HC Deb 30 March 1971 vol 814 cc1383-5

I now come to a consideration of the basic structure of corporate taxation, personal direct taxation and indirect taxation, and I will deal with each in turn.

First, corporation tax. From the moment when the introduction of the corporation tax was announced, we made it clear why we were opposed to the particular form which had been chosen. Nothing that has happened since then has caused us to alter that view, and I therefore intend to reform the structure of the tax.

But there are two reasons why it is not appropriate to legislate this year. First, I want to give adequate time for consideration and consultation, because in this case there is more than one method of achieving what we have in mind. The proposals are therefore being published in a Green Paper which will be available today. The second reason why it is preferable not to legislate this year is that the changes we make in this country should have regard to the developments in company taxation within the E.E.C. But my intention is that, unless something unforeseen occurs, we should legislate next year.

The main reason why we regard it as essential to reform the present structure is that we are, and always have been, opposed to the substantial discrimination which it entails in favour of retained as opposed to distributed profits. This discrimination distorts the working of market forces and so tends towards the misallocation of scarce investment resources.

The present system makes it difficult for companies that need to raise equity capital from the market. And it lessens the pressure of the market and the shareholders on the efficiency of the company and on the profitability of new invest- ment. But there is another and very important reason why I am convinced that the change must be made. The particular form of corporation tax chosen in 1965 required very considerable anti-avoidance measures in respect of close companies, and this has led to a great deal of complex administration with little advantage to anyone.

We have therefore been considering a number of forms of company taxation which would remove these objections. The conclusion we have reached is that the present system of corporation tax should be replaced by one which would be neutral as between distributed and undistributed profits. On domestic grounds our preference would be to secure this result by a two-rate system of company taxation. Corporation tax would be paid at a lower rate on distributed than on retained profits. When the company paid a dividend it would, just as at present, deduct income tax and pay it over to the Revenue. The rates of tax could be so fixed that the tax burden on distributed profits, taking income tax and corporation tax together, would be at the same level as the corporation tax alone on undistributed profits. Among other advantages, this method would reduce considerably the regulation to which close companies are subject, and it would allow a treatment of overseas income which I believe would be fair and reasonable.

This is not, however, the only way to achieve the objective. For example, there is an alternative system under which all company profits, whether distributed or not, are taxed at the same rate, but part of the corporation tax on the distributed profits is treated as a payment on account of the shareholder's eventual income tax liability on his dividends. This system, normally known as the imputation system, can in substance be very similar to a two-rate system and we should certainly consider adopting it here. Clearly developments in Europe will be a factor affecting our choice.

However, as I have said, our present preference on domestic grounds is for a two-rate system, and for this reason the Green Paper sets out the way in which the proposed corporation tax changes would operate primarily in terms of such a system. But it also describes the main respects in which an imputation system would differ in its operation. I hope that representatives of industry, commerce and the professions will study both systems and make known their views. I believe that this reform will do much to revive equity investment and with it the health of our economy.