HC Deb 10 July 1979 vol 970 cc363-74 " The maximum rate of capital transfer tax for the year 1979–80 shall be 60 per cent"— [Mr. Loveridge.]

Brought up, and read the First time.

Mr. John Loveridge (Upminster)

I beg to move, That the clause be read a Second time.

The Temporary Chairman

With this we may take new clause 5 entitled Only one rate of capital tax to apply in respect of lifetime transactions ".

Mr. Loveridge

Many people believe, as I do, that it is only through the small business sector that new jobs can be created on the scale required to reduce unemployment in any substantial measure. Large businesses, public and private, will shed manpower as technological advances come about. We all know this. At the same time, very heavy tax on capital discourages small businesses from expansion. I know this from experience.

In speaking of capital taxes arising on death, perhaps I should declare a contingent interest, although I hope to be around for some time yet. Capital transfer tax at very high marginal rates undoubtedly helps to destroy incentive in medium-sized firms. Therefore, we hope that the Government will view favourably the suggestion that the top rate should be reduced from 75 per cent. to 60 per cent. Capital gains tax affects much of business and many of those people who contemplate investment in business. The combination of both could destroy productive assets, and therefore many proprietors who own their own firms cannot afford and are unable to make the necessary lifetime transfers to ensure the survival of their businesses. Thus, I hope that new clause 5 will be acceptable.

In these new clauses I am very grateful to have the support of my hon. Friends the Members for Uxbridge (Mr. Shersby) and Luton, East (Mr. Bright). I know that the Government intend to review all capital taxes. This promise for the future is most welcome. In the meantime, many businesses will want some practical sign of immediate progress before bringing forward their investment schemes. Medium size firms especially are affected by capital taxes. It is from these medium- sized firms we must look for a breakthrough in the future. They have the levels of output from which growth would come. If they are owned by inventive entrepreneurs able to pursue new ideas of greater fulfilment, it is easier for such firms to go ahead on risky new ideas from which development may come. It is from these firms that the smaller firm on the fringe will also grow. because such medium-size firms provide work for small specialist firms in addition.

If we encourage the medium-size firms, the new small firms will grow alongside them. Yet the top marginal rate of 75 per cent. CTT hits the medium-size firms most of all. Even though there have been concessions related to this tax on productive assets, none the less it is still large enough to be destructive. For example, if a firm has grown substantially and its assets are valued at. say, as much as £6 million, that firm could well have to pay approaching £2 million in taxes on the death of the owner even after all the reliefs which have already been given. Such owners or the survivor of a man and wife pair are likely to be of middle age and they cannot afford to pay the heavy insurance premiums that will be needed to cover such contingent claims. In any case, many policies will only be aggregated on such an estate to add to the burden of death.

Any business can carry only a certain measure of debt. Proprietors will not expand if they believe that at their death they will leave behind them a dangerous level of debt which could destroy the firm. Expansion by itself requires not only financing for production lines and capacity but, where materials must be paid for before the product is sold, the faster the sales grow the greater the need for credit if dangerous over-trading is to be avoided. Already we have lost many medium-size businesses in mergers with conglomerates. Many of them may be excellent, but the nature of a group of firms is to aim at a known forecast of return on capital rather than at an inventive break-through for the future.

Already this country in terms of population has fewer small firms than have Japan, Germany or the United States. In manufacturing industry in 1968 in the United Kingdom only 29.9 per cent. of employment came from firms with fewer than 200 workers. The nearest comparison in Germany in 1970 shows that such firms had 43.6 per cent. of employment, and on a slightly different basis in 1970 Japanese firms with fewer than 300 workers accounted for over two-thirds of employment—67.5 per cent—and a higher figure two years later.

The contrast in the very small firms is even greater. Yet it is those countries which are doing so much better economically than we are which have far more small firms than we do. This has great significance for our capacity to recreate full employment. A major job survey in the United States, entitled " Job Generation Process " by David L. Birch of the Massachussetts Institute of Technology, showed that in the period 1960 to 1976 two-thirds—66 per cent.—of all new jobs created came from firms employing fewer than 20 persons. This survey covered over 5.5 million businesses—over 80 per cent. of the private sector in the United States. It is also significant that four-fifths of the new jobs were provided by firms less than five years old. Small and young—that is where the hope for fresh employment lies.

8.45 p.m.

These are the sort of firms that are most likely to develop having obtained orders from medium-size firms with new products that require specialist smaller businesses to service them. They are the very firms which will be put off by high CTT on investment. The tax on death not only destroys incentive for owners who fear to leave heavy debt behind them but hits at their staff, who feel insecure in working for firms that may have a heavy burden of debt to pay.

With such contingent liabilities hanging over these firms, banks do not like to lend them money. The firms that Britain needs most are those that are hardest hit by capital taxation. While we in this country hit such firms hard, other nations help them to prosper. Bank and other credit advances are guaranteed by central or local government in Germany, Switzerland, the United States, Austria, the Netherlands, Belgium, Finland and Japan. Japan has an elaborate system of credit guarantees and State-aided loan facilities that covered credits valued at £6,000 million in 1975. Japan's small business sector dominates two-thirds of manufacturing employment. In Japan, nation, economy and small businesses expand together.

Since October 1978, small and medium-size firms in Belgium qualify for subsidies of up to 36 per cent. on credit, with reductions of nearly one-third on interest charges. That applies to firms with 40 and, in some cases, 70 workers. I hope that the Government's capital tax plans will do as much for our small firms.

At present, we ask for temporary relief only—for top-rate CTT to line up with top rates of income tax on earned income and the complete elimination of the threat of double tax on lifetime transfers. Past measures of relief were welcome but relief should apply to all transactions alike, without there being any doubt about the matter.

The European business magazine Vision reminded us in November 1978 that most European Governments provide low-interest loans, special write-off provisions and guarantees for long-term borrowing as well as providing other forms of subsidy to create the work that new jobs demand. The article stated: If an independent British entrepreneur leaves his business with, say, £1 million, a 30 per cent. tax is due. Not only are small and medium-size firms actively helped in other successful countries but effective rates of duty on death are much lower. Many countries give relief to sons and other relatives. Our top rate of 75 per cent. compares ominously. For example, Holland in 1975 had a top rate of 54 per cent. That was relieved to a maximum of 17 per cent. for inheritance by a son. There is similar relief in many other EEC countries. No wonder our small and medium-size businesses ask the Government to get off their backs. No wonder the present Chancellor of the Exchequer said in 1976: The next Conservative Government certainly would take emergency action to prevent any further damage being done by CTT. Since then reliefs have been given. However, those reliefs leave an emergency contingent danger for the medium-size firm and a threat to the productive assets of that firm if the owner dies.

Now is the time for modest and simple reliefs to be given. New clauses 3 and 5 would provide them. The creative capacity of small firms is threatened in an emergency if their owners are old or ill.

Will the Government act to give transitional relief now, pending major reforms that are to come? Thus, by practical deed the Government would bring extra new life and hope into medium-size firms and the small firms which depend upon the large firms.

Much has been given in the Budget. The small business sector appreciates what has been done. I hope that the Government will consider this case before they reject it. We are grateful for what has been done. But this problem still needs to be met.

Mr. Michael Shersby (Uxbridge)

The Chancellor of the Exchequer made it clear in his Budget speech that he intended to review capital taxation but, due to the compressed timetable, that he was unable to make all the changes as quickly as he would like to make them. The Chancellor's statement was welcomed by the House and by many small and medium-size firms in my constituency.

However, I hope that without disturbing the general policy to review the structure of capital taxation, it will be possible to give small businesses interim relief and encouragement. That case was put forcibly by my hon. Friend the Member for Upminster (Mr. Loveridge) in his admirable speech.

I am talking of the medium-size firm with assets of between £5 million and £6 million which may have to pay £l½ million to £2 million in capital transfer tax on the death of the sole owner.

If we do not provide interim encouragement pending a complete review, we shall not provide sufficient encouragement for investment by such firms. This investment is essential if we are to encourage expansion and create the new jobs which are needed to replace the jobs which are being lost in many large firms.

Insurance premiums providing the type of life cover which is sufficient to meet such a capital tax liability are far too dear to make insurance a viable proposition for the proprietors of small and medium-size firms.

In Britain, there are fewer small businesses in relation to population than in other European countries. We must give them encouragement this year rather than next year. For that reason, my hon. Friends and I intervene to press the Government to take action.

Such encouragement would not affect the general review and would cut the top rate of tax to the same level as the top rate of income tax. Other countries give credit guarantees and loan subsidies to firms with up to 40 or 70 employees. For example, Belgium gives up to 30 per cent. credit by way of grant. Nearly one-third of the interest charges are relieved.

Small and medium-size firms in Britain account for 29.9 per cent. of employment. Each of them employs fewer than 200 workers. In Germany, small firms account for over 40 per cent of employment. In Japan, such firms account for 67.5 per cent. of employment. I am talking of firms with up to 300 employees.

The small firm sector in those countries is larger than in Britain and yet they are richer than we are. Moreover, their rates of death duty are lower than ours, which is another point that the Treasury Bench should consider. In addition, many European countries give special relief to sons and other relatives, bringing the tax on death to low levels. In France, for example, the 60 per cent. maximum marginal rate came down in 1975 to 20 per cent. for a son.

This brings me to new clause 5, which deals with capital gains tax. I ask the House to consider a firm in sole ownership having assets of, say, £3 million. On disposal of the firm in conditions where roll-over relief does not apply, CGT will be payable at the maximum rate, which could be about £1 million. To pay that it would be necessary for the firm to sell business assets which then would attract CGT on the inflation of values, which might be a 30 per cent. difference between old and new on current values.

I could not illustrate this better than to quote from a letter which by pure chance I received today. My correspondent says: As I mentioned to you recently, CGT and CTT are our major problems. Our latest profit figures are about £1 million pre-tax and the company owns substantial freehold properties. Despite taking defensive action over 10 years ago, if either my brother or I die there is no way the company can survive in family ownership. That is an example of the situation that requires emergency action. It will not be good enough simply to delay the necessary reforms for an undue period.

It is for these reasons, therefore, that I believe that it is urgently necessary to end the charging of CGT on the same lifetime transactions as are charged to CTT. I therefore support the clauses in the name of my hon. Friend the Member for Upminster, and I hope that the Government will be able to give some assurances this evening that urgent remedial interim action will now be taken.

Mr. Bob Cryer (Keighley)

I believe that the clauses are misplaced because they overlook the efforts of the last Labour Government to assist small firms. Capital transfer tax on the value of the business for small firms was halved to provide 50 per cent. relief. In addition, for example, a man and a wife who own a business will receive a substantial allowance or exemption from CTT of around £100,000. We also doubled the annual allowance of exemption from CTT for gifts so that significant and extremely generous allowances were made after representations by various small firms' organisations.

If Conservative Members are concerned about small businesses, they should examine the background of Government policy much more intimately than simply fastening their criticisms on the position of CTT. I received representations only last Saturday from a director of a small firm in my constituency who was outraged to discover that the small firms employment subsidy ended for all firms, other than those in special development areas and development areas, on 30 June. The director was unable to take on extra people because, he said, he would have cash flow problems.

That subsidy provided direct assistance for small firms in manufacturing industry employing fewer than 200 people to take on additional employees. Many firms took advantage of that incentive, which demonstrates that the emphasis of Conservative Members on CTT is misplaced.

Mr. Shersby

I am interested in this point. I took the trouble to check up some months ago on the extent of the take-up of that benefit in the London area. I found that it was very small. In checking this matter out with industrialists in Uxbridge I found that they want not a subsidy on employment but the opportunity to give a security to their firms for the future, which would do far more to generate expansion.

9 p.m.

Mr. Cryer

In my constituency, 64 firms have received the small firms employment subsidy. I do not know how many people that covers, but I assure the hon. Gentleman that if each of those 64 takes on one additional employee that is a welcome addition to the creation of employment opportunities in the area. I am deeply disappointed to see that kind of support diminishing. Clearly, circumstances will vary throughout the country, but too much emphasis has been given to factors like CTT and not enough to direct support such as the small firms employment subsidy.

Loan guarantee schemes are a direct intervention by the Government. France, West Germany and Japan assist. In the United States, the small firms business administration intervenes extensively to help small firms—more, indeed, in some areas than I would think desirable—particularly through the small firms guarantees scheme.

The proposal in the new clause is contradistinction to the Government's view that small firms should stand on their own feet and meet the storms in the market place, with the weak going to the wall and the strong surviving. Hon. Gentlemen omit from their calculations that the strong are very often the top 100 companies, which buy up small firms and close them down. The small family firm usually comes to an end because the son or grandson of the founder decides not to follow in the family tradition, for all sorts of reasons, not because of CTT or CGT but because he thinks that dabbling with commerce or industry is rather undistinguished and he wants to farm in Sussex or the posher parts of Yorkshire. That is what happens. That is why small firms sell out to big firms, which then close them down because they have a competitive product, or are inconvenient, or for some other reason.

There are many other reasons why small firms should obtain a reasonable amount of assistance but it is clear that they will not get it from this Government. Yet the squalls of the market place are often too strong for small firms to survive. The Government are saying that they must survive or go under. I share the view that small firms need a certain amount of assistance and guidance in order to weather the advances of big firms and the difficulties of economic recession.

The public expenditure cuts which the Government are already starting to impose will wreak far more havoc than any of the taxes which the Labour Government put forward. Indeed, the Labour Government made significant concessions to assist small firms. When local authorities cut back, it is often the small firms which do not get the contracts. When Government Departments cut back, in many instances it is the small firms which do not get the jobs. Where a large firm is involved and it has to cut back because of a reduction in Government orders, it is the small firms which supply components that suffer.

For example, to British Leyland and Chrysler—two giants—over 10,000 firms, employing fewer than 200 people each, supply components and services. Thus, if the Government rescue or preserve a large firm, there is a chain reaction through to small firms. That is why I hope that we shall see increasing concern among hon. Members opposite because their Government's present policies will wreak great damage among big, medium-size and small firms.

The concessions that the Labour Government gave on CTT and CGT—particularly the former—were sufficient to give a degree of confidence to small firms. They generously met the representations made on behalf of the small firms. In my judgment, we shall need to look at a much wider area of economic activity to ensure that small firms play their part in the economy.

Mr. Peter Rees

The two new clauses before us, in the names of my hon. Friends the Members for Upminster (Mr. Loveridge), for Uxbridge (Mr. Shersby) and for Luton, East (Mr. Bright), raise an important question and have generated a small but significant debate. My hon. Friends the Members for Upminster and for Uxbridge have presented a strong case. My hon. Friend the Member for Upminster described new clause 3 as modest and simple. I am bound to concede its simplicity. It is concise in the extreme. It is modest. As for the cost, the best estimate that we can give is £2 million.

New clause 5 may be modest, but it is not entirely simple, and I hope that my hon. Friend the Member for Uxbridge will forgive me for pointing out that there are one or two technical defects. I never like that argument, because we are more concerned at this stage with the principle, but the clause does not, for example, deal with the question of capital losses and it does not entirely meet the case that there may be a small element of a transaction which attracts capital transfer lax —not the whole of it—but does the whole of it attract capital gains tax? I suspect that the answer is " Yes ", but, as I say, I do not wish to rest my case on the ground of technical defect, and I recognise that my hon. Friends and, I imagine, all hon. Members are concerned with the principle.

We on the Treasury Bench recognise the damage which the ill-considered, ill-thought-out and ill-prepared measures which comprise capital transfer tax have done to agriculture, industry and the capital market. I may say that added weight is given to the case presented so admirably by my hon. Friend the Member for Upminster by the publication today of the Northfield report. Lord Northfield was enjoined to undertake his task by the previous Government, and we shall need to study with care his report on the patterns of land holding and the impact on agriculture of many of these ill-judged measures.

I was interested in the speech of the hon. Member for Keighley (Mr. Cryer). I know that he had a certain preoccupation with these measures under the last Administration. I do not underestimate his depth of knowledge, although I do not share his approach or his prejudices. The hon. Gentleman said a little plaintively that my hon. Friends had overlooked the Lever package, as I always describe it in verbal shorthand. I cannot remember now—I hope that he will forgive me—whether the hon. Gentleman had a personal hand in it, but I can only say, I hope not too dismissively, that if my hon. Friends overlooked it the reason is perhaps that the Lever package is all too easily overlooked.

I do not believe that the Lever package measures have put many taxpayers back even in the position that they were in when capital transfer tax was first introduced. We shall have to have a much more fundamental examination of capital transfer tax and, indeed, capital gains tax than Mr. Harold Lever, as he then was, even with the able assistance, no doubt, of the hon. Member for Keighly, constrained by the prejudices of the rest of his right hon. and hon. Friends, was able to give to those two taxes.

In this context I put particular emphasis on capital gains tax. I mentioned the impact of inflation and the way in which it had accentuated the burdens of these taxes. Perhaps one of the most significant answers ever given to a parliamentary question was that given, I think, by the right hon. Member for Heywood and Royton (Mr. Barnett), when Chief Secretary, to a question asking what would be excluded from capital gains if inflationary gains were taken out of the charge to capital gains tax. I regret that I do not remember the precise terms, but the answer was about £250 million—between two-thirds and three-quarters of the yield of capital gains tax. That demonstrates the impact which the tax is having not only on private fortunes, which the Opposition may regard as a legitimate target for the tax, but also on agriculture and industry.

We on these Benches recognise that something fundamental has to be done. My right hon. and learned Friend the Chancellor made clear in his Budget speech—from a more modest position, I ventured to re-emphasise it in our debates on clause 22—that we shall be undertaking such a review during the course of this winter. I hope that the fruits of our review will be embodied in the next Finance Bill that the House of Commons will be called on to debate.

I listened sympathetically to the pleas of my hon. Friends. They ask for immediate and urgent short-term reliefs. As I am sure they will recognise, it is not merely a matter of rates. A lowering of the top rate contracts the bands below. In a review of capital transfer tax it is not easy to separate the rates and the significant and technical detail. Those matters will have to be considered against the background of altered rates and altered bands.

I hope that my hon. Friends will recognise that the debate has served a useful purpose. It has set out certain markers that the Government will not be disposed to ignore. However, we feel that we shall be able to do a more workmanlike and, ultimately, a more constructive job. It may be that I am being naively optimistic, but I hope that when our review is produced we shall be able to find sonic common ground. I look forward to carrying with us the hon. Member for Keighley. We know that the hon. Gentleman's heart and mind are in the right places. Now that the hon. Gentleman is free from the constraints of office, it may be possible for him to find some common ground with the Government.

The right hon. Member for Llanelli (Mr. Davies), who I believe reached the Government Front Bench before the introduction of capital transfer tax, said that he did not have to show any pride of authorship. Of course, capital gains tax was introduced by his right hon. Friend the Leader of the Opposition, the right hon. Member for Cardiff, South-East (Mr. Callaghan). Although they are both Welsh Members, the right hon. Member for Llanelli does not have to show any real solidarity with his right hon. Friend on that score.

I hope that we shall be able to find some common ground and that we shall be able to approach these important matters without prejudice, rancour or partisanship when we discuss the next Finance Bill. Against that background, I hope that my hon. Friends will feel able to withdraw the new clause.

I conclude by picking out a telling phrase used by my hon. Friend the Member for Upminster. In the course of his remarks he said, most appropriately—I warmed to him, as I so often do—that much has been given to the small business sector. The Government recognise that there is much still to be done, and much will be done. I hope that, having received that categoric assurance, my hon. Friends will feel able to withdraw the new clause.

Mr. Loveridge

In the light of the sympathetic words of my hon. and learned Friend and the clear undertakings that he has given for the near future, we hope, I beg to ask leave to withdraw the new clause.

Motion and clause, by leave, withdrawn.

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