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.

Alert me about debates like this

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee 12:00 am, 10th May 1965

I have seen that argument, but I do not accept it for the long run.

My hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever) asked why there should be double taxation in the Capital Gains Tax sphere. I was clear about this in my Budget Statement and I see no reason to depart from it. This arises from the separation of taxation—the separation of tax on the company from tax on the shareholder. Both in the Corporation Tax and in the Capital Gains Tax, there is this separation and, as far as I am concerned, I think that we should carry the logic of this separation the whole way through. Thus, if one is separating the taxation of one from the taxation of the other, I do not think that one can use the tax of one to offset the tax of the other.

I return briefly to the Corporation Tax. I now particularly address my hon. Friends, although I hope that hon. Gentlemen opposite will bear this in mind. One of the advantages of the Corporation Tax, apart from its simplicity and the fact that in my view it acts as an incentive to growth, is that it enables trade unions to take what I would regard as a rational view towards profitability.

Nobody likes to work for an unprofitable industry. That is why one can always get employees to work for, say, I.C.I. in preference to British Railways. [HON. MEMBERS: "Hear, hear."] They prefer to work for an industry in which profits are to be made. Since I carry hon. Gentlemen opposite with me so far, let us see if they will come with me on the next stage of the argument. It has always been the case that whenever we, former Labour Administrations or hon. Gentlemen opposite have asked the wage earner—the man who has nothing to sell but his skill and labour—to restrain what he gets from industry, he inevitably replies, "If I do that, those other chaps later on are going to get it all back in the shape of some kind of capital gain, capital distribution or whatever it may be, whereas I never get back pay". How often have the trade union shop stewards heard that argument advanced against having a rational policy on wages?

One of the important points in this connection—I am not saying that it is the only virtue of the Corporation Tax—is that it enables one to separate the tax on the company from the tax on the shareholder. This is a very important element in it. It means that one can, as I am proposing here, have a relatively low rate of tax on the profitability of the company, so encouraging it to plough back its retentions into new machinery and plant, whereas there will be a higher rate of tax on the shareholder. This is, in itself, a very substantial advance on the old system, for reasons which will be apparent to many people.

I was asked—remembering that the old system was full of anomalies—how much tax was being lost under the old system. I would remind him that the Public Accounts Committee—in its Fourth Report for 1963–64—had something to say which certainly influenced my thinking, in paragraphs 6 and 7, in relation to taxation which was not paid by companies although normal people might think it had been paid. The Committee took a specimen group and said: Some of the companies had paid the whole of their dividends to parent companies, and in these cases the Comptroller and Auditor General was able to establish that the gross dividends used by the parent companies for repayment claims exceeded by £32 million the total of profits on which the subsidiaries had paid tax. In these few examples— few examples— therefore, there had been repayment of tax of £32 million (equivalent to tax of £12 million at the current standard rate) which had not been received by the Revenue and which, the Department confirmed, never would be received. When we get in the tax system to that state where we "repay"—I put it in quotation marks—tax which has never been paid and which is then used to make dividends I say it is high time the system was changed. Everybody knows that through a variety of devices which we can go into in Committee a great deal of this sort of thing and other arrangements have been going on.

My hon. Friend the Financial Secretary put the argument on investment allowances and I shall not go into that again now as it is getting late, except to emphasise that from some of the exaggerated comments of hon. Members opposite one might think that investment allowances were being destroyed. Nothing of the sort. In fact, as my hon. Friend pointed out, they are costing something over £300 million a year and as a result of the introduction of Corporation Tax that cost will become roughly about £220 million which industry will still be getting.

I thought that the right hon. Gentleman's thinking was moving along very interesting lines, because he, like a great many other people, is now beginning to regard investment allowances not so much as a tax relief as a subsidy. That was the way he was framing it, as he will see if he reads his remarks, and I invite him to do so. If these things are being regarded more and more as subsidies rather than tax relief then it is the duty of the Government to consider whether this is the best method in which that additional relief between £220 million and £320 million should be given. That is what I propose to look into during this year.

The hon. Member for Nottingham, South and other hon. Members opposite have claimed that there will be uncertainty. But if we are to operate on that basis we shall never make any changes at all. I think companies are sufficiently well versed in investment allowances over many years as not to be affected by this consideration too much. In any case I must point out that one of the consequences, as my hon. Friend the Financial Secretary reminded the House, is that it places more free reserves in the hands of companies. Because there is a lower tax on profits, they have more free reserves which they devote to investment.