§ I now turn to the tax changes which. must accompany these cuts in public expenditure if we are to strengthen our economy and maintain our political and social priorities. First the company sector, and in particular the position of industrial and commercial companies. The past year has been a difficult one. I recognised this in my November Budget Statement. In particular I noted the problems caused by inflation, and I proposed two measures designed to relieve companies of some of these pressures.
§ In this coming year there is general agreement that the financial position of the company sector will improve compared with the past year, though inevitably there is doubt and uncertainty about the extent of this improvement. There are signs that this improvement has begun. It is encouraging that although demand for bank credit generally has been slack in recent months, bank lending to manufacturing industry has been holding up relatively well. There has also been a good response to the arrangements announced in November for making additional funds available through Finance 299 for Industry. Applications for loans totalling £600 million have already been made and some £100 million already granted. FFI is evidently well placed to make a significant contribution to industry's needs for medium-term finance.
§ In addition, there has, of course, been the very welcome revival in the stock market since the turn of the year, and the prospects for raising new equity capital are now considerably brighter than they were in November. The CBI agrees that prospects look somewhat better, but it sees rather less improvement than I would myself expect. I recognise that the company sector, taken as a whole, has faced a period of financial deficits, which it financed largely through borrowing from the banks. In recent weeks the opportunity has been taken to fund some of this borrowing through new issues. Even so, companies' net short-term liabilities for some time yet are likely to continue to represent an abnormally large proportion of total turnover.
§ The company sector is the major source of employment in Britain and of goods and services for domestic consumption and investment as well as exports. In the long run our growth prospects, and prosperity, depend on the company sector being able and willing to invest in new plant and machinery and equipped, therefore, to meet overseas competition on an equal footing. The Government have committed themselves in their White Paper on the Regeneration of British Industry to the creation during the next decade of a vigorous, alert, responsible and profitable private sector within our mixed economy. I emphatically endorse this commitment.
§ At the same time, companies must be expected to make an adequate contribution to the finance of the public sector. Companies do not operate in a vacuum but in an environment in which facilities are provided by central and local government; the nationalised industries provide them with more of the goods and services they need, just as the education system and the social services benefit their work force.
§ The stock relief measures and the Price Code relaxations which I introduced last November will greatly improve the financial position of the corporate sector this 300 year. A number of further proposals for relief have been put to me. I have examined them very carefully but I have felt bound to weigh them against the need to improve the financial balance of the public sector and to ensure that the burden of adjustment is spread as equitably as possible. Moreover, too many of the proposed changes—particularly suggestions that corporation tax should be reduced—lack selectivity. I favour a selective approach, covering measures of the kind I propose in this Budget. In the long run the strategy which underlines this Budget will redound to the benefit of the company sector, since it will contribute towards an economic environment in which industry can invest with confidence.
§ For these reasons I have concluded that no new general reliefs should be introduced this year. I have indeed considered whether, on the contrary, there is a case for seeking an increase in the tax contribution of the corporate sector. But, although the financial outlook is beginning to improve, companies are still feeling the effects of a period of financial deficits and I do not want to do anything which might prejudice the prospects of industrial investment this year. I propose, therefore, to leave the rate of corporation tax unchanged at the 52 per cent. which I introduced in March last year. The rates for small companies, co-operatives and building societies will also remain the same.
§ I do not propose, however, to repeat the advance corporation tax supplement this year. This will avoid adding to the liquidity problems of those companies that pay dividends and, therefore, ACT in the current financial year. Moreover, as I reminded the House several times last year, the surcharge introduced in my 1974 Budget will reduce the tax bill of companies this year, when the reduction in business activity makes this particularly welcome.
§ There is one way in which I propose to help company finance, though this will not come as a surprise. The House will remember that when I introduced a measure of relief from corporation tax in the autumn which was related to increases in stock valuations I promised similar action again this spring. The financing problems of traders who replace their trading stock in times of inflation are very serious. They would be 301 aggravated if tax had to be paid on profits calculated in terms of the traditional methods of stock valuation. My autumn proposals therefore gave relief for the abnormal inflationary element in the stock valuation, a relief which added some £800 million to company resources, and I then gave a pledge that similar relief would be given again this year.
§ In order to obtain the maximum immediate impact from the autumn stock relief, it was made retrospective in the sense that it related to accounting periods ending in the year 1973–74—that is, to the period on which the tax bills becoming payable this last winter were generally based. For practical reasons I could not make it available to all businesses but had to limit it to companies which carried considerable amounts of stock. I promised that this year I would include all traders in my proposals and would take account of the fact that those who had not benefited in the autumn had had to wait for their relief.
§ The relief given in the autumn was deliberately simple in design, for it was intended as a temporary measure until we can examine the recommendations of the Sandilands Committe on accounting for inflation. It will be looking at many other things besides stock valuation, but this must he an important element in its studies. The committee has not yet reported, and I think the best course this year is to continue relief on very much the same lines as before.
§ I propose, therefore, that this year's relief should be given on the lines of my autumn formula, measuring the stock increase over two years, however, instead of one only, but altering the scope of the relief in certain respects; for example, excluding land held as an investment and including professional work in progress.
§ For unincorporated businesses and those companies which did not qualify for relief in the autumn, relief will thus be available for the increase in stock valuations over the two years as a whole, less 10 per cent. of the aggregate trading profits of the two years. The relief will be given in the assessment for the second year; that is to say, for an unincorporated business in the assessment for 1975–76 and for companies in the assessments on 302 accounting periods ending in the financial year 1974.
§ To implement my promise that I would give some compensation to those traders who have had to wait a year for relief, I propose that for them there should be a separate and further deduction from taxable profits equivalent to 5 per cent. of the amount of the stock relief itself. For those companies which have already had relief under the autumn proposals the relief due this year will be measured by the company's history over the two years on the same basis as for unincorporated businesses. The relief it has received this year will be taken into account in the assessment for the second year.
§ The measures I have announced will mean a continuing improvement in the financial position of companies. This is both necessary and desirable. We need a strong and financially healthy industrial sector able and willing to invest funds in new plant and machinery to provide new jobs and in working capital and stocks to support existing operations. This is particularly important in the period before the expected upturn in world trade next year.
§ There is one other matter that I should refer to—affecting oil companies. In the White Paper on United Kingdom Offshore Oil and Gas Policy, published on 11th July 1974, it was announced that it was intended that the losses that had accrued to oil companies from transactions at artificial prices in overseas oil should cease to be allowable against profits arising after that date. The Finance Bill will contain the provisions to implement that intention.