distributed profits. They have done that for years, because they have no capital market and want to encourage one. After years of trying, they have now managed to raise from 2 per cent. to 3 per cent. the amount of money that comes from the market, and the balance of equity capital all comes from realised profits.

It is therefore absolutely clear that ours is the best way to encourage growth and to enable companies that wish to be efficient to have the means of increasing their efficiency. I have more faith in those companies than have some hon. Members opposite. I have more faith that, given the tools of the trade, they will try to achieve the efficiency at their hand, and I think that the way we propose is quite clearly the best way of doing this.

Mr. Gower

Does the Chief Secretary say that 92 per cent. of the money is coming from retentions? Can he confirm that figure? If so, what span of all the companies does that cover? Is it limited merely to public limited companies?

Mr. Diamond

It is the whole span of companies. It is not selective, as is sometimes the case with figures from the other side. Incidentally, I apologise for having earlier laughed when Elliott Automation was mentioned. The reason was that I had just said to my hon. Friend here, "Just wait—Elliott Automation will be mentioned." and Elliott Automation was mentioned at that moment.

The figures cover the whole span of companies going to the market, but that does not mean that 92 per cent. of capital came from ploughed-back profits. A good deal comes from borrowing. Approximately 65 per cent. of equity capital comes from ploughed-back profits, 8 per cent. or 9 per cent. from the market, and the balance is borrowed—it may come from the market or privately. We are talking about equity capital. We are talking about growth, and this is the way to achieve it.

Mr. Heath

The hon. Gentleman has used these figures to such an enormous extent and he has used this argument so frequently that we have been constantly trying to check up on his figures. None of the authorities that we have consulted agree with his figures. The hon. Gentleman is talking purely about equity issues of companies over a particular field. He is excluding the question of borrowings which come from people's savings which come from the dividends they have been paid. He is using a useless comparison the whole time.

Mr. Diamond

Borrowings come largely from the banks. It has nothing to do with savings at all. The borrowings come largely from the banks; they come partly from private sources and partly from public sources. I hope the right hon. Gentleman is not making the simple point that we must have savings. Of course we must. There is no question about it. The simple question is, which is the best method of taxation to encourage companies towards growth, particularly those young and growing companies which have no access to the market? The answer is, by enabling them to have the largest possible amount of resources before they start to pay dividends. It is then up to them to decide whether to pay dividends or not.

Let me now give some indication of the scale of it all. A great deal of misunderstanding exists about the amount of dividends. The break-even point with Corporation Tax at 35 per cent.—that is a figure comparing like with like—is 51½ per cent. That is to say, a public company paying 51½ per cent. or less is paying no more tax under the new system than under the old. Everybody paying less than 51½ per cent. is paying less tax than under the present system—that is, 51½ per cent. of their profits. [An HON. MEMBER: "Gross or net?"] I do not know what the hon. Gentleman means by "gross or net". One does not pay 51½ per cent. of one's gross profits.

Mr. Patrick Jenkin (Wanstead and Woodford)

Before or after Corporation Tax?

Mr. Diamond

I am referring to 51½ per cent. of the profits before taking into account Profits Tax, Corporation Tax and any other tax. Those who pay 52 per cent. and more will be paying more under the new system. Those who pay 51 per cent. or less will be saving under the new system. We have not heard very much from those who will be saving as to how much they approve of this new scheme of taxation. The average rate of dividend is 50 per cent. So the average company making its average distribution will benefit. Of course, it will benefit. Domestic companies as a whole will benefit by about £100 million, comparing like with like and foreign investment will suffer to the same extent. Foreign investment will suffer to the extent of £100 million, before we deal with concessions, and there will be £100 million benefit to all domestic investment. The break-even point is 51½ per cent., and on the average distribution and all distributions less than that there will be a considerable saving. That is, by and large, the practical effect of what we are discussing.

Sir T. Brinton

rose—

Mr. Diamond

I am not giving way again.

I now come to a point which has been raised, the question of simplicity. I have referred to this break-even point of 51½ per cent. I wonder if the Commitee will forgive me if I go over one set of figures which illustrate this point of the 51½ per cent. and the question of simplicity or complexity.

Mr. Heath

On 35 per cent.?

Mr. Diamond

On 35 per cent. Corporation Tax which produces the same yield as the present Income Tax and Profits Tax. Therefore, we are comparing like with like. As a man of objectivity, fairness and intelligence the right hon. Gentleman naturally would wish to do that.

9.30 p.m.

If we have a figure of £100 for profits and take £35 for Corporation Tax we are left with a figure of £65. If we now take a gross dividend at 51½ per cent., from that we have a retained profit of 13½ per cent. To get back on the other side, on the present system we start off with profits of £100, deduct Profits Tax and Income Tax at 56¼ per cent., dividend gross and net at 30¼ per cent., and we are left with 13½ per cent., exactly the same figure, on a distribution of 51½ per cent. But let us look at the ordinary business man who wants to understand his business and the burden of taxation on it. Under the new system he makes £100 in any accounting period, and for every £100 a sum of £35 goes into Corporation Tax.

It is as simple as that, and I say with 35 years' experience as a practising accountant that the average business man for the first time will know what is happening year by year so far as the Inland Revenue and himself are concerned, without waiting for years for his accountants to tell him the position. Every time he makes £100 he pays £35 Corporation Tax, or 35 per cent., on every £100 profit that he makes in the accounting period. If he wants it even easier than that, he can do it by the rule of thumb method and call it one-third—every time he makes £3 there is £1 for the Revenue and £2 for himself. It could not be much easier.

Let me compare the present system. First of all, he has to pay Profits Tax, and Profits Tax is calculated on a particular period. He then has to pay Income Tax which is calculated on an entirely different period, or partly on an overlapping period, or it may be a period some way back, or even a period during which he had not actually been trading. He does not know. There are all sorts of rules and the complexity is unendurable. All one can say is that no business man really knows the tax which he has to pay on the profits that he is making today under the present system. He does not know when the capital allowance applies—that is a different period, and again the investment allowance period is different. There are all these complications and it is beyond the wit of any lay business man to know month by month or quarter by quarter what the taxation is on his figures.

Under the new system he says every quarter, "I have made so much profit. I know what the Corporation Tax is and what my capital allowances are and I know exactly what is left for me." He knows this, quarter by quarter and year by year. That is what I mean by simplicity and I repeat that for the business man of the future life will be simplicity itself. The Committee should realise this and all those hon. and right hon. Members who are business men know full well that they have not the vaguest idea of the tax liability of their companies until they go to their accountant to work it out and he tells them months and months later. Every honest business man in the Chamber knows the truth of what I am saying. Therefore, this is one of the advantages that we are claiming for the introduction of the Corporation Tax.

Sir Cyril Osborne (Louth)

rose—

Mr. Diamond

No, I cannot give way.

Then I come to the question of anomalies. The right hon. Gentleman the Member for Altrincham and Sale (Mr. Barber), who opened the debate, criticised my right hon. Friend by reference to a particular company, a most unusual company—I hope I can say that without being too difficult about it—a company which had a capital involvement of about £6 million—

Mr. Barber

£7 million.

Mr. Diamond

—£6 or £7 million, and ordinary shares of £20,000. A curious sort of gearing. Our bachelor with £1 million a year is much more usual than a company of this kind, I suggest. The right hon. Gentleman said that this company would be affected. It would not be able to pay its dividend as it could under the present system. Precisely. I confirm that it is exactly this kind of company operating under the present system which the Public Accounts Committee, a Select Committee representing both sides, referred to in its Fourth Report, issued on 7th May, 1964. Referring precisely to this kind of company, the Select Committee made the following criticism: Some of the companies had paid the whole of their dividends to parent companies, and in these cases the Comptroller and Auditor General was able to establish that the gross dividends used by the parent companies for repayment claims exceeded by £32 million the total of profits on which the subsidiaries had paid tax. In these few examples, there had been repayments of tax on £32 million (equivalent to tax of £12 million at the current standard rate) which had not been received by the Revenue and which, the Department confirmed, never would be received. Under this very anomaly which we are ending, £12 million was the figure. It was not unlawful, but it was a consequence of the system which we are ending, a system under which one could distribute dividends notionally tax-paid, whereas we are now to have a system under which, if one pays one's dividend, one pays one's tax at the same time. I remind the Committee that that £12 million under the system we are ending is exactly the same figure as that taken by this Committee at the end of its long debate ending in approval of the Capital Gains Tax, a tax which next year will produce £12 million. That is the order of the matter to which I am referring. That is why we are happy to say that the kind of anomaly to which the right hon. Gentleman referred will no longer continue.

I have been asked by a number of hon. and right hon. Members how I reconcile what I have been saying with the position of the close corporation. I am very glad that this matter has been raised because, clearly, we are at fault in that we have put forward a system which is much more helpful than the present one to the average business man and it has been misunderstood. Therefore, we should make endeavours to put the matter more clearly either in legislation or in the White Paper. But I must say that every criticism which has been founded on a misunderstanding could have been rectified by reference to the Clauses and, more particularly, to the Schedule. But it is a long and detailed Schedule, and I am glad to have the opportunity to explain the situation.

As most people know, the present position is that, in order to protect the Revenue against the Surtax payer who avoids the payment of Surtax by refraining from distributing profits accumulating in his company, the company can be challenged and, if the Special Commissioners are satisfied that there has been an inadequate distribution—inadequate by, perhaps, 5 per cent.—they can adopt the only remedy which is open to them, namely, to distribute 100 per cent of the remaining profits which have not been distributed. If there has been a distribution of 20 per cent. and it is clear that there should have been a distribution of 30 per cent., the Special Commissioners have to distribute the whole of the rest of the profits. That is the present position.

The right hon. Gentleman criticises the whole of the Bill because, instead of this matter being handled at Thames Ditton, in the future it will be handled more conveniently in the offices of inspectors of taxes all over the country. Instead of something that suits the convenience of those who practise in London, this will be convenient for those who practise in Birmingham, in Manchester—like my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever)—and all over the country. It is a ridiculous complaint to say that there will be a lack of fair treatment if individual inspectors of taxes deal with the matter instead of the Special Commissioners at Thames Ditton. The final answer is that the dissatisfied taxpayer can go to the courts. He can do that at present and he can do it in the future.

I have explained the present situation, that, if there is an inadequate distribution, the whole of the balance of the profits has to be distributed for Surtax purposes. The new situation is designed to take account of a new circumstance, the new circumstance being that not only can Surtax be avoided under the new system but Income Tax can be avoided as well. If a company makes profits, it pays Corporation Tax, but if it does not distribute dividends it does not pay any Income Tax.

Therefore, a small company—let us call it a one-man company for the moment—which holds its profits and does not distribute them will avoid both Surtax, as it would before, and Income Tax in addition. Therefore, one has to take care to see that the Revenue is fully protected, and by protecting the Revenue I mean that one has to take care to see that each person pays his fair share of Income Tax and there are not some people who leave their fair share of Income Tax to be borne by others.

The way we propose to do it is to see that there is adequate distribution. One way to clear the decks for the vast majority of small companies is by a rule that, if they make modest distribution—I shall give a figure in a moment—they are immediately taken out of the provisions regarding the close corporation. I refer to a distribution of 60 per cent.—

Sir C. Osborne

Modest?

Mr. Diamond

Will the hon. Gentleman wait? Everyone has taken this 60 per cent. to mean 60 per cent. of profits. It is nothing of the sort. People have not gone on to read the next section, only three lines further on. Before taking into account the 60 per cent., one deducts Corporation Tax, so it is 60 per cent. of profits less Corporation Tax, which, comparable with the present system, means a distribution of either 36 per cent., with Profits Tax at 40 per cent. or 39 per cent. with Profits Tax at 35 per cent. Therefore, a distribution of 39 per cent. of the net profits, compared with the kind of distribution which one talks about now, will take almost every small company out of the consideration of these Clauses.

There is, however, much more in it than that. If hon. Members read the Schedules, they will find repeated the words which have been used in the previous Clauses. I am sure that my hon. Friend the Member for Cheetham will be interested in following me in paragraph 10(2) of Schedule 17, on page 213 of the Bill, where it states: In determining how far a company could or could not make distributions up to the required standard without prejudice to the requirements of its business"— that is its first consideration; and now come the words which are the exact repetition of Section 246 of the Income Tax Act, 1952, which my hon. Friend thought should be repeated and which are repeated: the Commissioners concerned shall have regard not only to the current requirements of the company's business but also to such other requirements as may be necessary or advisable for the maintenance and development of the business". The situation, therefore, is that if there is a distribution of 36 or 39 per cent., the relevance of these Clauses and this part of the Bill goes completely. If there is not such a distribution, but the business needs these funds for either its present or its future development, again it comes out. In short, the only concern of the Inland Revenue is to stop tax avoidance.

Let me make this quite clear. People have said, and naturally, "How do you reconcile this with the other part of the Bill which encourages retention?". It does not. Corporation Tax does not encourage retention. Corporation Tax encourage plough-back. There are three things that a company can do with its funds. It can distribute them to shareholders, reinvest them or retain them. To retain them and have them in portfolio investment, in the bank or in gilt-edged or whatever else one likes is not reinvestment. That is not plough-back.

9.45 p.m.

The right hon. Member for Altrincham and Sale invited us to consider the two-tier tax system. What that did was to encourage retention: that is, to use the right hon. Gentleman's words, "growing fat". We do not encourage growing fat. We encourage growing fit. One does that by getting slick and energetic and using one's funds to reinvest, have more assets, work harder and make more profits. That is the whole purpose of the Corporation Tax. It is wholly consistent with the close corporation provisions.

We do not want a small or one-man business to retain its profits. If such a man retains his profits, he is in trouble, because if he retains them idly and leaves them in the bank obviously he is merely avoiding reasonable distribution and avoiding Surtax and Income Tax. lf, however, he makes a reasonable distribution or uses his profits to develop his business, he need never declare 1 per cent., so long as he continues to plough back fully the whole time and to have regard not only for the present, but for the future needs of his business. That is the reconciliation. For the first time, we really have got down to the heart of what the taxation business is about and how to encourage companies.

Finally—

Sir Harmar Nicholls

If there are good business reasons why 39 per cent. should not be redistributed, has the case to go to the commissioner to be decided or could it be settled at the level of the Income Tax collector?

Mr. Diamond

It can be settled in the ordinary way in correspondence between the accountant and the inspector of taxes, just as it is settled in the ordinary way, at present, in correspondence between the accountant and the Special Commissioners. Instead of the inconvenience of having people at Thames Ditton, which is a long way from Scotland, there will be inspectors of taxes all over the country who are there to serve the public and who will change around rapidly to secure similarity and consistency of treatment all over the country.

Sir C. Osborne

Is there any method of appeal?

Mr. Diamond

Yes, of course—to the Special Commissioners and the courts, in the ordinary way. The final arbiter will be the courts, as they are at the moment.

I hope that I have made it clear that what we are encouraging is plough-back and that what we are doing under the new provisions is a great relaxation from the existing provision so as to avoid troubling businessmen more than is necessary and to make it obvious that the only person in whom we are interested is the businessman who makes large profits and avoids distributing them so as to avoid Surtax and Income Tax in his hands.

Sir C. Osborne

rose—

The Chairman

Order. I have no power to stop interruptions, but I heard the Chief Secretary say "Finally" some time ago.

Sir C. Osborne

As an ordinary businessman who is concerned with this problem, and with a close corporation, too, may I ask this question? The hon. Gentleman says that if we do not distribute our profits but we keep them idle and do not put them into new machinery and developments, we shall be taxed upon them. Suppose that we do not distribute the extra profits, but use them to buy subsidiary companies that will increase our turnover. Would that be free of tax?

Mr. Diamond

Subsidiary companies are a different question from portfolio investment. I have indicated that portfolio investment is neither distribution nor plough-back. I can answer the hon. Member quite simply. when a businessman develops his business, either by himself, through a subsidiary, through a consortium, or in whatever way he wants, so long as it is a developing business he will not be prejudiced by these new rules.

I hope that the hon. Gentleman, who is a very fair man, and all others who have been under a misapprehension, will help the business community generally by explaining that there has been very considerable misapprehension, perhaps by our not having put the matter as clearly as we should, and by removing this understanding, which is quite without foundation.

I want, finally, to deal with the very important question addressed to me by the right hon. Member for Hampstead (Mr. Brooke), about overseas investment. My right hon. Friend has made it so clear that there is hardly need for me to repeat it, but what we are proposing is that the amount of new investment going overseas should have regard to our balance of payments difficulties. That is all. Therefore, while we are in the position not to be able to afford it, we cannot look at investment abroad in amount with the same kindliness as we have done hitherto.

Last year, as everybody knows, there was a deficit of £750 million on our balance of payments. Half of it was long-term capital. As one of my hon. Friends pointed out, the total position of the country in terms of investment abroad is that we have borrowed short and lent long. This is not an easily manageable position and, therefore, we have to have special regard to foreign investment. That is all that is happening. To reduce the flow of new investment my right hon. Friend has allowed the Corporation Tax to apply as it applies in other countries.

The right hon. Gentleman asked me the real question: how does a British company operating abroad compare with an American company operating outside America? Are we under fair competition? We have not been under fair competition because America has had a Corporation Tax. Seventy other countries have had Corporation Tax, and in all these cases there could not be any question of spillover because they had not the same kind of system as we had. In our case, with one single Income Tax instead of two—a Corporation Tax and Income Tax—all these companies investing abroad have been on favoured terms. We are altering that.

However, when we alter anything and we have a new situation, the intelligent question to answer is: which was the right situation, the new or the old one? It is not right to say that we are changing from an old to a new situation and, therefore, the old one was right. We are changing from a situation in which our investors abroad were treated specially favourably compared with other countries' treatment of their investors abroad to a system under which they will be treated similarly. But to avoid any hardship while this process of change-over takes place, my right hon. Friend is proposing a total period of seven years for foreign investors to adjust their circumstances.

I think that this is a very reasonable arrangement indeed. Therefore, the £100 million to which I referred, and which otherwise would have been an additional burden on these companies, will be vastly reduced. There will be 100 per cent. relief under these concessions for the first three years and a tapering arrangement for the remaining four years. We are not opposed in any way to foreign investment; we have to look at it more closely.

May I give the Committee one set of figures which will throw light on the matter? The average return to this country from all our foreign investment is 4 per cent. Eight per cent. is made. Half of it is reinvested abroad and 4 per cent. comes back to this country. I am not talking about the investor. The investor has plenty of people to look after him. We want to look after him reasonably, but the country has to be considered, too. The return on foreign investment to this country is 4 per cent. The comparison is the return on domestic investment, which is 15 per cent. Half of that goes in tax. The tax is used for what? Social services—housing, welfare, schools, doctors. That is what it is used for. That is of just as much value to us as other money in any other way. It is exactly the same thing. The comparison there is with 4 per cent. on foreign investment as a whole and 15 per cent. on domestic investment, without taking any account of the skills, of the employment, and of the other benefits which flow.

What I am saying, therefore, is that these things must be very fully considered, and I hope that I have satisfied the Committee, therefore, that this Amendment ought not to be carried, and that as soon as possible we ought to get on with the job of making Britain enterprising and efficient.

Mr. Heath

The debate on this Amendment has been a long one, and Dr. King, thanks to your generosity of interpretation of the Amendment, it has been possible for the Committee to have a wide-ranging debate. Hon. and right hon. Members on each side have taken part, for the greater part of the debate, one for one, and I think that their contributions have been extremely valuable. I know that there are still some of my hon. Friends who would like to take part. It is true, of course, that we have been able to discuss a large number of provisions, but in a general way. We shall be discussing them in further detail when we come to the specific Amendments, when we shall have an opportunity of pursuing these matters further.

It has been pleasant to welcome back to the debate the hon. Gentleman the Member for Manchester, Cheetham (Mr. Harold Lever). We missed him in the late early hours of our last Committee sitting.

Mr. Harold Lever

I was here.

Mr. Heath

We heard nothing from him on Schedule 9 and the provisions for dealing with snoopers. He was already exhausted by that time, but today, as a sound capitalist, he has renewed his almost solitary fight to save his party from the anti-business tag which has now been attached to his Government. We all admire the ingenuity with which he does it and the freshness he brings to his task. Today, he has continued his form of backing the Chancellor to the hilt. As soon as we hear those familiar words, "What a splendid Chancellor he is; how wise he is; how generous he is; how co-operative he is" we know the knife is going in to the hilt.

There is only one thing on which between the two sides of the Committee we really differ, I think. We, as one of my hon. Friends said, take the view that the Chancellor is a responsible person; in fact, has done the things he has in the Bill because he is a responsible person and accepts responsibility for them.

The hon. Member for Cheetham, on the other hand, takes the view that the Bill is full of terrible things which the Chancellor did not think of either because he did not know or because he could not help it; therefore, this keeps him a wise, generous and helpful person. This is the only real difference between us. So it is possible for the hon. Gentleman to stand up at one moment and say about close companies—I took his words down, "These are iniquitous provisions". I have from time to time criticised the Chancellor and been accused of being uncharitable, but never have I said anything that corresponds to that, that these are "iniquitous provisions" which should never have been put in the Bill—and he backed the Chancellor to the hilt.

Mr. Harold Lever

The right hon. Gentleman might add that in the very next breath I asserted complete confidence that those iniquitous provisions would be deleted by the Chancellor.

Mr. Heath

Yes, but the hon. Gentleman then had the Chancellor squirming on the end of his dagger. He thought that he would get what he wanted, but this remains to be seen.

It has also been a pleasure to have the Chancellor taking part in the debate. Despite his protestations that he has taken more part in the debates on this Bill than any other Chancellor has on any other Finance Bill of recent years, I think that the right hon. Gentleman will agree that, certainly on the last part of the Bill, he did not, though he took part on two occasions in debates, one on the gilt-edged market.

10.0 p.m.

But today we have had a few airy remarks about ploughing back resources and, companies now having more to play around with, a cheery aside about his friends in India and that was all we had from him. This is what his hon. Friend the Member for Cheetham described as reducing the standard of the debate to its proper level. For once I find myself disagreeing with the hon. Gentleman.

While we are on the subject of India perhaps I could recall to the Chancellor part of Mr. Paul Chamber's letter, which has already been mentioned by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) in which he said: Total exports to India during the 15-year period were over £100 million. Our own investment in India, which stood at £1 million in 1950 has increased to £7 million but more than half of our £7 million has been recovered in net dividends and royalties both of which will be of growing benefit to I.C.I. and to the U.K. balance of payments. Their total exports to India have been £100 million investment has been £7 million and of that 50 per cent. has already come back in dividends and relief. There is a particular example of what is happening in India and it has not justified what the Chancellor has given as his impression of what is happening there.

The Chancellor has been taking little part in the debates in this Committee. He has left the winding-up to his hatchet-man the Chief Secretary, who has been doing admirably—and on other occasions to that faithful and soft-voiced spaniel the Financial Secretary. This has enabled the Chancellor to stand apart from the great controversies which have been sweeping over us. That is the reason I read in The Guardian today that the Chancellor is that gentle, reasonable, kindly and moderate James Callaghan. Iniquitous provisions which ought never to have been put into the Bill, said the hon. Member for Cheetham. That is how it happens, standing apart from the battle. The Chancellor put down last night a considerable number of Amendments about which we have already heard something. He said at the time that this was for the convenience of the Committee. I do wish that the Chancellor had "come clean" with us over this.

The real reason that we were circulated last night, the second circular in this Committee stage we have had so far, was not for the convenience of the Committee. It was so that he could tell the Stock Exchange and hold a Press conference before the House of Commons saw the Amendments. The purpose of this was to prevent another debacle such as he had on the gilt-edged market, when he made his announcement about capital gains. We may, therefore, say that the Chancellor was very wise to adopt this procedure. All I am suggesting is that he should not say it was done for the convenience of the Committee. Quite obviously, he did it to suit his own particular purpose.

We have been told by the Chief Secretary that there are more to come, but, alas, the Chancellor sat down this evening without telling us on which night and in what sequence they are to come. If he could kindly tell the Committee on which night he is to circularise us again at seven o'clock we would make the necessary personal arrangements to be able to deal with the situation, and it would be of general convenience to the Committee. My point yesterday about this was that these Amendments reflect the representations made before the Bill was published. It really is lamentable that they were not included in the Bill. Now they have been rushed out in the middle of the Committee stage and before we ourselves have had the opportunity of discussing what is in the Bill.

Some of my hon. and right hon. Friends, when they received the circular, recognised immediately the typewriter and said, "There is no doubt about it. This has come from the Inland Revenue." The only question is whether, in winging its way from Somerset House to the Vote Office, the Chancellor happened to see it. I hope that he did.

Let us come to the particular remarks made by the Chief Secretary.

Mr. Callaghan

As the right hon. Gentleman went into great detail about the arrangements we are making, will he tell the Committee, too, that since he asked last night whether we would reprint Parts I to III of the Bill I have informed him we shall be able to do so and are doing our best to meet his convenience?

Mr. Heath

I did not inform the Committee and was not intending to do so, because—[HON. MEMBERS: "Oh."] I hope that the Chancellor will not lose his sense of proportion. I have always understood that anything which the Chancellor is kind enough to tell me is told to me in confidence. [HON. MEMBERS: "Oh."] It is a tradition between the two sides of the House that if a Minister tells a Member of the Opposition Front Bench something in confidence, that Member does not stand up in the House of Commons or in Committee and relate what he has been told. I propose to adhere to that tradition. When the Chancellor announces that this is what he is going to do, I shall thank him for adopting our suggestion.

The Chief Secretary has been talking about Corporation Tax, and no one is better qualified than he is to do so, because it was due to what seemed at the time to be a rather casual remark which he made at the Investors' Chronicle conference last July that the present Government and the Labour Party suddenly, and without warning, out of the blue as it were, were committed to the Corporation Tax. We know what followed afterwards. There was no mention of it at the Election, and then when the Government came into office there was a sudden announcement of the two new taxes.

I propose now to deal with one or two general points which have been raised—[Interruption.]—I say general points, because I shall come on to the specific points, which hon. Gentlemen opposite will like even less. The Chancellor has made a great deal of the fact that we on this side of the Committee are sup- posed to be against reform. This is one of the general airy things that he said. Perhaps I might remind him of the White Paper issued by my right hon. Friend the Member for Barnet (Mr. Maudling), "A scheme for an Accounts Basis for Income Tax on Company Profits" which set out the first part of the work done by the Treasury and others when he was Chancellor, and which was an approach to this whole question of reform. [HON. MEMBERS: "When was that."] April, 1964. The Chancellor is not, therefore, justified in arguing that we have been opposed to reform in this matter, and I hope that that is now quite clear.

I now come on to the reasons why there is supposed to be a Corporation Tax, and I should like to deal with these one by way. First, there is the question of simplification. The Chief Secretary is reckless in giving hostages to fortune, and this evening he has given another one. He said that in future life for the business man would be simplicity itself. I am sure that he will be reminded of that for the rest of his political life.

The fact is that, as my right hon. Friend demonstrated, the law itself is not going to be all that much simpler, if at all. The legislation by reference which still exists makes it extremely complicated, and I believe that it will remain so. Perhaps we can learn from what we have had on the first part of the Bill with the Capital Gains Tax, which is already becoming very complicated, having started from a simple principle of 30 per cent. right across the board. We shall see the same thing happening with the Corporation Tax. As the Chief Secretary said, year after year we shall have to develop and change it to meet the situation. It is in this respect not going to be simpler in the way that the Chancellor has tried to describe.

The chief secretary said that accountants would no longer be needed. I cannot believe that this Bill is to enable us to do away with accountants. I cannot believe that the hon. Gentleman would be responsible for the demise of his own profession and that of my hon. Friend, who has been much maligned. If I thought that we were not going to have accountants after the Bill, it might to some extent change my attitude to it, but I do not see that situation developing. Accountants come in to determine profits. Once they have been determined it is not difficult, with a few calculations, to work out how much will be left after the Treasury has taken its share, so that is not the point of the Corporation Tax at all.

Is the reason for it to enable company taxation to be varied separately from personal taxation? Again the answer is "No", because that can be done at the moment. It can be done through Profits Tax. Is it so that retained and distributed profits can be treated differently? Once again the answer is "No", because that can be done under the present system. Is it to stop avoidance? We have heard a great deal from the Chief Secretary about the case quoted by my right hon. Friend. The fact is that that case was cleared by the Inland Revenue, and it was legal.

If the Chancellor wanted to change the situation, I am advised that he could have done it by means of a simple amendment to the existing law. If the Chief Secretary had also gone on to tell us a large amount of what was said in the evidence to the Public Accounts Committee, he would then have been able to put the other side of the case and the reasons that no action had been taken thus far. If he had wanted to do this, it could have been done without the Corporation Tax.

We come finally to the argument in favour of the Corporation Tax which was developed by the Chief Secretary. This is that, if policy requires an extra tax on profits or a diminution in tax on profits, if one amalgamates Profits Tax and Income Tax, the different sets of rates and the different years, one will, in that respect, have a more straightforward tax. This is the major, I think the sole, argument in favour of the Corporation Tax. It is on this argument that the Chancellor ought to base his case, and not on the others. With it goes the advantage which has already been cited, that it assimilates our system nearer to that of Europe and the United States.

Of course, having said that, we then come to the point which the Chancellor always argues and which the Chief Secretary has argued, that there is only one form of Corporation Tax, and that is the tax which he has in the Bill. This is, of course, not the case. In fact, his form of Corporation Tax—so far as I can find out—is different from all other forms of Corporation Tax which are all more similar to each other. It is this form of Corporation Tax which the Chancellor has chosen which has led him into the difficulties which have been emphasised today from both sides of the Committee. His Corporation Tax is not like that of the United States. It is not like that of Canada or of the Federal Republic or of France or the Netherlands. It is, in its way, a unique form of Corporation Tax. Our quarrel with the Chancellor is that he is insisting on this form of tax.

Mr. W. Baxter

As the right hon. Member seems to approve of the principle of Corporation Tax and has shown that there are various types of the tax in the world, if he should ever become the Chancellor of the Exchequer—[HON. MEMBERS: "Never."]—what type of Corporation Tax would he favour?

Mr. Heath

I would deal with the Corporation Tax in the light of the situation which arose. If that situation ever arose, any right hon. Gentleman on that side or on this side of the Committee would say exactly the same thing. It is the only responsible thing to say.

This is the reason we have criticised the Chancellor and this is why every one of his hon. Friends has emphasised the great disadvantages of this form of Corporation Tax, whether it is on overseas investment, on investment allowances, on close companies, whatever it is. Yet, in the face of that, the Chief Secretary could say last night on television, I am told: It is all going beautifully, swimmingly and straightforwardly. Another splendid hostage to fortune. Of course there are alternative methods which could have been used. The Chancellor could have used the split rate system which they have in the Federal German Republic, or the credit system which they have in Canada in which fixed credits are given. I shall not go into details, as I might be approaching the fringe of order.

I want to make the point that it is this form of tax which has caused all the difficulties which the Committee now has to go on discussing at length. What are the consequences for policy? I should like to state these, also, clearly. The first is that it penalises dividends compared with the profits which are retained by public companies. Secondly, it taxes companies more heavily than partnerships with all the consequences which my hon. Friend the Member for Wimbledon (Sir C. Black) pointed out. Thirdly, it taxes growing private companies more heavily than public companies because of the close companies provision.

The fourth point is that it devalues the investment allowances. There is absolutely no doubt about that. Fifth, it makes the preference dividends more expensive than debenture interest with the consequence which is well known to many companies quite differently constructed from the one which my hon. Friend has been dealing with. Sixth, it means probably a complete alteration in the investment policies of charities which we have already discussed in part in dealing with the Capital Gains Tax provisions of the Bill.

Seventh, it heavily penalises income from overseas investment, and it does it in a random and haphazard way. This is a further criticism, even if one accepts the Chancellor's principles. Eighth, it discourages portfolio investment in the United Kingdom by foreigners. Ninth, the other side of the coin, it loses a lot of revenue for the Chancellor from foreign companies here in the United Kingdom which distribute their profits overseas.

The Chancellor is making it infinitely more difficult for British companies investing overseas, while foreign companies investing here get off much more lightly. Those are the nine policy consequences of the Chancellor's action. The Chief Secretary has certainly not proved his case on any of those points.

10.15 p.m.

My right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) dealt with distribution and emphasised, as did the Leader of the Liberal Party, the great power which these provisions give to corporations, which can indulge in unwise diversification and can also sit on their resources. This is not an academic question in any way, as anyone knows who has talked in the past 10 years to those who have been involved in mergers and take-overs in this country. The finance directors will tell anyone that they were shocked by the cash holdings which they found in many of those companies and which were not being put to good use. The result of the merger and take-over was that those holdings were put to good use by a much more dynamic company. That is the existing situation, and the Chancellor is making it worse. That is why we criticise him.

The hon. Member for Cheetham attacked him on this and said that he thoroughly supported us and, what is more, that he forced a Division in favour of the differential Profits Tax and that neither party supported him. After that we came to agree with him, and on the next Amendment it will not be necessary for him to force a Division, because we shall force one and he can support us without any difficulty at all.

Mr. Harold Lever

I shall give the right hon. Gentleman and his hon. Friends the same support in the Division on this point of principle as he gave me.

Mr. Heath

I want to deal with the question of investment in one other aspect which I believe is in the Chancellor's mind and, if not in his mind, at any rate in the minds of many of his colleagues. He believes that small companies should plough back rather than create dividends and that there would then be better investment. This will mean, broadly speaking, that dividends will be reduced, and this, I think, is what the Chancellor wants. He wants it in order to please those who are trying to get an incomes policy. That is the reason. Of course, if he is to do this he wants also to prevent investment overseas. Because if he is to reduce the return paid out in this country, people will invest not in this country but overseas where there is a better return.

The right hon. Gentleman's policy, therefore, holds together, but it is essential to see what the policy is. The policy is to reduce the return on investment in this country and then to prevent people from investing anywhere else, so that they must accept the reduced return here. He is doing this in what he believes is a genuine attempt to get an incomes policy, but we had better be quite plain about what he is doing and why he is doing it. This is why he is adopting this structure of the Corporation Tax.

The Chief Secretary has explained a great deal of the Bill about close companies. I agree with the hon. Member for Cheetham that the Government have only themselves to blame for the mess into which they have got themselves over the close companies and for all the anxieties which they have caused and all the criticism which has been aroused. The Chief Secretary pointed out that the same words are used in Schedule 17 as are in the Act of 1952. But the same words are not used in the body of the Bill; they are not used in the Clause. When the Chancellor was asked about this on Second Readiing he did not tell us about the Schedule. He said, "I think the words mean the same," or "I want them to mean the same". It is only at this stage that the Chief Secretary has tried to set these anxieties at rest. All this difficulty could have been avoided long ago.

My hon. Friend the Member for Kidderminster (Sir T. Brinton) emphasised a substantive point. The plain fact, to which the Chief Secretary did not address himself, is that the definition of close companies is much wider than the old formula. The Chief Secretary has given no reason why this should be so.

Mr. Diamond

I will.

Mr. Heath

The Chief Secretary says that he will do so. Presumably he means when he has had a few more days to find out. Are B.P. a close company or the great stores like Marks and Spencer and some other great companies? Surely the Chief Secretary could have told us long ago why this definition has to be so wide. The hon. Member for Cheetham said that the onus is to be changed and we agree with him. Again, we have had no explanation why the onus should have been changed in this way. These provide yet another example of how the Government have created trouble for themselves and have only themselves to blame.

The hon. Member for Cheetham wanted the Government to look again at the question of preference dividends. We agree with him there. He went on to say that in any case this was not the sort of Corporation Tax which he would have introduced. He is justifying everything that we have said about what the Chancellor has adopted.

May I add a word about the question of 35 per cent. or 40 per cent. The Chief Secretary always bases his figures on 35 per cent. The Chancellor has been much more forthcoming, and even in the Paper which he circulated last night he again used the expression, "a charge which is not expected to exceed 40 per cent. in Corporation Tax". Every business man who looks at this cannot say, "It will be 35 per cent. and I will make all my plans on 35 per cent.". If the Chancellor says that it is not likely to exceed 40 per cent., he must prepare for the worst. Every business man will, therefore, make his plans on the basis of 40 per cent. That is why so many of the Chief Secretary's arguments are undermined. The Chancellor of the Exchequer is wrong—there are five points in the scale. He said that there were four. There are five points involved in the difference concerning this total of £150 million, and this makes an immense difference to all the calculations.

Mr. Callaghan

There are four points—36, 37, 38, and 39.

Mr. Heath

And 40. The Chancellor has always been very cynical about the use of matchsticks, but I do not think that we should descend to the use of counting on our fingers. We cannot have the Chancellor doing his sums in public in the Committee on his fingers. The Chief Secretary always emphasises how much better off—

Mr. E. Shinwell (Easington)

On a point of order, Mr. Speaker, I should say Sir Horace—[Interruption.]

The Chairman

Order. I hope that the Committee will allow me to hear the point of order which the right hon. Gentleman is putting.

Mr. Shinwell

That was only intelligent anticipation, Dr. King. Did you observe that an hon. Gentleman opposite threw something across the Chamber—[An HON. MEMBER: "A box of matches."]—and is that in accord with the decorum of Parliament?

The Chairman

I assure the right hon. Gentleman that I noted what happened. It did not go across the Chamber. I nevertheless deprecate what happened.

Mr. Heath

I agree with you, Dr. Kitts, and suggest that we had better stick to the Chancellor's fingers.

The Chief Secretary has constantly emphasised, as has the Chancellor, how much more money companies will have with which to play around, but that applies to only some companies. How and why are they going to have the extra money if the figure is kept at 35 per cent. and the like-for-like relationship applies? They will have it because two lots of companies will provide the extra; those which trade predominantly overseas and those which receive investment allowances, including those in the development districts. That is where the price will be paid and that is the part which the Chief Secretary never emphasises.

The effect on overseas investment is the last point with which I will deal, but it is a major item. The Committee has already discussed it for some hours today. Many examples have been given of the impact on individual companies and we will be able to give them again when we discuss the coming Amendments. I will not, therefore, give them now. I do not accept the Chief Secretary's figures in regard to the return on overseas investment. The Chief Secretary himself gave the figure of an 8 per cent. return to this country. All the figures that we can find support that. We have quite separate figures which support an 8 per cent. return. But the Chief Secretary says, "Why should we not have it here if we get more than 8 per cent. return, because then the Treasury will get a greater return from taxation and will be able to spend the money on the social services?"

However, that completely overlooks all the overseas consequences of investment overseas. It is not only a question of getting 8 per cent., or whatever figure it is, back but of getting all the other benefits from the overseas investment. Therefore, to say that one must judge purely on the figure of return so that one can have it in this country and get more for the Treasury, which can be spent on the social services, is so far out of relationship with what is going on in the rest of the world as to be unbelievable. That was the whole tenor of his argument and it supports my previous thesis of what the Chancellor really wants to do, which is to get more investment in this country at the expense of investment overseas, which is investment essential to our balance of payments. We should get more investment in this country from higher savings. That should be our aim.

When we consider the developing countries, the argument is that the investment is declining. What is the point, even if it is declining, of making it worse through the Corporation Tax? There is absolutely no justification for it. What is more, we still have a very large amount of investment in the developing countries. Why damage that? After all, the Finance Minister of Malay has expressed himself on this subject in public and has said that this is going to damage Malaysia—so much so that he is prepared to offer haven to British companies which will move their residences from this country to Malaysia. I have no doubt that the Chancellor would come down firmly and stop that because it would be in accordance with his policy for him to do so.

This does not alter the damage which those in the developing countries and the Commonwealth see from the whole aspect of this policy. The hon. Member for Meriden (Mr. Rowland), in an interesting speech, said exactly what he would like the Chancellor to do. Every proposal he put forward was an absolute condemnation of the Bill. He said that he was glad that the Chancellor had extended the full-time period of overspill because that would give the right hon. Gentleman time in which to see the whole investment position and to find out exactly what was going on. Could there be a bigger condemnation of the undue haste and ill preparation of the Bill? We deplore the action that is being taken. We will consider all the Amendments and, despite the transitional arrangements—they will not meet the fundamental problem of overseas investment—

Mr. Rowland

Before the right hon. Gentleman proceeds, since he was selective in referring to my speech, would he not agree that I was praising the Chancellor for having made concessions for which not only hon. Members but many people outside had pressed?

Mr. Heath

That is true and I accept it. The reason why the hon. Gentleman was glad about that was because it would give the Chancellor time in which to find out just what the situation is with regard to overseas investment. That is a clear condemnation of the Chancellor for acting without knowing the position.

Mr. Callaghan

Would the right hon. Gentleman give a clear answer to this question? Does he think that overseas investment in its present form should continue at its present rate unchecked?

Mr. Heath

I fully accept the situation that new overseas investment may have to be reduced. [HON. MEMBERS: "Oh."] Yes, I accept that. I accepted it in the Second Reading debate. What we have challenged is the damage that will be done to existing overseas investment. What we are now challenging is the haphazard way in which the Chancellor, through this tax, is dealing with new investment overseas, and that is our major criticism.

I will deal with the reasons why the Chancellor should accept the Amendment and postpone the introduction of the tax for a year. The Chief Secretary made the point, albeit a political point, that if this tax were postponed for a year, the Government might be changed. That is not only fair, but very likely. However, looking at it from the Chancellor's point of view, he is not only hoping but making a last despairing effort to keep the Government in office.

10.30 p.m.

What are our arguments for postponing the operation of this tax for a year? First, there are the complications which are quite apparent to the Committee in dealing with this part of the Bill at this time. After all, it is well known that not even the professional associations have been able to give anything like proper consideration to this part of the Bill with its 40 Clauses. Certainly, there has not been time for hon. Members to discuss with their advisers and the professional associations and so on what should be done to the Bill. We just have to press on as best we can with these complications—

Mr. Callaghan

That means never doing it.

Mr. Heath

It is not a case of never doing it, but of doing it, if the Chan- cellor decides to do it, in the right way and at the right time.

Secondly, there will be great complications about bringing this tax into action when to do so requires full and detailed preparation. The Chancellor made a very interesting statement this afternoon when he said that he was quite convinced that, once we were through the transitional problems, all would be well. That is just the sort of joyfully confident statement which we are used to hearing from the right hon. Gentleman, but there is a very big "if"—"once we are through the transitional period". What the companies need is time to prepare to get through the transitional period and they are not getting it.

The third reason is that it would leave the Chancellor time to deal properly with the question of investment allowances. So far, he has dealt lightheartedly with them. He said that they would be sliced, severely reduced, that he had a few views about them anyhow, that he would like to look at the whole thing and that if, in due course, he decided to do something about them, he would. That is not good enough for firms which are concerned with investment allowances, especially firms in the development districts. The right hon. Gentleman has been misled by one sentence in the N.E.D.C. Report, taken it for granted and decided upon it. Postponement of this tax for a year would give him time to examine investment allowances, reach his own conclusions and come forward with a properly considered proposal for the Committee.

The fourth reason is that there would be more time for the renegotiation of double taxation agreements, which the Chancellor has told us must take place.

The fifth reason is that as he is prepared to increase the transitional full relief for a year, he might as well have delayed operation of this part of the Bill for a year and saved himself that part of the full relief which is now giving as a result of his Amendment announced last night about overspill relief. This would give the Committee proper time to consider the Bill and it would give companies time to make any transitional arrangements and himself proper time to organise the agreements and to deal with investment allowances. He would still have saved an additional year of the full rate of this transitional relief if he still thought that it should go forward.

These seem to us to be very powerful and serious and genuine reasons why the Amendment should be accepted, and I

therefore hope that my right hon. and hon. Friends will support it in the Lobby.

Question put, That the words "1964 and 1965" stand part of the Clause:—

The Committee divided: Ayes 281, Noes 281.

Division No. 160.]	AYES	[10.33 p.m.
Abse, Leo	Fitch, Alan (Wigan)	Lever, Harold (Cheetham)
Albu, Austen	Fletcher, Sir Eric (Islington, E.)	Lewis, Arthur (West Ham, N.)
Allaun, Frank (Salford, E.)	Fletcher, Ted (Darlington)	Lewis, Ron (Carlisle)
Alldritt, Walter	Fletcher, Raymond (Ilkeston)	Lipton, Marcus
Allen, Scholefield (Crewe)	Floud, Bernard	Lomas, Kenneth
Armstrong, Ernest	Foley, Maurice	Loughlin, Charles
Atkinson, Norman	Foot, Sir Dingle (Ipswich)	Mabon, Dr. J. Dickson
Bacon, Miss Alice	Foot, Michael (Ebbw Vale)	McCann, J.
Bagier, Gordon A. T.	Ford, Ben	MacColl, James
Barnett, Joel	Fraser, Rt. Hn. Tom (Hamilton)	MacDermot, Niall
Baxter, William	Freeson, Reginald	McGuire, Michael
Beaney, Alan	Galpern, Sir Myer	McInnes, James
Bence, Cyril	Garrett, W. E.	McKay, Mrs. Margaret
Bennett, J. (Glasgow, Bridgeton)	Garrow, A.	Mackenzie, Gregor (Rutherglen)
Binns, John	Ginsburg, David	Mackie, John (Enfield, E.)
Bishop, E. S.	Gourlay, Harry	McLeavy, Frank
Blackburn, F.	Greenwood, Rt. Hn. Anthony	MacPherson, Malcolm
Blenkinsop, Arthur	Gregory, Arnold	Mahon, Peter (Preston, S.)
Boardman, H.	Griffiths, David (Rother Valley)	Mahon, Simon (Bootle)
Boston, T. G.	Griffiths, Rt. Hn. James (Llanelly)	Mallalieu.J.P.W. (Huddersfield.E.)
Bottomley, Rt. Hn. Arthur	Griffiths, Will (M'chester, Exchange)	Manuel, Archie
Bowden, Rt. Hn. H. W. (Leics S.W.)	Gunter, Rt. Hn. R. J.	Mapp, Charles
Boyden, James	Hale, Leslie	Mason, Roy
Braddock, Mrs. E. M.	Hamilton, James (Bothwell)	Mayhew, Christopher
Bradley, Tom	Hamilton, William (West Fife)	Mellish, Robert
Bray, Dr. Jeremy	Hamling, William (Woolwich, W.)	Mendelson, J. J.
Broughton, Or. A. D. D.	Harper, Joseph	Mikardo, Ian
Brown, Rt. Hn. George (Belper)	Harrison, Walter (Wakefield)	Millan, Bruce
Brown, Hugh D. (Glasgow, Provan)	Hart, Mrs. Judith	Miller, Dr. M. S.
Buchan, Norman (Renfrewshire, W.)	Hattersley, Roy	Milne, Edward (Blyth)
Buchanan, Richard	Hazell, Bert	Molloy, William
Butler, Herbert (Hackney, C.)	Healey, Rt. Hn. Denis	Monslow, Walter
Butler, Mrs. Joyce (Wood Green)	Henderson, Rt. Hn. Arthur	Morris, Alfred (Wythenshawe)
Callaghan, Rt. Hn. James	Herbison, Rt. Hn. Margaret	Morris, Charles (Openshaw)
Carmichael, Neil	Hill, J. (Midlothian)	Morris, John (Aberavon)
Carter-Jones, Lewis	Hobden, Dennis (Brighton, K'town)	Mulley,Rt.Hn.Frederick(SheffieldPk)
Castle, Rt. Hn. Barbara	Holman, Percy	Murray, Albert
Chapman, Donald	Horner, John	Neal, Harold
Coleman, Donald	Houghton, Rt. Hn. Douglas	Newens, Stan
Conlan, Bernard	Howarth, Harry (Wellingborough)	Noel-Baker, Francis (Swindon)
Corbet, Mrs. Freda	Howarth, Robert L. (Bolton, E.)	Noel-Baker, Rt.Hn.Philip(Derby,S.)
Cousins, Rt. Hn. Frank	Howell, Denis (Small Heath)	Norwood, Christopher
Craddock, George (Bradford, S.)	Howie, W.	Oakes, Gordon
Crawshaw, Richard	Hoy, James	Ogden, Eric
Cronin, John	Hughes, Cledwyn (Anglesey)	O'Malley, Brian
Crosland, Rt. Hn. Anthony	Hughes, Emrys (S. Ayrshire)	Oram, Albert E. (E. Ham, S.)
Crossman, Rt. Hn. R. H. S.	Hughes, Hector (Aberdeen, N.)	Orbach, Maurice
Cullen, Mrs. Alice	Hunter, Adam (Dunfermline)	Orme, Stanley
Dalyell, Tam	Hunter, A. E. (Feltham)	Oswald, Thomas
Darling, George	Irvine, A. J. (Edge Hill)	Owen, Will
Davies, G. Elfed (Rhondda, E.)	Irving, Sydney (Dartford)	Padley, Walter
Davies, Harold (Leek)	Jackson, Colin	Page, Derek (King's Lynn)
Davies, Ifor (Gower)	Jay, Rt. Hn. Douglas	Paget, R. T.
Davies, S. O. (Merthyr)	Jeger, George (Goole)	Palmer, Arthur
Delargy, Hugh	Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)	Pannell, Rt. Hn. Charles
Dell, Edmund	Jenkins, Hugh (Putney)	Pargiter, G. A.
Dempsey, James	Jenkins, Rt. Hn. Roy (Stechford)	Park, Trevor (Derbyshire, S.E.)
Diamond, John	Johnson, Carol (Lewisham, S.)	Parker, John
Dodds, Norman	Johnson,James(K'ston-on-Hull,W.)	Parkin, B. T.
Doig, Peter	Jones, Dan (Burnley)	Pavitt, Laurence
Donnelly, Desmond	Jones,Rt.Hn.Sir Elwyn(W.Ham,S.)	Pearson, Arthur (Pontypridd)
Driberg, Tom	Jones, J. Idwal (Wrexham)	Peart, Rt. Hn. Fred
Duffy, Dr. A. E. P.	Jones, T. W. (Merioneth)	Perry, Ernest G.
Dunn, James A.	Kelley, Richard	Popplewell, Ernest
Dunnett, Jack	Kenyon, Clifford	Prentice, R. E.
Edwards, Rt. Hn. Ness (Caerphilly)	Kerr, Mrs. Anne (R'ter & Chatham)	Price, J. T. (Westhoughton)
Ennals, David	Kerr, Dr. David (W'worth, Central)	Probert, Arthur
Ensor, David	Lawson, George	Pursey, Cmdr. Harry
Evans, Albert (Islington, S.W.)	Leadbitter, Ted	Randall, Harry
Evans, Ioan (Birmingham, Yardley)	Ledger, Ron	Rankin, John
Fernyhough, E.	Lee, Rt. Hn. Frederick (Newton)	Redhead, Edward
Finch, Harold (Bedwellty)	Lee, Miss Jennie (Cannock)	Rees, Merlyn
Reynolds, G. W.	Solomons, Henry	Watkins, Tudor
Rhodes, Geoffrey	Soskice, Rt. Hn. Sir Frank	Weitzman, David
Richard, Ivor	Stonehouse, John	Wells, William (Walsall N.)
Roberts, Albert (Normanton)	Stones, William	White, Mrs. Eirene
Roberts, Goronwy (Caernarvon)	Strauss, Rt. Hn. G. R. (Vauxhall)	Whitlock, William
Robertson, John (Paisley)	Summerskill, Hn. Dr. Shirley	Wigg, Rt. Hn. George
Robinson, Rt. Hn.K.(St. Pancras,N.)	Swain, Thomas	Wilkins, W. A.
Rodgers, William (Stockton)	Swingler, Stephen	Willey, Rt. Hn. Frederick
Rogers, George (Kensington, N.)	Symonds, J. B.	Williams, Alan (Swansea, W.)
Rose, Paul B.	Taylor, Bernard (Mansfield)	Williams, Clifford (Abertillery)
Ross, Rt. Hn. William	Thomas, George (Cardiff, W.)	Williams, Mrs. Shirley (Hitchin)
Rowland, Christopher	Thomson, George (Dundee, E.)	Williams, W. T. (Warrington)
Sheldon, Robert	Thornton, Ernest	Willis, George (Edinburgh, E.)
Shinwell, Rt. Hn. E.	Tinn, James	Wilson, Rt. Hn. Harold (Huyton)
Shore, Peter (Stepney)	Tomney, Frank	Wilson, William (Coventry, S.)
Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)	Tuck, Raphael	Winterbottom, R. E.
Silkin, John (Deptford)	Urwin, T. W.	Woodburn, Rt. Hn. A.
Silkin, S. C. (Camberwell, Dulwich)	Varley, Eric G.	Woof, Robert
Silverman, Julius (Aston)	Wainwright, Edwin	Wyatt, Woodrow
Skeffington, Arthur	Walden, Brian (All Saints)	Zilliacus, K.
Slater, Joseph (Sedgefield)	Walker, Harold (Doncaster)	TELLERS FOR THE AYES:
Small, William	Wallace, George	Mr. Charles Grey and
Smith, Ellis (Stoke, S.)		Mrs. Harriet Slater.
NOES
Agnew, Commander Sir Peter	Corfield, F. V.	Harris, Reader (Heston)
Alison, Michael (Barkston Ash)	Costain, A. P.	Harrison, Brian (Maldon)
Allan, Robert (Paddington, S.)	Courtney, Cdr. Anthony	Harrison, Col. Sir Harwood (Eye)
Allason, James (Hemel Hempstead)	Craddock, Sir Beresford (Spelthorne)	Harvey, Sir Arthur Vere (Macclesf'd)
Amery, Rt. Hn. Julian	Crawley, Aidan	Harvey, John (Walthamstow, E.)
Anstruther-Gray, Rt. Hn. Sir W.	Crosthwaite-Eyre, Col. Sir Oliver	Harvie Anderson, Miss
Astor, John	Crowder, F. P.	Hastings, Stephen
Atkins, Humphrey	Cunningham, Sir Knox	Hawkins, Paul
Awdry, Daniel	Curran, Charles	Hay, John
Baker, W. H. K.	Currie, G. B. H.	Heald, Rt. Hn. Sir Lionel
Balniel, Lord	Dalkeith, Earl of	Heath, Rt. Hn. Edward
Barber, Rt. Hn. Anthony	Dance, James	Hendry, Forbes
Barlow, Sir John	Davies, Dr. Wyndham (Perry Barr)	Higgins, Terence L.
Batsford, Brian	d'Avigdor-Goldsmid, Sir Henry	Hiley, Joseph
Beamish, Col. Sir Tufton	Dean, Paul	Hill, J. E. B. (S. Norfolk)
Bennett, Sir Frederic (Torquay)	Deedes, Rt. Hn. W. F.	Hirst, Geoffrey
Bennett, Dr. Reginald (Gos & Fhm)	Digby, Simon Wingfield	Hobson, Rt. Hn. Sir John
Berkeley, Humphry	Doughty, Charles	Hogg, Rt. Hn. Quintin
Berry, Hn. Anthony	Douglas-Home, Rt. Hn. Sir Alec	Hooson, H. E.
Bessell, Peter	Drayson, G. B.	Hopkins, Alan
Bitten, John	du Cann, Rt. Hn. Edward	Hordern, Peter
Biggs-Davison, John	Eden, Sir John	Hornby, Richard
Bingham, R. M.	Elliot, Capt. Walter (Carshalton)	Hornsby-Smith, Rt. Hn. Dame P.
Birch, Rt. Hn. Nigel	Elliott, R. W.(N'c'tle-upon-Tyne,N.)	Howard, Hn. G. R. (St. Ives)
Black, Sir Cyril	Eyre, Reginald	Howe, Geoffrey (Bebington)
Blaker, Peter	Farr, John	Hunt, John (Bromley)
Bossom, Hn. Clive	Fell, Anthony	Hutchison, Michael Clark
Bowen, Roderic (Cardigan)	Fisher, Nigel	Iremonger, T. L.
Box, Donald	Fletcher-Cooke, Charles (Darwen)	Irvine, Bryant Godman (Rye)
Boyd-Carpenter, Rt. Hn. J.	Fletcher-Cooke, Sir John (S'pton)	Jenkin, Patrick (Woodford)
Boyle, Rt. Hn. Sir Edward	Foster, Sir John	Jennings, J. C.
Braine, Bernard	Fraser,Rt.Hn.Hugh(St'fford & Stone)	Johnson Smith, G. (East Grinstead)
Brewis, John	Fraser, Ian (Plymouth, Sutton)	Johnston, Russell (Inverness)
Brinton, Sir Tatton	Gammans, Lady	Jones, Arthur (Northants, S.)
Bromley-Davenport,Lt.-Col.Sir Walter	Gardner, Edward	Jopling, Michael
Brooke, Rt. Hn. Henry	Gibson-Watt, David	Joseph, Rt. Hn. Sir Keith
Brown, Sir Edward (Bath)	Giles, Rear-Admiral Morgan	Kaberry, Sir Donald
Bruce-Cardyne, J.	Gilmour, Ian (Norfolk, Central)	Kerby, Capt. Henry
Bryan, Paul	Gilmour, Sir John (East Fife)	Kerr, Sir Hamilton (Cambridge)
Buchanan-Smith, Alick	Glover, Sir Douglas	Kilfedder, James A.
Buck, Antony	Glyn, Sir Richard	Kimball, Marcus
Bullus, Sir Eric	Goodhart, Philip	King, Evelyn (Dorset, S.)
Burden, F. A.	Goodhew, Victor	Kirk, Peter
Buxton, Ronald	Gower, Raymond	Lagden, Godfrey
Campbell, Gordon	Grant, Anthony	Lambton, Viscount
Carlisle, Mark	Grant-Ferris, R.	Lancaster, Col. C. G.
Carr, Rt. Hn. Robert	Gresham Cooke, R.	Langford-Holt, Sir John
Cary, Sir Robert	Grieve, Percy	Legge-Bourke, Sir Harry
Chataway, Christopher	Griffiths, Eldon (Bury St. Edmunds)	Lewis, Kenneth (Rutland)
Chichester-Clark, R.	Griffiths, Peter (Smethwick)	Litchfield, Capt. John
Clark, Henry (Antrim, N.)	Grimond, Rt. Hn. J.	Lloyd,Rt.Hn.Geoffrey(Sut'nC'dfield)
Clark, William (Nottingham, S.)	Gurden, Harold	Lloyd, Ian (P'tsm'th, Langstone)
Cole, Norman	Hall, John (Wycombe)	Lloyd, Rt. Hn. Selwyn (Wirral)
Cooke, Robert	Hall-Davis, A. G. F.	Longbottom, Charles
Cooper, A. E.	Hamilton, Marquess of (Fermanagh)	Longden, Gilbert
Cooper-Key, Sir Neill	Hamilton, M. (Salisbury)	Loveys, Walter H.
Cordle, John	Harris, Frederic (Croydon, N.W.)	Lubbock, Eric

Lucas, Sir Jocelyn	Percival, Ian	Taylor, Edward M. (G'gow,Cathcart)
McAdden, Sir Stephen	Peyton, John	Taylor, Frank (Moss Side)
Mackenzie, Alasdair (Ross&Crom'ty)	Pickthorn, Rt. Hn. Sir Kenneth	Teeling, Sir William
Maclean, Sir Fitzroy	Pike, Miss Mervyn	Temple, John M.
Macleod, Rt. Hn. Iain	Pitt, Dame Edith	Thatcher, Mrs. Margaret
McMaster, Stanley	Powell, Rt. Hn. J. Enoch	Thomas, Sir Leslie (Canterbury)
McNair-Wilson, Patrick	Price, David (Eastleigh)	Thomas, Rt. Hn. Peter (Conway)
Maginnis, John E.	Prior, J. M. L.	Thompson, Sir Richard (Croydon,S.)
Maitland, Sir John	Pym, Francis	Thorneycroft, Rt. Hn. Peter
Marples, Rt. Hn. Ernest	Quennell, Miss J. M.	Tiley, Arthur (Bradford, W.)
Marten, Neil	Ramsden, Rt. Hn. James	Tilney, John (Wavertree)
Maude, Angus	Rawlinson, Rt. Hn. Sir Peter
Mawby, Ray	Redmayne, Rt. Hn. Sir Martin	Turton, Rt. Hn. R. H.
Maxwell-Hyslop, R. J.	Rees-Davies, W. R.	Tweedsmuir, Lady
Maydon, Lt.-Cmdr. S. L. C.	Renton, Rt. Hn. Sir David	van Straubenzee, W. R.
Meyer, Sir Anthony	Ridsdale, Julian	Vaughan-Morgan, Rt. Hn. Sir John
Mills, Peter (Torrington)	Roberts, Sir Peter (Heeley)	Vickers, Dame Joan
Mills, Stratton (Belfast, N.)	Robson Brown, Sir William	Walder, David (High Peak)
Miscampbell, Norman	Rodgers, Sir John (Sevenoaks)	Walker, Peter (Worcester)
Mitchell, David	Roots, William	Walters, Dennis
Monro, Hector	Royle, Anthony	Ward, Dame Irene
More, Jasper	Russell, Sir Ronald	Weatherill, Bernard
Morgan, W. G.	St. John-Stevas, Norman	Wells, John (Maidstone)
Morrison, Charles (Devizes)	Scott-Hopkins, James	Whitelaw, William
Mott-Radclyffe, Sir Charles	Sharples, Richard	Wiliams, Sir Rolf Dudley (Exeter)
Munro-Lucas-Tooth, Sir Hugh	Shepherd, William	Wills, Sir Gerald (Bridgwater)
Murton, Oscar	Sinclair St. George	Wilson, Geoffrey (Truro)
Neave, Airey	Smith, Dudley (Br'ntf'd & Chiswick)	Wise, A. R.
Nicholls, Sir Harmar	Smyth, Rt. Hn. Brig. Sir John	Wolrige-Gordon, Patrick
Nicholson, Sir Godfrey	Spearman, Sir Alexander	Wood, Rt. Hn. Richard
Noble, Rt. Hn. Michael	Stainton, Keith	Woodhouse, Hon. Christopher
Onslow, Cranley	Stanley, Hn. Richard	Woodnutt, Mark
Orr, Capt. L. P. S.	Steel, David (Roxburgh)	Yates, William (The Wrekin)
Orr-Ewing, Sir Ian	Stodart, Anthony	Younger, Hn. George
Osborn, John (Hallam)
Osborne, Sir Cyril (Louth)	Stoddart-Scott, Col. Sir Malcolm	TELLERS FOR THE NOES:
Page, John (Harrow, W.)	Studholme, Sir Henry	Mr. Martin McLaren and
Page, R. Graham (Crosby)	Talbot, John E.	Mr. Ian MacArthur.
Pearson, Sir Frank (Clitheroe)	Taylor, Sir Charles (Eastbourne)

The Temporary Chairman (Sir Herbert Butcher)

Ayes to the right, 281, Noes to the left, 281.

The responsibility falls upon me of giving a casting vote, which I do for the retention of the words in the Bill, and I accordingly vote with the Ayes.

Mr. Heath

I beg to move, That the Chairman report Progress and ask leave to sit again. I agree that this is a somewhat earlier hour than that to which the Committee is used to concluding its business, but we are now faced with the most extraordinary situation. It is quite apparent that the Government are no longer in a position to carry on with their business. Not only have they been quite unable to answer the arguments put forward in the Committee, but they have been unable to muster a majority to support them. We must, therefore, ask whoever is the senior Minister now on the Front Bench—

Hon. Members

Send for the Prime Minister.

The Temporary Chairman

Order.

Mr. Heath

It is evident to the Committee that the Prime Minister is not present. It has, of course, been evident to the Committee throughout its sittings on the Bill that the Prime Minister has never been present. Perhaps, therefore, the Leader of the House would like time to send for the Prime Minister, wherever he may be. In any case, we must call upon the Leader of the House or the Chancellor of the Exchequer to say whether the Government are now prepared to abandon at least this part of the Bill.

I put it to the Leader of the House and the Chancellor of the Exchequer that they should state their intentions. My right hon. and hon. Friends and myself firmly believe that now has come the time to report Progress because the Government are no longer in a position to carry on.

Mr. Callaghan

It is Derby day [HON. MEMBERS: "Oh."] If I had not known, I would have thought I was watching a performance of a pack of hounds trying to tear someone to pieces.

We have had a Motion to report Progress. There is clearly no reason why we should do so. The next Amendment on the Notice Paper is one that has been put down by the Opposition to reduce the tax on dividends. I think it would be for the benefit of the country, and certainly for the benefit of my hon. Friends, for the Opposition to declare themselves on this subject of reducing the tax on dividends.

It ought to be made known that from their point of view, at a time when we are asking the wage earners to restrict their incomes. [Interruption.]

The Temporary Chairman

Order.

Mr. Callaghan

I think it right that the country should know that the Opposition are keen to reduce the tax on dividends—[Interruption.]—when what we ask the country for is restraint on incomes.

Hon. Members

Resign.

Mr. Callaghan

It therefore seems to me very appropriate—

Mr. Norman Cole (Bedfordshire, South)

On a point of order. Are we in order in discussing the next Amendment when we have a Motion to report Progress?

The Temporary Chairman

When I think that the Chancellor of the Exchequer is out of order I will say so.

Mr. Callaghan

I am not discussing the next Amendment, I am saying that I think there is plenty of time ahead of us and that we ought to go on and discuss other Amendments so that we can hear what the view of the Opposition is and they can try their luck again and see whether they are as successful next time as this time. As far as I am concerned, I would recommend to the Committee that we should continue the debate from the point we have now reached.

Mr. Hirst

I cannot really accept the Chancellor's explanation as adequate. My right hon. Friend the Member for Bexley (Mr. Heath) is quite right. Many hon. Members have not been here. I have been here six and a half hours out of seven and I know perfectly well. [Interruption.]

The Chairman

It is very difficult for the Chair to hear the hon. Member who is addressing the Chair.

Mr. Hirst

I am a relatively old Member of the House and I shall say my little speech regardless of interruptions. I have said that my right hon. Friend the Member for Bexley is quite right. We have not had a satisfactory answer to this debate. It had been obvious that the Government have not understood and I think that it is appropriate and right, at this stage of affairs, that in view of the crisis that has overcome the Committee, the Prime Minister should be here to deal with this situation.

We are not likely to make much progress tonight at all unless we hear from the head of the Government some explanation of what he intends to do to get his party into line and control the business of the Committee. We are quite right to press this and I hope that we shall do so very strongly.

Sir K. Pickthorn

Dr. King—[Interruption.]

The Chairman

Order. It is difficult for the Chair to call an hon. Member if other hon. Members make a noise.

Sir K. Pickthorn

I wish to say only two things. [Interruption.] Right hon. Members opposite who have not had much to say, or who have not had anything to say that was worth saying, might

keep quiet now and help that bare half of the Committee which is prepared to listen to them to listen to me.

I have two things to say. The Chancellor of the Exchequer has argued against the Motion on the ground that there is no reason for it. The reason is that Her Majesty's present advisers have not a majority in the Committee. It might be argued to be an insufficient reason, but to say that it is no reason at all is absurd. Surely, in these circumstances, the Committee should do nothing without having heard the advice of the First Lord of the Treasury, who is in the Committee, or was a few minutes ago—[Interruption.] Damn George Brown!

Hon. Members

Oh!

The Chairman

Order. I did not hear what the right hon. Gentleman said, but I suspect that it was out of order.

Sir K. Pickthorn

As always, Dr. King, you are perfectly right. I should not have used those words. What words would you suggest?

Question put:—

The Committee divided: Ayes 279, Noes 284.

Division No. 161.]	AYES	[10.58 p.m.
Agnew, Commander Sir Peter	Brooke, Rt. Hn. Henry	d'Avigdor-Goldsmid, Sir Henry
Alison, Michael (Barkston Ash)	Brown, Sir Edward (Bath)	Dean, Paul
Allan, Robert (Paddington, S.)	Bruce-Cardyne, J.	Deedes, Rt. Hn. W. F.
Allason, James (Hemel Hempstead)	Bryan, Paul	Digby, Simon Wingfield
Amery, Rt. Hn. Julian	Buchanan-Smith, Alick	Doughty, Charles
Anstruther-Gray, Rt. Hn. Sir W.	Buck, Antony	Douglas-Home, Rt. Hn. Sir Alec
Astor, John	Bullus, Sir Eric	Drayson, G. B.
Atkins, Humphrey	Burden, F. A.	du Cann, Rt. Hn. Edward
Awdry, Daniel	Buxton, Ronald	Eden, Sir John
Baker, W. H. K.	Campbell, Gordon	Elliot, Capt. Walter (Carshalton)
Balniel, Lord	Carlisle, Mark	Elliott, R. W.(N'c'tle-upon-Tyne,N.)
Barber, Rt. Hn. Anthony	Carr, Rt. Hn. Robert	Eyre, Reginald
Barlow, Sir John	Cary, Sir Robert	Farr, John
Batsford, Brian	Chataway, Christopher	Fell, Anthony
Beamish, Col. Sir Tufton	Chichester-Clark, R.	Fisher, Nigel
Bennett, Sir Frederic (Torquay)	Clark, Henry (Antrim, N.)	Fletcher-Cooke, Charles (Darwen)
Bennett, Dr. Reginald (Got & Fhm)	Clark, William (Nottingham, S.)	Fletcher-Cooke, Sir John (S'pton)
Berkeley, Humphry	Cole, Norman	Foster, Sir John
Berry, Hn. Anthony	Cooke, Robert	Fraser,Rt.Hn.Hugh(St'fford & Stone)
Bessell, Peter	Cooper, A. E.	Fraser, Ian (Plymouth, Sutton)
Biffen, John	Cooper-Key, Sir Neill	Gammans, Lady
Biggs-Davison, John	Cordle, John	Gardner, Edward
Bingham, R. M.	Corfield, F. V.	Gibson-Watt, David
Birch, Rt. Hn. Nigel	Costain, A. P.	Giles, Rear-Admiral Morgan
Black, Sir Cyril	Courtney, Cdr. Anthony	Gilmour, Ian (Norfolk, Central)
Blaker, Peter	Craddock, Sir Beresford (Spelthorne)	Gilmour, Sir John (East Fife)
Bottom, Hn. Clive	Crawley, Aidan	Clover, Sir Douglas
Bowen, Roderic (Cardigan)	Crosthwaite-Eyre, Col. Sir Oliver	Glyn, Sir Richard
Box, Donald	Crowder, F. P.	Goodhart, Philip
Boyd-Carpenter, Rt. Hn. J.	Cunningham, Sir Knox	Goodhew, Victor
Boyle, Rt. Hn. Sir Edward	Curran, Charles	Gower, Raymond
Braine, Bernard	Currie, G. B. H.	Grant, Anthony
Brewis, John	Dalkeith, Earl of	Grant-Ferris, R.
Brinton, Sir Tatton	Dance, James	Gresham Cooke, R.
Bromley-Davenport.Lt.-Col.SlrWalter	Davies, Dr. Wyndham (Perry Barr)	Grieve, Percy
Griffiths, Eldon (Bury St. Edmunds)	Lloyd,Rt.Hn.Geoffrey (Sut'nC'dfield)	Renton, Rt. Hn. Sir David
Griffiths, Peter (Smethwick)	Lloyd, Ian (P'tsm'th, Langstone)	Ridsdale, Julian
Grimond, Rt. Hn. J.	Lloyd, Rt. Hn. Selwyn (Wirral)	Roberts, Sir Peter (Heeley)
Gurden, Harold	Longden, Gilbert	Robson Brown, Sir William
Hall, John (Wycombe)	Loveys, Walter H.	Rodgers, Sir John (Sevenoaks)
Hall-Davis, A. G. F.	Lubbock, Eric	Roots, William
Hamilton, Marquess of (Fermanagh)	Lucas, Sir Jocelyn	Royle, Anthony
Hamilton, M. (Salisbury)	McAdden, Sir Stephen	Russell, Sir Ronald
Harris, Frederic (Croydon, N.W.)	Mackenzie, Alasdair (Ross&Crom'ty)	St. John-Stevas, Norman
Harris, Reader (Heston)	Maclean, Sir Fitzroy	Scott-Hopkins, James
Harrison, Brian (Maldon)	Macleod, Rt. Hn. Iain	Sharples, Richard
Harrison, Col. Sir Harwood (Eye)	McMaster, Stanley	Shepherd, William
Harvey, Sir Arthur Vere (Macclesf'd)	McNair-Wilson, Patrick	Sinclair, Sir George
Harvey, John (Walthamstow, E.)	Maginnis, John E.	Smith, Dudley (Br'ntf'd & Chiswick)
Harvie Anderson, Miss	Maitland, Sir John	Smyth, Rt. Hn. Brig. Sir John
Hastings, Stephen	Marples, Rt. Hn. Ernest	Spearman, Sir Alexander
Hawkins, Paul	Marten, Neil	Stainton, Keith
Hay, John	Maude, Angus	Stanley, Hn. Richard
Heald, Rt. Hn. Sir Lionel	Mawby, Ray	Steel, David (Roxburgh)
Heath, Rt. Hn. Edward	Maxwell-Hyslop, R. J.	Stodart, Anthony
Hendry, Forbes	Maydon, Lt.-Cmdr. S. L. C.	Stoddart-Scott, Col. Sir Malcolm
Higgins, Terence L.	Meyer, Sir Anthony	Studholme, Sir Henry
Hiley, Joseph	Mills, Peter (Torrington)	Talbot, John E.
Hill, J. E. B. (S. Norfolk)	Mills, Stratton (Belfast, N.)	Taylor, Sir Charles (Eastbourne)
Hirst, Geoffrey	Miscampbell, Norman	Taylor, Edward M. (G'gow,Cathcart)
Hobson, Rt. Hn. Sir John	Mitchell, David	Taylor, Frank (Moss Side)
Hogg, Rt. Hn. Quintin	Monro, Hector	Teeling, Sir William
Hooson, H. E.	More, Jasper	Temple, John M.
Hopkins, Alan	Morgan, W. G.	Thatcher, Mrs. Margaret
Hordern, Peter	Morrison, Charles (Devizes)	Thomas, Sir Leslie (Canterbury)
Hornby, Richard	Mott-Radclyffe, Sir Charles	Thomas, Rt. Hn. Peter (Conway)
Hornsby-Smith, Rt. Hn. Dame P.	Munro-Lucas-Tooth, Sir Hugh	Thompson, Sir Richard (Croydon, S.)
Howard, Hn. G. R. (St. Ives)	Murton, Oscar	Thorneycroft, Rt. Hn. Peter
Howe, Geoffrey (Bebington)	Neave, Airey	Tiley, Arthur (Bradford, W.)
Hunt, John (Bromley)	Nicholls, Sir Harmar	Tilney, John (Wavertree)
Hutchison, Michael Clark	Nicholson, Sir Godfrey	Turton, Rt. Hn. R. H.
Iremonger, T. L.	Noble, Rt. Hn. Michael	Tweedsmuir, Lady
Irvine, Bryant Godman (Rye)	Onslow, Cranley	van Straubenzee, W. R.
Jenkin, Patrick (Woodford)	Orr, Capt. L. P. S.	Vickers, Dame Joan
Jennings, J. C.	Orr-Ewing, Sir Ian	Walder, David (High Peak)
Johnson Smith, G. (East Grinstead)	Osborn, John (Hallam)	Walker, Peter (Worcester)
Johnston, Russell (Inverness)	Osborne, Sir Cyril (Louth)	Walters, Dennis
Jones, Arthur (Northants, S.)	Page, John (Harrow, W.)	Ward, Dame Irene
Jopling, Michael	Page, R. Graham (Crosby)	Weatherill, Bernard
Joseph, Rt. Hn. Sir Keith	Pearson, Sir Frank (Clitheroe)	Wells, John (Maidstone)
Kaberry, Sir Donald	Percival, Ian	Whitelaw, William
Kerby, Capt. Henry	Peyton, John	Williams, Sir Rolf Dudley (Exeter)
Kerr, Sir Hamilton (Cambridge)	Pickthorn, Rt. Hn. sir Kenneth	Wills, Sir Gerald (Bridgwater)
Kilfedder, James A.	Pike, Miss Mervyn	Wilson, Geoffrey (Truro)
Kimball, Marcus	Pitt, Dame Edith	Wise, A. R.
King, Evelyn (Dorset, S.)	Powell, Rt. Hn. J. Enoch	Wolrige-Gordon, Patrick
Kirk, Peter	Price, David (Eastleigh)	Wood, Rt. Hn. Richard
Lagden, Godfrey	Prior, J. M. L.	Woodhouse, Hn. Christopher
Lambton, viscount	Pym, Francis	Woodnutt, Mark
Lancaster, Col. C. G.	Quennell, Miss J. M.	Yates, William (The Wrekin)
Langford-Holt, Sir John	Ramsden, Rt. Hn. James	Younger, Hn. George
Legge-Bourke, Sir Harry	Rawlinson, Rt. Hn. Sir Peter
Lewis, Kenneth (Rutland)	Redmayne, Rt. Hn. Sir Martin	TELLERS FOR THE AYES:
Litchfield, Capt. John	Rees-Davies, W. R.	Mr. Martin McLaren and
		Mr. Ian MacArthur.
NOES
Abse, Leo	Bottomley, Rt. Hn. Arthur	Cousins, Rt. Hn. Frank
Albu, Austen	Bowden, Rt. Hn. H. W. (Leics S.W.)	Craddock, George (Bradford, S.)
Allaun, Frank (Salford, E.)	Boyden, James	Crawshaw, Richard
Alldritt, Walter	Braddock, Mrs. E. M.	Cronin, John
Allen, Scholefield (Crewe)	Bradley, Tom	Crosland, Rt. Hn. Anthony
Armstrong, Ernest	Bray, Dr. Jeremy	Crossman, Rt. Hn. R. H. S.
Atkinson, Norman	Broughton, Dr. A. D. D.	Cullen, Mrs. Alice
Bacon, Miss Alice	Brown, Rt. Hn. George (Belper)	Dalyell, Tam
Bagier, Gordon A. T.	Brown, Hugh D. (Glasgow, Provan)	Darling, George
Barnett, Joel	Buchan, Norman (Renfrewshire, W.)	Davies, G. Elfed (Rhondda, E.)
Baxter, William	Buchanan, Richard	Davies, Harold (Leek)
Beaney, Alan	Butler, Herbert (Hackney, C.)	Davies, Ifor (Gower)
Bence, Cyril	Butler, Mrs. Joyce (Wood Green)	Davies, S. O. (Merthyr)
Benn, Rt. Hn. Anthony Wedgwood	Callaghan, Rt. Hn. James	Delargy, Hugh
Bennett, J. (Glasgow, Bridgeton)	Carmichael, Neil	Dell, Edmund
Binns, John	Carter-Jones, Lewis	Dempsey, James
Bishop, E. S.	Castle, Rt. Hn. Barbara	Diamond, John
Blackburn, F.	Chapman, Donald	Dodds, Norman
Blenkinsop, Arthur	Coleman, Donald	Doig, Peter
Boardman, H.	Conlan, Bernard	Donnelly, Desmond
Boston, T. G.	Corbet, Mrs. Freda	Driberg, Tom

Duffy, Dr. A. E. P.	Kenyon, Clifford	Price, J. T. (Westhoughton)
Dunn, James A.	Kerr, Mrs. Anne (R'ter & Chatham)	Probert, Arthur
Dunnett, Jack	Kerr, Dr. David (W'worth, Central)	Pursey, Cmdr. Harry
Edwards, Rt. Hn. Ness (Caerphilly)	Lawson, George	Randall, Harry
English, Michael	Leadbitter, Ted	Rankin, John
Ennals, David	Ledger, Ron	Redhead, Edward
Ensor, David	Lee, Rt. Hn. Frederick (Newton)	Rees, Merlyn
Evans, Albert (Islington, S.W.)	Lee, Miss Jennie (Cannock)	Reynolds, G. W.
Evans, Ioan (Birmingham, Yardley)	Lever, Harold (Cheetham)	Rhodes, Geoffrey
Fernyhough, E.	Lewis, Arthur (West Ham, N.)	Richard, Ivor
Finch, Harold (Bedwellty)	Lewis, Ron (Carlisle)	Roberts, Albert (Normanton)
Fitch, Alan (Wigan)	Lipton, Marcus	Roberts, Goronwy (Caernarvon)
Fletcher, Sir Eric (Islington, E.)	Lomas, Kenneth	Robertson, John (Paisley)
Fletcher, Ted (Darlington)	Loughlin, Charles	Robinson, Rt. Hn.K.(St. Pancras, N.)
Fletcher, Raymond (Ilkeston)	Mabon, Dr. J. Dickson	Rodgers, William (Stockton)
Floud, Bernard	McCann, J.	Rogers, George (Kensington, N.)
Foley, Maurice	MacColl, James	Rose, Paul B.
Foot, Sir Dingle (Ipswich)	MacDermot, Niall	Ross, Rt. Hn. William
Foot, Michael (Ebbw Vale)	McGuire, Michael	Rowland, Christopher
Ford, Ben	McInnes, James	Sheldon, Robert
Fraser, Rt. Hn. Tom (Hamilton)	McKay, Mrs. Margaret	Shinwell, Rt. Hn. E.
Freeson, Reginald	Mackenzie, Gregor (Rutherglen)	Shore, Peter (Stepney)
Galpern, Sir Myer	Mackie, John (Enfield, E.)	Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)
Garrett, W. E.	McLeavy, Frank	Silkin, John (Deptford)
Garrow, A.	MacPherson, Malcolm	Silkin, S. C. (Camberwell, Dulwich)
Ginsburg, David	Mahon, Peter (Preston, S.)	Silverman, Julius (Aston)
Gourlay, Harry	Mahon, Simon (Bootle)	Skeffington, Arthur
Greenwood, Rt. Hn. Anthony	Mallalieu, J.P.W.(Huddersfield,E.)	Slater, Joseph (Sedgefield)
Gregory, Arnold	Manuel, Archie	Small, William
Grey, Charles	Mapp, Charles	Smith, Ellis (Stoke, S.)
Griffiths, David (Rother Valley)	Mason, Roy	Solomons, Henry
Griffiths, Rt. Hn. James (Llanelly)	Mayhew, Christopher	Soskice, Rt. Hn. Sir Frank
Griffiths, Will (M'chester, Exchange)	Mellish, Robert	Stonehouse, John
Gunter, Rt. Hn. R. J.	Mendelson, J. J.	Stones, William
Hale, Leslie	Mikardo, Ian	Strauss, Rt. Hn. G. R. (Vauxhall)
Hamilton, James (Bothwell)	Millan, Bruce	Summerskill, Hn. Dr. Shirley
Hamilton, William (West Fife)	Miller, Dr. M. S.	Swain, Thomas
Hamling, William (Woolwich, W.)	Milne, Edward (Blyth)	Swingler, Stephen
Harrison, Walter (Wakefield)	Molloy, William	Symonds, J. B.
Hart, Mrs. Judith	Monslow, Walter	Taylor, Bernard (Mansfield)
Hattersley, Roy	Morris, Alfred (Wythenshawe)	Thomas, George (Cardiff, W.)
Hazell, Bert	Morris, Charles (Openshaw)	Thomson, George (Dundee, E.)
Healey, Rt. Hn. Denis	Morris, John (Aberavon)	Thornton, Ernest
Henderson, Rt. Hn. Arthur	Mulley,Rt.Hn. Frederick(SheffieldPk)	Tinn, James
Herbison, Rt. Hn. Margaret	Murray, Albert	Tomney, Frank
Hill, J. (Midlothian)	Neal, Harold	Tuck, Raphael
Hobden, Dennis (Brighton, K'town.)	Newens, Stan	Urwin, T. W.
Holman, Percy	Noel-Baker, Francis (Swindon)	Varley, Eric G.
Horner, John	Noel-Baker,Rt.Hn.Philip(Derby,S.)	Wainwright, Edwin
Houghton, Rt. Hn. Douglas	Norwood, Christopher	Walden, Brian (All Saints)
Howarth, Harry (Wellingborough)	Oakes, Gordon	Walker, Harold (Doncaster)
Howarth, Robert L. (Bolton, E.)	Ogden, Eric	Wallace, George
Howell, Denis (Small Heath)	O'Malley, Brian	Watkins, Tudor
Howie, W.	Oram, Albert E. (E. Ham, S.)	Weitzman, David
Hoy, James	Orbach, Maurice	Wells, William (Walsall, N.)
Hughes, Cledwyn (Anglesey)	Orme, Stanley	White, Mrs. Eirene
Hughes, Emrys (S. Ayrshire)	Oswald, Thomas	Whitlock, William
Hughes, Hector (Aberdeen, N.)	Owen, Will	Wigg, Rt. Hn. George
Hunter, Adam (Dunfermline)	Padley, Walter	Wilkins, W. A.
Hunter, A. E. (Feltham)	Page, Derek (King's Lynn)	Willey, Rt. Hn. Frederick
Irvine, A. J. (Edge Hill)	Paget, R. T.	Williams, Alan (Swansea, W.)
Irving, Sydney (Dartford)	Palmer, Arthur	Williams, Clifford (Abertillery)
Jackson, Colin	Pannell, Rt. Hn. Charles	Williams, Mrs. Shirley (Hitchin)
Jay, Rt. Hn. Douglas	Pargiter, G. A.	Williams, W. T. (Warrington)
Jeger, George (Goole)	Park, Trevor (Derbyshire, S.E.)	Willis, George (Edinburgh, E.)
Jeger,Mrs.Lena(Hlb'n&St.P'cras,S.)	Parker, John	Wilson, Rt. Hn. Harold (Huyton)
Jenkins, Hugh (Putney)	Parkin, B. T.	Wilson, William (Coventry, S.)
Jenkins, Rt. Hn. Roy (Stechford)	Pavitt, Laurence	Winterbottom, R. E.
Johnson, Carol (Lewisham, S.)	Pearson, Arthur (Pontypridd)	Woodburn, Rt. Hn. A.
Johnson,James(K'ston-on-Hull,W.)	Peart, Rt. Hn. Fred	Woof, Robert
Jones, Dan (Burnley)	Pentland, Norman	Wyatt, Woodrow
Jones,Rt.Hn.Sir Elwyn(W.Ham,S.)	Perry, Ernest G.	Zilliacus, K.
Jones, J. Idwal (Wrexham)	Popplewell, Ernest
Jones, T. W. (Merioneth)	Prentice, R. E.	TELLERS FOR THE NOES:
Kelley, Richard		Mrs. Harriet Slater and
		Mr. Joseph Harper.

11.15 p.m.

Mr. Barber

I beg to move Amendment No. 273, in page 50, line 5, to leave out from "charged" to "rate" in line 6 and to insert: a tax, to be called corporation tax on the undistributed profits of companies at such rate as Parliament may hereafter determine, and on the distributed profits of companies at such lower rate, not exceeding two fifths of the first mentioned". We have now an incredible situation. While we may or may not—[Interruption.]

The Chairman

Order. Will hon. Gentlemen who are leaving the Chambe do so quietly?

Mr. Barber

While we may or may not be right to continue to consider the merits of the Corporation Tax we all do so now in the knowledge that long before this tax will ever come into co-operation the Chancellor and his right hon. Friends will be on this side of the Committee. However, Dr. King, I have, like everyone else, to keep within the rules of order, so I must confine my remarks to this Amendment.

This is the first of a number of major Amendments which are concerned with the particular form of the Corporation Tax, which the Chancellor seeks to impose. Some of the arguments have already been deployed and I shall do my best not to prolong the proceedings. The Committee will realise this is one of the most important Amendments which we have put down on this side of the Committee. Its purpose can be simply stated. It is to avoid the discrimination against distributed profits which is inherent in the system which the Chancellor has chosen.

If one takes the rate of Corporation Tax as 40 per cent., the Chancellor proposes in future to charge tax on undistributed profits at 40 per cent. and distributed profits at 40 per cent. and thereafter at the standard rate, which is at present 41¼ per cent., making a composite rate of 63¾ per cent. We are not wedded to the particular form of righting the situation proposed in this Amendment, nor do we say that we have necessarily got the extent of the proportionate reductions precisely right. What we do say is that if the country is to be saddled with a Corporation Tax, and companies are to be obliged to deduct tax at the standard rate and to account for it to the Inland Revenue, then it is essential to have a lower rate of Corporation Tax on distributed profits than to retained profits.

Before I get down to the details, let me state in broad terms our objections to the Chancellor's system of Corporation Tax which we seek to remedy by the Amendment. In the first place—and I make no apology for saying this quite bluntly—it is inequitable to the shareholder who is to be burdened with an excessive degree of double taxation. Secondly, it is bound to encourage—some may think that this is a more important point—the inefficient use of scarce capital resources, because the inevitable consequences will be to divert those resources away from uses where would most contribute to prosperity. Thirdly, the Chancellor's system involves a complete reversal of the trend of company taxation as it is evolving in those countries with which we have to compete in the export markets. As my right hon. Friend the Member for Bexley (Mr. Heath) said, those countries are now moving to avoid the very situation which the Chancellor seeks to create in this country.

What is the basis of the right hon. Gentleman's proposed Corporation Tax, and his method of taxing distributions, in particular? It is, if I may say so with no disrespect, "Diamond's Delight". It is that a company is a legal entity, wholly distinct and separate from the shareholders, and, therefore, the right hon. Gentleman says, quite logically it follows that there is no element of double taxation.

But if the hon. Gentleman's logic is right, if, in fact, a company is an entity quite separate in reality as well as in law from the shareholders, surely the payment of dividends should rank as a charge in the computation of the profits for Corporation Tax purposes. Neither he nor I, nor anyone else in the Committee, would suggest that. The hon. Gentleman assumes that the identity of the company and its shareholders are the same when it suits his purpose, and equally he assumes that they are quite distinct when he wants to justify another aspect of the tax.

Of course it is true—I will grant him this—that in law a company is a legal persona quite separate and distinct from the shareholders.

Mr. Diamond

Hear, hear.

Mr. Barber

The hon. Gentleman says, "Hear, hear", but this is no more than a legal fiction which is convenient for many of the purposes of a highly developed society. The underlying reality with which the hon. Gentleman should be concerned is that a company, although in law a distinct entity, has in fact no interest in its business, in its assets, in its profits, distinct from the interest of its members. If the tax ever becomes operative, people who choose the company structure for their trading activities will be seriously overburdened in comparison with other taxpayers. This point has been made already in the general debate earlier and I do not propose to elaborate it. I only pose the question: why should risk capital, which is the lifeblood of our economy, be singled out to be penalised?

I will deal in a moment with the economic consequences of the Chancellor's, in my view misguided, incentive to increase retentions, but let me, first, illustrate the consequences in terms of hard cash. Anyone, I should have thought, with a modicum of business experience knows that in the case of most public companies, and certainly in a growth industry, it is of the highest importance that dividends should not fall, and the reason is that one must always have in mind the need as the business expands to go to the market for additional capital. The dividend record of a company is, therefore, a highly important factor in the eyes of the investing public. It follows that many up-and-coming companies will rightly regard the maintenance of the dividend as a matter of prime importance.

We ought to consider for a moment the comparative effects of the existing system of taxation and the proposals in the Bill. Assume that a company has annual profits of £1 million before tax and an established dividend distribution of £600,000 gross. At this time of the night, I shall not weary the Committee with the details, but the conclusion to which one comes is that, under the present system, with Profits Tax at 15 per cent. and Income Tax at 8s. 3d. in the £, £85,000 would be available for plough-back. Under the Corporation Tax of 40 per cent., that company would have nothing at all left for plough-back.

The higher the ratio of dividend to profit the greater would be the disparity, and conversely. The 60 per cent. ratio is by no means unreasonably high. After all, investors risk their money for the sake of yield, and it is right to infer, there- fore, that in many instances, and probably in the case of most of the largest companies, the effect of the Corporation Tax would be to reduce the amount ploughed back.

Consider not the case which I have just put to the Chief Secretary, but the case at which the Chancellor is aiming, the case in which, because of the conjoined effect of the Corporation Tax and Income Tax, the company cuts its dividends and increases its retentions, which is what, in many cases, the Chief Secretary would like to see. It is nonsense to pretend that by increasing retentions we are likely to see a more efficient use of our capital resources than in the normal working of the market. I will tell the hon. Gentleman what I think he will achieve. I believe that, if this proposal goes through, many of the less dynamic companies will certainly be encouraged to increase their retentions, and I have not the slightest doubt that this will lead to an expansion of less profitable investment.

The fallacy in the Chancellor's reasoning is to concentrate on the quantity of investment rather than on the quality. Even if one considers only the quantity of investment, the facts simply do not support the right hon. Gentleman's reasoning. When the Chief Secretary spoke in the Budget debate, he tried to show that, after the change from dual rates of Profits Tax to a single rate in 1958, the pattern of financing was virtually unchanged. He repeated the same point today. I was surprised at what he said. I notice that Mr. Harold Wincott, in the Financial Times, reached the conclusion that the evidence available to him did not support the hon. Gentleman's conclusion.

I have made my own inquiries, and with the best will in the world—I would not put forward this view lightly—I fail to see how the facts support the Chancellor. Let me give him the facts which I have been able to ascertain. They are from highly respectable sources, which I can give to the right hon. Gentleman if he wishes them. As far as I understand it, the position is that from 1954 to 1958 the total sources of capital funds amounted to £7,011 million, out of which issues of ordinary shares amounted to £787 million, or 11.2 per cent. During the years 1959 to 1963, the total sources of capital funds amounted to £10,468 million, out of which the issues of ordinary shares accounted for £1,662 million or 15.9 per cent. That was 11.2 per cent. in the first four year period and 15.9 in the second.

No doubt the hon. Gentleman will wish to consider these figures, and in due course he will correct me if he thinks that I ant wrong, but in view of the great interest in what he said and the importance of the facts he gave in relation to the argument which he was putting before the Committee, I think it right to give these facts, so that the hon. Gentleman can correct me if I am wrong.

Mr. Diamond

I will ask only one question of the right hon. Gentleman. I shall, of course, be glad of the opportunity to consider the figures. Do his figures of shares issued mean shares issued for cash or shares issued for cash and shares in other companies?

Mr. Barber

I have with me a detailed note of the meaning of the terms I have used—total dividends distributed, total additions to reserves, issues of ordinary shares, and so on—and if the Chief Secretary would like I will send them to him. I would be glad to know whether I am right or whether there is some difference in the coverage. If I am right, then the converse of the Government's case has been proved. The consequences of the Government's proposals can be simply stated. They will favour and protect the inefficient and inhibit the free flow of capital to those projects where it can be most effectively used.

I come to the most extraordinary claim of all to be made by the Chancellor in favour of the tax. The right hon. Gentleman is claiming that it will be for the benefit of the British economy. In his Budget speech he said: By separating formally the two taxes, namely, the tax on corporations and the tax on individuals, we shall be bringing the tax system of the United Kingdom into line with reality and adopting what has become the general practice throughout the world".—[OFFICIAL REPORT, 6th April, 1965; Vol. 710. c. 254.] I do not propose to go into details, after the long discussion we have had today, but if the Chancellor really believes what he said in his Budget speech—and one can only assume that he does—then, frankly, he will believe anything. It is incredible and alarming to think that when the right hon. Gentleman made his Budget speech he thought that the principles of his Corporation Tax tallied with those of our principal competitors. Does he not know that few countries with a corporation tax have full double taxation of dividends on the lines he proposes?

Before getting to the Amendment, the right hon. Gentleman, in his observations in opposing the Motion to report Progress, made some rather disparaging remarks about dividends. What he did not tell the Committee was that there are virtually no other countries with a corporation tax which proposes to do what he proposes, which is to impose full double taxation on dividends. Of the two countries which do, the United States has a generally low burden of personal taxation, which makes all the difference, and France, as is well known, has a highly inefficient capital market.

As for the Common Market countries, they are now moving to the very situation which the Chancellor seeks to abandon. While the Prime Minister trips from one European capital to another making overtures about bridging the gulf between E.F.T.A. and the E.E.C., the Chancellor is quietly moving in the other direction.

I will read two passages from the Report of the Fiscal and Financial Committee of the E.E.C.—the so-called Neumark Report—which are of great importance to anyone who wishes to see closer co-operation between the Common Market countries and ourselves. I understand, from what the Prime Minister and others have said, particularly at Question Time, that the Government wish, even if they cannot join the Treaty of Rome on suitable and favourable terms, in as many directions as possible, to move closer to Europe.

The first passage stated: The structure of the rate"— that is, the Corporation Tax rate— should, according to the opinion of the Fiscal and Financial Committee, be uniform in all the Member countries and it is proposed that for practical reasons, the tax be varied in such a way … that the part of the profits retained for self-financing be taxed more heavily than that which is distributed". I can properly leave out two paragraphs. The Report continued: The majority of members of the Fiscal and Financial Committee consider that the company tax affecting the distributed part of the profits in the form of dividends should represent about half the tax applicable to undistributed profits and by no means less than 15 per cent.". 11.30 p.m.

What the Committee is in this respect recommending to the other members of the E.E.C. is, broadly speaking, the German system, which imposes corporation tax on undistributed profits at 51 per cent. and on distributed profits at 15 per cent. So if the Chancellor really wants to bring our taxation into line with our major competitors, as he purported to be doing on Budget day, he must accept a modification of the tax on the lines of the Amendment.

Mr. Harold Lever

Does the right hon. Gentleman favour some such discriminatory system such as is advocated by the Neumark Report?

Mr. Barber

I most certainly do. At present—this is the real significance of the argument—if we have a Corporation Tax of 40 per cent. on the lines suggested by the Government, it means that undistributed profits will bear tax at the rate of 40 per cent. and distributed profits, because of the interaction of Profits Tax and Income Tax, which has to be deducted and accounted for to the Revenue, will bear an effective rate of 63¾ per cent. In other words, there is a disincentive to distribute, which, I believe, is a bad thing economically for the reasons I have just mentioned.

So, although the particular figures which I have given and the particular form of the Amendment may not be exactly right, what I am suggesting to the hon. Gentleman is that we should move at any rate somewhat nearer to the sort of proposals which are being made for the Common Market countries. The blunt truth, in my view, is that in its present form the Corporation Tax is based on a principle which is unsound, it leads to consequences which are unjust, and in the penalty which it imposes on risk capital it is, I believe, economic folly.

Mr. Patrick Jenkin (Wanstead and Woodford)

I am happy to support the Amendment. Before I go on to the substance of it, I should like to correct the record on one matter. On Second Reading, the Financial Secretary sought to claim that there were many Members on this side of the Committee who supported a Corporation Tax, and he mentioned my name and drew attention to a pamphlet. I did not write, nor put my name to, the chapter which he mentioned. Furthermore, I put my name to another chapter in which I roundly condemned any idea of a Capital Gains Tax. No doubt the Chief Secretary will convey this to the Financial Secretary.

If the hon. and learned Gentleman will refer to the spring, 1961, issue of Crossbow he will find all my arguments for objecting to a Corporation Tax on the lines we are discussing this evening. The use of my name to support the Chancellor's proposal was very wide of the mark, and I hope that on some future occasion the hon. and learned Gentleman will withdraw what he said.

I support the Amendment for reasons touched on by some speakers earlier. As at present embodied in the Bill, the tax is based on a number of misconceptions about the capital market and the desirability, in particular, of retentions. The remarks that the Chief Secretary made in winding up an earlier debate about drawing a distinction between ploughing back and retentions was nonsense. To a public company other than a close company, the Corporation Tax makes no differentiation at all as to whether the profits are reinvested or merely retained. Therefore, the argument which is directed towards the form in which the tax has been cast in the Bill, against which the Amendment is intended to strike, depends on the validity of the argument as to whether retentions are a good thing.

It is my humble opinion that retentions on the whole are not a good thing. A company which has a desire to expand should be prepared to justify its plans to the market. This was a point touched on by my right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) earlier today, when he said that a system based on encouraging retention is, in fact, undemocratic. It has been said before, but let hon. Members reflect on what politics are about; they are a matter of power, and one of the things which we on this side of the Committee stand for is not the concentration of power, but a wider dissemination of power. A tax system which tends to concentrate the power of investment decisions —and those are a very important exercise of power—in the hands of boards of directors, tends also to isolate them from the market as well as from their own shareholders.

It is fundamentally undemocratic and the sooner that right hon. and hon. Members opposite realise the fact, the better. There is another argument. Apart from being undemocratic, it is inefficient. There is no evidence at all that those companies which plough back a larger than average share of their profits are any more efficient.

Then there is the question of growth. The hon. Member for Colne Valley (Mr. Duffy) made a speech in relation to ploughing back, during the course of which he said there was no evidence to suggest that distributions were a good thing. In fact, the hon. Gentleman was entirely wrong. It is absolutely untrue for anyone to suggest what he suggested; I will draw the Chief Secretary's attention to an extremely important article based upon work done at Oxford University, a couple of years ago.

The results were published in November, 1962, by the Oxford University institute of Statistics in an article by Mr. I. M. D. Little, of Nuffield College. Mr. Little analysed the published results of more than 500 major companies, of which the details had appeared in Moody's Index, and if hon. Members care to study the article they would see that his calculations were extremely complex. He employed the most advanced statistical techniques, making use of the university's computer, and so far as I am aware his work has never been challenged by anyone.

It produced some very surprising results. First, in the period at which he was looking, 1951–1959, it was found that the pre-tax earnings of companies rose, in real terms, less than the growth in personal incomes, that is, only 1.3 per cent. per annum, and that, with two-thirds of the equity income ploughed back, the average yield was only 2 per cent. per annum. Mr. Little drew the conclusion that a lot of these ploughed-back earnings were very inefficiently used indeed. His findings shook the stock market, and something which shook the stock market even more was the fact that he found no correlation at all between past growth and probable future growth. If one's stockbroker says that a company has had good growth over the last five years, that is no indication that it will have a good growth in the following five years. For the purposes of this debate, perhaps the most important conclusion which Mr. Little reached and which he described as a very disturbing conclusion was that there was no correlation between plough-back and growth, that there was no evidence whatever that firms which ploughed back a higher than average proportion of their profits grew any faster than firms with a higher rate of distribution.

I hope that the Chief Secretary is listening to this, because it takes the carpet away from under the feet of the whole case for this form of Corporation Tax. Mr. Little concludes that the results support the view that institutional or fiscal arrangements which limit dividends are a relatively inefficient method of increasing investment. The whole case for the Corporation Tax in this form has been that it will encourage retention and that this miracle tax, to use the glowing terms in which the Chief Secretary regards it, would lead to greater efficiency, healthier companies, and so on.

The one comprehensive piece of academic research which would have thrown some light on the validity of this whole proposal, and did, has come to the conclusion that … institutional or fiscal arrangements which limit dividends are a relatively inefficient method of increasing investment. I do not know how the Chancellor's advisers could have missed this. Of course, one comes from King's, Cambridge, so perhaps does not read the bulletins of the Oxford Bureau of Statistics, whereas, in Balliol, they have not yet got round to reading the publications of Fellows of Nuffield. Perhaps they will learn. The fact of the matter is that this article and its findings—and no one has seriously challenged them—make a complete nonsense of the whole of the Government's case for this Corporation Tax.

The second point with which I wish briefly to deal is the question of the proportion of new capital which is raised from the market. My right hon. Friend referred to the article by Harold Wincott which appeared in the Financial Times of 27th April, in which the figures quoted by the Chief Secretary in the Budget debate on 12th April were challenged. The first question which Mr. Wincott put is one to which the Committee is entitled to an answer. What are the sources of the Government's figures? In the last debate the Chief Secretary refined them down to one place of decimals and appeared to feel that that strengthened the validity of his argument.

The Committee is still awaiting any indication of the sources from which the Chief Secretary has derived his figures, whereas, on the other hand, Mr. Wincott—and, I have no doubt, the figures which my right hon. Friend is to send to the Chancellor of the Exchequer—are from sources which are published and acknowledged and impartial, and arrive at entirely different conclusions, namely, that after the law was changed in 1958 a substantially higher proportion of new capital was raised from the market than had been raised in the five years before.

It is a bit disingenuous of the Chief Secretary—and he was caught out by one of my hon. Friends—to link this to equity capital only and to say that it is essential to take into account preference shares and loan capital. He said that loan capital came from banks. Has he never heard of convertible debentures, a favourite way of raising capital? Until a year or two ago, a very large number of new issues on the market were in the form of convertible debentures.

Mr. Wincott shows that whereas, in the previous five years, £1,282 million had been raised from the stock market, in the five years following the change of the Profits Tax pattern in 1958 that figure was nearly doubled to £2,287 million. I am convinced that the Chief Secretary owes it to the Committee to publish the information upon which he arrives at his statistics which are clearly contradicted by respectable statistics from impartial and thoroughly reliable sources.

11.45 p.m.

I support the Amendment because it brings us very much nearer the pattern which Europe is approaching. The logic of the Common Market, of the European Economic Community, drives one inexorably to the conclusion that it is not only a matter of tariffs and quotas but a matter of institutions as well, and no institution is more important or has a greater influence on business, trade and commerce than taxation.

Inevitably, a Community that wants to establish itself as a single trade unity has to harmonise its institutions as it harmonises its tariffs. The E.E.C. has been driven to that, and I am quite certain that in the future the logic will become even more obvious. If we are to set our faces against this, and adopt a system of taxation which is moving in the opposite direction and not towards the system they are abandoning while they move towards the system that we are abandoning, no one will take seriously our claim to be a European country wanting to play our part in Europe as an integral part of Europe.

Speaking from the back benches, I would say that if we find ourselves, as I am confident we shall, in a short time—within 12 months—in a position to amend this Measure it will be on the lines of this Amendment, based on the Neumark system—

The Temporary Chairman (Mr. Thomas Steele)

Order. The hon. Member has been referring a great deal to the discussion that we have already had, but I hope that he and other hon. Members will remember that the last discussion was so conducted as to enable hon. Members to range fairly widely over the question of the Corporation Tax.

Mr. Jenkin

I am much obliged, Mr. Steele. I conclude by saying that I support the Amendment.

Mr. Hirst

This is an extremely important Clause, but the trouble all the way through is that the Government have based their provisions on what I choose to call a muddled version of minority reports of Royal Commissions and committees on taxation. They cannot expect to get things nearly right because, by and large, the muddled versions of amalgamated reports of Royal Commissions and committees are bound to be about as wrong as anything can be. That is where the Government started from, and that is where, as far as I can make out, they finish.

I hope that the Chief Secretary will not once again play his one-man charade that we all know so very well—we can almost recognise it before he does the first part—and try to fool the Committee into accepting the supposition that no business man must consider any calculation or forward planning except on the basis that in no circumstances whatever will the rate of Corporation Tax be more than 35 per cent. Perhaps the Chief Secretary could give me his attention, because I am addressing him so that I may save time. If the hon. Gentleman wants me to repeat it—

Mr. Diamond

I have heard every word that the hon. Gentleman has said. He does not want me to go back on 40 per cent. and wants the assurance that never, during the next century, will Corporation Tax be more than 35 per cent. I have the point.

Mr. Hirst

The hon. Gentleman will not achieve anything by being silly, if I may say so. I treat him as being intelligent, and possibly he might treat me as the same. Time and time again he has refused to accept any argument unless it has been based on the factual figure of 35 per cent. I hope that he will not do it again.

We have had it from the Chancellor time after time. He did it on his fingers, though we did not find it very easy to follow and we did not know whether he was counting his fingers as four or five. But, unfortunately, 40 per cent. is at least a possibility if the present Government survive long enough, and if companies are to plan and be fair to their shareholders they must take into consideration the possibility that that could happen.

Therefore, my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) is perfectly correct in pointing out that in that event the element of taxation involved under these proposals would be 64½ per cent. I suggest that the figure now is 56¼ per cent.—in other words, 41¼ per cent. plus 15 per cent. If these proposals are accepted, the element of 8s. 3d. would still remain at 41½ per cent. and if Corporation Tax was 40 per cent. that would make the composite rate of 64 per cent. I am not working this out on my fingers, or with a box of matches—which, incidentally, I do not think has been returned, as far as I know.

That is a penal rate and it is absolutely contrary to the whole trend. Hon. Members opposite like to mention instances from other countries, but we shall not hear them tonight because they do not suit their case. One of our hardest "sells" in the E.E.C. is Germany—I have recently been on the Continent—which is changing its system. The Germans are realising the necessity, which we could have told them, of encouraging distribution in order to get mobility of capital in the same way as mobility of labour. The trouble with hon. Members opposite is that they are not modernising their reactions. They really must face facts if we are to compete in business in the future.

Many businesses have grown enormously during the past year or so from distribution policies. Electronic machines are one example. I have no interest in that industry, although I was once a director of a firm concerned with it. That has gone ahead in the last few years on a policy of distribution plus efficiency. Money retained is not always put to the best purpose. A large number of firms are rather sluggish in their management. I have heard hon. Members opposite say this in a different context. The trouble is that they have a packet of arguments for one Bill and a packet of arguments for another. Sometimes firms sit on their money because they have not got the imagination to enable them to use it. It happens right, left and centre until somebody who knows how better to use the capital comes along with a takeover bid.

It would be much better if the profits were distributed and invested in companies which know how to use the money and get export orders. We should not encourage reactionary policies or continue this everlasting hate against dividends as if there was something indecent about them. They are the yardstick of efficiency and growth of firms.

Mr. Harold Lever

The hon. Member says that we hate dividends. The only evidence that he has is that they would be more highly taxed than ploughed-back profits. Are we on this side of the Committee entitled henceforth to refer to the Opposition's hatred of ploughed-back profits on the ground that a right hon. Gentleman opposite has said that he would tax ploughed-back profits more heavily than dividends?

Mr. Hirst

In the same context, one does not penalise something one loves and, on the other hand, if it is something which one does not love one tends to be discriminatory about it. I am all against encouraging plough-back in that sense.

Is it thought that, by reason of this suggested concession, efficient sound businesses, which are a large proportion of our firms, thank heaven, will distribute this money at a preferential rate just for the love of doing it rather than plough back for an efficient purpose which will be to the ultimate benefit of the shareholders and of the country? The hon. Member for Manchester, Cheetham (Mr. Harold Lever) is able in these matters, but he must not try to bring up these arguments in order to square himself with his earlier speeches.

It is because we want firms to have the capacity to be mobile, fluid and up to date so that we can take our place, as we must, in a competitive world and as an equal partner in Europe that we on this side of the Committee say that we must not pursue policies which by their very nature will make that more difficult.

Mr. Percy Grieve (Solihull)

I support my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) in his moving of the Amendment. Having heard my hon. Friend the Member for Wan-stead and Woodford (Mr. Patrick Jenkin) deal so cogently with the economic aspects of the reasons for the Amendment, I found my objections to the Clause on justice and equity.

The Clause is avowedly designed to penalise distributed profits and subject them to higher taxation in the hands of the shareholders than the other profits of companies. It is founded on a completely fallacious view of the nature of public and private companies. They are not, save by legal fiction, separate entities distinct from their shareholders. Their shareholders created them. Shareholders' money gives them their lifeblood, and their shareholders can put an end to them.

As an hon. Member observed earlier, these compaines have no interest outside that of their shareholders. The money that flows into these companies is given by the shareholders to create the businesses which have made this country prosperous. What reason is there why these shareholders, drawing their revenues from their enterprises, should be penalised and be subject to a higher rate of tax than persons who draw their revenues from any other kind of enterprise? There is none whatever. This whole Corporation Tax, in its attitude towards the shareholder, is founded on the dislike of hon. Members opposite for the shareholder as a person.

The Chancellor of the Exchequer disclaimed this afternoon any dislike or enmity for the business of this country, but business consists not only of labour and management but also of capital provided by the savings of the people. That capital is entitled to a proper and fair reward without being penalised by methods of this kind which, however disguised and covered up, are a form of penal taxation.

It is said by the Chief Secretary to the Treasury, "Ah, yes. But this will encourage retention". Retention as such is, apparently, desirable. Surely the test of efficiency is best left to the market. It is to the market that companies can say they need money. If those companies are efficient, there will never be a lack of money coming forward. Those companies make a just balance between the need to give their shareholders a proper reward for enterprise and the thrift they have shown in forming the companies and carrying them on in the interest of building up the company from day to day.

I agree that to give management complete power to pile up profits for whatever purpose they desire inside the company is not only inimical to the interests of the shareholders, but to the best interests of trade and enterprise in the country. It is for that reason that I desire to support the Amendment.

12 m.

Mr. Harold Lever

At this late hour, I think that it would be unwise to address the Committee with a detailed examination of the merits and demerits of encouraging by fiscal measures retention of profits. I do, however, wish to point out that the right hon. Member for Altrincham and Sale (Mr. Barber) has now committed his party to the point of view, from the Front Bench opposite, that a penal rate of tax should be levied against profits that are retained in a company, compared with those paid out by way of dividends.

Mr. Barber

I am sure the hon. Gentleman will realise, on reflection, that I said no such thing. I did say that, if we are to have a Corporation Tax, I favour a system such as the Neumark Committee proposed, with dual rates—a higher rate of tax on undistributed profits than on distributed profits. I said nothing whatsoever about penal rates. If the hon. Gentleman will look at our particular Amendment he will see precisely that is what we have suggested.

Mr. Lever

Perhaps I was unfair in one respect, in using the word "penal". I meant it in its literal sense. I was asking if the hon. Gentleman favoured the notion that you should differentiate between profits retained in a company and profits paid out in dividends. The right hon. Gentleman, without any of the "ifs" and "buts" he now apparently attaches, said explicity that he favours a rate of tax for retained profits greater than that which would be charged on profits paid out in dividends.

In an affectionate way the right hon. Gentleman quoted from the Neumark Report and commended the good sense of what it was proposing. I ask him again: does he favour, as being advantageous for Britain, instead of what the Government are doing, namely, making it dearer in a fiscal way to pay out dividends, a system where higher rate of tax is exacted on retained profits and lower rate charged on dividends?

Mr. Barber

The hon. Gentleman is talking the whole time in terms of tax. He must differentiate between the Corporation Tax and Income Tax. At the moment, the position is that if the Bill is passed into law there will be a 40 per cent. rate of Corporation Tax levied on both distributed and undistributed profits and, in addition to that, after the dividends will have borne the Corporation Tax at the rate of 40 per cent., there will be an additional impost of Income Tax which is at the moment 8s. 3d. in the £. That will have to be accounted for to the Revenue. This is an additional burden on dividends and this is what we seek to do away with under this Amendment.

Mr. Lever

I have all that. The right hon. Gentleman is well aware that I did not come to the Committee this evening—and I think that most hon. Members have not come to the Committee—unaware that the gist of our proposals is to charge 40 per cent. Corporation fax and thereafter, upon dividends, to exact an Income Tax. Everyone, on both sides, is well aware of this. [Interruption.] Or whatever the rate is to be. Let us stick to the issue.

My question seems to cause the right hon. Gentleman greater difficulty as the evening wears on. When I first asked the question, he did not feel it necessary to hedge by replying to me with a statement of the obvious; he gave me a straight answer, and it is on the record in HANSARD. What I want him either to reaffirm or to withdraw from is his favouring the idea of charging to tax at a lower rate those profits that are distributed compared with those profits which are paid back. He has not contradicted his previous statement. He has restated certain matters which have no relevance to my question.

For my part, I do not recant anything that I have said this afternoon in criticism of differential rates. If that is the view of the Conservative Members, they should go around preaching it to firms like Jaguar Motors and Elliott Automation—which has been quoted by hon. Members opposite—which plough back a great part of their profit, and many other of the great firms which have expanded their business by ploughing back profits year by year. The right hon. Gentleman owes it to the Committee to say how he stands upon this question.

Sir D. Glover

In a cogent speech earlier this evening, my right hon. Friend used the example of Elliott Automation to show that in the last seven years that company had acquired another £16 million of capital from outside and that its total retentions provided only £2 million.

Mr. Lever

That still does not answer my point. That was a company which used to plough back a great deal of its profits.

It is interesting to know that the right hon. Gentleman the Member for Altrincham and Sale, according to his first reply—he has not made it clear whether he has gone back on that—would tax those retentions at a higher rate of tax than the standard rate. He would penalise the retention of profits. It shows the folly of this hyperbolic party political statement, in which I do not want to indulge. It is a perfectly reasonable point of view of the right hon. Gentleman—I do not agree with it—that one should penalise profits that are retained in companies. I do not, however, accuse him of having a hatred of companies which seek to plough back profits, whereas his hon. Friend the Member for Shipley (Mr. Hirst) accused my right hon. Friend the Chancellor, on the strength of no greater evidence, of having a hatred of dividends and of people who pay them out.

Sir K. Pickthorn

It is obvious.

Mr. Lever

It illustrates the folly of this hyperbole. I am not in favour of making a differential rate of tax between dividends paid out and profits retained, but that does not entitle hon. Members opposite to say that those who have a contrary view hate dividends, hate shareholders and are anti-business.

Sir K. Pickthorn

Did the hon. Member hear the short speech of his right hon. Friend the Chancellor on the Motion to report Progress? The Chancellor made it plain. I do not blame the hon. Member if he was not here, because we have all been here quite long enough and we must go out now and then to eat and drink. If he heard his right hon. Friend's speech, the hon. Member surely cannot complain.

Mr. Lever

I was here. It was not on the strength of that speech that the hon. Member for Shipley said that my right hon. Friend hated dividends, shareholders and profits. It was on the strength of the differential tax which my right hon. Friend is introducing.

Mr. Hirst

The hon. Member has no right to say on what strength I made my remarks. I made by speech quite clearly. The hon. Member has no right to say what he is saying.

Mr. Lever

The hon. Gentleman should not upset himself, because we all respect his sincerity and the passion with which he speaks. Speaking for myself, I respect the hon. Gentleman's sincerity. He sincerely believes that he did not say what he did say. Having regard to the undoubted sincerity with which he deceives himself, I do not want to rebuke him, but when he reads HANSARD tomorrow he will see that he attributed to the Chancellor an evil motive simply on the basis of the Chancellor's having adopted a system of taxation which differentiates between dividends and retained profits and which is favourable to the former.

Mr. Peyton

Does the hon. Gentleman recall his right hon. Friend's speech on Second Reading, when he said that the shareholder was as redundant as a rhinoceros, or a dodo, or some other animal which the Chancellor called to mind? Would not the hon. Gentleman agree that that indicates some indifference at least, if not hostility, to shareholders?

Mr. Lever

By the distorted snatching of a few words the hon. Gentleman is deceiving himself, but nobody else. The Chancellor said on Second Reading, with great passion, that he did not desire the Finance Bill to divide the nation but to unite it. He would hardly say that, if he had uttered any words which had the gloss which the hon. Gentleman is seeking to impute. The Chancellor made it plain then, and has made it plain again today, that the myth that the Government is against business and the normal working of free enterprise is quite unjustified.

Mr. Shepherd

I do not quite understand what the hon. Gentleman has been saying, except perhaps that he wants to make some redemption of the slight damage he has done to the Government. As we wish to make progress, I do not want to detain the Committee by dealing with the eccentricities of the hon. Gentleman.

I support my right hon. Friend the hon. Member for Altrincham and Sale (Mr. Barber) in his Amendment, though I am a keen supporter of the concept of a Corporation Tax in this context. I believe that a good deal of the distortion in our company law and our company attitude arises from the attempt to apply a form of personal taxation to corporations. I believe that we ought to pursue intelligently a Corporation Tax. This is not to say that I would support the views of the hon. Gentlemen opposite and the manner in which they are doing this.

I wish to make one simple point. It is useless for hon. Gentlemen on either side of the Committee to pontificate about what should or what should not be the retention or dispersing of the profits of a company. I do not take very much notice of what the Neumark Report said, or what the Chief Secretary said, or what my hon. Friend behind me said, because it is not true that anybody can lay down at any given moment of time the pattern of dividend distribution suited to the interests of the country or to the economy. A dividend distribution policy which might be good at one point of time in a company's life may not be the right dividend policy for a different period of its life.

All these statements with so-called academic backing, all these rigorous assertions about what is the correct and incorrect method of distributing profits, have no basis in reality at all. They are all fashioned on the view that business is something which is permanent and immutable, but no day's business is the same as the previous day's business. Therefore, hon. Gentlemen opposite should think most seriously about the view put forward by my right hon. Friend that we ought not to commit ourselves within the basis of a Corporation Tax and a fixed pattern of distribution which, although it may have reality at the present time, may have none in three or four years' time. We ought to leave it to the fiscal judgment of the companies themselves to decide what they wish to do with their resources.

I do not believe many of the wonderful things that my hon. Friends say about the City of London. I often think that many of our industrial firms are wiser than the people in the City. I would not assert that the City is necessarily wrong, any more than I would assert that those who run industrial companies are wrong. I want individual judgments to be made, and do not want to see a fiscal straitjacket put on those who have to take the decision of whether to distribute profits or retain them.

So I hope that all this nonsense which has been talked from both sides about patterns which can be imposed and all those voluminous reports which pretend to show what ought to happen in this country or that country may be disregarded. We ought to aim at a form of taxation which enables each individual company to distribute its profits in the manner which it thinks best. It is along those lines we shall best serve the interests of the nation.

12.15 a.m.

Mr. Diamond

The speech of the hon. Member for Cheadle (Mr. Shepherd), as usual, was a most interesting one. I do not want to embarrass him, but he said, what not many on that side of the Committee have said, that the first step forward towards Corporation Tax is to recognise corporations as such—and to have a Corporation Tax. He went on to say, entirely consistently with his first point, that we do not want a fiscal straitjacket, and that what was right for today might not be right for the future. It is only if we have separate individual's tax and taxation of companies that we have the flexibility which is one of the major arguments claimed in support of the new kind of taxation—that we have the flexibility which enables us to adjust Corporation Tax, as may be appropriate, from time to time, without having the deterrent of the difficulties which are upon a Chancellor because he has to collect the main amount of his tax—large amounts, that is—through Income Tax. I thought the hon. Member's speech was a most interesting one indeed, and that it leaves the door open to some kind of agreement between the two sides.

However, the speech does not support the proposed Amendment, because the Amendment is that there should not be complete freedom to each company in fiscal terms to decide whether it distributes more or less, because this Amendment is an encouragement to distribution. It is an encouragement to distribution as opposed to our pattern, which is encouragement to plough back.

The hon. Gentleman is quite right in saying nobody should pontificate and it is possible to draw a variety of conclusions from a variety of studies—and I had read the study a long time before the hon. Gentleman retailed it to the Committee. He arrived at a tentative and negative conclusion, that nobody is able to say, "The way to get companies growing, and the best way to ensure dividend policy, is as follows." Nobody has got as far as that, and we on this side are not pontificating. All we are saying is that, in practice, and, in fact, over the years, this is the way companies got their money; this is the way they get their additional money to develop, to grow. On both sides we have accepted, over many years now, that one of the greatest methods of increasing production, and indeed productivity, is investment—investment in additional plant, and premises, and so on—and if we accept that, we must try to enable companies to have the means of carrying this additional investment.

Sir Harmar Nicholls

That is all very well, but the hon. Gentleman cannot deny that the shareholder is the means of supplying capital and has been downgraded from the start. The hon. Member for Manchester, Cheetham (Mr. Harold Lever) used exaggerated language about my hon. Friend the Member for Yeovil (Mr. Peyton) in referring to the rhinoceros. It was the Chancellor who talked of the rhinoceros.

I refer to what the Chancellor said on 10th May, that the shareholder as a means of supplying capital is really as redundant as the rhinoceros."—[OFFICIAL REPORT, 10th May, 1965; Vol. 712, c. 208.] That is in accordance with all the speeches on the Government side, who are downgrading the shareholder as the supplier of capital.

Mr. Diamond

There is no question of downgrading the shareholders at all. The hon. Gentleman has been able to make the intervention which he wanted to make a long time ago. I do not complain, but there is no question of downgrading. There is an honest difference of opinion between those who are addressing themselves carefully and objectively to this problem. There is an honest difference of opinion whether growth—and we all want to see growth—is best engendered by encouraging dividends—I do not want to interrupt either the hon. Gentleman or my hon. Friend. I gave way to him—I will give way to him again.

Sir Harmar Nicholls

I beg the hon. Gentleman's pardon. There was a little exchange, quite out of order. I apologise.

Mr. Diamond

Nothing could be more satisfactory than that.

I do not think that the Committee would welcome a long series of quotations from me from a number of eminent judgments or from the Royal Commission on Taxation, drawing attention to the fact that a company is a separate entity from its shareholders, or that profits belong to the company and not to the shareholders until a dividend is declared, and so on. We all recognise there is a clear legal difference. That is the main difference and consequences flow from it. What I do want to deny utterly and completely is the imputation that goes with the word "penalising".

The hon. and learned Gentleman the Member for Solihull (Mr. Grieve) used it and the suggestion is that, because one proposes a different rate of tax on distributed profits as opposed to profits ploughed back, one is penalising. There is no question of penalising at all. The hon. and learned Gentleman has great knowledge of these things and must know that the average rate of dividends declared at present is 50 per cent. It is not a question of companies ploughing back 80 per cent. and 90 per cent. The average rate is 50 per cent.

Mr. Grieve

Since the hon. Gentleman addressed his observations through the Chair to me, I must say I do not resile from the word "penalised" for one moment. What is it if one puts a heavier taxation on distributed profits which go to the shareholders? What is that if it is not penalising?

Mr. Diamond

It is not a penalisation. Penalising is an emotive word and what we are talking about is an additional rate of tax, a smaller rate of tax, on the profits ploughed back. Would the hon. and learned Gentleman think for one moment to whom ploughed-back profits belong? They belong to the same shareholders as he says are being penalised. It is utter nonsense to draw this distinction. In a whole variety of companies the shareholders are delighted when directors move a modest rate of distribution so that the profits can pile up so that they shall be able to make large capital gains with the profits not being distributed but being ploughed back. Many shareholders welcome that move by the directors and it is utter nonsense to differentiate in this way, on the hon. and learned Gentleman's own philosophy.

All we are saying is that, from the information available, the practice of companies is clearly established. We are not moralising at all. The practice of companies is clearly established: that they get by far the greater part—no matter whether the figures of the hon. Gentleman the Member for Wanstead and Woodford (Mr. Patrick Jenkin) are taken, or the Financial Times figures, or my figures, are taken, it does not matter at all—they all come back to the same answer: that the vast majority of new money used for investment by companies comes from their own realised profits. This is what the figures show.

That is why we are saying that if one wants to encourage growth one has got to give companies the means to enable them to achieve the growth. That is what we are saying. What no one has said, but no one can deny, is that the alternative method of encouraging distribution means that money goes to shareholders. But what do the shareholders do with it? Is it seriously suggested that every shareholder who gets a dividend retains the whole of it, 100 per cent., and does not spend a farthing—that he reinvests all of it?

Mr. Shepherd

If the existing distribution and retention system is satisfactory to the right hon. Gentleman and his colleagues, why are they attempting to change the whole system? Why not retain the same relationship?

Mr. Diamond

I am saying that it is a good thing to have a Corporation Tax and to have a separate tax on the company from the tax on the shareholders. That is what the hon. Member said.

We are left, then, with a question of rates. What we are talking about is whether we should encourage distribution or plough-back, and the argument between the two sides of the Committee is clearly established. Hon. and right hon. Gentlemen opposite do not like management. Their concern is exclusively for the shareholders. If the in- terests of the shareholder and the interests of management are in conflict, hon. Members opposite support the shareholder every time. They represent the City and the recipient of the dividend. They care practically nothing about efficient and modern management. We are giving enterprising management a chance to show its merit and that is why we do not like the Amendment.

Mr. William Clark (Nottingham, South)

As the Chief Secretary has not answered the debate, I wondered for a moment whether he had finished his speech. I will put the argument into perspective, and I hope that he will give the matter further thought.

My right hon. Friend the Member for Altrincham and Sale (Mr. Barber) stated that we are not wedded to the differential rates in the Amendment. May we consider the position today without the imposition of the penal taxation proposed in the Bill? On a profit of £100, a company is able to pay a gross dividend of £74. Under the Corporation Tax at a 40 per cent rate the gross dividend which it can pay is only £65. In terms of dividend, if the same slice of income is passed through, the dividend must be reduced from £74 to £60 gross, which is a reduction of 19.43 per cent.

This is the straitjacket into which the Chief Secretary and his colleagues are putting the investor. In the previous debate the hon. Gentleman used the spurious argument that only companies which pay a dividend of over 51½ per cent. will be affected. He forgot to tell the Committee that if a company paid a dividend of 51½ per cent., under the old system it paid £15 profits and under the new system it will pay £35 in Corporation Tax. Someone is having to pay an extra £20 of tax, and it can be only the investor in that company.

The Chief Secretary should have been a little more forthcoming when he said that only the company which is distributing over 50 per cent. of its profits will be affected. He should have said that, in addition, £20 of taxation would be clawed back by the Inland Revenue. It is no good the hon. Gentleman shaking his head. If he wants to disprove my figures I shall be glad to sit down. I agree with my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin)—if we have an undynamic company and we encourage retention, what will happen to the retention? Can we be sure that they will put them to proper use? Would this not lead, possibly, to idle management?

12.30 a.m.

My right hon. Friend the Member for Sutton Coldfield (Mr. Geoffrey Lloyd) gave some very good figures, and his examples included Elliott Automation. I think that the Chief Secretary will agree that that company is one of our leading progressive firms. Over the last six or seven years, Elliott Automation has increased its capital by £26 million. Only £3 million of that came from retentions. Where is the argument of the Chief Secretary that it is only companies which can retain which will have the dynamic growth?

Mr. Diamond

The hon. Member has been good enough to invite me to challenge the statement he made in contradiction of my allegation that the break-even point for dividends is 51½ per cent., that this would have the same effect. He says there is an extra £20—he has not thought the matter through—taken from somebody or other. If profits are £100 and the Corporation Tax is £35, that is the amount of tax paid up to that point on the old system where a dividend is paid. On that new system, we have £56¼ tax paid on the £100, and a recovery on the dividend of £21¼, leaving exactly the same £35 paid. Whichever way one does it, the same tax is suffered.

Mr. Clark

I think that the Chief Secretary's point when he put the figures was that the retention of the company would be exactly the same. I agree with him, but one cannot say that a company which has suffered £35 tax, which is the rate of Corporation Tax on £100, is in the same position as and has paid no more tax than a company with £100 profit which pays £15 Profits Tax. He should get the figures right. I accept his retention figures for the company, but, nevertheless, £20 more in tax will have been paid.

I want to get back to these undynamic companies and profitless expansion. I agree with my hon. Friends who have said that the real test of getting capital for income is the market test, and the market test is the test of efficiency and profitability. What the Government are saying to companies—"We are allowing you to retain profits and you will get growth"—is pie in the sky. This will not follow naturally. The real test is whether the company is sufficiently attractive for the investor to want to put his money into it. The retention of profits does not matter. Under the Bill, the investor will certainly be hit, because at the moment, even with Profits Tax, the company must earn £134 so as to pay £100 dividend. Under the new system, the company will have to earn £166 so as to pay £100 dividend.

Surely this is a more penal rate than even hon. Gentlemen on that side of the Committee would accept. As the Chief Secretary said, if the retention is increased, of course the asset value of the company is increased. But in doing this, the Government are not allowing the shareholders or management to get away with any tax, because they have introduced the Capital Gains Tax. Even if there is any capital distribution of that profit, if it is merely an increase in dividends subsequently, the Revenue will collect its double taxation. We have seen it in the past, when we had the two-tier rate of Profits Tax. Huge retentions were made in the past by companies and these were ripe plums for the takeover people. This is the fallacy, I think, of this part of the Government's legislation.

If the Chief Secretary thinks that his Government are being modernistic, and progressive, I would invite him to look at the other countries with whom we are competing. In the United States and Luxembourg, which are the only two countries with double taxation in this way, the rate of personal taxation is infinitely lower than in this country. In Canada, there is an 80 per cent. tax on dividends in the hands of the recipient. In Germany there is a tax of 51 per cent. on profits retained and a 15 per cent. tax if it is all distributed.

The difference in terms of actual cash is that if a company retains all its profits in Germany, the retention rate is 49 per cent. but if it distributes a gross dividend it will pay 76 per cent., compared with the United Kingdom rate of 74 per cent. The Neumark Report stated that it would be much better if the continental countries went towards the German and United Kingdom tax system. Instead, the Government are moving against it.

It does not matter which continental country one considers—the Netherlands, Belgium or others—one finds that they are moving towards a system of encouraging dividends. It is not good enough for the Chief Secretary to say that the distribution of dividends has not increased investment. According to his own figures investment out of retentions in recent years has been about 65 per cent., leaving 35 per cent. from other sources, as he said.

The Chief Secretary said that not all of it had come out of dividends; that it had been borrowed from the banks, institutions and other bodies. From where does the hon. Gentleman think that the banks, pension funds, institutions, and so on get their money unless they get it from savings? I should have thought that the Chief Secretary, with 35 years' experience of these matters, would realise that the 35 per cent. of investment in the past few years which has come from

the market has come out of the savings of people who have received investment income. I remind him that savings in this country have gone up from £100 million to £2,000 million a year.

The real difference between the two sides of the Committee is on the question whether one encourages retention for the sake of it or penalises the investor. My hon. Friends and I say that the investor should not be penalised. The person who is able to invest is not the idle management, to use the term that has been used, but the investor who should be given a proper rate of dividend. I agree with my hon. Friend the Member for Shipley (Mr. Hirst) that the Government are out of date and are doing something which our competitors discarded years ago. For these reasons, I must advise my hon. Friends to divide the Committee.

Question put, That the words proposed to be left out stand part of the Clause:—

The Committee divided: Ayes 283, Noes 279.

Division No. 162.]	AYES	[12.39 a.m.
Abse, Leo	Cousins, Rt. Hn. Frank	Garrett, W. E.
Albu, Austen	Craddock, George (Bradford, S.)	Garrow, A.
Allaun, Frank (Salford, E.)	Crawshaw, Richard	Ginsburg, David
Alldritt, Walter	Cronin, John	Gourlay, Harry
Allen, Scholefield (Crewe)	Crosland, Rt. Hn. Anthony	Greenwood, Rt. Hn. Anthony
Armstrong, Ernest	Crossman, Rt. Hn. R. H. S.	Gregory, Arnold
Atkinson, Norman	Cullen, Mrs. Alice	Grey, Charles
Bacon, Miss Alice	Dalyell, Tam	Griffiths, David (Rother Valley)
Bagier, Gordon A. T.	Darling, George	Griffiths, Rt. Hn. James (Llanelly)
Barnett, Joel	Davies, G. Elfed (Rhondda, E.)	Griffiths, Will (M'chester, Exchange)
Baxter, William	Davies, Harold (Leek)	Gunter, Rt. Hn. R. J.
Beaney, Alan	Davies, S. O. (Merthyr)	Hale, Leslie
Bence, Cyril	Delargy, Hugh	Hamilton, James (Bothwell)
Benn, Rt. Hn. Anthony Wedgwood	Dell, Edmund	Hamilton, William (West Fife)
Bennett, J. (Glasgow, Bridgeton)	Dempsey, James	Hamling, William (Woolwich, W.)
Binns, John	Diamond, John	Harper, Joseph
Bishop, E. S.	Dodds, Norman	Harrison, Walter (Wakefield)
Blackburn, F.	Doig, Peter	Hart, Mrs. Judith
Blenkinsop, Arthur	Donnelly, Desmond	Hattersley, Roy
Boardman, H.	Driberg, Tom	Hazell, Bert
Boston, T. G.	Duffy, Dr. A. E. P.	Healey, Rt. Hn. Denis
Bottomley, Rt. Hn. Arthur	Dunn, James A.	Henderson, Rt. Hn. Arthur
Bowden, Rt. Hn. H. W. (Leics S.W.)	Dunnett, Jack	Herbison, Rt. Hn. Margaret
Boyden, James	Edwards, Rt. Hn. Ness (Caerphilly)	Hill, J. (Midlothian)
Braddock, Mrs. E. M.	English, Michael	Hobden, Dennis (Brighton, K'town)
Bradley, Tom	Ennals, David	Holman, Percy
Bray, Dr. Jeremy	Ensor, David	Horner, John
Broughton, Dr. A. D. D.	Evans, Albert (Islington, S.W.)	Houghton, Rt. Hn. Douglas
Brown, Rt. Hn. George (Belper)	Evans, Ioan (Birmingham, Yardley)	Howarth, Harry (Wellingborough)
Brown, Hugh D. (Glasgow, Provan)	Fernyhough, E.	Howarth, Robert L. (Bolton, E.)
Buchan, Norman (Renfrewihire, W.)	Finch, Harold (Bedwellty)	Howell, Denis (Small Heath)
Buchanan, Richard	Fletcher, Sir Eric (Islington, E.)	Howie, W.
Butler, Herbert (Hackney, C.)	Fletcher, Ted (Darlington)	Hoy, James
Butler, Mrs. Joyce (Wood Green)	Fletcher, Raymond (Ilkeston)	Hughes, Cledwyn (Anglesey)
Callaghan, Rt. Hn. James	Floud, Bernard	Hughes, Emrys (S. Ayrshire)
Carmichael, Neil	Foley, Maurice	Hughes, Hector (Aberdeen, N.)
Carter-Jones, Lewis	Foot, Sir Dingle (Ipswich)	Hunter, Adam (Dunfermline)
Castle, Rt. Hn. Barbara	Foot, Michael (Ebbw Vale)	Hunter, A. E. (Feltham)
Chapman, Donald	Ford, Ben	Irvine, A. J. (Edge Hill)
Coleman, Donald	Fraser, Rt. Hn. Tom (Hamilton)	Irving, Sydney (Dartford)
Conlan, Bernard	Freeson, Reginald	Jackson, Colin
Corbet, Mrs. Freda	Galpern, Sir Myer	Jay, Rt. Hn. Douglas
Jeger, George (Goole)	Mulley,Rt.Hn.Frederick(SheffieldPk)	Silkin, John (Deptford)
Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)	Murray, Albert	Silkin, S. C. (Camberwell, Dulwich)
Jenkins, Hugh (Putney)	Neal, Harold	Silverman, Julius (Aston)
Jenkins, Rt. Hn. Roy (Stechford)	Newens, Stan	Skeffington, Arthur
Johnson, Carol (Lewisham, s.)	Noel-Baker, Francis (Swindon)	Slater, Mrs. Harriet (Stoke, N.)
Johnson, James (K'ston-on-Hull,W.)	Noel-Baker,Rt.Hn.Phllip(Derby,S.)	Slater, Joseph (Sedgefield)
Jones, Dan (Burnley)	Norwood, Christopher	Small, William
Jones,Rt.Hn.Sir Elwyn(W.Ham,S.)	Oakes, Gordon	Smith, Ellis (Stoke, S.)
Jones, J. Idwal (Wrexham)	Ogden, Eric	Solomons, Henry
Jones, T. W. (Merioneth)	O'Malley, Brian	Soskice, Rt. Hn. Sir Frank
Kelley, Richard	Oram, Albert E. (E. Ham, S.)	Stonehouse, John
Kenyon, Clifford	Orbach, Maurice	Stones, William
Kerr, Mrs. Anne (R'ter & Chatham)	Orme, Stanley	Strauss, Rt. Hn. G. R. (Vauxhall)
Kerr, Dr. David (W'worth, Central)	Oswald, Thomas	Summerskill, Hn. Dr. Shirley
Lawson, George	Owen, Will	Swain, Thomas
Leadbitter, Ted	Padley, Walter	Swingler, Stephen
Ledger, Ron	Page, Derek (King's Lynn)	Symonds, J. B.
Lee, Rt. Hn. Frederick (Newton)	Paget, R. T.	Taylor, Bernard (Mansfield)
Lee, Miss Jennie (Cannock)	Palmer, Arthur	Thomaa, George (Cardiff, W.)
Lever, Harold (Cheetham)	Pannell, Rt. Hn. Charles	Thomson, George (Dundee, E.)
Lewis, Arthur (West Ham, N.)	Pargiter, G. A.	Thornton, Ernest
Lewis, Ron (Carlisle)	Park, Trevor (Derbyshire, S.E.)	Tinn, James
Lipton, Marcus	Parker, John	Tomney, Frank
Lomas, Kenneth	Parkin, B. T.	Tuck, Raphael
Loughlin, Charles	Pavitt, Laurence	Urwin, T. W.
Mabon, Dr. J. Dickson	Pearson, Arthur (Pontypridd)	Varley, Eric G.
McCann, J.	Peart, Rt. Hn. Fred	Wainwright, Edwin
MacColl, James	Pentland, Norman	Walden, Brian (All Saints)
MacDermot, Niall	Perry, Ernest G.	Walker, Harold (Doncaster)
McGuire, Michael	Popplewell, Ernest	Wallace, George
Mclnnes, James	Prentice, R. E.	Watkins, Tudor
McKay, Mrs. Margaret	Price, J. T. (Westhoughton)	Weitzman, David
Mackenzie, Gregor (Rutherglen)	Probert, Arthur	Wells, William (Walsall, N.)
Mackie, John (Enfield, E.)	Pursey, Cmdr. Harry	White, Mrs. Eirene
McLeavy, Frank	Randall, Harry	Whitlock, William
MacMillan, Malcolm	Rankin, John	Wigg, Rt. Hn. George
Mahon, Peter (Preston, S.)	Redhead, Edward	Wilkins, W. A.
Mahon, Simon (Bootle)	Rees, Merlyn	Willey, Rt. Hn. Frederick
Mallalieu,J.P.W.(Huddersfield,E.)	Reynolds, G. W.	Williams, Alan (Swansea, W.)
Mapp, Charles	Rhodes, Geoffrey	Williams, Clifford (Abertillery)
Mason, Roy	Richard, Ivor	Williams, Mrs. Shirley (Hitchin)
Mayhew, Christopher	Roberts, Albert (Normanton)	Williams, W. T. (Warrington)
Mellish, Robert	Roberts, Goronwy (Caernarvon)	Willis, George (Edinburgh, E.)
Mendelson, J. J.	Robertson, John (Paisley)	Wilson, Rt. Hn. Harold (Huyton)
Mikardo, Ian	Robinson, Rt. Hn.K.(St. Pancras.N.)	Wilson, William (Coventry, S.)
Millan, Bruce	Rodgers, William (Stockton)	Winterbottom, R. E.
Miller, Dr. M. S.	Rogers, George (Kensington, N.)	Woodburn, Rt. Hn. A.
Milne, Edward (Blyth)	Rose, Paul B.	Woof, Robert
	Ross, Rt. Hn. William	Wyatt, Woodrow
Molloy, William	Rowland, Christopher	Zilliacus, K.
Monslow, Walter	Sheldon, Robert
Morris, Alfred (Wythenshawe)	Shinwell, Rt. Hn. E.	TELLERS FOR THE AYES:
Morris, Charles (Openshaw)	Shore, Peter (Stepney)	Mr. Ifor Davies and Mr. Alan Fitch.
Morris, John (Aberavon)	Short,Rt.Hn.E.(N'c'tle-on-Tyne,C.)
NOES
Agnew, Commander Sir Peter	Bowen, Roderic (Cardigan)	Cooper, A. E.
Alison, Michael (Barkston Ash)	Box, Donald	Cooper-Key, Sir Neill
Allan, Robert (Paddington, S.)	Boyd-Carpenter, Rt. Hn. J.	Cordle, John
Allason, James (Hemel Hempstead)	Boyle, Rt. Hn. Sir Edward	Corfield, F. V.
Amery, Rt. Hn. Julian	Braine, Bernard	Costain, A. P.
Anstruther-Gray, Rt. Hn. Sir W.	Brewis, John	Courtney, Cdr. Anthony
Astor, John	Brinton, Sir Tatton	Craddock, Sir Beresford (Spelthorne)
Atkins, Humphrey	Bromley-Davenport,Lt.-Col. Sir Walter	Crawley, Aidan
Awdry, Daniel	Brooke, Rt. Hn. Henry	Crosthwaite-Eyre, Col. Sir Oliver
Baker, W. H. K.	Brown, Sir Edward (Bath)	Crowder, F. P.
Balniel, Lord	Bruce-Gardyne, J.	Cunningham, Sir Knox
Barber, Rt. Hn. Anthony	Bryan, Paul	Curran, Charles
Barlow, Sir John	Buchanan-Smith, Alick	Currie, G. B. H.
Batsford, Brian	Buck, Antony	Dalkeith, Earl of
Beamish, Col. Sir Tufton	Bullus, Sir Eric	Dance, James
Bennett, Sir Frederic (Torquay)	Burden, F. A.	Davies, Dr. Wyndham (Perry Barr)
Bennett, Dr. Reginald (Gos & Fhm)	Buxton, Ronald	d'Avigdor-Goldsmid, Sir Henry
Berkeley, Humphry	Campbell, Gordon	Dean, Paul
Berry, Hn. Anthony	Carlisle, Mark	Deedes, Rt. Hn. W. F.
Bessell, Peter	Carr, Rt. Hn. Robert	Digby, Simon Wingfield
Bitten, John	Cary, Sir Robert	Doughty, Charles
Biggs-Davison, John	Chataway, Christopher	Douglas-Home, Rt. Hn. Sir Alec
Bingham, R. M.	Chichester-Clark, R.	Drayson, G. B.
Birch, Rt. Hn. Nigel	Clark, Henry (Antrim, N.)	du Cann, Rt. Hn. Edward
Black, Sir Cyril	Clark, William (Nottingham, S.)	Eden, Sir John
Blaker, Peter	Cole, Norman	Elliot, Capt. Walter (Carshalton)
Bossom, Hn. Clive	Cooke, Robert	Elliott, R. W.(N 'c' tle-upon-Tyne, N.)

Eyre, Reginald	Kaberry, Sir Donald	Price, David (Eastleigh)
Farr, John	Kerby, Capt. Henry	Prior, J. M. L.
Fell, Anthony	Kerr, Sir Hamilton (Cambridge)	Pym, Francis
Fisher, Nigel	Kilfedder, James A.	Quennell, Miss J. M.
Fletcher-Cooke, Charles (Darwen)	Kimball, Marcus	Ramsden, Rt. Hn. James
Fletcher-Cooke, Sir John (S'pton)	King, Evelyn (Dorset, S.)	Rawlinson, Rt. Hn. Sir Peter
Foster, Sir John	Kirk, Peter	Redmayne, Rt. Hn. Sir Martin
Fraser, Rt.Hn.Hugh(St'fford & Stone)	Lagden, Godfrey	Rees-Davies, W. R.
Gammans, Lady	Lambton, Viscount	Renton, Rt. Hn. Sir David
Gardner, Edward	Lancaster, Col. C. G.	Ridsdale, Julian
Gibson-Watt, David	Langford-Holt, Sir John	Roberts, Sir Peter (Heeley)
Giles, Rear-Admiral Morgan	Legge-Bourke, Sir Harry	Robson Brown, Sir William
Gilmour, Ian (Norfolk, Central)	Lewis, Kenneth (Rutland)	Rodgers, Sir John (Sevenoaks)
Gilmour, Sir John (East Fife)	Litchfield, Capt. John	Roots, William
Glover, Sir Douglas	Lloyd, Rt.Hn.Geoffrey(Sut'nC'dfield)	Royle, Anthony
Glyn, Sir Richard	Lloyd, Ian (P'tsm'th, Langstone)	Russell, Sir Ronald
Goodhart, Philip	Lloyd, Rt. Hn. Selwyn (Wirral)	St. John-Stevas, Norman
Goodhew, Victor	Longbottom, Charles	Scott-Hopkins, James
Gower, Raymond	Longden, Gilbert	Sharples, Richard
Grant, Anthony	Loveys, Walter H.	Shepherd, William
Grant-Ferris, R.	Lubbock, Eric	Sinclair, Sir George
Gresham Cooke, R.	Lucas, Sir Jocelyn	Smyth, Rt. Hn. Brig. Sir John
Grieve, Percy	McAdden, Sir Stephen	Spearman, Sir Alexander
Griffiths, Eldon (Bury St. Edmunds)	MacArthur, Ian	Stainton, Keith
Griffiths, Peter (Smethwick)	Mackenzie, Alasdair (Ross&Crom'ty)	Stanley, Hn. Richard
Grimond, Rt. Hn. J.	McLaren, Martin	Steel, David (Roxburgh)
Gurden, Harold	Maclean, Sir Fitzroy	Stodart, Anthony
Hall, John (Wycombe)	Macleod, Rt. Hn. Iain	Stoddart-Scott, Col. Sir Malcolm
Hall-Davis, A. G. F.	McNair-Wilson, Patrick	Studholme, Sir Henry
Hamilton, Marquess of (Fermanagh)	Maglnnis, John E.	Talbot, John E.
Hamilton, M (Salisbury)	Maitland, Sir John	Taylor, Sir Charles (Eastbourne)
Harris, Frederic (Croydon, N.W.)	Marples, Rt. Hn. Ernest	Taylor, Edward M. (G'gow,Cathcart)
Harris, Reader (Heston)	Marten, Neil	Taylor, Frank (Moss Side)
Harrison, Brian (Maldon)	Maude, Angus	Teeling, Sir William
Harrison, Col. Sir Harwood (Eye)	Mawby, Ray	Temple, John M.
Harvey, Sir Arthur Vere (Macclesf'd)	Maxwell-Hyslop, R. J.	Thatcher, Mrs. Margaret
Harvey, John (Walthamstow, E.)	Maydon, Lt.-Cmdr. S. L. C.	Thomas, Sir Leslie (Canterbury)
Harvie Anderson, Miss	Meyer, Sir Anthony	Thomas, Rt. Hn. Peter (Conway)
Hawkins, Paul	Mills, Peter (Torrington)	Thompson, Sir Richard (Croydon, S.)
Hay, John	Mills, Stratton (Belfast, N.)	Thorneycroft, Rt. Hn. Peter
Heald, Rt. Hn. Sir Lionel	Miscampbell, Norman	Tiley, Arthur (Bradford, W.)
Heath, Rt. Hn. Edward	Mitchell, David	Tilney, John (Wavertree)
Hendry, Forbes	Monro, Hector	Turton, Rt. Hn. R. H.
Higgins, Terence L.	More, Jasper	Tweedsmuir, Lady
Hiley, Joseph	Morgan, W. G.	van Straubenzee, W. R.
Hill, J. E. B. (S. Norfolk)	Morrison, Charles (Devizes)	Vaughan-Morgan, Rt. Hn. Sir John
Hirst, Geoffrey	Mott-Radclyffe, Sir Charles	Vickers, Dame Joan
Hobson, Rt. Hn. Sir John	Munro-Lucas-Tooth, Sir Hugh	Walder, David (High Peak)
Hogg, Rt. Hn. Quintin	Murton, Oscar	Walker, Peter (Worcester)
Hooson, H. E.	Neave, Airey	Walters, Dennis
Hopkins, Alan	Nicholls, Sir Harmar	Ward, Dame Irene
Hordern, Peter	Nicholson, Sir Godfrey	Weatherill, Bernard
Hornby, Richard	Noble, Rt. Hn. Michael	Wells, John (Maidstone)
Hornsby-Smith, Rt. Hn. Dame P.	Onslow, Cranley	Whitelaw, William
Howard, Hn. G. R. (St. Ives)	Orr, Capt. L. P. S.	Williams, Sir Rolf Dudley (Exeter)
Howe, Geoffrey (Bebington)	Orr-Ewing, Sir Ian	Wills, Sir Gerald (Bridgwater)
Hunt, John (Bromley)	Osborn, John (Hallam)	Wilson, Geoffrey (Truro)
Hutchison, Michael Clark	Osborne, Sir Cyril (Louth)	Wise, A. R.
Iremonger, T. L.	Page, John (Harrow, W.)	Wolrige-Gordon, Patrick
Irvine, Bryant Godman (Rye)	Page, R. Graham (Crosby)	Wood, Rt. Hn. Richard
Jenkin, Patrick (Woodford)	Pearson, Sir Frank (Clitheroe)	Woodhouse, Hn. Christopher
Jennings, J. C.	Percival, Ian	Woodnutt, Mark
Johnson Smith, G. (East Grinstead)	Peyton, John	Yates, William (The Wrekin)
Johnston, Russell (Inverness)	Pickthorn, Rt. Hn. Sir Kenneth	Younger, Hn. George
Jones, Arthur (Northants, S.)	Pike, Miss Mervyn
Jopling, Michael	Pitt, Dame Edith	TELLERS FOR THE NOES:
Joseph, Rt. Hn. Sir Keith	Powell, Rt. Hn. J. Enoch	Mr. Ian Fraser and
		Mr. Dudley Smith.

Mr. Callaghan

I beg to move, That the Chairman do report Progress and ask leave to sit again.

Hon. Members

No.

The Deputy-Chairman (Sir Samuel Storey)

Order. I must ask hon. Members to keep quiet so that I may hear what is being addressed to the Chair.

Mr. Callaghan

It looks as though I may have to rely on the support of the Opposition against my hon. Friends. What a dilemma! What do the Opposition wish to do? It is quite clear that the Government have re-established their ascendancy. Our majority is 25 per cent. up on what it ought to be and in these circumstances we ought to give the Opposion time to refresh themselves for to-morrow. The speeches, although still coherent, have lost that zip and sparkle which they had several hours ago and it is only fair to hon. Members opposite that we should give them another opportunity.

After all, we have had 52 or 53 Divisions on the Bill and we have won every one of them. [HON. MEMBERS: "No."] Tomorrow we had better start on the second half and see whether the Opposition can score a goal or so. They have nearly got into the net, but not quite. This is not the time to continue a debate of this nature. I say it in all good humour.

We have had a very hard day's work. We have not made as much progress as I would have liked, but it is fair to say, on behalf of both sides of the Committee, if I may speak for both sides of the Committee—[HON. MEMBERS: "No."] All right, I speak for myself and my hon. Friends when I say that we have had an excellent debate, with very good speeches. Having thrashed out the substance and principle of the Clause, I hope that we shall be able to make much faster progress tomorrow than we have today.

Mr. Heath

After a night of high drama, the Chancellor of the Exchequer has decided to release his colleague and his hon. Friends behind him from the intolerable position in which they find themselves.

Mr. E. Shinwell (Easington) indicated dissent.

Mr. Heath

I hope that the right hon. Gentleman is not suggesting that the Leader of the House has lost control of hon. Members opposite.

This brief respite which they are claiming will no doubt give the Postmaster-General time to install Division bells in the Crypt—[Interruption.]—or in another place, or wherever hon. Members can have been at that dramatic moment.

I agree that we have had a splendid debate. We have got through a lot of work, which should enable us to deal with the specific problems which arise in the Amendments that are to come. Once again, the Chancellor of the Exchequer shows himself to be the gentle, reasonable, kindly and moderate man which he likes us to think he is, but, above all, he shows wisdom in releasing his party from this position. He made the somewhat challenging remark that we had not quite got there this time. Last week, he survived by one vote, and tonight he has survived by the casting vote of the Chair. Next time he will not survive.

Question put and agreed to.

Committee Report Progress; to sit again this day.