Orders of the Day — FINANCE (No. 2) BILL

Part of the debate – in the House of Commons at 12:00 am on 10th May 1965.

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Photo of Mr William Clark Mr William Clark , Nottingham South 12:00 am, 10th May 1965

It depends who is printing it. It is very complicated and long and, I suggest, sometimes incomprehensible. Some unkind critics say that it would be easier to understand in Hungarian than it is in the language in which it is printed.

We not only have to look at this Finance Bill. It is allied to the previous Finance Bill, and the Chancellor of the Exchequer has made it clear all the way through that one of his objects is to improve our balance of payments through improving our exports. I know that there are certain side effects to that, but I very much agree with my right hon. Friend the Member for Bexley (Mr. Heath), who earlier today asked whether if we are trying to show the world that they should have confidence in this country, it would not have been much better to have boasted of our overseas investments last November rather than to wait until a week or so ago.

I know that hon. Members opposite do not like to be continually reminded of that matter. The Prime Minister is pleased to boast of our £11,000 million investments abroad, but I think it fair to point out that not one penny of that huge investment was ever built up by any policy of a Socialist Government in this country. The Chancellor of the Exchequer and his right hon. Friends should take that to heart.

In this Finance Bill we have again, as my hon. Friend the Member for Horsham (Mr. Hordern) pointed out, the two whipping boys of taxation—beer and tobacco. I should like to quote a man of considerable experience in this connection who, on 7th May, 1964, said, referring to this increase in taxation on beer and tobacco: I should be wrong to say that this £100 million has no relevance to an incomes policy, because it puts up the cost of living by 1 per cent. and will stimulate a whole series of wage claims. But it has no other effect. The same person went on to say: As the Chancellor of the Exchequer has provided for £100 million exclusively from drink and tobacco, and as this provision has no relevance whatsoever to all the major issues, it is not surprising that his Budget is being called an irrelevant one, and it is not surprising, therefore, that the Finance Bill does very little to help the situation."—[OFFICIAL REPORT, 7th May, 1964; Vol. 694, c. 1477.] I wonder what the Chief Secretary thinks now of what he said a year ago about these two whipping boys?

Does he think it wrong for a Conservative Administration to use these two taxes with, of course, all the bad effects that will flow from them but that if a Socialist Government uses them they will not have the same effect? It will be interesting to know and perhaps the Chancellor of the Exchequer will tell us about these two taxes. I think he will be fair enough to admit that the effect of his swingeing tax on beer and spirits, particularly on spirits, has been partially alleviated by the operation of the Resale Prices Act, a Measure introduced by the last Administration. That, to a certain extent, has cushioned the effect, particularly of the huge increase in the whisky tax.

We have also to look at what might be termed the various minor points of this Finance Bill, but this Bill should be looked at with the previous one, in which the Government increased the petrol tax, put 6d. on Income Tax, gave us the surcharge and increased National Insurance contributions. Now we have the increase in vehicle duty. It is rather extraordinary to listen to the First Secretary saying on 7th April: The taxes that we have imposed do not hit industrial costs."—[OFFICIAL REPORT, 7th April, 1965; Vol. 710. c. 521.] He must be the only man in the country who really believes that, because all these things increase our industrial costs. As everyone save the First Secretary knows, one cannot increase taxation in this way without hitting industrial costs. And not only will it hit industrial costs, but it should not be forgotten that it will also hit agricultural and horticultural costs. This is something to which the Government should pay particular attention.

The Chancellor of the Exchequer, of course, in his Budget speech and in the Finance Bill, has brought forward his entertainment expenses bogy. Possibly there may be some abuse on entertaining —the hon. Member for Manchester, Cheetham (Mr. Harold Lever) made a very good point on this question—but the Revenue already has powers under Form P.11B. It is all right for the Financial Secretary to say this afternoon that the Revenue cannot really find out; all they need do is to make Form P.11B a little more stringent.

This tax on entertaining will hit the small man, not the tycoon. It will hit the commercial traveller and the semiprofessional man. It will affect the estate agent who employs five or six salesmen to sell houses. The agent has to pay for the entertaining that those salesmen incur. If the expense is disallowed for tax purposes it will not penalise the person enjoying a lunch but the owner of a business who pays at the highest rate. I beg the Chancellor to look at this proposal again because the small man will suffer under it.

We well remember the Chancellor's speech when he introduced this part of his Budget. He spoke of penthouses, grouse moors and yachts. Today my hon. Friend the Member for Abingdon (Mr. Neave) asked a Question of the Treasury about what percentage was allowed by the Inland Revenue for these grouse moors, yachts and so on. It is extraordinary that when the Government have placed such great emphasis on entertaining by such things as grouse moors, yachts arid so on that my hon. Friend should get such a dusty answer— I regret that this information is not available. How can the abolition of such allowance for expenses be justified if it is not known what expense is involved?

When he introduced the proposal, the Chancellor said that at least he would have the satisfaction of knowing that anyone who had a business luncheon would not be "heavily subsidised by the Exchequer." Why is this not applied to Government entertaining? That is not heavily but wholly subsidised by the taxpayer. I was interested when I listened to the right hon. Member for Easington (Mr. Shinwell), whose comment is reported in col. 599 of the OFFICIAL REPORT for 7th April. Regarding business expenses, he said that he would like the provision applied to Government hospitality. He went on to say that he had not been invited to some of this entertainment. I feel sure that if an Amendment is moved to include Government entertainment expenses we shall welcome him in the Lobby to vote against the Chancellor, unless he changes his mind.

The main part of the Bill, the Capital Gains Tax, is hailed as a great social measure, but will it achieve the object we are led to believe to be behind it? All my hon. Friends agree, as do some hon. Members opposite, that this will hit the small man. I accept that life insurance policies are exempt from the tax, but one has to look beyond an insurance policy to see how its value is made up. Premiums are received by an insurance company, which invests the money and receives dividends which eventually go to aid millions of policy holders. Any hon. Member who has had experience of investing knows that investments have to be switched. The Capital Gains Tax will be employed and the money going into the pool eventually to be distributed to the millions of policy holders will be reduced. Eventually this will affect the small man as it will in the case of unit and investment trusts.

It is all very well the Chancellor of the Exchequer saying that we could have a franked dividend voucher showing what Capital Gains Tax the investment trust and the unit trust will pay, but in fact they will be paying at the rate of 35 per cent. As one of my hon. Friends pointed out, a direct investor who makes a capital gain pays at the rate of 30 per cent. But take the case of the small man who has not got the income that will justify him paying 30 per cent. He can have the one-third exemption and the rest of it added to his income. Possibly he will be paying at the rate of 15 per cent. or 20 per cent., and in many cases he will not be paying anything. So what is the effect of this franked Capital Gains Tax on the small man who owns any unit trust shares? One could go on with many of the anomalies that this system throws up. One thing we should remember is that the Capital Gains Tax will be paid by anybody who owns a small business and retires. Why will not the Chancellor give some exemption?

Then there is the difficulty of valuation. I would remind the Chancellor—this is an example that, no doubt, has been brought to his attention already—that last week at Christies a set of plates was sold for £5,000. Apparently they were very special plates. A similar set was sold later in the same sale for £4,000. I am sure the hon. Member for Manchester, Cheetham will support me when I ask, how is it possible to get a straight valuation on 6th April this year when we have a variance of £5,000 and £4,000 for two identical sets of plates?

As many of my hon. Friends have pointed out, Capital Gains Tax is at the swingeing rate of 30 per cent. But if it is paid by a company it will be 35 per cent., whereas in America, which is constantly quoted, the maximum rate is 25 per cent. and the average rate paid is about 9 per cent.

Hon. Members opposite are great admirers of Sweden, that sort of Socialist paradise. Sweden also has a capital gains tax, and even in that country they have obviated the necessity to tax inflation. In Sweden, as I think the Chancellor knows, the rate of capital gains tax is tapered off so that eventually it becomes nil. Why is it right to tax at 30 per cent.? Surely there must be some tapering off in inflation.

One other matter—and this was brought out forcibly by my right hon. Friend the Member for Flint, West (Mr. Birch) in a previous debate and by my hon. Friend the Member for Horsham—is that of gilt-edged securities. The failure to keep faith with people who invested in gilt-edged below par could have a serious effect on the future workings of the gilt-edged market. The Chancellor must take this into consideration. He knows that he has got to find by borrowing £700 million this year. If the Government of the day are going to issue gilt-edged securities below par, as my hon. Friend the Member for Horsham pointed out, one does not just work out the rate of interest; one adds on the capital value of the redemption. If the Chancellor does not accept this, he has got to increase the rate payable for the £700 million that he has got to raise. Surely this is a short-sighted policy.

I do not suppose it would be right to let the Second Reading go without mentioning Corporation Tax. I would commend to the Chancellor—I hope he has read it—the debate in another place last week which the noble Lord, Lord Aldington, initiated on overseas investment. There one can get an overall and, if I may say so, a fairly non-party approach to this problem. [Laughter.] Hon. Members opposite may laugh, but the imposition of Corporation Tax is bound to affect our exports. There is not an industrialist or a financial journalist who will not say this, knowing that it is true. It is no good hon. Members opposite laughing when we say that it will affect exports. Of course it will affect them. If we want to get exports, there is no point in trying to discourage people from investing overseas.

There has been great argument on both sides today about whether exports flow from overseas investment. The recent Federation of British Industries study shows that there is a connection between exports from this country and overseas investment. Of course there is a connection. Last year, from our overseas investment—the £11,000 million—we got net, after the foreign tax had been paid, £860 million. To discourage this investment means that eventually that £860 million will diminish, and if it diminishes we must somehow replace it by actual exports.

As my hon. Friend the Member for Middleton and Prestwich (Sir J. Barlow) said, many overseas companies must reduce their dividends because of the imposition of Corporation Tax. On 12th April, as reported at c. 969 of the OFFICIAL REPORT, the Chief Secretary to the Treasury pointed out the danger of paying low dividends. He said that when a company pays low dividends, there will be a depreciation in the value of the shares. That is obvious. The hon. Gentleman went on to say that such a company was ripe for take-over bids. This was precisely the point made by my hon. Friend the Member for Middleton and Prestwich concerning the rubber companies in Malaysia. That is not the only sort of company which is affected.

Insufficient importance has been attached to the effect that the Corporation Tax will have on insurance companies which insure overseas. On many occasions they have to invest their money overseas, because of statutory requirements, to pay claims. If the Government penalise insurance companies overseas by this Corporation Tax, we may lose a large invisible export that we enjoy and from which last year we got £60 million. These items are extremely relevant to our balance of payments.

The Chancellor accepts that there is hardship with the imposition of Corporation Tax. He must agree, otherwise he would not have introduced the transitional periods. Accepting that hardship will be caused, he has allowed the five years, the two years and then the tapering off. This is merely putting off the evil day. It is small comfort to these overseas companies to realise that they have five years' grace before the full effects of this tax hit them. We should certainly control new investment, but I do not see why, in the Bill, the Government should hit out blindly.

Many hon. Members opposite have said that the United States has cut down in its overseas investments. The United States, however, has been careful not to act to the detriment of its existing overseas investments. It is only in the case of new investments that it is taking action. We would agree with this, but we certainly would not agree with hitting out blindly and, to cut down investment this year, hitting all our existing investment. This is short-sighted policy.

The other thing on Corporation Tax is the question of the Neumark Committee's Report. Here again the Financial Secretary to the Treasury, on 8th April, 1965, really got himself into a slight jam and then got out of it—when it was pointed out to him that the German system on retained profits was 51 per cent. and on distributed profit 15 per cent.; the exact opposite of what we are doing—by saying: I said that this new tax would bring our tax system into closer approximation with theirs. That is true, but I was not talking about the rate of taxation but the system of taxation."—[OFFICIAL REPORT, 8th April, 1965; Vol. 710, c. 802.] We are talking about the rate of taxation. We say why, if in Germany they pay 51 per cent. on retained profits and 15 per cent. on distributed, are we in this country doing the complete reverse? This really is short-sighted policy and it shows quite illogical thinking. As my right hon. Friend the Member for Bexley quite rightly said, it is nonsense for the Government of the day to be saying on the one hand, "We will give you 1 per cent., 2 per cent. or 3 per cent., if you export", when at the same time they are taking away exports by the imposition of the Corporation Tax.

I hope that the Chancellor and his right hon. Friend are realising the folly of their actions, because the doubts about the Corporation Tax are not restricted to this side of the House. Most hon. Members opposite who spoke—and, with the greatest respect, those who spoke with any authority or experience—all agreed that there were many doubts on the imposition of the Corporation Tax and how it will hit the export trade.

I know the Chancellor has not yet closed his mind. I presume that he has not, because I think he will remember at a May Day rally a few days ago in Manchester he said that he would "listen to them." It seems to be the sort of thing to do. At one time it was the reviewing Government. Now we have got the listening Government. I hope that very soon we will be able to say the defeated Government.

At home the Corporation Tax is supposed to be a great measure, a clarion call to modernise, to do this and to do that, to put some dynamic force into our economy. What does it do? Because of the imposition of the Corporation Tax, and with the same amount of profit passed, every small investor in this country is going to have a decrease in his dividend of nearly 20 per cent. This is not going to please the 4,000,000-odd small investors in this country. This is the effect. It is all very well for the Chief Secretary to nod his head. He knows, as I do, that if one takes £100 of profit passed to dividend, one would have got a gross of £74 under the old system. Under the new system one will get a gross of £60 and the difference between £60 and £74, to my reckoning is 19.43 per cent. It is the small man who is going to be hit.

The 60 per cent. compulsory distribution is going to affect the closed company and the small company. At the moment, with a director-controlled company the Revenue insists on 20 per cent. to 40 per cent. distribution.

The Chancellor is saying that small companies must distribute 60 per cent. of their income after Corporation Tax has been paid. This is quite obviously hitting the small man. Many of our companies have been built up over the past 8, 10 or 15 years from small beginnings, and the people who started them ploughed back their profits and worked 24 hours a day. Now they will not be able to do this. This is crippling private enterprise and killing the small man. One could go through many classes of industry and show how they are going to be affected.

I know that the Chancellor is serious about this, even though some of his hon. Friends are not. I should like him to answer the question about the diminution of dividends to the small investor. I am sure he will agree that there must be a diminution.

I know that in some parts of his party the profit motive, or the dividend motive, is not entirely in tune with the party's philosophy. In fact, on 7th April of this year the right hon. Member for Easington (Mr. Shinwell) said that he was rather surprised that the Government were still paying homage to the profit motive. I should have thought that the profit motive had served this country, and many others, too, extremely well, and this nonsensical philosophy that there is something wrong with profit cannot do anything but damage to our standard of living. Everybody knows that. One could speak for a long time on this topic, but time is short.

I come back to the main theme of the Bill, which is balance of payments vis-à-vis exports. I was astounded, as I expect all hon. Members were, last week when the First Secretary, when talking about exports, said during the steel debate: … if the argument is that one does not export in the nation's interests but only when one makes money, one is doing a very unpatriotic thing."—[OFFICIAL REPORT, 6th May, 1965; Vol. 711, c. 1688.] Can we, as an international industrial nation, dependent as we are on exports for our standard of living, possibly subscribe to the theory that one can export without making money? Are we really going back to the 1945 days—to the will-o'-the-wisp of exports? Are we going back to unrequited exports? That, partially, was the reason why we had to borrow nearly £2,000 million from the Americans. We do not want to go back to that position. We want to progress.

The Chancellor and many Government spokesmen have pleaded that the purpose of the Corporation Tax is to simplify the tax system. I should have thought that it made it more complicated, and I could not understand why the Chief Secretary said this about the Corporation Tax: It is therefore a great privilege for me to be associated in a minor way with my right hon. Friend in giving shape to this reform." —[OFFICIAL REPORT, 12th April, 1964; Vol. 710, c. 972.] He and I are accountants, and I should have thought that one reason why accountants welcome the Bill is that it is an accountants' paradise. It is so complicated, and in many instances so incomprehensible, that it is an accountants' and lawyers' paradise. I am sure that the hon. Member for Heywood and Royton (Mr. Barnett) will agree that it is difficult to interpret the Bill.

Talking about interpretation, it took a Socialist Government to define a connected person. I should have thought that this was a little infantile, but there it is, boldly printed in Schedule 6, paragraph 21(2) on page 156, where it says: A person is connected with an individual if that person is the individual's husband or wife … I cannot think how, even in a Finance Bill of this magnitude, anyone could stoop to defining the connection between husband and wife.

During the debate hon. Gentlemen opposite have spoken about the Tory record. I do not think that they have been very kind about it, but the cold fact of the matter is that during 13 years of Tory Government the standard of living in this country went up by 40 per cent., and that is no mean achievement. From the benches opposite in those days the cry went up about a candy-floss economy. At least we had candy. We have no candy now. All we have is a floss economy.

The Bill shows antagonism towards the capitalist system. [HON MEMBERS: "Hear, hear."] Here we have the Left-wing of the Government, who are their Achilles heel. I hope that they will not become the Achilles heel of the economy. They think that capitalism does not work, but it has worked extremely well up to now.