PROFITS TAX NON-DISTRIBUTION RELIEF (Hansard, 24 April 1958)

§ LORD LATHAM
My Lords, I beg to ask the Question which stands in my name on the Order Paper.

§ THE FIRST LORD OF THE ADMIRALTY (THE EARL OF SELKIRK)
My Lords, a differential rate of profits tax has been in operation since 1947 in respect of distributed and non-distributed profits. Both rates have in fact been changed from time to time; the rates current for periods from April 2, 1956, up to March 31, 1958, were 30 per cent. in respect of distributed profits and 3 per cent. in respect of non-distributed. From January 1, 1947, to March 31, 1957, the non-distributed rate has been paid on £16,000 million. However, after income tax, profits tax and excess profits levy and foreign taxes had been paid, there was left to companies about £6,500 million. If the whole of the sum on which non-distributed profits tax was paid had been levied at the same rate as for distributed profits, an additional sum of £2,750 million would have been due for payment. This figure is quite unreal, since after tax has been met out of retained profits, the total amount of profits would not be there for distribution. Moreover, in so far as the reserved profits have been invested in real assets, they do not represent a liquid fund for the payment of dividend.
One of the disadvantages of a differential system, which was pointed out by the Royal Commission on Taxation, was that companies were accumulating a heavy potential charge, but the amount which would ultimately be levied could not be ascertained. In the words of the Royal Commission, we do not feel we can minimise the seriousness of this. Accordingly, my right honourable friend the Chancellor of the Exchequer, in accepting the recommendations of the Royal Commission, said that … after the profits to March 31, 1958, have been dealt with, the contingent liability for payment of profits tax at subsequent distributions or Liquidation will cease. This should 993 remove a source of apprehension in the case of companies which have ploughed a big pant of their profits back into the business and should enable them to face the future with greater confidence. My right honourable friend went on to say that the Finance Bill will contain provisions designed to protect the revenue this year by countering any attempts to allocate to current periods normal dividends out of last year's profits which should bear 30 per cent. tax. For the details of these proposals, I must ask the noble Lord to await the publication of the Finance Bill.

§ LORD LATHAM
My Lords, I thank the noble Earl for his Answer. No doubt he will agree that, on any basis of calculation or deduction, this is a pretty handsome slice of tax relief to be handed out to one group of taxpayers, especially in these difficult days, and also that the Government's proposals are unfairly discriminatory against those companies which, for a variety of reasons—

LORD SALTOUN
This is a Question.

§ LORD LATHAM
My Lords, this is a supplementary question. I should not have thought that the Minister was in need of care and protection.

LORD SALTOUN
It is the House.

§ LORD LATHAM
May I go on?—which for a variety of reasons, including especially the need to attract fresh capital, were compelled to distribute a larger proportion of their profits in past years than they otherwise would have done and have thus paid distribution tax, from which the more fortunately placed companies will now get relief. I am sure the noble Earl would agree with me. Moreover—

§ THE EARL OF SELKIRK
My Lords, I cannot say honestly that I do agree with the noble Lord. I do not think that this is unfairly discriminatory in any way. I am sure that anyone who reads impartially the Report of the Royal Commission on Taxation will see the very sound basis on which the Chancellor of the Exchequer has proceeded, and, if I may say so, previous Chancellors were severely criticised for not doing so. This is a sum on which tax has been levied over the past years; and there was no 994 question of its being made anything more than a contingent liability at any time. If any previous Chancellor of the Exchequer had wanted to levy similar tax on it, he was perfectly free to do so.

§ LORD LATHAM
My Lords, the Royal Commission on Taxation used, the words "presumptive liability". Whilst, for excellent reasons, in some respects it urged the discontinuance of differential rates, nowhere in the Report can there be found any suggestion that accumulated liability upon undistributed profits was to be relieved from distribution tax, if and when the money was distributed.

§ THE EARL OF SELKIRK
My Lords, I should have thought that the Royal Commission made it abundantly clear that uncertainty of liability was a very serious business and that companies should know exactly how they stood. They hoped that the extreme limit of taxation would be made abundantly clear.

§ LORD LATHAM
My Lords, removing uncertainty is not giving relief—not at all.

§ THE EARL OF SELKIRK
In so far as it is a contingent matter, this is the only way in which this contingency can be brought to an end.

§ LORD LATHAM
No, my Lords. I submit, if I may, that the procedure and basis of profits tax for the future could easily have been adjusted to a flat rate, without any relief.

§ THL EARL OF SELKIRK
My Lords, I think that this matter could be much better discussed on the Finance Bil, when we come to it.