CHARGE OF CORPORATION TAX FOR FINANCIAL YEAR 1979 (Hansard, 2 June 1980)

§ Mr. Dick Douglas (Dunfermline)
I beg to move amendment No. 27, in page 11, line 27, at end add— ' (2) In subsection (3) of section 10 of the Finance Act 1974 (relief for industrial and provident societies, housing associations and building societies) there shall be substituted the words "shall for the financial year 1979 and subsequent years be 38 per cent ".'. The amendment is sponsored by some of the Co-operative-sponsored Members. Its purpose is to discuss the position of building, housing and co-operative societies now that the rate of corporation tax payable by small companies is to be reduced from 42 to 40 per cent. by a subsequent clause.
We support the help given in the Budget to small companies, not only in their rate of corporation tax but in other significant ways, because we believe that 1206 they play an important part in our economy. The previous Labour Government also gave assistance to small companies, such as the mitigation of corporation tax liability in the Finance Acts of 1977 and 1978, a number of easements in respect of retirement annuity premiums in 1977 and concessions on capital gains and transfer taxation in 1978.
Nevertheless, we have to acknowledge that, we hope, small companies are both private profit-making and personal capital gains-creating organisations, whereas the organisations that we list in the amendment—building societies, industrial and provident societies and housing associations—do not and cannot act in this way on behalf of their investing members. If they attempted to do so, apart from being in breach of the principle of mutuality, it is doubtful—indeed, highly improbable—whether the Chief Registrar of Friendly Societies would allow their registrations to go unchallenged.
The aspects of being fixed-interest rate and non-capital gains-creating bodies doubtless influenced the Government to ask such societies to pay a lower rate of corporation tax than profit-making bodies. The purpose of the amendment is both to preserve that status and to encourage it. Companies can always convert themselves into industrial and provident societies if they wish, and this may help the growth of organisations such as worker co-operatives. The modest concession that the amendment seeks to make could be open to all.
Industrial and provident societies are especially vulnerable to inflation. As they are both fixed interest and non-capital gains creating, their ability to borrow money is impaired. Although offering security, lenders are not able to participate in their equity, and consequently they require higher rates of interest on loans. The effect of that is to compel industrial and provident societies to rely on members for capital, in addition to ploughing back undistributed surpluses. Needless to say, the effect of inflation is to require more capital to remain in business let alone expand.
Co-operatives are essentially small savings institutions. Their share capital can be withdrawn on demand, or at very short notice. The result is to force 1207 societies to compete with other bodies for capital, including various Government schemes. Scope for getting more capital from members is extremely limited. In addition, co-operatives need to maintain a high liquidity ratio, because their share capital can be withdrawn. That inhibits their ability to use all their share capital within the business. Cooperatives can best finance themselves by retained profits, even if corporation tax must be paid.
A 2 per cent. reduction in the rate of corporation tax payable would be helpful, and would represent an incentive. I do not have statistics on how much this would cost the Treasury in terms of loss of revenue. However, there would not be a great reduction in revenue, because price competition in the market place forces down the profits which co-operatives hope to earn. Secondly, societies return half of their profits, after depreciation, in the form of dividends or dividend stamps, to their members.
There is a further important point about the reserves of industrial and provident societies. Apart from protecting the shareholdings of members, they do not enhance the value of the shares. It could be argued that allocations by co-operatives to their reserves should be free of tax. However, we do not seek to put that proposal before the Committee. We suggest that the Government should reduce the rate of corporation tax from 40 to 38 per cent.
The Government have expressed a desire to see an extension of workers' cooperatives. That is in harmony with encouraging small firms. The modest tax concession sought in the amendment will help newly-formed workers' co-operatives to establish themselves on a sound financial base by the creation of reserve funds. That view is supported by the Co-operative Development Agency, which does not have financial resources with which to assist the setting up of workers' co-operatives. Shares in productive co-operatives cannot be withdrawn. That makes them less attractive to worker shareholders. Consequently, reserves are even more important to them.
We also concede that building societies would benefit from such proposals. Although criticisms may be made of the building society organisation, I hope that the Government will agree that it is in 1208 their interest to continue to give support to building societies. Higher reserves should enable building societies to lend more money to borrowers. The existence of large reserves should enable building societies to reduce marginally, or at least to refrain from increasing, borrowing rates. That would be beneficial to all. Building societies do not capitalise their reserves. They therefore satisfy the test of being non-capital gains-creating organisations. Encouragement of the expansion of building societies can still be a desirable feature of British life. It will help the building industry, which is now in a general state of recession.
The cost of reducing the rate of corporation tax to housing associations will be minimal and, I suggest, insignificant. Against this, the value of encouraging their expansion, especially at a time when the cost of borrowing and of land makes expansion difficult anyway, cannot be overstated. The development of this middle way in housing has all-party support, and the amendment represents a modest practical concession to this end.
The amendment is designed to encourage the concept of self-help, which is in keeping with the professed aims of the Government. It will do so at a modest cost to the Revenue while strengthening reserve funds of the non-capital gains-creating enterprises which I have mentioned. I trust that the Minister will give the amendment favourable consideration, and I await his response.

§ The Financial Secretary to the Treasury (Mr. Nigel Lawson)
The hour is late, and I do not wish to detain the Committee.
Although deserted by his fellow co-operators whose names appear on the Amendment Paper, none of whom is present for this debate, the hon. Member for Dunfermline (Mr. Douglas) read his brief very nicely, and I listened to it attentively.

§ Mr. Dalyell
With great understanding.

§ Mr. Lawson
Yes, he showed some understanding of what he said. He asked what the cost of this amendment would be. It would be of the order of £5 million if it were accepted, which is not a negligible sum.
I detected a strange difference between what the hon. Member for Dunfermline was saying and what the hon. Member 1209 for Gateshead, West (Mr. Horam) said a short while ago. The hon. Member for Gateshead, West said that if there was any bias in the tax system, it should be in favour of commerce, trade, industry, and so on, rather than housing. However, the bias in favour of housing was implicit in the system until this Finance Bill. The small business rate was 42 per cent., whereas the rate of corporation tax payable for housing associations, building societies and co-operative societies was 40 per cent. What is done by a combination of this clause and clause 20 is to bring the two rates together.
It was not intended originally that the two rates should be different, although slightly different considerations apply in the two cases. When the imputation system of corporation tax was introduced originally, it was intended that small businesses, which on the whole retain their profits and do not distribute them, and building societies, co-operative societies and housing associations should retain the old rate of 40 per cent., whereas a new rate of 50 per cent. should be introduced for the imputation system of corporation tax generally.
In 1974 the right hon. Member for Leeds, East (Mr. Healey), who introduced the new rate of tax, increased it to 52 per cent. for corporation tax generally, and to 42 per cent. for the small company rate, but kept it at 40 per cent., as originally intended, for the building societies, housing associations and co-operative societies. He thus introduced, in a sense, a discrimination against small businesses.
We felt in the present circumstances that that was wholly unjustified and that, as part of a package to help small businesses, this rate should be brought down from 42 to 40 per cent. In common with the hon. Member for Gateshead, West, I think that if there were any difference in the rate, it should be on the basis that the small business rate was lower, rather than higher, as the hon. Member for Dunfermline wants, than the rate paid by housing associations, building societies and co-operative societies.
Nevertheless, we have a high regard for the value of the work of building societies, co-operative societies and housing 1210 associations. We have therefore kept the rate of tax at 40 per cent. which is the rate that has always pertained, and which is the rate set when the imputation system was introduced by the right hon. Member for Leeds, East. On that happy note of bipartisanship, we should leave the matter there.
12 midnight
The hon. Gentleman does not wish to attack small business, and, as he said, he does not disapprove of the fact that we have brought down the rate from 42 to 40 per cent., which makes it the same as originally intended and the same as that which applies to this other group, about which the hon. Gentleman is rightly concerned. I hope that in the light of that the hon. Gentleman will ask leave of the Committee to withdraw his amendment.

§ Mr. Douglas
With great respect, the Minister's response was inadequate. The amendment was moved generously, in no attempt to react in hard party political terms or to castigate small business. In any tax system there are advantages and disadvantages and bias. No Government can run a perfect system of revenue raising, least of all this Government.
The amendment seeks to indicate why certain organisations, because of their revenue-raising difficulties and the fact that they are non-capital gains-creating organisations, should have the differential in terms of corporation tax. I appreciate that the Government cannot afford £5 million, because of their overwhelming desire to curb inflation and cut the public sector borrowing requirement. I have some understanding of their difficulties. I wish that the difficulties could be removed. I wish even more that the Government could be removed.
However, I beg to ask leave to withdraw the amendment.