§ Notwithstanding anything in Sections forty-eight, forty-nine and fifty where a company issues by way of bonus any securities to its members or debenture holders and that company has at any prior date reduced its issued capital or debentures by reason of losses of its property there shall be disregarded in calculating the value of the bonus the amount by which the securities were so reduced and which has not already been so disregarded on the occasion of a previous bonus issue.—(Mr. Birch.]
§ Brought up, and read the First time.
§ Mr. Birch
I beg to move, "That the Clause be read a Second time."
During the watches of the night last week my right hon. Friend the junior Member for the City of London (Mr. Assheton) urged upon the Chancellor of the Exchequer the importance of recognising the converse of the proposition which he was putting forward in regard to bonus shares—that if it was wrong that the capital of a company should be watered, equally it was wrong that it should be dehydrated. That was, in effect, what he was saying. He was urging that the nominal capital of a company should approximate to its real capital. The right hon. Gentleman the Chancellor of the Exchequer very wisely refused to answer that, because there was no answer, and equally wisely arranged that that discussion should take place in the small hours of the morning so that it could not be reported. The Chancellor has laid down, in general, that bonus shares are immoral, but can be allowed on payment of 10 per cent. If he maintains that, that to inflate capital by bonus shares must be immoral, he must hold that to reduce capital must be highly moral, because it would have the effect of increasing the nominal rate of dividend. Both those propositions are equally nonsense, as he knows, I have no doubt, himself. What we say is that the nominal capital of a company should be the true capital; that is to say, that it should represent the real assets employed in that particular business.
1736 11.15 p.m.
Many companies in the past have had to write down their capital and I have no doubt in the future many will have to do so. It is impossible for the present inflation to go on for ever, but, even with it going on, very heavy losses will no doubt happen, because of shortages of raw materials and so on. In addition, changes in our economy are bound to cause certain companies at certain times to go down, just as they cause others to go up. But the whirligig of time does bring its revenges, and often a company which has gone through difficult times is restored to prosperity. What this new Clause seeks to do is this—if a company has had to write down its capital in a difficult period, if and when it is restored to prosperity and writes its capital back, it should not have to pay a 10 per cent. tax for so doing. It is obviously impossible in the case of such a company to argue that the real capital has never been there—it has been saved twice over.
Take the case of a company like Vickers —20 years ago it wrote down the ordinary shares to 6s. 8d. and then some time before the war wrote them up from 6s. 8d. to 10s., where they now remain. Of the capital which had originally been put in, a lot was lost after the last war, but in the 20 years since a conservative policy was followed and there is no doubt at all that the real assets employed in the business now are very much greater than the capital would be if written back to £1 for each ordinary share. This Bill lays down that where you have a company which has written down its capital, and the capital is first saved and then lost and then saved over again, it still has to pay a tax of 10 per cent. to put it back to a level which represents no more than the truth. We clearly recognise that what we are proposing is only a mitigation of the evil the Chancellor of the Exchequer has wrought and quite a small one, but it is a certain mitigation and goes some way towards justice. I therefore commend it to hon. Members.
§ Colonel Crosthwaite-Eyre
I support my hon. Friend the Member for Flint (Mr. Birch). He said the object of the Clause was to try to ensure that reasonable assets and nominal capital do as far as possible equate one with the other. That is the situa- 1737 tion which is represented by one of the major pieces of legislation we are passing through the House this session—the Companies Bill. The most stringent provisions are being laid down to ensure that every balance sheet gives a true and fair picture of assets of the company. This Clause is designed to ensure that what we are doing under the Companies Bill so far as bonus shares are concerned is translated into fact. My hon. Friend the Member for Flint gave examples of companies whose assets have been written down, but he has not mentioned the most important one, which is the case of mining companies. We have the headquarters of most of the large mining companies of the world in this country; with the exception of a few in U.S.A. These companies are for the most part dependent on what we may call genuine speculation. Capital is produced as they may or may not succeed in the favourable exploitation of the mining sites selected.
It often comes to the point that the people running a mine have to decide whether their capital shall be increased or not, whether they will risk any further money, whether they will write down the capital they have in order to meet future prospects. There is no branch of industry which has brought more prosperity in the way of dividends from abroad, or which has done so much to help our progress, as the mining industry. I think it will be generally agreed that of all those things on which we have relied to balance our adverse trade, nothing has contributed so much as the mining industry.
In this Bill we are going to place a burden upon these big companies—a burden which will force their headquarters from this country. Let it be remembered that they can equally well operate from other parts of the globe. Unless we accept some such proposal as this to enable the company to get back what it has spent and to enable it to readjust its balance sheet, it is indeed a gloomy prospect. It is a gloomy prospect in hoping that we shall keep in this country this large source of invisible revenue. One could speak of the publishing trade. One has to risk the capital before one can hope to get anything back. In newspaper production, in which the whole of the capital is entirely spent on the development of the proposition, one has to hope that at the end one will see a profit and that the undertaking 1738 will be a paying proposition. In a weekly or monthly magazine one has to take the capital and write it down in the hope that it will come back. The faith of the proprietors is justified very often, but as this Bill stands who can have that faith? If one has faith in one's enterprise and writes down one's capital, one has to pay in respect of real assets and nominal assets. I have mentioned two trades and they show the evils of this tax. I want to make it clear that it is no intention of ours to say that this Clause meets all the evils, but we hope it will remedy one of the major evils. We are very largely dependent on these industries which redound to the credit of our country, and we should give them faith and hope for the future.
§ Mr. Benson (Chesterfield)
We are not now discussing the desirability or otherwise of the bonus issue but directing our minds to the desirability or otherwise of the Clause on the Paper. The bonus tax is not a tax on the accumulation of assets. It is a tax upon a pure financial transaction and that transaction is the issue of bonus shares. I cannot see the slightest justification for the proposal that is involved in this Clause. I suppose that every company tends to starts its life with its paid-up capital approximately equal to its assets, and if a company, having lost its assets, of its own volition writes down its nominal capital to the value of its assets, it is merely reverting to the status quo. It is merely reverting to its original virginal purity where these assets and its paid-up capital are equal. Why should a company making that mere voluntary financial transaction enjoy a more favourable position if things go well than a company which has not had losses and which has not voluntarily written down its capital? It has merely gone back to its original position. My objection to this Clause is that it introduces an entirely illogical element into the bonus tax. The bonus tax is perfectly logical. Hon. Gentlemen may or may not like it, but in itself it is consistent. If the Chancellor of the Exchequer accepts this Clause, immediately he will introduce an element of inconsistency and, as a person of a very tidy mind, or at least one who prides himself on having a tidy mind on financial matters—
§ Mr. Benson
The untidiness is on the opposite side. As a person who prides himself on having a tidy mind in financial matters, I strongly object to the introduction of illogicality and lack of consistency into any tax. It is perfectly true that the Chancellor of the Exchequer does, from time to time, give concessions which are themselves illogical and which destroy the logicality of a tax. If he does that it is for the purpose of furthering some public policy. But that is not involved here. No one can get sentimental about the bonus tax, and certainly there is nothing in public policy which would suggest that the issue of bonus shares should take place. I am not arguing whether they are good or bad, but there is nothing in public policy which suggests that the Chancellor of the Exchequer should facilitate them.
Hon. Gentlemen suggested that the penalisation of the issue of bonus shares imposed a burden. There is no compulsion to issue bonus shares. It may be desirable to issue bonus shares, or it may not. It is purely a voluntary action upon the part of the company that does so, and there is no burden imposed upon it if it does not. It does not put a company in any better position to trade or make it financially stronger to issue bonus shares. It is purely a book-keeping transaction. I am sorry to oppose this because I have noticed that hon. Gentlemen opposite during the whole of this Debate have been very generous in supporting any concession asked for from this side, even though they had the last 25 years to grant those concessions themselves. I would have liked to reciprocate, but, frankly, appealing once again to my tidy mind, I should resist any attempt to make a bonus tax illogical by this means.
§ 11.30 p.m.
§ Colonel Ropner (Barkston Ash)
This is by no means the first occasion during the last few weeks that we have been asked to consider a tax on bonus shares. I have sat, I think, through most of the Debates on this subject, but I have not heard a more illogical argument than that to which we have just listened. I must confess that I usually admire the hon. Member for Chesterfield (Mr. Benson) for the tidiness of his mind. But on this occasion, I think his remarks are very untidy indeed. As I understood him, his argument was that in the case of a company 1740 which, for instance, started with a nominal capital of a million pounds and assets equal to that amount, if half the capital were lost and the company wrote down its nominal capital by £500,000, then, to use his own expression, the company would have reverted to the original position. I do not see that that can be claimed in any sort of fairness or justice or tidiness. By writing down your capital you acknowledge that you have lost half of it. What would, I think, be a reversion to the original position would be if the company, having acquired new strength and ploughed back funds into the industry, was once again able to increase its nominal capital to a million pounds. Then, indeed, you would revert to the original position. It is that transaction which we seek, by this new Clause, to exempt from taxation.
I hope that hon. Members on either side of the Committee will not feel aggrieved if I say that during these Debates on bonus shares there has been a tendency to overstate the case. I think, for example, that there may have been isolated instances where the nominal capital of a company has been increased for the purpose, to some extent, of making the dividend payments apparently at a lower level than they really were. There have been cases where the value of holdings in companies have been increased to some extent by the issue of bonus shares. On the other hand, I thought that the hon. Member for Chippenham (Mr. Eccles) hit the nail completely on the head when he remarked, a day or two ago, that in his view the Chancellor of the Exchequer was entirely wrong in fixing his attention, and asking the Committee to fix its attention, on the actual operation of issuing the bonus shares; the actual moment of the financial operation. Of course, it certainly is that event which will attract taxation if the Chancellor's proposals become law; but there has probably been, prior to any issue of bonus shares, many years of excellent, orthodox, sound and prudent finance when profits—and this should please the Chancellor of the Exchequer—have been ploughed back into the industry. Also, if, on occasions, increasing the nominal value of a company has led to a false impression with regard to the rate of dividend which that company is paying, the reverse is at least equally true, and I think would probably be much more frequent, for unless 1741 the nominal capital of a company can be freely increased and made roughly to correspond to any increase of actual capital—
§ The Chairman
The hon. and gallant Gentleman is addressing himself to the general question of bonus issues and not applying himself to the new Clause, which really deals with the question of disregarding certain factors. The question of the taxation or otherwise of bonus shares is not in issue.
§ Colonel Ropner
I was developing an argument with a direct bearing on the new Clause. I know that the arguments which I have been using, have a direct bearing on Clauses 49 and 50 of the Finance Bill, but I think that they are much more applicable to the case which we are asking the Chancellor of the Exchequer to consider in this new Clause. We hope that the Chancellor of the Exchequer, whom we were not able to persuade to give way in the case of the general range of bonus shares, will agree that the general arguments used—and I have tried to outline them again tonight —are more powerful and more worthy of his consideration when applied to companies which have reduced their capital in the past and now desire to increase their capital to the original figure. We do believe that these are special cases and are exceptional, and should be excluded from the provisions of the Bill in accordance with this new Clause.
There were a number of very lean years for a number of companies between the wars, and wise and sound finance prompted executives in these companies to take exactly the opposite procedure to that of issuing bonus shares. They reduced the capital of the companies which they managed. The admission that assets have been lost is a courageous act, and one which must be given very considerable thought before it is embarked upon. In the case of many companies which did lose capital and did write down capital, there has occurred that which the Chancellor of the Exchequer has pleaded for on numerous occasions—namely the ploughing back of profits, a resistance to the temptation to pay dividends, again something for which the Chancellor has pleaded in this House—and after some years of toil, effort, and enterprise, the position has arisen where the capital may 1742 with fairness be restored to the shareholders and be written back to the original amount. Whatever confidence the Chancellor of the Exchequer may have placed in his arguments when resisting arguments from this House on the general question of bonus issues I hope he will not place reliance on them in such cases as these.
There is only one other consideration I would ask the Chancellor of the Exchequer to note when dealing with this proposed new Clause. I remember the Chancellor of the Exchequer, in a speech a year or more ago, talked about incentives to enterprise and of initiative and hard work in trade and industry. He decried the profit motive. He did not think much of it, although the time will come when even he will be convinced that it is an extremely powerful force in trade and industry whether among the executive, wage earners, or anyone else. I remember he said that one of the incentives afforded in trade and industry was the pride that executives take in running a successful show. I think he was right and that perhaps that plays a bigger part in encouraging industry than most people are prepared to admit. I speak feelingly on this because, as I have already told him, know a company which is concerned in this matter and believes that this consideration is of real importance.
However small the element of blame may be in managing a company which has had to reduce its capital—I think there have been many occasions when there has been no room for blame at all—the Chancellor of the Exchequer will agree that those who have to sponsor a proposal to reduce capital do feel that there is an element of shame. It is a rather shaming thing for a company to have to do. Companies such as that are even compelled to have a little "reduced" in brackets after their title to indicate to the world that capital has been lost by the shareholders. I can assure the right hon. Gentleman that in cases like that, those who manage companies look forward to the time, and work for the time, when they can restore the original capital. However little truth there may be in the assertion that in issuing bonus shares the shareholders gain something, a firm with a history in which it takes a pride, feels its existence is once again justified if it can restore the original nominal value of 1743 its shares and gets rid of the "reduced" even if the word has already disappeared from the notepaper. It is for that reason that I asked the right hon. Gentleman to consider with sympathy the suggestion that companies which have had to reduce their capital but which are now in a position to restore it may do so without attracting tax.
§ The Solicitor-General
I am sorry that we cannot accept this new Clause. We have listened very carefully to the arguments which have been adduced in support of it, and we considered it very carefully when it was put on the Order Paper. What is the position? The Clause does not really raise the question of the rightness or wrongness of the tax. It is a tax on a single transaction on the issue of bonus shares, the making of a bonus issue. The question that arises is whether logically one can relate that tax and the charge to be made under it to some accident in the history of the company which may have taken place years before. There may have been a writing down which took place a long time back in the company's history, and it is said that because of that writing down, when there is a subsequent bonus issue made by the company, there should be a scaling down of tax.
What is the position when the capital of a company is written down because a certain part of the assets have been lost? Really these assets have gone irretrievably. It is not as if the assets are regained by the company or for the company. Assets which have gone are gone for good. What happens in the company's history may be this. By earning profits with the remaining part of the capital which has not been lost and capitalising reserves made by the use of the remaining capital—the remaining capital assets —a company gets in a position where it feels it should make a bonus issue. As pointed out, it is free to make or not to make such an issue. It is a voluntary transaction and the tax is a tax which impinges on the transaction as a transaction. It is not a tax on reserves nor is it related to reserves. It is a tax on a single transaction which the company is free to enter into or not to enter into. We feel that in these circumstances it is really logical to say that we should not 1744 relate a tax on a transaction to what may have been far back in the company's history.
Shareholders who acquire bonus shares may or may not be the same shareholders who suffered loss when the capital of the company was written down. If a long time intervened between the two transactions, it may very well be that the shareholders will be entirely different. Therefore, we feel that we must, in order—to borrow a phrase used by the hon. Member for Chesterfield (Mr. Benson) in relation to his way of thinking—to keep the earlier decision tidy—adhere to the decision that the tax is a tax on nothing but a particular decision. When there is a bonus transaction, this demand for a scaling up or down is wholly and utterly irrelevant to the incidents which gave rise to the bonus issue. When the capital has gone and has led to the writing down of the company's capital, it has gone for good and all, and the profits which led to the issue of the bonus shares at the later stage relate to later profits which are made with the assets which remain and which cannot in any sense be related to the assets which have gone and gone for good.
§ Mr. Assheton
I have not more than one point I wish to raise because, for one thing, I am tired talking about bonus shares in the middle of the night. The hon. Member for Flint (Mr. Birch) put this case very well and he was very well followed by the hon. and gallant Member for Barkston Ash (Colonel Ropner), I do not think the Solicitor-General really answered the main point. He has told the Committee that reasons of logic prevent the Chancellor of the Exchequer accepting the new Clause. There will be a considerable sense of grievance if the new Clause is not accepted—a very legitimate grievance. A company which has worked its way back to prosperity will feel it is not being treated fairly or given a fair deal when the happy day is reached for it suffers a heavy tax at the hands of the Chancellor. The hon. Member for Chesterfield has said it would not be tidy. You cannot make a rubbish heap tidy, and the bonus tax is about the biggest rubbish heap ever seen in this House. For that reason we propose to divide.
§ Question put, "That the Clause be read a Second time."
§ The Committee divided: Ayes. 53; Noes, 182.1745
|Division No. 258.||AYES.||[11.52 p.m.|
|Assheton, Rt. Hon. R||Gage, C.||Pitman, I. J.|
|Barlow, Sir J||Hannon, Sir P. (Moseley)||Ramsay, Major S.|
|Baxter, A. B||Hollis, M. C.||Robinson, Wing-Comdr Roland|
|Birch, Nigel||Hope, Lord J.||Stanley, Rt. Hon O.|
|Bossom, A. C.||Howard, Hon. A.||Stoddart-Scott, Col. M.|
|Bower, N.||Hutchison, Col. J. R. (Glasgow, C.)||Stuart, Rt. Hon. J. (Moray)|
|Braithwaite, Lt.-Comdr. J. G||Law, Rt. Hon. R. K||Sutcliffe, H.|
|Buchan-Hepburn, P. G T||Lucas-Tooth, Sir H.||Thomas, J. P. L. (Hereford)|
|Carson, E||Maclay, Hon. J. S.||Thorneycroft, G. E. P. (Monmouth)|
|Clarke, Col. R. S.||Macpherson, N. (Dumfries)||Thorp, Lt.-Col. R. A. F.|
|Clifton-Brown, Lt.-Col. G.||Manningham-Buller, R E||Ward, Hon. G. R|
|Crookshank, Capt. Rt. Hon. H F, O.||Marples, A. E.||Wheatley, Colonel M. J.|
|Crosthwaite-Eyre, Col. O. E.||Marshall, D. (Bodmin)||Williams, C. (Torquay)|
|Darling, Sir W. Y.||Mellor, Sir J.||Williams, Gerald (Tonbridge)|
|Digby, S. W.||Morrison, Maj. J. G (Salisbury)||Willoughby do Eresby, Lord|
|Drayson, G. B.||Neven-Spence, Sir B|
|Drewe, C||Nicholson, G.||TELLERS FOR THE AVES:|
|Fraser, H C P. (Stone)||Noble, Comdr. A H. P||Mr. Studholme and Major Consult|
|Fraser, Sir I (Lonsdale)||Orr-Ewing, I. L.|
|Adams, W. T. (Hammersmith, South)||Gibbins, J.||Popplewell, E|
|Alexander, Rt. Hon. A. V.||Gibson, C. W.||Porter, E. (Warrington)|
|Allen, A. C. (Bosworth)||Glanville, J. E. (Consett)||Price, M. Philips|
|Attewell, H. C.||Greenwood, A. W. J. (Heywood)||Pritt, D. N.|
|Awbery, S. S.||Grey, C. F.||Proctor, W. T.|
|Bacon, Miss A.||Grierson, E||Pryde, D. J|
|Baird, J.||Griffiths, D. (Rother Valley)||Randall, H. E|
|Barton, C.||Haire, John E. (Wycombe)||Ranger, [...]|
|Bechervaise, A E||Hale, Leslie||Rankin, J.|
|Benson, G.||Hall, W. G.||Reid T. (Swindon)|
|Bing, G. H. C.||Hamilton, Lieut.-Col. R.||Richards, R.|
|Blenkinsop, A.||Hannan, W. (Maryhill)||Robens, A.|
|Blyton, W. R.||Hastings, Dr Somerville||Roberts, Emrys (Merioneth)|
|Bowden. Flg.-Offr. H. W.||Henderson, A. (Kingswinford)||Rogers, G. H. R.|
|Braddock, Mrs. E. M. (L'pl. Exch'ge)||Herbison, Miss M.||Royle, C.|
|Braddock, T. (Mitcham)||Hobson, C. R.||Sargood, R.|
|Brook, D. (Halifax)||Holman, P.||Scollan, T.|
|Brooks, T J. (Rothwell)||House, G.||Shackleton, E. A. A|
|Brown, George (Belper)||Hoy, J.||Sharp, Granville|
|Brown, T J (Ince)||Hutchinson, H. L. (Rusholme)||Shawcross, C. N. (Widnes)|
|Bruce, Maj. D. W. T||Irving, W. J.||Shawcross, Rt. Hn. Sir H. (St. Helens)|
|Burke, W. A.||Janner, B.||Simmons, C. J.|
|Butler, H. W. (Hackney, S.)||Jeger, G. (Winchester)||Skeffington, A. M|
|Byers, Frank||Jeger, Dr. S. W. (St. Pancras, S.E.)||Smith, C. (Colchester)|
|Callaghan, James||Jones, D. T. (Hartlepools)||Snow, Capt. J. W|
|Champion, A. J||Jones, Elwyn (Plaistow)||Solley, L. J.|
|Cobb, F. A.||Jones, P. Asterley (Hitchin)||Soskice, Maj. Sir F.|
|Coldrick, W.||Keenan, W.||Sparks, J. A.|
|Collindridge, F||Kenyon, C.||Stamford, W.|
|Collins, V. J.||Kirby, B. V||Steele, T.|
|Colman, Miss G. M||Lang, G.||Swingler, S.|
|Comyns, Dr. L.||Levy, B. W||Sylvester, G. O|
|Cooper, Wing-Comdr, G.||Lewis, A. W. J. (Upton)||Symonds, A. L.|
|Corbel, Mrs. F. K, (Camb'well, N.W)||Longden, F.||Taylor, H. B. (Mansfield)|
|Corlett, Dr. J.||Mackay, R. W G (Hull, N.W.)||Taylor, R. J. (Morpeth)|
|Corvedale, Viscount||McLeavy, F||Taylor, Dr. S. (Barnet)|
|Crawley, A.||Macpherson, T. (Romford)||Thomas, D. E. (Aberdare)|
|Crossman, R. H. S.||Mallalieu, J P. W||Thomas, Ivor (Keighley)|
|Dalton, Rt. Hon. H.||Manning, Mrs. L. (Epping)||Thomas, I. O. (Wrekin)|
|Davies, Edward (Burslem)||Mikardo, Ian||Thomas, George (Cardiff)|
|Davies, Harold (Leek)||Mitchison, G. R||Thorneycroft, Harry (Clayton)|
|Deer, G.||Monslow, W||Ungoed-Thomas, L.|
|Diamond, J.||Morley, R.||Wadsworth, G.|
|Dobbie, W.||Morris, P (Swansea, W.)||Walkden, E.|
|Driberg, T. E. N.||Moyle, A.||Weitzman, D.|
|Dugdale, J. (W. Bromwich)||Murray, J. D.||Wells, W. T. (Walsall)|
|Dumpleton, C, W||Neal, H. (Claycross)||West, D. G.|
|Dye, S.||Nichol, Mrs. M. E. (Bradford, N.)||White, H. (Derbyshire, N.E.)|
|Ede, Rt. Hon. J. C.||Nicholls, H. R. (Stratford)||Whiteley, Rt Hon W.|
|Edwards, W. J. (Whitechapel)||Noel-Baker, Capt. F. E. (Brentford)||Wigg, Col. G. E|
|Evans, John (Ogmore)||Oliver, G. H||Wilkins, W. A.|
|Evans, S. N. (Wednesbury)||Orbach, M.||Williams, D. J. (Neath)|
|Ewart, R.||Paget, R. T||Williams, J. (Kelvingrove)|
|Farthing, W J.||Paling, Will T. (Dewsbury)||Williams, W. R. (Heston)|
|Fernyhough, E.||Palmer, A. M. F.||Willis, E.|
|Field, Capt. W. J.||Pargiler, G. A||Wyatt, W.|
|Fletcher, E. G. M (Islington, E.)||Parker, J.||Yates, V. F.|
|Fool, M M.||Paton, J. (Norwich)||Zilliacus, K.|
|Forman, J. C.||Pearson, A.|
|Fraser, T. (Hamilton)||Peart, Thomas F.||TELLERS FOR THE NOES:|
|Gaitskell, H. T. N||Piratin, P||Mr. Joseph Henderson and|
|Ganley, Mrs. C. S||Platts-Mills. J F F||Mr. Michael Stewart.|
Question put, and agreed to.