Charge of Armament Profits Duty.

Orders of the Day — Ways and Means. – in the House of Commons on 26th June 1939.

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3.53 p.m.

Photo of Mr John Simon Mr John Simon , Spen Valley

I beg to move, That where, in any acccounting period ending after the thirty-first day of March, nineteen hundred and thirty-nine, the receipts of a business include receipts under armament contracts (as denned by any Act giving effect to this Resolution) of not less than two hundred thousand pounds in a year, or proportionately less for any less period, and the profits of the business for that accounting period (or for so much thereof as is subsequent to the said day) exceed a certain standard, there shall be charged on so much of the excess as arises from such contracts a tax of sixty per cent. On the passing of this Motion we propose to found additional Clauses in the Finance Bill which will impose Armament Profits Duty. The Motion, of course, is in much more general terms than the Clauses, and it appeared to us that it would be convenient to put on the Paper the proposed Clauses before we had this Debate to-day. Accordingly, hon. Members who are interested in the detailed application of the proposal will find our scheme already set out in those Clauses. There has also been, as the Committee will recall, a White Paper, which was issued at the same time as the Notice of Motion was put on the Paper—Command No. 6046—which gave a short descriptive account of the scheme. The purpose of the proposed duty is to be found stated in some remarks which have been made to the House by the Prime Minister, and I will quote, if I may, three passages altogether. On 26th April last, when the intention to introduce the Military Training Bill was announced, the Prime Minister in that connection said: We intend to take further steps to limit the profits of firms mainly engaged on the rearmament programme and the necessary legislation will be introduced at an early date. Already the Departments exercise the greatest possible care in fixing prices to ensure that only reasonable profits are made, but experience shows the difficulty of providing for all possible contingencies beforehand, and in the case of the establishments I have indicated it is felt that a definite limitation of profits is the only method of achieving the desired object with certainty."—[Official Report, 26th April 1939; col. 1154, Vol 346.] On the next day, 27th April, in moving the Motion of approval of the Government's proposals with regard to the introduction of a system of compulsory military training, the Prime Minister said: We do not desire to deprive armament firms of reasonable profits, but we do say that it is repugnant to the general sense that profits should be unreasonably swollen."—[Official Report, 27th April, 1939; col. 1350, Vol. 346] He then went on to tell the House that we were therefore considering plans for the purpose. Lastly, in reply, I think, to a question put to him across the Table by the acting Leader of the Opposition, the right hon. Gentleman the Member for Wakefield (Mr. Greenwood), the Prime Minister said: The House will recall that on 26th April, when I announced the proposal of the Government to introduce a measure of compulsory military training, I indicated that it was also intended to take further steps to limit the profits of firms mainly engaged on the rearmament programme. The provisions contained in the Ministry of Supply Bill, together with the ordinary contracts procedure, revised as it has been from time to time to take account of changing conditions, go far in the direction of preventing excessive profits. The Government feel, however, that there may be cases where, in particular by reason of large increases of turnover, further measures of limitation are called for, and it is, therefore, proposed to include in the Finance Bill provisions for a tax on concerns engaged on a large scale on armament work in respect of any excess profits arising from that work. These provisions will require to be founded upon a Ways and Means Resolution which it is hoped to table on Monday."—[Official Report, 15th June, 1939; cols. 1516–7, Vol. 346.] I have ventured to remind the Committee of these statements of the Prime Minister because it is important to bear in mind throughout that this proposed Armament Profits Duty is intended to apply, as it were, as a second or reserve measure in cases, if there be cases, where the existing provisions do not adequately secure the desired result. The first and main method for controlling profits on armaments must be, and ought to be, of course, the arrangements for making the contracts themselves—for fixing the terms of the contracts entered into between the State and the armament manufacturer, and settling the prices which that manufacturer is going to receive; and a very great deal of effort has been thrown into that work. I recall, in particular, a speech that was made by my right hon. Friend the Secretary of State for Air in which he described how he was engaged in revising that contract system with a view to securing the result that we want to secure.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

Has any revision actually been made that amounts to anything?

Photo of Mr John Simon Mr John Simon , Spen Valley

I think so, yes. In the second place, as a further development of the first method, we have the Ministry of Supply Bill, which has now passed this House. It will be in the minds of hon. Members that the Minister of Supply has very drastic powers addressed to the same purpose. But none the less it is right to recognise that cases may arise which will require this supplementary procedure. They arise mainly for this reason: However carefully you consider the terms of contracts, however reasonable the rate of profit may be, considered as a percentage of the turnover, still, if there be, as there are now going to be, very large increases in the size of the orders and enormous increases in the turnover, that may very well appear to produce, and would in fact produce, a very reasonable and proper rate of profit so far as the original scheme went, but none the less produce extremely large total profits when the turnover is so much enlarged. Of course hon. Members will appreciate that the effect of that is to increase the rate of return to the ordinary shareholder, because the greatly swollen turnover, the amount of business done, is not necessarily accompanied by an equal expansion of plant or of other similar outlay, and the result is that you get a return on the ordinary investment which goes up very much, even though the contract itself may be a perfectly reasonable contract.

I therefore present these proposals not as being the primary method by which we suggest that armament profits may be controlled, but rather in the nature of a secondary provision, a supplementary provision, which will operate supposing that our main check were not adequate. If I may use a metaphor, I regard myself in this matter merely as a long-stop who is put behind the wicket to try to take care of anything that escapes the prehensile hands of the Minister of Supply.

Photo of Mr James Ede Mr James Ede , South Shields

Does the right hon. Gentleman not know that the long-stop has been abolished in first-class cricket?

Photo of Mr John Simon Mr John Simon , Spen Valley

The first thing that the Committee will observe, that which no doubt it is very proper to observe, is the limit that has been set for the purpose of securing the armament turnover which we are going to examine. The line has been drawn at an armament turnover of £200,000 in the 12 months, that is in businesses in which in any accounting year ending after the 31st March, 1939, the receipts for armament work are not less than £200,000. Such businesses will come within the scope of the duty. I can quite understand the observation being made that that is, or appears to be, a high figure, but the Committee must appreciate the reason for it and look at the thing in its due proportions. Of course this criterion of liability, the £200,000, is the amount of payments received, this is not of course any measure of the profit at all, still less of the growth of profit, which is ultimately to be taxed. When we speak of receipts of £200,000, they represent selling prices of the goods, or rather the payments received in respect of the purchase of them. What we are going to charge to tax is not the payments received but the profit that is made by the business as far as it exceeds the defined standard. The scheme is to tax the proportion attributable to armament work, and the growth of profits as shown by comparing the profits of the chosen period with a standard, and I think it will be found that we have chosen on the whole a reasonable period. We should certainly not make the duty a more effective instrument if we sought to include in this scheme a vast number of much smaller contracts.

The matter in question is necessarily a little complicated, but I can assure the Committee that this figure has been fixed having fully in mind the considerations which might be expected to suggest themselves at first sight, and I think the figure will be found to be right. It must be remembered, of course, that with a total receipt of £200,000 paid for armaments, in most cases for articles which themselves are made out of expensive products like steel, the profit on that will be a relatively small figure. It is not possible to say how much or within what limits that profit will lie or what will be the growth of profit. The Committee will understand that that depends on a test of the current profit of the armament industry, comparing it with a standard which will be derived from earlier trading. As indicated in the Prime Minister's statement, the contracting Departments of the different Government offices concerned, fortified as they will be now by the operation of the Ministry of Supply Bill, with their methods of placing contracts, testing costs and watching the working of the contracts, can be trusted to deal adequately with the ordinary cases, but the case that we are anxious to provide for in this new duty is the case where rearmament has necessitated large expansion upon armament production, large turnover, in which it may very well be that we shall find profits which are swollen to a point that calls for taxation.

There is another consideration which I hope the Committee will not overlook. It is really essential, if we are to make anything like a good scheme, that we should not limit this to consideration of profits of armament contractors themselves, that is those who make contracts with the Government. There is a very important section to be looked after, that of the subcontractor, and even that of the sub-subcontractor. They do not make contracts directly with the Crown, but we are here making provisions which will apply this new duty not only to the man who contracts to the Crown but to the subcontractor and even the sub-subcontractor in so far as he is engaged in providing materials and the like which enter into a war contract.

Photo of Mr William Gallacher Mr William Gallacher , Fife Western

In the event of a contractor letting out a series of sub-contracts, each of them under £200,000, are all those sub-contracts excluded from the scheme, although it may be that these sub-contracts are let out merely to subsidiary companies?

Photo of Mr John Simon Mr John Simon , Spen Valley

Oh, no, the scheme covers the cases which the hon. Member has in mind. This may well be in the mind of hon. Members and of others: When you come to the sub-contractor he very possibly will have very large dealings not with one Government Department but with several Government Departments—it may be with the Air Ministry, the Admiralty and the War Office. We are engaged in devising a plan—we have tested it very thoroughly by practical means—by which we shall be able to find out what is the sum total of sub-contracts in such cases, not subcontracts with one Department only, but adding them all together. It is to be tested, however, not by reference to the amount of work which is given by one contracting Department, but by the work given by all contracting Departments and given out by all armament contractors. It is a somewhat complicated process, but it has been studied very carefully, and that is one of the reasons why I strongly urge on the Committee that they should examine this limit of £200,000, not suspecting us of putting the figure unduly high, but realising that the limit is chosen because we want to make the machine work in the case of contractors and sub-contractors. There are, of course, administrative difficulties, but we mean to get over them. It is a difficulty that our tax does not apply to all businesses as did the old Excess Profits Duty; but it is the wish of the Committee, and certainly it was the declaration of the Government, that we should address ourselves specifically to the armament contractors and their profits. As the Prime Minister said, there is something particularly open to objection when so much public money is being paid out at a time of rearmament that an unnecessarily large reward should go to certain persons engaged on work of this sort Let me give a short indication of how we are to find out who are the persons who will be liable to this duty.

Photo of Mr James Ede Mr James Ede , South Shields

In working out this £200,000 are contracts with the Government for Civil Defence purposes included?

Photo of Mr John Simon Mr John Simon , Spen Valley

Yes, they are, certainly. I shall make a short statement in a minute as to what is included and as to its nature. It is a very important point. Before I do that let me deal with another point. How, as a practical matter, is the Inland Revenue to find out who are the firms to which it has to apply this measure of taxation? Obviously the Inland Revenue themselves cannot do it, because it involves in some cases adding up the amount of contracts in connection with various Departments. The persons liable to the tax will be those who are declared by the Ministry of Supply to have received in a particular year not less than £200,000 in respect of armament supplies. I do not say firms which have received £200,000 from public funds directly; I am using an expression which will cover the sub-contractor as well as the contractor—" the persons declared by the Minister of Supply to have received in a particular year not less than £200,000 in respect of armament supplies." That will make a firm liable and it will be for the Inland Revenue Department then to act. It would be quite impracticable for the Inland Revenue Department, for which I am responsible, to find out for themselves what businesses are liable, if the criterion of liability is to be the supply of armaments to various Government Departments or various Government contractors; but the Government Departments themselves have, of course, records of their contracts. They will be in the closest touch with the Ministry of Supply. We are making provisions which will require that Government contractors shall disclose who are their sub-contractors and to what extent they are making payments to them. By that machinery it will be possible to make up a list, and of course it is desirable that any concern which is engaged in armament work should know without delay whether it is to come within the charge or not.

I do not think there is a better criterion than the criterion of receipts from the Government or from Government contractors, received by the business. That is the simplest and quickest and most definite way of testing. Therefore the various Departments engaged on armament contracts will notify the Ministry of Supply of payments made of such an amount as may possibly bring some of them within the charge. The Ministry of Supply with its organisation, in possession of this information, will add up the total payments. In every case, when they get to this total, the' Ministry of Supply will certify that that firm has the prescribed total, and, therefore, comes within the scope of the tax.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

In the Resolution with which we are now concerned, the reference is to receipts in any given year, but in the specific New Clause that the Chancellor proposes to move the reference is to the turnover of that year. Receipts and turnover may be completely different things, and we should know whether it is the intention to take cash receipts or turnover.

Photo of Mr John Simon Mr John Simon , Spen Valley

The Resolution, as my hon. Friend rightly says, refers to receipts—and receipts are to be taken as the test of whether the enterprise is within the scope of the tax. But as regards the apportionment of the profit for the purpose of tax, I think my hon. Friend will find that the language of the Clause is right. If not, we can of course alter it.

I said just now that I would make plain what is meant by armaments. There is a general description in. the White Paper, but in the New Clause we describe the supplies in question as being supplies required for the purposes of the armed forces of the Crown or of any foreign armed forces. The White Paper spoke only of supplies for the armed forces of the Crown; but we include supplies for any foreign armed forces because there are cases where supplies may be handed on to some allied Power, and I do not see why we should exclude those cases. Armed forces of the Crown covers any allotment to a Dominion, so I am advised. The significance of the words "the armed forces" is this. It is designed to exclude supplies of a purely civil character, such as those required for the Post Office. Supplies to the Ministry of Supply, the War Office, the Admiralty, the Air Ministry, the Home Office, for Air-raid Precautions, or the Air-Raid Precautions Department will all. be included.

Photo of Colonel Josiah Wedgwood Colonel Josiah Wedgwood , Newcastle-under-Lyme

Will police uniforms be included?

Photo of Mr John Simon Mr John Simon , Spen Valley

I think not. On the other hand, ordinary supplies to Government Departments, say, to the Stationery Office and the Post Office, will be outside this. We intend definitely to include not only supplies to what are ordinarily called the fighting services, but also supplies required for Civil Defence under the Air-Raid Precautions Act, 1937. Articles supplied for the passive defence of the Realm are specifically included.

Photo of Mr John Wilmot Mr John Wilmot , Lambeth Kennington

Does this include articles supplied to local authorities, as well as to the Home Office, for air-raid precautions purposes?

Photo of Mr John Simon Mr John Simon , Spen Valley

I doubt whether we should include supplies to local authorities. In any case, I do not think they would be in large quantities.

Photo of Mr John Wilmot Mr John Wilmot , Lambeth Kennington

The right hon. Gentleman will appreciate that local authorities are under an obligation, which is laid upon them by Parliament, to purchase large supplies for that purpose—the London Fire Brigade, for instance, requires large supplies for air-aid precautions.

Photo of Mr Duncan Sandys Mr Duncan Sandys , Lambeth Norwood

My right hon. Friend says that he does not think that this would apply to anything except deliveries to the Crown. Is that the reason why the Resolution refers to the Air-Raid Precautions Act, 1937, and not to the Civil Defence Act, 1939?

Photo of Mr John Simon Mr John Simon , Spen Valley

I would remind my hon. Friend, and perhaps other hon. Members, that, although we have, for the sake of convenience, printed what the Clauses ought to be, those Clauses can be modified so long as they are within the Resolution. The Resolution is in very wide terms indeed. It does not refer to the Crown as such at all. It speaks of armament contracts as defined by any Act under the Resolution.

Photo of Mr Duncan Sandys Mr Duncan Sandys , Lambeth Norwood

Before my right hon. Friend leaves that point, could he give a broad assurance that when the actual Clauses are drawn up they will cover the vast sums which are being spent under the Civil Defence Act?

Photo of Mr John Simon Mr John Simon , Spen Valley

My hon. Friend is forcing an open door. I think that all contracts entered into by the Government for these supplies for passive defence are within the scheme.

Photo of Mr Duncan Sandys Mr Duncan Sandys , Lambeth Norwood

But the Act of 1937 is cited, and not the Civil Defence Act, 1939, which is a much bigger thing.

Photo of Mr John Simon Mr John Simon , Spen Valley

This was printed before the Bill had been carried. Having carried the Bill, we can consider if we ought to make our Clauses correspond. We do not wish to limit the definition to what would ordinarily be called actual munitions of war. This is intended to cover much more than battleships, guns and aeroplanes, which are the main instruments of fighting. The intention is to include machines, tools, materials required for the making of armaments, and you may say broadly anything required for the Forces.

Photo of Mr John Simon Mr John Simon , Spen Valley

I was going to mention that. I think the best course would be to make the definition as all-embracing as possible, but if we do that it will be necessary to provide that the Minister of Supply may, by Order, exclude articles or materials which, in his experience, are commonly required for purposes other than munitions, and which cannot be equitably dealt with within the scope of the charge. As was indicated in the White Paper, our intention is to exclude food. Considerable complications might arise if we were to apply this form of duty to contracts for food, and thus have two forms of contract side by side, one open to the duty and the other not. I am advised that it would be much better to have the definition wide in the first instance, and then it may be—and I think will be—necessary to have a provision by which certain articles may be left out.

Photo of Sir Archibald Sinclair Sir Archibald Sinclair , Caithness and Sutherland

Does the Chancellor mean that such things as bully beef and Maconachie ration would be left out? If there is to be a tax on armaments, should there not be a tax on bully beef, Maconachie ration and other things of that sort which are used for the forces?

Photo of Mr John Simon Mr John Simon , Spen Valley

The scheme would not include food. I doubt whether it would include coal. That would be a very difficult thing to include, because one would have to trace the coal to see whether it was ultimately employed for armament purposes. There is a further application which I wish to make plain to the Committee, because I do not want anyone to doubt the width of the scheme. The definition, it is true, applies to things and materials, but, at the same time, I am proposing that we should define as an armament contract a contract with a company for managing a factory belonging to the Government. The purpose of that provision is to include profits which are made by, say, a trading company undertaking to manage one of the Government's shadow factories.

Photo of Mr Hugh Dalton Mr Hugh Dalton , Bishop Auckland

Before the Chancellor passes from the subject of materials, would he say something about the application of the Clause to local authorities? Take such a matter as concrete, used for underground shelters, trenches and the like. Much of the cost of this is borne by local authorities. They get a Government grant, perhaps, but the local authorities are responsible. It may be that no one authority will purchase enough to bring the profits within the £200,000 limit, but if you aggregate all of them it may be that some firms will be making a profit in excess of £200,000. It seems to me wrong that they should not be brought in.

Photo of Mr John Simon Mr John Simon , Spen Valley

I am obliged to the hon. Gentleman for mentioning it, but I do not know that I shall be able to give him a complete answer at the moment. It is pointed out to me that in our Clause we have been careful to include a contract for the execution of any works required for those purposes. There is no doubt that a supply of concrete is not excluded, because it is that kind of work.

Photo of Mr Hugh Dalton Mr Hugh Dalton , Bishop Auckland

Works carried out by local authorities?

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

The intended Clause to which the right hon. Gentleman referred says: Provided that nothing in this Sub-section "— which is the definition of contract"— shall apply to any contract for the supply of any such articles or materials "— which in the opinion of the Minister shall not be required for the purposes in connection with this Sub-section. That is to say that any article used for any other purpose except the immediate purpose is presumably exempt from the contract. It is a most cryptic proviso, and we should be glad to have some explanation of it.

Photo of Mr John Simon Mr John Simon , Spen Valley

I have no doubt that an explanation will be offered, but I may observe"— not for the purpose of getting over any question that may be put to me"— that that really arises on the proviso of the draft Clause, which for the convenience of the Committee has been printed on the Order Paper, but it really cannot have any existence until we have decided upon this general Resolution. The Resolution, which is what I am discussing now, does not itself impose any limitation which will embarrass hon. Members who are putting questions to me now. I think that I am right in saying that the Government have stated that we think that it would be difficult to include contracts of local authorities, and that what we were really concerned with more especially were the contracts entered into by the Crown or by a contractor when granting sub-contracts.

Photo of Mr John Wilmot Mr John Wilmot , Lambeth Kennington

It is important to everybody concerned that there should be no misrepresentation of the Government's broad intentions. It would seem to be entirely inequitable that the uniforms of soldiers should be subject to the provisions of this proposal whereas the uniforms of firemen should be exempt merely because for departmental convenience they are ordered by local authorities and not by the Home Office.

Photo of Mr John Simon Mr John Simon , Spen Valley

I think that it would be better for me not to discuss these matters in detail now, because, as anyone can see, they are not really matters that are vital to the Resolution since the Resolution has been drawn, in wider terms.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

The right hon. Gentleman himself began this.

Photo of Mr John Simon Mr John Simon , Spen Valley

I agree, I brought it on myself. It seems to me that I should not be treating the Committee fairly if I did not tell them the kind of scheme which we had in our own mind.

Photo of Mr Hugh Dalton Mr Hugh Dalton , Bishop Auckland

They would not be treating you fairly unless they followed it up.

Photo of Mr James Ede Mr James Ede , South Shields

May I remind the right hon. Gentleman that in some cases the Government are paying as much as 90 per cent. of the cost of these schemes, and that even in the richest areas of the country they are paying substantially over one-half. Therefore, to all intents and purposes these are Government contracts although not actually, and really the local authorities are only acting as Government agents.

Photo of Mr John Simon Mr John Simon , Spen Valley

The Chancellor of the Exchequer is fully conscious of where the money comes from for the national effort, but I hope that the hon. Gentleman will not expect me to deal with that now. I have taken note of the fact, and I agree that it is a thing of importance. I want to make quite plain how we are going to deal with sub-contractors. We are going to secure the necessary information. That will enable the totals of the work done for the Crown contracts by sub-contractors to be assembled, and thereby we shall have a very effective means of securing that the big sub-contractors are brought within the scheme as well as the main contractors. Now comes the question of the charge of duty.

Photo of Mr Stuart Russell Mr Stuart Russell , Darwen

My right hon. Friend said, in the case of foreign contracts, that if they were ordered through Government Departments they would be subject to this tax. Do I understand that if they are ordered direct from firms in this country they are to be excluded?

Photo of Mr John Simon Mr John Simon , Spen Valley

I think that we must con-line ourselves to the spending of what we call British money. I want to say a word about the duty to be charged. The basis of the charge will be the extent to which the profits made in the accounting period exceed a certain profit standard. There is no way that you can devise a tax on excess profits except by that sort of comparison. You would find out what would be the growth of profits of the whole business from armament activities and from non-armament activities alike, and then apportion the excess between armament activities and non-armament activities. We are engaged here in putting an excess duty on profits on armaments. In the first instance, it would, therefore, be spread according to the size of turnover of armaments as compared with the turnover of non-armaments, or the turnover on the whole business. That assumes that there has been a rise of profit equally over both kinds of work. That, however, may not be true. It may be in some cases that the growth of profit can be shown to have arisen on the non-armament side to a greater extent than on the armament side. It may be that the converse will be the case. Accordingly we propose to provide that the Board of Referees, which exists now for certain taxing purposes, and which is generally recognised as perfectly impartial and very businesslike, can adopt a different apportionment, if the taxpayer can prove that really the increase of profit has not arisen in his Government work, or alternatively, if the Board of Referees takes a view more favourable to the Revenue if the Crown contends to the contrary, that a greater proportion of the profit has been made on the Crown contract. By that method we shall arrive at the amount of excess profit as is attributable to armament work.

Mr. Pet hick-Lawrence:

I would like to be clear on this matter. I confess that it has puzzled me very much in reading both the White Paper and the Clause. As I read these, I thought that it was only in exceptional cases that this special procedure was to be called into account, but, if what the right hon. Gentleman now says is correct, that will be the rule. It will be only on an infinitesimal proportion of cases that there will be the same proportion of increase in armament production as in other non-armament manufac- ture. That will only happen in one case out of a thousand. If the right hon. Gentleman is right then in 999 cases out of a 1,000 this exceptional procedure will be the one to be adopted.

Photo of Mr John Simon Mr John Simon , Spen Valley

I do not think so. I should expect the adjustment to be claimed on one side or the other, if there was a very substantial and palpable inequality. I do not see any other method —and the right hon. Gentleman does not suggest that there is any other method—by which you can be fair both to the Government and to the taxpayer. That is what we had in mind. It is dangerous perhaps to proceed too literally on the White Paper because it was necessarily issued at a slightly earlier stage before the Clause was put down.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

In certain cases there is to be a separation between profit due to armaments and profit due to other works. In the ascertainment of the profit of the whole concern which is to be made first, there is no provision made for adjusting the standing charges as between the armament side of the business and the ordinary commercial side. Apparently the firm in question is to be allowed to charge an equal proportion—a standing charge—to armament work and to commercial work, and to that extent it is going to lead to very large evasion. It certainly evades the intentions of the proposal that has been put forward. In the normal course of events a standing charge on armaments will be more flagrant as compared with the turnover on commercial business.

Photo of Mr John Simon Mr John Simon , Spen Valley

I do not think that it will be found quite like that, but, if it is, I suggest to my hon. Friend that that would be a very suitable subject for discussion, and may be for amendment, when we come to the Clause. I am willing to do my best to answer any questions that may be asked. I am not in the least embarrassed, but I think that for the general convenience it would be as well if I stated the scheme. I was about to say, before I was interrupted, that the duty will be charged at the rate of 60 per cent. I do not know whether there is anybody in the Committee who really thinks that it would be desirable to make the duty cover the whole amount. If so he is entirely wrong, because it is really essential in this matter to secure that we get the incentive, which exists, for rapid, economical and successful production, and we shall completely destroy it if we do not make a provision which divides the amount. I think that 60 per cent. is the amount which we would recommend.

Photo of Mr Hugh Dalton Mr Hugh Dalton , Bishop Auckland

Excess Profits Duty was 80 per cent.

Photo of Mr John Simon Mr John Simon , Spen Valley

That may be, but 60 per cent. is the proposal. It is intended that the duty should have a life of three years. That is as far as the enactment would go, and it would correspond with the remaining life of the National Defence contribution, and the period under the Ministry of Supply Bill for the special powers. There is an arrangement which, I believe, will be found satisfactory regarding the date of commencement. The date of commencement of the old Excess Profits Duty differed with different firms according to the date up to which they kept their accounts, which ran out at different dates. A much better and a much simpler plan is that there should be a common commencing date of liability. That can be done even though the duty is chargeable according to the accounting year, for although that does not commence on the date that the duty is to commence, it will be possible to take a proportion of the year.

And now I will say a word about the standard that we propose to adopt. We have endeavoured to adopt a course which is simpler than the course which was followed in the case of Excess Profits Duty, and, I believe, very much more desirable. In the case of Excess Profits Duty, as older hon. Members of this House will certainly remember, there was an alternative. You could either take what was called the profit standard, which was based upon your past experience and successes, or, if you did not think that that was a good standard, you could have your choice and substitute for it a percentage standard which depended essentially on a calculation of capital. Under that scheme the taxpayer had a choice. I believe that to be a very undesirable plan here. The matter is very complicated. These calculations of capital are not easy to make and ought, as far as possible, to be avoided, for they depend essentially upon the price paid for your plant, which in many cases may have been a long time ago, and then there are calculations about wear and tear and all that.

The proposed standard is one that does not give any alternative. The profit standard would be either profits of the calendar year 1935 or profits of the calendar year 1936, or an average, for which you would take two years, either 1935 and 1937, or 1936 and 1937. It will be a calendar year in each case. There is no alternative as in the Excess Profits Duty of a capital standard. The only provision that we suggest need be made for exceptional cases would be that the Board of Referees may fix an exceptional standard higher than the profits of the years mentioned, if the trader can show to the board either that he had a low volume of business in those years or even if he had a normal volume of business that he had an exceptionally low rate of profit in those years. That would have to be proved by way of exception, but unless it can be shown that through some specific cause peculiar to the business a higher figure should be allowed, the general basis of the standard will be this: In a case where an exceptional standard is allowed to a company, we propose that it is. not to exceed the amount necessary to pay its fixed preference dividend and 6 per cent. on its other share capital.

Hon. Members may refer to 1937 because it is the case that before the end of that year the rearmament scheme was in progress. On the other hand, the beginning of the rearmament scheme was very much more in the region of planning and preparation then than in the region of very active production, and it must be remembered that it is the rapid expansion of armaments production since 1937 that really constitutes the reason for the duty. It is this expansion of turnover, which has become very big in some cases in the last year or two, that has created conditions where our price-control machinery may not in all cases achieve the result of limiting profits to a reasonable return. I think that that, together with the reason that we do not under our scheme allow an alternative standard based on a fixed return on capital, will be found to make our scheme perfectly fair and reasonable, and it is one which I commend to the Committee. That, again, is a matter which will need subsequent discussion, but I thought it convenient to tell the Committee what was our general plan.

Photo of Mr John Wilmot Mr John Wilmot , Lambeth Kennington

The Chancellor will be aware that it only is in the years since 1937 that we have tried to make our price control machinery more effective. There is, of course, more work for the long-stop when the wicket-keeper is not on the field.

Photo of Mr John Simon Mr John Simon , Spen Valley

Yes, but the wicket-keeper has got a new pair of gloves, and there always was a wicket-keeper.

Photo of Mr John Simon Mr John Simon , Spen Valley

These sporting analogies are very difficult to control. As in the case of Excess Profits Duty borrowed capital will not be taken into account in dealing with additional capital, but it will be necessary in the case of additional capital to make some adjustment, which will be based on the fact that there is now larger capital at work than when the business began.

Photo of Mr Hugh Dalton Mr Hugh Dalton , Bishop Auckland

May we take it that bonus shares are to be treated for this purpose as an increase of capital?

Photo of Mr John Simon Mr John Simon , Spen Valley

It is important, but it is a little difficult to state it accurately. Bonus shares in most cases arise from taking profits, capitalising them and distributing them. That will not necessarily be an increase of capital. It will not be an increase of capital within this scheme. The capital referred to here is capital—I am speaking broadly, but I think accurately—represented by the figure of the value of the assets of the business, as under Excess Profits Duty. If a firm since the beginning of this armaments programme has bought new plant or has built a new factory, has added in that way to the material resources for production and has thereby incurred expense, it is only right that it should be allowed a higher standard on that account; but the standard is allowed because of the increase in its real capital, its solid assets, and not any increase of paper.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

I understand from what the right hon. Gentleman has said that if a firm had made a new issue of capital to the public and had raised a lot of new money but had put very little of that money into the business in the form of new plant, it would not get an allowance for that new issue. A large number of armaments manufacturers have done that thing.

Photo of Mr John Simon Mr John Simon , Spen Valley

That may be, but for this purpose when one speaks of an increase of capital one means—to the best of my belief it always was so under Excess Profits Duty—an increase in the physical assets which enable production to be carried on and the like. The firm acquires, say, a lot of new machinery, or it builds a new factory. Then you must allow something for that additional capital. It does not refer to the operations of the City.

Photo of Mr Hugh Dalton Mr Hugh Dalton , Bishop Auckland

Or to a company in changing its nominal capital.

Photo of Mr John Simon Mr John Simon , Spen Valley

No. It refers to physical things which have the result of producing increased profits.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

Does it include cash at the bankers?

Photo of Mr John Simon Mr John Simon , Spen Valley

At first sight, I do not see why it should. The object is to determine whether the company ought to be allowed a higher standard of profit. It earns its profit by using its plant—its plant capital. If it increases its plant it may reasonably expect to get a larger amount of profit, but it will not get a larger amount of profit simply because it has an additional £100,000 in the bank.

Photo of Sir George Schuster Sir George Schuster , Walsall

My right hon. Friend is not quite clear on this point. If a firm raises £500,000, it does not necessarily put that money into new plant, but that money may diminish its indebtedness to its bankers, thereby diminishing the interest charges it has to pay. Therefore, that may have a considerable effect on its profits.

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

What about a company that has written down its capital, a company that has made big losses and has had its plant standing idle for years? Would not that come in the same category?

Photo of Mr John Simon Mr John Simon , Spen Valley

My own understanding of the matter may be imperfect, but as far as it goes I am perfectly clear. I am answering in rather general terms, and here again if there be any doubt about it it can be put right beyond peradventure, hereafter. It is perfectly clear to me that the scheme is this, that if a company throughout its history has some capital, by which I mean has some installation, for the purpose of carrying on its business, that installation will have associated with it a certain standard of profit. If, however, the company increases that installation by providing new materials, new machines, then it is only right that it should be allowed to have an increase in its standard on that account. As at present advised, I do not appreciate that there would be any alteration of the standard for the reason mentioned by my hon. Friend the Member for Blackburn (Sir W. Smiles). Suppose you had a company which wrote down its capital, the question would still be what was the cost of the physical assets which it acquired, and how far should that cost be written down because of what had happened to that plant in the meantime. What we are speaking of is the essential capital of the company, of the enterprise, which is earning profit.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

Under that ruling, will my right hon. Friend in future allow us to deduct cash assets in ascertaining our liability to Income Tax?

Photo of Mr Ralph Assheton Mr Ralph Assheton , Rushcliffe

May I suggest that beside plant, buildings, and so on, working capital is of great importance, and that some account should be taken of it.

Photo of Mr John Simon Mr John Simon , Spen Valley

On reflection, I think my hon. Friend is right about cash and working capital. What I have been anxious to be clear about was that this has nothing to do with bonus shares or the rearrangement of the internal distribution of a company's paper, and matters of that kind. It is proposed that this scheme shall apply for three years, and I do not think that at this stage the Committee will require me to go into other details. I think I have shown the Committee what is the general nature of the scheme for which we ask that they should pass the Resolution. I am asking the Committee to carry the Resolution which will authorise the charge. We have already put down Clauses, and those Clauses will later be open for consideration. I believe that if the matter is treated in a reasonable spirit we ought to get a scheme which is fairly satisfactory to everybody. Nobody wants, and I have less reason to want it than anyone, to see excessive and unreasonable profits being made out of armaments production; but I am very much concerned that I should not be clogged by unnecessary and elaborate investigations of the smaller cases, because if we do that, the result will be that we shall not catch the big fish. I am sure that this is the right plan, to take a limit of this sort and apply it, without undue exemptions, to the general scheme. These are the general purposes of the Resolution, and I hope that, after such discussion as the Committee think right they will be good enough to pass the Resolution and give me the authority to bring the Clauses forward.

4.59 p.m.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

We have had this highly complicated proposal explained to us as far as the ability of the Chancellor of the Exchequer enabled him to do so. When I say that, I am not in the least detracting from the right hon. Gentleman's well known ability. While he was speaking I could not help feeling how much happier he would have been if instead of having to explain and defend this complicated scheme he could have been let loose to detract from it and show how hopelessly impossible it was to work. I think his forensic skill would have found that a very much simpler task than the one which he set himself to accomplish. A little personal feeling enters into this matter on my part, because a few weeks ago I had to explain a scheme far less complicated than this, and the right hon. Gentleman attempted to brush it aside on the ground of its complication and the difficulty of its administration.

It must be clear to everyone that this is a political and not a revenue tax. The announcement of the intention to introduce it was not made by the Chancellor of the Exchequer himself, but by the Prime Minister, and it was made not in any way in connection with the revenue, but as part of an announcement regarding the intention to bring in the Military Training Bill. The scheme forms no part of the budgetary provision of the year. The yield from it is so problematical that the Chancellor did not even think it necessary to mention a hypothetical figure. He did not because quite clearly he could not, and he could not even pretend to do so, because the proposal is not designed to bring in any fixed amount of revenue. It is not designed to bring in revenue at all. It is designed to meet a political objection to the Military Training Bill. Its effect on the whole national finances is exceedingly doubtful. No one can say what effect the Excess Profits Duty, though it brought in a very considerable amount of revenue, had on the whole financial arrangement of the country. Further, if you consider the position of the armaments manufacturers alone, I am very uncertain what the net effect on them of this proposal is going to be.

Let me come to the details of the scheme itself. When I use the word "details," I think the Committee is in slight fog, which the Chancellor's remarks did not altogether penetrate, as to where we are in this matter. We have four statements of policy. First we have the White Paper, we have the Resolution in Ways and Means on the Order Paper, we have had the Chancellor's speech, and finally we have the draft Clauses in the document relating to the Amendments to the Finance Bill. As far as the White Paper is concerned, that is of no validity except as a convenient explanation. The Resolution which we are actually discussing has complete validity but it is couched in very general language, which leaves a great deal of option as to the precise form in which the scheme is embodied in the Finance Bill. At the same time, it will be quite wrong to assume that, because the Resolution is in fairly general terms, the Committee can compose the actual proposal in a way entirely to its own liking. As I understand the position, the Government can introduce these Clauses which they have on the Paper, or after the discussion to-day it is perfectly open to the Chancellor— I think he would have to get the King's consent technically—to introduce quite different Clauses, and after this discussion has run its course he may think fit to do so. But, if I am not mistaken, the Committee could not alter these Clauses, if the Government adhere to them, except in minor matters of explanation. To give an illustration, the figure of £200,000 appears in the Clause. It is open to the Government to withdraw the Clause and introduce a new one containing the figure £100,000 in its place. There is nothing in the Resolution which would prohibit that, but it would be quite impossible for anyone but the Government to take that course. On the other hand, smaller modifications and explanations could be made, and Amendments could, therefore, be taken of a smaller character from any part of the Committee.

I interrupted the right hon. Gentleman and asked him a question about this matter of computation of what, I think, is called a proportion. As far as the White Paper is concerned, it is clear that the normal method of computing this proportion is to take the amount of armament work and compare it with the amount of work for other than armament purposes in the year under assessment. It is stated clearly in the proposed Clause: The proportion of any such excess as is mentioned in Sub-section (1) of this Section which is to be attributed to armament contracts shall be ascertained by reference to the proportion which the turnover under armament contracts bears to the total turnover of the business in the chargeable accounting period in question. That I take to be the normal method of procedure. But if what the Chancellor said is correct, I think that will certainly not be the normal method. It will practically never apply. Suppose in the standard year the amount of armament work is roughly £200,000 and the work not for armaments amounts to £300,000. Suppose the armament work increases to £500,000, does the Chancellor seriously suggest that, while that increase in armament production has been going on, there is the smallest ground for thinking that the other work has increased in like proportion? Of course not. It is much more likely that the other work will remain roughly constant. The normal case would be one in which, while there has been a great growth of armament work, there will not be anything like the same growth in other work. If that is the case, the Inland Revenue will never be content with this scheme because, instead of getting the Excess Duty on the real increase under the scheme, they would only be getting a proportional part of the increase. If that is so, they will always put in operation the exceptional proviso and not what I should have thought, reading the Clause, was the normal working of the scheme. If this is the normal method, as I take it to be, the Inland Revenue will not get the benefit.

Photo of Mr John Simon Mr John Simon , Spen Valley

We are getting to a detail which is a very important one, and I think there is a little misunderstanding. This is my way of carrying the thing in my own mind. As far as regards the standard profit of a firm, it will not be necessary to inquire whether it was made out of armament or non-armament work. The standard, whatever it may be, will have to be compared with the total profit in the year of charge. The difference between the two things will give a certain figure. Inasmuch as this is a tax not upon all excess profits, but only upon excess profits made out of armaments, it will be necessary to divide the profit made in the year of charge between that part that comes out of armament work and that part which does not. You have not got to do that for the standard year, but you have got to do it for the year of charge. Normally, if you regarded all the profit as being made proportionately, you might assume that the distribution of this excess profit should be spread proportionately over the two kinds of work. That would be on the assumption that if there was an increase of profit made, profits had gone up all round, and that would be the case if we simply relied upon proportion. If, however, the firm says, "In our opinion that is not really approximately fair, because for some reason we have made this excess profit much more out of non-armament work," they ought to be given the opportunity of saying so. Equally the revenue ought to be allowed to say, "We are not going to treat the excess profit as though it came rateably out of the two kinds of work. We believe you made the profit mostly out of Government work." That is the scheme, and it does not seem to me that it is open to the criticism that the right hon. Gentleman has made, except that I think he was justified in saying that, if people like to quarrel about very small figures, this kind of dispute might arise.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

I am much obliged for the explanation of the Chancellor of the Exchequer, but it does not in the least change my point of view. The real fact is that the right hon. Gentleman calls the normal case what we in the peculiar circumstances of the day think is the wholly abnormal case. It is not the rate of profit which is concerned: it is the quantity of production. In order to make his argument apply the right hon. Gentleman is taking the case that a particular firm of armaments will have gone on increasing their armament production and that pari passu with that there will be an equal increase in their production of non-armament work. That, under the peculiar circumstances of to-day, will be a wholly abnormal case: it would not be the normal case. Let me take the case I was suggesting. I know it is difficult to found an argument on figures, but I think I can make it quite clear.

Suppose in the standard year the firm had £200,000 worth of armament work and £300,000 worth of non-armament work, and that in the year under assessment the £200,000 of armament work had increased to £500,000 while the non-armament work had remained constant at £300,000. The profits have gone up, but you will get only a certain amount of the excess profits taken into consideration. What does the right hon. Gentleman say? He says that only that part of the excess profits shall be counted which bears the same proportion to the whole profit as the armament work in the year under review bears to the whole work. That is a proportion of five to eight, that is to say, that only five-eighths of their excess profit will be counted, whereas in fact the whole of the excess profit is really attributable to armament work; for unless they have put up the rate of profit for their ordinary work it remains the same, and the whole of the excess profit is really due to armament work, for that is the part which has increased from £200,000 to £500,000. That will not be the abnormal but the normal case. It seems to me that if the Inland Revenue have the right to appeal they will be appealing in almost every case.

Photo of Mr John Simon Mr John Simon , Spen Valley

I think the right hon. Gentleman has misunderstood the plan. Let me assure him that it is quite indifferent to the plan how the profit is divided in the standard year as between armament work and non-armament work —it does not matter a bit. I agree with him that for the year of charge if the turnover was £500,000 and in the other case £300,000, then the proportion would be as five to eight, and I do not see why not. I know of no law which says that the rate of profit on non-armament work shall always be regarded as being exactly the same.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

I want to correct the Chancellor of the Exchequer where, I think, he is a little incorrect. He says that it will not be the business of the Revenue authorities to discuss the ratio between armament and non-armament work in a standard year, but surely that is just the consideration which arises. The proposed new Clause says: if on the application of the Commissioners, the Board of Referees, after giving the person carrying on the business— come to a certain conclusion. On what grounds will the Commissioners make their application? It will be on the ground that the proportion of armament work has increased more than the proportion of non-armament work, and, therefore, they will naturally have to consider whether the amount of non-armament work has or has not increased. It is, however, I admit, a very complicated point, and I do not want to go into more detail.

Let me turn now to the question which has been raised with regard to the work done for Civil Defence by local authorities. I hope the Chancellor of the Exchequer will reconsider this matter, because I think the point is even more important than some of my hon. Friends were able to make clear. The first important point is, that this work which is being done all over the country is work for which the Chancellor of the Exchequer himself is having to find a very large part of the cost, in some cases as much as 90 per cent., and if, therefore, through a pure technicality, the orders are actually given out by a local authority instead of by the State, it will be possible that these people will be able to exclude these contracts not only from the £200,000 but also from the profits that they make. Surely there is a very large loophole for escaping this duty. But there is a further point. In addition to being able to escape paying the duty on that account, they will be able to count it on the other side of the balance. Suppose they do no other but this work, and they do £250,000 of Government work and £250,000 of local authority work, then when their excess profits are taken into account they will only have to pay on part, because the £250,000 local authority work would not only be not counted in the Government contract, but would be counted on the other side as work which loads the proportion on which they will not have to pay.

The next point to which I want to refer is the question of the basic year. The Chancellor of the Exchequer defended his basic year on the ground of the steady growth in armament production which has arisen since then. It is true that the £450,000,000 which is being spent this year has not been spent in a previous year, but it is an exaggeration to say that in the year 1936–37 there had not already been a very considerable increase in armaments, and if you are going to take that as the standard year, you are going to include a considerable part of the armament increase. I have here a table showing the profits of some of the principal armament firms for the years 1934–35. 1936–37 and 1937–38. I notice that one firm—Vickers, Limited— after Income Tax and National Defence Contribution had been taken off made a profit of £613,000 in the year 1934–35 and £1,411,000 in the year 1936–37. I see that Hadfields' profit rose from £94,000 in 1934–35 to £269,000 in 1936–37 arid John Brown's from £50,000 up to nearly £500,000. I could give many more cases—

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

Can the right hon. Gentleman give the losses which were made between 1930 and 1934?

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

That, really, is not the question we are discussing. We are discussing whether this year is a suitable year as the basic year, and all I am arguing is that the year which the Chancellor of the Exchequer is offering as the basic year was itself one in which a very considerable amount of armament profit was being made

. I should have thought, in spite of what the Chancellor of the Exchequer has said, that £200,000 was a very high figure to fix as a minimum, and it seems to me that it is surely an unnecessarily high figure so far as sub-contractors are concerned. I understand the point of the Chancellor of the Exchequer that you may have contractors who may have a large number of sub-contractors, who are not concerned only with one contractor but who are themselves supplying several contractors. That may be. I do not know the figures, and we shall have to go into the figures and see whether the £200,000 will catch not only practically all the contractors, but even those who have sub-contractors. I confess I rather doubt it. I shall want a good deal of convincing that there will not be a large number of sub-contractors who are making £100,000 to £200,000 who will escape these proposals.

There is one point on which I should like further explanation. The Chancellor of the Exchequer did not entirely cover it. There is a provision in this new Clause that if a company in order to evade the duty were to divide itself up into several parts, if, say, it got £1,000,000 worth of orders and it cuts this into six separate orders of about £160,000 worth each, it will not be allowed to escape the duty. I understand that, but suppose the firm gives the order out as sub-contracts to a number of subcontractors, who, although they may not be in precise and meticulous identity with the original company, are nevertheless subsidiary companies and, broadly speaking, are the same company. Suppose the parent company gets a contract for £500,000.I understand that it will render itself liable to have its profits dealt with, because it has £500,000 worth of work, although it has let out £160,000 worth of orders to sub-contractors here and there. I understand that. But what I am thinking about is this. Here is a company which has a main contract of £500,000 and it lets out to subcontractors an order of £150,000 to a subsidiary company, broadly speaking to itself. The company buys from its subsidiary, and of course, the subsidiary can charge any price it likes. The company so arranges the terms between itself and its subsidiary that the subsidiary makes a handsome profit, for which it does not have to account, because its total contracts are under £200,000. The parent company makes a very meagre profit and although, because it is over the £200,000 limit, it comes within the Chancellor's mesh, it escapes very lightly, because by the arrangement that it has made with its subsidiary, it makes very little profit. I do not know whether that point has occurred to the Government, but perhaps we may be given an explanation and an indication as to whether such a case has been met.

I come now to the question of depreciation, on which I am not at all clear. We are told that special depreciation is required to meet the exceptional circumstances of armament work. That is natural and understandable, but I should like to be clear as to precisely what it is that these Clauses propose. As I understand the matter, there is to be an exceptional depreciation allowance which will not be decided until the end of an emergency. It will remain open, either to be raised or lowered, until the emer- gency is over and the whole depreciation is taken into account; but meanwhile, a provisional figure of 10 per cent per annum is to be fixed. What is not clear to me is whether that is to be in addition to or in substitution of ordinary depreciation under the Income Tax law. As I read the Clauses, I take it that it is to be in addition to the ordinary depreciation, and if that be so, there are two questions which arise.

First, as the special depreciation is only provisional, no one will know, while the tax is in force, what is the amount he will have to pay. It may be that when the time comes for a complete settlement, he will find that he has paid a great deal too much or too little. If that be so, it seems to me that this will produce a very great deal of uncertainty. Putting that difficulty aside, however, I foresee a certain amount of trouble arising in the following way. Under the old Excess Profits Duty, there was a very great deal of waste. A large number of firms said, "We are going to make a very heavy profit this year, and if we do not do something about it, we shall have to pay 60 per cent., and later 80 per cent., on it; suppose that we spend a large sum of money on renewals of plant, etc.; in that case, the Government will have to contribute 80 per cent., or we may even be able to wangle a little more.

I want to be clear as to how far a similar position might arise in this case. I will put the matter to the Minister of Supply, as I see it. Suppose there is a firm that is going to make a very considerable profit, and it seems clear that it will come into the category where a heavy Armament Profits Duty will be charged against it. Suppose that such a firm decides to spend £1,000,000 on new plant, a new factory, works, machinery and so on. What will they have allowed to them for that against the profits they are making? I understand they will get 8 per cent., which is the allowance for interest—that is to say, £80,000. They will then get the normal Income Tax allowance for depreciation; I believe that varies considerably, but I think 7 per cent. would be under the mark, probably. Then they will get 10 per cent. special depreciation. Altogether, they would get 25 per cent. of their outlay saved to them in Armament Profits Duty, if they were likely to have to pay as much as that in the event of their not making that expenditure. Roughly speaking, such a firm in four years would have paid for the whole of their extensions. I think it is possible that a good deal of waste will go on on that basis, and I should be glad to know whether the Government have thought of that difficulty, and what is their answer.

I will not devote further time to the details, but I will say a few final words on the general issue. This is a political tax, designed to meet a feeling in the country with regard to the conscription of life. The country wants to take the profit out of war, and it wants before war comes to take the profit out of the armaments industry. Of course, this duty certainly does not do that. It may make an inroad into the profit, but certainly it will not take the profit out of the armaments industry, and therefore, it will not solve the difficulty that is in the public mind. The only way to take the profit out of the armaments industry is to have the industry under national ownership. That is the point of view which my hon. Friends have always held. Hon. Members opposite say that would be impracticable and that it is much better to run the industry under private enterprise. Let us consider what is happening at the present time. That was the principle on which the Government decided to embark. Have they been able to carry out that principle? If hon. Members will examine the facts, they will find that, in spite of the Government's inclination and the overwhelming desire of hon. Members opposite that the armament industry should be in private hands, the Government are gradually being driven from that position by the logic of events. First of all, there were the shadow factories. It was with considerable surprise that I learned that the Government have found it impossible to get private industry to run those vast shadow factories and that, in fact, they are Government-owned factories having private individuals as managers.

Photo of Mr Oliver Simmonds Mr Oliver Simmonds , Birmingham Duddeston

Will the right hon. Gentleman explain himself on that point? He said that the Government have been unable to get private industry to run the shadow factories. That is exactly what the Government have done. They have asked private industry to manage those factories on behalf of the Government.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

The hon. Member has got the whole thing entirely wrong. The point is that these shadow factories are Government-owned. No one in his senses, and certainly no one on this side of the Committee, imagines that Government-owned industries will be run, managed and controlled by right hon. Gentlemen on the Government Front Bench. We know that to run a large industry needs expert knowledge. On this side of the Committee, we have always thought of Government-owned concerns being managed and controlled on behalf of the public by experts and men who have had experience. That is precisely what is being done by the Government with regard to the shadow factories.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

Is the right hon. Gentleman under the impression that no one is making a private profit out of the shadow factories? If so, he is wrong.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

I said nothing of the kind. Let us be clear on the facts. Fees are being paid to people for managing the factories, but the ownership of the factories is not private ownership but public ownership. Not only is that the case with regard to the shadow factories, but Government ownership and Government capital have also entered into the private armament factories. It may not be known to all hon. Members, but in a very large number of cases at the present time, even the armament factories are not in the direct independent control and ownership of private firms. The firms are not able, or at any rate not willing, to find the money themselves for extensions, and in an increasing number of cases and to an increasing amount the Government have had to step in and provide the additional capital which the companies could not or would not provide themselves. The private enterprise system with regard to armaments is, to a very large extent, failing to cover the whole ground. Hon. Members on this side have always maintained that the whole of this great industry should be run by the Government, and that even if the Government are not prepared to go the whole way, a very much larger amount of work ought to be done in the Government arsenals and factories. It is for the Government to find a way of taking the profit out of industry. If they will not adopt our method, they ought to find some other means. Certainly the means which they have proposed so far, including their Armament Profits Duty, do not cover the whole ground. It is not for us to make further suggestions, but my hon. Friend the Member for Ipswich (Mr. Stokes) and Lord Addison have made very wide proposals, even within the limits of private enterprise, for a much better scheme.

We shall not vote against the Government's proposal, because it does attempt, in a small measure and in quite an inadequate way, to do something of what we think ought to be done; but it lends itself to considerable waste, just as the old Excess Profits Duty during the War undoubtedly was a very wasteful method of dealing with the financial position that then existed. The Prime Minister spoke of the conscription of wealth, and pointed out that this was a step in that direction. If that be the idea, then certainly it is a very small step, for the Committee must not forget the essential fact that, if the Chancellor of the Exchequer is going to borrow £400,000,000 in this financial year, that money, whatever be the form it takes, whether bonds, Treasury bills, or long-term or short-term debt, is private wealth in the hands of the people who lend the money. Therefore, the Chancellor will be increasing the wealth in private hands to the amount of £400,000,000.

Photo of Sir George Schuster Sir George Schuster , Walsall

Will the right hon. Gentleman explain what he means by saying that in that case the Chancellor of the Exchequer would be increasing the amount of wealth in private hands? If the Chancellor of the Exchequer is able to get £400,000,000, if that money is available from private savings, he may divert it from private investments into Government securities, but he would not thereby increase the wealth of anybody.

The Deputy-Chairman:

This does not seem to me to be very relevant to the question which is before the Committee.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

I would only point out that in the circumstances which I was indicating there will come into existence £400,000,000 of additional Government stock, but, at the same time, private enterprise and private companies are not reducing their assets but increasing them; therefore all that this new duty will do will be to take a very small part of the additional wealth that is coming into existence. This proposal, in fact, only deals with the question on a minute scale as compared with the proposals which I made the other day, and which I do not intend to repeat on this occasion. As I have said, I do not propose to ask my hon. Friends to divide against the Resolution. I think it would be wrong to do so because the Resolution, as far as it goes, is an attempt to get at the excess wealth which is being made. We think, however, that it is an inadeqaute step, and it certainly does not take the profit out of war. It does not take the profit out of production for war and it does not really tap, for the purposes of the protection of the country, the vast wealth which war and aggression threaten to destroy.

5.48 p.m.

Photo of Mr Ernest Evans Mr Ernest Evans , University of Wales

I think there will be a large measure of agreement with the general principle that special profits which arise under special conditions should be subject to a special contribution to the National Exchequer, especially at a time when the Government are being called on to make increasingly large demands upon the people of the country. When we come to consider how such a contribution is to be made by those who derive special profits out of the supply of armaments, we find there are two ways in which the Government may proceed. One method — apart from that suggested by the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) of nationalising the armament industry which I leave aside for a moment—is to make sure by efficient machinery in Government Departments and by efficient costing, that the contracts made between Government Departments and contractors are fair and are based upon just and proper prices, thus ensuring that there will be no excessive profit. I gather from the speech of the Chancellor of the Exchequer that that is still to be part of the policy of the Government. The other method is to have a special duty or tax such as we are discussing.

I do not think that these two methods are, of necessity, mutually exclusive. I think they may be supplementary one to the other, and even complementary to each other, and I gather that that is the point which the Chancellor of the Exchequer wished to emphasise. But I do hope that the first method which I have mentioned will remain part of the policy of the Government. We have heard many speeches by Members of the Government stating that that is one of their aims, and many of those who have long advocated the creation of a Ministry of Supply hope that the existence of such a Ministry will help towards that end. To-day we are concerned primarily with the other method, though I am bound to say that I think it would be much wiser for Government Departments to take great care in regard to their contracts, to limit the cost to the Department and so limit the profit of the contractors in the first instance, rather than to pay out large sums and then go to the contractors afterwards and say "You must pay back part of what we have paid to you." Firms may have spent the money, or in the meantime may have devised means of avoiding having to repay it. But we are concerned here with the second method in so far as it is represented by the proposed Armament Profits Duty.

The first thing that would occur to anybody in connection with that proposed duty is the question: Who is to pay it? The first indication which we had about that was a statement by the Prime Minister who said it would be paid by those persons or firms who were substantially engaged in the supply of armaments. It will be agreed that that was rather indeterminate and indefinite. In regard to the definition now before us, the first comment I would make is that it is to be based upon a declaration made by the Minister of Supply, and not by the Chancellor of the Exchequer. I do not think it unfair to deduce from that fact the conclusion that this duty is not proposed by the Government as a revenue-producing duty. If it were, I think the House of Commons, as the guardians of national finance and expenditure, would be entitled to raise objections to such a great power being given to the Minister of Supply as that of fixing the basis from which duty is to be levied. That deduction is supported by many of the remarks of the Chancellor of the Exchequer. He referred to the great difficulties which would face the Inland Revenue authorities in deciding on the basis upon which the amount was to be fixed. The Inland Revenue authorities have often faced greater difficulties than that, and if this were meant to be a real contribution to the national Exchequer, the Chancellor of the Exchequer would not, I believe, accept the view that the definition of those who are to be liable to the duty should be entrusted to the Minister of Supply.

Apart from that consideration, the Chancellor of the Exchequer did not show that great confidence and enthusiasm for a tax which is usually shown when the Treasury intends to make an imposition upon a large section of the community for revenue purposes. The right hon. Gentleman did not show even that enthusiasm for it which he has shown for other taxes which he has since dropped. I do not think we are unfair to him in suggesting that this is not something of which he really approves as a proposition which is going to produce a large revenue for the State. Then why is it proposed? It is proposed in order to establish the respectability of the Government by enabling them to say that when they are calling for service from so many sections of the community, they also intend to prevent unfair profits being made by armament producers. It is really a political machine.

The second part of the definition also depends upon a declaration by the Minister of Supply. It is that a trader who is liable to this duty shall be one who has, in his ordinary accounting year, received a sum of not less than £200,000 in respect of armament supplies. One thing appears to be clear from that condition, that no firm which receives less than £200,000 in an accounting year, can be made liable for the tax. Is that a pledge on the part of the Government that during the three years for which the duty is to be imposed, that sum will be fixed and that no Chancellor of the Exchequer and no Minister of Supply during those three years, whatever may be the circumstances which evolve, will be entitled to direct that a lower sum be fixed as the amount upon which this duty may be levied? That figure represents the lowest sum. What about the largest? There is nothing here to say that the Minister of Supply shall fix a sum of £200,000 as the amount at which the duty shall come into operation. Might he not fix that figure at £250,000, or £300,000 or at any figure he likes without consulting the Chancellor of the Exchequer in regard to what ought to be a revenue-producing tax at the present time? It seems to me that that is a matter of some difficulty, and it is important that the Committee should know what are the intentions of the Government.

I do not object to the principle of the tax, but there are one or two questions which I wish to ask and one or two observations which I wish to offer, upon its incidence and operation. I put my first query in the form of a hypothetical case, but one which is based on practical considerations. I ask the Committee to consider the case of a firm producing an article which is required by the Government, either for the Army or for Civil Defence purposes—which we understand are included in the Government policy. Let us assume that it is a firm which is producing cloth. It might have been a firm which was producing foodstuffs, but I gather that the Chancellor of the Exchequer and the Government have not yet made up their minds whether or not such things as the Maconachie rations, the "plum and apple," and the rest of it, which were handed out to the troops and many other things out of which great profits were made are to be included within the ambit of this duty.

I ask the Committee, then, to suppose the case of a firm producing cloth required for uniforms for the Army or for persons engaged in Civil Defence. The firm's accounting year ends in February. Between February and September in a particular year they receive orders for cloth from the Government amounting to £125,000. In order to meet the Government's requirements they have to employ machinery which would, otherwise, have been used by them for private commercial purposes, in the production of this material. If between September and the following February, when the accounting year comes to an end, Government needs and orders involve a similar production, that firm will have received from the Government about £250,000, and it will, therefore, presumably, be liable to this duty. But in the meantime while this firm in response to the Government's invitation has been using part of its machinery for Government purposes, rival firms have had an opportunity of making excess profits in producing material which would have been produced by the first firm, if they had not complied with the request of the Government. I would like to ask what will happen in regard to that firm? Would there not be a temptation to that firm, either at the end of September or at a time when it looks as if the Government's orders are going to approach £200,000, to say, "No thanks, we shall not want any more of your orders; we will go back to our private concerns, where we can make quite as good profits, because the very demand of the Government for this particular article is increasing the demand for private consumption as well"?

One must realise that excess profits arc not being made merely by those who are producing armaments; they are being made also by private commercial firms, whose demands are increased by two things. One is the fact that some firms will convert themselves into armament-producing firms, and the other is that the very demand of the Government for certain materials raises the cost and increases the demand. It is true that by the dispensation of Providence the rain falls on the just and on the unjust alike, but that does not deprive the Government of the responsibility of taking care as to which is the party to which it hands out the umbrella. It seems to me that the new duty should be assessable on all businesses, not only on those confined merely to armament manufacture. If any discrimination is to be made between firms which benefit in common by the emergency, it should be fair as between the makers of armaments whose activities are urgently required by the Government and those who produce the other articles, even though they may be luxury articles. I am told that this sort of principle which I have enunciated applies largely to shipbuilding firms, but I will raise that matter on a later stage.

There is one other question that I would like to ask. There is no indication in the White Paper that in the years in which the standard profits are not attained the deficiency may be carried forward and set against the subsequent excess profits. I believe that that did apply in the case of the Excess Profits Duty, and I should like to ask, merely for information, whether it is intended to apply in regard to the present duty. I know that it is very difficult to make a duty of this kind completely watertight, but it is very important to reduce to a minimum the possibilities of evasion. Many of us remember some incidents in regard to the old Excess Profits Duty, and that there were so many loopholes then that the very feasi- bility of taxing excess profits was put into jeopardy. There is no doubt that the ingenuity of lawyers and accountants will be requisitioned for the purpose of considering the present duty, and I think we shall all agree that it would be better to prevent loopholes beforehand than to try to close them when they have been revealed.

I have always had a feeling that one measure of the effectiveness of a new tax is to be found in the protests which it inspires. It is not a true test, and it is not an infallible test, but it is not to be ignored. I am not a very great reader of the financial newspapers or of the financial columns of the ordinary newspapers, but I must say that I have been surprised to find that this particular duty has not caused the slightest ripple on the surface of the City, and that is very surprising, in view of the fact that they have been very nervous in recent weeks and have jumped about from one day to another with every rumour that has come out. The Chancellor may say that that is a tribute to the fairness of the proposed tax, but it may also be due, as one newspaper calls it, to the fact that it is a damp squib. I do not object to the principle of the tax, and I, and those associated with me, will be glad to help to make the application of the principle more thorough and more effective.

6.5 p.m.

Photo of Mr John Wardlaw-Milne Mr John Wardlaw-Milne , Kidderminster

Like the speakers who have preceded me, I do not rise to oppose this tax. I do not agree, however, with the hon. Member for the Welsh University (Mr. E. Evans) that the Government have proposed it purely as a political measure. I think, on the other hand, the Government have introduced this tax not only because of the declarations previously made to that effect, but also because there is general agreement, not only in this House, but throughout the country, that it is desirable, so far as possible, that there should not be unusual or extravagant profits made out of the provision of our defences against war. I do not think there is any doubt that that opinion is generally held. Personally, I welcome the proposals of the Government to bring about that object, but I rise to deal with some of the details set out in the White Paper, because I am not at all clear that the tax will work out exactly as the Government intend that it should.

Before I come to these difficulties, however, may I say one or two things about the conditions under which the tax is to be levied? I do not quarrel with the limit of £200,000. I think that, as a general statement of the basis on which the tax should be levied, that is probably quite sound. It means that we intend to eliminate the small people and concentrate on those who are doing business on a fairly large scale in connection with armaments, but I find it difficult to know how exactly the Government will ascertain who does and who does not come within this definition. Two hundred thousand pounds is to be the limit of receipts, so the Chancellor of the Exchequer told us this afternoon; that is to say, that only firms which receive, within their financial year, a payment of £200,000 or more from the State—I leave aside for the moment the question of payments from local authorities—for the supply of armaments in one form or another will be liable to the tax. I have no connection with or authority to speak for British industries connected with armaments—I do not know their practice —but I do know the practice of firms which have had contracts with Governments in other parts of the Empire, and I know that in some cases it is difficult to complete contracts within the period called for and that it is not unusual for contracts to be delayed, and, on the other hand, curiously enough, I have known of Government Departments which have been very anxious to pay within their financial year for supplies which they do not expect to get by 31st March. Both those circumstances might entirely invalidate this limit of £200,000, and in fact delay in delivery of much needed equipment may result.

Notice taken, that 40 Members were not present; Committee counted, and, 40 Members being present —

Photo of Mr John Wardlaw-Milne Mr John Wardlaw-Milne , Kidderminster

I was speaking about the questions which might arise if contracts were not completed within the period called for or within the financial year on which the company was to be taxed, and saying that there might be difficulties arising, either from the fact of the Government paying rather earlier than they would otherwise do, or, alternatively, that the company might be de- ferring its deliveries to bring itself below the £200,000. These are practical difficulties which the Exchequer will have to face, and I suggest, therefore, that there will have to be some basis of contract for manufactured or delivered goods to enable the Government to be sure that they are not losing time in securing supplies on the one hand or causing the company to come within the limitation on the other hand by a change in the time at which payment is made.

We have heard a good deal to-day from the Chancellor of the desirability and, indeed, the intention of including subcontractors within the scope of the tax. Here again I find it very difficult to know how we are going to do it, and I must say that the Chancellor's explanation to us this afternoon did not seem to cover all the points. I can understand quite clearly that if, leaving aside the difficulties to which I have just referred, a company comes within the £200,000 definition, you may then tax it, but how, if it passes on most of the contract to sub-contractors, are those sub-contractors to be brought within the main contractor's £200,000? Does not each subcontractor stand by himself? It is almost bound to end in spreading sub-contracts over a large area, and we may find ourselves unable to bring in sub-contractors at all. I see very considerable difficulties in that respect. I do not, as I said at the beginning, raise these points to oppose the tax, but because I think the Treasury will have to go into them very carefully. The Chancellor said something to the effect that he proposed to prevent the formation of subsidiary companies, to evade taxation, but there again I see no difficulty in a man evading the tax by giving a certain amount of work that will bring him above the £200,000 limit to newly created smaller companies. It is true that he cannot ensure that they will get the business, but if, for example, the portion of his work which he hands over to that subsidiary company is an essential portion of the contract—perhaps the only company, or one of a few, in the country that is able to make the particular article —it will be extremely difficult for the Government to say that that company is really a part of the parent company. All these are difficulties that I think will require very careful looking into.

Now I turn to one or two other points connected with the estimation of profits. The Chancellor states in his White Paper that the Armament Profits Duty will be taken normally on a proportion of the turnover. The profits of any company, of course, depend upon turnover, but the profits tremendously vary, not only from the fact of having armament work, but also from the fact of having a larger amount of turnover for any purpose. Everybody knows that the standing charges on a factory turning over £250,000 worth of work in a year may be, let us say, 200 per cent. but if they turn over £500,000 worth of work, the standing charges may be: only 150 per cent., and therefore, the total turnover has a definite bearing on the profits actually made. To start with the assumption, as it appears to me in this White Paper, that the same profit is made on civil as on armament work is to my mind erroneous. I see also a difficulty in ascertaining what are the extra profits caused by armament orders in a company doing a large amount of general work. It is perfectly clear from the wording of the White Paper that the Government's intentions are to be fair and reasonable, almost every word shows that, but that does not convince me that it will always; work out fairly, and I shall be very much interested to see the Clauses which the Chancellor finally brings forward.

Again, there is the difficulty of written-down stocks. Almost every large company has written-down stocks. Profits as shown in annual accounts are largely dependent upon the figure at which the stocks are put in. All these are matters which affect the figure of profit of almost any company in the country. And just as there are written-down stocks so there can be written-up stocks, and the question whether the profits shown are accurate will be one which the Board of Referees will have very great difficulty in deciding. At first sight it may seem very nice and simple to send all these problems to the Board of Referees, but I am sorry for the Board of Referees if they have no more guidance than appears in the White Paper. It is not a fair task to put upon them unless they are given careful statements on a number of points which I have no doubt any actuary could define more competently than I can.

There is one other matter, which I admit is a detailed point but which I should like the Financial Secretary to consider when he comes to the drafting. The intention is perfectly clear, as I understand it, that if a company doubles its profits, let us say, by reason of armament work it will pay 60 per cent. of the excess to the Government, but that is not the wording of the White Paper, at any rate as I read it. The White Paper distinctly says: The excess armament profit of any charge-able accounting year represents the proportion attributable to armament supplies. So far that is all right, but let us read later on: The proportion attributable to armament supplies will normally be the proportion which the turnover on armaments bears to the total turnover. Let me give a simple case. The turnover of a company increases from £1,000,000 to £2,000,000 and the profit increases from £100,000 to £200,000. The clear intention is that the extra £100,000 should pay 60 per cent. tax, but according to the wording of the White Paper that will not be what will happen, because the proportion which the armament turnover bears to the total turnover is a half, and therefore it is clear that what the White Paper says is that 60 per cent. of the half, that is 60 per cent. of £50,000, will be payable to the Exchequer. I do not think that is the intention of the Government, but it is what the White Paper says. If their intention is to take 60 per cent. of £100,000 in the case I have quoted and not 60 per cent. of £50,000 I think the Clauses which will eventually come before us will need to be worded differently.

I do not want to worry the Committee with details, because I have risen only to point out what appears to be some of the difficulties which will have to be met, but there are other points. For example, the reference to depreciation of assets is much too vague in the White Paper. It is only right that a company which creates new assets primarily for the purpose of armaments but which may be of general value for civil work in the days when we do not require armaments ought to have some definite allowance for plant which in other circumstances it would not have put in. I think myself that it would only be fair that such plant should be completely written off. I am not going into further details, because I do not oppose the tax, but I hope the Treasury will consider all the criticisms which have been made regarding the working of these proposals, so that we shall not have every- thing left to a Board of Referees without any guidance as to how the House of Commons means this tax to be applied.

6.20 p.m.

Photo of Colonel Josiah Wedgwood Colonel Josiah Wedgwood , Newcastle-under-Lyme

I understand that we are not going to have a Division tonight, and I want to put it on record that I am against this tax altogether— fundamentally. It is a piece of eye-wash, intended to please the Labour party, while at the same time it is thoroughly understood by those who are supposed to be going to pay the tax that there is nothing in it. I am one of those who remember the Excess Profits Duty during the War. The Treasury seem to have forgotten all about it. The Chancellor of the Exchequer might never have heard of it, judging by his speech to-day. We stopped the Excess Profits Duty. Why? Because it was the most fatal tax that could be imagined for the industries of this country. It was a tax of 75 per cent. — and I think it went up to 80 per cent.— on any profits over the profits of the standard year. The result was exactly what any man of intelligence would have expected. Overhead charges were increased; works were painted, quite unnecessarily, every year; directors used motor cars to assist them in getting to the office and charged them to the company. The fortune of Sir Ernest Benn was made then, because everybody could advertise, and the advertisements cost the company which advertised only one-quarter of the amount that fructified in Sir Ernest Benn's pockets. The duty left the productive industries of this country with a stiff-collar brigade which nearly ruined them after the War. It is easy at any time for any business to increase its overhead charges, but they are one of the most difficult things to cut down later, when the business is once more in competition with the world. That was perfectly well understood 15 years ago.

This tax would not have stood a chance of being proposed by the Treasury or accepted by the House 15 years ago, when they had before them the experience of the Excess Profits Duty. They were determined when they abolished it never to have anything of the sort again. The present tax is obviously contrary to all the canons of good taxation. We shall put in the hands of the Minister of Supply, whom I would not trust a yard, the decision as to which particular gentle- man is going to be taxed. It is no longer this House which is controlling taxation. The bureaucracy will pick out particular manufacturers. At the moment they do not know whether they include coal-owners or the makers of Maconochie rations; they will pick out whom they like and put upon them a tax— which will not be paid, but which will have the effect of preventing those firms ever getting any increased profits over those of the standard year. I wish I owned a firm which was liable to this tax, or had some control in the management of such a firm. A firm has got to keep profits down to the level of 1937. It can do that in two ways. It can do it by increasing the salaries of the directors.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

No, there is a provision about that.

Photo of Colonel Josiah Wedgwood Colonel Josiah Wedgwood , Newcastle-under-Lyme

Well, increase the salaries of the directors' relations. If the firm is determined to spend money it will see that it avoids this tax, and the shareholders in the company can whistle for their dividends. This system is contrary to the ideas of good taxation because it selects certain specified persons for taxation, those, nominally, who are occupied with the manufacture of armaments. Almost everybody is connected with the manufacture of armaments to-day. Once upon a time I was connected with the manufacture of battleships. Everybody knows that, roughly, three-quarters of the material for some forms of Government contract is sub-contracted for by other people. I suppose that John Brown amp; Company do produce pretty nearly everything they want—steel, armour-plating, guns, machinery for driving the ships and the like; but in most cases there is a great deal of sub-contracting. There may be a dozen sub-contractors, coming down to the people who supply the paint, and others who supply the steel, and others who supply the screws or the rivets. Every one of those people is taking some part in the manufacture of armaments. Think of the accounting difficulties, in the case of all these sub-contractors, of working out how much of a sub-contract was for building a Government ship and how much for building a private ship, how much was for making a motor for pumping and how much for making a motor for a battleship.

That brings me to the next point. A tax should be one which produces for the State the whole amount that it takes from the public. Here the accounting alone will cost all the money which the tax produces—the working out in the case of each sub-contract whether the sub-contractor should pay the 60 per cent. or the man who delivers the finished article to the Government. It puts upon the Government an enormous expense in collecting the tax and puts upon firms, whether they pay the tax or not, a heavy expense in breaking up every invoice to sec how much is chargeable to duty because it is for armaments, and how much is in respect of other supplies. One of the largest industries which has developed recently is that of making ferro-concrete. A ferro-concrete manufacturer will receive a large order from the Air Ministry for ferro-concrete for an aerodrome, and he will be liable to the tax in respect of that. He will receive another large order from the local authority for ferro-concrete to make a road leading to that aerodrome. One is armament work and the other is not. Why make the distinction? And think of the position the manufacturer is put in. He has; to show everything he does that is not armament work, and has to prove it in the case of all his subcontracts.

Take the case of the coal mines or the big electricity undertakings. In some great works the whole of the power is supplied by a municipality or by a private contractor. Power is one of the biggest elements in the cost of the manufacture of armaments. Are such undertakings to be included or not? If they arc to be included the price of the power will be increased to the manufacturer and the cost of the contract to the Government will go up. Power comes from coal and from electricity and you cannot say that one is contributing to the manufacture of munitions and that the other is not. Are the profits to be made in the future by the great steel and iron combines and coal companies to be excluded entirely? On what ground do you exclude them and yet include the people who develop the products of the steel works and the coal mines?

The three great tests of taxation are these: First, whether the tax is fair. The proposed tax is demonstrably unfair because it deals with some people who are making profits out of our necessities and not with others. Secondly, the test is, will it produce for the Treasury the whole amount of the expense put upon the taxpayer? In this case, obviously it will not. The third test is, what is the ultimate incidence of any such tax? The ultimate incidence of the tax in question must be, like the incidence of every tax upon production, to restrict production and thereby to increase prices. One of my hon. Friends pointed out clearly enough how, when you take the manufacturers of cloth away from supplying the civil demand for clothing and put them on to supplying the needs of the Government, the other manufacturers of cloth, no longer feeling the competition of that firm, are immediately able to push up prices. They get their increased profits and they will not be taxed. The main thing that I want to point out is not only that they will get an unjust exemption but that the whole community will have to pay more dearly for this tax without the Government getting the money.

There are two ways in which a company can keep its profits down to the standard level of £200,000 a year and avoid paying any money in tax. The first way is for it to increase its overhead charges. If we look back only to the War, and to the year after the War, we see what the effect of that process was upon prices. The other way is for the company to stabilise and crystallise its production and not to take more Government orders than it did in 1937. That is not a very good thing to do just at the moment when we want to develop production. Consider the case of the firm that is making just under £200,000. That firm will see that its Government orders do not exceed £200,000 and if it gets the offer of an order over that amount it will take care that the price they get for it will cover the tax which the firm will be obliged to pay. Otherwise the firm will not take the order. It has to recoup itself for the tax, or not accept the order. Obviously you will not get these people overstepping the £200,000 level.

We have always relied upon new factories and new people coming forward, especially when we have new forms of production bringing forward new crops of machines and inventions to be manufactured. These people will have no standard profits upon which to base their profits because, in 1937, their profits were nil. For them it is absolutely essential that they should never get Government orders above £200,000 a year, for if they did they would have to pay 50 per cent. on the whole of their profit. That would have the disastrous result of discouraging anybody from developing a new industry. From the point of view of justice and of finance, and the incidence and the effect of this tax upon industry as a whole, there is absolutely nothing to be said for for it. It is a piece of window dressing intended to placate those of us on this side of the House who have, quite rightly, declaimed against the enormous profits that have been made, particularly in the aeroplane business.

The Committee, and the right hon. and gallant Gentleman on the Front Bench opposite, know that there is only one way to prevent these profits. No amount of inspection of accounts will do any good. The only way is to compete with them. If you only had some Government factories you would have a check upon the price which the private contractor is tempted to charge. In shipbuilding, you at least have the Government Dockyards. There you have perhaps an extravagant form of production, but those dockyards have been some check on contract prices. The bulk of our production in guns has always been in Government factories. In the Air Force we have not one single Government factory and we have no check upon prices. The other day I saw the astounding figures of the Budget of the Union of Soviet Socialist Republics. I am quoting from memory, but there was a sum of something like £1,600,000,000 mostly for their gigantic armament production. Out of that sum the revenues or the profits from their armament factories were estimated at £560,000,000 a year. Of course it is a mere matter of book-keeping.

Photo of Mr John Wardlaw-Milne Mr John Wardlaw-Milne , Kidderminster

It cannot be a profit because they sell to themselves.

Photo of Colonel Josiah Wedgwood Colonel Josiah Wedgwood , Newcastle-under-Lyme

I believe they put the things in at the sort of price they would have to pay if they bought them from outside. The point is that there you have a vast income from the manufacture of armaments, represented by what they would have to pay if they got the things elsewhere. It is at least a check upon their own efficiency. If we had, as I always thought it possible we should have, the Government starting some few aeroplane factories themselves, we should not only increase the production of aeroplanes, but we should also have a check upon the profits of private aeroplane companies and be able to bring them down in a way more satisfactory to the industries of this country and to everyone except Government officials and auditors.

6.38 p.m.

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

When talking on the subject of armament profits in this Committee I had better begin by making it clear that I am not interested in the business in any way. I have no shares in shipbuilding or aeroplane production or in any of the companies that supply arms to the Government. One would imagine, when listening to some of the Debates upon armaments, that the men who are making them are some sort of criminal and that to provide the materials with which to defend the country is some sort of criminal act.

I live in a town in the north of Ireland where we have a melancholy monument to what happened during the last War. The late Lord Pirie increased the production of Harland and Wolff by about 100 per cent. during the War. The works were in operation night and day and never stopped. After the end of the War, in 1920, they were left with a huge amountof gantries for shipbuilding, and lathes, tools and machinery for producing engines of warfare, and those have been lying idle for practically 16 years. Between most of the slips there the grass was growing nearly as high as myself. The same thing happened, I believe, in Cammell, Lairds and on some of the shipbuilding yards of the Clyde. When the Chancellor of the Exchequer is considering what profits are being made by some of those companies now, I think he should take into consideration also some of the losses that were suffered by those companies.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

Is the hon. Member suggesting that during the War those firms did not make profits which more than paid for the capital investment which they made? If some of them watered their capital and then could not pay the interest on it, that is a different matter.

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

I do not deny that those companies made a profit, but I say that they were left with all that plant on their hands and that it was completely useless. When we are talking about bonus shares issued by companies making large profits we must consider at the same time those companies that have written down their capital. What is sauce for the goose is sauce for the gander.

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

I should say that the people who put down large plants for the purpose of producing armaments in the last War were the geese. [Hon. Members: "No!"] Yes. I am thinking of a friend of mine who has an engineering works. It is not very big. He has only about 1,000 people employed. About five years ago when I was buying some machinery I said to him: "I see that the Government are starting to go in for building up the defences of the country again. I suppose you will get some contracts." He said: "I don't want them at all. It's such a nuisance having Government contracts, and having inspectors running about. I would very much sooner stick to my own business." About last Whitsun I saw him again. I was again trying to place an order for machinery. I said: "I suppose you have got some contracts, now that the Government want these things so badly." He said: "No, I shall be very glad to make armaments for the Government if they can't get them anywhere else, or if they want my services, but I don't want any Government work. I prefer to stick to engineering for civilian work." I agree with what was said by an hon. Friend that many firms do not go in for Government contracts because they are getting the cream of all the other business. Their profits are increasing just as much, I dare say, as are those of firms who are actually getting contracts from the Government.

In this connection I asked the Chancellor of the Exchequer how many aeroplane companies in Great Britain had failed between 1921 and 1930. He could not give me an official figure—or, at any rate, he did not do so—but I understand that quite a number of such firms failed and the people concerned lost their money. I am sure no one would deny that the aeroplane companies are defending this country just as much as are the men in the Army, the Navy and the Air Force and the engineers who work in these companies.

Photo of Mr John Wilmot Mr John Wilmot , Lambeth Kennington

The unfortunate shareholders who lose their money in the experimental stages of aeronautics do not participate in the profits that are made by other companies later on.

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

I quite agree that you have to think of these things. It is not everyone who is as clever as the hon. Gentleman opposite, and is able always to buy at the bottom and sell at the top.

Of course, this duty is not going to be a simple one. If we had every company in the armament industry that had a capital of £1,000,000 producing armaments and nothing but armaments, and making an exact profit of, say, £200,000 a year, I think it is a fair way of estimating what they would pay to say that at the start they would be allowed 10 per cent. of their capital, or £100,000, for depreciation of their machinery, that of the remaining £100,000, 5 per cent. would go in National Defence Contribution, and 25 per cent. or just over 25 per cent. in Income Tax. Then there would be the 6 per cent. dividend that is allowed them, and, of the balance, only 60 per cent. would be taxed. The right hon. Gentleman opposite remarked that there have not been any great scares in the financial papers about this tax; they called it a damp squib. I think one of the reasons for that is that the Stock Exchange always discount everything six months ahead. Sometimes, of course, they discount it six years ahead.

Photo of Mr Samuel Silverman Mr Samuel Silverman , Nelson and Colne

Would the hon. Gentleman agree that their response was much more prompt when the present Prime Minister, who was then Chancellor of the Exchequer, introduced the National Defence Contribution?

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

I should say that that was perhaps an evidence of lack of brains on the Stock Exchange. I admit that, when the National Defence Contribution was brought in first, a howl went up, and it had to be altered to a flat rate of 5 per cent. Surely that can be justified by saying that, when a tax is unfair and unjust, a howl goes up.

Photo of Mr Samuel Silverman Mr Samuel Silverman , Nelson and Colne

Why is there no howl to-day?

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

Because the tax is a fair and reasonable tax. I understand the whole test of democracy to be that, when any great injustice is done in this country, such a howl always goes up from the Press and the people that eventually the injustice is cured. That is the whole test and justification for democracy. The right hon. Gentleman spoke about Government factories, but I think he would admit that, if the Government get any factories into their hands, they are generally not as well run as those of private firms. [Hon. Members: "Oh !"] I would point to our own refreshment department here, which does not seem to produce as good food at as reasonable prices as can be got at an A.B.C. restaurant. When anybody hears that someone has a contract which is going to last four years, he says immediately, "Four years! It must be a Government job," because he knows that private contractors try to get through their contracts as quickly as possible. As soon as people get into Government employment, they become very generous with the taxpayers' money, and not so anxious to get efficient work as they are when they are working for themselves. That is human nature all over the world.

Photo of Lieut-Colonel Sir Walter Smiles Lieut-Colonel Sir Walter Smiles , Blackburn

I noticed that the right hon. Gentleman opposite said that it was difficult now to get the people of the country to find money to build new armament factories. I think that that is because people feel that the armaments industry is being heavily taxed, and that they would sooner invest their savings by lending £400,000,000 to the Government on Government security than invest them in any armament industry at the present time. Reference has been made to the fact that the Government are putting up 90 per cent. of the money for contractors who are supplying uniforms and fire engines to local authorities, and those contractors get off scot free, while the same contractors supplying the same things to the Government are taxed. That is most inequitable, and I agree that firms who are making profits out of the local authorities should be taxed in the same ratio as those who are selling their goods to the Government. As to the basic year, the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) asked whether the years named by the Chancellor of the Exchequer were fair ones. I should say that they were named in a reasonable and fair way. During the War, the Excess Profits Duty was levied on the basis of the three years previous to 1915, an average being taken of the profits during the years 1912, 1913 and 1914, and I think the basis of this Armament Profits Duty is a reasonable one also. I think the tax is a just one and is fairly put on, but that the net might be extended to catch some of the contractors I have mentioned. I think the country as a whole will accept it as reasonable, and I am glad to hear that it will not be divided upon to-night.

6.54 p.m.

Photo of Mr Austin Hopkinson Mr Austin Hopkinson , Mossley

I have been listening to the hon. Member for Blackburn (Sir W. Smiles) with some interest. Having heard him say, while I was in the Chamber, that the general attitude of armament contractors towards Government contracts was that they did not want them at any price, and only took them on as a special favour, I ventured to ask my neighbour, as I was not here at the beginning of the hon. Member's speech, whether he had already said that "profit is no crime." I found that I was right in my anticipation, and that he had said that. That is the first bit of cant to which the Committee has to devote itself. If one considers it, the making of profits out of the necessities of one's native land is one of the meanest and foulest crimes of which any man could be guilty. I resent the aspersion upon those of us who are engaged in industry that is conveyed by the general idea which seems to prevail, both in the Government and among hon. Members like the hon. Member who has just sat down, that we who direct industry have to be bribed to do our duty to our country. There are scores of men in this country in leading positions in industry who would be only too glad to give every effort and the whole of their brains and experience and organising ability to help the country, without the faintest expectation of any reward whatsoever.

That, of course, is the mistake that the Government have made. The Government, unhappily, and particularly this Conservative and so-called National Government, are apt to come into intimate contact with captains of industry of a type which, thank God, is not representative of the leading industrialists of this country. I came up against them when I held a minor position with the Ministry for the Co-ordination of Defence —the people who are always on the doorstep begging for contracts, and trying to use political influence to "wangle" money out of the necessities of their country. I would say to the Government, apropos of this tax, that they are making a profound mistake in supposing that the profit motive is necessary to get the best brains in this country's industry at the present time.

I wish, if I can, to confine myself rather more strictly than previous speakers have done to the Motion which we are discussing. This proposed tax, as has already been pointed out by other speakers, and I wish to insist upon it further, is not a tax in the ordinary sense of the word. Its main object is certainly not to raise revenue. I do not criticise it on that account. Its main object, as has been said already, is political, and I think, myself, that it is perfectly justifiable. [Hon. Members: "Oh!"] If I may explain myself, it is political for the reason that the Government, having decided that a certain measure of compulsory national service was desirable—it is not for me to criticise or discuss that now—also realised that, in a country constituted as we are, there would be considerable difficulty in getting that view accepted by the general body of the people unless some sort of attempt was made to prevent other persons than those conscripted for national service from making gigantic fortunes out of the necessity of the country, as happened once before within living recollection. Therefore, as the Chancellor of the Exchequer pointed out to-day, the Prime Minister, on 26th April, remarked that he felt that a definite limitation of profits was necessary, and the proposal which is before us to-night is an attempt to fulfil that pledge.

My only objection to it is that it does not fulfil the pledge in any sense of the word whatever. It does not limit by one single halfpenny any profits on armaments, and never can limit any profits on armaments. All that it does is to take a certain proportion of those profits which have been made; it does not limit them; and experience in the last War showed us conclusively that, if the type of Government contractor which the hon. Member for Blackburn appears to think typical of all Government contractors is confronted with a tax of that sort, all that he does is to put up the profits and make his income the same as it would have been it there had been no tax. That is a perfectly simple operation—the sort of thing that we carry on regularly in industry, even with Income Tax and Super tax. Therefore, I criticise this proposal simply because it does not fulfil the Prime Minister's pledge; it does not limit profits. In actual fact it may well have the effect of costing the taxpayers very much more than if it had not been in existence, simply through the attempts of those who are drawing exorbitant incomes out of the necessities of the country to preserve those incomes intact even after the tax has been paid.

I have given in general terms the reasons for the introduction of the tax, but I think it might be useful to go into those reasons in rather more detail. Profiteering—a horrible word, but I cannot for the moment think of any reasonable equivalent—has the effect, in a country like ours, of splitting the country. It prevents thousands and millions of good English men and women from putting their backs into helping the country in its hour of necessity. It is totally unreasonable that one should serve one's country any the less because someone is making a great fortune out of the situation, but it is a feeling that is bound to exist and does exist. To me—I suppose because I am getting on in years—it is a matter of total indifference that I should be serving on Is. I0d. a day when someone I know is getting away with half a million a year. It does not worry me in the least. But I realise that the vast majority of my fellow countrymen and countrywomen are extremely worried and annoyed when they see that sort of thing going on.

Let the Committee realise the two sorts of profiteering which are rife at the present day. There is one which has very little material effect upon the finances of the country, but has a profoundly bad moral effect upon the people. There is another which has an immense material effect upon the finances of the country, but very little effect on the moral feeling of the country. The first form is that practised by the big profiteers. Some of the worst of them are engaged in the aircraft industry. But the fact that Mr. So-and-so and Lord So-and-so are putting into their pockets enormous incomes this year, and will continue to do so for several years, does not really affect the national finances very much. After all, 10 big profiteers at a quarter of a million apiece per annum only make a profit of £2,500,000 per annum, but the effect on the feeling of the country is absolutely disastrous.

On the other hand, you have at present, particularly in the aircraft factories, tens of thousands of men drawing inflated wages, out of all proportion to what they could draw if they were employed anywhere else. These small profiteers produce very little moral effect on the country. The feeling of the people is that they do not get very much in the ordinary way, and why should not they get this? As a result no indignation is aroused. But when you come to total up the material effect of these tens of thousands of small profiteers upon the national finances, you then perceive that, from the purely material point of view, the small profiteer is a very much more dangerous fellow than the war millionaire, who eventually becomes an ornament of the Peerage.

Therefore, it seems to me that the Government, in dealing with these profits, are not really getting down to the main point at issue. The right hon. and gallant Gentleman the Member for New-castle-under-Lyme (Colonel Wedgwood) said that this was eye-wash. I am not sure whether that expression is Parliamentary, but it is certainly very appropriate to this proposal. Since I had the opportunity of reading the new Clauses my only comment is this: from my recollection of the Excess Profits Duty nobody except honest men ever paid it, and so far as this tax is concerned not even the honest ones will pay it. The term "eye-wash" is quite justifiable. I do hope that even at this late hour the Government will see their way to try and do something which at any rate will have some effect. Unfortunately, the Government is, to use a vulgar expression, on clover in this matter. You have the whole of the Labour party devoted to the defence and protection of the small profiteer, and very nearly the whole of the Conservative party devoted to the defence and protection of the large profiteer, and between the two the Government can go on gaily producing eye-wash of this sort with perfect safety.

A suggestion has been made by the right hon. and gallant Gentleman the Member for Newcastle-under-Lyme and other Members that the only way to get rid of this excess profit is by having Government factories, and to some extent I agree, because I have been urging on the Air Ministry for three and a-half years that it is absolutely essential that they should have "check" factories if ever they are going to control prices. The hon. Gentleman who spoke last said that Government factories must be inefficient. I do not know whether he has any experience of Government factories. Undoubtedly some of them are inefficient as compared with private enterprise, but I have recently had an opportunity of seeing one of the new Government factories, and, after 35 years' experience of the engineering trade, I can only say it struck me as being extremely efficient and well-managed. It is quite possible that private contractors might have reduced the price of the product which that factory was turning out, though not by a great deal, and the reason why is that a Government factory has to maintain a certain standard which the private contractor is not morally bound to maintain. But the hon. Member for Blackburn seems to me to be living in the world of 30 or 40 years ago. He talks about things which passed years and years ago, and are unknown at the present time. In fact, listening to him, I felt that the hon. Gentleman who is the sole representative of the Communist party in this House might well be justified in some of the things that he says about us capitalists.

7.7 p.m.

Photo of Mr Frederick Bellenger Mr Frederick Bellenger , Bassetlaw

No doubt all our hearts have been wrung by the illustrations that the hon. Gentleman the Member for Blackburn (Sir W. Smiles) gave—I think he was referring to the Harland and Wolff factory in Belfast, but it is as certain as night follows day that if only armament manufacturers keep their machinery, someone will turn up some day to utilise that machinery, even if only by selling it for scrap-iron at high prices. It is a strange thing that wars come in regular cycles. I suppose it is because they do come like that that we are faced with the problems which are before us this afternoon. I agree with the hon. Member for Mossley (Mr. Hopkinson) that we shall probably not find a remedy by way of taxation. But, if I may use a simile introduced by the Chancellor of the Exchequer himself, he has been batting on a somewhat sticky wicket all day, because hardly anybody has spoken in favour of this proposal, not even the hon. Member for Blackburn. The illustration which the Chancellor gave was not very ap. He told the Committee he was in the position of a long-stop trying to save the balls; which got past the wicket-keeper, by which he was referring to the Government's system of costing control. I think the right hon. Gentleman would have done better if he had stuck to the game at which he is, I understand very efficient, because, to revert to the right hon. Gentleman's illustration, too many runs are stolen before the ball gets to the long-stop, and that is the gravamen of our charge against the Government to-day. We say that the Chancellor as long-stop is permitting many balls to go past the wicket-keeper which ought to stop in the wicket-keeper's hands.

It is of interest to note that it has taken all this time to establish the case which the Opposition have put before the Government for many months past, namely, that excessive profits are being made in armaments. We told the Government, and quoted chapter and verse for our contention, but the Chancellor himself and other members of the Government affected to know nothing about these excess profits. The White Paper, however, is the official justification for the Opposition's assertions, and the Chancellor in introducing his Resolution to-day, is admitting the Opposition case which he has denied for months past. My right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) referred to the question of taking the profit out of war. Although this ostensibly is a revenue tax, its basic object is to implement the guarantee given by the Prime Minister, in introducing his Measure to conscript human material, that he would at the same time limit the possibilities of making excessive profit out of armaments. The question arises, however, how far it is possible to recover these profits which the Government themselves to-day admit are being made. It is not suggested that the whole of the excessive profits from armaments should be taken for Government purposes, although I would go so far as to say that the uncontrolled manufacture of armaments by private industry is immoral. If we must have these weapons of war, we should do it by national production under national control. The sooner you get armaments production under national control everywhere, the easier it will be to get rid of war altogether. It is not necessary to point out how previous attempts at disarmament have been sabotaged by the private manufacturers of armaments in different countries.

As to the question whether this tax will take a large part of the excess profits, it is significant that neither of the Members for the City of London is present, although I believe one of them was present for a little while earlier this afternoon. The Government benches are sparsely occupied, and I was about to say that at the moment there was no Minister present on the Front Bench, but I observe that one has just arrived. This shows the amount of interest that Government supporters take in this tax. Compare the whole-hearted interest that they displayed last week when the repeal of the tax on films or even the Patent Medicine Duty was in question. The House was then full, and it forced the Chancellor of the Exchequer to change his mind. To-day very few hon. Members who support the Government are here to question this tax, and it is left to the Opposition to do it. The reason is that the supporters of the Government realise how ineffective this tax will be, and therefore they are not concerned either way, whether there is a Division or not, although, if there were, I have no doubt they would support the Government. The Chancellor, in introducing this Resolution, did not even deign to tell the Committee how much he expected it to produce, and I would ask his deputy, who is now present, how much the Government expect to- lose on Income Tax and National Defence Contribution because, as the result of the provision in the White Paper, those taxes are excluded in the computation of profits for this tax on armaments. Perhaps the right hon. Gentleman the Financial Secretary can tell us whether on balance the Government expect to get anything at all.

What alternative could the Chancellor have adopted? I do not believe that the Government can expect to get any large sums out of this new tax. If you are going to allow the manufacture of armaments to remain in private hands, how are you going to tackle the question? I have a suggestion which, it seems to me, might go some way towards limiting the Profits—if we are going to allow the manufacture of arms to remain under private enterprise. Excess profits accrue largely to the ordinary shareholders. The industry is so constructed that the debenture stockholders and the preference shareholders are paid fixed rates of interest. The fixed assets of companies, about which the Chancellor spoke to-day, are largely in the possession of the debenture holders and the preference shareholders, who have first call on the assets in a winding-up. The ordinary shareholder is the one who can skim the cream off the excess profits made in arms manufacture. It would be equitable to allow only a fixed rate of interest to ordinary shareholders, as is the case with debenture stockholders and preference shareholders.

It may be said, "The ordinary shareholder is carrying all the risk." But is that true in armament production? Something like £16,000,000 has been advanced by the Government to provide for plant for the manufacture of armaments, and my right hon. Friend the Member for East Edinburgh has said that many manufacturers either cannot or will not find the money necessary for putting down more plant or extending their factories. So it is not as inequitable as it sounds to limit ordinary shareholders to a fixed rate of interest. The Government themselves have gone some distance towards recognising the justice of this claim, because in their White Paper they say: In the case of a company the highest standard shall not exceed a figure fixed by reference to the earnings required to cover debenture and other fixed charges and to pay any fixed dividends on preference capital carrying the fixed rate, and 6 per cent. on all other share capital.…

Mr. Gurney Braithwaite:

Would the hon. Member also have a system under which ordinary dividends are guaranteed?

Photo of Mr Frederick Bellenger Mr Frederick Bellenger , Bassetlaw

In so far as you can guarantee any return on capital, in so far as the debenture and preference shareholders are guaranteed their return, I would say "Yes." In any event, the Government are doing that in the case of those factories which are being farmed out to private managers. They are guaranteeing them fixed fees—and very big fixed fees. My own preference is for national control, through national ownership of armaments production. That might result in those armaments costing more. I recognise that; but I would rather see that than that this immoral interest should create the danger of war.

Photo of Mr Brendan Bracken Mr Brendan Bracken , Paddington North

Would the hon. Member put that argument to Herr Hitler, because he also takes the view that there should be national control of armaments?

Photo of Mr Frederick Bellenger Mr Frederick Bellenger , Bassetlaw

I am not one of those who dismiss Herr Hitler's views in toto. There are many points in connection with the manufacture of armaments in Germany which might well be introduced here. I am not going to fall into the trap, so cleverly laid by the hon. Member opposite, and discuss Herr Hitler and his whole policy. But many of the measures which the German Government has taken to control armament production, and the profits to be made out of it, might well be introduced into this country. My main concern is to limit the profits which are to be made out of rearmament, and, if possible, to eliminate armament production altogether. If anything that Hitler is doing will have that effect, it will have my support; but we know very well that it will not have that result.

This scheme of the Government is irritating to business men, who have to carry on their businesses under the present system. These men are producing armaments. We may say it is wrong for them to do so, but the fact remains that the Government want those armaments. This scheme will not satisfy the nation, as the Chancellor said it would; it will only create contemptuous derision. We agree with the hon. Member for Mosley and others that this Measure was introduced only as an attempt to satisfy the Opposition and damp down criticism. It will not have that effect, because we shall continue to criticise excessive armament profits until the Government introduce a Measure which will satisfy us. I would have been prepared to vote against this Motion if the question had been taken to a Division; but we must be satisfied with a fraction of a loaf if we cannot get the whole. We are in the position of beggars, having to be content with the crumbs that fall from the rich man's table; but I would have preferred a much bigger loaf.

7.24 p.m.

Photo of Mr Harold Macmillan Mr Harold Macmillan , Stockton-on-Tees

This resolution is, of course, a matter of first-class importance, yet it appears to have created a somewhat tepid interest on the part of the Government themselves. The Chancellor left the House soon after introducing it and has not reappeared since.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

He has been summoned to a meeting of a very important committee.

Photo of Mr Harold Macmillan Mr Harold Macmillan , Stockton-on-Tees

If it had been a meeting of the Cabinet I might have understood it. But no other Cabinet Minister has appeared. The heads of the Service Departments are not here. The Minister of Supply is not here.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

He is at the same committee.

Photo of Mr Harold Macmillan Mr Harold Macmillan , Stockton-on-Tees

Well, let us hope that that committee will decide on some typically virile policy. This Resolution has been generally recognised by the Committee as being not sufficient to meet the question with which it sets out to deal. Nevertheless, the principle of the armament profits tax is recognised as being reasonable on moral grounds: it is sound in principle, but very difficult of application. It seems to me that it neglects the real problem of the economic stresses which are set up by this vast rearmament programme. It is difficult to apply in practice, because, as the Committee has recognised, the distinction between armament profits and other forms of profits is unsound. The true distinction is between normal and excess profits. How is this distinction to be drawn, not by the Chancellor of the Exchequer, but by another Minister? Some of the fortunes of the past War, I believe, were made not so much from shells, as from such things as soap and jam. Secondly, this tax deals only with the larger turnovers. It used to be a maxim of English law, I believe: de minimis non curat lex. This now reads, "de less than two hundred thousand pounds non curat the Chancellor of the Exchequer."

But when we come. to the wider aspect, the problem other than the moral one, we find that the real harm done by excess profits is not put right by their recovery by the Exchequer. Even if you recovered 100 per cent. of the excess profits, all the economic effects equally follow the building up of this inflated standard of cost and profit. I think that, to the extent that this tax does produce a return to the revenue, it will show that the control proposals of the Minister of Supply have failed. It is true that he is allowed to operate over only one-sixth of the total expenditure on armaments; but the argument is the same.

It is useful to recall the dangerous sequence of events which is following the present lack of control of the cost of rearmament. The armament producers are to-day competing with one another, and with non-armament producers, for labour and materials. In the first stage of that battle the armament producers will win; for the simple reason that their margin of profits over costs is greater and more flexible, because of the Government's tremendous drive to get armaments. That will necessarily produce a scarcity of peace-time products, non-armament products; and the price of them will rise. There will be an increase in wages and material prices in the non-armament industries, and the armament industries will bid up again the prices of labour and materials. I beg the Minister of Supply and the Chancellor of Exchequer to give their attention to this problem, which is more important than that of recovering excess profits by taxation. The high prices of armaments and high wages will automatically increase the spending power of certain classes, and there will consequently be a greater demand for consumer goods, at the very time that the diversion of labour and materials from consumer goods into armament production has reduced supply and therefore raised prices. The whole sequence of the inflation that we had 25 years ago will begin all over again, with the same results upon the general social structure as before, unless we are in control of it from the very start.

It may seem to some hon. Members who recall the past Debates, unnecessary to warn the Committee of the danger of inflation, remembering that we had for so many years extensive deflation. So far as possible, of course, we should try to avoid both. Nevertheless I fear times of bitter wage disputes, falling value of the purchasing power, of pensions, unemployment payments and health benefits—reduction in the value of all the savings of the great masses of the people, which are nearly always invested in fixed interest-producing investments and not in equities. If that be so, the moral satisfaction of having scraped in a few millions of these excessive profits will not outweigh the actual evil done to the whole structure and the whole economic basis of our life by allowing profits to be made on this scale. I am certain, if this Resolution is passed, the object which any Chancellor of the Exchequer expects will not be achieved, nor should this method be relied upon except as a final one to deal with exceptional cases. It is not anything more. The Government should attempt to control prices and profits at the start. If they wish this other instrument, it should only be for (what there must be over so huge a field) the exceptional which has slipped through after the most careful scrutiny.

Unless the Government, the spending Departments and the Ministry of Supply really give their minds to this problem, I am convinced it will very soon be too late to turn back the flood. They can solve the problem in a variety of ways. They can hold stocks of and fix the price of materials. They can buy stocks from overseas with their own resources. They can set up—and it is essential that they should have some form in all the main forms of armament production—cross-checks of production such as we have by Admiralty production by the naval arsenal, and as we have at Enfield over a certain part of war armament production. It is essential that these national factories should be increased. It is the only effective way. Once everybody gets a certain fixed percentage everybody is out to make the cost as high as possible. One does not blame them. You cannot tempt the system into making armaments for you by the profits it can make and then blame it for making them. The profiteers are not only the owners. They are also those particular classes of labour who gain. In the long run everyone will benefit by maintaining a reasonably stable equilibrium, but in the short run certain classes of workmen and employers benefit by raising the whole of the cost.

The second duty is still more important. They must increase the supply of available labour as well as control the supply of available material. Where they see that there is a danger of over-employment in a particular type of industry or a particular range of skilled labour they must —there is no other method open—reduce the demand upon that class of labour. There is no other way. They can do that by voluntary agreement to scale down the production of certain non-armament enterprises. They can get the manufacturers of motor cars together and say, "What was our production last year? How much are we going to export in order to get the foreign currency necessary to maintain our imports? How much can we cut down, and release for you, the plant, so far as it is useful, the men, the technical skill, and the material? "Instead of simply letting one set of armament producers compete against the motor car manufacturer for a limited supply of labour and material, we must create a kind of artificial unemployment by scaling down where there is already over-employment production, either by voluntary arrangement or by the Government control of those industries which enter into particular competition with the production of armaments.

Reference has already been made to the pledge of the Prime Minister that there would be a limitation of profits. I think that the Committee as a whole are agreed that from the general moral point of view, it is undesirable and indecent, and perhaps even obscene, that there should be an excessive profit made out of a war or the preparation for war. But the economic system does not work, solely at any rate, upon these high moral principles. It is reasonable to suppose, both as regards labour and employer, that the only way you can prevent this excessive rise in the price level is by the character of control which I have tried to describe. We had all this lesson 20 years ago; and we cannot twice within 20 years inflict so tremendous a blow upon the stability of our system as unlimited inflation involves. I should have thought that nobody had a greater interest in trying to control the level of prices and profits than those hon. Members, who, like myself, regard as vital the conservation and preservation of our general stable order of society. Nobody has a greater interest in the prevention of vested profits than the Conservative party. We believe that although it is necessary to develop and modify our system to suit changing needs, yet it should remain the permanent basis of civilised life. If you inflict the kind of blow that another war would inflict upon it, with another set of profiteers, with the destruction of all investments of rich and poor alike that are based on fixed interest charges, if we have that kind of inflation again—our system will perhaps not survive. We have the lesson, in the very countries that may possibly be opposed to us in war, how they suffered their present troubles largely as a result of the effect on the social system of rises in prices and inflation. Nothing did more to bring about Fascism and Nazism than those very conditions. I beg of the Government to regard the fiscal instrument only as a weapon to deal with a few exceptional cases, and to devote the whole of their attention to seeing whether they can, as far as possible, organise effectively this vast national effort, which is only in the preliminary stages, and which, if the worst comes, may have to last for two, three, four or five years, upon such a basis as will not destroy our chief assets. Let us rather see to it that, if we have to face the final conflict, we shall not destroy the very system which we are fighting to preserve.

7.40 p.m.

Photo of Mr John Wilmot Mr John Wilmot , Lambeth Kennington

The Chancellor of the Exchequer will no doubt have noticed that, during his absence from the Committee, although many Members on both sides have spoken, no one has as yet had a good word to say for this proposal. One of our most distinguished financial journals summed up the matter in a way which I cannot improve upon when it said: No one has a good word to say for this tax. If it were simple to collect, if it were obviously just, and if it yielded a lot of money at the time when the Treasury is badly in need of it, or if it even satisfied only one of those requirements, it might be all right, but actually it is a P.D. —a political duty. That sentiment has been expressed all round us. If it is the fact, it seems to me that the Government have introduced this fiscal proposal not for the purpose of raising revenue, or even for the purpose of really seriously dealing with the admitted problem of excess armament profits, but only as a political gesture to try and appease opinions hostile to the Government. Then, I would ask the Government to consider very seriously the sort of results that are going to flow from such an ill-considered action. I find myself very largely in sympathy with much that has been said by the hon. Gentleman the Member for Stockton-on-Tees (Mr. Harold Macmillan). This is bound to be an impost upon somebody, and it will be an incidence of the most grossly unfair nature. As has been pointed out, it will fall only upon those people whom the Minister of Supply singles out for declaration. Surely, it is a grossly improper new form of imposing a tax that it should be left to a single Minister, and not to the Chancellor of the Exchequer or the House of Commons —no Order to be laid and no parliamentary control of any kind—to declare in secret that such a one is liable for the tax. What sort of standards are to guide him in making these declarations? Very loose and very elastic as they are, in such documents as have been laid before us, some of the anomalies are already sticking out a mile.

What are armaments? That is a question which will want a lot of answering, but upon the answer depends whether or not you pay what can amount to a substantial sum. It would be grossly unfair and very much against the public interest that producers should at this time be induced for financial reasons to devote their efforts to other than national requirements. Of paramount importance is the securing of the maximum output of essential supplies for the defence of the country. This discriminatory tax imposed in this form invites anybody who can see a better profit by making supplies of goods and materials which fall outside these purely artificial definitions, to do so. It is true, as several hon. Members have pointed out, that the very existence of this national demand produces inflated demands in other quarters for that class of goods. When the Chancellor of the Exchequer is hesitant about even including the contractors to local authorities, I really am alarmed at the magnitude of the injustice which is about to be done.

The right hon. Gentleman will be aware that local authorities are spending immense sums of money, not upon war supplies, not upon armaments, but upon materials and services of all manner of character, which they would not have to buy were it not for the threat and menace of war. I am a member of the London County Council. Our expenditures are swollen to enormous degrees by the fact that we must provide a whole range of services and purchase a whole multitude of various articles which are intended as some measure of safeguard for the great civilian population under our care and protection. The Chancellor of the Exchequer knows very well that in a very large range of those commodities the actual cost is being met very largely out of national funds, by grants-in-aid, and it is only a matter of Departmental convenience and practice whether the orders are placed in come cases by the Home Office, in the Department of the Lord Privy Seal, or in other cases by the local authorities themselves. Even supplies for the same departments of the local authority are placed in part by the Home Office and in part by the local authority. Fire engines and fire hose are ordered by the Home Office, but fire-fighting boats, which will perform precisely the same duties afloat that fire pumps perform on land, are ordered by the London County Council direct, although as to go per cent. in certain cases they are paid for out of Exchequer funds. There can be no reason for saying that a levy of this kind shall fall upon one class of contract and not upon another, that one sort of supply will attract the duty and another sort of supply will not, because it is ordered by the local authority instead of by a Government Department.

There is a second defect of this curious proposal. Why pick upon this £200,000 limit? There will be a gap. There is no grading off, no shading off, no sliding scale. There is a sudden imposition of this duty the moment £200,000 worth of orders has been received. What will be the effect of that? The obvious effect will be that people will seek to evade the tax. There is nothing criminal in that, because it has been laid down that any citizen is entitled to arrange his affairs so that he pays as little tax as possible. Obviously, it will break up the units of production so that the orders always remain below the taxable limit. That is the very opposite of what I am sure the Minister of Supply wants. He does not want to see a whole host of small units being created in order to evade the duty. He wants to get some national organisation which he can co-ordinate into this business. It is true that some provisions have been made in this matter, which are rather difficult to understand and will be even more difficult to apply, but am I not right in thinking that the ordinary Income Tax provision in the case of a holding company with subsidiaries each taxed on its own results, will apply here? If so, there is a direct incentive to break up a concern into a number of separate operating units, each of which will keep the volume of the Government orders which they accept below the taxable limit. As soon as there is an opportunity of acquiring another £200,000 worth of orders, they will create a new subsidiary and operate it for that purpose. These are some of the effects which are obviously going to be the result of this duty.

There seems to be a whole host of detailed objections to the duty in the form in which it now stands. It is obviously going to yield in its present form a comparatively small amount of revenue because, as one hon. Member pointed out, this 60 per cent. applies only to the excess over the standard year. The standard year is taken, for some reason which I completely fail to understand, as the year 1936–37. Mention has been made of some of the profits which have been made in the years prior to that standard year. Particularly is this true of the aviation companies, where enormous profits were made before the Government Departments really got an effective price-control system working. That system is far from complete and perfect now, but it is immensely better than it was in1932, 1933 and 1934. Here are the figures of the Fairey Aviation Company. Their 1934–35 profits were in the region of £4,000, but by 1936–37 they had risen to £162,000. If that is going to be the standard year, it seems to me to be grossly unfair and to a very large number of other enterprises that really started a profit-making business a little later.

It seems to be admitted that this duty is not a revenue tax, but that it is introduced, as several hon. Members have suggested and as the Chancellor of the Exchequer has said, for the purpose of implementing the pledge which was given by the Prime Minister when he introduced the Military Training Bill. The nature of that pledge was that if it was proper to conscript man-power for the defence of the State it was equally proper to conscript wealth for the defence of the State. The Prime Minister interprets that as being the need to impose some form of duty upon excess armament profits, but I suggest that that is not the way to implement the pledge. A tax upon profits arising from armaments is in no sense comparable with the conscription of manhood. I admit that it is very difficult to envisage a comparable sacrifice, but if the Chancellor of the Exchequer wishes to do that, and if it is admitted that some demand should be made upon wealth, then he ought to attach, without payment for the service to the State, some part of the wealth that belongs to wealthy persons and not merely to impose a duty upon some proportion of the extra profits that arise out of war conditions.

How can it be argued that there is anything comparable between the conscription of a man's services for next to no payment, the interruption in his life, it may even be the taking of his life with the result that he loses his life; how can that be compared in any moral sense with a duty levied not upon the wealth of a wealthy individual but upon part of the extra income which he gets as a result of war activity? I suggest to the right hon. Gentleman that, upon consideration, he should substitute for this cumbersome, expensive, unremunerative and altogether uneconomic proposal a definite levy upon accumulated wealth, for the purpose of relieving the necessity of borrowing money upon loan for national purposes. That, it seems to me, is the nearest we can get to some equivalent form of sacrifice. One is the attachment of service and the other is attachment of accumulated wealth. I urge the Chancellor of the Exchequer to consider that alternative and by so doing to relieve industry and to relieve this immense effort to produce the necessary supplies from irritating, unjust and cumbersome machinery which will produce no good for anybody.

7.57 p.m.

Photo of Sir John Mellor Sir John Mellor , Tamworth

Whatever may have been said by some hon. Members, I think that throughout the country a tax upon excess profits from armaments will be very generally acceptable, especially if it is regarded, as the Chancellor of the Exchequer put it, as a reserve method for the purpose of securing for the country military equipment at reasonable and proper cost. If this method is regarded only as supplementary to the principal method, that of securing in contracts that the prices are correctly fixed, and later on the bringing into operation of the provisions of the Ministry of Supply Bill, then it is thoroughly sound in conception. It will, however, be necessary in the course of subsequent stages that the new Clauses which the Chancellor of the Exchequer has put upon the Order Paper should be amended in order to secure closer definition. Unless they are so amended, and the Amendments are conceived with great skill and drafted with equal skill, the result will be that when the Clauses find their place in the Finance Act and are brought into play the result will bristle with undesirable anomalies.

It is highly important, and Parliament always recognises the fact, that justice should be secured for individuals, but in this case there is an even more important consideration which we must bear in mind, and that is the effect of this Measure upon the progress of our rearmament programme. The prospective Minister of Supply, the right hon. Member for Luton (Mr. Burgin), has more than once said that he will rely far more upon the good will which will prevail between his Department and the manufactures than upon the letter of the law. I am sure that that good will will prevail and that having regard to the general conception of this scheme there will be nothing in it which will tend to impair that good will; but I do think it would be a pity if, through the existence of a certain number of anomalies, there were in particular cases an impairment of that good will, even to the slightest degree. I can see dissatisfaction arising on the part of manufacturers, not on the score of the general purpose and incidence of these proposals but because some of them may be put in a relatively invidious position as compared with others. It is right that we should be especially careful in the way in which the position of manufacturers who will be subject to this tax is dealt with because many of them are going to lose, and are losing, a quite appreciable amount of their normal business to competitors who are not engaged in the provision of arms for the Government.

Notice taken that 40 Members were not present; Committee counted; and, 40 Members being present —

Photo of Sir John Mellor Sir John Mellor , Tamworth

The existence of the sharp distinction between the position of businesses just below and just over the £200,000 mark may well cause dissatisfaction on the part of proprietors whose businesses are just above that mark. I think that is a case which should be dealt with by some tapering of liability. There is bound to be very great difficulty in drawing a line in many cases in the administration of this Measure, and it will bean unfortunate result if employers have to devote much time to the consideration of their position in relation to liability to this tax. It is very important that they should be able to put all the steam they can into production and, if they are having to think a great deal about their accounts and about their liability to taxation, they may well spend their time giving themselves headaches instead of getting on with their important job of providing the Government with equipment. The question is being asked, what revenue will the tax produce? I do not think that is the most important question. The most important question is what will be the effect upon the cost of production? What will be the effect on the net cost to the Government of the equipment that it receives? That is what attention should be focused on— not so much the yield of the tax but the general consequences.

8.5 p.m.

Photo of Mr George Ridley Mr George Ridley , Clay Cross

The hon. Member for Blackburn (Sir W. Smiles) expressed some pleasure that my hon. Friends were not going to divide against the Resolution. I do not think his friends should seek to derive too much pleasure on that account. We will refrain from voting, not because but in spite of the terms of the Motion. It is halting and insufficient. We shall not oppose it, because apparently its defeat will mean that the war profiteer will escape altogether. I regard it as a fraudulent prospectus and as a political dodge, if I may use the initial letters which are being applied to the tax in another sense. The Chancellor of the Exchequer recalls the fact that the Prime Minister on an earlier occasion used the word "repugnant" about abnormal profits in the manufacture of munitions. I did not doubt for a moment that the Prime Minister intended all the implications included in the word he used, but that sort of thing is typical of the generally illogical approach to problems of this kind that is characteristic of hon. Members opposite. We are always protesting our detestation of those things in which we believe. We are always trying to protect ourselves against the thing in which we believe. Hon. Members opposite believe in what they call capitalism and competition and the profit-making motive, yet maintain an army of inspectors to see that the butcher does not sell bad meat and that the baker does not give short weight in bread. The Government do not believe in public ownership but apply it when they cannot avoid it. It is a pity that they have sought so strenuously to avoid it in the armaments industry. If, instead of avoiding it, they had applied it, they would have saved themselves a great deal of bother and trouble.

One of the most striking speeches, of which the Chancellor of the Exchequer heard only the latter part, was made by the hon. Member for Stockton (Mr. Harold Macmillan). He recalled the experience of the War years, and no one can doubt the accuracy of his statement that the only way to take the profit out of war is to challenge the private munitions maker by the establishment of national munition factories. No one can doubt that general contention who has read the autobiography of Lord Addison or the books of a number of other people who were intimately concerned with munitions production in the Great War. I cannot escape the conclusion that this sort of attempt to catch the patriotic munitions manufacturer is indeed a grave reflection on his patriotism. He puts the Union Jack on the bonnet of his American car and makes ostentatious contributions here and there but, when he comes as a manufacturer of arms in a grave national emergency, business is business. Then, indeed, in the words of Dr. Johnson, patriotism becomes the last refuge of a scoundrel. This Government believes in an economic system which puts a premium on ignobility of that kind. Several inquiries have been addressed to the Government Bench as to the choice of the basis year or years. An editorial in the "Daily Herald" of last Thursday puts the point concisely: Owing to the Government's failure to take any action for the control of profits at the beginning of the arms boom, most of the big arms firms were already in fact earning excessive profits in 1936 and 1937, and the increase since then has often not been great. This means that the tax will not really fall on the excess of arms profits over a normal year, but on the excess over a level already highly inflated by the Defence boom. Drastic as the tax looks at first sight, it will really do very little to save public money unless the standard year is put back at least to J935, the first year of the Defence programme. Why should the choice of the basis year for taxable purposes be left to the muni- tions manufacturer, in order that he may as far as possible avoid contributing to national taxation? Why should not the choice be within the control of the taxing authority, so that not the minimum amount of contribution but the. maximum would be paid? I really have not yet been able to understand why orders in the matter of food placed by the Minister of Supply are excepted from these provisions. I have reached the conclusion that 60 per cent. is totally insufficient. My own recollections in the matter of Maconachie's and plum and apple suggest that these profits should be taxed completely out of existence. Then it seems to many of us that the figure of £200,000 is very much too high and that substantial profits can be made on a much smaller figure. The Chancellor said we should not make the instrument of taxation more effective if we sought to include vast numbers of smaller companies, but in the end the aggregate of the orders placed with a vast number of smaller companies might in fact be equal to or even in excess of the total number of orders placed with firms which will fall within the figure mentioned in the Motion.

Then what is to happen to the profits of companies no1: engaged directly on armament work, but whose prices and profits are lifted by armament demand, and who may in a profit sense be doing even better than the armament firms? Nothing is to be done about that; they are to be left entirely outside the scope of this tax. And why only 60 per cent.? Much too little attention has been directed to this matter. I have spent several hours during the week-end in making one or two calculations based on what I think are very modest figures, and a 60 per cent. tax, applied in this fashion, will leave armament firms in the position of paying a 50 per cent. increase in the dividend on the ordinary shares of a munition factory. It' can easily lead to an addition of 15 or 20 per cent. increase in the dividend on ordinary shares even when the 60 per cent. tax has been paid. Perhaps the Financial Secretary will explain why 60 per cent. has been chosen, and why the basis year should be left to the choice of those who have to pay the tax instead of to the Treasury. Will he also tell the Committee whether the appeals which may be made are to be in public so as to allay public suspicion, or whether they will be heard in private, and so invite suspicion and even exacerbation?

The general case against this proposal is the general case against all particular taxation. Particular taxation is seldom equitable. It is not equitable, in my view, in the case of the National Defence Contribution. It taxes the manufacturer and leaves the wealthy lawyer entirely un-taxed. It taxes a whole range of people and leaves an entirely whole range of people, equally well able to bear their share of taxation, untouched. Indeed, it seems to me that the time has arrived for a general review of the whole field of taxation. Many of our instruments of taxation have grown up in a haphazard and in an entirely unplanned fashion. Instead of attempting a partial tax in this fashion it would have been far better to have stiffened and steepened existing taxation, to have lowered the level of the Super-tax and steepened its application, to have done much more in the way of Death Duties, and in that way to have raised a sum far in excess of what will be contemplated by anything in these proposals. But if that cannot be done, there must be some stiffening and tightening of the provisions of the proposal in the Committee stage. This is a mere pretext at striking by those who fear to wound. It would be strange to think that the party opposite would, in fact, be willing to wound their own friends by these proposals.

8.19 p.m.

Photo of Group Captain John Wright Group Captain John Wright , Birmingham Erdington

I do not intend to keep the Committee for more than a few moments, but as I have listened to every word of the Debate there are one or two questions I would like to put to the Minister, which I hope he will consider. Before doing so I would like to make this point. It has been suggested by several hon. Members that the best way of checking profits is to institute Government factories. I do not think that is so, not at least if what my hon. Friends in the City of Birmingham who are making armaments tell me. I understand that since the Government adopted their policy of spreading the manufacture of armaments to all sorts of firms who have not previously made them, prices have absolutely tumbled down, indeed, to such an extent that the contracts departments have hesitated, and I believe in some cases have refused, to place orders because they did not believe the materials could be made for those prices.

There are four questions to which I want to refer. The first is with regard to the question of total receipts. The Chancellor of the Exchequer was definite that a firm would be a judged as being due to pay this tax by the fact as to whether it had received £200,000 in payment in any particular year. I am wondering whether the right hon. Gentleman really means that. Suppose a firm which has a large contract placed with it in its first year gets done over £200,000 worth of that contract. Obviously it would not have received payment in that year, because payment is always delayed by a few months, sometimes by many months. Are we to understand that that firm would not have to pay the tax on that £200,000 simply because it had not received payment in the year in which it was made? I do not think that can be the case.

The second point is with regard to the question of arriving at the difference between the profits in a standard period and the accounting period. It is difficult to explain a matter like this, particularly when it is necessary to introduce figures. I have been working it out. I assume that a firm in its standard year has been doing £1,000,000 turnover, on which it had a profit of £50,000, that is, 5 per cent., and in that year it had also done £100,000 armament work on which it made £5,000, a profit of 5 per cent.; and a total of £55,000. When we come to the accounting period the civil business still remains at £1,000,000 turnover, returning £50,000, but the armaments turnover has gone up to £1,000,000, still returning 5 per cent., or a total of £100,000 profit on the £2,000,000 capital. That gives an actual excess profit of £45,000, and from the way in which I have given the figures clearly the excess profit would be due to the increase in the armament work. What happens under the Clause as it is drawn? The excess profit of £45,000 would be divided into two as there had been £1,000,000 worth of civil business done and £1,000,000 worth of armament business done. Therefore the tax which would be payable, instead of being £45,000, would be £22,500, giving a tax of £13,500 which, in fact, works out as a tax of 30 per cent. on the excess and not 60 per cent. It seems to me that this difficulty could have been got over if in the standard year the proportion had been considered there as well as in the account period. The result of the figures I have worked out is on the assumption that the profit on the civil business has gone up from 5 per cent. to 7¼ per cent., whereas the profit on the armaments turnover has fallen from 5 per cent. to 2¾per cent. I take it that there will be some method of dealing with that?

The third point I want to raise has reference to subsidiary companies and the way in which they are to be dealt with. This is a matter which has not been made clear. Although one hesitates to mention names, there is a glaring example in Imperial Chemical Industries, and one wonders whether or not contracts placed with their subsidiary companies, even though they amount to less than £200,000 in the case of an individual subsidiary company during the year, will be considered as being charge-able for the tax? I realise that this is a double-edged sword, but it seems to me that the matter is one that needs to be cleared up.

I come now to the fourth point. It does not seem to have been made clear whether the provision will be a three-year provision or whether each year will be a definite accounting period which will be settled up and finished. If a large contract is given to a firm, and over a period of three years that firm does more than £600,000 worth of business with the Government, but in the first year does not reach the figure of £200,000, will the firm escape tax in respect of the first year, or will the whole period be taken as one and the firm be reckoned as having done £200,000 a year over three years? Arising out of that point, I want also to ask whether firms that do not make an excess profit in one year will be able to bring forward the deficiency against another year?

8.27 p.m.

Photo of Mr Lewis Silkin Mr Lewis Silkin , Camberwell Peckham

I do not propose to enter into the merits of the White Paper, as this has been done effectively by several of my hon. Friends, but I should like to ask the Financial Secretary one or two questions for the purpose of clarifying the White Paper and putting right what appear to me to be flaws and defects in the proposals contained in it. In the first place, what will be the position of a firm which is doing a large business in goods that are not covered by the White Paper, but which has received over £200,000 worth of orders in respect of armament supplies? It could be argued that such a firm was not substantially engaged in the production of armaments. It might be that it would have a total turnover running into millions of pounds, and it might have orders from the Government amounting to £200,000 or £300,000, and therefore, it could truthfully contend that the orders did not represent a substantial part of its business. According to the terms of the White Paper, it might well be that such a firm would be exempted from the tax. I should like to have an assurance that a firm of that sort, whatever might be the amount of its outside business, would come within the terms of the White Paper. Is it to be left entirely to the discretion of the Minister of Supply to decide which firms shall be declared to be substantially engaged in the supply of armaments "? Ought not there to be an automatic obligation on all firms dealing directly or indirectly with the Government in connection with munitions to make a return showing the amount of business they are doing? Surely, it should not be left to the Minister of Supply to find out for himself and then require these firms to make a return of their profits. In the case of Income Tax, there is an obligation on every citizen to make a return, whether he is liable to tax or not, and if he fails to do so, he is liable to certain penalties. I submit that the same thing ought to apply to those who come within the terms of the White Paper, and that there should be an obligation on everybody who has dealings with the Government to make a return showing what are his profits from those dealings.

The next question I want to ask is what justification there is for fixing £200,000 as the sum above which a person becomes liable to the tax? This means that if a firm is doing £199,999 worth of business with the Government, it is exempted, but if it is doing £200,001 worth, it immediately becomes liable to a tax of 60 per cent. on its excess profits. That seems to me to be a very unfair way of dealing with the matter. The figure of £200,000 is purely arbitrary. I should have thought that it would have been possible to have a sliding scale and to provide that any- body doing business with the Government in connection with munitions should be liable to some form of tax. As it is, it might be possible for a firm supplying armaments to the Government so to arrange the orders that it will supply a certain amount in one financial year and a certain amount in another, so that there will be less than £200,000 in one year, and that firm will be totally exempted for that year.

I should like, then, to ask the Financial Secretary whether he regards turnover as being the most satisfactory basis. Surely, profits would be a much more satisfactory basis. In the case of Income Tax, one is not taxed on the basis of turnover but on the basis of profits, and the test as to whether or not a person is liable to pay Income Tax is not the amount of turnover but the amount of profits. I submit that turnover, the amount of sales to the Government, is not a satisfactory basis for a tax, but that there should be a certain amount of profit fixed as the basis. It may well be that it would be wise to fix a minimum amount of profit below which a person would not be taxed. I suggest that if the Government took the two things together—first, the obligation on persons who have dealings with the Government in connection with munitions to make a return, and secondly, the requirement for them to state what their profits are—and then taxed the profits above a certain figure, that would be a more satisfactory basis, and a very much greater revenue would be obtained. I should like the Minister to give some explanation of the phrase substantially engaged in the supply of armaments. A firm may have a very large business and supply the Government, in proportion to the size of their business, with a relatively small amount of munitions, but one which nevertheless exceeds £200,000. From the point of the view of the scale of their business, those supplies might not amount to a substantial proportion of the business. According to the terms of the White Paper, such a firm would be exempted. My hon. Friend the Member for Clay Cross (Mr. Ridley) asked why food is to be exempted. I want to ask what is the significance of the words: "such materials as may be specified by Order of the Ministry of Supply. Surely, the Committee ought to know what is in the Minister's mind and what kind of materials, apart from food, it is intended to exempt. Surely, we ought to know this before we approve of the Resolution. For instance, is it proposed to exempt boots, building materials, tobacco, and things of that sort that are supplied to the Forces? That is not clear from the White Paper. It is open to the Minister to assert that those are articles which he specifies by Order to be exempted, and accordingly they will be exempted. The Committee should be informed straight away of the articles which the Minister intends to exempt by order.

Finally, if it is the intention of the Government to tax war profits, that is profits made in connection with the arms industry, or the supply of materials, equipment and appliances for air-raid precautions, why has the Minister omitted materials supplied for these purposes to local authorities? Profiteering may take place, to at least as great an extent, in the supply of materials to local authorities, as in the supply of materials to the Government. The same kind of materials may be supplied to local authorities by the same firm, and they will probably charge one price to the Government and another price to the local authorities. Considering the enormous amount which local authorities are required to spend in connection with air-raid precautions, the firms who supply them ought to come within the terms of this Resolution, just as if they were supplying the same class of articles to the Government. I hope that the Financial Secretary to the Treasury will be able to give a satisfactory reply to these questions.

8.37 p.m.

Photo of Mr Robert Tasker Mr Robert Tasker , Holborn

I wish to point out what is, I think, a misunderstanding on the part of many hon. Members who have addressed the Committee. Attention has been concentrated on the question of the supply of armaments but, as I read it, the Government's proposals go very much further. May I call attention to the proposed new Clause of the Finance Bill which appears on the Order Paper and which refers to: a contract for the supply of anything required for the purposes of the armed forces of the Crown.… or for the supply of any machines, tools or materials required for making or repairing anything required for those purposes.

Photo of Sir Robert Smith Sir Robert Smith , Aberdeenshire and Kincardineshire Central

The hon. Member is now dealing with a proposed new Clause in connection with the Finance Bill, but we must, in this discussion, keep to the Resolution which is before the Committee.

Photo of Mr Robert Tasker Mr Robert Tasker , Holborn

I quoted it only to draw attention to a fact which seems to have escaped the attention of many hon. Members, namely, that this Resolution covers many other things besides the supply of armaments. The hon. Member who has just spoken seemed to think, for example, that building materials were exempt, but I understand that they are covered. This is provided for in lines 21 and 22: a contract for the execution of any work required for those purposes. I put it to the Minister that if that is not so, we are confronted with what seems to me to be a very serious position. For the purposes of armaments it is necessary to have big building contracts. My attention was called only yesterday to one such contract, in connection with which it is reported that a very large sum is to be expended on the basis of profit on cost. Will such a contract as that, come under review in connection with this proposal? If not, may I point out that if a given contract amounts to, say, £1,000,000 at least one-half will be sublet to sub-contractors each one of whom will escape this excess profits duty.

What is the effect of this sub-letting? It is not the profit on cost of the builder. It is not the assumed percentage, it is something in excess of that. In this particular case I was informed by a responsible person that unskilled people were being employed at rates which were quite unreasonable. I give an example. An errand boy who had been earning 15s. a week is employed as a labourer at £5 15s. a week. A telephone operator who has been employed at a telephone exchange as a learner at £1 a week is being paid 8 a week by the general contractors. Skilled operatives in London and other large cities have to be content with £3 10s. but similar skilled people, employed by these general contractors and subsidiary contractors are receiving £7, £8 and £9 a week. We, therefore, reach the unhappy position that the more the job costs the better it is for the contractor. Therefore, I ask the Minister whether this kind of contract is covered. Criticism has been almost solely confined to armaments contractors and the arguments which I have heard lead one to suppose that no effective steps are contemplated to prevent enormous profits which are being made by those whom I will refer to as building contractors. It is notorious that during the last War, one firm boasted, accurately or inaccurately, that they had carried out £30,000,000 worth of building for the Government.

Photo of Mr John McGovern Mr John McGovern , Glasgow Shettleston

What is the name of the firm?

Photo of Mr Robert Tasker Mr Robert Tasker , Holborn

I do not know that it is necessary to give the name of the firm, but if the hon. Member is very keen to have it I do not mind disclosing it to him. But there is a firm now who say that they are carrying out £10,000,000 worth of building for the Government. Suppose you give them 5 per cent. or 10 per cent. or whatever the percentage may be—and I do not know what it is—I am told it is a secret though why it should be a secret is not clear. Accordingly I have been unable to ascertain what the percentage is. If half of these contracts are let to sub-contractors, naturally they are entitled to the same percentage of profit as the general contractor so that in fact the general contractor is not getting x per cent. but twice x per cent. profit if half the value of the contract is executed by the sub-contractors. This is a matter which ought to receive the attention of the Minister of Supply and the Chancellor of the Exchequer. I could give many illustrations, but I am not so much concerned about individuals as about the general question. My own view is that patriotism is never profitable to the right people, and patriotism ought not to be made profitable. I speak only for myself when I say that I would take the most drastic measures to deal with people who tried to make profit out of the misery and distress of their fellow-citizens. I say, plainly, that the average profit made by a firm prior to its employment in the armament programme should be taken as a basis. I would not mind giving them a little more than the average profit because of their bigger turnover, but I would only give them a very small percentage over it. The whole of these ill-gotten gains should be returned to the Treasury and to their fellow-citizens, or. better still, should never be allowed. In this democratic Assembly everyone has a right to express his own views, and that is my view. The men who are actually engaged in the conflict should such occur, cannot make these immense profits; they will be called upon to sacrifice life and limb. I would prohibit profits earned by people and their operatives who are engaged not only in the manufacture of armaments, but everything connected therewith.

8.46 p.m.

Photo of Mr John McGovern Mr John McGovern , Glasgow Shettleston

I am sure the last speech will not be acceptable to the official Conservative and Liberal parties which form the coalition of the alleged National Government of this country. Nevertheless, I must congratulate the hon. Member upon at least expressing his own point of view in relation to the armaments industry and to the proposals that are before the Committee to-day. I listened to the speech of the right hon. Gentleman the Chancellor of the Exchequer in introducing these proposals, and I must say that while I have seen a number of sham fights in this House, to-day has seen, I think, the total eclipse of anything that has taken place up to the moment, because there is nothing at all in this Resolution that need annoy any person who is making vast sums of money out of the armament industry. It has been described by Conservative Members who are in business as only National Government eyewash; that is their description of it in private conversation. I do not need to take my own opinion only, because I often try to get the opinions of various Members on measures that are before this House after I have arrived at my own conclusion. To-day the absence of the hundreds who usually occupy these benches and the absence of the high-powered motor cars that are usually to be found in Palace Yard is a living evidence of the lack of fear of the vested interests of this country in regard to this Resolution, because when their interests are being threatened from any side they can always be depended on to man these benches to the last man and the last boy and to roll up in order to defend, not the interests of their constituents, but the large vested interests of the companies with which they are associated.

This proposal reckons to tax the armaments industry, but why should there be such an elaborate system that even the Chancellor of the Exchequer, with all his ingenuity, could not explain it and did not seem to understand its implications and the way in which it will affect the various interests in the armaments industry. I venture to say that there is no Member on the Treasury Bench who could adequately explain and reply to the various points that have been raised, unless from time to time he took consultation on all these points with the officials in order to get the ideas in the minds of the civil servants. I agree with the right hon. Member for East Edinburgh (Mr. Pethick-Lawrence) when he said that it was singular that no estimate was placed in the speech of the Chancellor on the amount likely to be raised by this duty. I think he struck the nail on the head, because there is no Member opposite who will dare to assess the amount of money that will be raised. If there is a desire to tax the armament industry, I would suggest, while condemning many things that are done across the Channel, in Germany, that we might as well take a leaf out of Hitler's book and find out how he deals with the various industries in Germany. He limits them to 6 per cent. profit, and the balance goes to improving conditions in the factories and workshops, with a quota to the State to carry on its work. The same might have been said with regard to many things that happen here from time to time, such as questions like the Czech gold. Hitler would have stopped the money on the instant and, if necessary, placed the bankers in a concentration camp in order to protect his interests. There is, however, little but fumbling and stumbling on the part of this alleged democracy in dealing with these problems.

This measure is not designed to get money; it is designed to cover the machinations of the Government and their representatives and to allay the feeling in this country, which is gradually growing in volume, in connection with the large profits that are being made by the people who are interested in war, and also because of the fact that you are taking young men of 20 and 21 years of age from their homes and their parents and putting them into the Service at a mere pittance, and, on the other hand, you are being asked—and the question has been cropping up even among Conservative supporters in the country—what you intend to do with the birds of prey that live on, and enjoy life out of, the discomforts, the tragedies, the brutalities, and the sufferings of the human race. The Government have drawn up a Resolution here in order to attempt to allay that public opinion in the country, because they dare not make a frontal attack upon the armaments ring. They dare not make an attack on those who are the building contractors, like Sir Robert McAlpine, who, I assume, was the man who did £30,000,000 worth of building contracts in the late war, the friend of the right hon. Member for Carnarvon Boroughs (Mr. Lloyd George).

Those who made money out of the last war were not confined to industry. These vultures live on the sufferings of the human race, and they become the new rich, while men are buried under the sod and lie in asylums in this country, are blinded, lose their reason, lose their all, and have their children brought up on miserable pensions, while the armaments ring take their toll out of every round of ammunition, every shell, every torpedo that is fired. They profit by every disaster. Even after the last war they collected the toll from Germany and Turkey and from every nation that fired a torpedo from Whiteheads in this country. They collected the toll and set up the account over the bodies of the men who died. I was talking the other day about the various crises that have been developing, and one man said to me, "McGovern, they are very highly strung in this armament industry." But they are not strung high enough for me; I would string them much higher.

If the Government were wanting to deal with this industry they would apply the most rigid rules in order to prevent it exploiting the misery of the community. But the supporters of the Government in this House are the armament industry; they are the contractors; they are the people who are living on the misery and suffering of the poor of this nation. With the approach of a General Election in the Autumn—if we dodge war, and we may not do it; it is not generally expected that we shall—and with the circulars going out asking for contributions to the party funds, would the Government dare to attack these interests? It would be attacking its moneyed supporters in the country and its coffers would be empty. What would be the use of having a bogus National Government if it was going to make a frontal attack upon the armaments industry or the vested interests of this country? They expect decent treatment from this Government. Contrast the treatment of the armament industry, on which firms are allowed £200,000 before a start is made with taxing them, with the searching of the pockets of the poor who are on the means test, with the inquiries to see whether the boy has earned an extra half-crown by selling firewood or delivering papers.

Not only are the Government waging class war on them in that way, but they are taking their sons for military service for a mere pittance, prepared to place themselves behind their young bodies. Then the Government come along with this "cod" of a Bill and ask serious-minded men to believe that they mean to do something. It is too tragic. If it were not so tragic it would be too funny for words. Even the "Funny Wonder" could not produce anything funnier than this measure. For the Government to attempt to make people believe that they mean business is a fraudulent practice. If the Government did mean business there would be activity among the groups opposite, deputations and a Press barrage in order to compel them to retreat. But the armaments ring exists; its members move around this House, they put cigars in their mouths—to-day I saw two or three of them—and they go out smiling and feeling quite happy. The Government are having their day—"Little man, you've had a busy day"—in "codding" the electorate. The Bill is not designed for any other purpose.

The Government have been shovelling out money for years past to shipping rings, to fanners, to landowners, to royalty owners, have been searching the pockets of the poor to pay off every interest in the country. Then they come to the great crooks who run the armaments industry, whose interest it is to have crisis after crisis, to have groups of nations threatening that they will hurl the workers against each other in deadly combat, that they will build battleships, submarines, torpedo boats and airships, will go on creating every process for destroying human life. They are the people who will be at the head of these organisations and who will draw their millions upon millions out of the industry. Then, on Sundays, they will be seen with the Bible under their arms, and will be respectable members of Christian society, trying to make us believe that they believe in the peace of the little Nazarene. At the moment the Government are represented on the Treasury Bench by two of the most astute Members of this House. If the Financial Secretary to the Treasury were on this side of the House and held the views that we hold and a Bill of this kind had been presented by the Tory party, he would have torn it asunder. He has the ability to do it. He knows that he is engaged to-day in a great game of "cod."

I watched the Chancellor this afternoon. I have seen people crossing a stream and dodging from stone to stone to avoid falling into the water. I watched his skilful work here to-day—dodging all the danger points, telling Members, "Oh yes, that point will be borne in mind, or it can be raised later on; just let us get the principle accepted." The Government are always wanting to get the principle accepted, just as they did in the case of the Militia conscription. But I for one, along with many hon. Members in this House, am not taken in by this Measure. I do not profess to have great ability, but if I were on the other side and felt sincerely on this matter I could, with a few simple Clauses, catch the profiteers in the armament industry in a very simple manner.

I loathe the methods employed by Hitler in many fields of activity, but when I was going round the armament works in Berlin and asked how they were dealing with the industry I discovered that they limited the profits to 6 per cent. I discovered also that there were four plaques on the front of factories—one indicating that it was a model factory, the second that its employès had model housing conditions, the third that there were model health conditions and the fourth that it provided playgrounds. Part of the profits went into the provision of those things for the workers, and whilst I loathe the brutal methods they employ there are many things in Germany of which I could approve, and which could be endorsed by anyone who desired to introduce some decent form of restraint on industry; but our Government, not being sincere, bring in a Measure which baffles human ingenuity. They always bring in something which can be interpreted in a dozen different ways, so as to confuse people and provide a smokescreen under which the armaments industry can get away with the "swag." There is an old song which runs: The landlord calls it rent,As he winks the other eye,The merchant calls it profit, As he heaves a heavy sigh,The banker calls it int'rest,As he puts it in his bag. But Bill the burglar's honest, He simply calls it 'swag'. This Government represents "swag." One day the people of this country will tumble to the fact that the Government are not only using their bodies in war but leaving them to live in misery, and when that day dawns the enemy will not be Hitler but enraged mankind in this country, who will be chasing the Government as the Kaiser was chased into Holland in 1918.

9.5 p.m.

Mr. Gurney Braithwaite:

This Ways and Means Resolution has now been before the Committee for some time, and while there has been very little difference of opinion regarding our objective, there has been considerable criticism of the method suggested by the Government for dealing with this particular matter. To-day has been another example of the advantage of our Parliamentary methods by which a Ways and Means Resolution is later on incorporated in the Finance Bill. In this year's Finance Bill we have already seen two drastic alterations of what was proposed and approved in Ways and Means Resolutions. I think the Government will profit from the Debate which has taken place because of the various suggestions which have been made in connection with the suggested duty If the Government have decided to remodel the tax, I hope that they will not be deterred by the scorn which was poured upon the Chancellor of the Exchequer last week by the right hon. Gentleman the Member for South Hackney (Mr. H. Morrison) who seemed to suggest that Parliamentary discussion was of very little avail, and that the steam-roller would be applied by a strong Government. That is a system which may work admirably on the other side of the river if the suggestions of private Members are ignored by the automatic application of the steam-roller.

This armaments duty is in danger of creating the same kind of confusion as was brought about by the first National Defence Contribution, which failed largely because it was quite impossible for the ordinary person to compute the result which it would have upon industry. It was also subjected to the perfectly proper criticism that it fell with unnecessary severity upon one class of shareholder— the ordinary shareholder. The Debate which we have had to-day has shown a desire in all parts of the Committee that this tax should be equitable. The hon. Members for Mossley (Mr. Hopkinson) and Kennington (Mr. J. Wilmot), in very able speeches, pointed out certain defects which appear to exist. We have had from the other side of the Committee a speech from the hon. Member for Bassetlaw (Mr. Bellenger) in which he advocated the theory that all these difficulties would be surmounted were the armaments industry placed under national control. The particular disadvantage of so doing would be that it would place upon the State the necessity of maintaining specialised plant and labour which are required only in times of emergency, and which would have to be maintained by the State in ordinary peaceful circumstances. It would, moreover, create for the Government and for the State a vested interest in those very armaments industries which hon. Members opposite deplore. It is not difficult to imagine a situation under nationalised armaments in which the State would either have to export arms to other countries in order to maintain the industry in a profitable condition or would feel compelled to economise in the factories. In that case they would have members representing various divisions rising in this House to protest against their constituents being put out of employment. Those are some of the obvious Parliamentary consequences of that method of dealing with the problem.

I want to call attention to one aspect of the suggestion for the taxation of armaments profits which was brought clearly before me when I sat in this House for another constituency—one of the divisions of Sheffield. For many years skilled workers in the steel industry were engaged in making neither swords nor ploughshares. They would have been very happy and satisfied to have been doing either, but those key men were simply kept hanging about awaiting the consequences of the Disarmament Conference which was very protracted and which eventually ended abortively. During the whole of that time those skilled artisans were kept in a state of tension. There is a tendency, certainly in the public mind, and I think in the minds of certain hon. Gentlemen in this House, that as soon as they talk of armaments they immediately conjure up a picture of the steel industry. It is fair to say that the steel industry is singled out for attack whenever armaments are mentioned.

Photo of Mr William Gallacher Mr William Gallacher , Fife Western

They are all steel industries.

Mr. Braithwaite:

It is not so very long ago that steel manufacturers were described as merchants of death because they happened to be engaged in a certain line of activity, but since a Member of the party on the other side, a certain merchant of death, won a striking victory in the Ipswich by-election, that term has very properly disappeared from the language used in this House. That industry is fully engaged in warlike preparations, but one has also to take into consideration in imposing this duty, that there are other manufacturers who are also busy.

Photo of Mr Alfred Edwards Mr Alfred Edwards , Middlesbrough East

Would the hon. Gentleman explain what he meant by saying that the use of the phrase "merchant of death" had been affected by the victory at Ipswich?

Mr. Braithwaite:

I said there was a tendency among hon. Members and others, whenever steel manufacturers were mentioned, to refer to them as merchants of death. The hon. Member for Ipswich (Mr. Stokes) has declared that he has been engaged at one time or another and would desire to be engaged now in that work. Since that time I have not heard that epithet used.

Photo of Mr Alfred Edwards Mr Alfred Edwards , Middlesbrough East

Would not the hon. Member agree that since the hon. Member for Ipswich has been in this House he has endeavoured to take some of the profits out of armaments manufacture?

The Deputy-Chairman:

I must remind the two hon. Members that this discussion is leading them some way from the Resolution.

Mr. Braithwaite:

I think it would be agreed that none of those engaged in this manufacture ought to be so described. That was my only point.

Photo of Mr Robert Taylor Mr Robert Taylor , Morpeth

You have not made a point. You have made an accusation.

Mr. Braithwaite:

I should be glad if hon. Members would be good enough to let me make my speech. I have sat here all day and listened to the Debate without interrupting. I was saying that one should take into account, not only manufacturers in the steel industry, but manufacturers of such things as uniforms, boots, plum-and-apple jam and bully beef. I think it is true that the fortunes in the late War were not made by the big armament manufacturers, but by subcontractors. In all these matters the new Minister of Supply will have a large field for careful research. The right hon. and gallant Member for Newcastle-under-Lyme (Colonel Wedgwood) suggested earlier in the Debate that Government factories were a check upon prices charged by private rms. Government Departments very often make the basis by which private firms tender. Since this duty was proposed evidence has reached me of work done by Government factories in a manner extraordinarily expensive to the taxpayer, and as long as that is the case one can hardly blame the private firms for tendering to that price level.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

Would the hon. Gentleman give the Committee an example of work done in a Government factory being more expensive than work done by private firms?

Mr. Braithwaite::

I have had a visit only to-night in the Lobby from one of the employès in the Woolwich Arsenal who gave me figures of great interest which I propose to send to my right hon. Friend when he becomes Minister of Supply. I think they will reach him in a day or two. I will not delay the Committee by going into the details now, but the figures are to reach me in the course of a day or two. The hon. Gentleman will be interested to know that there are very often occasions on which Government work is not done in the most economical manner possible.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

All the evidence is the other way.

Mr. Braithwaite:

Perhaps the hon. Member will allow me to have a perfectly friendly difference of opinion with him about that. In these circumstances, it is very often the case that, when private firms are tendering, that is the kind of price level on which they make their offers.

I want to give the Committee a few examples of the situation which has prevailed in the steel industry over a long period. Like other Members who have spoken, I must explain that I have no financial interest or connection whatever with that industry, but I have had these figures taken out, checked and counter-checked, and they go far to destroy the impression that the steel industry over a long period of years has been making large profits out of the manufacture and sale of armaments in this country or abroad. I will take first the case of the very well known firm of William Beard-more. A holding of 2,050 of their ordinary shares in 1919 is to-day worth £10. No dividend was paid between the years 1919 and 1939. There was recently a distribution of 3½ per cent., which represents.017 per cent. on the original capital. The hon. Member for Kenning-ton, who is by way of being a statistical expert in these matters, is sitting opposite to me, but I work it out that, over the period of 20 years, there has been a yield of.00085 per cent. That is admittedly an extreme example. I am going to give two more.

Photo of Mr John McGovern Mr John McGovern , Glasgow Shettleston

As that firm is in my division, may I ask the hon. Member if he could also give the profits they made during the period 1914–19? Is he aware that this firm is now in the hands of the Bank of England?

Mr. Braithwaite:

As I have said, I do not want to delay the Committee, but am trying to deal with the accusation that during the last few years—I am, of course, dealing with the post-War period —these firms have made profits out of the manufacture and sale of armaments at home and abroad. I shall be glad if I may be allowed to proceed, because I have two more examples to give to the Committee.

Photo of Mr John McGovern Mr John McGovern , Glasgow Shettleston

If the hon. Member does not intend to give us the profits made during the period 1914–18, why does he give the figures for the lean years and not for the fat?

Mr. Braithwaite:

I am endeavouring to make the point that during the past 20 years these firms have gone through a period so lean that in many cases the profits made in the War years have been completely eliminated. In any case it is true that many of the shareholders in these firms are people who during the War took an active part in fighting for their country, and they very much resent some of the charges that have been made against their industry during this period of peace. I will be quite frank with the hon. Member for Shettleston (Mr. McGovern). I have not the figures for which he asks. I know, of course, that large profits were made, but I am trying to deal with these post-War years, if he will allow me to do so.

Photo of Mr John McGovern Mr John McGovern , Glasgow Shettleston

In many cases they made more money than an average member of the middle class makes during his whole life.

Mr. Braithwaite: That is very likely the case, but it does not apply to the ordinary shareholders, who have been for a long period without any dividend at all.
The next case I will take is that of Messrs. Cammell Laird. A capital holding of £2,000 of their shares in the year 1931 is now worth £100, and their recently declared 10 per cent. dividend represents only one-half of 1 per cent. on the original investment. The last case that I would submit to the Committee is that of Messrs. Dorman Long, who are not, strictly speaking, an armament firm, but who have a large number of Government orders just now. Some years ago the capital value of their I shares was' written down to 2s., so that the current 10 per cent. dividend represents only 1 per cent. of the former holding. I would emphasise the fact that the shareholders in all these firms received no dividend or income whatever for many years.
This problem of the limitation of armament profits bristles with anomalies and hard cases, and no one pointed that out with greater effect than the hon. Member for Kennington. I should like to give two examples of the kind of anomalies with which we are confronted. Take the case of two shipyards in the same port. One, building a cruiser, would presumably come within the ambit of this duty. The other might be building a liner such as the new "Mauretania," which assuredly will become either a troopship or an auxiliary cruiser in the event of hostilities breaking out, but presumably in that case the duty will not apply. Then there is the case of two contractors, one of whom builds, let us say, a hangar, and the other a canteen. I wonder whether the contractor who builds the welcome necessary canteens for the rank and file will come within the ambit of the duty. All kinds of cases of that kind will occur. Large-scale manoeuvres will take place in a time of emergency, end possibly all the public houses in the manoeuvre area are tied to one brewery. In that case it seems to me that he will be making a profit arising out of the emergency, and yet, presumably, he will go unscathed.
I hope that the Government, in considering this tax before it is incorporated in the Finance Bill, will bear in mind what I believe to be the sense of the Committee to-day. While I am sure the Committee is unanimous in feeling that there is everything to be said against profiteering out of the national necessity in a time of crisis, it would be a great mistake if any ill-considered propaganda were to give rise to discrimination against armament manufacturers alone, while ignoring those who provide goods or raw materials for which—and I think this is the test—there is an emergency demand. I agree with my hon. Friend the Member for Stockton-on-Tees (Mr. Harold Macmillan) that this duty might well be the starting handle for another dangerous period of inflation., and that the Government would be wise to have careful daily consultation between the Chancellor of the Exchequer and the Minister of Supply designate, in order to see to it, not so much that we spend our time in taxing profits which are going to have an inflationary effect, but that the nation shall have full value for every penny that is spent on this necessary task of rearmament.

Photo of Mr Alfred Edwards Mr Alfred Edwards , Middlesbrough East

The hon. Member was quite right in saying that the £I shares of Messrs. Dorman Long were written down to 2s., but would he say at what figure those 2s. shares are quoted to-day, because that would have a considerable effect on the argument?

Mr. Braithwaite:

I think the answer is given in my speech. The market quotation is of very little effect as compared with the yield, and the yield is 1 per cent, of the original value.

Photo of Mr Alfred Edwards Mr Alfred Edwards , Middlesbrough East

They are now quoted at 30s

9.24 p.m.

Photo of Mr Thomas Sexton Mr Thomas Sexton , Barnard Castle

I have never handled very much finance, and therefore cannot speak with authority on financial matters, but one thing has struck me very forcibly in this Debate. There have been two counts, which to my mind is significant. If those who have been making profits out of armaments had been afraid that they were going to be touched, they would have been here in their battalions to defend their case. Their absence seems to signify that they are satisfied, because, after all is said and done, they are going to retain 40 per cent. of these excess profits, and we had experience of the Excess Profits Duty during the last War. The Excess Profits Duty did not prevent huge fortunes being made, because the manufacture of armaments in private hands is purely a "ramp." It does not matter to whom the manufacturers sell their armaments, or who uses them, because the financiers behind the armament firms acknowledge no flag, and know no frontier. We have had experience of that time and time again.

During the last War our men were shot down by guns sold from this country. Recently I asked a question of the President of the Board of Trade as to how much money this Government paid to Krupps at the time of the last War. He said that, so far as he could trace now, after the long time that had elapsed, the British Government had paid £40,000 to Krupps for the use of a patent during the last War. And all the time that we are preparing to defend our country we are supplying potential enemies with all the war material that they want. I learnt the other day, in answer to a question of mine, that last year we supplied from the British Empire no less than 4,000,000 gallons of petrol to Germany, and 1,250,000 tons of iron ore. What a game it is! No wonder that the people of the country are appalled at the huge profits that are being made.

Then the Government come along with this duty. It is the National Government's soothing syrup for the mothers of the conscripts. They have to do something, or make pretence of doing something, to soothe the mothers who are sending their boys of 20 years of age. And it is the soothing syrup also for the unemployed, especially those who are under the Unemployment Assistance Board, because if the Government keep on spending money like this, the unemployed know very well that there is no possible chance of any increase in benefit. It is a soothing syrup also for the old age pensioners. It was said by my political opponent at the last election, speaking at Newcastle last Saturday, that he could hold out no hopes of higher pensions for widows, spinsters or anybody else while the present international situation continued; the country, he said, could not afford increased expenditure on social services while rearmament was being pressed forward. So the hon. Member for Shettleston (Mr. McGovern) is quite right. This is purely shadow boxing; it is a "cod" duty, because you will never by this means get right down to the root of the problem, and even if you do, you are still leaving these people with 40 per cent. of their ill-gotten gains. I and my colleagues on this side of the House, therefore, protest strongly because the Government have not done something more effective to prevent arms profiteering.

9.29 p.m.

Photo of Sir George Schuster Sir George Schuster , Walsall

As one who has listened to most of this Debate I should like to make a very few remarks. I hope that I may be in order in trying to place this proposal in relation to the wider issues which seem to me to lie behind it. I speak as one who is fully prepared to give his support to this Resolution, but only if it is to be regarded as one step in a much wider programme. I think that some hon. Members opposite who have spoken have tended to be somewhat unfair to the Government, because they seem to forget that only a few days ago we discussed in this House a very important Measure, which I am sure I am right in supposing should be read together with the proposal now before us. I have in mind particularly Clause 9 of the Ministry of Supply Bill which introduced one of the most important steps which the Government have taken in relation to this whole matter of limiting profits. By that Clause the Minister is entitled to prescribe standardised forms of costs accounting, and to make the closest scrutiny into the profits that have been made. Again, under the Ministry of Supply Bill the Minister has most stringent powers for ordering work to be done at reasonable prices; and looking at the matter from the point of view of the manufacturer—and I should like to say that I am not a manufacturer myself, nor am I in any way concerned with the armaments industry—I think it is right to point out that there are grave dangers that if these powers are misused the whole incentive to co-operate in the Government's effort may be reduced, with some risk to the country.

I have been thinking to myself, as I listened to this Debate, how what has been said here compares with the task which is before the country, and the emergency in which we are placed. I suppose one is correct in supposing that this measure has been introduced—indeed, it was so described by the Prime Minister himself—as a measure which was being considered as essentially linked with the proposals for compulsory military training. Therefore, I suppose one may not unnaturally connect it with those ideas which arc conveyed somewhat loosely by the expression "conscription of wealth," and consider this measure as part of a policy designed to give some effect to that kind of idea. If that is so, it is very important that we should try to clear our minds as to what is meant.

It seems to me that there are three important purposes which might be included in the significance of that expression. The first, and to my mind by far the most important, purpose is that the Government should have power to mobilise all the resources of the country, so that in the face of the emergency of which we foresee the possibility we may be sure that all the resources of the country are coordinated and directed towards fulfilling a common purpose. That I would describe as "getting on with the nation's job." The second purpose is to see that, in connection with all the work which may be necessary for "getting on with the nation's job," no undue profit should be made; and that purpose is covered by the expression which has become a commonplace "taking the profit out of war."

The third purpose is to see that the necessary expenditure in carrying out this armament programme is raised in a manner most beneficial to the country, and that, in the raising of it, those who are wealthy should make their fair contribution. That is a purpose which might be covered by the expressions "equality of sacrifice" or "making wealth pay its share." I suppose the present measure is to be connected with what I have described as the purpose of "taking the profit out of war." In considering whether it is effective for that purpose, however, we ought not to lose sight of what should be the overriding purpose of "getting on with the nation's job." Therefore, it is well to consider some of the possible effects of this measure.

I should like to see something going a good deal further than what is now-proposed. I have a great deal of sympathy with what has been said on all sides of the Committee as to the difficulty of drawing a distinction between purely armaments work and other kinds of business which may be considerably affected by rearmament expenditure. I am not ashamed to confess that I should have preferred to see the Government go back to the idea of the original National Defence Contribution, and introduce a tax which would have fallen on all profits above a certain datum line. I hope that the possibility of that is not excluded because of the introduction of this proposal.

Photo of Mr Ernest Evans Mr Ernest Evans , University of Wales

Does that mean that the hon. Member is prepared to envisage such a tax being imposed on industry other than purely armaments work?

Photo of Sir George Schuster Sir George Schuster , Walsall

That is the point that I was try to make. I hope that the fact that the Government have introduced this Measure does not mean that a further measure is excluded. We should visualise the conditions to-day in comparison with the conditions which existed when the National Defence Contribution was first proposed. That brings up a consideration which, I think, should be present in our minds through all the discussions on this proposal—that we are not yet at war. As many of us pointed out at the time, we supported the Budget proposals because we felt that they were well adapted to the existing conditions—conditions when we are not at war, and in which we must ensure that while adequate resources must be turned to the rearmament effort we should not give up the idea that there is a possibility of returning to normal conditions. That, I imagine, is a consideration which has been present in the minds of the Government during the whole of their handling of this problem, and the fact that they have proceeded step by step, instead of introducing drastic measures at the beginning, has been due to a desire not to disturb the normal economic life of the country more than is necessary.

In that they have been extremely successful, for, indeed, one of the most surprising things about the situation to-day is that, in spite of the enormous diversion of effort which has been caused by rearmament, there are signs that the normal economic life of the country is in a healthy condition. The recent trade figures bear that out. The point I am making now is that, although I fully support all that has been done in the past, and think that it has been wisely timed and regulated, we are now up against new conditions. There is now a serious danger of undue competition in certain fields of industry—a point which was fully developed in the Debate on the Ministry of Supply Bill. Those being the conditions, a great many of the considerations which made the National Defence Contribution open to criticism at the time have now lost their chief weight, and I submit that it is desirable that we should consider another measure of that kind, partly as a very legitimate means of raising tax revenue, and partly as a means of securing proper regulation of our national effort.

Let me turn to another point. If special taxation is to be limited, as it is under the present proposal, to armament contracts— defined in whatever way they may be defined, but still with a fairly narrow limitation— there is a very grave danger that to work for the Government may become relatively unattractive for many undertakings. The point has been made already that if you take a firm which has contracts for the Government running up to £190,000, that firm is going to think very seriously before it goes out to compete for orders which would put it above the £200,000 limit. It is true that in the Ministry of Supply Bill powers are provided for the Minister to force such firms to undertake orders and get above that limit, but I am sure everyone agrees that it is undesirable that those powers should be used more than is necessary. There will be friction in calling them into operation. Again, it has been pointed out that a firm getting a contract for, say, the Turkish Government will be free from any obligation to pay this extra taxation compared with firms working for the British Government. Surely that is not desirable. Therefore, I ask the Government to give very special consideration to the idea of making this sort of measure applicable over a much wider field.

I want now to turn to another point. As I have already said, we are discussing this Measure in times of peace. I think a good deal of the criticism which has been brought against it has been brought by people who are visualising a national emergency such as would arise in the event of war. We ought to make a great distinction between those two conditions. Fortunately, we are not under any necessity to regard war as inevitable, but I put it to the Government that that possibility must be taken as being within the horizon of everybody's vision, and it is desirable that certain measures should be thought out in advance for meeting that possibility. The point I want to make is that we won through the last War with industry operating according to the rules of the money game. Many undesirable results came from that process and yet one must admit that the game worked to the extent that we got through the War successfully and that by the end of the War this country was turning out the materials of war on a scale and with an efficiency which far exceeded that of any other country that had been engaged. That may be asserted with certainty, but I submit that it is also certain to say that the people of this country would never tolerate going through another war with industry operating according to the rules of "the money game." I do not believe that the people of this country would stand for it. Therefore we have to consider very carefully what is to take its place.

When I consider a measure of this kind I am filled with some apprehension that we are in danger of falling between two stools. We may be introducing measures which will so hamper and bind private industry that it may not be able to operate freely, and yet we have not gone far enough to assume that complete Government control which is the only alternative to take its place and which I believe is the alternative which will have to take its place if we become involved in the emergency of war. I feel that if we are to get through another war efficiently and maintain unity among the people of this country it can only be done if all the main industrial enterprises are being operated not for private profit but for the public purpose. [Hon. Members: "Hear, hear."] I note the sign of approval from hon. Members opposite, but I wish also to make clear that I do not in the least regard that as a prelude to the introduction of the Socialist State. What I look forward to, and believe to be the right course for this country to take, is the enlistment of the voluntary co-operation of every industrial enterprise to work as agents for the Government. Those of us who are responsible for the supervision of trading and industrial enterprises do not, of course, speak in this House as representatives of such enterprises, but still we cannot escape the responsibilities of our position.

Speaking with a full sense of the responsibility of my own position in relation to business enterprises I wish to put this point to the Committee. Supposing we were involved in war, I should like to be able to put above every branch of the business for which I am responsible, "This business is being carried on for the duration of the war on account of the Government, and all profits will accrue to the Government." In circumstances of war the essentials which directors should seek to preserve in the interests of the shareholders would be that the property and good will of the company should be preserved and that each shareholder should get reasonable regulated return upon his investment. I put that forward to illustrate the idea I want to put to the Government, because if we are to contemplate passing into arrangements of that kind it is extremely necessary that discussion as to how they should be taken up should begin before we are actually landed in an emergency. The right hon. Gentleman the Chancellor of the Exchequer will find that there are a great many business leaders who will be only too ready to enter into discussions so that plans might be prepared in case the emergency came upon us.

Photo of Mr William Gallacher Mr William Gallacher , Fife Western

Will the hon. Gentleman tell me how it is that those who represent private enterprise always say that that enterprise could not be run efficiently by the nation and yet they suggest that, when we are in the deepest crisis, the most efficient way to run industry is not by private enterprise but by Government control?

Photo of Sir George Schuster Sir George Schuster , Walsall

I was suggesting that, in an emergency of that kind, those who are now running businesses and have developed their efficiency under the driving force of competition in private enterprise, would be very suitable people to continue running those businesses, but that they should run them not for private profit, but to play in with the national purpose. That is a very different idea from what the hon. Gentleman has suggested. I must apologise if I have gone rather outside the scope of this measure, but I have ventured to do so because it is extremely important that, in considering it, we should consider the wider issues, and I also, greatly venturing, want to make it clear to the right hon. Gentleman and his colleagues sitting on the Treasury Bench that if I personally give my support to the measure it is because I regard it as no more than a small step in a general plan, and because I cherish the hope that all the steps which are necessary to give effect to the wider ideas which I have mentioned may receive some consideration from the Government.

9.53 p.m.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

In commenting on the proposals of the Chancellor of the Exchequer in his paper the other day, the editor of the "Financial News" said, in a leading article, that the duty was a complicated but a luke-warm affair calculated to yield very little except satisfaction to the Government that they were honouring one of the Prime Minister's pledges. That may be a satisfaction all the more precious to the Government because it does not happen as often as some of their supporters may desire. I do not believe— and in this I agree with the hon. Gentleman the Member for Mossley (Mr. Hopkinson) who spoke this afternoon—that they will get very much even of that satisfaction out of this new tax because the fulfilment of the Prime Minister's pledge is very meagre. The Government have refrained from calling the tax the E.P.D. Perhaps because the old E.P.D. was not a very flagrant memory, they call it the A.P.D. I believe that the future will come to interpret these initials as meaning "A Political Dodge." There is no doubt whatever that my right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) was right when he said that this is a political tax. It is not introduced for financial reasons. I have been trying to read the opinions of the City editors, who say almost with one accord that, from a financial point of view, it is pernicious, futile, absurd, and inequitable.

The political purpose for which this tax is introduced is extremely important to our Debate. What is the political purpose or the ostensible political purpose for which it has been introduced? The Chancellor of the Exchequer reminded us this afternoon that the Prime Minister had said on 27th April that something like this was required as a counterpart to conscription, and the Prime Minister himself then said that it was designed to meet the views of the Labour party. What are our views? As my right hon. Friend said this afternoon, we want to take the profit out of war and out of the preparation for war. That means three things. It means (1) that we agree with the Royal Commission, appointed by the Government a few years ago, that it is peculiarly revolting to the conscience of ordinary men and women that killing, or the supply of killing power, should be a source of profit to particular groups of people. We find it impossible to reconcile the moral values of patriotism and National Defence with the moral values of the private manufacture of arms. (2) We think there are practical objections no less serious than the moral objections to profiteering. We remember that in the last War, as one hon. Member has recalled to-day, the factor of private profit was a perpetual poison in the body politic and a perpetual source of difficulty in organising the expanded armaments production that was required. Thirdly, and above all, for it is fundamental to our political purpose, we think it intolerable that private firms, vested interests, should be able to influence, even in the slightest degree, or should have a desire to influence, the policy which Governments pursue in matters of armaments of war.

After a very prolonged study of the subject I say that it has been proved that vested interests have exercised such an influence. I know it from my own personal experience on the Disarmament Conference eight years ago, and we cannot tolerate the idea that when the moment comes at which the present armaments race is brought to an end, and it may be near, or it ought to be near, there may be powerful vested interests whose profits will be increased if that armaments race goes on. It is with these things in our minds that we approach this A.P.D., and it is with these things in our mind that we say that, although we shall not vote against the Resolution we think that it is on wrong lines and that it is utterly inadequate to fulfil the political purpose of which the Prime Minister spoke a month ago.

As my hon. Friend the Member for Bassetlaw (Mr. Bellenger) said earlier, we have been saying for years that great profits were being made from arms production. Time and time again we have raised the matter in the House in question and in Debate, and time and time again the Government have told us that all is well. They told us in the White Paper on defence in 1936 that they were determined that the needs of the nation should not serve to pile up extravagant profits for those who were called upon to meet them. They said that they would devise means to prevent profiteering by the inspection of books, by technical costing, by audits on behalf of the Government and by arbitration in disputes. We said that those things were inadequate. Today, the Government admit that we have been right and they have been wrong. The Prime Minister specifically admitted that in his speech last month, and the Chancellor of the Exchequer did so by his complete failure to-day—I hope he will forgive me for saying it—to explain away what the Prime Minister admitted. When they come to deal with these excess profits the Government adopt methods which experience has shown to be inadequate and wrong, and which have been specifically condemned by the Royal Commission, which they themselves appointed. The Royal Commission went out of its way to say, with a certain amount of elaboration, that costing, the ordinary work of Government Departments and an Excess Profits Duty could not do what was needed.

If we seriously want to stop excess profits, where must we begin? Many hon. Members this afternoon have told us, all experience tells us, and the Royal Commission told us, that you must begin by expanding manufacture in Government factories, arsenals and dockyards. On this side of the Committee we believe in the full nationalisation of arms production in times of peace and, as the hon. Member for Walsall (Sir G. Schuster) has just said, almost everybody believes in its full nationalisation in time of war. Even the private manufacturers before the Royal Commission admitted that that would be right. But I exclude for the present purpose the policy which I know the Government will not adopt. Suppose they had left the private firms where they were in 1935, what ought they to have done to deal with profiteering, to prevent profiteering during the period of expansion from that year onwards? In our view, obviously, they ought to have done what the Government did in the last War, when it was confronted by exactly this same problem of inefficiency, waste and excess profits. They should have increased production in Government establishments. That is to say, they should have expanded the Royal ordnance factories and the dockyards far beyond the limits to which they have expanded them. I know that the War Office have done something, but the Admiralty and the Air Ministry have done very little.

They should have created new national factories, exactly like those we had in the last War—factories owned and operated on the same basis as the Royal ordnance factories, by the Government itself. Above all, they should have carried out the recommendation of the Royal Commission that there should be Government production of every type of arms and munitions which the Government wants to buy. If the Government had done these things they would, in the first place, have enormously reduced the volume of armament production on which private profits is being made, and there would have been no difficulty about doing it. It was done in the last War on an immense scale. There were hundreds of thousands of men and women working in Government factories, and the scheme was enormously successful in every way. Therefore, I hope the hon. Member for Holderness (Mr. Braithwaite) who doubts the efficiency of Government production, will study the numerous volumes of the history of the Ministry of Munitions, and he will find out that what I have said is true.

No one would suggest that what could be done in three years under war conditions, with a great number of our skilled men fighting at the front, could not have been better done and more easily done in the last three years. There is only one argument that can be used against it, an argument which recurred constantly in the proceedings of the Royal Commission in 1935, and which was constantly used by the private manufacturers and the experts of the Service Departments. That argument is that the expansion of Government factories will cost the Government too much, and it is asked, why should the Exchequer bear the heavy costs incurred, when private firms are quite ready to do the work? That argument has been exploded in the last three years, because the Government in those years have been advancing the capital which the private firms required. They have been guaranteeing that the firms shall suffer no loss if the armaments race ceases and their new plant should become redundant. I doubt—the Financial Secretary to the Treasury will correct me if I am wrong— whether there has been a single armament expansion of production in the last three years in which the Government have not in some form or other put up the money or guaranteed the private firm against the risk of loss.

In any case, whether I am right or not on that point, the Government have done it on an enormous scale. In the Estimates for 1937 £10,000,000 were provided for this purpose. The other day the Chancellor of the Duchy told us that the value of manufacturing plant belonging to the Government being used. by private firms might be estimated at perhaps £13,250,000. I do not know how far the two figures overlap, but the total in one form or another must be far beyond £13,250,000. Why should not the whole of that money have been put into national factories of the kind that we had in the late War? In very many of these factories the Government have put up the capital and taken the risk, and yet the new part is simply being used by private firms on a profit basis as if the factories were their own, and even where they are run for a management fee, like the shadow factories, there are still great elements of private profits which enter in.

There is another point of immense importance. There is the certainty that in such factories run by private arms there will be no real competition with the other factories belonging to the managing private firms. That is a point of capital importance. If the Government had created real national factories—I hope the Minister of Supply is still going to do it; it is not too late—not only would they have cut out a great volume of armament production on which they would not have had to deal with excess profits at all, but they would have secured another benefit of far greater importance. More than one Member has called attention to the obvious fact that the price is the source of profit, and that if you want to do anything about profit, you must look at the price and reduce and control it if you can. How can that best be done? In 1934 the Chancellor said, in a speech on private manufacture, that State factories are useful, not only because they produce arms themselves, but as a check on the prices and the qualities of those produced by private firms. In other words, if you have Government production, you check the prices of all the arms which the private firms produce. That is fundamental to our present purpose. It is what made the Royal Commission propose that every kind of arms should be produced by the Government itself. It is what solved the problem of profiteering in the last War.

Again, I ask hon. Members to look at the history of the Ministry of Munitions. They will find on every page that the national factories made immense savings for the nation. History estimates those savings at £440,000,000. They say they were effected by confronting the larger manufacturers with cost returns from the national factories. Over the last three years the methods that the Government have pursued have failed and, so long as the great part of arms production is left to monopolistic private firms—and many of them are monopolistic—working with sub-contractors whom they control, and without any Government competition, those methods of costing and so on are bound to fail. Over the vast range of armaments there is no Government competition at all. The Government to-day, I believe, are building no capital ships they are doing very little new construction in the dockyards at all—they are making no heavy naval guns or heavy naval mountings, no armour-plate and no tanks. What an immense field is left to private enterprise alone. We believe that only national production in national factories will check the prices of these things and we believe that, if the Government had used the public money which it had advanced in various forms to private firms, they would have been able to reduce prices all round and so enormously reduce the problem of excess profits with which the Chancellor is now trying to deal. We therefore think that the methods that the Government are pursuing are all wrong.

I want now to consider, if the method is to be accepted, whether the Government could not have done a great deal better than they are doing. I should like to say a word or two about those factors in the scheme which constitute its main framework. I think it has been shown that the rate of 60 per cent. of the excess profits is very low. The Government call it 60 per cent., but in reality it is, after allowing for Income Tax and National Defence Contribution, only 41¼per cent. That is to say that nearly 60 per cent. of the increased profit over the standard year is left to the shareholders of the private firms. If that is compared with the Excess Profits Duty of sacred memory —and we recall that that was 80 per cent. plus 5s. Income Tax—15 per cent. was left to the producers, and that was considered enough to induce them to produce. I do not want to urge this very strongly, because a high rate of levy is open to the objections of which my right hon. Friend spoke, but if you are to have a levy of this kind at all—we think it a bad tax—you surely ought to do better than the 41¼ per cent. of profit which you yourselves describe as excessive.

In the second place, many Members have urged that the limit of £200,000 worth of armament orders is far too high. Again, I have been reading the City editors, and there is hardly one who has not suggested that many of the fish—not the very big fish—will escape so loose a net. It must be so. In the aircraft industry there are 3,500 sub-contractors. How many will pay this? I should think too at the very outside. Why should the limit be £200,000? The "Economist" said it should be £50,000. The hon. Member for Ipswich (Mr. Stokes), who is a manufacturer, said he saw no difficulty if it began at £100. He has said that he has himself paid back to the Treasury the profit which he earned on an order for £700. I know there are difficulties about it and I know also that, as it is now defined, there are possibilities of evasion of this £200,000 limit, with which the Chancellor will have to deal by new proposals beyond those already made. The Chancellor said that on contracts under £200,000 profits would be small. There have been a good many contracts put out to private firms for under £200,000 on which a profit of 33per cent. was going to be made, according to the hon. Member for Ipswich, and on which certainly the total profit would have been pretty large. I hope the Financial Secretary will deal very particularly with that point.

Thirdly, there is the question on which the Chancellor of the Exchequer did give us a specific assurance this afternoon. I accept that assurance, I am sure he is right, but I mention the matter all the same because it is one of great importance and will illustrate another point which I want to raise later on. It would have been quite absurd, and the Chancellor of the Exchequer agreed, for capital increases of a firm which were merely the issue of new paper shares, bringing in no new money into the real manufacturing capacity of the company, to be allowed exemption from Armament Profits Duty. The Chancellor of the Exchequer will remember that I ventured to recall to his attention that this is not a matter of theory only; the thing has happened. In 1935 there were many new issues of aircraft stocks on the London market, following the collapse of the air disarmament proposals. The public took up these issues with great alacrity; but less than one-twelfth of the very large sum of money which was raised from the public was put into new capital development by the companies which took it.

I give two examples. The Bristol Aeroplane Company put a new issue on the market, and six original shareholders cleared nearly £2,000,000. Altogether £2,400,000 was shared between the vendors and the brokers and not one penny of it was used to finance any new development or extension of plant. In the same year the Hawker and Siddeley Companies amalgamated. One owner of the Siddeley Company was bought out for £1,000,000 or rather more. The directors of the Hawker Company were £1,000,000 in pocket. This money was provided by the public in return for the new shares which they purchased; and only £23,000 out of the £2,000,000 was put into new development of the new companies manufacturing resources. I say that with facts like these the Chancellor of the Exchequer must make absolutely certain that no increases of capital of this description receive allowance.

I come to the principal point I want to make. By far the most serious criticism of the proposals of the Chancellor of the Exchequer relates to the standard profits year. Many hon. Members have called attention to the importance of this point. I want to emphasise it with all the power at my command in the hope that the Chancellor of the Exchequer will make a change in the standard he has proposed. In the White Paper there is a fourfold choice to the manufacturers; they can take the profits of 1935 the profits of 1936, the average of the profits for 1935 and 1937, or the average of the profits for 1936 and 1937. I suggest to the right hon. Gentleman that 95 firms out of 100 will take the last. And why? To calculate 1936 and 1937 as the standard years for normal profits on armament production is utterly grotesque. It is bad enough in the production of civil goods. As City editors point out, that is extremely favourable to the manufacturers of such goods, because it is almost at the peak of the profits they have been able to make in recent times. But to take that year in the case of armament firms is quite absurd. Let the Committee remember that a great part of the armaments which the Government are purchasing is still being purchased from armament firms, the large proportion of whose output are armaments and armaments alone.

I have a list of firms here, but I will not trouble the House with the figures—Vickers Armstrong, the Aircraft Firms, and so on, whose production in 1935 was, as to 75 per cent. or more, armament production. For such firms as that to take the years 1936 and 1937 as the standard makes the thing a farce. The Chancellor of Exchequer tried to defend it this afternoon by saying that in 1937 our rearmament was still on paper, that we had only plans, that it was only since then that the real armament expansion had begun. I think he ought to have looked up the figures. For 12 years up to 1934, the national expenditure on armaments had been stabilised around £112,000,000 or £115,000,000 as an average. The arms firms had settled down to normal peace-time production, receiving, as they did, orders which varied from year to year—it is difficult to make an exact calculation—but the orders usually amounted to about £20,000,000 or £25,000,000 a year. But by 1936, the first of the two years which these firms are to choose, our armament production had risen from —103,000,000 in 1932 to —186,000,000, and in 1937, it was —269,000,000. I admit that takes in three months of 1938, but still, what I say is substantially accurate. Therefore, the average comes out very close to —230,000,000, an increase on 1932 of more than double, and an increase on 1934 of more than double. Let the Committee also note that a very large proportion of that increase was not on man-power, for we had not reached that stage, but on the purchase of arms from private firms. Their orders had not only doubled, but quadrupled at the very least. And their profits had done the same.

Many hon. Members have cited profits, comparing the years 1933 and 1934 with 1937. Let me cite one or two more. The profits of Vickers Armstrong had risen from —188,000 in 1933 to —867,000 in 1937. The profits of John Brown had risen from —79,000 in 1935 to —488,000 in 1937. In the case of the Projectile and Engineering Company—not a very big company, but one that does a large proportion of armament work—the profits had risen from —8,000 in 1933 to —137,000 in 1937. The English Steel Corporation's profits had risen from —113,000 to —840,000. Perhaps the Chancellor will say that those are special cases. In any case, they leave out market ramps such as those of the aircraft firms, of which I have spoken, in which these people made millions of pounds—and the aircraft firms were not the only ones. But take an average of the 30 most important firms that were producing arms in 1937. Their profits rose from a total, in 1934—I take a year that is more favourable to the Chancellor—of —3,800,000 to —11,700,000 in 1937. I venture to suggest to hon. Members who had said that the arms firms make such terrible losses in lean times that on a profit of —3,800,000 in 1934 they could carry on. They were not going bankrupt. But by the second of the Chancellor's standard years, their profits had increased by nearly —8,000,000—they had almost trebled—and yet, together with 1936, which was only relatively less prosperous, and not very much less, than 1937, that is to be the standard year. I will not go into details about the dividends, but the dividends likewise are very high.

What is the result of this grotesque standard which the Chancellor proposes to take? Let me state it for an individual firm, Vickers. Let hon. Members understand that in what I am going to say I am not attacking any individual. I never have done that. What I attack is the system of private manufacture, and not those whom the Government call on to work it. Over half a century, Vickers. have become one of the greatest powers in British industry. They have done so by making private profit out of arms. They have built up immense personal fortunes for many private persons. They used to employ Sir Basil Zaharoff, the chief inventor of the high-pressure salesmanship of arms by corruption, political blackmail and other means.

Photo of Mr Quintin Hogg Mr Quintin Hogg , Oxford

I thought the hon. Gentleman said that this was not to be an attack on persons.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

What I am pointing out is that the agents of private firms used, in selling war material, the high pressure salesmanship which is often used in other businesses but which, when used in selling war material, is open to the gravest objection. I am perfectly entitled to say that this firm did use the services of Sir Basil Zaharoff, who has left a not very savoury reputation, and, indeed, since I am pressed on the matter, I will say that in 1927 they presented a gold cup to Sir Basil Zaharoff to mark their appreciation of the valuable work which he had done for the firm for 50 years. And these further facts are also very relevant to my point. It was one of the Vickers directors who wrote to an American colleague to the effect that Geneva was "a troublesome organisation," when the Disarmament Conference was seeking to carry out the British Government's policy of abolishing submarines. It was a constituent of the Vickers group which gave a subsidy to the Air League, which was working against the abolition of bombing aircraft, then being proposed in the Disarmament Conference.

At present, Vickers are receiving from the Government orders which must amount to tens of millions of pounds. The overwhelming proportion of their work must be on arms. For years they have been building up reserves. Nobody knows what their real earnings have been. And yet, under the Chancellor's proposal, as it is drawn, they will be left, accord- ing to an expert calculation made in the "Spectator "—it is not mine—with a standard profit of £1,800,000 and on that standard profit on which they would have paid in 1938 the princely sum of £70,000. £70,000 on a standard profit of £t,800,000! £70,000 from the greatest arms firm in the country! If the calculation is wrong, I hope the Financial Secretary to the Treasury will put it right. Nobody would be more pleased than I. But I do not think it is wrong, because Mr. Douglas Jay, whose competence no one doubts, has made other calculations in which he shows that in the case of four representative firms the tax, measured as a percentage on the ordinary capital, will be equal to 3 per cent. for Rolls-Royce, 0.8 per cent. for De Havilland, 1 per cent. for Hadfields', 9 per cent. for Faireys', and even Faireys' will be able to maintain their dividend of 15per cent., after paying the tax. No wonder the Chancellor is unable to tell us anything about the yield. Some experts have said it would be £2,000,000, others £5,000,000 and others rather more. A yield of £5,000,000, on an armament expenditure of £400,000,000 a year! The real verdict on this new tax was given in the leading article in the financial journal which I have quoted already and which I quote again: Generally, this duty seems to be drafted its generously as possible for industry. This generosity will, of course, reduce the yield still further and will make the tax even less sensible as an economic force. But if it is decided that we must have this bad tax, it is better that it should be so mild as to be almost innocuous than that it should be drastic and effective as a revenue getter. I think that will be the verdict of history on this proposal. It is a political dodge and one that will not succeed. It gives us no real counterpart to the conscription of life. It does very little to stop excess profits on preparations for war. It does nothing at all to remove the evils which we think that profit involves, and I am very certain that the Chancellor will not persuade the British public that it does.

10.30 p.m.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

I must say, when it comes to the end of a Debate of this kind and the hon. Gentleman the Member for Derby (Mr. Noel-Baker) is replying for the Opposition, that I rather envy him his place, because he is able to take a much wider perspective than I would ever be allowed to do, in view of the many questions that have been asked me and of the replies which hon. Members would wish to secure from me. I will not by any means go back over all the problems which the hon. Gentleman has raised; I know perfectly well that he was one of the people who gave evidence before the Royal Commission on the Private Manufacture of and Trading in Arms, and we all know his own line in this matter of the Government control of armaments, but one would not suspect, unless one had one's attention drawn to the fact, that in spite, no doubt, of the great eloquence and the enormous mass of figures which he brought before the Royal Commission, that Commission did not accept his thesis in the very least. As he has raised the matter, I would like to remind the Committee of what they did say in their summary of conclusions and recommendations. They said: The abolition of the private industry in the United Kingdom and the substitution for it of a system of State monopoly may be practicable; but it is. undesirable. No sufficient case "— in spite of the hon. Gentleman— has been made out for taking,' so drastic a step. Who believe that the reasons for maintaining the private industry outweigh those for its abolition. We are of opinion that the necessities of Imperial defence cannot be effectively met, in existing conditions, except by the maintenance in peace time of a system of collaboration between the Government and the private industry of the country in the supply of arms and munitions.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

I know the right hon. and gallant Gentleman does not want to misrepresent me, and I do not think he can have heard what I said, or perhaps I did not make myself clear. I said I was not arguing for the complete monopoly of armament production in time of peace, but only that the Government: should carry on what the Royal Commission recommended, namely, that the Government should themselves make all kinds of armaments and to do so should extend their national factories.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

For all that, that is the recommendation of the Royal Commission on a fundamental point. I think the Committee will consider that it has been useful to-day that, though we have been debating a very wide Resolution on the Paper, it has also had before it the White Paper and the Clauses which we propose to move on the Finance Bill, so that it has been able to get a much better view than is usually the case on occasions of this kind. The trouble, from my point of view, is that it has led to a very diffuse Debate, and many questions have been asked which it would be far more appropriate to answer on the Clauses themselves, and I will not go into them now to any extent. As I say, it has been useful to have this general Debate, because, of course, many questions which have been raised to-day will be raised again, and it will be possible for my right hon. Friend to consider some of the aspects of the question which already at this early stage have been brought to his notice. The only question before us now, however, is this Resolution, and it has been drawn in such very wide terms that I think very few problems which we have discussed to-day would be ruled out of order because of the narrowness of the Resolution on which the Clauses are founded. I think there have been a few misunderstandings, and if I can help to clear them away, so much the better, but if I cannot, there will be other opportunities.

In some quarters, perhaps not so much in this Committee as elsewhere, it has been thought that the figure of £200,000 mentioned referred to profits which came under the purview of the tax; but that is not so. The £200,000 refers to the receipts during the year which make the business liable. I have been asked one or two questions in regard to that, one by the hon. Member for Peckham (Mr. Silkin) who read in the White Paper: The Armament Profits Duty will be charged on all persons carrying on a trade or business which is declared to be substantially engaged on the supply of armaments. The White Paper goes on to define what is meant by "substantially engaged," and there comes in the figure of £200,000. The hon. Member thought that in the case of a very big business £200,000 would not be a substantial proportion, and that perhaps the firm could get out of the tax because it was not "substantially engaged" in the work; but that is not the case, and I am very glad to have the opportunity of disabusing his mind on that point.

Some questions were asked about the position of local authorities. That, of course, is a matter which would fall for further discussion on the Clause, but hon. Members may be interested to know that as we have envisaged the Clause, and as it is now on the Paper, these contracts are those declared to be receipts of the nature of £200,000 and over in the year; declared, that is, by the Minister of Supply at present designate. That being so, it is said that there is the complication of the supplies for local authorities. and that there may be contracts made by local authorities which have nothing to do with the Minister of Supply and which he could not be in a position to do anything about declaring to be liable for this duty. But we must bear in mind how much of the big contracts of local authorities are being effected through the central Government. It is estimated that the expenditure this year on central purchase of equipment and materials — steel shelters, fire engines, steel for basements and so on— for air-raid precautions purposes, is about £34,000,000, which is something like 80 per cent. of the expenditure at present envisaged by the local authorities. That is the estimate to-day. I agree that the figure may go up as the requirements go up and that so much might not be purchased through central channels, but that is the figure at present. The estimate of what is being purchased centrally on Government contract and is therefore within the scope of this duty is £34,000,000 or at least 80 per cent. of air-raid precautions expenditure.

Photo of Mr John Wilmot Mr John Wilmot , Lambeth Kennington

The right hon. and gallant Gentleman may have inadvertently fallen into an error. Because the grants may be 80 or 90 per cent. that does not mean that that particular expenditure is 80 or 90 per cent. Local authorities have a whole range of A.R.P. expenditure.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

I am not talking about the grants to local authorities— which are a very much smaller figure—but about actual money. This £34,000,000 is the estimate of what in this year is being purchased through the central Government, and it would therefore be covered by the duty we were talking about. But this point can be raised again and perhaps more usefully later on.

Photo of Mr Harold Macmillan Mr Harold Macmillan , Stockton-on-Tees

The difficulty about the Ministry of Supply in this connection is not confined to the case of the local authorities. The Minister of Supply is not dealing with Air Force purchases or Admiralty purchases, and so there is only a small range of the total armaments expenditure of which he has direct knowledge.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

Captain Crookshank : He is dealing with a great number of different subjects connected with those Departments, or will be; but we were on the point of the local authorities.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

As I pointed out in my speech, it is clear that there are some things which can be altered by the Government which could not be altered by ordinary private Members. Can we rest assured that with regard to this question of the local authorities the House will be able, if it desires, to secure that profits from local authorities' contracts should become amenable to this tax?

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

If the right hon. Gentleman is asking that question as a point of Order, it is not for me to reply upon it. I did say, earlier on, that the Resolution was so defined that there would be no particular difficulty from that point of view. On the general point of local authorities, I stated what was the actual position at the moment. This is obviously one of the questions on which the House will want to go further in subsequent Debate in order to consider the points which have been raised.

A great many questions have been raised during the Debate, and perhaps it would be more convenient if I answered some of them in the order in which they were made. The right hon. Gentleman who spoke first gave us an instance of how he thought this duty would fall. I will not say that he fell into error because I do not suppose that he ever falls into error on these matters, but he actually raised a point which was irrelevant. I do not know whether I can make it clear, but I will give some purely notional figures which may make the matter a little clearer and show exactly how this duty will fall. I only wish, as Miss Susan Lawrence once said in this House, that one had a blackboard on which to illustrate these mathematical arguments.

Take the case of a firm which had a turnover of £500,000, before it received an armament order of £250,000. The error which the right hon. Gentleman committeed was to say that some propor- tion goes to armaments and some not to armaments. It does not matter what the proportion was before this matter came up for discussion. Let us assume that the firm had a turnover of £500,000 and made a profit in the standard year of £30,000 [Interruption]. These are only bogus figures but they illustrate how this tax will work.

The firm then got an order for armaments of about £250,000 and that brought them to the position that, as a result of their private business and the armament contract together, their profits became £70,000. The growth of the profit was £40,000. The total of their turnover in the accounting period was £500,000 in the first instance, and then there was the £250,000 brought in by the armaments contract. It is here that the formula of the proportion come in, because the proportion would then be £250,000 for the armaments and £500,000, the figure that existed before. Therefore, of the £40,000 growth of profit one-third become liable to A.P.D., and on that, one-third which becomes liable, 60 per cent., is the rate of duty levied. The balance of the total profit, after taking off the armament profits duty, becomes taxable for N.D.C. and Income Tax. That is the way it works. I would again make the point that these figures are no doubt perfectly absurd, because I only wanted to make clear the machinery, and that is why I say that the right hon. Gentleman's question as to what proportion of the original turnover is armaments and what proportion is not armaments does not affect the apportionment one way or the other.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

With respect I do not think he did, but I think we are all agreed now. Perhaps, while I am oh that point, it might be appropriate to take up the point by the hon. Member for Derby, when he sought to demonstrate that the effective rate of tax would be, not 60 per cent., but only 41 per cent.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

I said that that was the calculation of the "Economist."

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

Then I need not go into it at any length, if it is not the hon. Gentleman's calculation.

Photo of Mr Philip Noel-Baker Mr Philip Noel-Baker , Derby

The "Economist" is a much higher authority than I am, and, therefore, the Financial Secretary ought to answer the point.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

The hon. Gentleman is far too humble; I do not agree with him; but whoever made the suggestion that the effective rate was only going to be 41 per cent. was in error, because the cumulative effect of the A.P.D., and then the N.D.C., and thereafter the Income Tax, leaves a balance of only 27 per cent., and takes away 73 per cent. of the excess profits. That is quite different from the idea of whoever made the calculation that it was only 41 per cent.; it is a very great deal more than that.

I apologise if my reply is rather disjointed, but it is nothing like as disjointed as some of the questions were. The next question was that of the right hon. Gentleman about depreciation, and whether wear and tear was going to be allowed. I think that that question is answered in the White Paper, but, anyhow, the intention is that it will be allowed on similar lines to the Income Tax allowance for that purpose. The hon. Member for the University of Wales (Mr. E. Evans), in a very friendly, welcoming speech, suggested that there might be a firm who received orders for £130,000 worth of cloth, and then, having received a further order, might perhaps prefer not to undertake it, but to do civilian work and be clear of armament work altogether. The hon. Gentleman asked, would there not be a temptation for such a firm to do private work instead of doing what was required for the good of the State? The answer is that, of course, there might be a temptation to a firm not to take this armament contract, and if the temptation is very great it seems to bring one to the conclusion that armament contracts are not necessarily so profitable as some people may think. If it was essential for the service of the State that that firm should not take up further private work, but should make cloth for the Army, then it must not be forgotten that Clause 7 of the Ministry of Supply Bill will give the Minister power to deal with that problem and make them carry out the contract.

My hon. Friend the Member for Kidderminster (Sir J. Wardlaw-Milne) asked about the difficulties that might arise if the Government paid sooner than was expected, or, alternatively, if the company tried to get out of this duty by diverting some of its orders to sub-contractors. I think those considerations, if they arise. are matters on which the Minister of Supply will obviously have to keep very careful watch. The right hon. and gallant Gentleman the Member for Newcastle-under-Lyme (Colonel Wedgwood) by anticipation answered questions which were raised by other hon. Gentlemen opposite, because one of his complaints against this duty was that the cost of administration and collection was going to be so high that the State would never get anything out of it. If his ideas were correct on the £200,000 basis, that would be all the more applicable on a £100,000 basis. He asked about the position of electricity supply and municipal undertakings, and that is one of the questions for which I think we had better wait until the Debate on the Clauses takes place. He then asked what is going to happen if a firm received a sum in the region of £190,000, but less than £200,000. This firm might have had a small order already, and it might not wish to take a second order because by doing so it would be brought within the ambit of this duty. But, of course, if it did not take an armaments contract in circumstances like that, it obviously would not be making any alleged profits out of the armaments contract; but, on the other hand, if it were necessary in the interests of all of us that that firm should have an armaments contract, then again the powers of the Minister of Supply would presumably come into play.

The hon. Member for Blackburn (Sir W. Smiles) rather touched on another aspect of the same question when he said that there were firms nowadays which were not getting armaments contracts and they were getting the cream of the business. I hope it will be realised that these various points are mutually contradictory. because if these enormous profits are being made by people in armaments there is no point in saying that other firms do not want these contracts because they are getting the cream of the business already. There cannot be two lots of cream. It may be that some firms do not put in for armaments contracts because they prefer what they think is more profitable business of another kind. But if that is so it is not the effect of this particular duty. It is nothing new and does not arise out of these proposals.

Then the hon. Member for Bassetlaw (Mr. Bellenger) asked how much we were likely to lose on Income Tax and National Defence Contribution as the result of this new duty. I am sure his logical mind will realise that that is only another way of asking what is the estimated yield of this duty, and my right hon. Friend in his opening speech made no reference at all to what might be expected as the result of the imposition of the duty. I cannot say more than that the answer about National Defence Contribution and Income Tax is that it is not possible at present to estimate. My hon. Friend the Member for Stockton (Mr. Harold Macmillan) made, if I may respectfully say so, a most interesting speech, raising very much larger issues than many with which I have dealt so far in this reply. It was a matter of great regret to my right hon. Friend the Chancellor that he could not be here— for the reason I stated— all the time my hon. Friend was speaking, but I can assure my hon. Friend that my right hon. Friend will certainly read what he said in the Official Report and study the considerations put forward in that most interesting contribution.

The hon. Member for Clay Cross (Mr. Ridley) asked whether the appeals referred to the Board of Referees would be heard in public. The answer is "No," because the machinery will be on the same lines as the Income Tax machinery, and those appeals are not heard in public. In his peroration the hon. Member pointed out that it would be, in his view, much better as a weapon of taxation— though he did not use the word "weapon"—to raise Surtax and Death Duties. It is perhaps rather a long time since the Budget Resolutions but we are in fact raising both those taxes by the present Budget.

Photo of Mr George Ridley Mr George Ridley , Clay Cross

I did not say "raise;" I said "further steepen."

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

Of course, I realise the meaning of "further." As I said, we are already taking steps in the Finance Bill to increase the burdens upon both Surtax payers and estates passing at death. My hon. and gallant Friend the Member for Erdington (Wing Commander Wright) asked several questions, but I have time to answer only one;. He asked whether each year was to be an accounting year or whether the three-year period would be taken. The answer is that each year is to be the accounting year. The hon. Member for Peckham asked whether it would be within the discretion of the Minister, if he did not for any reason care for the £200,000 limit, to make it £300,000, £400,000 or £500,000. The answer is "No." Once Clauses of this kind are put on the Statute Book —

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

No Clause at present, because we are discussing only the Resolution.

Photo of Mr Ernest Evans Mr Ernest Evans , University of Wales

Which Clause on the Paper would prevent that? I have not seen any.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

It is quite clearly the intention.

Photo of Mr Ernest Evans Mr Ernest Evans , University of Wales

I asked a question, and I would like an answer. Which Clause prevents the Minister putting the figure at £250,000 or £300,000?

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

It is at the bottom of page 1659 of the Amendment Paper: If the Minister declares to the Commissioners that in any accounting period the total receipts of a business under armament contracts were not less than two hundred thousand pounds.… Mr. Evans: Yes, but it does not say that the Minister will fix it at that figure.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

That is one of the things that we can consider in Committee. What I was trying to point out was that it will not be in the volition of the Minister-to work the figure up and down. It will be whatever figure Parliament chooses to insert for that purpose.

The hon. Gentleman also asked, why could not these contractors make declarations, as they do on Income Tax, and show what their profits are? I would like to answer that point. Inherent in that question is, why should it have anything to do with the Minister of Supply at all? Why should he be the first to do the declaring whether the contracts were or were not over £200,000? The answer is that the Income Tax authorities themselves have no direct way of knowing what sort of contracts were being given out by the contracts departments, whereas the Minister would have that information. [An HON. MEMBER: "How?"] Because he is generally the Minister of Supply with the powers that the House has given him. If there is any doubt about it, again, it can be looked into between now and the other stages, but he is in the position to have the knowledge. [Interruption.] Perhaps the hon. Gentleman will pay me the compliment of listening.

Photo of Mr Harold Macmillan Mr Harold Macmillan , Stockton-on-Tees

This is a very important point. My hon. Friend referred just now to Debates on the Bill. In the Bill it was made quite clear that the Minister of Supply should not deal, in his powers, with more than one-sixth of the total amount of money spent on rearmament. He would deal neither with Admiralty nor with Air Force contracts. Out of a total of £600,000,000 he would have immediate official cognisance of something like £100,000,000.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

He will be in touch with all the contracting departments.

Photo of Captain Harry Crookshank Captain Harry Crookshank , Gainsborough

Yes, but not the Inland Revenue authorities. The question whether they should be returned on the same form to the Inland Revenue authorities is the point with which I am dealing. It is a much smaller point which the hon. Gentleman has raised. My right hon. Friends will be in a position to give this information and be in constant touch with all the direct powers under the authority Parliament is giving. When the hon. Gentleman goes on with the question about Inland Revenue, I would add this further. It will be found in one of the Clauses which we have put down, and which again is a very important point for us to get right in the Committee stage, that that is the proper way of giving information on these subjects. The Minister of Supply will be making his declaration and notifying armament contracts, and it is important, if there are sub-contracts, to see that the sub-contractors know that they are working on sub-contracts of an armament nature, and also, vice versa, that the Minister of Supply should be informed that these contracts are being given out It is only a question of words and getting it right when we come to the Clause. It is clear that all the information with regard to sub-contracts should be available.

I hope that I have dealt, at any rate, with some of the more important questions, although I am conscious that I have certainly not dealt with all the questions that have been raised. But I am all the more satisfied in that we shall have other Debates upon this subject. The Resolution is to be Reported, and the Clause will have to be discussed on the Finance Bill, and there will be opportunities for amendments to be made and so on. The first day's discussion has certainly brought out a number of points of interest both to hon. Members and to the Government. My right hon. Friend will be the first to agree that it has been valuable at this early stage to get these various points brought forward so that they can all be seen in focus.

The fact that the Committee is not dividing against the Resolution is in itself important. I think we can claim that from most quarters of the House, although there have been some exceptions, there has been general assent to the proposition made by the Prime Minister, when he spoke two months ago, that when the nation was embarking upon this great rearmament programme and seeking to fix fair prices for the contracts, if, after those efforts had been make to keep prices down, there should emerge, as a result of the very magnitude of the contracts, something which could be considered as the taking of a disproportionate profit, then that should be taxed, and taxed heavily. The Committee have given general assent to that proposition. One must go back to what my right hon. Friend said when he introduced the Resolution. He made it clear that in what we are engaged in to-day, we are doing a bit of rearmament ourselves. We have here two weapons. First, the supervision of contracts strengthened as it will be by the powers that the Minister of Supply will have under the new legislation. If, owing to the very magnitude of the contracts, excessive profits are made, then this second weapon of armament profits duty will come into play to deal with them. The Committee are giving us authority, by passing this Resolution, to forge that weapon. It is impossible for my right hon. Friend or anyone else to give an estimate in regard to the possible income from this duty, because it is impossible to say how much will come within its purview.

Resolved, That where, in any accounting period ending after the thirty-first day of March, nineteen hundred and thirty-nine, the receipts of a business include receipts under armament contracts (as defined by any Act giving effect to this Resolution) of not less than two hundred thousand pounds in a year, or proportionately less for any less period, and the profits of the business for that accounting period (or for so much thereof as is subsequent to the said day) exceed a certain standard, there shall be charged on so much of the excess as arises from such contracts a tax of sixty per cent.

Resolution to be reported To-morrow.