§ The special tax relief for increases in stocks which I introduced in November 1974 has been of great benefit to industry. However, some business men believe that the temporary nature of the scheme reduces the value of the relief, and others fear that the scheme may be withdrawn without anything to replace it so that all the tax which has been deferred on increases in stock will suddenly have to be paid. In particular, some say that the need to create balance sheet reserves against the possibility of the relief being withdrawn is reducing some companies' ability to borrow.
§ In our debate on employment on 29th January I did my best to dispel fears of this kind. Now I can go further. I am anxious to introduce as soon as I can a scheme of relief which will be a permanent feature of the tax code. It is, however, clear from recent discussions between the Inland Revenue and representatives of industry and the accountancy profession that there are legitimate differences of view about the form which a permament relief should take. I am naturally anxious to carry industry and the accountancy profession with me in this matter, if I can; and, since what we are considering will be a permanent part of our tax system with important implications for the operations of British industry, I think that it is worth taking a little time to get it right.
§ I therefore propose that the relief should continue in substantially its present form for two more years while the Inland Revenue is consulting industry and the professions about its permanent form. But I do propose one change. Its purpose is to strengthen the incentive for investment. There has been increasing criticism that the profits deduction operates unfairly against companies investing in fixed assets, because the profits base to which it applies is calculated before deducting depreciation allowances. I therefore propose that in future profits for this purpose shall be calculated after deducting allowances for depreciation.248
§ This change would be an expensive one unless I sought to compensate for it in some way, and I therefore propose to do that by increasing the size of the profits deduction from 10 per cent. to 15 per cent. Even so, the benefit of stock relief to the company sector as a whole will increase by some £65 million in a full year. The real importance of the change is that the relief will now be concentrated more heavily on firms which are expanding and investing.
§ As a result of what I have just said, it must be clearly understood that there will be no question of any clawback with respect to tax relieved under this scheme in the case of all those companies whose stock valuations and rates of investment are maintained or increased. This means that for the great majority of companies stock relief really implies a deferral of tax not only for some short or limited period but into the indefinite future. I can also give an assurance that, if we decide ultimately on a different form of relief, we shall ensure as far as possible that the transition from one system to the other will not significantly affect the cash flow of individual companies.