As I was saying, in referring to the intention to encourage retention, the former President of my Association put forward no argument, but simply made a statement without giving any examples to prove it. He and others may be right, but, to put it mildly, the case was presented both by him and by right hon. and hon. Gentlemen opposite in a most superficial way. I might add that on that occasion the President of my association was not speaking for at least one of his members.
It is important to understand that the effect of the Corporation Tax is not the same on all companies, and this is what I meant when I talked about the blanket criticism that is made, and which is so totally wrong and totally indiscriminatory. Let us consider first the small companies. The Leader of the Liberal Party said this afternoon that the Corporation Tax would affect the largest possible number of companies. This is untrue. The last available information, that for the year ending 31st March, 1962, shows that nearly 200,000 companies did not pay Profits Tax. That means that those companies had profits of less than £2,000, and clearly the Corporation Tax as such will have none or very little effect on that type of company. The only effect it will have is that tax will be chargeable at the rate of 8s. instead of the present Income Tax rate of 8s. 3d., or the previous one of 7s. 9d.
Now I come to the important close companies as defined in the Bill, and as formerly defined in Section 245 of the Income Tax Act, 1952. Most of the 200,000 companies to which I have referred would be classed as close companies, but I should like to refer to close companies with profits large enough to pay Profits Tax. Again, in the year to 31st March, 1962, there were about 73,800 companies which paid Profits Tax. Far and away the largest number of those companies were not public quoted companies, and would almost certainly have been close companies as defined by the Bill.
Under Clause 72(5), if a company shows that it is ploughing back, or if distribution could prejudice requirements, as the clause puts it, it will pay 40 per cent. Corporation Tax instead of the 56¼ per cent. Income Tax and Profits Fax which it was paying before, or would have paid under the old arrangement, a reduction of more than 25 per cent. in the tax liability of the company.
The greatest number of companies, although not the greatest in profits—I shall come to profits in a moment—will thus have a tremendous incentive, by way of reduction of tax, to plough back. This argument has never been stated by right hon. and hon. Gentlemen opposite. They do themselves an injustice by not undertaking some examination of this type of company.
I propose to consider now the companies making the bulk of profits. These are the smallest in number, but they make the bulk of the profits. My hon. Friend the Chief Secretary proved that the major part of capital for this type of company comes from retaining profits. These companies would be under intense pressure to maintain and increase dividends. In the first year after the Corporation Tax comes into force they will be likely to maintain dividends even without sufficient cover. This will reduce retentions, and will not achieve the objective of the Government. Later, this may be rectified. In later years, with higher profits, they may not increase dividends. But there is no clear evidence on the matter.
Hon. Members opposite are screaming before they are hurt; but equally the Government should not sit back complacently and delude themselves into believing that their objective has been achieved. They should keep an open mind and if changes need to be made they should not be afraid to make them.
But in respect of the majority of companies—the close companies—there is a tremendous encouragement to growth. These companies are often new, small companies, with young dynamic ownership and management. Hon. Members opposite have said that this type of company derives no encouragement from the Corporation Tax. I can only believe that they have been listening to the right hon. Member for Bexley (Mr. Heath), who has shown he really does not understand the workings of the Corporation Tax [HON. MEMBERS: "Really!"] Hon. Members opposite should have listened to the right hon. Gentleman's speech. However much growth may be desired, it can only be expressed in real terms either in increased mechanisation or an increase in or the full use of a company's labour force—or both.
In the short term this is the tough problem. The Machine Tool Traders' Association recently announced that there was a nine-months gap between order and delivery. With the best will in the world, expansion, through increased mechanisation, is therefore difficult in the short term—and it is in respect of the short term that we face our greatest battle. In war, when we were faced with a powerful enemy, we worked long hours without question and gained a great victory. We have a war on our hands now—a tough, economic war—and I would tell trade union leaders that their members will respond to the great challenge if it is put to them squarely that the time for greater leisure will come, but it is not now. First we have to defeat our economic enemy.