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Orders of the Day — Corporation Tax

– in the House of Commons at 12:00 am on 11th November 1964.

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Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee 12:00 am, 11th November 1964

I shall have a major change to propose in the Budget of 1965 in the system of taxation as it affects companies and other corporate bodies. This system is not well designed for the second half of the twentieth century. In particular, it does not provide sufficient incentive to companies to plough back profits for growth rather than to distribute them as dividends. It is also unnecessarily complicated. Company profits are subject, in the first place, to Profits Tax, the burden of which remains on the company. Secondly, full company profits are charged to Income Tax at the standard rate, though, to the extent that the profits are distributed as dividends, the Income Tax paid on them by the company is treated as tax of the shareholder. So it is only the Income Tax on the undistributed profit—so long as it remains undistributed—which is really borne by the company, and this situation makes it very difficult to ascertain what the true burden on the company is.

Moreover, the system leads to the abuse and anomalies to which attention has been called by the Public Accounts Committee. The effect of these is that companies can recover large sums called "tax" by way of repayment, though no corresponding amount has ever reached the Exchquer.

A corporation tax levied on companies and other corporations distinct and separate from Income Tax would simplify the tax structure and put an end to a position that some are exploiting. I shall, therefore, come forward next spring with proposals to abolish Income Tax and Profits Tax on the income of companies. A new corporation tax will take its place.

The rate of tax under these new proposals will, as in the case of any other tax, depend on the financial and economic situation at the time. The change will affect the burden of tax on different companies in different ways—according, for example, to the proportion of profits they distribute. Some companies will bear more, others will bear less, as is inevitable when a major change of this kind is made, but since, with the new tax, we shall be able to raise the same total revenue with a lower corporation tax rate than the present combined rate of Income Tax and Profits Tax, the new rate will mean a reduction on the current rate of taxation of undistributed profits—in other words, profits that are retained for investment and expansion. The main objects of the scheme will be to modernise the tax system, to get rid of anomalies and to provide an incentive to dynamic companies to develop at a rapid pace through the use of their ploughed back profits.

Although I intend to introduce the legislation next April it will not be practicable to bring the scheme into force immediately. Income Tax assessments will continue to be made on companies under the existing system for 1965–66. I contemplate that the first profits to which the new corporation tax will apply will be the profits of the period immediately following that which formed the basis for 1965–66.

A corporation tax will have the further advantage of making unnecessary some of the present complex anti-avoidance legislation. There will be a number of complicated problems to he solved in connection with its introduction. But this major reform in the fiscal field will reinforce the other policies of the Government for toning up the economy to face the future.

The taxation proposals which I have made today are the necessary counterpart to the measures which the Government have taken to put our external position right. They also take account of the Government's proposals for additional expenditure on pensions and benefits. They are a direct consequence of the situation which we inherited—[HON. MEMBERS: "Oh."] If hon. Gentlemen do not think so they really cannot understand how the balance of payments can be as it is. These proposals are proof of our determination to find the money needed for the claims of social welfare. [HON. MEMBERS: "Ah."] They both go together. Hon. Gentlemen opposite cannot dodge this. They both go together. If we are to get the balance of payments right we have got to lessen the pressure of demand. If we do not do that we shall have inflation—an inflationary runaway; and that is the inheritance, and that is why we are trying to face it.

The present state of the economy does not require action to be taken to divert resources away from the home market all at once: there will be a gradual build-up as our measures to correct the external deficit take effect.

I have weighed the position very carefully and conclude that these measures will work provided that there is a successful and swift conclusion to the discussions on an incomes and prices policy that have already begun. I regard success in this field as vital.

None the less, I must never forget the fallibility of previous forecasting, as a result of which other Chancellors have given the economy a deflationary twist just at the moment when it did not need it. I believe that on this occasion I have chosen the right measures in the correct proportions, but if they should turn out to be insufficient, I shall use the battery of additional weapons that exists for regulating pressure on the economy.

As a result of what others have failed to do, we have reaped a bitter harvest, but the world overseas should know that the Government are determined to put an end to these recurring deficits in our foreign balances, to the constant recourse to international loans, and that we intend to re-establish our economic strength once and for all.

I say this with confidence. The British people have only to understand the situation to respond to the need when Government measures are firm and clear and fair. All of us are involved in this, and, with all the conviction that I can muster, I say to the Committee and to the country that this is the time for a united effort both from management and from the shop floor. As the Government's measures unfold, we shall show that there is now the opportunity to fight our way out of the economic trap in which we have been caught for too long. The British people can do it, and I put my trust in them.

That is the end of my speech, but, in accordance with normal usage, Budget Resolutions must now be distributed. I sat for long enough on the other side of the Committee to know what hasty decisions have to be taken. Therefore, with the indulgence of the Committee, I should like to say a few words while these Resolutions are being perused, in order that decisions can be reached.

I think that it might be for the convenience of the Committee to remark that we have decided not to have a General Resolution on this occasion. The annual Finance Bill rightly occupies a good deal of the time of the House in the late spring and summer months, and it is proper that we should consider a wide range of suggestions for the improvement of our tax laws at that time. But an autumn Budget is a rather different matter, and I hope that the Committee will recognise that it will be making too great a demand on the timetable of the House—the right hon. Gentleman and are the only two who are listening to what I am saying.

Photo of Sir Harry Hylton-Foster Sir Harry Hylton-Foster , Cities of London and Westminster

Order. I shall be grateful if hon. Members will pass the copies of the Resolution along the benches quietly.

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

As I was saying, an autumn Budget is rather a different matter, and I hope that the Committee will recognise that it will be making too great a demand on the timetable of the House to have between now and Christmas a full-scale Committee stage for the second time this year. After all, the Government had the opportunity of putting down many new Clauses when they were the Opposition, and the Opposition had the same opportunity when they were the Government, only three or four months ago.

We have a good deal of other business to transact, including the very important legislation to implement the National Insurance proposals which I have announced. Therefore, while I certainly accept that the House should have the opportunity for full discussion of the measures which I have proposed to be embodied in the autumn Finance Bill. I think that in the exceptional circumstances of an autumn Bill I can reasonably ask for our discussions to be limited to those proposals.

Photo of Sir Harry Hylton-Foster Sir Harry Hylton-Foster , Cities of London and Westminster

Order. The Opposition Front Bench is very anxious to hear every word spoken by the Chancellor. I hope that hon. Members on the back benches will sit quietly while the Chancellor is finishing his speech.

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

Now that I have raised the question of procedure, I think that I should also call the attention of the Committee to a procedural point arising from the need to make the increase in the standard rate of Income Tax operative from next April. Hon. Members will see that one of the Resolutions being circulated will fix the standard rate of Income Tax for the next Income Tax year, that is, 1965–66, subject, of course, to confirmation in the Finance Bill. As is the practice in such cases, a special procedure Resolution will be tabled to permit the inclusion in the Finance Bill of a provision which will take effect in a future year.

The right hon. Member for Barnet will recall that there was a similar procedure Resolution in connection with the 1963 Budget proposal to taper off the child allowance when the child's income reached the income limit.

I trust that in that short interlude hon. Members have had the opportunity of looking at the Resolutions and of defining their attitude to them.