Clause 69. — (Restriction for Close Companies on Deduction for Directors' Remuneration.)

– in the House of Commons at 12:00 am on 16th June 1965.

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Photo of Sir Harry Hylton-Foster Sir Harry Hylton-Foster , Cities of London and Westminster 12:00 am, 16th June 1965

The first Amendment selected is No. 689, and with it we are to discuss Amendment No. 354, in page 89, line 32, to leave out "£25,000 nor"; Amendment No. 355, in page 89, line 33, to leave out "shall it exceed"; Amendment No. 357, in page 90, line 26, to leave from the first "the" to the end of the line; and the two Government Amendments, Nos. 741 and 690, in page 89, line 33, to leave out "shall it", and in page 90, line 26, to leave out from "months" to the end of the line and to insert "each of the".

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I beg to move Amendment No. 689, in page 89, line 32, to leave out "exceed £25,000 nor".

This and the other two Government Amendments which go with it have the effect of removing the ceiling of £25,000 a year which the Clause prescribes as the maximum for allowable remuneration for Corporation Tax purposes for the directors of close companies other than whole-time service directors.

I shall, first, explain what whole-time service directors are, because this will come into our consideration from time to time. Whole-time service directors, as the Committee appreciates, are virtually employees. They are individuals who, holding office as director, work full time, do not hold more than 5 per cent. of the shares and, therefore, do not have any serious measure of control. They work for a company, being treated for all purposes, therefore, as though they were salaried employees; and they do not enter into our calculations as regards limits at all. Now in everything that we say about these Clauses on close companies I will assume that service directors are excluded and regarded automatically as if they were ordinary salaried workers.

9.15 a.m.

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

I am sure that the right hon. Gentleman will agree that we are concerned with the words in Clause 69(3), … applying to directors who are required to devote substantially the whole of their time to the service of the company in a managerial or technical capacity …

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

There are three categories of directors. I want to say to the right hon. Gentleman that if we can remove one category it leaves two. It is easier to comprehend two categories rather than three. If we get rid of the third category straightaway then everyone understands what we are talking about when we refer to directors' remuneration excluding those directors who are whole-time service directors, as already explained.

These Amendments abandon the ceiling of £25,000 a year. I have to explain, although I am sure that the Committee understands it fully, that in Corporation Tax as in Profits Tax, one has to take reasonable steps to see that, where a company is easily controlled by a small group of individuals, they behave—shall I say—normally with regard to the distribution of their profits.

Normally, in a company not in the control of a small group, the directors pay a reasonable amount of remuneration to themselves and then they have regard to dividends. What they would not do if they were not in control would be to receive all the profits by remuneration. They would like to do this now that we have a Corporation Tax because this would mean that there would be no Corporation Tax assessment of the company; and there would be tax avoidance. It is, therefore, essential, as it was with the Profits Tax, to put a sensible limitation on directors' remuneration.

There are two other categories of directors and they are the only two about which we are talking now. Firstly, there are those engaged full time in the service of the company and who own more than 5 per cent. of the shares. The second category is any other kind of director who may work part-time, full-time, little-time—even come-along-once-a-month directors. So far as these two categories are concerned, there is a maximum remuneration which they are entitled not only to draw but having drawn to set against profits for Corporation Tax purposes. Of course, there is no limitation to the amount a company may pay, but merely a limitation to the amount allowable to be set off against profits for Corporation Tax purposes. We are considering the maximum which can be paid by a company which is affected by all these Amendments.

I recognise that under the Corporation Tax, close companies cover a wider field and larger companies than those in the previous similar appellation of a "director controlled" company which was used for Profits Tax purposes. We are moving into the field where there are larger companies and larger profits and perhaps more directors and certainly where there is a need for more skill and appropriately more remuneration. We can, therefore, base our calculations on the Profits Tax formulae, but we have to have regard to the fact that larger profits will be made by companies covered by these provisions than previously.

Therefore, it is right that the maximum we are now to consider should be fully as great as, if not greater than, it was before. The previous arrangement was that there was a maximum percentage and a ceiling beyond which the figure calculated by reference to that percentage could not rise. The ceiling proposed for Corporation Tax purposes in the Bill was £25,000. The percentage limitation of 15 per cent. has been in existence for a very long time and, of course, as it is a percentage the amount of the remuneration rises according to the amount of profits.

Fifteen per cent. of £20,000 is more than 15 per cent. of £l0,000—approximately, even at this hour of the morning, I think, it would be about twice as much. I am grateful to the Committee for following me with such close attention.

Photo of Mr Emrys Hughes Mr Emrys Hughes , South Ayrshire

This generosity does not appeal very much to me. What will the cost to the Exchequer be?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I am only explaining the background. My hon. Friend need have no anxiety, not even the anxiety which we recognise north of the Border and in the Treasury. I am merely describing the limitations on remuneration which are permissible in calculating Corporation Tax and I have explained that 15 per cent. is an appropriate figure that has been with us a long time and that, its being a percentage, there is no reason to vary it, but the ceiling has been varied and increased to £25,000.

On second thoughts, however, the Chancellor, having regard to representations made, feels that there is no longer any need to impose a limit of this kind, since substantial profits will be made by some of the large companies that will be affected by the new legislation. He is, therefore, suggesting that the ceiling of £25,000 should now be abandoned.

Photo of Mr William Van Straubenzee Mr William Van Straubenzee , Wokingham

With the moving of this Amendment we come for the first time to the close company section o the Bill and I think that it will not have been lost upon the Committee that the very first action of the Government is to make a major concession in the Bill as originally drafted. In fact, if the Chief Secretary had been moving a Second Reading of the Bill, he could not have put it more succinctly and, indeed, argued it more carefully. One would have had to listen to his speech very carefully to have detected that what he was doing was to concede frankly that the original limit of £25,000 simply did not make sense.

It did not make sense because, as the right hon. Gentleman said, the definition of close company as it now is in the Bill brings in to the provisions of the Measure a far wider range of companies than, I suspect, was at first appreciated in the Treasury, and even if it was at first appreciated in the Treasury then the figure of £25,000 in the Bill was entirely nonsensical.

I think that the right hon. Gentleman was a little less than generous. He might have acknowledged the fact that, without any difficulty whatever, he could have accepted the Opposition Amendments on exactly this point. They have been on the Notice Paper for much longer than his. The relevant Opposition Amendments start at No. 354; his at No. 689. The plain fact of the matter is that this is an example where the Chief Secretary appreciated that his arguments could not stand up to the assaults which would be mounted against them once the Opposition Amendments were moved.

It therefore follows that I personally hope that the Committee will accept the Chief Secretary's recommendations which are, almost word for word, those which would have been put up from this side of the Committee. We really cannot allow this first incursion into the close company discussions to go by without just recording the fact that this is essentially an initiative taken from this side of the Committee.

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

It would be ungracious of me not to express our gratitude to the Chief Secretary and the Chancellor for accepting precisely the same suggestion made by my hon. Friends. The only difference between our Amendments and those in the name of the Chancellor is one of grammar, a difference which has no doubt enabled the Chancellor's to get in a little earlier on the Notice Paper.

It is an astonishing reflection on the Chancellor's understanding of the business world that he could ever have thought that an overall limitation of £25,000 could be appropriate. As the right hon. Gentleman the Chief Secretary has pointed out, we are no longer concerned with the old Section 245 companies. We are concerned now with many far larger public companies as well as family businesses.

There is another factor which I would have thought the Chancellor would have taken into account from the very beginning and that is that any remuneration which is disallowed by virtue of this Clause will be liable to Corporation Tax at 35 per cent. or 40 per cent., whereas previously, under Profits Tax it was liable to tax at only 15 per cent. It has taken the Chancellor weeks after the publication of the Bill to pluck up sufficient courage to table this very simple Amendment. The business world will doubtless be grateful that the Chancellor is learning, albeit a little tardily.

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

I want to welcome, because no one else has welcomed it with sufficient cordiality, the Chancellor's cooperation in this matter. I should like to go on record as saying that I see no reason at all for any restriction upon remuneration of directors, because in my opinion the loss of Corporation Tax becomes irrelevant when one has regard to the fact that money paid out would immediately fall within our very adequately severe and progressive system of tax, for Income Tax and Surtax. That is something the Inland Revenue might bear in mind when they are troubled about the avoidance of the Corporation Tax when a salary is paid. Everyone is reasonably satisfied that the Chancellor has gone a long way to meet the objections to the original drafting.

There is one thing I would urge upon the Chancellor. If income is disallowed in this manner for the purposes of the profits of a company and is hence written back for Corporation Tax purposes, and hence for purposes of deduction of Income Tax and Surtax from the company's profits, it should not be assessed upon the director as well, because if it is it would produce a penal result which I am sure the Chancellor would not want.

I may have read the Clause hastily, but, as I read it, if a company erroneously pays out something beyond the permitted salary this sum is not allowed for tax purposes to the company in computing its profits and the money thereby accruing to the company, or deeming to accrue to the company, is available for dividends and can attract Surtax in the hands of the shareholders. In those circumstances, it would surely be wrong that the company should pay Income Tax and Surtax upon these profits and then the director who received the money should pay Income Tax and Surtax upon the same profits.

9.30 a.m.

If I am wrong in thinking that that is the position the Chief Secretary will, of course, correct me. If I am right, I should like him to say whether he really thinks it is necessary for any purpose at all that these profits should be taxed twice in this manner, if such an error is made by a company.

Amendment agreed to.

Further Amendment made: In page 89, line 39, leave out "shall it".—[Mr. Diamond.]

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

With the next Amendment, No. 356, we can take Amendment No. 358, in page 90, line 2, leave out "£3,500" and insert "£5,000".

Amendment No. 359, in line 3, leave out from "directors" to "who" in line 7.

And Amendment No. 360, in line 10, leave out from "directors" to end of line 24 and insert: below the aggregate remuneration of such directors with an overall limit of £5,000 for each such director".

Photo of Mr William Van Straubenzee Mr William Van Straubenzee , Wokingham

I beg to move, Amendment No. 356, in page 89, line 33, to leave out "fifteen" and to insert "twenty-five".

I am sure you will appreciate, Dr. King, that the effect of this Amendment, and of those which you have been good enough to say may be discussed with it, is, first, to substitute 25 per cent. in subsection (1) for the permitted deduction of the remuneration of directors—I am also using the word "directors" in the sense in which, earlier, the Chief Secretary used it, and helpfully, if I may say so—and secondly, in sum, to make £5,000 the minimum figure in subsection (2), very much to simplify the provisions of both subsection (2) and subsection (3), and to limit to £5,000 the individual payments in these circumstances. I am only summarising, because I am quite certain the Chief Secretary has before him the effect of the Amendments on the Clause as a whole.

In moving the Amendment—at this advanced hour I shall do so more shortly than would otherwise have been the case—I am encouraged by the interjection of the hon. Member for Manchester, Cheetham (Mr. Harold Lever), although, frankly, I myself could not go as far as does he in advocating that the Clause should have no restriction at all. The Chief Secretary will notice that we are not arguing to him that there should be no restriction at all. We are in the first half of the Amendments seeking to persuade him that in present conditions, and even allowing for the valid point—and I take the valid point—of this being a percentage, with the very much wider range of companies included in the term "close company" 25 per cent. would be a more realistic figure, and that certainly the individual figures of £5,000 in the second series of the Amendments would be far more appropriate in modern conditions.

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

Since the hon. Gentleman has said that he is in agreement, and since he thinks it a sensible idea to govern these things on percentage of profits, may I put this to him? Suppose a company has a bad year and its profits drop. Is that a reason for penalising the shareholders again, by refusing them the right to pay the directors the normal salary? Or does the hon. Gentleman think there is an even better way of dealing with the matter?

Photo of Mr William Van Straubenzee Mr William Van Straubenzee , Wokingham

No. It is a reason, surely, for accepting the second half of the series of Amendments, which make the resultant position in that case very much better than it is under the Bill as drafted. But I think the hon. Gentleman has a valid point, which, I have no doubt, will be gone into further daring our discussion.

It may very well be that the Chief Secretary will be tempted to suggest to the Committee that the figure as it now stands as now amended, as a result of the last Amendment, does represent a substantial advance, or at least an advance, on the Profits Tax rules. I suggest to the right hon. Gentleman that this argument does not allow for a point made earlier by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber), that the effect of the Corporation Tax on the disallowed deduction is savagely greater than it is under present legislation.

Secondly, the Profits Tax rules, applying as they do to director-controlled companies—which means exactly what it says—are now extended to a very much wider range of companies, so that, by virtue of the provisions of Schedules which we have yet to discuss, a person may well find himself losing his status of a whole-time director because of the 5 per cent. holding, perhaps in the hands of members of his family.

The second series of Amendments seeks to bring up to date the levels of remuneration. For example, it is present practice to grant earned income relief in full up to £4,005. We do not start imposing Surtax on earned income until £5,000. I therefore suggest that the proposed figures are far more in keeping with present-day conditions and the present-day sense of what is proper by way of remuneration over a wide range of companies which have been brought into the Bill.

The Bill as drafted suffers from the defect that the figures inserted by the Chancellor—or, indeed, by my Amendment; and this must be so by virtue of it being an Amendment—are fixed in the Bill. They are fixed and immovable figures. If, after a time, it was thought wise to increase them, this would involve an Amendment to the Act, as it would be by then, which would be a far more cumbersome procedure, and I suggest to the Chief Secretary that it might be worth considering taking power to vary these figures by Order, though I hope that as result of the arguments that I have put to him he will think that the combination of 25 per cent., on the one hand, and what I loosely call the £5,000 figure, on the other, makes more sense in this modern day.

Mr. Gresham Cooke:

I rise to support my hon. Friend the Member for Wokingham (Mr. van Straubenzee), and to observe that when we were dealing with the Corporation Tax Clauses the Chancellor treated individuals and companies as two separate sets of beings, yet now, when we have come to the close company Clauses, the right hon. Gentleman seems to have turned round on the other tack and to be treating individuals and companies as one being. He is treating them as indissolubly linked, and this is a very serious matter for large sections of British industry, I am told that Marks & Spencers and Jaguar Cars are close companies. I know that the same is true of Rootes, and in this connection I declare an interest, because I am connected with the company, although not, of course, a controlling director.

This Clause seems to be responsible for anomalies and unfairness. Surely we should not penalise an individual director by making him pay more tax than he would pay if he were an individual director of an ordinary company. Let us take a one-man company with profits of £20,000 a year, before tax at present. If it made an extra £1,000 and that were paid out, I take it that the individual would pay tax on that £1,000 to the extent of £912—being 8s. 3d. in the £ on £1,000 and 10s. in the £ in Surtax. In a close company he would pay 40 per cent. on £1,000, less 15 per cent., which would be £340, and 8s. 3d. on the next £660 and 10s. on the next £660, which would make £942 in all—£30 more than the director of an ordinary company.

I would like to have seen the limit done away with altogether. If the profits were paid out as remuneration, why not take it by way of Surtax and Income Tax, in the normal way? What happens if the company makes a loss, or a very small profit? The 15 per cent. limit applies very harshly in this case. If the remuneration of directors is more than the profit the balance must be added back and for tax purposes a genuine loss can be turned into a profit. Surely that is very inequitable.

One solution would be to adopt the old definition of a Surtax company instead of a close company for all these companies, and put them under Section 252 of the Income Tax Act, 1952. In my view, and in the view of the companies involved—and very large amounts are paid out in remuneration in some of them—and in view of the fact that the directors would have to pay it in Surtax and Income Tax anyway, the least the Chief Secretary could do would be to raise the limit from 15 per cent. to 25 per cent., if not to get rid of it altogether.

Photo of Mr Paul Bryan Mr Paul Bryan , Howden

I am a director of a close company, and come from an area—Yorkshire—which abounds in close companies. Hon. Members on this side of the Committee have been slow to recognise the underlying Socialist objective of this Bill. We all expected an anti-business Bill and an anti-private enterprise Bill, and that we have certainly got, but we have not recognised that this is only phase one in the campaign against private enterprise. This is the attack on the small company and, in particular, the family company. Once the small companies have been hamstrung the others can be dealt with.

My hon. Friend the Member for Wimbledon (Sir C. Black), in an earlier speech, put up a case which was unanswered—because it was unanswerable—stating the effect of Corporation Tax on the small company. He showed that the increase in tax suffered by the small company was far more severe than the increase on a large company. I can think of no small company which benefits from the Corporation Tax. Each one is bound to suffer. Quite a number of the big companies, on the other hand, will benefit.

During the proceedings on the Bill the Government have been pushed, sometimes ridiculed, into making about 200 Amendments. Any concession that has been made has been in respect of the bigger companies. Today's concession is a perfect illustration of the point. We have had the £25,000 concession but no other concession whatsoever. As it stands the Clause is absolutely ludicrous and quite unfair to the smaller companies.

I wonder whether the Chancellor has any idea of the scale of reward in British industry today. I would invite him to look at last week's Sunday Times, at the advertisements of Management Selection Ltd., which is, I suppose, the biggest and best-known of the executive agencies. There are nine advertisements this week, and five of them offer a figure of £3,500, mostly with pensions, and the "preferred age", as they call it, is, in most cases, in the 30s or early 40s. That is a fair sample, and shows that, early on in their lives, these executives can expect to earn this sort of sum. Needless to say, 20 years later, when they are 55 or so, still in the prime of their business life, they can expect to earn a good deal more.

9.45 a.m.

The figure of £3,500 is absolutely out of tune. I wonder where the Chancellor has got this figure from, and how he has thought it up. He has said that he has not missed a single Division on the Finance Bill. I would willingly pair with him for a couple of days if he would go on a pilgrimage into British industry and look into the question of salaries.

Photo of Mr Paul Bryan Mr Paul Bryan , Howden

Not just now.

I am not inviting him to ooze abortive charm at City boardroom lunches, but to go to Manchester, Liverpool, Leeds and Sheffield, where real manufacturing takes place.

Photo of Mr Emrys Hughes Mr Emrys Hughes , South Ayrshire

Will the hon. Gentleman continue the pilgrimage into my constituency, where a large number of miners, working on the surface, are asking for £9 15s. a week?

Photo of Mr Paul Bryan Mr Paul Bryan , Howden

It is the Chancellor whom I am inviting to go on this pilgrimage. Perhaps the hon. Gentleman will put it to him.

The Chancellor has only to look at the nationalised industries to realise that £3,500 would not get one very far there. I see from the Daily Mirror that the author of the Bill, Dr. Kaldor, gets £4,000 a year for three days' work a week. Recently, Mr. Leslie Jenkins was appointed Chairman of the Forestry Commission at £5,000 a year on a part-time basis. I am not saying that these sums are excessive; from them one gets some idea of what is paid and what is fair.

Photo of Sir Douglas Glover Sir Douglas Glover , Ormskirk

Would my hon. Friend not agree that the famous Dr. Beeching got £24,000 a year?

Photo of Mr Paul Bryan Mr Paul Bryan , Howden

One can easily see the purpose of this limit. What I am trying to point out now is that £3,500 is unreasonably low and out of touch with modern requirements

I should like to give the Committee one or two examples of the absurdities into which this Clause will lead us. Take the case of a company with a capital of £100,000 and making a profit of £20,000 a year. A director of that company can be paid any salary provided that he has no shares in the company. Say that we pay him £6,000 a year. If he is thrifty and saves £5,000 in shares, that is when, under the provisions of the Bill, the company will be told, "You cannot pay him that any more. You must reduce his salary to £3,500". Where is the sense in that?

Earlier, the Chief Secretary was saying that the Government are in favour of any sort of saving. This is absolutely against it. The Chancellor might argue that, with a company making an annual profit of £20,000, that director ought not to be paid £6,000 a year. But what the hon. Member for Manchester, Cheetham (Mr. Harold Lever) said in this context was absolutely right. The company may normally make £40,000 or £50,000 a year, but gets into a bad time and the profits go down to £10,000 a year. A natural reaction might be for the board to say, "We must get in somebody to put our production right; or our sales right". They might then have to offer £6,000 a year, and the commonest occurrence in a smallish company is to give such a man the chance to acquire shares in the business. But he will not be able to acquire them while earning £6,000 a year—though he can if he accepts only £3,500 a year.

I cannot think that the Bill is meant to have this effect. I ask the Chief Secretary to think again. If a director is thrifty and saves to buy shares he can only be paid £3,500. If he does not do so the sky is the limit. Where is the sense in that?

Let me give the case of another company making, say, £40,000 a year, with two directors, both with a 5 per cent. plus holding. Under the Bill, they can only be paid one at £3,500 and the other £2,500. When one of them asks for an increase in salary he will have to be told, "We cannot give it to you without an enormous cost to the company unless you sell your shareholding." How can that be right or healthy? As soon as he sells his shareholding he can be paid £10,000. Surely that is wrong, and I should like to hear the Chief Secretary's justification.

A third case is even more stupid. A director is working for a company, earning £5,000, and has a 4 per cent. holding, Then his brother joins the company and buys a 2 per cent. holding. At once, the salary of the first director must come down from £5,000 to £3,500, otherwise the company will be very heavily penalised. So, once again, because of a tiny family influence, the company will suffer excessive tax.

The last case really does earn the Oscar for the frightened Socialist obsession with the family company. Let us imagine a works manager of 55 earning £5,000 a year. He has a 4 per cent. holding. His son comes into the business, and the father must tell him, "For goodness' sake, do not save any money and buy 2 per cent. of the shares, otherwise, between us we shall be associates holding 6 per cent. of the shares, and my salary will have to come down." That is because they have committed the cardinal sin, in Socialist eyes, of overmuch family interest—and that overmuch family interest is a 6 per cent. holding in a company.

What it boils down to is that there is a Socialist vendetta against the family firm which is both malicious and pathetic. Why should that be? We have many family firms to which the country owes a lot. Marks and Spencer, Pilkington, Sainsbury—they do not ask for favours. They lead in their own field by their own excellence, and still are to a high degree family managed. But if Marks and Spencer, when they started in that small stall in Leeds market-place, had done so under the present breed of Government, they would never have got off the ground.

This Socialist obsession against individual success permeates the Bill. The affront to all Socialist thought is the man who was a bricklayer 10 years ago, started a business, and now has a Jaguar. In their eyes money-making of any sort is bound to be a "fiddle". In the early stages of the Bill, we on this side of the Committee were constantly racking our brains for metaphors of the sledgehammer-to-crack-a-nut variety. We were wrong. As we go on, I see that a far more accurate metaphor would be that of the small boy who was once stung by a bee and ever since has always taken a nervous and nasty delight in tearing off bees' wings.

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

In the early days of our discussion of the Finance Bill, the right hon. Member for Bexley (Mr. Heath) was good enough to refer to an advertisement that I placed in various newspapers inviting proprietors of private companies to approach me for the purpose of acquiring their shareholding—

Photo of Mr Edward Heath Mr Edward Heath , Bexley

Avoiding penal taxation.

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

Avoiding penal taxation—yes.

As a result of that advertisement, I have had contacts with several hundred limited private companies, and I should like to tell the Committee of the kind of thing that this Clause intends to do away with. I am sure that the Committee will agree that we need to do away with many private companies owned by individuals who give no time to them at all.

The owners do nothing at all to make those companies thrive. They use the profits to hire management and pay it well. They use these profits to pay fantastic salaries, obtaining the benefit of earned income relief. [Interruption.] These are not minor amounts, I would say to my hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever).

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

Order. I hope that the hon. Member will address the Chair.

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

The earned income relief practice, on the kind of scale that is going on, is not minor.

Photo of Mr Emrys Hughes Mr Emrys Hughes , South Ayrshire

When the hon. Member uses that word does he spell it "minor" or "miner"?

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

I do not mean the ones that go underground.

We have had a hard day's night and I am sure that the Committee will agree that it is right, necessary and timely that this way of earning money, when the recipients are doing nothing to help these companies produce that income, ought to be stopped. It is not fair, because it really means that other taxpayers are bearing an unfair burden.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

Would the hon. Member agree that the description of the director he gave could not possibly be described as a director who has to devote a substantial amount of time to the business?

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

I agree, but Members who are chartered accountants will tell him that the practice is widespread and ought to be put a stop to.

Photo of Sir Tatton Brinton Sir Tatton Brinton , Kidderminster

Would the hon. Member not agree that we are talking about two different things? This Clause deals with tax on companies. If they pay directors of this type more than £3,500 or £2,500, it has nothing to do with the amount actually paid by the company for that director's earned income relief, which he is talking about. The company can pay £10,000 to that director, who himself will have the earned income relief.

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

The hon. Member is wrong. [HON. MEMBERS: "NO."] I hold the opinion that the hon. Gentleman is wrong. If he is right I would like to check it. Perhaps the Chief Secretary would be prepared to develop that point. [HON. MEMBERS: "Arbitrate."] Right hon. and hon. Members opposite really must stop pretending that they are the party that is interested in business, and want to help it, and that we on this side wish to penalise it.

The purpose of the Budget is to help people to earn money and to penalise those who make money. What is wrong with that? Right hon. and hon. Members on the Opposition benches must also get this straight: the purpose of this Budget is to bring about a disincentive to investment abroad. We want more investment in this country. We wish to penalise those people who have been spending time and making a great deal of money without earning it.

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

The hon. Member will appreciate that the people who are being penalised by this Clause are directors who are required to devote substantially the whole of their time to the service of the company in a managerial or technical capacity.

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

The idea that there are hundreds of thousands of directors with 4 per cent. or 2 per cent. in private companies is utterly stupid. The bulk of private companies are owned and controlled by families. Certainly, a few individuals have small holdings in these private companies, and they will have an option to dispose of the holdings. [HON. MEMBERS: "Oh."]What is wrong with that? We are quite frank in admitting it.

We must put a stop to this nonsense of paying oneself out of a private company income which one has not earned or accumulating it merely for the purpose of paying oneself one day a capital gain. The time has come when people on P.A.Y.E. should no longer be penalised at the expense of those who possess capital or who control companies which give them an opportunity to pay themselves in excess of what they have earned. If they want to pay themselves more than £3,500, let them pay the proper taxes introduced in the Bill, which I am sure the country will come to realise is both fair and necessary.

10.0 a.m.

Photo of Mr David Mitchell Mr David Mitchell , Basingstoke

I listened with fascination to the hon. Member for Buckingham (Mr. Maxwell), who began by telling us that the Budget is designed to end the ownership of businesses by non-working proprietors. Does he realise that the capital gains proposal in the Budget is an extreme disincentive to any proprietor to sell his business, be- cause in future 30 per cent. of the appreciation of the business will be confiscated? Any proprietor in future who is approached by the hon. Member for Buckingham or any other take-over bidder will seriously ask himself whether he wishes to see a major slice of his capital confiscated by the Chancellor or whether he should leave it in the business.

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

The United States has had a Capital Gains Tax for many years and a great number of businesses have grown and prospered—and the number of millionaires has grown and prospered. It is surely time that the people with capital should pay their fair whack in the same way as those on P.A.Y.E.

Photo of Mr David Mitchell Mr David Mitchell , Basingstoke

That does not alter the case that I made. The hon. Member may be an expert on millionaires. I do not pretend to be an expert on millionaires.

Photo of Mr George Mackie Mr George Mackie , Caithness and Sutherland

Would not the hon. Member agree that there appears to be a strong objection to the creation of certain types of millionaire?

Photo of Mr David Mitchell Mr David Mitchell , Basingstoke

This argument is particularly relevant to the words referring to when a business is a separate entity from the shareholders who own and control it. But in the case of a close company, and particular a smaller family business, the whole thing breaks down. As director of a close company, I declare my interest. I have some personal experience and knowledge of what it is that drives these businesses on from generation to generation and what brings out the skill, ingenuity, energy and enterprise, so important for the country, which build up a business.

This has built up for the very human reason which drives human beings on—a family business to be passed on from one generation to another, plans for security in one's old age or for one's widow, or, indeed, for the personal rewards of success.

Quoted companies normally come from smaller family businesses, and time and again one will find in the records of a family business how for one generation there has been one proprietor, then his son has built it up a bit further, and then a Stock Exchange quotation has been obtained and the company has grown into a bigger concern.

The hon. Member for Buckingham said that the purpose of the Budget was to encourage business. I should like to mention a practical example of how it will encourage, or otherwise, a business with a turnover of £100,000 and a profit of, say £15,000 a year. This is an example of a close company which, I wish to make clear, is not my own. Such a business might be worth £100,000. Out of the profits of £15,000 the proprietor takes his salary. Let us look at the figures. Forty per cent. is left in the business—that is £6,000. The proprietor takes out £9,000, of which £5,500 is disallowed for Corporation Tax. Therefore, the Corporation Tax payable out of the £15,000 profit is £4,600 a year. In addition to that, the proprietor of the business pays £2,107 in Income Tax and Surtax, leaving him with £4,693.

If one considers such a company over a 10-year period—a £100,000 business with inflation at 5 per cent.—if nothing spectacular is done within the business in respect of its growth it will be worth £150,000 in 10 years, purely by reason of inflation. If the present Government stay in office one can only suggest that the inflation will be greater than that, but let us work on the assumption of a 5 per cent. inflation. Therefore, if the proprietor passes the business on to his children he will have to pay Capital Gains Tax of £50,000. He has got to find £1,500 per annum. The Company cannot pay Capital Gains Tax. The proprietor has got to do that. That must come out of the £4,600. He is left with £3,193.

What would happen if that man, instead of sweating away at his business, were to put the money into a building society and get 4 per cent.? He would get £4,000 a year. He would pay £888 in Surtax and be left with £3,112. The net additional amount for all the hard work which he has put into that business will be £81 per annum, not enough to pay duty on a bottle of whiskey a week. Instead of spending his time playing golf, as he could do if he put his money into a building society, the man has worked up his business, "beavering" away each day, taking home books—

Photo of Mr David Mitchell Mr David Mitchell , Basingstoke

I have given way already to the hon. Gentleman. I have checked these figures with an accountant. I ask the Committee: what a reward for skill, energy and enterprise!

One thing of which I am certain is that this will be so major a disincentive to proprietors to put their money into their businesses and build them up that we shall be heading for an economy which will be stagnant and in this country that is a prescription for disaster.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

We are dealing with two Amendments in the name of the hon. Member for Wokingham (Mr. van Straubenzee), the first of which seeks to increase the percentage limit which we previously referred to on an earlier Amendment, and the second one of which seeks to increase the individual amounts allowable to directors by £1,500 to £5,000. Perhaps it would be convenient for me to deal with the first Amendment first.

It is common ground between us that the 15 per cent. produces a larger figure the larger the profits. The answer to the hon. Member for Howden (Mr. Bryan)—I cannot remember whether he was in the Chamber when we were discussing the previous Amendment—is that the whole basis of these additional allowances is that the new definition will bring larger companies into consideration. That is why, to answer the hon. Gentleman's political comment, larger companies are involved. The whole argument by every section of the City, business representatives and all others, is that we are bringing into the net larger companies and, therefore, we must make adjustments accordingly. When the hon. Gentleman says that the Socialist Government looks after only the larger company, we take the argument for what it is worth.

Photo of Mr Paul Bryan Mr Paul Bryan , Howden

Is the right hon. Gentleman saying that smaller companies will benefit? Will not they be harmed both by this Measure and by the Corporation Tax?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

Vast numbers of small companies will pay no Corporation Tax at all and will be much better off in terms of their tax burden. Anybody who has been into the figures knows this. But we are dealing with a different matter.

Photo of Sir Eric Errington Sir Eric Errington , Aldershot

Sir Eric Errington (Aldershot) rose

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

Perhaps I can go on with my argument on the Amendment which was moved quite some time ago and which relates to an increase—

Photo of Sir Eric Errington Sir Eric Errington , Aldershot

Sir E. Errington rose

Photo of Sir Samuel Storey Sir Samuel Storey , Stretford

Order. The hon. Gentleman must not persist.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

We are dealing with an Amendment which seeks to increase the percentage limit which is used for the calculation of the maximum to be allowed for directors in certain circumstances in relation to the profits of their companies.

The first point I have made is that the 15 per cent. is an increasing figure if the profits are increasing. Secondly, it is a figure which has been with us for a very long time—ever since 1937, when we had the forerunner of Profits Tax, which was called National Defence, Contribution. It has been carried on from 1937 every year and during the term of office of every Administration, including the 13 years of the last Administration, with which the hon. Member for Howden had a slight political connection, right up to today. It has always been regarded for Profits Tax purposes, which is the exact parallel, as the right figure for allowing directors' remuneration.

The Millard Tucker Committee looked at this matter in 1951. Its view as set out in paragraph 321 was that The existing alternative limitation, namely, 15 per cent. of the profits subject to a maximum of £15,000 should remain. We have dealt with the maximum, but that Committee saw nothing wrong with the percentage. We have a situation in which we have a percentage figure which takes account of increasing profits of larger companies with larger profits. It is the figure which has been acceptable to every Government since 1937. It is a figure which has met with the approval of the Millard Tucker Committee, and now the hon. Gentleman, and several of his supporters, I take it, think that it should be increased to 25 per cent.

I am sorry that I cannot recommend the Committee to agree to such an adjustment.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

Does not the right hon. Gentleman recognise that all the authorities which he has quoted were working against a context of a Profits Tax, which only in the last two or three years reached 15 per cent.? We are talking about a tax which the right hon. Gentleman has been at great pains to point out is entirely new—Corporation Tax.

10.15 a.m.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

As I have pointed out previously, Profits Tax was, I forget for how many years, at the rate of 30 per cent. It appears, from the attitude of the hon. Member for Wanstead and Woodford, that he is aware, after all, that this was the case. In that case, why did he bother to say what he said?

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

The right hon. Gentleman should not try to mislead the Committee. [HON. MEMBERS: "0h."] Profits Tax was an entirely different kind of tax compared with Corporation Tax. It has been the burden of the right hon. Gentleman's case, throughout our discussion of the Bill, that we are dealing with a new type of tax—something that is simplicity itself.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

I assure the hon. Gentleman that I am not trying to mislead the Committee. I am trying to be open. I wish that every hon. Gentleman opposite was equally open. I am attempting to demonstrate why his party, long before he came to Parliament, was perfectly satisfied when in office, year after year, when this matter came up—indeed, for 13 years running—to leave the figure at 15 per cent., notwithstanding the fact that Profits Tax was running at the rate of 30 per cent. during part of that period; and this is an exact parallel.

The hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) said in a previous intervention that this is against a different background compared with Profits Tax. I am saying that it is exactly the same background and that Profits Tax was running at 30 per cent. We are now talking about Corporation Tax at 35 per cent. That is a reasonable parallel.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The hon. Gentleman can hold a different opinion if he wishes. Let us at least agree on the facts. Neither he nor I can withhold facts which are common knowledge.

The rate of 15 per cent. was held to be satisfactory and I am sorry to say that I cannot recommend the Committee to accept the Amendment. Nor can I give any indication whatever that my right hon. Friend is prepared to review the matter in regard to the 15 per cent. in any way at all.

The second Amendment relates to the absolute figures as opposed to the percentage. Here we are dealing with figures relating to the situation which will arise where one has one, two, three or four directors, with perhaps one who is not a director who is working full-time, but who puts in an appearance at one directors' meeting a month. We are not concerned with that point now. We are talking about the 15 per cent. and the first figure. I do not think that it is generally known that the first figure, which has been for Profits Tax purposes £3,000, and under the Bill is £3,500, would be the amount allowed if one were considering a company which had a number of whole-time service directors; that is, directors working all the time and being concerned with their work and not merely with their shareholding—and one director who was, perhaps, purely a consultant, perhaps a financial adviser, who attended perhaps once a fortnight.

For him there would be available a figure of £3,500 to be set off in calculating Corporation Tax under our proposals and the whole amount paid to the full-time service directors would be allowable whether £10,000 or £100,000, according to the extent of the profits available.

Photo of Mr David Mitchell Mr David Mitchell , Basingstoke

Is the right hon. Gentleman saying that a working proprietor running a business with one or two service directors with him can have anything he likes, so to speak? Presumably when the right hon. Gentleman refers to a director coming in once a fortnight it will make no difference whether it is once a fortnight or every hour of the day.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The answer is, "No".

Photo of Mr Geoffrey Lloyd Mr Geoffrey Lloyd , Sutton Coldfield

I take it that such a man as my hon. Friend the Member for Basingstoke (Mr. Mitchell) mentioned would be limited to £3,500?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The right hon. Gentleman is correct. Such a man could have any amount of shares or none. He would not have to work more than a small proportion of the time and the figure of £3,500 would be used in calculating the Corporation Tax liability.

The figure was £3,000 for Profits Tax purposes and remains so up to this moment. It was last adjusted a few years ago, and it might have been held to be due for further adjustment. The point I make is that in the Finance Bill a year ago, when right hon. and hon. Members opposite were in control, it was not sought to increase it beyond £3,000 for the purpose of calculating Profits Tax liability.

The figure we propose is £3,500, with additional amounts for each director who works and may hold a substantial number of shares at the same time—£2,500 each for the first, second and third, and so on. This brings us to the point that, if there are four directors of that kind, there can be £11,000 as the remuneration for them. In a large company making large profits, of course, one could take 15 per cent. of profits, with no maximum. The figures I am discussing refer to small companies. The big companies with big profits are concerned with a percentage.

Only in the small companies do these figures apply, and one must look, therefore—I want to be absolutely fair about this—at the small company making modest profits in which 15 per cent. of profits would afford no adequate remuneration for the board or for directors engaged. What we have to consider is whether these figures are sufficient for that kind of company.

My right hon. Friend is not saying that there could never be an adjustment. The hon. Member for Wokingham, who put forward his Amendment with great seriousness and cogency, suggested that there might be machinery for a quicker alteration in the figures than is provided for in the Finance Bill. I doubt that that would be necessary, and I doubt that consideration would have to be given at more frequent intervals than in Finance Bills; but he makes the valid point, which I take at once, that a figure fixed in a Finance Bill is not fixed for all time. Certainly, these figures would be open to review, and might well be reviewed upwards from time to time.

My own opinion is that the figures we suggest—£3,500 for one director, £6,000 for two, £8,500 for three and £11,000 for four—are about right. We are talking the whole time of the smaller company. I do not say that in any circumstances would my right hon. Friend wish to assert that this was the precise figure, that one could measure it exactly and no other figure could be right. I do not want to be as dogmatic as that about it, but I must tell the Committee that my right hon. Friend would not be prepared to recommend at this stage—certainly not this year—a figure as high as £5,000 for the first director or one as high as £5,000 for each subsequent director, which would be double for the second, third and fourth.

There may be a consensus of opinion that something slightly more than £3,500 might be appropriate. I am not persuaded that it would be right. I think that the best figure I can recommend to the Committee is the one proposed in the Bill. In the Government's view, it would provide adequate remuneration in the smaller company, the bigger company being able to look to its 15 per cent.

Photo of Mr Paul Bryan Mr Paul Bryan , Howden

Will the Chief Secretary take the point made by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) and myself about the company which makes quite large profits normally and then has to come down to a lower figure? Is it expected that, even if it is financially sound basically, the directors' salaries should then come down?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

It is provided here that these are maxima. These maxima do not relate to profits at all. If there are no profits and there are four directors, for instance, there is nothing to prevent the board paying £11,000 in directors' remuneration out of no profits, if it thinks fit so to do. The remuneration of the full-time service director who works a full day and has a shareholding of less than 5 per cent. and is interested in the work and not just in being a shareholder, is deductible in calculating Corporation Tax.

There is no justification for the first Amendment in our present practice. That is our view. On the second Amendment, I do not wish to be dogmatic and say that the figures are precisely right for all time. We would be prepared to look at it from time to time; but my recommendation to the Committee is that it should not accept this Amendment.

Photo of Mr George Mackie Mr George Mackie , Caithness and Sutherland

Could the right hon. Gentleman clear my mind? I thought that it was clear before his speech. Is he now saying that if a company has four full-time working directors who own 25 per cent. of the shares each then they cannot be paid more than £11,000 without penalty?

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

In a small company, yes; the hon. Gentleman is quite correct. In a large company they can be paid 15 per cent. of the profits. The hon. Gentleman could work out the figures.

Photo of Mr Geoffrey Lloyd Mr Geoffrey Lloyd , Sutton Coldfield

I listened with interest to the right hon. Gentleman and I would suggest that his mind is inclined to be open on the figure of £3,500. This is a very drastic prohibition and anything more would mean that before a business could expand it would have to be grossed up.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

If you pay more than the figure which is the maximum for the calculation of the Corporation Tax the extra amount would not be allowable for Corporation Tax purposes.

Photo of Mr Geoffrey Lloyd Mr Geoffrey Lloyd , Sutton Coldfield

I do not think that the Government are wholly aware of the permutations which can be made in the organisation of perfectly genuine private companies. I would like to mention a business in the Midlands which was built up by two brothers who died some years ago. Their intention was to pass the business on to their sons, but the two sons joined the R.A.F. and were killed during the war. The business went to four daughters, who were quite properly advised by their business advisers to bring in a manager. This they did.

They were further advised to give this full-time manager a stake in the business. After the shares were valued by the auditor he was given 10,000 shares, which brought him above the 5 per cent. so, technically, he is a participator. He worked full time and was quite unlike the man which the Chief Secretary mentioned in a rather discreditable way who only spent one day a week working. I do not think the hon. Member for Buckingham (Mr. Maxwell) built up his business by spending only one day a week working. He is, technically, a participator.

As the firm to which I refer had to compete for a manager in competition with large firms such as I.C.I. and Courtaulds, it was advised, quite properly, to pay its manager about £5,000 a year. This is the kind of thing the Government have not taken into account. I hope that they will be prepared to reconsider this figure now.

10.30 a.m.

Photo of Mr William Clark Mr William Clark , Nottingham South

We have had an interesting discussion on Amendment No. 357 so ably moved by my hon. Friend the Member for Wokingham (Mr. van Straubenzee). The two Amendments are the difference between the 15 per cent. and 25 per cent. for the directors receiving remuneration and the £5,000.

Photo of Mr William Clark Mr William Clark , Nottingham South

Before the hon. Member for Buckingham (Mr. Maxwell) interrupts me, perhaps I could deal with him. What he did not say to my right hon. Friend the Member for Bexley (Mr. Heath) when he referred to the advertisement was how many replies he had. He did not say what advice he gave to clients. I think that if he had given them the same advice as he has tried to give to this Committee, he would not have had many clients as a result of that advertisement. It is nonsense for the hon. Member to think that we have directors going round the country doing no work at all and drawing huge salaries from close companies. That is just so much nonsense.

I would suggest to the hon. Member for Buckingham that he should have a word with his hon. Friend the Member for Heywood and Royton (Mr. Barnett) and also with the Chief Secretary in his professional capacity. They will advise him that in order to get these allowances and minima one has to be substantially a full-time director, and if a person cannot satisfy a local inspector of taxes on that score he cannot get the allowance for that director. I hope that the hon. Member for Buckingham will agree he was entirely incorrect.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

We attach great authority to what the hon. Member says from the Dispatch Box. It should be, except the first one.

Photo of Mr William Clark Mr William Clark , Nottingham South

Yes, except the first one, the shareholding one. I ask the hon. Gentleman—

Photo of Mr John Mendelson Mr John Mendelson , Penistone

Disgusting. The hon. Member has made an attack.

Photo of Mr William Clark Mr William Clark , Nottingham South

I have not made an attack. I have tried to correct some of the remarkable statements the hon. Gentleman has made. What I did not say and the Chief Secretary has reminded me, is that in the case of the first director who does not have a shareholding in the company and has no limit, obviously he can be paid as much as one likes. But that was not the point of the hon. Member for Buckingham. He says that people owning these companies are going round the country and doing no work.

Photo of Mr John Mendelson Mr John Mendelson , Penistone

On a point of order. Is it not the custom and practice in Committee of the whole House that whenever an hon. Member from the Front Bench attacks or criticises a statement made by another hon. Member he gives way to allow a reply to be made? We do not want to create first and second-class hon. Members in this House.

Photo of Sir Samuel Storey Sir Samuel Storey , Stretford

No such rule applies that I know of.

Photo of Mr William Clark Mr William Clark , Nottingham South

I wish to pay tribute to what the Chief Secretary said. Now I will give way.

Photo of Mr Robert Maxwell Mr Robert Maxwell , Buckingham

I am obliged to the hon. Member. The fact is that he is quite right in saying that this advertisement did not produce many clients, for the very reason that I was unable to pay them the kind of prices that they would need to have in order to continue to benefit from the earned income for work which they had not earned. That is the first point. The second point is one which I hope the hon. Member will answer from the Front Bench. I am sorry it was so late when we started discussing this point. It is of considerable importance to hundreds of thousands of people in the country. Very important points are involved here.

As the Finance Bill stands at the moment larger companies are entitled to pay 15 per cent. of their profits without any limitation. Hon. Members opposite, including the hon. Member for Cheadle (Mr. Shepherd), are complaining that if a company's profits take a turn down then the directors will have to be reducing their salaries. What is wrong with directors reducing their salaries when the companies are no longer making the kind of profits that allow them to pay themselves 'high salaries? Why should hon. Members opposite defend directors who do not earn the good profits that enable the paying of these high salaries?

Photo of Mr William Clark Mr William Clark , Nottingham South

I have no doubt that in time, the hon. Member for Buckingham will be taking his place on the Front Bench. With his wide knowledge, I am sure that the present Treasury Ministers will be delighted to welcome him.

The underlying principle of both these Amendments is the fact that they apply to close companies. We have had examples given by some of my hon. Friends, such as Marks and Spencers. I believe that Butlins may be, and Jaguar motor cars. These are probably caught under the close company rule. What I would have thought the Chief Secretary must have recognised, as my hon. Friend the Member for Howden (Mr. Bryan), in an excellent speech, pointed out conclusively, is that the provisions for the Corporation Tax would hit the small company, the one- and two-man business, the working directors.

As always the Chief Secretary, and I hope he will not mind me saying this, came back to the specious argument and said well, it was the same for Profits Tax, the Conservatives were in for 13 years and did not do anything about it—the minimum-maximum percentage and the minimum per director. True, but he does not say that this Corporation Tax is something we have never seen in our fiscal system.

If we are going to operate the Corporation Tax as Profits Tax was operated with rebate between £2,000 and £12,000 and one-fifth—this is something we have lost as far as Profits Tax is concerned. If 1-e is also going to say that—as we do for Profits Tax now—legitimate charges paid to participators are to be allowed against profits for Corporation Tax purposes, and if he is also going to say that in the Corporation Tax, like the Profits Tax, we will allow charges which under the Bill at the moment are disallowed, then the Chief Secretary has some room for saying that Profits Tax and Corporation Tax can be compared. But there is no comparison at all between a 15 per cent. Profits Tax and a 40 per cent. Corporation Tax with all its restrictions, with no abatements, and interposing the minimum and maximum for directors' salaries.

I am convinced, and I am sure the Chief Secretary and the Financial Secretary in their own minds know this, that this is going to hit the small businessman. If we take a one-man company and the man earns £5,000 himself, my information is that he will be allowed to charge and pay himself £5,000 of the capital or the 51 per cent. or whatever. He will be able to charge £3,500 and he will be liable for Corporation Tax on £1,500. So the £5,000 a year man is going to pay £600 Corporation Tax. What for? This is supposed to help. As my hon. Friends have said this is quite obviously going to hit the small businessman.

Of course the abolition of the £25,000 maximum ceiling that was triggered off by the Amendment of my hon. Friend the Member for Wokingham and other hon. Members will only help the large companies. It is the small companies that we are speaking about in this Amendment. I have many examples here that I could give to the Chief Secretary. We have been sitting for some time but, if I might with the permission of the Committee. I should like just to give two examples. I promise the Chief Secretary that I will send details to him if he wishes.

May I give an example of a close company with three directors, two of them full-time and one of them part-time, and a profit of £50,000? Assume that the director's actual remuneration is £16,200. Under existing provisions, the tax paid by that company—Profits Tax and Income Tax—is £20,318 on a starting profit of £50,000. Under the Corporation Tax, the same remuneration is paid to the directors but the £16,200 is disallowed. If we take distribution into account we find that the actual tax paid by the company under the Corporation Tax is £23,311 compared with £20,318.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The hon. Member has forgotten the most relevant figure, the proportion of distribution.

Photo of Mr William Clark Mr William Clark , Nottingham South

I have taken that as 60 per cent., the ceiling under the Bill at the moment. That is the only figure I could take as we have not yet reached that Clause.

It is interesting to look at the effect on the company itself. Under existing conditions this company with a £50,000 profit can retain in the business £10,544. Under the new provisions it can retain in the company £1,500. Where is the argument that this will lead to more retention. This is a typical company with three or four directors making £50,000 profit. It pays £3,000 more in taxes and the retention in the company is reduced from £10,000 to £1,500. I could give many such examples, but I will not weary the Committee at this hour.

The Government cannot continue to hide behind the fallacy that Corporation Tax is the same as Profits Tax. They are entirely different, and it is about time the Treasury Bench and hon. Members opposite realised it and admitted that this was an entirely new tax bearing no comparison with Profits Tax. What my hon. Friends and I have said proves that the Government do not know which way to go. Where is their modernisation? Does this Clause suggest that there will be modernisation when we see what happens to retentions in small growing businesses?

Take the example of the executive and managerial class. What happens if one says, "Here is a stake in the business"? I am sure that the Liberals agree, as we all do, with the principle that employees and executives should have a stake in industry. If one offers an executive a 6 per cent. holding, immediately the tax position goes haywire and his salary goes down or the company is penalised. Where

is the incentive in an ordinary business? Where is the plough-back? It does not exist.

More and more as we go through the Bill we realise to our regret and dismay that the Bill was printed without the Government thinking through its full effects-My hon. Friends have pointed out that it taxes the family-controlled business. There is nothing for a contract negotiated at arm's length for somebody to run a family business whereby one gives a person some shares. The Government bludgeon everybody. They try to take action and they do not realise that they are knocking everybody down.

The Chief Secretary said that the £3,500 minimum was not the last word. I thought that he was about to say, as the Government have said so often, "Between now and Report we shall think about it". Unfortunately he said, "From time to time we shall think about it" and it will probably next be thought about when the next Budget is introduced by a Conservative Government.

The Chief Secretary's reply has been disappointing. Nobody argues that it should be 25 per cent. instead of 15 per cent. or £5,000 instead of £3,500. What we have to make clear to the Government is that as the Bill stands the minima and maxima are incorrect. Because of the disappointing reply, I ask my right hon. and hon. Friends to divide on the Amendment.

Question put, That "fifteen" stand part of the Clause:—

The Committee divided: Ayes 145, Noes 134.

Division No. 184.]AYES[10.45 a.m.
Allaun, Frank (Salford, E.)Coleman, DonaldFletcher, Sir Eric (Islington, E.)
Alldritt, WalterConlan, BernardFletcher, Raymond (Ilkeston)
Allen, Scholefield (Crewe)Corbet, Mrs. FredaFloud, Bernard
Armstrong, ErnestCrawshaw, RichardFoley, Maurice
Atkinson, NormanCrosland, Rt. Hn. AnthonyFoot, Michael (Ebbw Vale)
Baxter, WilliamCullen, Mrs. AliceFreeson, Reginald
Bence, CyrilDalyell, TamGarrett, W. E.
Benn, Rt. Hn. Anthony WedgwoodDavies, G. Elfed (Rhondda, E.)Garrow, A.
Bennett, J. (Glasgow, Bridgeton)Davies, Ifor (Gower)George, Lady Megan Lloyd
Binns, JohnDell, EdmundGregory, Arnold
Bishop, E. S.Diamond, JohnGrey, Charles
Blenkinsop, ArthurDoig, PeterGriffiths, Will (M'chester, Exchange)
Boston, T. G.Driberg, TomHamilton, James (Bothwell)
Bradley, TomDuffy, Dr. A. E. P.Hamilton, William (West Fife)
Bray, Dr. JeremyDunn, James A.Hamling, William (Woolwich, W.)
Brown, Hugh D. (Glasgow, Provan)Dunnett, JackHannan, William
Brown, R. W. (Shoreditch & Fbury)Edelman, MauriceHarper, Joseph
Buchanan, RichardEdwards, Robert (Bilston)Hattersley, Roy
Butler, Herbert (Hackney, C.)English, MichaelHazell, Bert
Butler, Mrs. Joyce (Wood Green)Evans, Albert (Islington, S.W.)Heffer, Eric S.
Carmichael, NeilFitch, Alan (Wigan)Herbison, Rt. Hn. Margaret
Hobden, Dennis (Brighton, K'town)Mahon, Simon (Bootle)Sheldon, Robert
Horner, JohnManual, ArchieShore, Peter (Stepney)
Howie, W.Mapp, CharlesShort, Rt. Hn. E. (N'c'tle-on-Tyne, C.)
Hughes, Emrys (S. Ayrshire)Mason, RoySilkin, John (Deptford)
Irving, Sydney (Dartford)Maxwell, RobertSilverman, Julius (Aston)
Jeger, Mrs. Lena (H'b'n&St. P'cras, S.)Mayhew, ChristopherSkeffington, Arthur
Jenkins, Hugh (Putney)Mellish, RobertSlater, Mrs. Harriet (Stoke, N.)
Johnson, Carol (Lewisham, S.)Mendelson, J. J.Small, William
Johnson, James (K'ston-on-Hull, W.)Miller, Dr. M. S.Snow, Julian
Jones, J. Idwal (Wrexham)Molloy, WilliamSteele, Thomas (Dunbartonshire, W.)
Jones, T. W. (Merioneth)Monslow, WalterStrauss, Rt. Hn. G. R. (Vauxhall)
Kelley, RichardMorris, Alfred (Wythenshawe)Thomson, George (Dundee, E.)
Kerr, Mrs. Anne (R'ter & Chatham)Mulley, Rt. Hn. Frederick (SheffieldPk)Tuck, Raphael
Lawson, GeorgeMurray, AlbertVarley, Eric G.
Ledger, RonNorwood, ChristopherWainwright, Edwin
Lee, Rt. Hn. Frederick (Newton)O'Malley, BrianWalden, Brian (All Saints)
Lever, Harold (Cheetham)Oram, Albert E. (E. Ham, S.)Wallace, George
Lipton, MarcusOrbach, MauriceWatkins, Tudor
Loughlin, CharlesPalmer, ArthurWhitlock, William
Mabon, Dr. J. DicksonPannell, Rt. Hn. CharlesWilkins, W. A.
McBride, NeilParkin, B. T.Williams, Mrs. Shirley (Hitchin)
MacColl, JamesPentland, NormanWoodburn, Rt. Hn. A.
MacDermot, NiallPrentice, R. E.Woof, Robert
McGuire, MichaelPursey, Cmdr. HarryWyatt, Woodrow
Mackenzie, Gregor (Rutherglen)Rees, MerlynYates, Victor (Ladywood)
Mackie, John (Enfield, E.)Reynolds, G. W.Zilliacus, K.
MacMillan, MalcolmRobertson, John (Paisley)
Mahon, Peter (Preston, S.)Rogers, George (Kensington, N.)TELLERS FOR THE NOES:
Mr. McCann and Mr. Gourlay.
NOES
Agnew, Commander Sir PeterGlover, Sir DouglasMore, Jasper
Alison, Michael (Barkston Ash)Glyn, Sir RichardMorrison, Charles (Devizes)
Allan, Robert (Paddington, S.)Goodhew, VictorMunro-Lucas-Tooth, Sir Hugh
Allason, James (Hemel Hempstead)Grant, AnthonyMurton, Oscar
Anstruther-Gray, Rt. Hn. Sir W.Grant-Ferris, R.Neave, Airey
Awdry, DanielGresham Cooke, R.Noble, Rt. Hn. Michael
Baker, W. H. K.Griffiths, Peter (Smethwick)Onslow, Cranley
Barber, Rt. Hn. AnthonyHall, John (Wycombe)Osborn, John (Hallam)
Barlow, Sir JohnHall-Davis, A. G. F.Page, R. Graham (Crosby)
Batsford, BrianHastings, StephenPeel, John
Berry, Hn. AnthonyHawkins, PaulPercival, Ian
Bessell, PeterHeald, Rt. Hn. Sir LionelPeyton, John
Bingham, R. M.Heath, Rt. Hn. EdwardPike, Miss Mervyn
Birch, Rt. Hn. NigelHendry, ForbesPounder, Rafton
Blaker, PeterHiggins, Terence L.Powell, Rt. Hn. J. Enoch
Boston, T. G.Hirst, GeoffreyPrice, David (Eastleigh)
Box, DonaldHobson, Rt. Hn. Sir JohnPrior, J. M. L.
Boyd-Carpenter, Rt. Hn. J.Hordern, PeterPym, Francis
Boyle, Rt. Hn. Sir EdwardHornby, RichardRedmayne, Rt. Hn. Sir Martin
Brinton, Sir TattonHunt, John (Bromley)Ridley, Hn. Nicholas
Brown, Sir Edward (Bath)Jenkin, Patrick (Woodford)Ridsdale, Julian
Bruce-Gardyne, J.Johnston, Russell (Inverness)Roots, William
Buxton, RonaldKerby, Capt. HenryScott-Hopkins, James
Carlisle, MarkKerr, Sir Hamilton (Cambridge)Sharples, Richard
Carr, Rt. Hn. RobertKershaw, AnthonySinclair, Sir George
Channon, H. P. G.King, Evelyn (Dorset, S.)Smith, Dudley (Br'ntf'd & Chiswick)
Chataway, ChristopherKirk, PeterSteel, David (Roxburgh)
Chichester-Clark, R.Lancaster, Col. C. G.Studholme, Sir Henry
Clark, William (Nottingham, S.)Langford-Holt, Sir JohnSummers, Sir Spencer
Cordle, JohnLloyd, Rt. Hn. Geoffrey (Sut'nC'dfield)Talbot, John E.
Corfield, F. V.Longbottom, CharlesTaylor, Edward M. (G'gow, Cathcart)
Crawley, AidanLongden, GilbertTaylor, Frank (Moss Side)
Dalkeith, Earl ofLubbock, EricTurton, Rt. Hn. R. H.
Davies, Dr. Wyndham (Perry Barr)MacArthur, Ianvan Straubenzee, W. R.
Dean, PaulMackenzie, Alasdair (Ross&Crom'ty)Walder, David (High Peak)
Deedes, Rt. Hn. W. F.Mackie, George Y. (C'ness & S'land)Walker, Peter (Worcester)
Eden, Sir JohnMaclean, Sir FitzroyWard, Dame Irene
Emery, PeterMacleod, Rt. Hn. IainWebster, David
Errington, Sir EricMarples, Rt. Hn. ErnestWhitelaw, William
Eyre, ReginaldMathew, RobertWilson, Geoffrey (Truro)
Fell, AnthonyMaude, AngusWise, A. R.
Fletcher-Cooke, Charles (Darwen)Mawby, RayYates, William (The Wrekin)
Fraser, Rt. Hn. Hugh (S'fford & Stone)Maxwell-Hyslop, R. J.Younger, Hn. George
Fraser, Ian (Plymouth, Sutton)Maydon, Lt.-Cmdr. S. L. C.
Gilmour, Ian (Norfolk, Central)Mitchell, DavidTELLERS FOR THE NOES:
Gilmour, Sir John (East Fife)Monro, HectorMr. McLaren and Mr. R. W. Elliott.

Photo of Mr Richard Sharples Mr Richard Sharples , Sutton and Cheam

On a point of order, Sir Samuel. Owing to the difficulties in which the Committe has got itself because the Government are trying to press their business through unreasonably, I ask your advice. The authorities of the House are unable to provide reporters for Standing Committees meeting upstairs and I should be grateful if you would let us know whether or not it is possible for the Committees upstairs to meet under these conditions?

Photo of Sir Samuel Storey Sir Samuel Storey , Stretford

The meeting of Committees upstairs is not a matter for this Committee. It is a matter that should be raised in the Committees upstairs. On the other hand, if it is a question of services to the House, that is a matter which should be raised with Mr. Speaker at a later time.

Photo of Mr John Eden Mr John Eden , Bournemouth West

Further to that point of order.

Photo of Sir Samuel Storey Sir Samuel Storey , Stretford

Order. I have already ruled that it is not a point of order for this Committee.

Photo of Mr John Eden Mr John Eden , Bournemouth West

On a point of order. Is it not a fact that the proceedings from the point of view of this Committee are still Wednesday's business and that, as far as we are concerned, what pertains to Wednesday's business still continues to do so?

Photo of Sir Samuel Storey Sir Samuel Storey , Stretford

I do not see what point of order arises there.

Amendment made: In page 90, line 26, leave out from "months" to end of line and insert "each of the".—[Mr. Diamond.]

Question proposed, That the Clause, as amended, stand part of the Bill.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I do not believe that we should leave this Clause without putting on record what appears to me to be the underlying rationale, the logic, that lies behind the reason for having limitations of this sort on directors' remuneration. It arises out of the anomalous position—and I do not use that word in any pejorative sense—the hybrid position, of a working proprietor.

The working proprietor in business derives his income partly from his personal exertions—that is the phrase used in the Australian Income Tax Act—and partly as a return on the capital that he has invested in the business. The purpose of the Clause as it was and as we have it now is to try roughly to ensure that the remuneration which comes to the work- ing proprietor as a reward for his personal exertion comes to him, to put it broadly, in the form of Schedule E emoluments while the reward for the investment of his capital is given to him in the form of distributions from the company.

This would seem to me to be a perfectly proper feature for a taxation system such as this is. I cannot agree with the view expressed by the hon. Member for Manchester, Cheetham (Mr. Harold Lever) and one or two other hon. Members that there should be no place at all in the scheme for limitations on working proprietors' salaries. The one thing on which I agree with the hon. Member for Buckingham (Mr. Maxwell) is when he spoke of the question of earned income reliefs. That is a very important point.

It will inevitably happen that it is very difficult to distinguish, to draw the line, between what is proper remuneration under Schedule E and what is return on the capital invested in the business. The point I wish to make is that it is so important that those who run these businesses should be given every possible encouragement to devote the maximum energy and enterprise to their work because, on the whole, the figures should tend to err on the high side; that, on the whole, the limits should be generous limits and not penal limits—

11.0 a.m.

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

Order. The hon. Gentleman is not to discuss Amendments we have already disposed of.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I will not mention a single figure. I am talking about the principles of the Clause as it now stands. In this regard I would say that it is probably wrong and could be misleading to try to compare the salary paid to working proprietors in those companies with the rewards paid to salaried employees in large public companies and in other walks of life. The two are simply not comparable. This was very clearly brought out in a survey conducted by the Department of Applied Economics at Cambridge a couple of years ago. It was commissioned by the Cambridge Appointments Board which wanted to find out what had been the careers and the incomes of men and women who had graduated from Cambridge University 10 years previously. The survey revealed that the class of graduate who arrived at the highest income levels was the working proprietor in family businesses. This is right, because not only do they have the responsibility of performing their duties as directors, technical advisers and managers but they also carry inevitably the risk of the responsibility for the overall direction of the business.

The combination of these factors leads to a justification for a higher reward for working in what otherwise might appear to the casual observer to be somewhat comparable work. It is for this reason that I hope the Government will, as the Chief Secretary has said, bear these figures in mind and will not cheesepare and treat this as a penal provision.

The whole of this section on close companies is anti-avoidance and, provided the whole idea of anti-avoidance is adhered to, the fact that, at the margin, salaries recommended to be paid to working proprietors may be somewhat on the high side, seems to be no disadvantage at all. I hope that the Government and the Inland Revenue, when considering these matters, will take this view and not adopt a penal attitude.

Photo of Mr George Mackie Mr George Mackie , Caithness and Sutherland

I and my hon. Friends have been considering the effect of the Clause on enterprise—and the small close company is the start of enterprise in this country. Judging from the anomalies that have arisen it appears to me that the Clause does nothing to encourage enterprise and in fact hits directly at the man starting a business, who because of regulations cannot pay himself anything like the sort of salary he could earn working for someone else. For this reason we must oppose.

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

We all recognise from the debates we have already had that the principal purpose of this Clause is to prevent avoidance of tax and so far as its terms as they now stand are necessary to do this I think that there would be very few Members who would oppose the Clause. While I certainly would not wish to bind myself to any particular figures I think that if we consider the Clause as it now stands that the Chancellor of the Exchequer has failed to understand the consequences of what he is doing.

One simply cannot compare, as has been done in the course of this debate the position of the existing Surtax companies, the Section 245 companies, and the close companies on which this Clause now bites because the definition of a close company is far enlarged and far wider than the definition of the old Surtax company. Many of the companies which are covered by this Clause, and on which this Clause will operate, are in our growth industries and are the very lifeblood of our economy.

Yet here is the Chancellor of the Exchequer penalising the very people on whom these companies depend. There can certainly be no doubt from what we have heard in the course of these debates that it is the smaller business which is hard hit by the terms of this Clause. Who are the people that the Chancellor seeks to penalise by this Clause? I make no apology for saying, once again, that they are, in the words of the subsection, … directors who are required to devote substantially the whole of their time to the service of the company in a managerial or technical capacity … What will be the result if a company in its best interests finds that it must pay remuneration in excess of the limits laid down in this Clause? The answer is that in many cases the marginal rate on the excess remuneration will be more than 20s. in the £. I realise we have been talking in terms of £4,000 and £5,000 a year. To take a case which is not unreasonable in certain circumstances, of a highly-paid individual operating in a managerial or technical capacity and who if his remuneration is about £8,000 a year would pay Income Tax and Surtax in the region of 12s. or more in the £ and Corporation Tax at 8s. in the £, a total of 20s. in the £ by way of taxation.

Of course, the consequence of all this is that in future many individual proprietors of businesses, building up their businesses and considering incorporation, will hesitate to incorporate their businesses. One is bound to ask, Is this what the Chancellor wants? I do not think that it is what he wants, but the reason it will happen is simple. It is because they will realise that the allowable remuneration is inadequate and, therefore, they will tend to stay as they are without seeking to incorporate, and that, I would have thought, would be a bad thing for the economy.

We have considered a number of Amendments, and I think that at this hour of the morning, when we still have more work to do, it would not be appropriate to divide the Committee again now. I can only say that I think that it may be appropriate to return to this on Report.

Photo of Sir Rolf Williams Sir Rolf Williams , Exeter

I do not want to detain the Committee for more than a few minutes, but I think that the result of having this Clause in the Bill will be tremendous wangles to avoid the restrictions on companies. I have no doubt myself that those parts of the Clause which seek to restrict this evasion of taxation can be got round by any skilful lawyer. Already, I have been told of one way in which this will be done; and that is hardly a sign of a good Finance Bill, and nor is it the Chancellor's policy. I thought that it was the Chancellor's policy to simplify—[Interruption.] I do not want to delay the Committee unduly, but if any hon. Member wants to intervene I am always prepared to give way. If the Parliamentary Private Secretary to the Prime Minister wants to say something perhaps he will get up instead of talking from a sedentary position.

Photo of Mr Ronald Ledger Mr Ronald Ledger , Romford

The hon. Member has a lot more energy than some of us who have been here all night. It is the first time we have seen him during this sitting.

Photo of Sir Rolf Williams Sir Rolf Williams , Exeter

That just shows how sleepy the hon. Member has been.

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

Order. We have quite enough to discuss in the Bill, without discussing the relative attendances of individual Members.

Photo of Sir Rolf Williams Sir Rolf Williams , Exeter

I should think that the hon. Member ought to be rather glad that I have been here, otherwise I may have been inveigled into making a number of interruptions.

But that is what will happen—a tremendous lot of work by lawyers, because in simplifying the tax and the fiscal system all that the Chancellor has done is to make all this more complicated and an absolute harvest for anyone engaged in these sorts of avoidance of taxation. So I hope that on Report this sort of practice will be taken into account again by the Chancellor, when, perhaps, he could give these unfortunate people some relief.

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.