HC Deb 16 June 1965 vol 714 cc780-93
Mr. Lubbock

I beg to move, Amendment No. 650, in page 85, line 46, to leave out from "1952" to end of Clause and to add: the building society shall not be liable to pay corporation tax on its profits".

The Temporary Chairman (Mr. Harry Hynd)

It is suggested that the Committee should discuss at the same time new Clause No. 31—Building societies—standing in the name of the right hon. Member for Orkney and Shetland (Mr. Grimond) and the names of his hon. Friends: A gain shall not be a chargeable gain if it accrues to a building society within the meaning of section 445 of the Income Tax Act 1952.

Mr. Lubbock

I am sorry to see the Chief Secretary leaving the Chamber because I thought that he had become more cheerful in the last few hours, in some contrast with his attitude earlier when he became rather annoyed with me the last time I spoke. The Chancellor has also been smiling again and I actually noticed even the Patronage Secretary in a jovial mood. I therefore move this Amendment with a certain justifiable optimism, having seen those cheerful faces on the Government Front Bench.

It is a pity that the debate takes place at this hour, after a very long night, when not many hon. Members may feel disposed to speak. It would be a great shame if millions of people outside who are directly interested in a reduction of mortgage rates—which would be the result of accepting the Amendment—were to get the impression that, because not many speeches were made on the Amendment, we in this Committee are not vitally concerned with the problems they are facing. Those problems would be to some extent relieved by the Amendment.

The Amendment is concerned with the Corporation Tax and the new Clause with the Capital Gains Tax. I do not propose to refer in detail to the new Clause because, as I hope the Chancellor will recall, I referred to it in a debate on the switching of gilt-edged investments on 31st May. Although he did not give me a reply on the points I raised then, I am sure that he will have had time to read them in HANSARD since. I propose to deal exclusively with the effect of Corporation Tax on the building societies.

I begin by reminding the Committee of what was said by the Minister without Portfolio when we were discussing the taxation of local authority associations. He made two remarks that I noted because I think that they are of some relevance to this Amendment. He said that the work the local authority associations had to do was of a very worthy kind and that to consent to the Amendment then under discussion would not involve any serious breach of principle. I suggest that those two arguments apply equally to relief of Corporation Tax on building societies.

This is something that the Chancellor could do right now in implementation of the promise made by the Labour Party before the election to give some help to people who are trying to buy their own homes. When the Secretary of State for Economic Affairs first talked about mortgages at less than 3 per cent., I never thought that a practical possibility. I do not think that, in the foreseeable future we shall get anything like that reduction in mortgage rates of interest.

8.15 a.m.

It is quite wrong to lead people, who in many cases are paying something like 7 per cent. for their mortgages, to think that reductions of over a half in rates of interest that they pay are possible in the present state of the country's economic affairs. All I am suggesting is a very modest reduction which the building societies could pass on to the borrowers if the Chancellor was prepared to accept these two Amendments.

The objects of building societies are prescribed by Statute and they are to encourage thift by the collections of the savings of people and to encourage home ownership by lending these accumulated savings to persons wishing to buy their own houses. These two objectives have commanded the support of all political parties for many years. At present total advances of building societies are nearly £1,100 million.

In 1932 the building societies were not liable to any taxation on their residual surpluses and it was in that year that Income Tax was imposed on them for the first time. In 1937 the societies were called upon to pay the National Defence Contribution and they made no protest against that because they thought it right they should make some contribution towards the cost of rearmament. Then in 1947 the National Defence Contribution was replaced by the Profits Tax and the whole nature of the taxation of building societies had changed. None of the grounds adduced at the time for the introduction of that tax applied to building societies, and for several years running, in practically every Finance Bill since the war, the building societies have sought to obtain exemption from both Income Tax and Profits Tax on the surpluses which they ploughed back.

In my opinion, what was right in 1932 is still right today. The building societies do not trade for profit like an ordinary commercial company. The important factor to bear in mind is that they have no equity shareholders to whom ordinary dividends could be paid. There is, therefore, no body of people who could benefit from this reduction in taxation other than the people who are borrowing money from the building societies for the purpose of home ownership. What the building societies try to do all along is to maintain a fair balance between their investing members and their borrowing members. In those circumstances, it is quite wrong that taxation should be applied to their surpluses as if they were ordinary commercial or industrial concerns. It has been estimated that if the Corporation Tax were completely remitted the savings to the societies in the first year would be about £10 million in tax on their operating surpluses. This would not become effective until the current taxes on their surpluses had expired and one cannot predict what the situation would then be with regard to the interest rates.

Speaking roughly, it is calculated that this remission would amount to something like one quarter of 1 per cent. on the borrower's interest rate. If the Chancellor is interested I can let him have more detailed calculations, showing that not only would one be able to give this reduction of a quarter per cent. but also that it would enable the building societies to plough back slightly more into their surpluses and thereby to increase the amount which they had available for borrowing.

This is quite a small relief, but I think it is one which would be very widely welcomed, and from which the Chancellor would gain great credit, if he were to put it into operation in this Finance Bill. I would remind him of the very great disappointment which was felt by building societies that nothing was done for them in this Budget. They say, in Building Society Affairs, published by the Building Societies Association, in the May issue: It is to be regretted that the Government did not take this opportunity to relieve Societies from tax on their net operating surplus and so restore the concessionary treatment they once enjoyed. So I appeal to the Chancellor to give this small concession to home owners, in implementation of the promises we heard so much about last October before the General Election.

Sir Eric Fletcher

I should like to respond immediately to the speech of the hon. Member for Orpington (Mr. Lubbock). I do not think that I need elaborate the point that we in the Government and everybody on these benches are very sympathetic to the cause of the building societies, and, as has been stated, we are considering ways in which we can help on the whole question of reduction of mortgage rates; but we have come to the conclusion, as the Committee will know, that we do not think it is the appropriate way of giving assistance to the building societies by relieving them from Corporation Tax and Capital Gains Tax as suggested in these two Amendments.

In the first place, I should like to emphasise the fact that building societies are already deriving very considerable benefits from the fiscal changes introduced by this Finance Bill. As the hon. Member will be aware, the building societies are at present liable to both Income Tax and Profits Tax, and as a result of the substitution for those two taxes of Corporation Tax there will be a very considerable relief in the total tax burden on all building societies. I cannot give a precise estimate, but according to some of the calculations I have seen the relief which the building societies in the aggregate will derive through the change over to Corporation Tax may well be some £4 million. Therefore, we are in this Bill doing something very considerable for the benefit of building societies.

The hon. Member went on to suggest that no breach of principle would be involved if we made this concession. I am afraid I must disagree with him there. I gather that some of the passages of his speech were taken from the Final Report of the Royal Commission on The Taxation of Profits and Income. If he had read paragraph 562 of that Report I think he would have realised that the concession which he suggests should be made to building societies, by relieving their surpluses of all liability to Corporation Tax, really would be an inroad on the principles enunciated in that Report, where it says: It seems to us that only by an impartial distribution of the tax whenever and wherever profits"— it was talking of Profits Tax, but the same argument applies— are found can there be a fair balancing of costs and prices between the public and private sectors of industry and commerce. And if these factors are not balanced fairly the true relationship between these different activities in respect of their development is itself disturbed. The reasons which led us to reject the suggestion made from the Liberal benches that the nationalised industries should be exempted from Corporation Tax operate equally to lead us to reject the suggestion that it would be feasible, or logical, or practicable to exempt building societies from Corporation Tax. Contrary to the assumption made by the hon. Member, in our view there would be repercussions of such a nature as to make it impossible to make this change.

The hon. Gentleman then asked what would be the cost involved if his Amendment were adopted. It is impossible for me to give any reliable estimate. It would be a very considerable figure; and of course, over and above the direct cost involved by conceding the Amendment, it is impossible to speculate as to what would be the indirect cost involved because of the inevitable consequences and repercussions that would flow from it.

Mr. Lubbock

There would be indirect savings—and I am sure that the hon. Gentleman realises this—because if the rate of interest to borrowers were reduced, they would get less remission on their own tax paid.

Sir Eric Fletcher

That is one of the difficulties. That does not follow. The hon. Gentleman suggested that if this remission of tax were made there would be an inevitable reduction in the mortgage rates to borrowers.

Mr. Lubbock

No.

Sir Eric Fletcher

I think that the hon. Gentleman suggested that, but that consequence does not follow. There is no certainty that if the building societies were excused from any liability to Corporation Tax the benefit, or at any rate the whole benefit, would be passed on to borrowers. It might, or it might not. Part might be passed on, and part might be used to add to surpluses.

As the hon. Gentleman probably knows, there were certain discussions with the Building Societies Association before the Bill was introduced, because the provisions of this Clause with regard to the taxation of building societies are somewhat complex. The Government were satisfied, as was the Association, that there was no certainty that relief of this kind would be reflected in anything like full concessions to borrowers.

Therefore, sympathetic though we are to the problems of all those interested in obtaining money on mortgage from building societies, and anxious as we are to help to devise workable schemes in that direction, we are satisfied that this is not a matter which can be dealt with by an undesirable modification of the fiscal laws, and I must, in consequence, invite the Committee to reject the Amendment.

Mr. Peter Bessell (Bodmin)

I am sure that the Minister's reply will be received with some dismay, not only by this side of the Committee, but also by some right hon. and hon. Gentlemen opposite. We are all gravely concerned about the position of the building societies, and the immense contribution which they have made to our national life in so many spheres.

Throughout this long session we have heard special pleadings on behalf of special causes, and I do not apologise for adding my voice to that of my hon. Friend the Member for Orpington (Mr. Lubbock) in making a special plea on behalf of the building societies.

I hope that the Chancellor's mind is not entirely closed on this matter. Not only have the building societies rendered great service to the community by providing funds which have enabled young people and others to acquire their own homes over many years, but they have been a source of investment for the small investor who has sought somewhere to put his money, somewhere that would be safe, and somewhere where he could expect a reasonable and fair return on his capital investment.

During the current year the building societies have experienced real difficulties.

8.30 a.m.

I do not want to over-emphasise or exaggerate those difficulties in in any way, and I do not want to suggest that there is any lack of confidence on anyone's part about the ability of building societies to overcome their temporary problems. Nevertheless, the building societies represent a very important part of the economic life of the nation. About £4,700 million is invested in building societies in this country. In addition, it is notable that in the first four months of this year they managed to advance about £330 million for house purchase and other purposes. In view of the difficulties which the building societies face as a result of the financial crisis which the country has been experiencing—and I do not make any sort of political point out of this—it would be a very helpful gesture to them, and to the small investors and those people who are seeking to purchase homes, if the Chancellor would consider making a worthwhile concession in this case, not only in respect of Corporation Tax but more particularly in respect of the proposed new Clause which deals with relief from Capital Gains Tax.

Building societies work under properly restricted conditions, and I do not quarrel with those restrictions. It is right that they should be required to maintain reserves. This is in the interests of the building societies themselves and their reputation as well as for the protection of the small investor. Secondly, they are limited by Statute in relation to the form of investment. I shall not labour the point by going into all the ways in which building societies may invest their money. They are well known to all hon. Members. Nevertheless, they are prohibited from making speculative investments, unlike any business concern—and in that can be included a very wide sphere of business activity. They may not use their money for speculative purposes.

For that reason alone there is justification in arguing that because they are restricted they are entitled to receive special treatment in relation to tax. Also, because of the wise distribution of investment within the limitation imposed upon building societies, some have been able to gain considerable advantages from capital gains. This has been due largely to the fact that they have spread their portfolio carefully and wisely within their limitations.

With this in mind I repeat the hope that these Clauses will receive earnest consideration. Building societies need growth, security and expansion, and not only because of the services they have given to the small investor, and not only because of the service they render to the nation in providing house mortgages, but because they are an integral part of the national financial structure. I hope that the Chancellor, who has had some wise second thoughts on some other matters, may have some second thoughts in this respect also. It would gain him the support of a very wide section of the public, as well as of the building societies themselves.

Mr. Rafton Pounder (Belfast, South)

There is one point in respect of which I should like some clarification. It concerns the apparently inequitable feature contained in subsection (2,b). It would appear that building society interest will be treated as if it is received net and used up at the standard rate for inclusion in the Income Tax computation. No relief whatsoever would appear to be given under Schedule 11 for the Income Tax which is deemed to have been charged. May we have a straightforward answer to this very important point?

Sir Eric Fletcher

They will get relief. I think that the hon. Gentleman will find that there is an Amendment dealing with subsection (2), to which he referred.

Mr. Lubbock

I should have thought that the Minister would have had something to say in reply to the arguments which have just been produced by my hon. Friend the Member for Bodmin (Mr. Bessell) —

Mr. Maxwell

Why?

Mr. Lubbock

I hope that we shall not end this debate until we have heard something more from the Minister without Portfolio. Without being offensive, I would say that his reply was the poorest we have heard during the night, and I have listened to many. I can understand it. The hon. Gentleman is perhaps tired and would like some time to think again about this. If he would like to take it away and promise me that he will come back with something on Report, I should possibly be prepared to withdraw the Amendment. His arguments were extremely feeble. I will deal with two of them.

He said, contrary to what I was trying to argue in moving the Amendment, that there would be a breach of principle. In that case, why was there no taxation of building societies before 1932? This is a new principle erected since then, and the hon. Gentleman's argument was so obscure that I could not follow what it was. We are not talking about a matter of logic. We are talking about a political decision which can be taken here and now, and this would be an earnest of the Government's endeavours to stimulate home ownership. It is all very well for Ministers to say that they sympathise with home owners and that they would like to see the building societies playing an even greater part and giving them a pat on the back for what they have done so far—[An HON. MEMBER: "The M.B.E. as well."]—and the M.B.E. as well, perhaps.

We should have a bit less lip-service paid to home ownership by this Government and little more help for it. The hon. and learned Gentleman completely ignored what I said about promises last October. I do not think that many people thought at that time that this summer we should be faced with 7 per cent. interest rates and that we should he arguing about this minute reduction—only ¼ per cent. and having a hardhearted answer like the one which we have had from the Minister without Portfolio.

On the question of the reduction, this ¼ per cent. I entirely agree with the hon. Gentleman that it does not all have to be passed on to the borrower and that it might be wise of the building societies to use some portion of it for increasing their reserves. That will enable them to lend more money to increase the number of people who could become home owners. It would be a matter of policy, possibly, as to how they would split the benefit they would obtain from this increase in taxation. I think that I was being a little cautious in talking about ¼ per cent. If the hon. Gentleman would like, I could show him some calculations which I have made, which show that the benefit would be something like 8s. per cent. That is more than ¼ per cent. and I was allowing for that when I said that they would not only reduce the rates to borrowers by that amount, but would also be able to put a little more into reserve.

These calculations, of course, are on the basis that everything else is equal. I am not committing the building societies to doing what I have suggested about the reduction in the mortgage interest rate. I think that these are reasonable calculations on the basis of what we know about the Corporation Tax, Income Tax and Profits Tax which the building societies have to pay at present. Throughout these calculations, I am assuming that the interest which they pay on shares is the same in every case and that their management expenses and so on are identical. I hope that the hon. and learned Gentleman will not try to dispute these calculations, which I can show him if he would like to see them after the debate.

If he is not prepared to accept this Amendment, what are the Government going to do about the home owner? Will they drag on through the summer forgetting about all those promises which sounded so marvellous at the election, or will the Minister now think again and take the opportunity to redeem at least one of the promises which the Labour Party has still to fulfil?

Mr. Anthony Barber (Altrincham and Sale)

I cannot be so hard on the Minister without Portfolio as the hon. Member for Orpington (Mr. Lubbock). My comments on this Amendment will be brief, because the arguments for and against it have been put cogently and succinctly. Nevertheless, I would remind the Committee that successive Chancellors of the Exchequer have felt bound to resist the view expressed in the Amendment that the profits of building societies should not be liable to tax. It follows consistently with that that I cannot advise my right hon. and hon. Friends to support the Amendment. All the same, I congratulate the Liberal Party on exposing the cynical attempt of the Labour Party year after year in this Committee to lead the country to believe that building societies would be exempt from taxation on their profits.

I would ask, in passing: where is the Minister of Housing? Where is the First Secretary of State? I can only assume that they are still both happily and comfortably and peacefully sleeping in their owner-occupied houses. At any rate, I should have expected the right hon. Gentleman the First Secretary to have been here, poised for instant support of this Amendment—but that was not to be.

We are here concerned with the charge of Corporation Tax on building societies, but Corporation Tax is charged only on profits—profits as defined by Clause 42. If there were no profits there would be no charge. The Minister without Portfolio says, and I believe that he is right, that if the Amendment were accepted there would be a serious breach of principle, but I would quote now the classic case for the proposition expressed in the Amendment that building societies do not make profits in the normal sense, and that there should therefore be no charge on them—be it Profits Tax or Corporation Tax. The quotation is very brief: … what we are talking about is not a profit but a reserve. It is different, for a reason I want to stress again in a moment, from the reserves of ordinary public companies with whose affairs we tend to deal for so great a proportion of the time we spend on the Finance Bill each year. A building society is not, as the hon. Member said, a trading company. There are no profits. Those were the words of the present Prime Minister. And I must say that I would have expected him to be here, knowing the right hon. Gentleman's strong feelings—and these views were expressed by him after the Report of the Royal Commission on the Taxation of Profits and Income and I have no doubt that he took account of what it said—and we know all that has been said by the Minister without Portfolio this morning from that Report. But no—the Prime Minister is not here to support the Liberal Party.

I might mention that in that same debate—and it was a very long debate, lasting several hours—speaking on a new Clause to exempt building societies from the Profits Tax, the Prime Minister also said: As a result of the Government's monetary policies, which I do not propose, perhaps to the relief of the Committee, to expatiate on at any length tonight since I had one or two words to say about them in a letter to a newspaper this morning, the householder is already paying what many people will consider to be an excessive rate of interest to the building societies, though, as the hon. Member for Wimbledon made clear, that cannot be laid at the doors of the building societies. It must be laid at the door of the Government's monetary policies."—[OFFICIAL REPORT, 2nd July, 1957; Vol. 472, c. 948–9.] What we are all wondering is what hon. Members opposite will do. For years they have spoken in support of the very sort of proposition which has today come from the Liberal Party. The Liberal Party is consistent in what it says. I and my right hon. and hon. Friends have been consistent in what we have said over the years. Are the Labour hon. Members to be so inconsistent as to vote against this Amendment, if the Liberals should decide to go to a Division? We shall see.

Amendment negatived.

8.45 a.m.

Sir Eric Fletcher

I beg to move, Amendment 697, in page 86, line 28, to leave out from "if" to "and" in line 33 and to insert a society which but for the arrangements would be assessed to income tax for the year 1965–66 by reference to a period ending before that year is under the arrangements (and without any election thereunder by the society) so assessed by reference to a period ending in that year, then subsection (3A) below shall apply to the society in place of the general provisions of this Part of this Act as to the time for payment of corporation tax".

The Temporary Chairman

It would be convenient to discuss, at the same time, Amendment No. 698.

Sir Eric Fletcher

I hope that the Committee will allow me to move these Amendments briefly. They look somewhat lengthy and are designed to make an alteration in the method proposed for dealing with the taxation not of surplus profits of building societies, but of their funds. The Committee will be aware that, for many years past, the provisions of the Income Tax Act relating both to the borrowings and the lendings of the building societies have been dealt with by the Revenue by rather special arrangements, hitherto enshrined in Section 445 of the Income Tax Act 1952.

By reason of the transition to Corporation Tax, there were considerable discussions with the association of the building societies as to the proper provision to be made. The Clause in the Bill as drafted was prepared by agreement with the building societies. They thought at the time it would be convenient for them to change from the current year assessment and to revert to the preceding year form of taxation. Since then they have had further thoughts about it and have come to the conclusions that the transitional provisions for current year assets would have unfortunate currency results and, as a consequence, at their request, these Amendments have been put down.

I hope that they will be acceptable to the Committee.

Amendment agreed to.

Further Amendment made: In page 86, line 43, at end insert: (3A) Where this subsection applies to a building society, then—

  1. (a) corporation tax assessed on the society for any accounting period shall be paid within one month from the making of the assessment, except that if the society's basis period for the year 1965–66 does not extend into the year 1966, the tax shall not be payable before the like time after the last day of the accounting period as 1st January 1966 is after the last day of that basis period; but
  2. (b) if corporation tax has not become payable by the society for an accounting period by the like time from the beginning of that period as there is between the beginning of the said basis period and 1st January 1966, the society shall at that time from the beginning of the accounting period make a provisional payment of tax computed on the amount on which the society is chargeable to corporation tax for the accounting period last ended (or, as the case may be, is chargeable to income tax by reference to the last basis period), with such adjustments, if any, as may be required for periods of different length or as may be agreed between the society and the inspector.
References in this subsection to a society's basis period for the year 1965–66 are references to the period by reference to which the society is assessed to income tax for that year under the arrangements referred to in subsection (3) above.

Clause, as amended, ordered to stand part of the Bill.