§ Sir Arnold Gridley (Stockport)
I beg to move, in page 19, line 32, at the end, to insert:or by five hundred pounds for each working proprietor in the trade or business whichever is the greater.The Committee will no doubt remember that the present position is that a business which has working partners all actively engaged in it can have a minimum standard of £1,500 each for any number up to four. In the Clause as it stands, the Chancellor is proposing to allow an increase of £1,000 for one or more partners up to four. That improves a situation which gave rise to a good deal of anxiety. The Amendment which I am moving suggests that the improvement does not go far enough. I hope I shall not be thought ungrateful or looking a gift horse in the mouth, but the fact is that working directors are receiving in many cases less than they are paying to a manager or other chief officer in the business.
The effects of the Amendment would be that, in the case of one working partner, the position under the suggested addition of £1,000 would be precisely the same. One working proprietor would get £2,500. The same applies to two working partners, who would get £2,000 each. When we come to cases of three or four, a different position arises. Under the Clause as it stands, three partners would be entitled to an allowance of £1,500 each, plus one-third of the £1,000, in other words, £1,833 a year. Under the amended proposals, three partners would get £1,500 plus two, which is £2,000; that is to say, they would get only £167 more than under the 2025 Clause as it stands. In the case of four working proprietors, they would get £1,500 under the Clause as it stands, plus a quarter of £1,000, which is a total of £1,750. By the amended proposals they would get £2,000 each, or £250 more than under the Clause. In other words, the total sanction which I am seeking is that the Treasury liability, which would be £7,000 under the Chancellor's proposals, should be increased to £8,000. That is not a very big thing to ask, and it would remove what are still felt to be injustices.
§ Sir Peter Bennett (Birmingham, Edgbaston)
I wish to support the case which has been put forward by my hon. Friend. This is not one of those Amendments of the Oliver Twist type, in which, having got so much, the sponsors say, "Please can you not give us a little more?" It has been put forward because in a considerable number of cases there will be a certain amount of difficulty if the matter is left as it is. The small businesses which are affected, with working proprietors, are very grateful indeed to the Chancellor for this concession, but it would be a very great help if, instead of putting it at £1,000, it is put in the way which my hon. Friend explained, in £500 steps. Of course, I cannot say with any honesty that on the average there is any chance of it costing less, because I am quite certain it will cost a little more. I do not think that on the average it will cost very much more, but we feel that it would give a very considerable relief in a number of cases in which there are three or four working proprietors, who have made a very considerable contribution to the war effort but are shut out, by the incidence of E.P.T., from getting any benefit from it. We would like the Chancellor to consider whether, in doing this very generous thing he has done, he cannot round it off in this way and make it more fairly applicable all round in a way which would be very much appreciated.
§ Mr. Tinker (Leigh)
I hope that the Chancellor will resist this appeal, because although my hon. Friend behind says that this does not mean much and is not like Oliver Twist, the whole trend has been for a little bit more to be given to the directors. I followed closely the arguments of the hon. Member opposite, and I gather his proposal was to raise the figure from £1,500 to £1,750—always on 2026 the increase. It is evident it means asking for more from the Chancellor which will have to be met out of taxation. If that is so it seems to me to be highly unfair for such a proposal to be brought forward at a time like this. Everyone is expected to make some sacrifice—that is what taxation is for—and when these men are getting a good competence I cannot see for what purpose they will use this excess. To make an appeal for something more than £1,500 seems to me to be rather ridiculous. I hope the Chancellor will not give way.
§ Mr. Colegate (The Wrekin)
I think the hon. Member for Leigh (Mr. Tinker) has a little misunderstood the Amendment. There is no question of getting out of taxation. Any amount earned here—and it is earned—will be subject to taxation, like the earnings of everybody else. One must not look at these things as though the men were pensioners and getting a grant of £1,500 at the present time. They are men of the very type most essential to industry so far as new and growing industries are concerned. I know of several cases, especially in Birmingham and Wolverhampton, where two, three or four working men have got together; they have an idea they can work out. That is one of the main ways in which new industries in this country come into being. It is most important that every encouragement should be given to new industries in the post-war period.
The hon. Member asked a question which I will answer. He said, "What are the people going to do with this money? They have a competence." The usual thing for these men to do is to plough back into their growing businesses every farthing they can spare. If I had had time I should have liked to repeat the story of one or two industries in this country which I know, which have been built up by working men working long hours, ploughing back every penny into the business as it grew and expanded, until at last there was an industry giving employment to hundreds or thousands of men. This is why we do not want the position left as it is, because it is unjust. What the hon. Member for Leigh left out was the fact that some of these men are getting £2,500 a year. If a man starts a business by himself he gets it, but if two or three fellows get together and start a new industry they get less. 2027 That is wrong. What we want is that the working proprietor, whether by himself or associated with others, should get more equitable treatment. The amount of money involved is very small. This money is earned by the men. It is only a question of how much the Chancellor allows them to retain of the money they are earning, which may be £10,000, £15,000, £20,000 or £30,000 a year. We say, "Give a little more." We say that these people are doing a wonderful job of work and that it is essential that they should be in a position to expand their industry and go on after the war.
§ Mr. Colegate
I agree that is a good argument. We want them to plough in as much as the Chancellor will permit.
§ Mr. Assheton
The point which has been raised by my hon. Friends is certainly one of substance, and I am obliged to the hon. Member for Stockport (Sir A. Gridley) for bringing it to the notice of the Committee. As more than one hon. Member has pointed out, the cost of the Amendment would not be very great. There are only a small number of businesses in this country with three or four working proprietors which come within the scope of Excess Profits Tax. I must confess that the natural sympathy I have with this Amendment is not reduced by what has been said here to-day. One point that my hon. Friend should bear in mind is that if this Amendment was accepted it would in fact provide somewhat differential treatment between a business with a personal standard and a business with other standards not based on profit. In spite of that I am bound to say that this is a matter which requires considering. I cannot advise the Committee to accept this Amendment as it stands, particularly because it is not limited to more than four partners in its wording, but we shall look at this matter before the Report stage. I will discuss it with my right hon. Friend and I will not fail to bring to his attention the remarks made by the hon. Member for Leigh (Mr. Tinker). In those circumstances perhaps my hon. Friend will be good enough to withdraw his Amendment.
§ Sir A. Gridley
We are quite willing that, between now and the Report stage, consideration should be given to this Clause, and to agree that the number should be limited to four. I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Sir Waldron Smithers (Chislehurst)
I beg to move, in page 19, line 36, at the end, to insert:(2) In the case of a business commenced after the first day of July nineteen hundred and thirty-six and carried on by a company the directors whereof have a controlling interest therein the standard profits in relation to any chargeable, accounting period beginning at or after the end of March nineteen hundred and forty-four shall if the company so elects (instead of being otherwise ascertained) be an amount arrived at by allowing in respect of each working proprietor in the trade or business (not e[...]xceeding four) the sum of one thousand five hundred pounds or a sum equal to the amount of remuneration which was payable to such working proprietor by the company, under an agreement made on or before the first day of January nineteen hundred and thirty-nine, for such consecutive period of twelve months ended not later than the thirtieth day of June nineteen hundred and thirty-nine as the company may select, whichever shall be the greater.Provided that in relation to a chargeable accounting period which is less than twelve months the said increase shall be proportionately reduced so as to correspond with the length of the period.The provision with regard to standard of profit contained in Section 13 of the Finance Act (No. 2) 1939, Section 13, Subsection (7) has been replaced by Section 27 of the Finance Act, 1940, and Section 13, Sub-section (2) has been replaced by Section 31, Sub-section (1) of the Finance Act, 1940. I read this out because I wish again to impress upon Ministers and their advisers the difficulty of the layman like myself as regards the law in trying to follow this intricate legislation by reference. It makes matters very difficult for us, and I hope something will be done to print the Clause, say in a White Paper. Here I want to say that I am proud that the hon. Member for Stockport (Sir A. Gridley) and his hon. Friend have also taken up the cudgels on behalf of working proprietors. I wish to put their case, which I think is really an injustice and demands serious consideration by the Treasury.
Under the existing Acts it is not possible in any circumstances to take the profits of any year later than 1937 as the 2029 standard. In the case of a business commenced after 1st July, 1936, no profits standard can be taken at all. The standard must either be a percentage of capital—Section 13, Sub-section (6)—or the minimum standard fixed under Section 13, Sub-section (2) as amended by Section 31, Sub-section (1) of the Finance Act, 1940. This Section still operates unfairly in the case of a new business which, though started after 1st July, 1936, was prosperous before the war began. It is particularly harsh in its effect in cases where, before the war, the company was already paying remuneration for services to working proprietors which was on a commercial basis but was nevertheless greater than the standard allowable under Section 13, Sub-section (2) of the 1939 Act as amended by Section 31, Sub-section (1) of the 1940 Act. In such cases the position of the company and the persons receiving remuneration is now worse than it was before the war even though the business has greatly increased since the war began. The Amendment I have put down seeks to mitigate this hardship.
I am very anxious to be as brief as possible, but want to take a typical case as an example. I happen to know the people well and they are constituents of mine. I wish to impress on the Committee that it is a typical case. I am told there are many other similar cases, or perhaps not exactly similar. This is a company called Morphy-Richards, Limited, which is a director-controlled company, which was formed after 1st July, 1936, to carry on the business of engineers. As a result, it has no profit standard for E.P.T. purposes but is compelled to adopt one of the fixed minimum standards. The directors had a contract of employment entered into by agreement with the other shareholders of the company at the commencement of the business, which therefore had no bearing whatever on the war. These people are exemplary employers. They employ about 350 men and women in their works. Nearly all are constituents of mine. Further, as the hon. Member below the Gangway said in the discussion on the previous Amendment, these are two young fellows who started and by sheer drive and initiative produced goods, manufactured things, beat the foreigner and saved imports.
The progress of the company was extremely good. For the year ended 30th June, 1939, the turnover had reached, in 2030 round figures, £106,000. The remuneration of the managing directors was £5,156. At the outbreak of war the directors made loyal and patriotic and strenuous efforts to obtain contracts for war production, but everywhere they met with opposition and Government restrictions. They were therefore reluctantly compelled to continue in the domestic market for a further 12 months. In spite of the restrictions and controls their drive and initiative increased the turnover to £172,000 and the remuneration of the managing directors rose to £7,107. Soon after the end of that year, 1940, the company succeeded in obtaining war work, and it set about closing down its peacetime operations, to concentrate on war production. This could not be achieved without a good deal of reorganisation of the factory, and at the end of the first year, ended 30th June, 1941, the output fell to £121,237 and the managing directors' remuneration dropped to £3,711, although the managing directors had to work harder to overcome war-time difficulties and restrictions. This is due almost entirely to E.P.T. It appears to be a grave miscarriage of justice. At the end of June, 1943, the turnover had increased to £212,968, and for the 11 months to the end of May this year it had exceeded £270,000. That is not the end of this story. Prior to the outbreak of war, the shareholders had regularly received a dividend, yet, in spite of the greatly-increased output, the directors feel unable to recommend distribution.
I have here a table, which I cannot convey by word of mouth to the Committee, but it shows the disastrous effect of the present taxation on these enterprising people. It should be emphasised that in the year ended 30th June, 1939, a commercial profit of £15,000 was made, of which £7,300 was required for taxation leaving a balance for the company amounting to £7,619. On the other hand, by increasing its efforts for the benefit of the war, the company made a commercial profit for 1943 of £33,000, out of which no less than £31,000 was required for taxation. The company is left with £2,060 for its patriotic endeavours. Surely, there is something wrong when the law requires a business to hand over 93.8 per cent. of its profits to the Government. Surely it is quite wrong that businesses which have been established for a number of years should be allowed to retain a large 2031 proportion of their profits while the younger firms are placed in a quite unjustifiably disadvantageous position. Is it not time that the new businesses were put in a position at least approaching that of the older firms? Is it not a principle of good taxation that each person should bear his just proportion of the burden, according to his needs? In this matter that is very far from being the case.
I have the table here, and I want to make reference to two points in it. In 1943 the commercial profits were £33,154, and the total taxation payable was £31,094, leaving a balance, after paying taxation, of £2,060. The managing directors, as has been stated by my hon. Friend the Member for Stockport (Sir A. Gridley), pay Income Tax on what they receive, but this small amount of £2,060 all told has to bear the cost of all items not allowable for taxation purposes, such as capital improvement, War Damage Contribution, war risks, and business insurance. Here we have a typical example of men who are assets to the country, who have shown drive and initiative, being pressed down, and being far worse off than they were before. To show how these people managed to build up the small business, the commercial production in 1943 was worth £212,968, and in 1939 it was worth £106,849. But there is no discrimination between the small workshop, which started during the war to make munitions, and a director-controlled company, which built up during the three years preceding the war an annual turnover of £230,000, purely on production. It is hard to understand why, in a director-controlled company, the directors' incomes are not regarded as a worthy expense for E.P.T. purposes. There is, I submit, gross injustice when one firm loses thousands of pounds pre-war through mismanagement, and has its profits revived through war work, while an efficient firm is completely stripped of all its resources, and compelled to dispose of a large proportion of its assets to its big business competitors, in order to keep going.
I feel very deeply about this case. It has now been going on for some years. I am pleading only for justice, to give these splendid men and others like them some hope for the future. Men of this kind who, through using their brains and 2032 initiative and employing people at good wages, have built up businesses, are the best asset the country and the Chancellor of the Exchequer have got. By continuing this injustice, the Chancellor of the Exchequer is killing the goose that laid the golden egg. This incidence of E.P.T., of which I have given a typical case, is an oppression and an injustice, which causes suffering, bitterness, and anger. The proprietors of undertakings—and this is an important point for the future of our country—will not dare, in future, to risk developing all their resources in this country, if they feel that they are not going to be justly treated. These are loyal people, anxious and willing to pay their full share towards the conduct of the war. They are honourable men, of high integrity; and I beg the Financial Secretary to convey to the Chancellor and his advisors the suggestion that they should consult the experts, and not confine their inquiries to lawyers and accountants. I want to show what are the kind of difficulties that this firm has experienced. The firm received a letter from the local tax collector, in rather strong terms. The letter said:I now require an undertaking that they"—that is, the company—will allocate all, or a large percentage of the next cheque received in settlement, or on account, of work completed under a Government contract. This undertaking is required"—I beg the Committee to note this sen-tence—as I am unable to agree that further payments on account, or in settlement, of Government contracts be retained or expended in acquiring stocks or material for future operations."Future operations" were vital war work. Then comes the veiled threat:I trust that it will not be necessary to raise the question of enforcing settlement, but this point must be considered.…This demand for payment was made. The company could not pay their taxes, because of the conditions imposed under the law, and the senior partner, in the course of his reply, said:In short, all our available resources are now harnessed to the war effort, and we require the highest possible authority to make the decision that the payment of revenue, in our exceptional circumstances, is of such importance that we must seriously curtail our output of war material.2033 I think the Treasury should instruct their local tax collectors not to take such drastic, or far-reaching, action without authority from higher up in the Treasury. We often hear of British justice. In the case to which I have referred, which is a typical case, injustice is being suffered. If British law is based on an injustice, it will certainly come back on the heads of the Treasury and of the country.
§ The Solicitor-General
One cannot help sympathising with the deep feeling which my hon. Friend has put into the presentation of this case, but I have to ask the Committee to distinguish between two matters, which are absolutely distinct. One is the severity with which 100 per cent. Excess Profits Tax falls on the taxpayer; the other is the question of whether there is injustice, that is, whether the distribution of the burden of the taxation is unjustly managed. If the Committee will bear with me, I will endeavour to explain the position which causes such a case to arise. As my hon. Friend explained, the company to which he directed most of his remarks has no profits standard. The Committee will appreciate that the basic idea in an Excess Profits Tax is that you compare one period during the war, when the excess profits are being made, with the chargeable accounting period of a pre-war period, and take your 100 per cent. of the difference. The pre-war period which was selected and approved by the House was 1935 or 1936, or the average of 1936 and 1937, in every case taking in the first part of 1936.
If a business or a company did not exist before 1st July, 1936, that period could not be taken in, and, therefore, we had to devise some other method of calculating the first standard, which is subtracted from the profits period during the war. They are given the choice of a minimum standard of £1,000, or if they are working proprietors, £1,500, for each working proprietor up to four, or else a calculation on their capital, allowing for increases and decreases. Therefore, a company like that to which my hon. Friend referred goes to the working proprietors standard, and gets its 1,500 per working proprietor up to four, and it can get, in addition to that £6,000, a discretionary allowance from the Revenue, according to the nature of its work, up to another £1,000 per working 2034 proprietor. In addition to that £1,000 per working proprietor, my right hon. Friend proposed a flat rate addition of £1,000 for every business dealing on the non-comparison of profits standard, and that is the position.
The reason for that, and I am sure the Committee will appreciate it, is to make the small company, the director-controlled company, where the directors own the majority of the shares, in line with the partnerships with which it is very comparable. The objection of my hon. Friend here, that there should be an alternative standard for Excess Profits Tax, either of whatever is given to the working proprietors, or any pre-war remuneration which had been agreed by the people in the business, would, of course, destroy the equal comparative incidence of taxation, between the partnership and the company of this sort. If the partners, who are not allowed, of course, to deduct any remuneration, are to be dealt with on this working proprietor basis, and a company, like the one referred to, is to be entitled to take into account any pre-war remuneration which they had arranged, you will not cure any injustice. You may cure some of the severity for this company, but you will promote injustice, because you will not have the same method and incidence of taxation for the different structures of firms and companies that obtain. That is the point which I would ask the Committee to consider.
Every one who has to deal with these cases appreciates the difficulties which arise. Of course, my hon. Friend will be the first to realise that a greater difficulty arises if you make agreements, or if you had agreements made before the war, by which you arrange your remuneration to your managing directors on the basis of salary and a percentage of profits, the profits to be taken before the Excess Profits Tax is paid. As early as 1937, we had the National Defence Contribution, and it was clearly to be seen that forms of taxation of that kind had come to stay. Therefore, although one feels sympathy, one realises, at the same time, that an agreement made on that basis of taking your profits before taxation is paid, is one which may cause considerable trouble, and may well have been anticipated to muse considerable trouble in 1937, 1938 and 1939. Therefore, I must say to my hon. Friend that, while I 2035 sympathise with every one who has to carry the burden of taxation, and while I sympathise with the admirable presentation of the case of his constituents which he gave to the Committee, the duty of those who have to decide as to these methods of taxation, is to keep the incidence fairly between the different kinds. I cannot, therefore, nor can either of my right hon. Friends, recommend to the Committee the alteration which he suggests, because the result would be that the incidence of taxation would be unfairly affected. I therefore ask my hon. Friend not to press this Amendment, and, if necessary, I ask the Committee to reject it.
§ Sir W. Smithers
I thank the Solictor-General for his very sympathetic reply. May I just make this remark? The hon. and learned Gentleman referred to the 100 per cent. E.P.T. standard. I am one of those who believe that, if he reduced that first, he would get more response. I do not think the hon. and learned Gentleman dealt with the point of the unfairness between the small firm which was brought into being before the date, and the firms already in being. I do not think he said anything to answer my argument about the injustice, and I still would ask him to look into the question again and see if he cannot make some suggestion for these people, who are really having their businesses ruined. The hon. and learned Gentleman talked about the managing directors getting a salary and some share of the profits, but, owing to the incidence of this taxation, there are no profits to distribute and they are thrown back on their salaries. I make the most urgent appeal, because, although this may affect only one or two cases, the extent of the injustice is sufficient for me to press the matter again. If the injustice is caused to only one British subject, the hon. and learned Gentleman should see that it is ended.
§ Amendment negatived.
§ Motion made, and Question proposed, "That the Clause stand part of the Bill."
§ Mr. Woods (Finsbury)
I have every sympathy with the aims of the hon. Member who moved the last Amendment, because I feel that, in many ways, a problem is created for many businesses who have no comparable standard for 2036 E.P.T., or who were in depressed areas, or are, in various ways, handicapped. The hon. Member who moved the Amendment stated, although I do not agree with him, that old firms are in an advantageous position compared with new businesses. I think the Chancellor will agree that probably the boot is on the other foot, and that businesses which have started since the war, or which started just before the war, and do not come into the period for the calculation of E.P.T., can thus be assessed on capital basis. The capital basis for them is 8 per cent., whereas the allocation of older businesses which prefer to be assessed on the capital basis is only 6 per cent., and this seems to me to be a serious anomaly. On another Clause, the Chancellor justified the rearrangement of E.P.T. on the basis that certain firms have come into industry, where it was necessary to tighten up the collection of the tax and have some security that E.P.T. would be paid. A firm of that type which has come into business and—
§ The Temporary Chairman (Sir Cyril Entwistle)
I am afraid there is nothing about the capital basis in this Clause. Perhaps the hon. Member will confine his remarks to the Clause itself.
§ Mr. Woods
I apologise for being out of Order, but, in this Clause, there is a concession for small firms where E.P.T. practically eliminates their profits. I ask the Chancellor to look again at the anomaly created by the fact that some firms are assessed at 8 per cent. while the older established businesses, many of them small businesses, are assessed or the 6 per cent. basis. I suggest that, while he is making modifications from the experience of the working of E.P.T., it would be desirable to consider making further modifications to meet that anomaly.
§ Mr. Hammersley (Willesden, East)
I would like to ask a question which I raised 2037 on the Second Reading. It deals with the precise interpretation of the words:Must be ascertained otherwise than by reference to the profits of a standard period.Generally speaking, the standard profit is ascertained either by reference to profits in the past or by reference to capital, but there is another class of case where you have an ascertainment of standard profits by reference to a substituted capital standard, which arises in this way. Capital for the purpose of the Act is defined in a particular way, and, in certain businesses, there has been some dispute as to what is and what is not capital. Therefore, there has been a grievance, particularly in the cotton trade, on the ascertainment of the standard by reference to what is called the substituted capital standard. I asked in the early stages of the discussions on the Bill whether standards ascertained in that way were eligible for the additional £1,000, and I understood that it was so, but, for greater certainty, I would like to repeat the question now.
§ Sir J. Anderson
The Financial Secretary said to me, rather pathetically, that he had already given the answer once, but perhaps I had better give it now. Certainly, the £1,000 is added in the case of all businesses that have a standard other than the ordinary profit standard, that is, the substituted capital standard, the minimum standard, the working proprietor standard, and so on. If I may say one word about the point made by my hon. Friend opposite, on the difference between the percentage allowed on old capital and new capital, in the one case 6 or 8 per cent., and, in the other, where the business is a company of the ordinary kind, 8 per cent., or in the case of a partnership, or a director-controlled company, 10 per cent., that difference was introduced with the deliberate object of giving some encouragement to the investment of new capital in businesses, and the argument for that difference is as valid to-day as when the decision was first taken.
§ Sir Robert Tasker (Holborn)
Regulations are issued when the Inland Revenue or the Chancellor or the Treasury find themselves in difficulties, but should we not insist that it is desirable to do justice? Regulations number thousands, and, if regulations can be issued in the interests of the Treasury, I respectfully suggest 2038 that they can be issued in the interests of justice.
§ Question, "That the Clause stand part of the Bill," put, and agreed to.