That brings me to what is, in some respects, the most important part of what I have to say, for it concerns the methods of measuring the profits of industry on which Income Tax in the post-war period will fall. The Committee may remember that a fresh study of the position of industry in relation to the incidence of Income Tax on profits was initiated by my predecessor a year ago, when he announced that he had asked the Board of Inland Revenue to examine the subject, with particular reference to profits which are not distributed but are ploughed back into the business for further development, and the treatment of capital expenditure for which no allowance is made in the existing Income Tax code. Evidence has been received since that time in the course of a very full inquiry, from organisations representing industry, including agriculture, and the whole subject has been anxiously examined by my advisers and by myself since I took my present office some six months ago. As a result, I am now able to give the Committee some important declarations of Government policy.
I must emphasise that I am addressing myself to Income Tax in the post-war period, and the proposals which I make will not come into effect until the return to peace-time production sets in. I think the Committee will agree that I should indicate my intentions now in outline, if not in full detail, in order that industry may make their plans for reconstruction in the light of that knowledge. There are many details to be filled in before we can see the translation of our policy into statutory form, and my advisers are now engaged on this task. My intention is to propose legislation on the subject in good time, so as to enable us to bring the new arrangements into force speedily on the termination of hostilities.
Two main propositions have been advanced by industry. The first is one to which I do not feel able to accede. It is that there should be a reduction of Income Tax in respect of any industrial profits that are not distributed but are placed to reserve for the future development and extension of the business. This, in effect, would be giving relief for the act of saving, and that is not, in my judgment, the appropriate approach to this problem. The other proposition advanced by industry is that taxable profits should be real profits in the sense that those profits should be struck only after making all proper deductions and allowances, especially adequate allowances such as might be made on a commercial basis for the amortisation of money expended on assets which are used up in the making of profits.
This proposition is not new. It has been frequently urged in the past and frequently considered, but the issue has undoubtedly become more pressing nowadays, when the standard rate of Income Tax has risen to such high levels. Tax should be charged on true profits reasonably measured, but not more. The appropriate allowances for capital expenditure are of supreme importance in relation to the work of reconstruction at the end of the war when, in order to take up the challenge which I have mentioned, in the interests of employment policy, industry of all kinds may have to embark upon modernisation and re-equipment. It is, therefore, to these questions, that I now address myself.