Paragraph 11 of Schedule 4 to the Finance Act 1937, as set out in section 34 of the Finance Act 1952 and as amended by section 33 of the Finance Act 1959 (limits on deductions for purposes of profits tax in respect of the remuneration of full-time working directors of director-controlled companies), is hereby repealed— [Sir H. d'AvigdorGoldsmid.]
§ Brought up, and read the First time.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
I beg to move, That the Clause be read a Second time.
Only too conscious of the fact that I have taken only a minimal part in these proceedings, I should like, first, to express my appreciation of the fact that at this late hour those who have borne the heat and burden of the day are still present, and that includes the Front Benches on both sides of the Committee.
This little new Clause deals with the peculiar position of director-controlled companies in respect of the remuneration of their full-time working directors. This is a matter with a history, which goes back to 1937 when the National Defence Contribution Tax was intro- 1706 duced and when it was obviously appropriate for some limit to be fixed to the remuneration of full-time working directors of director-controlled companies which escaped the new levy, which, in due course, became the Profits Tax. The figures were fixed in 1937, and they were reconsidered in 1959.
I should like, first, to ask my right hon. Friend whether there is any justification for treating director-controlled companies on a basis different from that of private partnerships. Private partnerships in business are not subject to Profits Tax. The taxation is paid by the individual partners on the basis of Income Tax and Surtax. It is also worth mentioning that what are called Surtax companies are dealt with in Section 245 of the Income Tax Act, 1952, and in that case the remuneration of directors is not caught by this provision. In other words, the Profits Tax is not applicable in those cases. My first point is that it might be time to reconsider the position of director-controlled companies and to see whether they should not be aligned with private partnerships with which they have so much in common.
The second point comes clearly out of the discussions of this subject in 1959. In the Finance Act, 1959, the limits fixed for the remuneration of full-time directors which escaped Profits Tax was raised. This was a Government proposal and, on the Opposition side, the hon. Member for Sowerby (Mr. Houghton) moved, not a countering Amendment, but an Amendment to fix a slightly lower limit. In other words, there was agreement on both sides of the Committee that the limits fixed in 1937 were no longer appropriate in 1959.
The debate on that occasion was answered by my right hon. Friend the President of the Board of Trade, who was then Economic Secretary to the Treasury. He referred to the fact that there were some 35,000 director-controlled companies—and that may be substantially the case today—and he added that the Clause was a move in the direction of equity. The Clause was accepted without a Division.
What is the remuneration of full-time working directors which escapes Profits Tax? I think that the Committee will be surprised when it is reminded how low it At present, if there are two full-time working directors, a total of 1707 £5,000 can be allowed in respect of both of them—not either but both; if there are three the figure is £7,000; if there are four the figure is £9,000. In the case of any individual director the highest earnings that escape being assessed for Profits Tax are as small as £3,000.
I wonder whether in terms of present conditions these are realistic figures. We are now getting used to very high salaries for executive directors. These salaries are, naturally, caught for Income Tax and Surtax, and one wonders whether the director-controlled company, which is certainly looked upon with some wariness by the Revenue, ought not to be treated a little more generously in this respect. It seems to me that in this sort of matter a director-controlled company is at a disadvantage in competition with both a private partnership, which escapes Profits Tax altogether, and a larger company which is not director-controlled.
These are matters which at this hour even at this stage of the Bill warrant genuine consideration by my right hon. and hon. Friends. I should be interested to hear whether they do not consider that the figures which in 1959 were considered barely adequate ought not now to be revised upwards so that the Profits Tax exemption in respect of individual full-time working directors should correspond very much more closely with the remuneration of a full-time executive director, which might be as much as £5,000.
§ Mr. Diamond
Does the Clause seek to raise the limit slightly—the hon. Gentleman spoke of "a little more generous treatment"—or to remove the ceiling completely?
§ Sir H. d'Avigdor-Goldsmid
The hon. Gentleman will realise that it would be quite pointless for me as a back bencher to expect to find a formula which would be acceptable to the Government. It was much more satisfactory to raise the whole question as a subject for discussion, which enables me in due course, if I receive permission from the Committee, to withdraw the Clause without prejudicing any particular figure for consideration by my right hon. Friend on a future occasion.
§ Mr. Barber
As appears on the face of this new Clause, its purpose is to repeal 1708 paragraph 11 of Schedule 4 to the Finance Act, 1937, which is the provision which, as it has been amended on a number of occasions, imposes limits on the amounts of directors' remuneration which can be deducted in computing the profits of director-controlled companies for Profits Tax purposes.
I should like to explain the purpose of the paragraph which my hon. Friend seeks to repeal. Ever since the introduction of the Profits Tax in 1937 there has been some restriction on the deduction allowable for remuneration of directors of director-controlled companies. This was considered necessary because, otherwise, the directors could take the whole or, at any rate, a pretty large part of the profits in the form of remuneration and so free the company from liability to Profits Tax on sums which were really a return on capital invested in the business and, therefore, ought to bear the tax. Of course, the restriction applies only where the directors have a controlling interest in the company. Furthermore, it does not apply at all to the remuneration of what are called whole-time service directors; that is, broadly, directors who work full-time for the company but do not own or control more than 5 per cent. of the ordinary share capital of the company. The present limit is laid down in paragraph 11 referred to in the new Clause. I need not refer to the existing limits which rule at the moment, because they are familiar to my hon. Friend and, I am sure, to many other Members.
There are really two questions for consideration. The first, raised by my hon. Friend, and also the one with which the new Clause deals in terms, is whether the restriction in question should exist at all, or whether it should be scrapped altogether. As I have said, it was originally introduced to prevent the danger that a large slice of the profits might be distributed in the form of remuneration and so avoid liability to Profits Tax. I must tell the Committee that the reason for having some restriction still seems to me to be a valid one.
As I expect my hon. Friends will know, the Royal Commission considered this point. I shall not weary the Committee with the whole passage, but I think that I ought to quote part of it 1709 to assist the Committee to reach a proper conclusion. The Royal Commission said:… if, as we recommend elsewhere, the structure of the tax"—that is the Profits Tax—is substantially simplified and the provisions far exemption and abatement are not retained, the main justification for the existence of Section 32 of the Finance Act, 1951, will disappear with them. But the complications that arise out of the special status of director-controlled corporations will remain. The special status given to such corporations is itself, as we have said, a form of anti-avoidance legislation, and we conclude, though with reluctance, that we cannot treat it as unnecessary and recommend its abolition. The rules that determine the deductible amount of the remuneration of such directors are, of course, arbitrary and it is hardly to he expected that they should appear to have any particular validity. The first Tucker Committee recommended certain alterations of detail which are no doubt an improvement. But they came to the same conclusion as we do that some such rules were 'a necessary safeguard for the Inland Revenue '. Our conclusion is that the provisions that bear upon director-controlled corporations ought to be retained …No new circumstances have arisen since that recommendation to lead one to suppose that no restriction at all is required.
There remains the question to which my hon. Friend also referred, as did the hon. Member for Gloucester (Mr. Diamond), and that is whether the present limits are right. I should remind the Committee that they have been relaxed on a number of occasions—in 1947, in 1951, again in 1952, and on the last occasion in 1959. I can promise my hon. Friend, and, indeed, I hope that what I say will be welcomed by those in the Committee who are not prejudiced about these matters, that this is just the sort of restriction which one must watch closely from year to year and, if further relaxation is justified, then obviously my right hon. Friend will not hesitate to amend the law.
Therefore, although I feel that I cannot advise the Committee to accept the new Clause which, as has been pointed out, would repeal what is in the main a necessary anti-avoidance provision, and which, incidentally, would cost £7 million a year, I hope that what I have said about keeping the limits under review will encourage my hon. Friend to seek the leave of the Committee to with- 1710 draw gracefully and so enable us to end our discussions on the new Clause in absolute harmony.
§ Mr. Callaghan
I think that I ought to disturb the harmony a little, because I am not in agreement with everything that has been said. I am in agreement with some of the things that have been said, but there is an important factor missing in this short debate, and that is the speech which the Chancellor of the Exchequer made to the Master Cutlers' feast in Sheffield last week.
I read that speech with great care and attention. Indeed, I quoted it to the newspapers today when they asked for my views about a particular matter, and that was in relation to increases in wages, incomes, profits and dividends. I think that everyone here knows how the Government have been joining, and the Chancellor of the Exchequer leading, the band—no increase in remuneration greater than 3 to 3½ per cent. per annum. This is the utmost that can be tolerated, he said, if we are to have a rate of growth of 4 per cent. per annum. I am a little astonished by the debate, which admittedly is not concerned directly with raising remuneration, but by an extension of the same principle it clearly arrives at the same end and conclusion, namely, the amount which is to be deducted from a particular sum in determining the point at which taxation starts.
I have the greatest respect and liking for the hon. Baronet the Member for Walsall, South (Sir H. d'AvigdorGoldsmid), but his thinking on these matters is entirely different from his thinking on an incomes policy. I doubt if the thought has ever crossed his mind that any increase might be related to the 31- per cent. principle which he is enjoining upon every trade unionist. The hon. Baronet is most anxious to explain the point to me, so I will gladly give way to him.
§ Sir H. d'Avigdor-Goldsmid
The hon. Gentleman is very kind, but he has not grasped the point. Any remuneration in the hand of a director is liable to Income Tax and Surtax. Surely we agree that we need a growth in profits, and the remuneration of directors is usually based on an increase in profits. It is the company itself that pays the Profits Tax. It is not the individual director. 1711 With great respect to the hon. Gentleman, nobody need feel that they are put off working harder for a company because the company is earning more.
§ Mr. Callaghan
If the hon. Baronet had not been quite so eager to interrupt, he would have heard me say that it was an extension of the original point about the 3½ per cent. It is not the main point. Everybody who has studied the wording of the Clause realises that. I ask hon. Members to realise that these issues are related. This Clause is tabled to repeal this provision, which has been in existence since 1937 and which has been extended twice since, certainly as recently as 1959. If hon. Members opposite want their policy on incomes to succeed, they must have regard to what they are doing in other directions. I believe that some hon. Members opposite manage to divide their minds into two completely different compartments on these issues.
I myself am absolutely convinced about the need for an incomes policy. It is the alternative to devaluation. I believe we have to succeed in getting it. If we are to have an incomes policy, there must be the same mental approach to the problems of directors as there is to the problems of tool fitters. Unless we get a national approach, in my view we shall not begin to succeed in an incomes policy. I do not think that the Financial Secretary committed himself at all. In fact, he uttered soothing noises to his hon. Friend. I was a little sorry that he indicated that the Treasury might even consider raising the limit at this stage. I cannot believe that it would be of the slightest advantage or of the slightest national gain to do so. The Financial Secretary gave no real encouragement. He said he would consider it. I want to drive a very hard nail into the coffin and say that I hope that when he has considered it he will reach the very firm conclusion that nothing should be done about it.
§ Sir H. d'Avigdor-Goldsmid
I have been invited to withdraw gracefully. I appreciate the adverb. I am sorry to hear the hon. Member for Cardiff, South-East (Mr. Callaghan) take this line. It is not the line that his colleague the hon. Member for Sowerby (Mr. 1712 Houghton) took when this matter was discussed in 1959.
§ Sir H. d'Avigdor-Goldsmid
All I am saying is that I am sorry that the hon. Gentleman is taking a line definitely retrograde from the one taken by the hon. Member for Sowerby when this matter was discussed in 1959. With the permission of the House, I ask leave to withdraw.
§ Motion and Clause, by leave, withdrawn.
§ Schedules 10 to 12 agreed to.
§ Bill reported, with Amendments; as amended, to be considered Tomorrow and to be printed. [Bill 119.]