Notwithstanding anything in the enactments relating to excess profits tax the Commissioners may make regulations to provide that where any trade or business suffers a loss of capital through enemy action the amount of excess profits tax payable shall be adjusted to ensure that the person carrying on the trade or business shall not be in a worse financial position than he would have been had there been no such loss.—[Mr. Cecil Wilson.]
I beg to move, "That the Clause be read a Second time."
I would like to say in regard to this new Clause that it concerns many businesses in all parts of the country, whether small or large, which have in any way suffered from enemy action. The position which appears to have been taken is that all sufferers from war damage will be penalised except those on a substituted standard who suffer no detriment. The case I have in mind is typical of many others. A firm has a capital of rather more than £100,000, half of it in preference shares and half of it in ordinary shares. Prevously the standard profit was such that after paying preference share dividends there was enough left for a substantial dividend on the ordinary capital. But because of damage which has been sustained the standard profits are such that after dealing with the preference shares as before there is only enough left to pay a very small dividend upon the ordinary shares. This is not a matter which affects only one particular interest. The British Chambers of Commerce Association states in a letter:
Traders who suffer destruction of assets by enemy action should not have their misfortunes aggravated by consequential additional taxation. Nevertheless, this is the effect of the Revenue insistence upon excluding from capital for E.P.T. purposes not only the destroyed assets but also the amount of compensation under the War Damage Act.
That is a statement from a body whose views are certainly entitled to considera-
tion The Treasury says that no regard is paid to partial damage of premises that continue to be used in the business and that it is only where a complete unit is practically destroyed that the issue arises as to whether the standard should be abated. The firm to which I have referred have had everything completely destroyed. While they are endeavouring to carry on, they are doing so under circumstances which have no relation to those which previously existed. As to whether capacity has been maintained, that, I think, is answered by this statement. Whereas before they had one central set of premises, where everything was carried on in a perfectly easy manner, now they are distributed in all sorts of places. Out of the shopping centre of the city and in an entirely different district nine shops which have been deserted have been taken over and various sections of the firm's business have been put into them. This case is illustrative of a great many similar cases in other parts of the country, and I think we are entitled to a much more equitable arrangement than appears to exist at the present time. The Chancellor may say that he cannot accept this proposed new Clause or anything of the kind, but, if that is so, I hope his answer will be such that those who are feeling this very acutely will feel that they are not to be left in their present unjust position.
I beg to second the Motion.
I want to deal with a rather different point from that on which the hon. Gentleman opposite has spoken. I recently drew the attention of the Chancellor to the fact that the Inland Revenue are treating payments by the War Damage Commission in respect of capital invested in stock destroyed by enemy action as a constructive sale the profits of which are liable to Excess Profits Tax, notwithstanding the fact that the whole of such payment is required for replacement of the stock destroyed. Further, I asked the Chancellor whether he was aware that by treating total loss of the stock destroyed by enemy action as a constructive sale liable to Excess Profits Tax, he was placing traders in many cases in a worse position than if the goods had not been insured at all. The Chancellor did not seem to think at the time that that was possible, and he asked me to give him an instance. I gave him an in- stance in connection with a whisky-blending company in which I was indirectly interested. This company has an Excess Profits Tax standard of approximately £6,500, above which all profits go to the State. The company's stock is insured for £126,000 at an annual premium of about £5,000. The purchase price was approximately £35,000. Should enemy action destroy the whole of that stock, the figure of £91,000 would be regarded as a trading profit, and therefore, £84,500 would return to the Government in the form of Excess Profits Tax plus the whole amount accrued from normal trading. Thus, the Company would have only £35,000 available for replacement, and at present prices would be able to replace only 25 per cent. of their original stock. All matured stock purchased at to-day's bulk prices could only be bottled at a considerable loss if sold at the agreed selling prices. As the company in these circumstances would only be able to trade at a loss, an old-established business would have to close down, with the consequential loss to home and export trade. I am sure that was never intended by Parliament.
I am fortified in the accuracy of the above case by receiving yesterday a letter from a firm in the North of England which trades as beer, wine and spirit merchants. They raised this matter some time ago, and said very much the same as I have just said. In the event of there being a total loss of their bonded stocks by enemy action, the whole amount of the recovery from the Government, less the original cost, would be paid over by them to the Government as Excess Profits Tax; no portion of such surplus would be retained by them, and they would only have available a sum equivalent to the original cost of the goods destroyed to replace such goods. In view of the difficulty at the present time of replacing similar goods, and the high price of replacement, they would be forced either to close down or to trade at a loss. At the time when I wrote to my right hon. Friend the Chancellor of the Exchequer, I had not seen the instance which I have just quoted. I cannot believe it is the desire of the Government or of the House that the Excess Profits Tax should be used in this way, which will involve the closing down of old-established businesses. Clearly that would be the result of the position I have indicated to the House. If my right hon. Friend is not able to accept the new Clause, I hope at any rate that he will be able to give some assurance as to amending the law to prevent the loss of capital and also the loss which would be sustained in the replacement of stock in such cases as my hon. Friend opposite and I have described to the House.
I wish to add a few words to what has been said by my hon. Friend the Member for the Attercliffe Division (Mr. Wilson). I imagine that both the House and the Chancellor will be anxious that, in administering the Excess Profits Tax, substantial justice shall be done to businesses and persons who come within its orbit. The question is whether in the type of case to which my hon. Friend referred and also, I have no doubt, the case mentioned by the hon. Member for South Kensington (Sir W. Davison), that is, in fact, what is happening. If it can be shown that something quite different is happening, there is obviously a case for some alteration, if not of the actual Finance Act, at any rate of the administration of it. To go over again the point that was made by my hon. Friend, this is the position which is envisaged. A certain firm are doing business from certain capital premises. Those premises are damaged by enemy action, and, with very great difficulty, the firm carry on their business in other ways. It may be that, as a result of their activities, they are able to keep their good will and achieve a gross profit not so very different from that which they had before. It might be thought then that they had got over their difficulties, and that they were entitled to give to their shareholders the benefit of the profit which they had succeeded in making in very difficult circumstances; but then the Chancellor's collectors come along and say, "But your standard originally was x thousand pounds annual profit; you have lost this large amount of capital, and therefore, we claim that in future, instead of your standard being x thousand pounds, it shall be x minus y thousand pounds"—a very much reduced figure if, in fact, the premises from which they were previously operating formed a substantial part of their capital in the business. The result would be that the figure of standard profit would be enormously reduced, and the profit which they were able to make, instead of being available for their shareholders as it was before, would be very considerably curtailed. Quite clearly, that is not as it ought to be.
What this new Clause is designed to do is to give sufficient latitude to the persons who administer the Excess Profits Tax to enable them, in the case of firms which have been injured in that way by war damage, to secure the position of those firms on an equitable basis. That is the point of the new Clause. It is very likely that the Chancellor may not be able to accept the Clause in its present form, but I hope he will give some assurance at any rate that the administration of the law will be in accordance with general equity and not unjustly penalise over again people who have suffered great difficulty, hardship, and loss through having their premises destroyed by enemy action.
The hon. Member for the Attercliffe Division (Mr. Wilson) has raised a matter of considerable importance to a number of people. It will be appreciated that I could not insert a Clause of this kind in the Bill. If any alterations were to be made, they would have to be of a specific character. However, the new Clause does give me an opportunity of stating the law and practices concerning this matter, on which there is, I think, a certain amount of misapprehension. I should like to explain, in the first place, the existing practice in relation to the incidence of Excess Profits Tax in cases where business assets have been destroyed or lost owing to enemy action. My right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) will recollect that the Excess Profits Tax takes as its measure of charge the excess of current profit over the profit earned in the prewar years. Where that pre-war profit was abnormally low, the datum line is fixed by reference to the capital employed in the business in the pre-war years, and generally comes out at 6 per cent. of the amount of that capital.
The first principle of the tax is the principle of comparison of like with like. It is only in so far as the capital employed in a business is the same to-day as it was in the pre-war years that it would be reasonable to measure the Excess Profits Tax by comparing the present profits with pre-war profits, or with the percentage of pre-war capital. Where a business has expanded by reason of additional capital being employed in it, the pre-war standard is increased by 8 per cent. on the increase of capital, and, similarly, where capital is no longer employed in a business, it is necessary to adjust the pre-war standard; accordingly the law provides that, where there is a fall in capital employed, a deduction of the standard profits is to be made on an amount representing 6 per cent. of the fall in the capital. That is the general position for the treatment of an increase or a decrease in capital employed in a business, and the provisions are to be found in the Finance (No. 2) Act, 1939, which first imposed the Excess Profits Tax.
Now I should like to refer to the particular case to which my hon. Friend has called attention to-day—that is the loss of capital due to enemy action. I must emphasise that we are concerned to-day only with the incidence of the Excess Profits Tax in such a case, and that compensation for loss suffered owing to enemy action is a different matter with which at this moment we are not expressly concerned. Where capital represented by trading assets has been destroyed by enemy action or has been temporarily lost owing to seizure by enemy action, the capital so destroyed or so lost is no longer employed in the business, and the provisions of the law relating to a deduction of capital employed in the business are, therefore, applicable in all these cases. Take, for example, a shipping company with a fleet of 12 ships of which 6 have been lost owing to enemy action. In computing the excess profits for the six ships remaining in service, it would not be reasonable to take the pre-war standard representing the standard of profit of running 12 ships; accordingly that standard has to be reduced to 6 per cent. of the value of the six ships which have been sunk. The loss suffered in respect of the sunk ships is a question of, compensation which is covered by the insurance monies, and I may observe that any interest earned or accruing on such monies is outside the scope of the Excess Profits Tax.
Take the case which has been put today. Take a concern which has two factories, one of which has been completely destroyed. The standard for the measurement of the excess profits for the remaining factory cannot be taken to be the standard applicable to the two factories, and an abatement has to be made in respect of the loss of capital represented by the destroyed factory. But, in applying its provisions one has to bear in mind the principle of comparing like with like, to which I have already referred, and in practice the application of this principle is directed to ensuring that the pre-war standard is only reduced where it is clear that the loss of capital has resulted in a corresponding fall in productive or profit-earning capacity. No regard is paid, therefore, to partial damage to trading assets, such as the damage to a wing of a factory, or partial damage to trading premises which still continue to be used for the purposes of trade. In general, where it is shown that the business has been carried on without any material impairment of its productive or profit-earning capacity, no deduction from the standard would be made in respect of any capital which may have been lost or destroyed.
A good example of this is to be found in the cotton industry. In that industry all the looms are not fully employed, and in certain cases a good neighbours arrangement exists under which the owner of a mill which may be destroyed by enemy action can take over the unused looms in another mill and carry on his normal production. The Revenue authorities have agreed with the cotton industry that in such cases the standard of the concern whose mill was destroyed will not be reduced by reason of the destruction of the mill. A further example, which may be of general interest, is the case where the premises of a trading concern engaged in the distributive trade whose shops or stores in the centre of our blitzed cities may have been destroyed. Where such a concern takes over other premises and carries on its business so that the profit-earning capacity remains substantially unchanged* no reduction will be made for capital lost, which would have the effect, taking into account such rent as may be paid for the new premises, of increasing the measure of the liability to Excess Profits Tax. That sets out the practice, and, of course, a statement of this kind requires careful consideration by those who desire to read and examine it. On the whole, I think that it represents a fair application of the principles of the law.
The Clause which stands in the name of my hon. Friend the Member for Attercliffe does not deal with a question that has sometimes been raised, and has again been put to me by my hon. Friend the Member for South Kensington (Sir W. Davison). I would say in reply to him that, if a trader has a stock of whisky worth, say, £100,000 and the stock is destroyed, he receives under the Government's insurance scheme £100,000; and is treated for taxation purposes in the same way as if he had sold the whisky across the counter for £100,000. The profit arising on the sale is taxed, and so is the profit arising on the payment for whisky stock which has been destroyed. The fact that a trader has to find finance for acquiring new stocks does not affect the liability to taxation, whether new stocks are rendered necessary by ordinary sales, or by compulsory sales which is the resultant effect of the destruction.
The trader would not wish to sell £100,000 worth of whisky. He could not replace it. Everyone who is in the habit of buying whisky knows that you can only buy one bottle when before you might have been accustomed to buy a dozen. It means that the business is ruined. I stated in my speech that it means ruining the business and putting it out of action, because a trader cannot in present circumstances replace the stuff which has been destroyed. His business is, therefore, closed down. It is not the same thing to say that he could have sold £100,000 worth of whisky on the market and that he has received £100,000 from the War Damage Commission and, therefore, he ought to be very well pleased, because he is getting a quick sale.