There are one or two points I wish to raise, and I am glad that the Leader of the House is here to listen to them. I could have put down Amendments to cover these points, but I thought that I could save time by raising them on this Motion. I am also glad that the Leader of the House is here, because this is a complicated Clause which it is difficult to discuss at this late hour.
The Clause contains a welcome concession. The Chancellor of the Exchequer, in his Budget speech, outlined the reasons for that concession. The Clause affects the computation of profits for tax in the case of director-controlled companies. At present—I hope I am right in this—Profits Tax is payable on the distributed profits and on the amount by which the total fees and salaries paid to directors, other than whole-time service directors owning 5 per cent. of the shares, exceeds £2,500, or 15 per cent. of the shares up to £15,000. That seems to be a rather arbitrary rule. The Chancellor of the Exchequer did concede that in view of the large increase, which we deem excessive, in the Profits Tax, this rule is not altogether fair to small businesses. So from 1951 the limit of £2,500 is to be increased, in accordance with this Clause, to a maximum of £4,500 or 15 per cent. of the profits, whichever is the greater figure.
I have three points to raise on the Clause. The first is that the limitation of £2,500 was fixed in 1947. It has been increased, in 1951, to £4,500. But the limit of £15,000 was fixed in 1947. It would seem that, in accordance with the depreciation in the value of money, it would be reasonable to increase that limit. A modest increase to £20,000 would have been in accord with the Chancellor's policy of assisting small businesses in this connection. This is my first question—whether the Financial Secretary will consider that matter with a view to action on the Report stage.
The second matter is rather smaller, and is with regard to sub-paragraph (1, c). That contains reference to the amount calculated only where, for more than half a period, there have been two or more directors to whom the considerations apply—that is, for five months and three weeks the benefit of the Clause does not apply, but if the period is six months and one week, the benefit does apply. Why cannot this be on a pro rata basis related to the length of service? If there are two or more directors for four months of the year, there could be one ruling, with a pro rata basis worked out if the period was eight months. I say this especially since sub-paragraph (3), which deals with the chargeable accounting period, accepts the pro rata principle. It has been represented to me, and probably quite correctly, that it would be practicable to have worked this out on a pro rata basis, and that would certainly have been more equitable than is this arbitrary fixing of a three months' limit.
My third point is one of more substance than the last. Is not the whole calculation very complicated? According to sub-paragraph (1) the amount to be deducted shall be either 15 per cent. up to £15,000, or £2,500, whichever is the greater; or where there are two or more directors to whom sub-paragraph (2) applies, the amount specified in sub-paragraph (2). When we look at subsection (2), we find a definition of directors, to which I do not think one can take much exception, and then it states that the amount referred to in sub-paragraph (1, c) shall be £3,500; and where there are more than two directors, it shall be increased by £1,000 or the aggregate remuneration for the chargeable accounting period of all but two of the directors to whom the paragraph applies—the directors whose remuneration is taken into account being those with the smallest remuneration for the chargeable accounting period. Why that is so, I do not understand.
Then there are certain provisos about the additional £1,000, or all the payments taken into consideration. I have had representations made to me on this point, and I ask the Financial Secretary why the Clause does not simply indicate £2,500 to be deducted if there is one director, and, if two, that the amount should not exceed £3,500, and not more than £4,500 if three or more directors. That seems a very much more simple way of putting it; there could be the three figures according to the number of directors, and then everybody would know where they were. It seems to me that that would have been very much easier to comprehend than this mass of verbiage. If the Financial Secretary agrees that what I am saying is not what the Clause says, then that simply emphasises the lack of clarity in the Clause itself.
The hon. and learned Gentleman rightly said that some parts of this Clause are rather complicated. He asked for elucidation on three points, raising first the issue of why we wanted to increase the lower limit of £2,500 while we were not at the same time raising the higher limit of £15,000, which was put at that figure many years ago. The principal answer to that is that the cost of this concession is, as I think the hon. and learned Gentleman knows, quite considerable already and will amount to something like £4 million in a full year, and that, in relation to the various other parts of its object, is a rather surprisingly large sum to spring from this particular concession. If we were to raise the £15,000 limit, of course, the cost would be even higher.
Secondly, the hon. Gentleman asked why, in sub-paragraph (1, c) we had formulated the Clause in such a way that
where, for more than half that period, there are two or more directors. …
and why we had not made it pro rata according to the length of the period. There is no particular reason why one should make it pro rata and it is reasonable as a general definition to take half the period as a dividing line. As a matter of fact, a similar rule was incorporated in the wartime Excess Profits Tax and that, I think, is the main reason that criterion was used here.
The hon. and learned Gentleman asked about the rather complicated provision in the proviso at the end of the Clause for calculating the exact sum. I agree with the hon. Gentleman that the arithmetic itself is complicated, and I would not like to explain it all in full detail at this time of the morning, but the purpose of that complication is to provide against two possible forms of evasion: first, bringing in the remuneration of part-time directors under the new limiting figure, and secondly—this was the main point—the possibility of avoidance by appointing dummy full-time working directors, who might be members of the family of the controlling directors, at a small remuneration so as to qualify for an increase in the allowable remuneration of the real controlling directors. I think it is a pity, perhaps, that the provision could not have been less complicated.
There is one point I would put very quickly to the Financial Secretary because I think he would be able to give an answer equally quickly. The first three lines in sub-paragraph (2) limits the sub-paragraph to directors who are required to devote substantially the whole of their time to the service of the company. There are many men who have formed or have bought small businesses and have retained them as separate entities legally for the purpose of retaining goodwill, perhaps, or the premises of the business concerned, but who for practical purposes run them as a single unit. For other tax purposes a director in such a position can elect to one particular company, and I want to ask whether such right of election can also apply in this case or is the subsection to be applied so that the man who is whole-time working for a small group is none the less to be treated as if he were not working whole-time for any.
Although there are no Amendments down on the Order Paper on this Clause, I had intended at this stage, when we are discussing the Motion, "That the Clause stand part of the Bill," to ask, purely as a layman, one or two questions as to the meanings of this provision, which the Financial Secretary himself confessed to be complicated. When I found that my hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) was also in doubt, with all his legal knowledge, I felt that perhaps there might be other hon. Members in the Committee who would like some clarification, too.
While my hon. and learned Friend addressed himself to the Financial Secretary, I confess I had intended to ask the right hon. and learned Gentleman the Attorney-General whether he could give us the main purport of this Clause. He has been with us all day, I have not had the pleasure of hearing him yet, and we always look forward to his interventions on the Finance Bill, particularly when we are told by the Minister—I thought in rather revealing words—that he thought the arithmetic of this Clause was such as should not be considered even, let alone calculated, at such an hour.
I am surprised, knowing that this Clause would be taken if the Motion to report Progress was defeated, that the Financial Secretary did not come with us into the Lobby. Surely he has given an argument, which no one can gainsay, in favour of the Committee now reporting Progress, first in order that we may have an opportunity of following the mathematics of this Clause—although I will give this point to the Government, that I should find it difficult to follow it at any hour, even were we fresh. With all that, we have little but the marginal note to help us which, as we know, is not part of the Bill in the strict sense of the word. It simply says:
Increase, in certain cases, of deductions allowable for directors' remuneration.
Without that, most of us would have been ploughed before reaching the end of the first paragraph.
We have with us not only the Attorney-General himself, but also the hon. and learned Member for Gloucester (Mr. Turner-Samuels), whom we always lean upon in times of difficulty on these Bills and who frequently volunteers explanations of them which cause the greatest embarrassment to the Law Officers of the Crown. With both these luminaries present, I feel that the moment is appropriate for the right hon. and learned Gentleman now to rise and give us the main purport of this Clause.
If he is unable to do that owing to fatigue, over-work or any other cause, there seems to me to be this alternative. Either to leave it to the hon. and learned Gentleman the Member for Gloucester, to whom the Committee will be willing to listen, or, a better procedure still—and perhaps the right hon. and learned Gentleman could indicate merely by some motion of his cranium whether this is acceptable or not—would it not be at least possible to have the Clause drafted in language which can be understood not only by hon. Members who, after all, are important, but by those who have to interpret these Clauses when they become Sections of the Finance Act, people for whom one must have the greatest possible sympathy?
After all, I am quite certain that the Attorney-General would not emulate the right hon. Member for Clackmannan and East Stirlingshire (Mr. Woodburn) who used to brush everything aside with the remark, "That will be a matter for the courts." Surely the duty of the House of Commons is to see that as little as possible is a matter for the courts? We have to avoid litigation if we can.
I thought the hon. Member for Jarrow (Mr. Fernyhough) would show his sympathies with the legal profession. He will agree with me, I am sure, that his constituents would prefer—
I hope the hon. Member will not take too constricted a view of his duties. Here he sits, and we are very pleased to see him, at one o'clock in the morning, taking part in the Committee stage of the Finance Bill, which we are now shaping. As he is with us. I think he should try to see that the Clause is made as workable as possible. Now that he has come in, however temporarily, I hope he will see the point of what I am saying, that it is important that this Clause should be worded far less obscurely than is the case at present.
Therefore, I hope the Attorney-General, if he cannot do so at this moment—and we shall quite understand if that is the case—will be prepared to have a look at this Clause before the Report stage with a view to drafting it in much clearer language than it is at the moment.
I should like to add my appeal to that of my hon. Friends, because it is really a most difficult Clause to understand. I have tried very seriously for a very long time, and I still feel I have not a very much greater or more accurate grasp of it than the hon. Member for Jarrow (Mr. Fernyhough) apparently had himself.
The first point I should like to ask is why, by Clause 26, we are substituting a new paragraph 11 in the Schedule to the Finance Act, 1937. To what else does the Schedule to the Finance Act, 1937, now apply? I think the right hon. and learned Gentleman will see my point. If we are changing this Schedule of 1937 and that Schedule still applies at the present time to something other than Profits Tax, to which it was made relevant by the 1946 Act, we are by this particular Clause of the present Bill making a change that is going to affect something about which we have no knowledge at all.
It is important that the Committee should be told whether, by changing this particular Schedule of the 1937 Act, we are affecting anything other than Profits Tax. If the answer is that we are not, then that Schedule to the 1937 Act no longer applies to anything except Profits Tax, and it is time we did away with all this indirect legislation by reference from one Act to another and having put in a new Clause 26, kept it there instead of putting into Clause 26 a new paragraph 11 of the Fourth Schedule to the 1937 Act. This is making it even more complicated than is necessary unless, of course, there is something still left in the 1937 Act to which this provision is going to apply, about which we have been told nothing.
The next thing about which I am particularly anxious is what exactly is the effect of the new class of directors we are introducing into this matter. In 1937 Act there were two classes of directors, the whole-time working director and other directors. Now, as I understand it, we are introducing a third class to complicate the matter, and they are directors who are substantially whole-time in a managerial or technical capacity, but who are not whole-time service directors. I do not see the benefit or advantage of having a separate classification for this particular type of person.
I appreciate the general advantage of increasing the allowance which the Clause effects. I hoped we might gain some evidence from what the Financial Secretary said with regard to the reasons the limit of £15,000—I do not quite understand why he called it an upper limit—is not being increased. As I understand the implication of his remarks, we are to leave that figure where it is, although it is admittedly inequitable. Everything else having risen, it is only equitable that the limit of £15,000 should also rise, but for reasons of expediency, the Government feel they are unable to allow a further reduction in the budgetary receipts which would follow from any increase in that limit of expenses. The hon. Gentleman should tell the Committee what it would cost if, say, the limit were increased from £15,000 to £20,000. I cannot see how that figure could possibly be of any appreciable size. I hope we shall have further enlightenment on these points before we pass this Clause.
As I raised these points originally, I should like to ask the hon. Gentleman whether we cannot get together on these matters. So far as the £15,000 figure is concerned, I agree with what the hon. Gentleman has said, and I would ask what would be the cost if the figure were increased to £20,000.
It is a substantial concession, we agree, and it will help the smaller type of business. There have been representations by the hon. Member for Edmonton (Mr. Albu) and other Members on the other side of the Committee, pointing out that these are precisely the sort of businesses to which the anti-profit vendetta should not be applied, and we suggest that this is a convenient method of assisting them.
My second point is with regard to the wording of sub-paragraph (1, c). I thought the hon. Gentleman's reply quite unsatisfactory, and that it would be more equitable to do it on the pro rata basis I suggested. Where I became even more confused was over the question of the drafting of this Clause so as to prevent certain types of tax evasion. I should have thought that sub-paragraph (2, c) was an invitation to tax evasion in itself. It is an invitation to directors so to arrange their remuneration as to obtain the maximum possible amount of benefit from this particular Clause. So far from its being a means of preventing evasion, it is an invitation to an artificial arrangement of salaries.
But the Financial Secretary did refer to one interesting individual. My hon. Friend referred to varying types of directors mentioned, and I think I heard the Financial Secretary say it would give scope to the use of a whole-time dummy director. It would be very interesting if he would tell the Committee what is a whole-time dummy director.
The main new point raised by the hon. Member for Chichester (Mr. Joynson-Hicks) was whether the alteration in the Schedule to the 1937 Act we are making will make any difference to the 1937 Act, other than the concession we are here giving to the full-time directors. The answer is, no. We are making no change here in the 1937 Act, other than the concession on Profits Tax which we are discussing.
My point was whether this change that we are making in the 1937 Act would be applicable to any other matter than the Profits Tax—which is rather a different matter—and, if not, why? I also asked why we have this indirect legislation by reference from one Act to another instead of putting it into the Bill we are discussing.
May I ask one question? I have heard my hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) speaking, and also the hon. Member for Chichester (Mr. Joynson-Hicks) who is also in the legal profession, and both of them have said, as most of us not learned in the law would agree, that this is a most unnecessarily complicated Clause. Is it not possible before the Report stage to put this into plain English that people can understand? If the learned people of the law do not understand it, what hope is there for the ordinary individual? I have asked before that these things should be put into simple English that ordinary people can understand.
All my life I have been brought up and trained very carefully to understand one thing: that if you issue an order which to the recipient is unintelligible, it is a thoroughly bad order. That applies not only to military matters, but also to matters connected with the Finance Bill. I cannot understand why we should put up year after year with this drivel, when it could be put into plain English which not only lawyers but the people to whom it is to apply could understand. Will the Attorney-General or the Financial Secretary see that this Clause is put into simpler terms before the Report stage, so that people can understand it?
I fully sympathise with the desire to see this put into simpler language, but I am assured by those who are more expert in these matters that the greatest possible effort has been made to put the Clause into the simplest language possible, and that it is not practicable to put it into plainer language. I regret that I cannot hold out any hope of doing what the hon. and gallant Member desires.