I beg to move Amendment No. 22, in page 6, line 38, after 'company', insert
'not being a company paying the small company rate of corporation tax'.
The purpose of the clause is to make a company give the Government an interest-free loan of the same amount as half its advance corporation tax. I say "interest-free"; of course, it is interest-free to the Government but it is not interest-free to the company concerned. Almost certainly it will have to go to its bankers and pay 15 per cent, interest on its overdraft.
The effect of the amendment is to exempt the smaller business from this impost. I speak as the voice of countless small businesses throughout the country. As a small businessman I should declare my interest. It may help the Committee to have someone intimately connected with the practical problems of running a small business moving the amendment.
The real problem that we are debating is the restriction on growth of the smaller business sector imposed by excessive taxation leading to a shortage of working capital.
The background is that for a long time the special problems of small businesses were not recognised, or were insufficiently recognised. The previous Labour Government—I give them full credit—set up the Bolton Committee to look into the matter. One of the most interesting and valuable points highlighted in its report was that one of the criteria of a small business was that it was financed largely out of retained profits.
My right hon. Friend the Member for Altrincham and Sale (Mr. Barber), when Chancellor of the Exchequer, made the first major step forward to help the smaller business community by introducing the smaller business corporation tax rate in his 1972 Budget.
I had hoped to see in the Chief Secretary to the Treasury a friend of small businesses. Indeed, I remember how, when in opposition, he recognised the important contribution that they make to this country's economy and recognised the need to encourage investment in them. I was particularly disappointed to find that this Budget, instead of helping them, has dealt a savage blow to many of them. There is a difficult situation facing such businesses, and the Budget makes it worse. As the Financial Secretary will be replying to the debate, I hope that he will be in a mood to accept the amendment, which it will be so reasonable and so inexpensive for him to accept.
The problem faced by small businesses is, quite simply, one of insufficient money being available to expand at present. I advance half a dozen reasons why the situation is as severe as it is at present.
First, there is the aftermath of the three-day working week earlier this year, for which the miners were responsible. At the time of the three-day working week companies were paying out virtually their full running costs. But it is only now, when the goods they have sold have to be paid for and when their customers have taken credit, that the real shortage of cash is making itself felt.
Many companies, on top of that, are finding that their profits are restricted and, indeed, in some cases cut, by the recent directions which have been issued by the Government in that connection. This again has exacerbated the shortage of cash. There are substantial increases in rates and there is a coming increase in National Health Service contributions, all of which require more cash in the businesses.
At present, we also have inflation, which means that a company having the same turnover and volume of sales requires more money for raw materials, work in progress and stocks, and more money outstanding waiting for its customers to pay for the goods which it has supplied.
When, on top of that, one has the sort of growth that we had in the economy last year—a welcome increase in production throughout our economy—it exacerbates the problem, for to have a greater volume of production requires even more money tied up in raw materials, in work in progress and in stock sitting on the shelf, and even more in money due from one's customers. On top of that, we have the factor of inflation accounting and the fact that corporation tax, as the previous debate has shown, is often levied on illusory profits, and often means, in the case of many companies, that the Chancellor is engaged in nothing more nor less than asset stripping.
There are six solid reasons why companies need more working capital. Large quoted companies may—I say "may", advisedly—go to the Stock Exchange to raise more working capital. The small business, by definition—the company that finances itself by plowing back its profits —is unable to do that. It is at this precise moment that the Chancellor has chosen to make the problem worse. On the one hand, businesses, especially small businesses, need more working capital. On the other hand, the Chancellor jacks up corporation tax by an extra 2 per cent, and, in addition, worsens the situation by this new impost in the clause.
When speaking earlier in our debates today, the Paymaster-General talked about the need for investment in British industry. For small businesses nothing could be more important, for the whole future of British industry rests on the ability of small businesses to grow into large businesses. They are the seed bed of our future prosperity. The seed bed needs to be cultivated, cared for and succoured. At this point, the Chancellor is making the cash-flow problems seriously worse.
Therefore, as it will cost the Chief Secretary so little, I hope that he will feel able to accept this simple, straightforward amendment.
I rise to offer briefly all the support that I can to my hon. Friend the Member for Basingstoke (Mr. Mitchell) in the amendment that he has moved so attractively and so persuasively.
I like to think that the Chief Secretary will in due course assure the House that he is able to accept the amendment. As my hon. Friend reminded the Committee, the hon. Gentleman, in his days in Opposition, emerged from his chrysalis as a great champion of the small companies. It was a unique position, because if ever the Labour Party has aimed its indiscriminate fire against a particular sector of the economy over the years, it is the small companies. We shall now be able to judge whether the words that he used to utter when in Opposition are to be backed up by deeds tonight, or whether, as many of us fear, it was all a load of old hypocrisy, after all. If the hon. Gentleman rejects the amendment, that is what it is.
The hon. Member for Bolsover (Mr. Skinner) will, I am sure, have a fascinating contribution to make to the debate in due course, to which we shall listen with great interest.
We have now reached Clause 10, which I suppose comes very much into the category of those aspects of the Budget which the Chancellor described in the Budget Statement, speaking of the public sector financial deficit and the borrowing requirement, as follows:
The best way to ensure that this deficit is cut sufficiently without excessive cuts in demand is to concentrate tax increases on those who are less likely to reduce their consumption when their taxes go up…But the richer you are, the less you need to cut your standard of life when your taxes go up; you are more likely to meet the increase in your taxes simply by drawing on your bank balance."—[OFFICIAL REPORT, 26th March 1974: Vol. 871, c. 307.]
In other words, the Chancellor made it clear that his intention was to tackle the seed corn. That is precisely what the clause is about.
In summing up the Budget debate, the Chancellor claimed that the provisions of this clause would have
little effect on close companies, which distribute very little of their profits".—[OFFICIAL REPORT, 1st April 1974; Vol. 871, c. 1007.]
The truth is, as the Chancellor ought to be aware but may not be—although the Chief Secretary certainly is—that although my right hon. Friends in the previous Government did a great deal to dismantle some of the more criminally damaging aspects of the Finance Act 1965 against the private companies, it still remains the case that the threat of surtax direction hangs over their heads. They are therefore under permanent pressure to increase their contributions. It is simply adding to their miseries to devise in Clause 10 an obligation upon them to add 50 per cent, to their advance corporation tax in respect of distribution which they may be pressurised by the Inland Revenue to make. As my hon. Friend the Member for Basingstoke pointed out, the private company is not in the position of the public company to ease its liquidity problems by approaching the market for additional capital.
The Chancellor of the Exchequer in his much-commented upon speech to the CBI the other night is reported as having said, among other things:
I am sure you will not complain if we do what we can to ensure that profits are ploughed back into industry, which produced them.…
The point about the private company is that it has every need to plough back its profits because it has no other possible source of resources for future investment, and in that respect it is in a different category from the public company. Yet in so far as it is obliged by the Inland Revenue to make distributions for fear of receiving a surtax direction, it is now to have lumped on top of it an obligation to pay an extra 50 per cent, on ACT in advance. As my hon. Friend pointed out, we can but guess at the effect which this will have on the liquidity of private companies in the months ahead.
I believe that the importance of the health of the private company sector is fundamentally underestimated in one particular respect. I have argued this point during debates on previous Finance Bills when appealing for a differential system for corporation tax for the private company, during the lifetime of the previous Government. I have referred to the vital importance of the small companies in many of the more far-flung areas, particularly many parts of Scotland, where a high proportion of employment is provided in many areas, such as mine, by private companies which are the only companies with genuine local identity and local roots.
Clause 10 is one more attempt by the Labour Government to destroy the identity of those companies, to drive them into the arms of the larger public companies because, under the tax regime devised by the Government, they cannot continue to finance their future investment needs. Nothing could be more damaging to the regions of the country, over which the Labour Party sheds crocodile tears when unemployment is liable to rise in those areas. If the Labour Party would look at the danger which its mayhem in the fiscal system does to these areas through proposals such as Clause 10, it might make a more positive contribution than it has to date to the well-being of many parts of the country, such as the part of Scotland which I represent.
In the light of the Chancellor's remarks at the CBI meeting, which to my mind clearly indicated that even he has recognised the damage the Budget is to do to the liquidity of the company sector as a whole and the risks he is taking regarding falling investment, I hope that the modest concession for which my hon. Friend has asked in the amendment is one which the Chief Secretary is prepared to concede.
I must confess that I have never been an unlimited admirer of the small company rate. I believe that we should instead strike a difference between the private company and the publicly-quoted company, and try to draw a line. Nevertheless, we have here a basis for dealing with the problems of a great many of the smaller companies, and if the Chief Secretary were to accept the amendment the cost to the Revenue would be minimal. It is no good the Chief Secretary trying to pretend that the amendment would have a dramatic effect on the level of the borrowing requirement, because in any case he is merely claiming forward money which would be due in due course, but it would make a significant difference to the liquidity of the private sector. I hope that the Chief Secretary will say what he said during his years in Opposition and accept the amendment.
As we are all declaring interests, I must tell the Committee that I am not a small businessman, I am not even a big businessman, but I claim an interest in that in the previous Government I was the Minister with special responsibility for small firms, and in that capacity I followed my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley).
This is a vital amendment which puts the Government to the test whether they support what I believe is one of the most vital sectors of our economy. When I had responsibility for small firms I found that those firms had a number of pressing problems. Many of the problems were outlined by the Bolton Report, and the previous Government took action on the overwhelming majority of those problems. They included those involving disclosures—which was a particularly difficult problem, upon which we took remedial action—form-filling and bureaucracy—upon which we also took action— and corporation tax—where we removed the worst vices of short fall and close company legislation.
Nevertheless, last year the small company sector, or an important part of it, found the burden of corporation tax particularly oppressive precisely because those companies were so different from the large companies which were able to raise money from the money market. The small company can raise money for future expansion only out of profits, after taxation has been paid or, if it is lucky, from the banking sector, where interest rates are high. But basically the small company has to finance itself from its own profits earned after taxation.
Undoubtedly the rate of corporation tax was of great concern, and amendments were moved last year by some of my hon. Friends during consideration of the Finance Bill, but unfortunately, for reasons explained by my right hon. Friend the then Chancellor, he was unable to accept the amendments at that stage. Nevertheless, there was some hope that had the previous administration continued it would have been possible to take action, in perhaps what would now have been a Conservative Budget.
But what has happened is the exact opposite. Far from reducing corporation tax this year—as we had hoped to do for the small companies—the Chancellor of the Exchequer, in the Budget, has increased it. He then pretended that there was a decrease by making the tax rather smaller for the smaller companies, but it is an increase by any standards, whereas these companies require a decrease in order to help finance themselves. The Government have also acted in a particularly sneaky manner by seeking in this offensive clause to get money in advance from those people who are least able to pay it.
Therefore, we must carefully consider what the proposals will mean for small companies. These companies are asked to increase investment. The Government are always prattling about more investment being required. How can they expect firms, particularly in the small sector, to increase their investment if they will have to bear substantial extra costs for steel, coal, electricity, postage, rail freight and a whole range of other items, with a further burden of corporation tax at the same time? Unless the Government accept the amendment, they will be striking at one of the most vital sectors of our economy, one on which they must depend.
I am pleased to see the Under-Secretary of State for Industry on the Government Front Bench, because I believe that he is my successor with responsibility for small firms. Unlike some of his colleagues, he has some experience of small firms, and I believe that his heart is in the right place, although we shall put him to the test. The trouble he will find is with the chaps next to him. I hope very much that he will whisper in the ear of the Chief Secretary about the importance of the small firms.
The Under-Secretary will have all the information now, because he should have seen nearly all the organisations dealing with small firms, and he will know the burden being placed upon them by the clause. I hope that he has conveyed the message loud and clear to the Chief Secretary. He will get no joy from any of his other colleagues, because they are manifestly not interested in small firms. The total lack of interest is shown by their absence from the Chamber and the lack of speeches on the subject by Labour Members. Therefore, we rely on the Under-Secretary's having twisted his hon. Friend's arm.
One reason why there is such a lack of interest in small firms is that industrial relations are infinitely better in them than in large firms. The large trade unions, to which the Labour Party is hog-tied— its members yap like Pavlov's dog when the large trade unions whistle—cannot get their clammy hands on small firms.
Unless the Chief Secretary responds favourably to this reasonable amendment, he will be striking a vital sector of our economy at its grass roots. If he believes in a mixed economy, as I know he does, he cannot depend solely on the nationalised industries and one or two large companies. He, above all, should recognise the importance of having a large, healthy and flourishing small sector to back them up.
I am glad to support the amendment so ably moved by my hon. Friend the Member for Basingstoke (Mr. Mitchell). I hope very much that the Government will pay heed to his modest request on behalf of small businesses.
Small companies have greater difficulties over liquidity matters than do large firms. The amendment would give some relief to firms up to the present profit figure of£15,000 a year and the marginal figure above that. It is just these smaller firms that find their cash flow figures under threat. They also find it hardest to foresee and manage the rapid month-to-month fluctuations that arise in seasonal business. They do not all have the highly specialised skills in their small bookkeeping departments to make precise and detailed forward analyses from month to month, although they should do as much as they can, as all firms should, to keep such figures.
Small firms often rely on overdrafts to cover the rises and falls of the seasonal business, but there must be limits to a firm's reliance upon short-term funds. Such funds may not always be readily, or even wisely, renewed.
1 accept that there is some difficulty in finding exact figures or statistics on the need of the smaller firm for greater liquidity than the larger firm. It is not an easy matter to research into, but common sense suggests that there is much less margin of error for the smaller firm and that any sound management of such a business should be cautious over its cash flow position. Any unevenness of cash affects small companies particularly.
The Accountant of 2nd May wrote:
The liquidity problems of companies are likely to be exacerbated in uneven fashion when the due date of the additional advance corporation tax arrives on September 1st
and went on—
For some this will represent a fortuitous and unforeseeable consequence of choosing a dividend payment date in the first three months
of the year.
Many will be hard hit. particularly in the month of January. Will the Government give us estimates of how much extra outflow will have to be met by firms in that month? Will they have to find a quarter more, a half more, or even double? There is no room in the small business for mistake estimates, particularly due to unforeseeable Government measures.
In those circumstances, any measures which further damage the cash flow position—and the clause would do serious damage—must put at risk future expansion and investment in projects requiring enterprise and initiative. Hoped-for growth which has any risk to it will be postponed.
Small firms are already hard hit in respect of their liquidity in other ways. First, they need to rebuild their stocks after short-time working. Often those stocks must be rebuilt at very high prices, due to the sharp rise in the purchase price of imported materials.
Secondly, they are hit by high interest rates on borrowed money. Thirdly, they are hit by tightening lines of credit from bigger companies, themselves pressed to pressure the smaller firms for payment because they are affected by the fear of the possible successive triggering off of threshold agreements.
Fourthly, they are hit by the greater difficulties that the medium-sized part of the smaller company sector must have in obtaining new sources of funds. When they reach the limit of short-term loans for overdraft arrangements they are not in the same position as the big firms, which may have public quotations or arrangements with finance houses. They cannot readily convert short-term loans into long-term loans.
That was recognised in the Bolton Report in 1971, which said that
small firms have suffered and still suffer a number of genuine disabilities, by comparison with larger firms, in seeking finance from external sources.
Earlier this year the Financial Times gave the warning that there are
signs of a distinct tightening of trade and credit, with small companies first (as usual) to feel the pinch.
It is widely recognised that the smaller company is the first to feel the pinch when liquidity is short. Why force this sector of the economy to be dependent to an even greater degree on borrowed money? Surely we should try to let them reinvest as much as possible of their retained earnings. Much of the Government's own policy seems to be directed towards that end. Why not continue that part of the Government's policy by accepting this modest amendment? It is an amendment that will not cost a great deal but which will help to even out the uneven flow of liquidity for the smaller firms.
I am grateful for the opportunity to take part in this debate. The welfare of small firms has been my interest since being elected to the House. I was glad to hear my hon. Friend the Member for Harrow, Central (Mr. Grant) draw attention to the source of the speeches. I well remember that when I had some Private Members' time and opened a debate on small businesses my hon. Friend had the job, as Minister, of replying. On that occasion, too, the whole debate came from the Conservative benches.
I must say a special word of welcome to my hon. Friend the Member for Basingstoke (Mr. Mitchell), who is now on our Front Bench. He is the Chairman of the Conservative Small Businesses Committee. We are now able to see the work that it does.
I wish to declare a former interest, my experience as the managing director of a small firm in the engineering industry. It employed about 120 people. It was driven into a take-over by the Labour Party's Budget in 1965. That took me away from small firms. That was something that I resented very much.
I think also of the many small firms in Bolton I visit from time to time. It might be said that I have a special relationship with those firms. The directors seem to regard me as rather a strange animal—the MP who knows what it is like to sit in the boardroom of a small business wondering where next week's wages are coming from and how they will be paid. They do not seem to think that many MPs have that sort of experience. I hope that this evening's debate will show them where those Members are.
Anything that will help to improve the liquidity position of small firms should be given a high priority. The small firms sector is vitally important to the economy and if we can help it without costing the Exchequer a great deal we should do so. The small firms are squeezed in all directions, and not least by the large firms, their customers, who take extended credit at a time of dear money, thus making life difficult. Small firms are not normally firms that pay large dividends, but there are occasions when it is necessary for them to do so. Sometimes, as has been mentioned by my hon. Friend for South Angus (Mr. Bruce-Gardyne), there is the need to avoid surtax direction. More particularly, it may be necessary to pay a dividend to the widow of the founder of the business. It might be the widow's sole income. She may be totally dependent on the dividend provided by the present directors. That sort of business is driven into the ground if it is over-taxed. Dividends are not paid by small firms for fun.
I doubt whether the amendment would cost much money. I hope that the Chief Secretary will tell us exactly what it will cost. If he does not know, he should accept the amendment without further demur. I know that his boss, the Chancellor of the Exchequer, is in favour of profits when he is at dinner with the CBI, but let him relent a little and allow small firms to keep some of their profits. I hope sincerely that we shall have Government acceptance of the amendment.
I am disappointed to see the right hon. and learned Gentleman the Attorney-General leave the Government Front Bench. I thought that he would tell his hon. Friend the Chief Secretary how he could accept the amendment. I congratulate my hon. Friend the Member for Basingstoke (Mr. Mitchell). He has taken an interest in this subject for a long time. I thought that he put his case very effectively. Advance corporation tax is an imposition on all businesses. If we are to have another Budget in the autumn the Government should realise by then that they are taking too much money away from business and that they will have to readjust corporation tax or take some other action. Advance corporation tax is even more of an imposition upon small firms.
For what is the money used? This Government will take money away from the small business—and not just corporation tax but advance corporation taxes— to pay for the losses of the nationalised industries and to pay for their own extravagances in their own sector. They intend to take from the prosperous area of business to pay for the losses of the unprosperous areas. That is in keeping with the way in which they run the economy. They are also going to use the money to pay for some of the subsidies that go to the larger businesses, such as the large corporations that we hear the Government talking about in terms of readjustment and subsidies. The subsidies will come from the additional taxation of the small businesses which can ill afford to provide the money.
I find it interesting that the Bill, in page 7, line 1, reads,
if the amount of the payments made under this section exceeds the amount of that liability, the excess shall be repaid to the company.
Thank you for nothing! What a wonderful offer! If the Treasury or the Inland Revenue decide that they have taken too much they will pay it back. I do not suppose that they will pay interest. They will not make up for the fact that a company has lost the use of the money. They will not make up for the fact that a company has been unable to expand because the Treasury has had the money which it should not have had in the first place.
However, it will be paid back. It is not said when it will be paid back. Presumably a company will get it back when next year's tax is due. Perhaps the Treasury will keep it for a little longer. It is usually behind in the repayment of tax but not in its collection. That will cause the small companies even more difficulties.
Perhaps the Chief Secretary will say what he proposes to do about that situation. In his previous guise he was an accountant. Therefore, he has spent much of his time trying to get round the Inland Revenue on behalf of his clients. I am sure that the hon. Gentleman's heart is in the right place and that he would like to concede this amendment.
That may be so, and he is surrounded by the wrong people. They are tugging at his coat tails and telling him that he dare not concede this amendment. If he cannot concede, may I try to help him by suggesting that he uses his head. We do not often get heads used by Government Members. This is a Government who act more from the heart, that being usually in the wrong place, than from the head, that being in the right place.
We know that the hon. Member has a head. He knows about business and industry. I have no doubt that some of his former clients, his best ones, were those who operated small businesses. He should, perhaps, bear in mind that he may need them quite shortly because he may have the distinction of having been Chief Secretary for the shortest-ever period. I appeal to him to use his judgment. If he persists with this course it will add an additional burden to the work of accountants and to those in the Inland Revenue who are already overburdened.
Why ask the Inland Revenue to start calculating tax in advance when there may be no justification for the collection of that tax because the profits are not there? The hon. Gentleman must know that this is a very good invitation to a company to make a loss. It is not difficult for a business to make a loss if it wishes to do so. In present circumstances it is almost inevitable that profits will be down. The hon. Gentleman knows that the Treasury will collect less in any case. If profits are down, in certain cases it may not be difficult to make a loss.
If the hon. Gentleman and his hon. Friends are to collect tax in advance, making a guess at what the profit might be, the Treasury could lose out in the long run. I believe that that is how the situation will be seen in 1975 when whichever Government are in power looks back on the situation. This is an invitation to small companies to stand still. If they go ahead, not only will they pay more tax but they will have to pay an additional advance tax. They will say, "Let us have a year when we do not expand." There will be some companies which will not be able to expand because of the squeeze resulting from the Budget. Added to this there will be other companies which could expand but which will not do so because they realise that they will be clobbered if they do. They will ask themselves, "Why should we be clobbered if we can avoid it?"
Such companies are in a position to avoid that kind of clobbering. I have a small business. The small business sector employs numbers of people completely out of relation to the size of the individual companies. If the Government want to maintain full employment in this
sector they must encourage expansion and discourage restrictions which will induce small businesses to begin shedding staff. This clause is inviting smaller profits, reduced revenue and redundancies. I hope that the hon. Gentleman will pay attention to the arguments that have been advanced against it.
it is nice for me to be able to take part in this debate, because I have followed the fortunes of small businesses in politics for some years. I joined my hon. Friend the Member for Croydon, North-East (Mr. Weatherill), who is now the party's deputy Chief Whip, in writing a pamphlet on small businesses some years ago. I am glad to say that the title of that pamphlet—"Acorns to Oaks"—was taken up at that time. I am also glad to see, on looking back, that the pamphlet reads like a summary of the Bolton Committee's Report. This was almost entirely due to the work of my hon. Friend, but I did play a small part in the work.
In cash terms, this clause raises nothing. It merely brings forward a payment. In these inflationary times money now is worth more than money some time in the future. But it also means that the Treasury has the use of that money, instead of the businesses from which it has been taken. So it is at the same time another example of the Treasury's using inflation to its own advantage. But it is, in addition, a way of improving the liquidity of the Government at the expense of the liquidity of the firms from which this money is taken.
My hon. Friend the Member for Harrow, Central (Mr. Grant) described it as a sneaky way of doing this. He was quite correct. After all, the Government can, because they are the Government, borrow more cheaply than can large companies; and large companies can borrow more cheaply than small ones can; so in that respect the imposition is even greater on the small company than on the large one. We shall be discussing this aspect if the amendment concerned with bank borrowing is called.
The effect of the clause in this year is very great, on all businesses. We on the Opposition side of the Committee at any rate cannot see how large it is at the moment on small businesses, but the total is£315 million in this year, which is far more than is being raised by the increase of 2 per cent, in corporation tax, even in the first year. It is more than twice the amount raised by the increase in corporation tax.
The real imposition, however, in the long term depends on the interest rate one assumes is necessary in this case. The real imposition must be somewhere around£20 million, so that the cost of this amendment for small businesses, in terms of the interest payable or not payable, cannot possibly be more than£10 million at the very outside. How much better it would be to spend the£10 million—if it is that much—as we suggest, rather than put forward the new clause about trade unions, which we are to debate later. It is a once-for-all extraction of liquidity from firms small and large.
A relevant question in this debate is why we should, why the Government should, do anything at all for small businesses, or businesses small by comparison with large businesses. I believe on the whole the economic world at the moment is loaded against small businesses. There are some things small businesses, by their nature, can do better than large ones, but in general the world is loaded against small businesses. Such economies as long production runs and the scale of modern technology—I speak from experience of that from my own constituency, where we have a good deal of it—can be effected in the large firms but make things more difficult for the small ones. But the small firm has advantages over the large one. It is much more adaptable, more resilient, and has the ability more easily and more quickly to respond to the needs of its customers because of this.
The small business is also a very great source—probably the principal source— of new ideas and innovation in development. The existence of a large number of small businesses decreases the likelihood of any one organisation achieving economic or political power because, as my hon. Friend the Member for Harrow, Central shrewdly pointed out, labour relations in small firms are by their nature much better, in general, than labour relations in large firms. He attributed this —and it is part of the reason—to lack of influence of trade unions in small businesses—a valid point. But I believe it is also because the proprietor, the owner, the manager of the small firm is largely the same person. What is more, this person is much closer to his employees than the manager—let alone the proprietors, through their pension funds, the small investor, and so on—is to employees in a large business. Small firms provide the opportunity for individuals to exercise their personal judgment and initiative, to live their own lives and to depend in a self-reliant way on their own businesses and on what they have created. That is important in our society and constitutes another reason for encouraging the small business sector.
The world is loaded against them in general terms. That is all the more reason for the Government to strive, when opportunities like this occur, to assist the small business and tip the scales back a little towards a balance between small and large businesses. The amendment provides a fairly cheap way of doing that. If the Government resist it that will be a sneaky way of hitting small firms. I hope that the Government will accept it, but if they do not I hope we shall press the matter in the Lobby.
I rise to support the excellent amendment which has been so ably and lucidly proposed by my hon. Friend the Member for Basingstoke (Mr. Mitchell).
I must comment on the deplorable lack of attendance by Labour Members. This vitally important sector of small businesses represents 93 per cent, of the British economy and only one Labour Member, apart from the Ministers, has bothered to turn up. It is regrettable that the Labour Party seems interested only in very large businesses, and then only how they can be absorbed into the State sector.
First I declare my interest as a small businessman with a family business. It is a service industry, it is capital, intensive with a high labour content, and it has high running costs, so I speak with deep conviction of the problems which face small businesses. Interest rates have doubled and costs are increasing dramatically all the time. Rates and water charges in many areas are up, and certainly in my area of the South-West they have increased 100 per cent, over 1973. Along with VAT, fire precautions and price restraint all add to the cash flow situation.
As my hon. Friend the Member for Gloucestershire, South (Mr. Cope) said, these businesses are the acorns from which the large businesses will grow in the future. Now they face the added imposition of the new corporation tax structure and the addition of the advance corporation tax. The small business generally does not distribute its profits but uses them for expansion and development. Under the new system retained profits are taxed at the higher rate.
As my hon. Friend the Member for Bolton, West (Mr. Redmond) said, the amounts distributed in the form of dividends often go to the members of the family who have ploughed all their savings into the firm and rely on the dividend income to keep it going. Now they are to be hit by the loss of part of those payments which will be paid to the Exchequer in the form of advance corporation tax.
The last Government accepted the need to help small businesses by giving relief up to£15,000 and transitional relief up to£25,000. Those figures are three years old, however, are out of date and should be increased substantially. Now also the tax levy is increased by 2 per cent, and the advance corporation tax requirement is stepped up. If the Government are prepared to see many of these small firms pack up, let them proceed with the measures they propose in the Bill. However, I hope they recognise, as most other countries do, the importance of the smaller firms. I hope they will not remove the incentives and rewards for the people who put in the long hours and take the gamble on their invested savings, receiving quite low returns on their capital, especially in the initial build-up years. If there is no encouragement for this basic structure of industry and commerce, the economy will founder.
I support the amendment because it is an attempt to breath life back into what is rapidly becoming a depressed sector of British industry and trade. It will represent some recognition of the need to give smaller businesses some encouragement during an increasingly difficult time for them in these inflationary days.
I hope that the Chief Secretary, who has long worn the cloak of champion of the smaller business, will accept the vital amendment and not show himself to be a "streaker" on the Front Bench, naked of any realistic policy for our small businesses. In the context of the graffiti saying, "Streaker repent, your end is in sight" would probably be appropriate in the present context.
I, too, should like to speak briefly in support of the amendment so ably moved by my hon. Friend the Member for Basingstoke (Mr. Mitchell). I declare an interest as a director of companies which pay advance corporation tax.
In the Budget debate on 1st April the Chancellor of the Exchequer justified this 50 per cent, increase in ACT by saying that it encourages investment because it applies only to distributions. That is an Alice-in-Wonderland argument. No forced, interest-free loan to a Government has ever encouraged investment, least of all in the case of small companies about which we are talking now.
As my hon. Friend the Member for Exeter (Mr. Hannan) said, the shareholders of many small companies have seen earnings ploughed back over the years, and they rely on income from their shareholdings for their livelihood. As my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) said, in order to avoid surtax direction small companies often cannot minimise or lessen their dividend distributions. In their case, therefore, the 50 per cent, increase in ACT can only be a serious addition to the liquidity strains which they already face.
The real reason for the increase in ACT lies in the wish of the Chancellor to lessen his own borrowing requirement to the extent of about£315 million, but, as the Chief Secretary will know, things have gone quite well for the Chancellor in this respect since Budget day. Sterling, particularly in the light of the weakness of the dollar, has been quite strong, the Bank of England has been able to sell fairly large quantities of gilts to the public and the money supply growth rate is still slowing down. The figures released yesterday show an annual growth rate in the money supply of only around 8 per cent. Therefore, the need for the Chancellor to worry about his borrowing requirement is somewhat less now than it was when he made his Budget speech and when he introduced this increase in ACT.
Talking last week to the CBI, the Chancellor said that he would stimulate the economy if he felt that that needed doing, but how will he find that magic touch that will give an instantaneous stimulation to the economy? It has eluded past Chancellors. The sensible thing for the Chancellor to do is to anticipate events somewhat and to show magnanimity. I should like to see the clause removed from the Bill altogether, but if that cannot be done I hope that the Chancellor will accept the amendment. It will help the small business, which will feel such a strain on its liquidity in the months ahead.
The Chief Secretary to the Treasury (Mr. Joel Harnett):
In this interesting debate I have been called many names which I did not recognise. I am obliged to hon. Members for those which were charming.
I congratulate the hon. Member for Basingstoke (Mr. Mitchell) on his maiden speech from the Opposition Front Bench. He and I have debated in many Committees on Finance Bills, sometimes on the same side.
I should like to deal first with some of the technical aspects of the amendment, although I would not use them as an argument for resisting it. The amendment refers to "small company" and I am told that it should have referred to "small companies" under the relevant sections and that therefore it is technically wrong. More important, however, it does not prescribe over which period a company should have qualified by having had this level of profits. There is a perverse effect from using Section 95 which deals with the small companies rate; the amendment exempts companies with up to£15,000 of profits but not companies with tax losses. I say that so that we can get the amendment in perspective, but I do not want to rest on that. I want to argue the merits of the case.
Many Conservative Members have said that I have long been a supporter of small or close companies, as they have been called. I withdraw nothing that I have said on the subject. On the other hand, many of the speeches today—some of them were excellent and I would wholeheartedly agree with them about close companies and their importance to the community—go wide of the amendment.
Clause 10 in relation to companies of the kind of which we have been speaking simply provides that those which pay dividends should pay another 50 per cent, of the ACT. It was not I or this Government who decided that companies should pay ACT in the first place. I have always argued, as I think has the hon. Member for Basingstoke, that close trading companies were much better off under the classical system than under the imputation system—[HON. MEMBERS: "Hear, hear."] This is where I have been unable to understand how Conservatives can keep telling us that the 1965 corporation tax clobbered close companies—[AN HON. MEMBER: "It did."] The hon. Member obviously disagrees with those of his hon. Friends who said, "Hear, hear," when I said that the classical system left these companies better off, so perhaps 1 should explain. I am talking, I emphasise, about trading companies.
Under the classical system, if a trading company could show that it was expanding and ploughing back its profits—that is the type of company that we want to help—it would not only have paid the lower rate of tax on£15,000 and below of profit, as applies at present under the imputation system, but would have paid 40 per cent, tax on the whole of its profits.
I do not want to argue on this narrow amendment the merits of the classical over the imputation system as a whole, but certainly for close companies I have never had any doubt—I was glad to hear that many hon. Members opposite agree —that the classical system was much better for that type of small company. I withdraw nothing that I have said at any time about wanting to help that type of company.
We should see the amendment in the context of our discussion. We are not talking about close companies in the real sense but about small companies. Many close companies pay the small companies rate but what Opposition Members were speaking about were the small companies and not the large companies on small companies rates.
There are approximately 350,000 close companies. Within that number there are between 130,000 and 150,000 which generally have no profit on which to pay corporation tax. There are between 180,000 and 200,000 with profits below£15,000. Some of those would be affected by the amendment. There are 10,000 with profits of between£15,000 and£25,000 and 15,000 with profits above£25,000.
Only a small number of those companies with profits below£15,000 will wish to pay dividends, although I accept what the hon. Member for Bolton, West (Mr. Redmond) said about some small companies wishing to pay dividends to elderly relatives. Close companies with profits below£15,000 a year would not be compelled to pay dividends by any reasonable inspector of taxes—and most of them are reasonable.
The hon. Member for Upminster (Mr. Loveridge) told us of the great tragedy of small companies which have overdrafts. That type of company would not pay a dividend, would not pay ACT and would not have to pay a supplement to ACT. Those close companies would not suffer from liquidity problems created by the clause. If they are liquid and are not ploughing back any profits they will either pay dividends or be compelled to do so by direction of an inspector of taxes, in which case they will have no cash flow problem. If a company can show the inspector of taxes that it is expanding, whether or not it is liquid, it will not be compelled to pay a dividend.
Does the hon. Gentleman agree that private individuals who have invested money in such small businesses are entitled to a return on their investment, and that if They do not get one small businesses will never be able to get private individuals to put up capital?
I have conceded that to the hon. Member for Bolton, West, but that would be only a small number. The burden of the argument put forward by most Opposition speakers is that small companies do not get the bulk of their capital in that way. They get it from directors and shareholders who are actively working in the company. That is the very nature of most close companies. Before the hon. Member for Bolton, West gets apoplexy, I willingly concede that there are some companies of the kind he described. In the vast majority of cases there are no wealthy relatives who are prepared to put money into close companies. In the vast majority of cases it is the directors' own money I am sure that the hon. Gentleman with all his advice will ensure that there are wealthy relatives to put money into those companies, in which case they will be liquid enough to pay dividend, ACT and a little supplementary ACT.
I was not talking of the people I advise, I was talking about my own family business. If he expects me as a director to finance that business, I assure the hon. Gentleman that the business had to finance me; it was all I had to live on. Some of the shareholders were the descendants or widows of people who contributed to the founding of the business. They were dependent on the business. They had no money to put into the business; the business was keeping them.
I am not sure what the hon. Gentleman is trying to prove. If he is trying to tell me that there are a few companies of that description, then I concede it. I shall come in a moment to whether that type of company will be hit by this supplement to ACT.
If they are, then the hon. Gentleman will be able to advise them how to do their best. I do not want to deal with one particular company, no matter how well advised it may be. I wish to deal with the amendment which we are now debating.
As to whether the majority of small companies expanding their businesses would be liable to ACT at all, let alone a supplement, I wish to call in aid the hon. Member for Rutland and Stamford (Mr. Lewis) who said that those companies would not show any profit. I will offer the hon. Gentleman some advice. They could show profits provided that they were an expanding company of the type we wish to assist, and they still would not pay ACT or the supplement to it. In terms of most trading close companies, only a small number will be hurt. There will be some non-trading close companies that will be hurt, in respect of finance in the City. Therefore, some close companies will be liable but, as I understand the situation, that was not the type of company of which Conservative Members were thinking. They were thinking of the important, small, close trading companies and that sort of company will not be hurt very much.
I should like to know, for we have not had an answer to this question, how much the Government's liquidity would be injured if the Government were to accept this amendment. What is the sum of money involved? If it is as small as the Chief Secretary suggests and is such a trifle, why are not the Government being generous and giving way? If it is a larger figure, then let us hear it.
The answer is that it is impossible to know what the figure would be. We do not know what the small companies would be distributing as dividend.
To come to the question of liquidity, many hon. Members argued—and the hon. Member for Harrow, Central (Mr. Grant) argued this matter with his great knowledge of small companies—that it would be offensive to obtain the money in advance. All kinds of nasty words were used about the provision and I would not dare to repeat them. The hon. Member for Gloucestershire, South (Mr. Cope) talked of the Inland Revenue receiving the money earlier and said that inflation was costing the companies more.
However we could look at the matter in another way. We could say that in the past companies paid their corporation tax some 18 months after the year end and that as a result of inflation they have had the benefit of paying corporation tax 18 months later.
The hon. Gentleman says, "It is their money". We all agree that there has to be some taxation. They have all been taxed but in the past have had to pay their tax only some 18 months later. I want to make clear what I thought was already clear—that they are not paying the tax earlier in the sense that they are paying it before the profits are made, but earlier than they had the privilege of paying it, which was 18 months after the year end.
The hon. Member for Gloucestershire, South asked, "Why take it from these companies? The Government can borrow money more cheaply". I am surprised to hear hon. Members opposite talk about the Government being able to borrow more easily and to borrow more. One of the reasons for Clause 10 is precisely to reduce the public sector borrowing requirement. Many hon. Members opposite were constantly attacking the Conservative Government for the size of the public sector borrowing requirement. If there is to be a vote on this matter, I hope that they will join us in the Lobby, because by Clause 10 we seek to reduce the public sector borrowing requirement to a small extent. In any case, as I hope I have shown, this provision does not affect the vast majority of close companies of the kind we want to help.
Like my hon. Friend the Member for Basingstoke (Mr. Mitchell) I must declare an interest. I am not a director of a small company as defined in the amendment but I am concerned with a private, unquoted company which though not affected by this amendment will be affected by this clause. I had better declare a double interest, because part of my firm operates in my hon. Friend's constituency, which gives me added pleasure in congratulating him on his speech moving the amendment from the Opposition Front Bench.
Many of my hon. Friends have pointed out what I thought the Chief Secretary to the Treasury to have accepted—some of the advantages that private, unquoted companies of any size have over quoted companies in helping the economy. They are free from the threat of take-overs and can, therefore, afford to take a longer view. They are less tied to short-term results and the need to justify themselves in the market. In this sense, they have an advantage in many ways over all but the largest public companies.
This is what makes it so important that the amendment should be taken more seriously than the hon. Gentleman has taken it. This clause, taken in conjunction with others, largely deprives the unquoted companies of some of their advantages and some of the contribution they can make to the economy by making their financial and liquidity problems even more difficult.
The evidence that the investment performance of the unquoted sector generally compares favourably with that of the quoted sector is formidable. I will not put it to the Committee now, although I hope to do so at a later stage. I wish that we had had more Government supporters present to hear the debate. The unquoted sector does not employ an insignificant number of people. Excluding State employees—Government servants, nationalised industry employees, local government employees, and so on—the unquoted sector employs about 51 per cent, of the total number of employees, and the quoted sector employs 49 per cent. Broadly speaking, one-third of the total number of employees work directly or indirectly for the State, one-third for public companies and one-third for private companies.
Compared with 9,000 quoted companies, there are 300,000 active unquoted companies. The Minister had a slightly different figure. I think that his was 350.000. This is excluding finance companies and nationalised industries. My figures show that there are about 42,500 private companies whose sales average more than£500,000 a year. I have not had time to do the necessary sums to see how that figure squares with the Minister's on profits. I suspect that it would be a difficult calculation.
Most of the arguments that we have heard in the debate apply to all unquoted companies, which by and large are financed out of retained profits, but they apply most of all to the smaller end of the unquoted sector where, as my hon. Friend the Member for Rutland and Stamford (Mr. Lewis) pointed out, companies depend on their liquidity—their cash position—for their capacity to expand.
My hon. Friend the Member for Basingstoke spoke of the difficulties of companies facing higher raw material costs, inflation, and the problem that money turnovers rising faster than real turnovers brings in financing the additional working capital required for expansion with existing plant, let alone for new investment in new equipment. My hon. Friend the Member for Upminster (Mr. Loveridge) and my hon. Friend the Member for Bolton, West (Mr. Redmond) both referred to the problems of financing working capital out of overdraft, the difficulty that a small company has in converting a loan from short-term to long, and the need to keep overdraft facilities for seasonal fluctations.
My hon. Friend the Member for Upminster asked for some idea of the seasonal impact of Corporation Tax. I cannot tell him that. The only figure that I have been able to estimate is that the total impact of corporation tax as a whole on the company sector as a whole in 1972-73 was£425 million and in 1973-74£625 million; in 1974-75 I estimate it to be£750 million. Those are the figures for January, which is the peak period for paying corporation tax. That is the order of the change, over the past three years, in the impact on the company sector of corporation tax at the peak period.
My hon. Friend the Member for Gloucestershire, South (Mr. Cope) pointed out the value of small companies in making innovations. Here I must again declare an interest in that my firm published a book by Professor John Jukes called "Sources of Invention" in which he made a series of case studies indicating that the greater part of the technical innovation from the end of the war until about five or six years ago came from the unquoted sector. But unquoted companies do not have the same ease in dealing with the problems of technology and economies of scale; their role in the economy is to become larger, to become the companies from which the great companies grow, and to operate on a scale which very large concerns do not find profitable but on which smaller concerns can fulfil a useful and economic function in a way profitable to themselves.
My hon. Friends the Members for Bolton, West and Mid-Sussex (Mr. Renton) referred to dividends and the need for them to be paid because they could not always all be ploughed back, being the reward of savings of retired directors, workers or members of a family concern. The Chief Secretary cannot get away with the argument that there is no need for a small private company to pay dividends because the directors provide all the capital. It is and always was nonsense to make such a suggestion.
I disagree with the hon. Gentleman. Perhaps I may quote my own family business when it was a great deal smaller than it is now and certainly came within whatever definition there might have been in those days of a small business. We had a great deal of trouble with a chemist who had lent money to my great-grandfather, and, not unreasonably, wanted some return on it. This is a situation unquoted companies have to face. They are not entirely free from outside investors, whether members of a family or not. It is nonsense to suggest that an unquoted small private company does not need to pay a dividend. I do not see why the hon. Gentleman should seek to discriminate in that way.
I agree with what the Chief Secretary said about surtax directions. I have never found the Inland Revenue reluctant to admit that an operating company requires money for genuine expansion. The hon. Gentleman went on to suggest that small companies would do better under the classical rather than the imputation system. I have also heard that argument made by a retired Prime Minister before now. I am not sure that it is
necessarily true for the larger unquoted companies, but I accept that for the smaller business, particularly in times of inflation, the imputation system is more difficult. That is why we introduced the smaller business rate and why we think that the starting level should go up.
It is not true, nor would I asert that it is, that this Clause 10 alone affects smaller companies in such a disastrous way. However, as my hon. Friend the Member for Basingstoke made clear, it is part of a general package which is pressing harder on small companies than on other sectors of industry. It is nonsense for the Chief Secretary to turn the argument round and to say that because there used to be an 18-months' lag we are not making them any worse off now. When there was an 18-months' lag there was too little investment. The hon. Gentleman is now making the situation worse by removing that lag and forcing this advance payment. He suggested that he was doing it only to help the Government's borrowing requirement. In effect, he is transferring the Government's borrowing requirement to the private sector's borrowing requirement. He has entirely ignored the fact that this is necessary because of public expenditure increases and other policies of the Government he supports.
The hon. Gentleman has in no way satisfactorily answered the points made both succinctly and forcefully by my hon. Friend the Member for Basingstoke in moving the amendment and by others who supported him in the debate. I therefore advise my right hon. and hon. Friends, unless at the last moment the Chief Secretary is willing to help us, to go into the Division Lobby and vote for the amendment.
|Division No. 28.]||AYES||(9.20 p.m.|
|Adley, Robert||Bell, Ronald||Bray, Ronald|
|Alison, Michael (Barkston Ash)||Benyon, W.||Brittan, Leon|
|Allason, James (Hemel Hempstead)||Bitten, John||Bruce-Gardyne, J.|
|Amery, Rt. Hn. Julian||Blaker, Peter||Bryan, Sir Paul|
|Ancram, M.||Bcardman, Tom (Leicester, S.)||Buchanan-Smith, Alick|
|Atkins,Rt.Hn.Humphrey(Spelthorne)||Body, Richard||Budgen, Nick|
|Awdry, Daniel||Boscawen, Hop. Robert||Bulmer, Esmond|
|Balniel, Rt. Hn. Lord||Bowden,Andrew) Brighton,Kemptown)||Burden, F. A.|
|Barber, Rt. Hn. Anthony||Boyson, Dr. Rhodes (Brent, N.)||Butler, Adam (Bosworth)|
|Beith, A. J.||Braine, Sir Bernard||Carr, Rt. Hn. Robert|
|Chalker, Mrs. Lynda||Howell. Ralph (Norfolk, North)||Price, David (Eastleigh)|
|Channon, Paul||Howells, Geraint (Cardigan)||Prior, Rt. Hn. James|
|Chatawav, Rt. Hn,. Christopher||Hunt, John||Rathbone, Tim|
|Clark, A. K. M. (Plymouth, Sutton)||Hurd, Douglas||Rawlinson, Rt. Hn. Sir Peter|
|Clark, William (Croydon, S.)||Hutchison, Michael Clark||Redmond, Robert|
|Clarke, Kenneth (Rushcliffe)||Irvine Bryant Godman (Rye)||Rees, Peter (Dover & Deal)|
|Clegg, Walter||Jenkin, Rt.Hn.P. (R'dgeW'std&W'fd)||Reid, George|
|Cockcroft, John||Johnson Smith, G. (E. Grinstead)||Renton.Rt. Hn. SirDavid(H't'gd'ns're)|
|Cooke, Robert (Bristol, W.)||Johnston, Russell (Inverness)||Renton R. T. (Mid-Sussex)|
|Cope, John||Jones, Arthur (Daventry)||Ridley, Hn. Nicholas|
|Cormack, Patrick||Jopling, Michael||Ridsdale. Julian|
|Corrie, John||Joseph, Rt. Hn. Sir Keith||Rifkind, Malcolm|
|Costain, A. P.||Kaberry, Sir Donald||Rippon, Rt. Hn. Geoffrey|
|Davies, Rt. Hn. John (Knutsford)||Kellett-Bowmon, Mrs. Elaine||Roberts, Michael (Cardiff, N.-W.)|
|d'Avigdor-Goldsmid, Maj.-Gen. James||Kimball, Marcus||Rooerts, Wyn (Conway)|
|Dean, Paul (Somerset, N.)||King, Evelyn (Dorset, S.)||Rodgers, Sir John (Sevenoaks)|
|Deedes, Rt. Hn. W. F.||King, Tom (Bridgwater)||Ross, Stephen (Isle of Wight)|
|Dixon, Piers||Kirk, Peter||Rossi, Hugh (Hornsey)|
|Dodsworth, Geoffrey||Kitson, Sir Timothy||Rost, Peter (Derbyshire, S.-E.)|
|Drayson, Burnaby||Knight, Mrs. Jill||Sainsbury, Tim|
|Durant, Tony||Knox, David||Scott-Hopkins, James|
|Dykes, Hugh||Lamont, Norman||Shaw, Giles (Pudsey)|
|Eden, Rt. Hn. Sir John||Lane, David||Shaw, Michael (Scarborough)|
|Edwards, Nicholas (Pembroke)||Langford-Holt, Sir John||Shelton, William (L'mb'th,Streath'm)|
|Elliott, Sir William||Lawrence, Ivan||Shersby, Michael|
|Emery, Peter||Lawson, Nigel (Blaby)||Silvester, Fred|
|Eyre, Reginald||Le Marchant, Spencer||Sims, Roger|
|Fairgrieve, Russell||Lester, Jim (Beeston)||Sinclair, Sir George|
|Farr, John||Lewis, Kenneth (Rtland & Stmford)||Skeet, T. H. H.|
|Fenner, Mrs. Peggy||Lloyd, Ian (Havant & Waterloo)||Smith, Dudley (W'wick&L'm'ngton)|
|Finsberg, Geoffrey||Loveridge, John||Spence, John|
|Fisher, Sir Nigel||Luce, Richard||Spicer, Jim (Dorset, W.)|
|Fletcher, Alexander (Edinburgh, N.)||McAdden, Sir Stephen||Sproat, lain|
|Fletcher-Cooke, Charles||MacArthur, Ian||Stainton, Keith|
|Fookes, Miss Janet||Macfarlane, Neil||Stanbrook, Ivor|
|Freud, Clement||MacGregor, John||Stanley, John|
|Fry, Peter||McLaren, Martin||Steel, David|
|Galbraith, Hn. T. G.||Macmillan, Rt. Hn. M. (Farnham)||Steen, Anthony (L'pool, Wavertree)|
|Gardiner, George (Reigate&Banstead)||McNair-Wllson, Michael (Newbury)||Stewart, Ian (Hitchin)|
|Gardner, Edward (S. Fylde)||McNair-Wilson, Patrick (New Forest)||Stodart, Rt. Hn. A. (Edinburgh, W.)|
|Gibson-Watt, Rt. Hn. David||Marshall, Michael (Arundel)||Stokes, John|
|Gilmour, Sir John (Fife, E.)||Mather, Carol||Tapsell, Peter|
|Glyn, Dr. Alan||Maude, Angus||Taylor, Edward M. (Gl'gow, C'cart)|
|Goodhew, Victor||Maxwell-Hyslop, R. J.||Taylor, Robert (Croydon, N.W.)|
|Goodlad, A.||Miller, Hal (B'grove & R'ditch)||Tebbit, Norman|
|Gorst, John||Mills, Peter||Thomas, D. E. (Merioneth)|
|Gow, Ian (Eastbourne)||Miscampbell, Norman||Thomas, Rt. Hn. P. (B'net,H'dn S.)|
|Gower, Sir Raymond (Barry)||Mitchell, David (Basingstoke)||Trotter, Neville|
|Gray, Hamish||Moate, Roger||Tyler, Paul|
|Grimond, Rt. Hn. J.||Money, Ernie||Waddington, David|
|Grist, Ian||Monro, Hector||Wainwright, Richard (Colne Valley)|
|Grylla, Michael||Moore, J. E, M. (Croydon, C.)||Wakeham, John|
|Hall,Sir John||Morgan, Geraint||Walder, David (Clitheroe)|
|Hall-Davis, A. G. F.||Morris, Michael (Northampton, S.)||Walker-Smith, Rt. Hn. Sir Derek|
|Hamilton, Michael (Salisbury)||Morrison, Charles (Devizes)||Watt, Hamish|
|Hampson, Dr. Keith||Morrison, Peter (City of Chester)||Wells, John|
|Hannam, John||Neave, Airey||Wiggin, Jerry|
|Harrison, Col. Sir Harwood (Eye)||Newton, Tony (Braintree)||Wigley, Dafydd (Caernarvon)|
|Hastings, Stephen||Nott, John||Wilson, Gordon (Dundee, E.)|
|Havers, Sir Michael||Onslow, Cranley||Winstanley, Dr. Michael|
|Hawkins, Paul||Oppenheim, Mrs. Sally||Winterton, Nicholas|
|Hayhoe, Barney||Page, Rt. Hn. Graham (Crosby)||Worsley, Sir Marcus|
|Henderson.Barry(Dunbartonshire.E.)||Page, John (Harrow, W.)||Younger, Hn. George|
|Holland, Philip||Pardoe, John|
|Hooson, Emlyn||Parkinson, Cecil (Hertfordshire, S.)||TELLERS FOR THE AYFS:|
|Hordern, Peter||Pattie, Geoffrey||Mr. John Stradling Thomas and|
|Howe, Rt.Hn. Sir Geoffrey(Surrey,E.)||Percival, Ian||Mr. Marcus Fox.|
|Allaun, Frank||Blenkinsop, Arthur||Carmichael, Neil|
|Archer, Peter (Warley, West)||Boardman, H. (Leigh)||Carter, Ray|
|Armstrong, Ernest||Booth, Albert||Carter-Jones, Lewis|
|Ashley, Jack||Boothroyd, Miss Betty||Castle, Rt. Hn. Barbara|
|Ashton, Joe||Boyden, James (Bishop Auckland)||Clemitson, Ivor|
|Atkins, Ronald (Preston, N.)||Bradley, Tom||Cocks, Michael|
|Atkinson, Norman||Broughton, Sir Alfred||Cohen, Stanley|
|Bagier, Gordon, A. T.||Brown, Hugh D. (Glasgow, Provan)||Coleman, Donald|
|Barnett, Guy (Greenwich)||Buchan, Norman||Colquhoun, Mrs. M. N.|
|Barnett, Joel (Heywood & Royton)||Buchanan,Richard(G'gow.Springbrp)||Concannon, J. D.|
|Bates, Alf||Buller,Mrs.Joyce[...] gey.WoodGreen)||Conian, Bernard|
|Bennett, Andrew F. (Stockport, N.)||Callaghan, Jim (M'dd'ton & Pr'wich)||Cook, Robert F. (Edinburgh, C.)|
|Bidwell, Sydney||Campbell, Ian||Cox, Thomas|
|Bishop, E. S.||Cant, R. B.||Craigen, J. M. (G'gow Maryhill)|
|Cronin, John||Jackson Colin||Parry, Robert|
|Crosland, Rl. Hn. Anthony||Janner, Greville||Pavltt, Laurie|
|Cryer, G. R.||Jay, Rt. Hn. Douglas||Peart, Rt. Hn. Fred|
|Cunningham, G.flsl'ngt'n.S&F'sb'ry)||Jenkins, Hugh (W'worth, Putney)||Pendry, Tom|
|Cunningham, Dr. JohnA.(Whiteh'v'n)||Johnson,James(K'ston upon Hull.W)||Phlpps, Dr. Colin|
|Davidson, Arthur||Johnson, Walter (Derby, S.)||Prescott, John|
|Davies, Denzil (Llanelli)||Jones, Barry (Flint, E.)||Price, Christopher (Lewisham, W.)|
|Davies, Ifor (Gower)||Jones, Dan (Burnley)||Price, William (Rugby)|
|Davis, Clinton (Hackney, C.)||Jones, Gwynoro (Carmarthen)||Radice, Giles|
|Deakins, Eric||Jones, Alec (Rhondda)||Richardson, Miss Jo|
|Dean, Joseph (Leeds, W.)||Judd, Frank||Roberts, Albert (Normanlon)|
|Delargy, Hugh||Kaufman, Gerald||Roberts, Gwilym (Cannock)|
|Dell, Rt. Hn. Edmund||Kelley, Richard||Roderick, Caerwyn E.|
|Dempsey, James||Kilroy-Silk, Robert||Rodgers, George (Chorley)|
|Doig, Peter||Kinnock, Neil||Rooker, J. W.|
|Dormand, J. D.||Lamble, David||Roper, John|
|Duffy, A. E. P.||Lamborn, Harry||Rose, Paul B.|
|Dunn, James A.||Lamond, James||Ross, Rt. Hn. William (Kilmarnock)|
|Dunnett, Jack||Latham, Arthur(CityofW'minsterP'ton)||Sandelson, Neville|
|Dunwoody, Mrs. Gwyneth||Lawson,George (Molherwell&Wishaw)||Sedgemore, Bryan|
|Eadie, Alex||Leadbitter, Ted||Selby, Harry|
|Edelman, Maurice||Lee, John||Shaw, Arnold (Redbridge, llford, S.)|
|Edge, Geoff||Lestor, Miss Joan (Eton & Slough)||Sheldon, Robert (Ashton-under-Lyne)|
|Edwards, Robert (W'hampton, S.E.)||Lever, Rt. Hn. Harold||Shore, Rt. Hn. Peter (S'pney&P'plar)|
|Ellis, John (Brigg & Scunthorpe)||Lewis, Ron (Carlisle)||Short, Rt. Hn. E. (N'ctle-u-Tyne)|
|Ellis, Tom (Wrexham)||Lipton, Marcus||Silkin, Rt. Hn. John (L'sham.D'lord)|
|English, Michael||Lomas, Kenneth||Si!kin,Rt.Hn.S.C.(S'hwark,Dulw!ch)|
|Evans, Fred (Caerphilly)||Loughlin, Charles||Sillars, James|
|Evans, I. L. (Aberdare)||Loyden, Eddie||Silverman, Julius|
|Evans, John (Newton)||McElhone, Frank||Sknnei, Dennis|
|Ewing, Harry (St'ling.F'klrk&G'm'th)||MacFarquhar, Roderick||Smith, John (Lanarkshire, N.)|
|Faulds, Andrew||McGuire, Michael||Snape, Peter|
|Fernyhough, Rt. Hn. E.||Mackenzie, Gregor||Spriggs, Leslie|
|Fitch, Alan (Wigan)||Maclennan, Robert||Stewart, Rt. Hn. M. (H'sth, Fulh'm)|
|Flannery, Martin||McMillan, Tom (Glasgow, C.)||Stoddart, David (Swindon)|
|Fletcher, Ted (Darlington)||McNamara, Kevin||Stott, Roger|
|Foot, Rt. Hn. Michael||Madden, M. 0. F.||Strang, Gavin|
|Ford Ben||Mahon, Simon||Strauss, Rt. Hn. G. R.|
|Forrester, John||Mallalieu, J. P. W.||Summersklll, Hn. Dr. Shirley|
|Fraser, John (Lambeth, Norwood)||Marks, Kenneth||Swain, Thomas|
|Freeson, Reginald||Marquand, David||Thomas, Jeffrey (Abertillery)|
|Garrett, John (Norwich, S.)||Marshall, Dr. Edmund (Goole)||Thorne, Stan (Preston, S.)|
|Garrett, W. E. (Wallsend)||Mayhew, Christopher (G'wh,W'wch,E)||Tierney, Sydney|
|George, Bruce||Meacher, Michael||Tinn, James|
|Golding, John||Melllsh, Rt. Hn. Robert||Torney, Tom|
|Gourlay, Harry||Mlkardo, Ian||Tuck, Raphael|
|Graham, Ted||Millan, Bruce||Urwin, T. W.|
|Grant, George (Morpeth)||Miller, Dr. M. S. (E. Kilbride)||Varley, Rt. Hn. Eric G.|
|Grant, John (Islington, C.)||Milne, Edward||Walnwright, Edwin (Dearne Valley)|
|Griffiths, Eddie (Sheffield, Brightside)||Mitchell, R. C. (S'hampton, Itchen)||Walden, Brian (B'm'ham, Ladywood)|
|Hamilton, William (Fife, C.)||Moonman, Eric||Walker, Harold (Doncaster)|
|Hamling. William||Morris, Alfred (Wythenshawe)||Walker, Terry (Kingswood)|
|Hardy, Peter||Morris, Charles R. (Openshaw)||Watkins, David|
|Harper, Joseph||Morris, Rt. Hn. John (Aberavon)||White, James|
|Harrison, Walter (Wakefield)||Moyle, Roland||Whitelaw, Rt.Hn. William|
|Hart, Rt. Hn. Judith||Mulley, Rt. Hn. Frederick||Willey, Rt. Hn. Frederick|
|Hattersley, Roy||Murray, Ronald King||Williams, Alan (Swansea, W.)|
|Hatton, Frank||Newens, Stanley (Harlow)||Williams,Rt.Hn. Shirley (H'f'd&St'ge)|
|Healey, Rt. Hn. Denis||Oakes, Gordon||Williams, W. T. (Warrington)|
|Heffer, Eric S.||Ogden, Eric||Wilson, William (Coventry, S.E.)|
|Hooley, Frank||O'Halloran, Michael||Wise, Mrs. Audrey|
|Horam, John||O'Malley, Brian||Woodall, Alec|
|Huckfield, Leslie||Orbach, Maurice||Woof, Robert|
|Hughes, Rt. Hn. Cledwyn (Anglesey)||Ovenden,John||Wrigglesworth, Ian|
|Hughes, Robert (Aberdeen, North)||Owen, Dr. David||Young, David (Bolton, E.)|
|Hughes, Roy (Newport)||Padley, Walter|
|Hunter, Adam||Palmer, Arthur||TELLERS FOR THE NOES:|
|Irvine, Rt. Hn. Sir A. (L'p'l,EdgeHill)||Park, George (Coventry, N.E.)||Mr. James Hamilton and|
|Irving. Rl. Hn. Sydney (Dartlord)||Parker, John (Dagenham)||Mr. Ernest Perry.|
The discussions today, although important and interesting, have been of a general character. We now move on to a more detailed examination of the clause, dealing with a completely new aspect of raising tax. I shall briefly sketch the background.
Under the new system of corporation tax, when a dividend is paid by a company it is regarded as having been paid out of the taxed funds of the company. Thus, the sum received by the shareholder is regarded as a net sum from which tax at the basic rate has already been deducted. As corporation tax is not due to be paid for some time after the end of the company's year, the tax notionally paid on any dividend would not normally be paid in the form of corporation tax until long after the payment of the dividend. Therefore, up to the present, the law has demanded, quite reasonably, that the tax that has notion-ally been deducted from the dividend should be paid almost immediately to the Inland Revenue and then treated as being an advance of the mainstream corporation tax liability. This system is known and understood by everyone. Accordingly, everyone, including Labour hon. Members——
We are delighted to have them with us, but whether they are taking a real interest in our proceedings is another matter. As I was saying, the system is known by everyone who has to make a judgment as to the appropriate dividend that should be paid. However, this year, without any notice, the Government have chosen to alter the time schedule for the payment of a part of a company's corporation tax liability. Up to now corporation tax has been paid between nine months and 21 months after the year end, except when tax on the dividend is paid at an earlier date, as I have already explained.
The Government now propose that some of the tax shall be paid much more quickly. The basis of arriving at how much should be paid more quickly is based on the amount of advance corporation tax that is paid on the dividend. In future not only will advance corporation tax be paid on the dividend but, in addition, a 50 per cent, charge will be paid in accordance with the Clause.
There has as yet been no reasoned argument for such an additional advance payment. I suppose that we can hope to receive such an argument during the course of the debate on the Question, "That the clause stand part of the Bill." My amendment concerns the element of retrospection in the Bill as drafted. The additional 50 per cent, on the ACT is payable in respect of any ACT due at any time during the financial year 1974. That raises two points straight away. First, when is ACT due? It is due 14 days after the end of the quarter in which the dividend is paid. What the clause as drafted does not say is what happens if the ACT is not only due but is overdue. If a dividend had been paid not in the previous quarter but in the quarter before that, and for some reason the ACT had not been paid and was overdue, would the additional 50 per cent, charge be made on the overdue portion of the ACT?
The second point concerns what happens if dividends are paid in the last quarter of this financial year—namely, in the first quarter of the calendar year 1975, which is the quarter ending 31st March 1975. The ACT will be due to be paid in the second quarter. Presumably there would be no 50 per cent, charge. When directors are deciding what dividend to pay during the first quarter of next year they will be entitled to assume that there will be no Clause 10 liability on that dividend.
Let us consider what will happen it the Bill remains as it is now. Any dividend paid in the quarter to 31st March 1974 is due to have its advance corporation tax paid in the first 14 days after 31st March. On that advance corporation tax a further 50 per cent, will now have to be paid. This clause therefore affects decisions taken by boards as far back as last December, that is, any payments during the first quarter of the year. Some of those payments will be made as a result of a declaration of dividends in 1973.
It seems very unjust that a board should take a decision, possibly four months before Budget Day, about what dividends it can afford to distribute, knowing what the law is and that the rates of existing taxes are changed from time to time in various ways but having no foreknowledge of this new tax. In certain circumstances this tax can make a considerable difference to the cash flow of companies. I believe this to be wrong. The sums involved are substantial, and far higher than should be the case with any changes in the rates of tax. For example, for every£100 paid in dividend a further£22 will have to be found immediately to meet the Clause 10 liability, together with about£43 for advance corporation tax.
In addition to the Government conceding this amendment I would like the right hon. Gentleman to give a specific assurance on the following point. If a company can demonstrate that no mainstream liability will be due as a result of a company's profits in any year, will the Revenue not enforce any possible payment under Clause 10? I do not believe that this would cause any substantial loss on the part of the Revenue. It has to be remembered that any late payment of tax —if it is found that Clause 10 payments ought to have been made—will suffer a 6 per cent, interest without any tax relief so that the deterrent will be there not to make any unjustified claims.
Whatever may be the merits of the Clause—and they are hard to find—in my view there can be no justification for making the charge under that clause apply to any dividends declared prior to 26th March 1974, on which date a board of directors would have been aware for the first time of this new, and in many cases serious, advance payment of corporation tax.
I support my hon. Friend the Member for Scarborough (Mr. Shaw). I do not think that the Government have thought this through. I am sure they do not mean to introduce retrospective legislation but I must tell the Paymaster-General that on the accelerated advance corporation tax it is really nonsense to say that during the tax year 1974 on any dividend that has been paid another 50 per cent, advance corporation tax should be paid.
I remind the right hon. Gentleman that we have been speaking this evening about company liquidity. Not necessarily all companies can pay on their equity ordinary shares. Take the case of the company that can maintain only its preference dividend. It does so, assuming it has sufficient profit to pay it, as projected by the board of directors. It may be that then the cash flow is such that the Government then say, "You have paid a preference dividend on 10th January 1974 and you paid your ACT. Now we want another 50 per cent, on the ACT." Surely, the Paymaster-General cannot say that this is at all equitable.
He has been making great play in previous debates, supported by his right hon. Friend the Chancellor, about how he wants to help and how he is going to look after profits—"profits" being no longer, apparently, a dirty word. We should not say on 26th March that payments made before that date should bear an additional liability. I trust the Paymaster-General will not say that this is not really a charge because the company will get the money back. I remind him that if the 50 per cent. ACT is paid and because of the cash flow that company has to make extra borrowing, it may, as he has said, be able to go to the banks, because in a previous debate the Paymaster-General said that he and his hon. Friends were thinking that if companies ran into difficulties in the future the Government would check the situation with the banks. But many companies which are suffering from a cash flow problem just cannot afford to borrow from the banks at the current interest rate. It is poppycock glibly to say that the Government are thinking of talking to the banks so that companies can get help with the cash flow. They cannot afford the going rate of interest.
The 50 per cent, advance corporation tax is an enforced loan to the Government. The Government of the day may say that it is quite right for businesses to make an enforced loan to the Government but I do not believe that even the Paymaster-General or the Chief Secretary would say in equity that this forced loan should apply to payments made before the Government took their decision on 26th March. I trust the Paymaster-General is taking on board the point that it is nonsense to say, on the one hand, that the Government are trying to help companies and, on the other, "We are going to make you give an enforced loan to the Government retrospectively."
I am very happy to support the amendment so ably moved by my hon. Friend the Member for Scarborough (Mr. Shaw). I will give the First Secretary one or two specific examples of the difficulties that companies are facing in relation to the Bill which this amendment seeks to correct. Let us consider the case of a company whose financial year ended 31st March last and which paid an interim dividend to its shareholders on 1st February. That company would have reserved an ACT of some three-sevenths of the dividend and this sum would have been set aside for payment by 14th April, the normal date.
Having made this provision the company finds that an extra sum which has not been reserved has to be provided, a sum which can therefore come only from funds which otherwise would have been spent on investment in the company or industrial investment. That is the only source from which these funds can come. Of course, the payment is retrospective and companies could not have made any provision for it.
The amendment seeks to remove the element of retrospection. What the Government propose presents a further disadvantage to cash flow. As it appears in the Bill, and from what the Chancellor said, it seems that a company in this position will have to reserve the ACT payment, the larger amount, and that that payment cannot be offset against the mainstream corporation tax until 1st February 1976. I am referring only to the element of the ACT, what might be called surcharge, which is not offsettable against mainstream corporation tax and which would normally have been available in 1975.
In an earlier amendment the Chief Secretary said that it was fortunate for companies that they did not now pay the tax quite so soon and that his Government and previous Governments had been considerate in not demanding more rapid tax payment. Developing that argument further, I suppose companies should consider themselves fortunate that they do not have to pay an advance levy before making a profit at all. It appears that not only is the tax being required much sooner, but the set off against mainstream corporation tax is being delayed. That means that the Government are asking for other people to pay their bills much sooner and that the Government are not prepared to pay their own bills until much later.
In previous amendments we discussed the effect of cash flow on companies and on industrial investment. The Chief Secretary was quite open in his remarks on the previous amendment when he said that the scheme would be bound to have its effect on companies' cash flow. He said that the borrowing requirement was very large—and what else did the Committee expect. This sum certainly has to be met from companies in the private sector. But what about the argument of the flow of funds? There is a staggering turnround, and if we take into account the balance of payments deficit, even on the most favourable assumption, and the Budget deficit, it appears that to meet the public sector deficit£2,000 million at least will require to be found from the private commercial and industrial sector. That is why there is bound to be a real squeeze on corporate cash flow and, ultimately, on profits. The Government are deluding themselves if they do not accept that the pressure on cash flow and on profits will be very severe.
I hope that the Paymaster-General will enlighten me on one matter. It relates to the unforeseen consequence of the position under Statutory Instrument No. 659 by which dividends are frozen to within 5 per cent, of those of the previous year. I understand that the effect of the increase—the surcharge—on ACT has been to make the permitted increase not 5 per cent., but about 0-5 per cent.
Perhaps I may give the Committee an example that has been given to me and ask the Paymaster-General to comment on whether this is right. Under the normal position, for a company which had a gross dividend of£100 the dividend payable would be£70 and the ACT element would be£30. In year two, before this surcharge, had the company wished to increase its gross dividend by 5 per cent, the gross dividend would have been£105, the dividend itself would have been£73-5 and the ACT element would have been£31-5. As I understand it, the effect of the increase in the surcharge is that the gross dividend will be£105, the dividend itself will be£70-35 and the ACT element will be£34-65. I am not clear whether that is the position, but that is what it appears to be on reading the Bill.
If that is the case, a most serious situation arises, because the statutory prices and incomes policy is supposed to be fair to every section of the community and as part of the bargain shareholders are to be restricted to increases of only 5 per cent, of their dividends. But if my interpretation of the proposal in the Bill is correct, they will get an increase not of 5 per cent, but of only 05 per cent. Any talk of a social compact is not sensible. It applies to wages but not to those who are elderly and in receipt of pensions who will be seriously affected by these provisions.
I hope that the Paymaster-General will be able to tell me that my interpretation is wrong, and I look forward with some anticipation to hearing what he has to say.
I rise with enthusiasm to support the amendment so ably moved by my hon. Friend the Member for Scarborough (Mr. Shaw).
This measure was introduced by the Chancellor as one of considerable ingenuity. I think that on closer examination the ingenuity evaporates and the anomalies and hardships become more apparent, and it is to correct some of those anomalies that my hon. Friend has moved the amendment.
This provision has been described as an enforced loan by companies to the Exchequer, and the answer comes pat that it is an enforced loan that will be repaid after a fairly short time, but what about a company which, deluded by the bland words of the Chancellor of the Exchequer to the CBI, has re-equipped itself lavishly, or is about to do so, and will be entitled to considerable capital allowances? It may be that in that situation it will not have any liability to mainstream corporation tax.
On the other hand, perhaps the chairman so as to preserve trustee investment status for the shares in his company, will feel compelled to recommend a dividend. In that situation, that company will pay the extra charge to ACT but will not be able to be relieved of it against its mainstream corporation tax for many years. Have the Paymaster-General and his col- leagues thought about that kind of situation? That is not precisely the point made by my hon. Friends on the amendment, but it demonstrates that this provision in the Bill is likely to create all sorts of anomalies and hardships.
One can understand the argument that, if a board of directors or a general meeting declares a dividend after 27th March, they must be presumed to do so with (heir eyes open and that therefore they must carry this extra burden, but it is not as simple as that. The decision may have been taken beforehand. In practical terms, if the decision has been taken and communicated to the Stock Exchange, it would not be possible in commercial life for the company to alter its dividend.
Again, it may be that an interim dividend has actually been declared before 27th March but not paid, and there will not, therefore, be any legal liability on the company to pay it until afterwards. In that situation, the advance corporation tax will not become payable until after 27th March, but it will stem from a decision taken before that date. It is that kind of case which the Government must consider more closely. Being generous-hearted people who genuinely mean the kind things that they have been saying to the CBI, they will, I am sure, want to look more closely at this clause. As an earnest of their good intentions they could at least accept the amendment.
I suppose that, in answering this deficient clause, the Paymaster-General may say that if companies do not know their corporation tax liability until the Budget, it is not unreasonable to make this provision apply to dividends declared before the Budget in a case in which ACT is not payable until after the Budget. The argument no doubt will be, since we do this with corporation tax, why not with ACT?
But that argument does not cover what I understood from the Budget Statement to be the Chancellor's intention. His intention, as set out in the clause, is that this clause 10 arrangement would apply to 1974. It will not be good enough for the Paymaster-General to say "Corporation tax is not known until the Budget and therefore it was reasonable for us to increase the imposition on companies in the Budget of this additional liability where advance corporation tax was not payable until after the Statement. 1 hope that that argument will not be used.
My hon. Friends who understand the complexities of this subject have advanced powerful technical reasons in support of the amendment. My support is on much more general grounds.
The amendment draws attention to a feature of the clause which is objectionable both in principle and for the practical difficulties that it will bring—that is, the retrospective effect of it. During the last debate, the Chief Secretary nodded assent when my right hon. Friend the Member for Farnham (Mr. Macmillan) said that the purpose was to transfer part of the borrowing requirement from the public to the private sector. As if that were not bad enough, it is wholly unjustifiable and objectionable in principle to do it retrospectively.
May I explain the practical difficulty? Representing Southport, where we do not have many big businesses, although we do have many small and medium ones, my interest is mainly in the latter. When the Chief Secretary was speaking I had the feeling, as I had from the look on his face when he was listening, that he did not appreciate that what he is doing creates practical difficulties and increases the burdens of medium and small businesses which are suffering considerable difficulties.
We shall have many figures from the right hon. Gentleman, as we had from the Chief Secretary, but no figures that he produces can disguise the fact that this will present an additional burden—it is intended to do so—which the small and medium businesses, as well as the large, will suffer.
I hope that the Paymaster-General will realise the purely practical point that it makes a difference to a company which has declared a dividend prior to that date. It will have worked out all the financial implications and have decided that it is in the interests of its business to do that.
If the company then finds that because of an unforeseen circumstance it has to bear yet another burden, it is presented with practical and in some cases severe difficulties. For those general and simple but I hope telling considerations of principle and practice, I hope that the Pay- master-General will accept the amendment.
The main burden of the argument has been that the clause is retrospective in its effect. Associated with the amendment various other matters have been raised about the operations of the ACT supplement, which arise on later amendments. The amendment tabled by the hon. Member for Croydon, South (Mr. Clark) deals with what happens if the supplement exceeds the mainstream corporation tax. I suggest that that point, which has been noted and thought about, should be dealt with by my hon. Friend the Chief Secretary when we come to that amendment.
The point at issue here is whether the clause has retrospective effect in respect either of dividends declared before 26th March 1974 or distributions made before 26th March 1974, depending on the wording of the amendment—whether of Amendment No. 31 or the associated Amendment No. 23. The clause is not retrospective. To adopt either of the amendments would go a long way towards wiping out the value of the ACT supplement in assisting the Government to bring down the borrowing requirement.
We estimate that the loss of yield to the ACT supplement if Amendment No. 31 were accepted would be about£175 million, although it is difficult to estimate a figure. It would be more than half of the total expected yield of the ACT supplement.
Amendment No. 23 is more modest in effect, because it is confined to distributions made after 26th March 1974. Our estimate of the loss of yield in that case is between£80 million and£90 million, in other words more than one quarter of the estimated total yield of the ACT supplement.
The Committee knows that one of the major concerns of my right hon. Friend in preparing his Budget was to reduce the borrowing requirement. This method was decided upon for that purpose. There were alternative ways to get the company sector to make a contribution to bringing down the borrowing requirement which would have been far more damaging to the company sector but which would not, in the view of Opposition Members, have been retrospective.
For example, it would have been possible to raise the level of corporation tax beyond 52 per cent. That would have been a way of bringing money into the Government and thereby reducing the borrowing requirement. We did not want to do that because we realised that it might be damaging. We wanted to find a way of increasing the yield from the company sector in the year 1974 to help us with the borrowing requirement but without forcing the company sector to pay more tax in total than was necessary for other purposes.
This is what we have done in the ACT supplement. The curious thing is that to declare such a higher rate of corporation tax in respect of the profits of the year 1973 would not have been regarded as retrospective; it is part of the ordinary system. Here all that is being done is that the overwhelming majority of companies are being asked to advance the date on which they pay some of their corporation tax liability.
This is surely different from raising the rate of corporation tax, since it is purely fortuitous. It means that if a company happens to decide that it will pay dividend one or two days late or early, then, as a result of that fortuitous decision, it will have to bear an extra tax imposition. That is different from the situation where the Chancellor in his Budget raises corporation tax to 52 per cent. It is the fortuitous nature of the Clause to which we are objecting.
I do not agree that this is quite different. The question we are considering is what companies know when they make their decision on dividends. They do not know what will be the level of corporation tax in 1973, they certainly do not know that when they decide to declare their dividend, and they do not know about any ACT supplement. All the ACT supplement does it to bring forward the payment of their corporation tax liability.
There is a fundamental difference because, on the whole, a company does not budget to make lower profits because it hears that taxation has gone up; it wants to maximise profits. But when it comes to distribution, the decision that has to be made is: "How much do we pay? What will it cost us in terms of cash and advance corporation tax?" The right hon. Gentleman is not making a valid point in this respect.
This is the point about the ACT supplement. It does not cost them more, because it is offset against corporation tax liability. They have to pay some of their corporation tax liability earlier. They are not being asked to pay more. The question is: what did they know when they made their dividend decision? They did not know about the rate of corporation tax or about this ACT supplement. All they are being asked to do is to advance the payment of their corporation tax liability.
May I put the point simply, as a chairman deciding whether to declare a dividend and, if so, how much? He makes certain assumptions about the rate of corporation tax, and there are indications as to what that might be. Most people will calculate this at roughly 50 per cent, and it might be 2 per cent, or 3 per cent, more, as it has turned out to be. However, a chairman would not assess an additional surcharge of 50 per cent, above that. If a chairman thought that to be a possibility, his whole attitude towards the amount declared in dividend, or, indeed, in respect of any dividend at all, would be different because of the effect on cash flow.
With respect to the hon. Gentleman, that is making the same point again. I do say that this is not retrospective. The payment is a payment against corporation tax liability, but is made rather earlier than the ordinary tax liability. We discussed earlier the fact that corporation tax liability tends to arise rather late in this country compared with the situation in some other countries. Here a proportion of that liability is brought forward.
It is not an enforced loan in respect of these companies, which will have a mainstream corporation tax liability which will cover the supplement. That applies in the great majority of companies. The other case on which hon. Members have spoken will be dealt with by an amendment to be discussed later. The clause is so worded as to give companies time, if they need it, to accumulate the money to make this payment of the supplement. They have, in respect of distributions covered by the amendment, until 1st September 1974 to pay. This gives them the necessary time.
A point which hon. Members have not raised is whether they intend by the amendment to defer the 12-month supplement beyond the date of 26th March —or whether they want to confine the supplement to the nine months, which is the effect of the amendment. But that would be equally unacceptable because it would delay payments which the Government need to cover the borrowing requirement. We do not regard this provision as retrospective. I cannot see that it is retrospective, and, as retrospection is the core of the argument, I reject the argument.
Surely the position is that a board meeting to decide whether to declare a dividend before 26th March would say, "The law is that if we declare a dividend we shall have to pay so much in ACT and will have to be credited with that amount against corporation tax liability whenever it arises." As a result of Clause 10, however, the board will find that the law is different from what it was when it arrived at its decision. The result will be that the company will have to pay more as an immediate consequence, although it will get credit for the amount later. Is that not a retrospective change in the law?
I do not believe it to be retrospective. Companies pay it on 1st September. I have emphasised several times that this would not be the only piece of knowledge which they would lack when they made their distribution decision. I repeat that, as the core of the argument has been that the provision is retrospective and I deny that argument, I can only recommend my right hon. and hon. Friends to oppose the amendment if it is pressed to a Division.
The hon. Member for Horsham and Crawley (Mr. Hordern) asked about the effect of Statutory Instrument No. 659 in this context. I had come difficulty in understanding all the figures he set out, and I should like to study what he said. But my initial reaction is that it does not have the effect he thinks it had. However, I will look at it to see whether it has such effect.
I find the right hon. Gentleman's arguments wholly unconvincing. He began blandly by saying that the provision is not retrospective because it is so important to helping the Government to reduce the borrowing requirement. Then he pointed out the effect which the amendment would have on the reduction of the borrowing requirement. Later he added to these bald statements the argument that it was not retrospective because it was useful. But he has been very unconvincing.
The right hon. Gentleman even said that part of the argument was that we in this country were lucky because companies in other countries pay corporation tax much earlier. That has nothing to do either with the clause or with the arguments that my hon. Friends have advanced.
The right hon. Gentleman also said that the Government could think of many ways more damaging to industry of reducing the borrowing requirement. 1 have no doubt that they could, but 1 do not think that that is a convincing example. If a man has his hand cut off and is then told that he could have lost both his arms, he will not regard that as much comfort. Of course, this is an interest-free forced loan to the Government and it is quite different from instances of the kind that the right hon. Gentleman quoted.
As my hon. Friend the Member for St. Ives (Mr. Nott) and my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) pointed out, it is known that corporation tax is coming when a dividend is declared. It is known that there will be advance corporation tax on that dividend. What is not known and cannot be known when a dividend decision is made is that the timing and the amount of the dividend—in other words, that decision itself—will change the amount of liability to corporation tax and advance corporation tax.
|Division No. 29.)||AYES||[10.21 p.m.|
|Adley, Robert||Finsberg, Geoffrey||Lamont, Norman|
|Alison, Michael (Barkston Ash)||Fisher, Sir Nigel||Lane, David|
|Allason, James (Hemel Hempstead)||Fletcher, Alexander (Edinburgh, N.)||Langford-Holt, Sir John|
|Amery, Rt. Hn. Julian||Fletcher-Cooke, Charles||Lawrence, Ivan|
|Ancram, M.||Fookes, Miss Janet||Lawson, Nigel (Blaby)|
|Atkins,Rt.Hn.Humphrey(Spellhorne)||Fox, Marcus||Lester, Jim (Beeston)|
|Balniel, Rt. Hn. Lord||Freud, Clement||Lewis, Kenneth (Rtland & Stmford)|
|Barber, Rt. Hn. Anthony||Fry, Peter||Lloyd, Ian (Havant & Waterloo)|
|Beith, A. J.||Galbraith, Hn. T. G.||Loveridge, John|
|Benyon, W.||Gardiner, George (Reigate&Banstead)||Luce, Richard|
|Biffen, John||Gardner, Edward (S. Fylde)||McAdden, Sir Stephen|
|Blaker, Peter||Gibson-Watt, Rt. Hn. David||MacArthur, Ian|
|Boardman, Tom (Leicester, S.)||Gilmour, Sir John (Fife, E.)||Macfarlane, Neil|
|Boscawen, Hon. Robert||Glyn, Dr. Alan||MacGregor, John|
|Bowden,Andrew (Brighton,Kemptown)||Goodhew, Victor||McLaren, Martin|
|Boyson, Dr. Rhodes (Brent, N.)||Goodlad, A.||Macmillan, Rt. Hn. M. (Farnham)|
|Braine, Sir Bernard||Gorst, John||McNair-Wilson, Michael (Newbury)|
|Bray, Ronald||Gow, Ian (Eastbourne)||McNair-Wilson, Patrick (New Forest)|
|Brittan, Leon||Gower, Sir Raymond (Barry)||Madel, David|
|Bruce-Gardyne, J.||Gray, Hamish||Marshall, Michael (Arundel)|
|Bryan, Sir Paul||Grimond, Rt. Hn. J.||Mather, Carol|
|Buchanan-Smith, Allcn||Grist, Ian||Maude, Angus|
|Budgen, Nick||Grylls, Michael||Maxwell-Hyslop, R. J.|
|Bulmer, Esmond||Hall, Sir John||Meyer, Sir Anthony|
|Burden, F. A.||Hall-Davis, A. G. F.||Miller, Hal (B'grove & R'ditch)|
|Burler, Adam (Bosworth)||Hamilton, Michael (Salisbury)||Mills, Peter|
|Carlisle, Mark||Hampson, Dr. Keith||Miscampbell, Norman|
|Carr, Rt. Hn. Robert||Hannam, John||Mitchell, David (Basingstoke)|
|Chalker, Mrs. Lynda||Harrison, Col. Sir Harwood (Eye)||Moate, Roger|
|Channon, Paul||Hastings, Stephen||Money, Ernie|
|Clark, William (Croydon, S.)||Havers, Sir Michael||Monro, Hector|
|Clarke, Kenneth (Rushcliffe)||Hawkins, Paul||Moore, J. E. M. (Croydon, C.)|
|Clegg, Walter||Hayhoe, Barney||Morgan, Geraint|
|Cockcrott, John||Henderson,Barry(Dunbartonshire,E.)||Morris, Michael (Northampton, S.)|
|Cooke, Robert (Bristol, W.)||Hooson, Emlyn||Morrison, Charles (Devizes)|
|Cope, John||Hordern, Peter||Morrison, Peter (City of Chester)|
|Cormack, Patrick||Howe, Rt.Hn. Sir Geoffrey(Surrey,E.)||Neave, Airey|
|Corrie, John||Howell, Ralph (Norfolk, North)||Neubert, Michael|
|Costain, A. P.||Howells, Geralnt (Cardigan)||Newton, Tony (Braintree)|
|Crouch, David||Hunt, John||Nott, John|
|Davies, Rt. Hn. John (Knutsford)||Hurd, Douglas||Onslow, Cranley|
|d'Avigdor-Goldsmid, Maj.-Gen. James||Hutchison, Michael Clark||Oppenheim, Mrs. Sally|
|Dean, Paul (Somerset, N.)||Irvine, Bryant Godman (Rye)||Page, Rt. Hn. Graham (Crosby)|
|Deedes, Rt. Hn. W. F.||Jenkin, Rt.Hn.P. (R'dgeW'std&W'fd)||Page, John (Harrow, W.)|
|Dixon, Piers||Johnson Smith, G. (E. Grinstead)||Pardoe, John|
|Dodsworth, Geoffrey||Johnston, Russell (Inverness)||Parkinson, Cecil (Hertfordshire, S.)|
|Drayson, Burnaby||Jones, Arthur (Daventry)||Pattie, Geoffrey|
|Durant, Tony||Jopling, Michael||Percival, Ian|
|Dykes, Hugh||Kaberry, Sir Donald||Price, David (Eastleigh)|
|Eden, Rt. Hn. Sir John||Kellett-Bowman, Mrs. Elaine||Rathbone, Tim|
|Edwards, Nicholas (Pembroke)||Kimball, Marcus||Rawlinson, Rt. Hn. Sir Peter|
|Elliott, Sir William||King, Evelyn (Dorset, S.)||Redmond, Robert|
|Emery, Peter||King, Tom (Bridgwater)||Rees, Peter (Dover & Deal)|
|Eyre. Reginald||Kirk, Peter||Rees-Davies, W. R.|
|Fairgrieve, Russell||Kitson, Sir Timothy||Renton.Rt. Hn. SlrDavid(H't'gd'ns're)|
|Farr, John||Knight, Mrs. Jill||Renton, R. T. (Mid-Sussex)|
|Fenner. Mrs Peggy||Knox, David|
|Rhys Williams, Sir Brandon||Smith, Dudley (W'wick&L'm'ngton)||van Siraubenzee, W. R.|
|Ridley, Hn. Nicholas||Spence, John||Vaughan, Dr. Gerard|
|Rifkind, Malcolm||Spicer, Jim (Dorset, W.)||Waddlngton, David|
|Rippon, Rt. Hn. Geoffrey||Spicer, Michael (Worcestershire, S.)||Wainwright, Richard (Colne Valley)|
|Roberts, Michael (Cardiff, N.-W.)||Sproat, lain||Wakeham, John|
|Roberts, Wyn (Conway)||Stainton, Keith||Walder, David (Clitheroe)|
|Rodgers, Sir John (Sevenoaks)||Stanbrook, Ivor||Walker, Rt. Hn. Peter (Worcester)|
|Ross, Stephen (Isle of Wight)||Stanley, John||Walker-Smith, Rt. Hn. Sir Derek|
|Rossi, Hugh (Hornsey)||Steel, David||Wells, John|
|Rost, Peter (Derbyshire, S.-E.)||Steen, Anthony (L'pool, Wavertree)||Wiggin, Jerry|
|Sainsbury, Tim||Stewart, Ian (Hitchin)||Winstanley, Dr. Michael|
|Scott-Hopkins, James||Stodart, Rt. Hn. A. (Edinburgh, W.)||Winterton, Nicholas|
|Shaw, Giles (Pudsey)||Stokes, John||Worsley, Sir Marcus|
|Shaw, Michael (Scarborough)||Tapsell, Peter||Younger, Hn. George|
|Shelton, William (L'mb'th.Streath'm)||Taylor, Edward M. (Gl'gow, C'cart)|
|Shersby, Michael||Tebbit, Norman||TELLERS FOR THE AYES:|
|Silvester, Fred||Thatcher, Rt. Hn. Margaret||Mr. John Stradling Thomas and|
|Sims, Roger||Thomas, Rt. Hn. P. (B'net.H'dn S.)||Mr. Spencer Le Marchant.|
|Skeet, T. H. H.||Trotter, Neville|
|Smith, Cyril (Rochdale)||Tyler, Paul|
|Allaun, Frank||Eadie, Alex||Judd, Frank|
|Archer, Peter (Warley, West)||Edelman, Maurice||Kaufman, Gerald|
|Armstrong, Ernest||Edge, Geoff||Kelley, Richard|
|Ashley, Jack||Ellis, John (Brlgg & Scunthorpe)||Kllroy-Silk, Robert|
|Ashlon, Joe||Ellis, Tom (Wrexham)||Kinnock, Neil|
|Atkins, Ronald (Preston, N.)||English, Michael||Lambie, David|
|Atkinson, Norman||Evans, Fred (Caerphilly)||Lamborn, Harry|
|Bagier, Gordon, A. T.||Evans, loan (Aberdare)||Lamond, James|
|Barnett, Guy (Greenwich)||Evans, John (Newton)||Latham, Arthur(CityofW'mlnsterP'ton)|
|Barnett, Joel (Heywood & Royton)||Ewing, Harry (Sfling.F'kirk&G'm'th)||Lawson, George (Motherwell&Wishaw)|
|Bates, Alf||Faulds, Andrew||Leadbitter, Ted|
|Bennett, Andrew F. (Stockport, N.)||Fernyhough, Rt. Hn. E.||Lee, John|
|Bidwell, Sydney||Fitch, Alan (Wigan)||Lestor, Miss Joan (Eton & Slough)|
|Bishop, E. S.||Flannery, Martin||Lever, Rt. Hn. Harold|
|Blenkinsop, Arthur||Fletcher, Ted (Darlington)||Lewis, Ron (Carlisle)|
|Booth, Albert||Foot, Rt. Hn. Michael||Lipton, Marcus|
|Boothrcyd, Miss Betty||Ford, Ben||Lomas, Kenneth|
|Boyden, James (Bishop Auckland)||Forrester, John||Loughlin, Charles|
|Bradley, Tom||Fraser, John (Lambeth, Norwood)||Loyden, Eddie|
|Broughton, Sir Alfred||Freeson, Reginald||McElhone, Frank|
|Brown, Hugh D. (Glasgow, Prauan)||Garrett, John (Norwich, S.)||MacFarquhar, Roderick|
|Buchan, Norman||Garrett, W. E. (Wallsend)||McGuire, Michael|
|Buchanan,Richard(G'gow,Springbrn)||George, Bruce||Mackenzie, Gregor|
|Callaghan, Jim (M'dd'ton & Pr'wlch)||Gilbert, Dr. John||Maclennan. Robert|
|Campbell, Ian||Gourlay, Harry||McMillan, Tom (Glasgow, C.)|
|Cant, R. B.||Graham, Ted||McNamara, Kevin|
|Carmichael, Neil||Grant, George (Morpeth)||Madden, M. 0. F.|
|Carter, Ray||Grant, John (Islington, C.)||Mahon, Simon|
|Catter-Jones, Lewis||Griffiths, Eddie (Sheffield, Brightside)||Mallalieu, J. P. W.|
|Castle, Rt. Hn. Barbara||Hamilton, James (Bothwell)||Marks, Kenneth|
|Ciemitson, Ivor||Hamilton, William (Fife, C.)||Marquand, David|
|Cocks, Michael||Hamling, William||Marshall, Dr. Edmund (Goole)|
|Cohen, Stanley||Hardy, Peter||Playhew, Christopher (G'wh.W'wch.E)|
|Coleman, Donald||Harper, Joseph||Meacher, Michael|
|Colquhoun, Mrs. M. N.||Harrison, Walter (Wakefield)||Mellish, Rt. Hn. Robert|
|Concannon, J. D.||Hart, Rt. Hn. Judith||Mendelson, John|
|Conlan, Bernard||Hattersley, Roy||Millan, Bruce|
|Cook, Robert F. (Edinburgh, C.)||Hatton, Frank||Miller, Dr. M. S. (E. Kilbride)|
|Craigen, J. M. (G'gow, Maryhill)||Healey, Rt. Hn. Denis||Milne, Edward|
|Crcnin. John||Hefler, Eric S.||Mitchell, R. C. (S'hampton, Itchen)|
|Crosland, Rt. Hn. Anthony||Hooley, Frank||Moonman, Eric|
|Cryer, G. R.||Horam, John||Morris, Alfred (Wythenshawe)|
|Cunningham,G.(lsl'rvgt'n,S&F'sb'ry)||Huckfield, Leslie||Morris, Charles R. (Openshaw)|
|Cunningham,Dr.JohnA.(Whiteh'v'n)||Hughes, Rt. Hn. Cledwyn (Anglesey)||Morris, Rt. Hn. John (Aberavon)|
|Dalyell, Tarn||Hughes, Mark (Durham)||Moyle, Roland|
|Davidson, Arthur||Hughes, Robert (Aberdeen, North)||Mulley, Rt. Hn. Frederick|
|Davies, Denzil (Llanelli)||Hughes, Roy (Newport)||Murray, Ronald King|
|Davies, Hor (Gower)||Hunter, Adam||Newens, Stanley (Harlow)|
|Davis, Clinton (Hackney, C.)||Irvine, Rt. Hn. Sir A. (L'p'I.EdgeHill)||Oakes, Gordon|
|Deakins, Eric||Irving, Rt. Hn. Sydney (Dartford)||Ogden, Eric|
|Dean, Joseph (Leeds, W.)||Jackson, Colin||O'Halloran, Michael|
|de Freitas, Rt. Hn. Sir Geoffrey||Janner, Greville||O'Malley, Brian|
|Deiargy, Hugh||Jay, Rt. Hn. Douglas||Orbach, Maurice|
|Dell, Rt. Hn. Edmund||Jenkins, Hugh (W'worth, Putney)||Ovenden, John|
|Dempsey, James||John, Brynmor||Owen, Dr. David|
|Doig, Peter||Johnson,James(K'ston upon Hull.W)||Padley, Walter|
|Dormant), J. D.||Johnson, Walter (Derby, S.)||Palmer, Arthur|
|Duffy, A. E. P.||Jones, Barry (Flint, E.)||Park, George (Coventry, N.E.)|
|Dunn, James A.||Jones, Dan (Burnley)||Parry, Robert|
|Dunnett, Jack||Jones, Gwynoro (Carmarthen)||Pavltt, Laurlo|
|Dunwoody, Mrs. Gwyneth||Jones, Alec (Rhondda)||Peart, Rt. Hn. Fred|
|Pendry, Tom||Short, Rt. Hn. E. (N'ctle-u-Tyne)||Tuck, Raphael|
|Perry, Ernest G.||Silkin, Rt. Hn. John (L'sham.D'ford)||Urwln, T. W.|
|Phipps, Or. Colin||Silkln,Rt.Hn.S.C.(S'hwark,Dulwich)||Varley, Rt. Hn. Eric G.|
|Prescott, John||Sillars, James||Wainwright, Edwin (Dearne Valley)|
|Price, Christopher (Lewisham, W.)||Silverman, Julius||Walden, Brian (B'm'ham, Ladywood)|
|Price, William (Rugby)||Skinner, Dennis||Walker, Harold (Doncaster)|
|Radice, Giles||Smith, John (Lanarkshire, N.)||Walker, Terry (Kingswood)|
|Richardson, Miss Jo||Snape, Peter||Watklns, David|
|Roberts, Albert (Normanton)||Spriggs, Leslie||White, James|
|Roberts, Gwilym (Cannock)||Stewart, Rt. Hn. M. (H'sth, Fulh'm)||Wigley, Dafydd (Caernarvon)|
|Roderick, Caerwyn E.||Stoddart, David (Swindon)||Willey, Rt. Hn. Frederick|
|Rodgers, George (Chorley)||Stonehouse, Rt. Hn. John||Williams, Alan (Swansea, W.)|
|Rooker, J. W.||Stott, Roger||Williams,Rt.Hn. Shirley(H'f'd&St'ge)|
|Roper, John||Strang, Gavin||Williams, W. T. (Warrington)|
|Rose, Paul B.||Strauss, Rt. Hn. G. R.||Wilson, William (Coventry, S.E.)|
|Ross, Rt. Hn. William (Kilmarnock)||Summerskill, Hn. Dr. Shirley||Wise, Mrs. Audrey|
|Rowlands, Edward||Swain, Thomas||Woodall, Alec|
|Sandelson, Neville||Thomas, D. E. (Merioneth)||Woof, Robert|
|Sedgemore, Bryan||Thomas, Jeffrey (Abertillery)||Wrigglesworth, Ian|
|Selby, Harry||Thorne, Stan (Preston, S.)||Young, David (Bolton, E.)|
|Shaw, Arnold (Redbridge,Ilford, S.)||Tlerney, Sydney||TELLERS FOR THE NOES:|
|Sheldon, Robert (Ashton-under-Lyne)||Tinn, James||Mr. John Golding and|
|Shore, Rt. Hn. Peter (S'pney&P'plar)||Torney, Tom||Mr. Thomas Cox.|
The First Deputy Chairman:
With this amendment it will be convenient for the Committee to discuss Amendment No. 44, in page 8, line 18, at end insert—
'(9) In the case of a company being an authorised unit trust or an investment trust the additional payment which the company is liable to make under this section where it is liable to pay such an amount of advance corporation tax as is mentioned in subsection (1) above instead of being one-half of that amount shall be one-half of what that amount would have been if income of the company on which income tax had been borne by deduction were treated as franked investment income.
(10) In this section "authorised unit trust" has the meaning given in section 358 of the Taxes Act and "investment trust" has the meaning given in section 359 of that Act'.
As the Committee will appreciate, Amendment No. 44 is consequential on Amendment No. 43.
This is a very modest amendment designed to relieve certain unit trusts and investment trusts from the full impact of the clause. I am certain that, away from the heady atmosphere of Blackpool, right hon. and hon. Members on the Government side of the Committee must nourish a certain affection for unit and investment trusts as providing a means for the small investor to acquire a stake in our economy and, indeed, foreign economies.
Bearing in mind the lateness of the hour, I hope that the Committee will forgive me for descending for a moment into the technical background to the amendment. For those companies whose income is largely franked investment income, advance corporation tax holds no terrors because, shortly, they do not pay any. For those companies whose income is largely trading profits, advance corporation tax holds some terrors; and indeed, bearing in mind the anomalies disclosed in the previous debate, perhaps more as a result of the clause. But they at least are able to set their advance corporation tax against their mainstream corporation tax. But for those whose income is not franked—investment income and not trading profits—in other words, if it is derived from foreign companies, gilt- edged securities or certain forms of interest, advance corporation tax bears doubly hard because they receive their income under deduction of tax and then when they distribute it they have to pay advance corporation tax. Thus in a sense this represents a double anticipation of the mainstream corporation tax.
This problem is compounded by Clause 10. The normal company can avoid this double charge of advance corporation tax by matching its distributions with its franked investment income or trading profits.
Some close companies may be in difficulty and no doubt the Chief Secretary may want to look at their case in due course. But unit trusts and investment trusts are in particular difficulties, unit trusts because under their constitution they have almost invariably to distribute the greater part of their income and investment trusts, if they are authorised investment trusts, because they are obliged to distribute 85 per cent, or more of their income. If their income is unfranked they will find that advance corporation tax will bear particularly hard on them and with any additional charge under Clause 10 they may be in considerable difficulties.
The Chief Secretary may not have realised that some unit trusts and investment trusts may not have sufficient current income to pay the distributions required of them by law and advance corporation tax and the advance corporation tax surcharge. In that situation they would probably have to have recourse to capital. I have searched the Budget speech in vain to see whether there was any evidence that this was the intention of the Chancellor when he uncovered Clause 10.
Another consequence of Clause 10 as it stands is that unit trusts and investment trusts may be discouraged from investing their funds in gilt-edged securities and foreign companies. Again, I should be surprised if this were the intention of the Chancellor when he introduced Clause 10.
Therefore, the amendment would allow a limited class of unit trusts and investment trusts, those defined in the Income and Corporation Taxes Act 1970, to treat the income they receive under deduction of tax as though it were received from United Kingdom companies.
Right hon. and hon. Members on the Government side of Committee have endeavoured to convince us and the business community with bland words that they are particularly tender about their interests. I hope therefore that they look with favour on this modest amendment which endeavours to put right a possibly unintended hardship which results from Clause 10.
Mr. Joel Burnett:
I feel inclined to tell my right hon. and hon. Friends and hon. Members opposite about franked investment income and unfranked investment income. I am sure they would find this fascinating, but, looking at the time, I feel that perhaps I should not do so. I suspect that the speech we have just heard from the hon. and learned Member for Dover and Deal (Mr. Rees) may have been his maiden speech from the Front Bench. If it were, I congratulate him. If it were not, it does not matter.
The taxation of unit trusts and investment companies is somewhat complicated, as the hon. and learned Gentleman knows only too well. I have some sympathy with the case he has presented, although he has not presented all the arguments, as he would be the first to admit. No doubt he omitted them because of the hour, but the main arguments he omitted were not those that favoured his amendment.
Let me make it quite clear, first, that the vast bulk of trusts' investment is in share capital, and the income therefrom is distributed to unit holders without involving liability to ACT or to the supplement. Many trusts manage their portfolios so that the receipts of unfranked income no more than balance the sum of their management expenses—running costs, salaries and so on—and any interest charges which they have to pay. In such cases, no part, or only a small amount, of such income is available for distribution. That gives hon. Members on both sides of the Committee some idea of how simple the taxation of this type of company is.
There are two other reasons why I cannot in any case readily accept the amendment. First, on the technical level, it would give too much relief. Secondly, if it were conceded as it stands I believe we should receive representations from banks, finance houses, discount houses and so on for a similar concession, and I am not sure that we should want to give it.
However, in view of the hour, the admirable way in which the hon. and learned Gentleman presented his amendment, and the fact that I like him as well sometimes—though not sufficiently to accept the amendment—I am prepared to say that I shall consider the amendment and see whether I can go some way towards meeting the hon. and learned Gentleman's point.
I thank the Chief Secretary for what he has said. We shall have an opportunity to discuss the taxation of unit trusts and investment trust companies when we consider Clause 8 upstairs. In view of the complexity of the subject, the lateness of the hour, and the Chief Secretary's undertaking, I hope that my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) will seek leave to withdraw the amendment.
I beg to move Amendment No. 39, in page 6, line 45, after 'period', insert
'or in the case of a parent company, where the company makes a claim, the payment shall be deemed to be made on account of its subsidiary's liability to corporation tax for the relevant accounting period'.
With this we are to discuss Amendment No. 40, in page 7, line 2, leave out 'that liability' and insert
'the company's liability referred to in this subsection, or in the case where a claim is made, the company's liability together with the liability of its subsidiary or subsidiaries'.
The amendments are in a sense almost technical. They are designed to remedy a defect in the clause which I am sure was not intended.
In practice it is often the case in a group of companies for the parent company to pay the dividend arising out of the profits of the whole group and to incur the liability for the group's advance corporation tax, while the greater part of the mainstream tax is borne by the subsidiaries. The due date of payment of mainstream corporation tax for the parent is often later than its subsidiaries, because of the delay in agreeing computations involving overseas income.
For example, groups such as Courtaulds, ICI or Unilever, with both United Kingdom and overseas subsidiaries, will generally, as the parent companies, declare the dividend and incur the liability for, and pay, ACT. But the subsidiary companies, especially overseas companies, may well settle their tax computations long before the tax computation of the parent company is settled, particularly where there are problems with double taxation relief, and so on. That means that the parent company has to wait until the final tax computation has been settled before it can claim an offset or repayment, if it is due, of the advance corporation tax. I am sure that that is not intended. It means an undue and unnecessary delay in settling such matters. I hope that I have only to bring the amendment to the attention of the Chief Secretary to ensure that it will be accepted.
This is another interesting amendment. Indeed, it is fascinating. If there are a number of companies within a group that are liable to a supplement on ACT, and there are other companies in the group in the situation described, it could be unfair to operate this provision. On the other hand, group relief works in such a way as to ensure that it is taken as one, as it were, for tax purposes. But the amendment seems to go further than one might want to go. For example, it would put a single company inside a group in a better position than a single company outside a group.
I must repeat that I have some considerable sympathy with the amendment. I cannot accept it because there are a number of factors that demand consideration—for example, whether concessions could be made for this type of amendment and the effect that that would have on other amendments. There is also the fact that the amendment does not define what is meant by subsidiaries. I cannot accept the amendment but I can assure the hon. Gentleman that I am prepared to consider the matter. I hope that he will be prepared to leave it at that.
I confess to a sense of some disappointment in that the Chief Secretary has not been able to accept the amendment. Nevertheless, I am grateful to him for saying that he is prepared to consider the matter and perhaps bring in his own amendments to give effect to the principle behind my amendment. I beg to ask leave to withdraw the amendment.
I beg to move Amendment No. 25, in page 7, line 30, at end insert:
'or on the date when the liability for such corporation tax is established, or on the date on which an amount of such corporation tax is either not in dispute or agreed under section 55 of the Taxes Management Act 1970, whichever is the earliest'.
This is a quite simple amendment. It relates to the question whether a company having paid advance corporation tax— accelerated corporation tax—should wait, if the mainstream corporation tax is not sufficient for the extra 50 per cent., until the corporation tax is due for repayment. That could hurt many companies. I am sure that the Chief Secretary will be kind in view of the brevity of my remarks.
As the hon. Gentleman knows, I have always respected his views. He is a member of my accountancy profession and association. He has presented his argument with great clarity. I only wish that every amendment were moved so briefly and succinctly.
If a company is liable to ACT and the supplement, because it has paid a dividend, but is not liable to corporation tax because of substantial capital allowances or all kinds of reasons, there is a clear case for saying that the ACT should be levied with or without the supplement.
On the other hand, the second part of the amendment, I am sorry to say, is far from clear. Often there are what are called estimated assessments on companies when accounts have not been agreed, either because they have not been submitted or because they have been submitted but various queries arise on them. Sometimes part of the assessment is cleared and paid on account, as it were. It does not mean that the whole of the rest of the corporation tax in the assessment, or certainly a good part of it, will not then be payable. That makes the second part of the amendment defective. Therefore, I cannot accept the amendment as it stands.
There is also the possibility that we might be able to deal with this problem administratively by ensuring that inspectors of taxes and collectors who would be making the repayment would be able to do so with or without such an amendment. I assure the Committee that I appreciate what the hon. Gentleman has in mind. I have considerable sympathy with it and I will ensure that it is examined to see whether we can fit it in.
I am grateful to the hon. Gentleman. In his usual generous way he has half accepted the amendment. When he says that he will give instructions to the Inland Revenue, I hope he will make it absolutely clear that where there is a difference between the inspector and the taxpayer over the assessment of profits, and the amount involved is trivial but the amount of the accelerated advance corporation tax is fairly substantial, the repayment should be made as early as possible.
I certainly would not want to give the impression that I have it in mind to instruct inspectors of taxes, especially after my career when they have been instructing me for many years.
I was not suggesting for a moment that the Chief Secretary would ever dare to instruct the Revenue. He holds a position which enables him to advise the Revenue. Despite his background the Inland Revenue will perhaps pay attention to him. In view of his assurance, I beg to ask leave to withdraw the amendment.
I beg to move Amendment No. 32, in page 8, line 14, after 'commenced', insert 'on or'.
One lives in eternal hope of success, however small. On the face of it, subsection (8) deals with the affairs of a company which is being wound up. It tells what happens if the winding-up starts before 1st January 1974 or after that date. It does not appear to say what happens if someone started the winding-up on 1st January 1974. I shall be grateful for the Chief Secretary's comments and even more grateful for his agreement.
I am obliged to the hon. Gentleman for the way he has moved the amendment. It is typical of accountants in this Committee. How well they speak to amendments!The hon. Gentleman has hit upon it exactly. The clause was drafted on the assumption that as New Year's Day had been declared a bank holiday under the Banking and Financial Dealings Act 1971 no company would begin winding-up on that day. We are now advised that this may not necessarily be the case and the amendment can be accepted without reservation.
The amendments clarify and make more secure the assessment and enforcement mechanics relating to the supplement on advance corporation tax. The present wording of subsection (9), which it is now proposed to amend, does not make sufficiently clear that an assessment to the supplement should be possible, even though the amount due has been paid, in order to recover interest for the period between the due date and the date of actual payment. There is a risk therefore that a company could delay payment of the supplement and avoid an interest charge by paying the supplement just before the assessment is made.
The statutory background is that under Section 69 of the Taxes Management Act 1970 interest on unpaid tax is to be treated for collection and enforcement purposes as if it were tax charged and due and payable under the assessment to which it relates. It follows that where there is no assessment the interest cannot be treated as if it were tax charged under such assessment. The present wording of subsection (9) provides that the supplement
may be recovered by an assessment
and it seems at least arguable that there is therefore no power to assess solely for interest recovery purposes where the supplement itself has been paid. The proposed amendments will ensure that the subsection works as intended.
I was seeking to do what I understood the Opposition wanted. I understood that they wanted to have the main debate on Clause 10 on the next day's sitting on the Floor of the House. I moved the motion to report Progress in order to accommodate that desire. If the Opposition have changed their mind and want the debate on the Question, "That the clause, as amended, stand part of the Bill" to take place now, they should say so.
Perhaps the usual channels have not spoken as clearly as I thought they usually did. I thought we had agreed that we should complete the debate on Clause 10, and we should have been prepared to accede to that, but in view of the motion moved by the right hon. Gentleman we are prepared to stop now and have the debate on the clause when we resume at our next sitting.
I must make it clear that I moved the motion because I understood that was what the Opposition wanted. If the Opposition have decided that they do not want the main debate on the clause after the Whitsun Recess, it can take place now. If they want to have that debate after the recess, that will be satisfactory to the Government, but I should not like to think that as a result of the Government's accommodating the Opposition in this way further amendments will be put down to the clause and we shall not be able to debate the clause itself as the first business on the next day which is devoted to the Finance Bill in Committee of the whole House.
There has been a genuine misunderstanding. We are perfectly prepared to cease further consideration of the Bill now, and I give the right hon. Gentleman the assurance that my right hon. Friends and I have no intention of flooding the Amendment Paper with further amendments to Clause 10 prior to the main debate on the clause. I cannot, of course, order right hon. and hon. Members to do anything any more than the right hon. Gentleman can do so, but I assure the Committee of the intentions of myself and those of my right hon. Friends who are conducting this debate.