HC Deb 12 November 1974 vol 881 cc263-6

I now turn to the burden thrown on to industry by the effect of inflation on the operation of corporation tax. This, too, requires immediate action of a selective kind. I have not, therefore, felt able to accept some of the proposals which might have been put to me. Some have suggested a massive cut in the rate of corporation tax. I see no case for making such a cut, since it would give the same relief to every company irrespective of the burden inflation has imposed upon it.

I have also been asked to cancel the advance corporation tax supplement. The House will remember that this is an additional payment to be made by companies when they pay dividends, which will be set off against their tax bills in 1976. The greatest benefit of repaying the supplement a year early would go to those who have paid the largest dividends this year, and they are unlikely to be the companies which most need help. We need an instrument more directly related to the problem.

Let me first say how I see the problem. Under the ordinary rules of accounting, the profit attributable to a particular year of a continuing business is arrived at after deducting from the excess of sales over outlays the value of the opening stock and adding the value of the closing stock. When stocks are valued at the actual cost of acquisition this method gives the same result as if the profit made on each item of sale were computed separately—which, of course, would be a difficult thing to do in the case of most businesses.

What happens in times of inflation is that the cost value of the closing stock becomes much larger than that of the opening stock because the stock is replaced at higher prices. This causes an acute liquidity problem, a shortage of cash for the payment of wages, materials and other expenses. The problem would exist even in the absence of taxation.

Mr. Hugh Fraser (Stafford and Stone)

That was true in February.

Mr. Healey

It was true last year.

Mr. Fraser

It was also true in March.

Mr. Healey

I shall try to confine myself to my speech, tempted as I am to respond to interventions. I shall leave that to the greater freedom which I shall enjoy when winding up the debate on Thursday.

But the need to pay tax on the part of the profit which does not accrue in cash or receivables but is tied up in stocks makes it much greater.

This problem has become so urgent during the present year that I am persuaded that industry needs a substantial immediate improvement of its liquidity through the deferment of tax on that part of the profit which corresponds to the abnormal increase in the value of stock and work in progress.

I therefore propose that for tax purposes companies should have the right to reduce the closing valuation of their stocks and work in progress for the accounting period which ended in the financial year 1973–74—on which their current tax bills are based—by an amount by which the increase in the book value of stocks and work in progress exceeds 10 per cent. of the trading profits of the business in the same accounting year. [Laughter.] In other words, for the benefit of those who have not had as much time as I to study the problem, the maximum profit represented by the increase in the value of stocks on which tax will be payable this year will be limited to 10 per cent. of the trading profit.

The figure of 10 per cent. was chosen because it broadly corresponds to the proportion of profits which is attributable to the increase in the value of stocks for an average of companies in a normal year.

Since the closing stock of one accounting period normally becomes the opening

* See col. 472

stock for the next period, this adjustment means a postponement of tax liability, and not an exemption. If no further steps were taken, the tax forgone this year would automatically be clawed back in the following year. But this is, of course, not in contemplation. Indeed, the need for deferring tax in 1975–76 on abnormal stock appreciation arising in the present year's profits is likely to be even greater. As honourable Members know, there is now sitting the Committee on Accounting for Inflation under the chairmanship of Mr. Francis Sandilands. I hope that when I come to decide what action to take next year I shall have the benefit of the Committee's recommendations before me.

For practical reasons, we cannot immediately deal with the whole range of companies, and the immediate relief will be confined to those who have a closing stock of at least £25,000. For the same reason, it is not possible to include individual traders or partnerships in this emergency relief. However, I intend next year's relief to extend to all traders, whether companies or unincorporated businesses.

In deciding how that further relief is to apply to those traders who, for practical reasons, will not benefit from my present proposals, I will take into account the fact that their relief will cover two years' trading and that they will have had to wait a year for it. This is a bankable assurance and should be treated as such.

I have also another, but minor, relief for industry. As from today I propose to increase from 40 per cent. to 50 per cent. the initial allowance given for industrial buildings. I hope that this will be some encouragement to companies to modernise their buildings and will be of some assistance to the construction industry. My measures in September showed that I am well aware of the current problems of the construction industry. I will watch carefully to see whether further action is appropriate.

Broadly speaking, the effect of the changes in the Price Code will be to raise the current profitability of industrial and commercial companies in 1975 by some £800 million compared with what it would be with present profit margins. The effect of the changes in corporate taxation will be to improve company liquidity by nearly £800 million in the coming winter.