§ Mr. Anthony Barber (Altrincham and Sale)
I beg to move Amendment No. 320, in page 63, line 25, at the end to insert:Provided always that the expenditure in respect of which investment allowances are calculated shall for the purpose of corporation tax be deemed to be increased by 40 per cent.
§ The Chairman
It would be for the convenience of the Committee if we took with this Amendment, Amendment 321, in line 25, at end insert:Provided always that the expenditure incurred in the provision of new machinery or plant for use in a development district in respect of which investment allowances are calculated shall for the purpose of corporation tax be deemed to be increased by 40 per cent.Amendment No. 322, in line 25, at end insert:Provided always that the expenditure on the provision of ships in respect of which investment allowances are calculated shall for the purpose of corporation tax be deemed to be increased by 40 per cent.Amendment No. 534, in line 25, at end insert:Provided always that the expenditure in Scotland in respect of which investment allowances are calculated shall for the purpose of corporation tax be deemed to be increased by 40 per cent.and New Clause No. 32—Increased investment allowances on ships:For the purposes of corporation tax investment allowances in respect of expenditure incurred after 5th April 1965 on the provision of a ship shall be increased by 40 per cent. and accordingly in relation to expenditure incurred after that date for the reference in section 15 of the Finance Act 1957 to two-fifths there shall be substituted a reference to fourteen-twenty-fifths.The said increase of investment allowances shall extend to all expenditure incurred by a company the accounting period of which commenced after 5th April 1964 and ended after 5th April 1965, and where expenditure was incurred in that accounting period it shall, for the purposes of this subsection, be deemed to have been incurred after 5th April 1965.Provided that this section shall apply only where the expenditure is to be treated for the purposes of subsection (3) of section 16 of the Finance Act 1954 as incurred after264the relevant date and is not to be so treated by virtue only of subsection (2) of section 279 of the Income Tax Act 1952.I have been asked by the right hon. Member for Bexley (Mr. Heath) whether I would permit a Division if necessary when the time comes on Amendments Nos. 321, 322 and 534.
§ Mr. Barber
This is the first Amendment to be considered since the announcement of the Birthday Honours. At the risk of a deliberate excursion into a matter which is wholly out of order, I know that it would be the wish of the whole Committee to convey to you, Dr. King, our congratulations and good wishes on your becoming a Privy Councillor. In this Committee you are at once our master and our servant here and I hope that during the remainder of our labours on the Bill we shall be able to say, with William Blackstone, thatthe king can do no wrong …Since you have allowed me to stray this far, Dr. King, you can hardly call me to order for also saying, on personal grounds, and also in virtue of his high office, that we extend our congratulations to the Chief Secretary to the Treasury. In his case I would only add the words of Isaak Newton to his faithful but most destructive dog which happened to be known by the name of "Diamond":Oh Diamond! Oh Diamond! Thou little knowest the mischief thou hast done.The purpose of these Amendments is simply to put right some of the mischief done and to do so by restoring the cash value of the investment allowances.
Amendment No. 320 sets out to do this finite generally across the board. Amendment No. 321 sets out to do this in the case of development districts only. Amendment No. 323 is limited to ships only, and Amendment No. 534 is limited to expenditure in Scotland. Amendment No. 320 raises the general arguments. Whatever view the Chancellor of the Exchequer may take concerning the degree of incentive provided by investment allowances, nobody would deny their actual value in terms of cash. Perhaps I can explain what I mean by giving a simple example.
265 An expenditure of £1,000 on an asset which qualifies for investment allowance carries with it, in effect, a licence to make £300 of profits, tax free. That means that at present with Income Tax at the standard rate of 8s. 3d. and Profits Tax of 15 per cent. it is equivalent to a tax free subsidy of £168 15s. or of a subsidy which is chargeable to tax of £384 14s. I am the last person to suggest that the system of investment allowances must stand without modification for all time, but the Chancellor's action this year seems to me to be wholly without justification. I will explain why in a moment. The reason the cash value of investment allowances will be substantially reduced is that, in future, they will be allowable only against the Corporation Tax at 40 per cent. or 35 per cent. and not against the 56¼ per cent. present composite rate of Income Tax and Profits Tax.
The reasons given by the Chancellor for accepting this situation and cutting the value of the investment allowances are two. First, he says that he doubts that investment allowances are an effective incentive to investment. Secondly, he says that there is no reason to increase the allowances whenever taxation is reduced. Both these reasons are bogus. Already, this particular aspect of the Corporation Tax is slowing down the modernisation of many companies. As for the incentive argument to which the right hon. Gentleman has referred, the truth is, as he admitted in his Budget speech, that he cannot make up his mind on the point. He said:I have set myself the task of looking into the whole question in the forthcoming year."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 257.]In passing, I observe that he had better "get cracking", because he may well not have as long as a year to carry out his investigations. But that is by the way.
Yesterday, we had a most significant intervention on the subject of investment allowances by the Minister of Technology. In reply to a question about investment allowances from one of my hon. Friends, the right hon. Gentleman said:This subject is under review between the Chancellor's Department and my own Department. We recognise the value of this incentive."—[OFFICIAL REPORT, 14th June, 1965; Vol. 714, c. 39.]It has been obvious for some time that the Chancellor of the Exchequer and 266 the First Secretary of State are at logger-heads over economic policy, but we have now, apparently, reached the stage when the Minister of Technology is prepared publicly to state a view on taxation which conflicts with that expressed only a few weeks ago by the Chancellor. It is an incredible situation.
If the Chancellor was not sure about the effectiveness of the investment allowances, which is what he said, the sensible course would have been to defer action until he was sure one way or the other. In support of his doubts, the right hon. Gentleman cited the Report of the Richardson Committee and the advice of the Management Consultants' Association. But why has he been so selective? Why not refer to the accountants, who take a different view? Why not refer to the Federation of British Industries, which also takes a different view? Why not take into account the views of some of the major industrial companies in Britain? The truth is that this is another example of the Chancellor not having the slightest idea of the practical consequences of his own proposals.
Here is an extract from a report of a speech made by the chairman of Swan Hunter:Industries faced with serious and often subsidised international competition can now plough back little, if any, profit, and the contemplated reduction in the value of investment allowances would be an added disadvantage to the group in extending the modernisation programme. Naturally the effect of the allowances has been brought into the calculation of the cost of major improvements and the financial returns to be expected from them. And if the expected contribution from capital allowances were to be reduced, binding commitments entered into would 'be less beneficial and further contemplated expansion might well prove impractical'.Does this mean nothing to the Chancellor? One could produce many quotations to the same effect.
Here is one more, coming from a newspaper report of a speech by the chairman of A.E.I. It is said thatMr. Wheeler does not share the Chancellor's doubts as to the effect of investment allowances and regrets the decision not to offset the fall in their value by at least 25 per cent. because of the introduction of Corporation Tax. He feels that these allowances do influence industrial decisions on investment, and in view of the country's crying need for investment to raise productivity, he thought it most unwise to weaken or remove investment incentives.267 But no—the Chancellor of the Exchequer refused to budge.
What of the Federation of British Industries? On this particular matter, the Chancellor has wholly ignored its advice. Last month, the president of the F.B.I. wrote a letter to the Chancellor about the Finance Bill and, among other things, he dealt with the question of investment allowances. As this view is representative of industry generally, I think it right that the Committee should know what he said:If corporation tax is set at about 35 per cent., the value to industry of the investment allowances will be reduced by about £100 million, or about one-third. Her Majesty's Government and British industry are at one in the belief that we must press forward with modernisation, improvement and innovation. The reduction in the value of the investment allowances must hinder this. We know that evidence has been produced purporting to show that the allowances have little or no bearing upon investment decisions. We believe that this evidence is of doubtful reliability, except to the extent that the various changes which have been made from time to time in the rates of the allowances have caused industry to be uncertain of their future. But, if there is substance in it, what is needed is not the reduction of the allowances but a campaign of education to show industry their worth, which we will be happy to mount or support.But no—once again, the Chancellor is impervious to the advice given to him by those with experience.
If the Chancellor's argument about the incentive effect of the investment allowances is in doubt, his other argument is really nonsense. This is what he said in his Budget speech, under the heading "Investment Allowances":Many of the representations I have received have pointed out that at a figure of 35 to 40 per cent. the reduction in the rate of tax charged on company profits will mean that the value of investment allowances is diminished; some have suggested that the rate of allowance should be increased to compensate for this. It is, of course, true as a piece of arithmetic that the lowering of the rate of any tax does in one sense reduce the value of any relief given from that tax. But that is not a reason for increasing the relief every time the tax is reduced."—[OFFICIAL REPORT, 6th April, 1965, Vol. 710, cc. 256–7.]What does the Chancellor mean by talking of reducing taxes? The conjoint effect of a 40 per cent. Corporation Tax and a standard rate of Income Tax at 268 8s. 3d. in the £ will inevitably be that the tax burden on industry will be considerably greater than it is at present. If the Labour Government had actually reduced the standard rate of Income Tax and retained the Profits Tax at its present level, no one in his right senses would have demanded a compensating increase in the investment allowances. But we are presented with a change to Corporation Tax which the Chancellor himself callsthe most fundamental of the tax reforms in this Budget."—[OFFICIAL REPORT, 6th April, 1965; Vol. 710, c. 254.]It is not a mere change of rates, and the Chancellor's reasoning on this point is pure sophistry. The truth is that what he himself admits to be the diminished value of investment allowances is bound to inhibit the modernisation of industry to which the Prime Minister continually pays lip-service.
Businessmen are getting fed up with the continuous barrage of appeals to modernise, made by a Chancellor whose main contribution so far has been to deal a body blow to British industry. Then, when those same businessmen have the effrontery to get up and complain, they are subjected by that captain of incompetence, the First Secretary of State, to the warning, "Don't bite the hand that feeds you". No wonder the managers of industry are getting "browned-off."
Even if the Government are not prepared to accept Amendment No. 320 perhaps they could accept Amendment No. 321. This also provides for the restoration of the cash value of investment allowances, but is limited to new machinery or plant for use in a development district. I hope that the Chief Secretary will at least accept the principle behind this Amendment, which is to provide a higher rate of investment allowances in the development districts.
Indeed, if the Government lead their supporters into the Lobby against Amendment No. 321 it will be, for reasons that I shall explain, a supreme example of political cynicism, because it is less than three years since the present Chancellor announced that a future Labour Government would provide a higher rate of investment allowances in development districts than elsewhere.
269 That was in 1962, in the course of a debate which lasted for several hours.
I hope that the Committee will take note of the precise proposal that the right hon. Gentleman then put before the Committee and the nation. I will quote what he said during a debate on a new Clause which was headed:Increase of investment allowances for expenditure in development districts.The right hon. Gentleman said:The simple proposal here is that in the development districts there should be an increase in investment allowances in respect of industrial buildings, machinery and plant in order to give a fiscal encouragement to industry situated there to develop there and to encourage new industries to go there …Some may raise the question whether we ought to use fiscal methods of this sort. Before the war they certainly would not have been considered, but I think that we have passed from the era when it was a belief in most industrial and commercial policy that taxation must bear equally on anyone wherever he was situated. In individual taxation we certainly adhere to that, but in company taxation there is no reason in principle or theory why we should not give fiscal incentives of this sort to clear up unemployment in these areas".Now I want the Committee and the benches opposite, in particular, to mark the right hon. Gentleman's final words. After remarking on the drift of population to the London area, he concluded:I am opposed to this"—the drift to the South—and I am sure that if the present Government have not the will to tackle it another Government will have to do so, and it will have to be an active policy of which this new Clause would form one part.Where is the Chancellor's promise now? [HON. MEMBERS: "Where is he?"] I can only assume that the right hon. Gentleman must have appreciated the nature of the argument which inevitably would be put forward in support of our Amendments and has decided not to be here. One can search through the 200 pages of the Bill and nowhere is this proposal of his to be found. The truth is that the Chancellor's specific promise to the development districts was a cynical attempt to curry favour with a section of the electorate, many of whom no doubt assumed at the time that he was sincere.
That is all I propose to quote from that speech in 1962 of the Chancellor, except for one more gem. Remember that that debate was concerned solely 270 with investment allowances. These words of the right hon. Gentleman are particularly apposite at the present time. He said:I should be out of order if I entered upon a discussion of the Government's incomes policy now and I propose to say no more than this. The proposal that incomes should keep pace with production is an obvious platitude which has been uttered by, I think, every Chancellor of the Exchequer since the end of the war. It does not of itself constitute a policy."—[OFFICIAL REPORT, 5th June, 1962; Vol. 661, c. 247–51.]The right hon. Gentleman's words would certainly gladden the heart of Mr. George Woodcock. Even though the Chancellor apparently is not here, I hope that we shall have from the Chief Secretary a full and detailed explanation of why this specific promise to development districts has been broken. I had hoped that the Chancellor himself would have come here to answer the debate which concerns, as he must have known, a specific promise of his own, made at this Box.
§ Mr. Raymond Gower (Barry)
Is not my right hon. Friend being unduly pessimistic? Does he believe that the Government are capable of such a cynical betrayal of development districts?
§ Mr. Barber
I hope that my worst fears will not prove to be true. It may well be that the Chief Secretary has been authorised to accept the Amendment. There is some significance in the fact that the Chancellor is not here, however, because I have noted that he generally turns up when there is something to give away. He leaves the remainder to the Chief Secretary and others. The fact that the Chancellor has not deigned to take part in this debate today confirms our impression, if I may purloin an apt phrase of the Prime Minister's at the weekend, that the Chancellor is the greatest of the non-playing Treasury captains.
Amendment No. 322 involves the same proposal as in the others but restricts it to investment allowances for ships. For years the Labour Party, in opposition, told us that it was the friend of the shipping and shipbuilding industries. Here, at least, is an opportunity for those on the benches opposite at the moment and the others who happen to be outside to show their mettle by supporting our proposal when we divide.
271 I think that no one on either side will deny the importance of the investment allowances to the shipping industry. There can be no doubt that the reduction in value of these allowances now proposed will be a grievous blow to many shipping companies which are having great difficulty in meeting foreign competition. In a desire to get on, I will leave it to some of my hon. Friends with special knowledge to elaborate the case for Amendment No. 322, but I point out the remarkable contrast between the treatment of the shipping industry in the last Parliament and the treatment which is now being meted out.
It is no exaggeration to say that the shipping industry is unique and it was precisely because if this that, in 1961, the then Conservative Chancellor gave an undertaking in his Budget Speech. He said:… the General Council of British Shipping has suggested that it would be of help to shipping companies, in drawing up their future plans, to have a guarantee that the investment allowance will be retained at its present rate of 40 per cent. for a period of years. I can certainly state that I see no prospect of this special allowance for shipping being withdrawn or reduced during this Parliament."—[OFFICIAL REPORT, 17th April, 1961; Vol. 638, c. 812.]What a contrast that is with the attitude of the present Chancellor. In his first annual Budget, he has taken the opportunity of cutting the cash value of the investment allowance for the shipping industry. Because some of my hon. Friends wish to deal with the matter later I will say no more about it now except that before we divide—unless, of course, there is a concession—we shall want a full account of the effect that this latest move will have on the shipping industry.
The fourth Amendment in the group concerns Scotland. Here, again, there are other hon. Members with special knowledge of the circumstances of Scotland who will no doubt wish to deploy the case for that Amendment.
None of these Amendments would have been necessary if the Chancellor had not determined to push ahead with the Corporation Tax in this form before his inquiries were complete. I do not say that these Amendments are necessarily the answer to the problems which he has created, but unless he intends to do some- 272 thing to mitigate the effects of the tax in its present form, we shall be forced to divide the Committee.
These Amendments are intended as a contribution to the competitiveness of British industry and are, therefore, of great importance to our export performance. Today's announcement of the trade figures for May is disturbing and came as a shock to those who listened to the Chancellor's recent optimistic pronouncements. The effect of introducing a Corporation Tax at a rate of 40 per cent. will be to reduce the cash benefit flowing from the investment allowance by nearly 30 per cent.
These Amendments would restore that benefit and there is no more compelling reason for accepting it than the ominous language of the Board of Trade at noon today when it declared:The rapid growth in exports which began in the concluding months of last year has flattened out in recent months.One organisation after another has urged the Chancellor to maintain the value of the allowances, but he has ignored the lot. If he had deliberately set out to use the Budget to discourage modernisation and technical advance or to impede our ability to compete in the export markets, he could hardly have made a better job of it.
§ Dr. Reginald Bennett (Gosport and Fareham)
On a point of order. As these Amendments seem to be of the utmost importance to many parts of the country and to many industries, are we to have the privilege of having the Chancellor of the Exchequer with us?
§ Dame Irene Ward (Tynemouth)
On a point of order. As with this Amendment we are discussing an Amendment specifically dealing with the issue of investment allowances in Scotland, but not also discussing two new Clauses, one dealing specifically with the North-East Coast and the other with Wales and relating to the same situation, why should Scotland have preference over the North-East Coast and Wales?
§ Dr. Bennett
On a point of order. Are the Amendments dealing with shipping to be discussed by any Minister from the Board of Trade?
§ Mr. Robert Sheldon (Ashton-under-Lyne)
The right hon. Member for Altrincham and Sale (Mr. Barber) adduced a number of reasons for thinking that investment allowances should be increased. Some of those reasons were rather curious. He mentioned the grievous blow, as he called it, to the shipping industry and in another context the extent of the increase in the tax burden.
While being of importance in themselves, this is not the point of having investment allowances. The Royal Commission on the Taxation of Profits and Income got at the kernel of this matter in its Majority Report, and study of this paragraph might well be worth while. Speaking of the investment allowance that Report said:… for an instrument of taxation the whole justification … lies in its service to the economic welfare of the State.The economic welfare of the State means the country as a whole and not this or that industry. The Majority Report also said that the investment allowances appeared to be conspicuously imprecise, and I do not think that any one could quarrel with that view.
§ Mr. Barber
Will the hon. Gentleman say whether that Report came before the present Chancellor of the Exchequer promised to increase investment allowances in the development districts?
§ Mr. Sheldon
The whole point about investment allowances—and this must be clearly understood—is that they are blanket allowances. We have been bequeathed nothing more precise than this blanket encouragement, and clearly what we need is a more precise instrument. The Corporation Tax gives this same general encouragement for investment—although it might reduce the effective rate of allowance—by increasing the advantages of retention, and that retention must be invested somewhere. Thus, the tax gives the same sort of overall encouragement to investment which the imprecise investment allowances, capital allowances and initial allowances provided heretofore.
§ Mr. Terence L. Higgins (Worthing)
The hon. Gentleman is speaking of blanket allowances. Would he not agree that the allowances specifically made for the development districts, far from being blanket, were specific to the development districts and that in the same way the allowance to the shipping industry was not a blanket allowance, but was an allowance for a particular industry which, on the ground he has advocated, it was felt should be supported for the good of the country as a whole?
§ Mr. Sheldon
I confidently expect that when the Corporation Tax has been working for a short time a large part of the increase in retention will be used for these investments. This is the argument for reducing the effective scale of extra investment allowances—that we have been thinking too long in terms of blanket allowances which we have in far too great a profusion. We have had them for too long—investment allowances, initial allowances and annual allowances. The right hon. Member for Altrincham and Sale complained about the variation in the rate of these allowances and said that firms could not plan properly. If there were this variation in allowances, one would expect that as the allowances increased, there would be more investment and that as they reduced, there would be less investment. There was not even that measure of control with the blanket allowances and the argument for an increase in general allowances has long vanished from the industrial scene. We have seen too much of them. What we want is a rather more precise instrument for obtaining advantages for the national welfare and the national economy.
§ Sir Douglas Glover (Ormskirk)
Does not the Corporation Tax itself lead to blanket retention and so have exactly the same arguments against it?
§ Mr. Sheldon
That is the whole point of what I am getting at. We have the blanket encouragement to investment by means of the Corporation Tax and therefore there is no need to add to the blanket encouragement. We are replacing part of one form of indiscriminate encouragement to invest by another form, and we do not need further general encouragement but a rather more precise instrument for directing the kind of 275 investment we need. We can all think of a few examples such as gaming machines and computers getting exactly the same investment allowances. We have had enough of blanket encouragements of this sort. They are maintained by the Corporation Tax and there are arguments for their retention. These arguments are apart from the rather more precise means which it should be our aim to try to achieve.
We must understand here that there is very much confusion as to what is meant by investment and this confusion is almost entirely limited to Members of the party opposite. Every time the word investment is mentioned in this Committee people think of stocks and shares. I am referring to real investment in machinery and plant, real productive investment. There are two kinds of this real productive investment. There is replacement investment which may or may not be modernising, which may or may not add to the created wealth of the country, which may or may not be in the sort of machinery and plant which will produce skilled knowledge and understanding of new technological processes. Then there is the other kind of investment, the one I particularly wanted to encourage, which is investment aimed at modernising industry, aimed at producing new ideas in industry, new processes, new skills, new understandings and new industries themselves which in their turn can spawn and generate new ideas, skills and productive processes to the benefit of all.
When the machine shop manager, to give one example, buys a machine tool he may replace an old machine tool with something which is almost exactly the same but just a little more shiny and a little newer looking but which really incorporates very little new in the way of modern development and new ideas. If that manager of the machine shop buys a machine tool which has some of the latest methods of machining incorporated in it, then not only is he doing a service to himself, but in most cases he is also doing a service to those people who use that machine because he will be generating new skills and understanding. Those new skills will in their turn be of benefit to the country.
276 The Corporation Tax itself removes the necessity for indiscriminate encouragement for new investment. There is an argument for blanket encouragement of investment. However accurate one may make one's means of discriminating between categories of investment one can never make them perfect. Most people will agree that, however one discriminates, one still needs a high level of replacement. This is not sufficient. If one accepts that the justification of these allowances is the economic welfare of the whole community then one must also accept that these allowances have not been sufficiently successful. They have not led to sufficient new investment, they have not led to sufficient replacement and they have not led to sufficient modernisation.
On page 130 of the Report of the Royal Commission on the Taxation of Profits and Income, there is the interesting comment thatOn the whole we think that there is a better method of obtaining more sensitive discrimination than is provided for by the present form of the investment allowance. That would be to sub-divide the present very broad categories of favoured investment and to introduce a range of different rates within these sub-divisions.That, I think, was one of the best statements in the Report. No doubt successive Chancellors will baulk at such discrimination and categorisation. There are always many problems involved in this. As soon as categorisation is introduced anomalies arise as this Committee well knows. This is an argument for sloth and for doing nothing. The whole of the Purchase Tax and the import duties are based on categorisation, and naturally we must accept those consequential anomalies. There have been many figures in this Committee who have enjoyed themselves from time to time pursuing these anomalies. This is a rather cheap form of entertainment. The whole point is that if one is trying to seek precision in any field at all and categories are introduced then there are bound to be anomalies. This should not deter us from their introduction.
§ 5.15 p.m.
§ Mr. Sheldon
The Corporation Tax, as I said, will be giving that blanket encouragement to invest and the capital allowances including initial allowances and the annual allowance will, I assume, also be giving the same blanket encouragement. My argument is about the investment allowances alone. I am not saying there will be no possibility for any company to do other than obey the categories introduced by the Chancellor. What they will be getting is an additional incentive because of certain advantages to be obtained both by the manufacturer of the new equipment and the people who introduced them. But I feel that, in general, there are natural limits as to how far taxation can serve this purpose. I should far prefer to see investment grants with their more direct and more immediate action and their ability to anticipate the situation rather than the later effect that investment allowances have.
I should be out of order if I were to pursue that very much further. The only thing I would say is that everything I have said on investment allowances applies with even greater force to investment grants. It may well be that by encouraging investment in modernisation the arguments might be that we are directing firms rather too narrowly, but we must remember that what we are giving them is this extra 10 or 20 per cent. which will be sufficient in the marginal cases to encourage but not necessarily deter. I think that the nub of this question lies on the actual categories to be introduced. No one could think of introducing this range of categories, naturally a small one, with anything but qualms, faced with the obvious discrepancies and anomalies that will naturally be part of them. But we have gone so far with these blanket allowances that it is up to those people who do not accept this view to point out an even better solution rather than to deny the validity of this one. If we are to produce discrimination which will encourage machine tools and possibly discourage gaming machines, to advance the rôle of computers by financial means and perhaps place somewhat less encouragement on those less worth-while machine tools which are for replacement purposes only and which could well have been 278 designed 50 years ago, then this encouragement could be worth while, fruitful and eventually profitable to the whole of British industry which is the only virtue of the investment allowances.
§ Mr. Simon Wingfield Digby (Dorset, West)
On a point of order. Might I inquire whether, at a later stage, it will be in order to move new Clause No. 32, which is being discussed with this Amendment, in case we wish to divide upon it?
§ Mr. Digby
I am sorry to hear that. I hope that before we reach it the Government will have altered their attitude towards the shipping industry. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) referred to paragraph 426 of the Radcliffe Committee Report. That refers to the advisability, recommended by the first Tucker Committee, of having variable rates of investment allowances.
I wish to refer to the shipping industry, which is I believe a very special case. I am sure that the hon. Member for Ashton-under-Lyne would not dispute that ships have to be replaced after about 25 years. Nor could he possibly dispute that they are becoming increasingly expensive to replace owing to high building costs. It is at this stage of the Bill that we come to the main case for the shipping industry. I believe that it is true to say that of all industries none is harder hit by the Corporation Tax because of the devaluation of the investment allowances partly because of overseas earnings and partly because of the cycles of the industry. It is a fact that in this industry there are cycles of prosperity and periods like the present period of very low profitability. I am sure that the Government would not dispute that this industry has special problems.
§ Mr. Edward Heath (Bexley)
Would not my hon. Friend wish that the Minister at the Board of Trade responsible for shipping were here? Could not the Chief Secretary do something about the empty Treasury Bench? We have nobody present from Scotland, nobody from the Department of Economic Affairs and nobody to represent the shipping industry.
§ Mr. Eric Lubbock (Orpington)
Is it too much to hope that the Ministers are drafting another 40 Amendments?
§ Dr. Bennett
It may not surprise my hon. Friend that the Minister in charge of shipping is not here when I point out that throughout the debates on the Anchors and Chain Cables Bill he was absent abroad or elsewhere.
§ Mr. Digby
I was not aware of that, but I hope that these remarks will be conveyed to the appropriate Ministers so that they will seriously consider this problem.
I need not remind the Committee of the importance of the shipping industry. It is a remarkable fact that we still have no fewer than 20 million tons of merchant shipping—a very fine fleet indeed. But this is not something which can be taken for granted indefinitely if the taxation position is unfavourable. The invisible earnings are of great importance. It has been estimated that if we had to carry all our exports and imports in foreign ships the cost would be about £200 million a year over and above what we pay. There is no doubt about the value to an island nation of an industry like the shipping industry. This has been clearly recognised by Parliament on a number of occasions.
The special position of the shipping industry was recognised in 1951 when, under the Labour Government's Budget, there was a suspension on initial allowances and special provisions were made for shipping. In 1954 and 1956 the special position of the industry was again recognised. In 1957 the investment allowances for ships were doubled. Therefore, I cannot believe that the Government have decided suddenly that shipping is no longer of importance. If that is so, surely they are prepared to do something 280 to met the additional difficulties which they are making for shipping on account of this tax, which is of their own creation.
The history of the investment allowances is of considerable length. It goes back to 1878. It has been a history of progressively increasing this type of allowance. There were sympathetic references to the special problems of replacing ships in the main Report and in the minority Report, which was signed by Dr. Kaldor, of the Radcliffe Commission. It therefore cannot be seriously disputed that shipping is in a very special position. But it will be hard hit by the Corporation Tax largely because of the low profitability of the industry.
It has been calculated that a Corporation Tax at 40 per cent. would enable a trading company to retain profits as before and to pay the same dividends as before if existing dividends were twice covered by profits. That is not the position in the shipping industry. The cover in the shipping industry is of the order of one. The table of the profitability of various British industries as set out in the Economist's quarterly returns shows that the profitability of the shipping industry is only 2 per cent. compared with that of oil of 12.9 per cent. and of tobacco of no less than 19 per cent. We are therefore dealing with a low profitability industry and yet one which is essential for the future of an island and trading nation like ours.
It might be argued that this was, perhaps, in some way the fault of the shipping industry, but I do not believe that to be the case. The industry is faced with cargo preferences against it which are increasing as the new nations try to build up their merchant fleets. It is engaged in competition which is tax free and tax assisted and subsidised. Therefore, it is not in a fair position to compete with many of its competitors, and the loss of the investment allowances is likely to be rather serious for it and more serious than for many other industries.
In one sample of 40 shipping companies taken in the year 1963, they paid £1.2 million in Income Tax and £500,000 in Profits Tax. Under the new system, the figures will be £4.2 million and £1 million. In the case of one large shipping group, the 1963–64 retentions were £2.8 million, and it is estimated that, with 281 Corporation Tax at the lower rate of 35 per cent., the relief will be reduced by £2 million to only £800,000. It will, therefore, be seen at once that very much more money will be paid out by British shipping companies which can ill afford it. They can ill afford to reduce their dividends, because that would make it more difficult for them to attract capital, and with an asset like a ship, which must be replaced every 25 years at least, it is essential to build up reserves to meet the very high cost of new ships. I am very glad to see that the Secretary of State for Scotland has come into the Chamber, even though the Minister responsible for shipping has not.
Another point to which I hope the Chief Secretary will pay attention is that a number of orders for ships have already been placed in anticipation of the existing investment allowances which will no longer be forthcoming. It will be seen at once that the industry will be in considerable difficulties.
§ Mr. Joel Barnett (Heywood and Royton)
Is there any particular reason why the hon. Gentleman is referring only to investment allowances and not to capital allowances generally?
§ Mr. Barnett
The reference in all the Amendments and proposed new Clauses is to investment allowances. Is the hon. Gentleman saying that the Amendments and new Clauses are incorrectly phrased?
§ 5.30 p.m.
§ Mr. Digby
I am saying nothing of the kind. The Committee understands perfectly well what I am getting at.
The proposed increase of 40 per cent. in the capital allowances under the Amendment and under my new Clause would be of great assistance to the industry. If the Government can think of a better way of helping it, that would be splendid. In a cyclical industry like shipping, there are years of high profitability. That is the time when the money has to be saved for the new ships. It is followed, unhappily, by periods when freight rates, which are a world factor, are lower, as at present, and when the industry is subjected to great competition, however unfair, when profits are bound to be 282 lower. Provision has still to be made, however, for the replacement of the existing fleet.
I hope that the Treasury will reconsider this matter. On an earlier Amendment about shipping, we had the astonishing spectacle of the Treasury refusing additional powers which we sought to give because we thought that they would help the shipping industry. I hope that on this general question of the adverse effect of the Corporation Tax upon shipping, the Government will think again and that, if they cannot accept my new Clause, they will think of another way in which these problems can be met for the shipping industry. If they are not met, the industry will be placed at a still further disadvantage as against its overseas competitors.
§ Dr. Jeremy Bray (Middlesbrough, West)
I certainly do not claim to understand the full intricacies of the impact of the Corporation Tax upon investment allowances, but I take comfort in the fact that the Amendment clearly indicates that the Opposition have not understood the impact either. The Opposition Amendment seeks simply to restore the cash value of investment allowances to what it was under the old Income Tax provisions, but it takes no account of the changed incidence on taxation of profits arising from the investment.
The right hon. Member for Altrincham and Sale (Mr. Barber) quoted from the F.B.I. letter to my right hon. Friend the Chancellor of the Exchequer and the Press statement, of which I also have a copy. I note that it does not deal either with the total tax position regarding investment allowances, which is the only rational way to see the effect of those allowances.
I can only assume that there was no intention on the part of the distinguished delegation from the F.B.I. which waited upon my right hon. Friend the Chancellor of the Exchequer to mislead the country and to mislead the members of the F.B.I. about the effect of the Corporation Tax and investment allowances, but that is what the delegation has done. When it spoke then of launching upon an education campaign to make good the generally admitted deficiencies in public understanding of the effect of investment 283 allowances, one thinks that there is nothing like beginning at home.
The only rational way in which to regard the effect of investment allowances is to look at the total cash flow out and in during the whole life of an investment and to discount the future flows back to the present by a rate of interest which reduces the total incomings to the total outgoings. The discounted cash flow method is advocated by the N.E.D.C. Report on Investment Appraisal. It has been developed by many workers, described by Merrett and Sykes and applied in a distinguished firm in the textile industry by Alfred and Evans.
It is a little surprising that none of the Amendments on the part of the Opposition reflects any appreciation of this modern outlook on investment which is used despite the evidence by firms which cover about 50 per cent. of the country's investment. Those firms are the larger firms. In number they are a small part of the total, but they are nevertheless, important and one would have expected the Opposition to phrase its discussion in terms of their investment appraisal.
As to the straight arithmetic of the problem, I will refer to an example quoted by Alfred and Evans in a paper in the Investment Analyst of December, 1964, which hon. Members opposite would be well advised to read and then to tear up their speeches.
§ Dame Irene Ward
Before the hon. Member turns to this new point, is he saying that the speech made by the Chairman of Swan Hunter did not reflect the true position and that the speech from Swan Hunter, which is one of our most important shipbuilding firms, was not correct? If the hon. Member does not think that what was said in that speech was true, is it not rather strange that Sir John Hunter should be one of the main people dealing with the incomes policy?
§ Dr. Bray
The text which I have is the text of the F.B.I. Press release, which, 284 to say the least, is a very partial statement of the true state of affairs.
The example which I should like to give relates to a typical investment project giving a return over a 15-year life of the investment, producing the net after-tax average return in this country of 7 per cent.
It brings out the fact, which is not generally appreciated even yet over the bulk of industry, that to secure a net return after tax of 7 per cent., it is necessary only to secure a before-tax discounted cash flow return of 4½ per cent. because of the net favourable impact of taxation on the return on an investment. When industry talks in terms of 12 or 15 per cent. as the required return from an investment, we see at once one of the most important reasons for the deficiency of investment.
§ Mr. Geoffrey Lloyd (Sutton Coldfield)
I have before me the N.E.D.C. investment appraisal dealing with this question of the cash flow. The hon. Member has just said that it is because of the effect of taxation that the return is 7 per cent. and needs to be only 4½ per cent. before tax. The sentence which I see in the appraisal, however, states:Because of this and because the tax allowances accrue early in the life of the asset, the after-tax rate of return will be much greater than the before-tax return, 7 per cent. as against 4½ per cent.It appears, therefore, to depend upon the existence of the tax allowances.
§ Dr. Bray
Taking the fact that to secure a return of £100 on a £100 investment at a 7 per cent. discount cash flow rate one needs to secure in net profit after tax only £44 and one is given the remaining £56 on a plate in tax reliefs, the effect of the change to Corporation Tax is certainly to reduce the benefit of the tax reliefs. It reduces it from £56 to £37, which is a substantial reduction, I agree. The Opposition, however, deliberately ignore the countervailing reduction in tax liability on the gross profits.
The gross profits, which under the old system yielded a net profit of £44, will 285 yield under the new system a net profit of £60. Thus the total return on this typical project under the new rules, as against £100 under the old provisions, will be £96.8. Thus, there is a shortfall of only 3.2 per cent. as a result of the change in investment allowances. To counteract this reduction of 3.2 per cent., hon. Gentlemen opposite propose to increase the benefit of the investment allowance by 40 per cent. In fact the required increase in the effective rate of return from an investment allowance is not 40 per cent. as the Amendment suggests, but only 8 per cent. Hon. Gentlemen opposite are thus just covering their risks five times over, which seems a little over generous.
In their other Amendment, where they deal with development districts, if hon. Gentlemen do a similar calculation they will find that the required increase in investment allowance return there is not the 40 per cent. which they have set down, but only 20 per cent.
§ Mr. Lubbock
In fact if the expenditure on which the investment allowance is calculated is increased by 40 per cent. and the investment allowance in this case happens to be 20 per cent., one arrives a t the 8 per cent. figure about which the hon. Gentleman is talking.
§ Dr. Bray
The mechanism which the Amendment proposes is to increase the expenditure on which the tax is granted by 40 per cent. which increases the benefit of the whole exercise by 40 per cent. I say that the increase in benefit required in this sense is only 8 per cent., and I shall be happy to show the hon. Gentleman the details of this later.
The Opposition seem to be confused in what they are trying to achieve. Are they trying to achieve an equivalent profitability on the investment decision as it is made by a company, or are they trying to achieve a position equivalent to that which existed before in the profitability to shareholders of a decision to invest made by a company? These are two different concepts, and hon. Gentlemen opposite seem to have tried to patch an old garment with new cloth.
If their objective is to achieve the same rate of return to shareholders as a result of the investment allowance under Corporation Tax, this will require a larger increase than 40 per cent. Indeed, 286 so much would the increase in investment allowance have to be, that one would also have to modify the initial and annual allowances.
Clearly, tremendous assumptions have been ignored by the Opposition. I appreciate that the right hon. Member for Altrincham and Sale said that it was only a bosh shot, but these tremendous assumptions require some sense of where the economy is going, not just next year, but in the years ahead as Corporation Tax begins to show its influence on the economy as a whole.
Even taking these provisions relating to investment allowances, which the Chancellor has said are not the last word, the tax treatments of buildings and of working capital are now more favourable than they were under the old system. It is simply because the investment allowance on plant and machinery is 30 per cent., whereas on buildings it is only 10 per cent.—
§ Sir D. Glover
I wish that the hon. Gentleman would not drop his voice at the end of each sentence. I am finding it extremely difficult to hear what he is trying to say.
§ Dr. Bray
I apologise for having a cold which makes it difficult to make myself audible.
I have accepted from the typical example that I have given that there is a very small net reduction in the incentive to invest in plant and machinery. If we have less tax relief on investment, and the same total revenue has to be raised in Corporation Tax and Income Tax combined, one is bound to ask where the extra money is going. Who is getting an extra incentive for what? I have put this question to investment experts and analysts, and they have not been able to give a straight answer. In many cases the question has not occurred to them. I therefore think that it is a little over hasty for the F.B.I. to suppose that it has the complete answer to this question.
287 It seems that in the transitional period at any rate the effect of the change will mean that there will be smaller taxation of accumulation to reserves. In the long-term equilibrium I think that the question is wholly academic, because the shape of the economy, the distribution of income, the rate of investment, and the rate of growth will all have changed. But there will be in the transition an increase in the rate of accumulation of reserves, due not to a lower investment rate, but simply to a marginally lower rate of tax incentives to investors. I accept that this is a complicated question, perhaps not suitable for discussion on the floor of the House, but if we cannot get these matters straight, one wonders who can.
§ 5.45 p.m.
§ Mr. Heath
I have been trying to follow the hon. Gentleman's argument with interest. He is being rude to Members of the Opposition for not putting down an Amendment in terms of discounted cash flow. He might as well be critical of his right hon. Friend the Chancellor for not expounding his proposal in these terms. The fact is that this is not a direct policy. It is an indirect consequence of adopting Corporation Tax. That is our main objection.
My objection to the hon. Gentleman's argument is that he is accusing us of overlooking certain assumptions. He is assuming that a company's expenditure is going to be entirely unaffected by its dividend and degree of cover. These are fundamental. They undermine all the figures which he has given, except on one basic assumption which is a rate of 35 per cent. with a company with a cover of about two.
§ Dr. Bray
The only assumption to be made relating to the profitability of the company is that it is able to take full advantage of the investment allowances. This is considered to be simply an investment project in isolation, as, for example, Courtaulds deciding whether to build an extension in Coventry. It is unrelated to the question of the dividend cover, the general profitability of the company, or anything else.
§ Mr. Heath
What the hon. Gentleman is saying is that, whatever they may lose 288 on the investment allowances, they are going to be able to replace because of the additional amount of profits which they will retain. This is making an assumption as to what they have to pay in taxation and existing dividends with the present basis of cover. The assumption is that if it is necessary to use the rest for investment the dividend suffers. I do not believe that one is entitled to make that assumption on looking at the conduct of its investment by a normal company.
§ Dr. Bray
I think that the actual situation in firms, which is what the House must finally consider, is that a decision is made on the profitability, on the return within the company, and afterwards one looks at how much one can afford to distribute. Quite clearly there are two distinct processes here, and I am sure that the right hon. Gentleman will find that firms accept that there is a rôle for the Chancellor, that there is a rôle for a national policy in setting the general level of distribution relating to rate of growth and so on, and that there is also a rôle for the company in assessing the profitability of the individual projects which it has to handle.
§ Mr. Heath
If the hon. Gentleman was starting from scratch and establishing a new capitalist system in which people had to make decisions for the first time, his argument would at least be debatable, but when he is starting from the existing position on the existing capital structure, on the existing dividend payouts, it is not justifiable in considering industrial decisions.
§ Dr. Bray
That is widening the point beyond that of the effect of investment allowance. If he wishes to make generalisations about Corporation Tax as a whole the right hon. Gentleman can do it at another stage of the debate.
I want to refer to the question of the way in which decisions are made in firms. At present there is a tremendously strong inducement to invest, as an effect of the investment allowances. But many firms do not understand how this works. The National Institute Survey, first of all, and then the N.E.D.C. report of the Management Consultants' Association have been the only reports, as far as I know, which have gone back to the actual prime evidence. The accountants' report, and 289 certainly the F.B.I. report, are not drawing upon anything other than expressions of opinion and general suppositions on the part of their members. If what I have just said is not the case, hon. Members will be able to correct me later.
It is not good enough for the F.B.I. to say that this evidence is unreliable. It must bring evidence which points in another direction. My experience is that in the chemical industry three years ago sums of up to £100,000 were invested without any consideration of the tax position. I have checked this with another chemical company in the last few weeks and find that, within the discretion of the works manager's sanction—which often goes up to £50,000—there is no consideration of the tax position. These are firms which in reply to the National Institute, or the Management Consultants' Association, will have said that they do take account of the tax position in their investment decisions.
Another firm in my constituency was anxious to secure a development district grant for a new crane. On technical grounds it was not eligible for that grant, but I drew attention to the fact that the free depreciation provisions were three times as valuable as a direct grant. However, the firm simply pointed out that it had no profits against which to set off its Income Tax liability.
§ Mr. Geoffrey Lloyd
The hon. Member has referred to what happens in the case of chemical companies. I know the one that he was connected with. He has said that amounts under £100,000 were being dealt with without considering the discounted cash flow, say, three years ago. Is he suggesting that the mass of investment by these big chemical companies is now done without consideration of discounted cash flow, so that there is a certain proportion of their investment in which this technique is not used—the "minor works", so to speak. Is that his argument?
§ Dr. Bray
No. I was accepting that probably 50 per cent. of investment of the country as a whole is based upon fairly rational investment criteria, but that even in those firms which appear to use proper criteria there are some pretty big loopholes. Furthermore, as far as I know the only handbook of use to industry in this matter was published in 290 March of this year, and is only now coming into general use.
§ Mr. Heath
The hon. Member is confusing the issue in his last remarks. He was talking about free depreciation. I would be the first to agree that industry has not yet understood the value of free depreciation in development districts, but that has been in force for only two years, whereas investment allowances, which have been in force for 12 years, are understood.
§ Dr. Bray
That is not what is shown by the surveys, and what one finds when asking for evidence with which the right hon. Gentleman could support his argument. The Management Consultants' Association goes to the nub of the problem when it says thatThe intended inducement"—that is, the investment allowance—does not obey a fundamental rule of an incentive. This is that to be effective the payoff must follow as closely as possible the action which it is intended to stimulate.This seems to me to be an absolutely fundamental proposition, which there is no way round.
That is the human argument, recognising the imperfection of the ways in which decisions will always be taken in industry, but it is also backed up with the arbitrariness in providing an inducement to investment only for those companies who have a tax liability against which they can offset their investment allowances. I am sure that my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) is right in saying that the direction in which we should move is towards the repayment of a proportion of the purchase price of investment goods at the time of sale.
The example of computers is always mentioned in this connection. I have talked to a number of computer salesmen on this point. First, none of them has heard of investment allowances. [HON. MEMBERS: "Oh."] They are selling lots of computers. Secondly, they acknowledge that if we were able to offer a 30 per cent. subsidy at the point of sale it would be tremendously effective. This is what we are now able to offer, if this is the basis of the incentive to invest which we choose to adopt.
291 When I speak to people in industry about this, the fear expressed is that to offer this kind of rate of subsidy in the form of a stimulous and incentive to investment would produce a quite unmanageable investment boom. That is probably the case. In the transitional period we should be paying out the 30 per cent. subsidy in the same year that we were remitting the tax relief on the investment allowances in respect of an earlier year, so that there would be a great deficiency in the Exchequer revenue in that year. This could be got over by gradually introducing the principle of the repayment at time of purchase on one product after another, so as to maintain full employment of the productive capacity in the capital goods industry.
This sounds complicated, but it is not when we realise the type of equipment to which we shall be applying it. It would not be necessary to move over totally from an investment allowance basis to an investment grant basis or repayment at time of purchase basis because the position is already pretty satisfactory with buildings and is favourable in respect of working capital. On plant and machinery, however, it is undoubtedly necessary to do something.
The question is: how selective is it desirable to be? Here we move over into considering the instruments of economic planning, and we cannot but be impressed by the control which the French Commissariat au Plan has over investment in France, where it is able to act as adviser to the Crédit National, which is the bank which finances most of the expansion in French industry. The planners are able to say yea or nay to particular investments in particular firms over the greater part of French industry. We have a more efficient capital market in this country, and that is not the way in which we would wish to proceed.
In the investment grant we have a splendid incentive. We must be able to direct our efforts to that part of industry where there is the greatest need for the expansion of investment. It would have to be done gradually. At present we have a 30 per cent. investment allowance which, under the old tax provisions, carried relief at the 56¼ per cent. tax rate.
292 If we reckon that tax relief could not be given on the total purchase price, but only on the balance of the purchase price left after the investment grant, a 30 per cent. investment subsidy is wholly practicable. I hope that even if this is not the direction in which the Government are going to move hon. Members opposite will have had rubbed into them the fact that a tremendous stimulus to investment is possible one way or another with the aid of the tax machinery which we have now developed.
§ 6.0 p.m.
§ Mr. Michael Noble (Argyll)
I hope that the Committee, and particularly my hon. Friend the Member for Tynemouth (Dame Irene Ward), will forgive me if I speak for a few moments to Amendment No. 534, in page 63, line 25, at the end to insert:Provided always that the expenditure in Scotland in respect of which investment allowances are calculated shall for the purpose of corporation tax be deemed to be increased by 40 per cent.The Amendment seeks to achieve the same effects as were mentioned by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) specifically for Scotland. In saying this, I should like to make it clear to the Committee that this is not a dog-in-the-manger attempt on the part of Scotland to get something which, perhaps, the rest of the country ought to have.
The position as I and many of my hon. Friends see it is that the Chancellor may, for some reason best known to himself—and probably kept to himself—feel capable of making only a very small gesture. If that is so, we would maintain that the place where that gesture should be made is Scotland. We realise very fully that the case for these extra allowances is very great, perhaps in the country as a whole, certainly in the development districts, but if all else fails, the Chancellor should remember that there is a place called Scotland—