Inflation Accounting (Sandilands Report)

– in the House of Commons at 12:00 am on 26th November 1975.

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Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar 12:00 am, 26th November 1975

With permission, Mr. Speaker, I should like to make a statement on the Sandilands Report.

The Report of the Committee on Inflation Accounting under the chairmanship of Mr. Francis Sandilands was published on 4th September as Cmnd. 6225. My right hon. Friend the Chancellor of the Exchequer and I are most grateful to the Committee for the hard work which has gone into producing this detailed and useful Report and for its clear analysis leading to a new and constructive approach.

The main proposal of the Committee is that the system of company accounts should be changed from an historic cost basis to a system known as current cost accounting—CCA—and that this should become mandatory for all listed and certain other companies for accounting periods beginning after 24th December 1977.

Having considered the Report, and taken into account the views of the accountancy profession and others, the Government agree with the Committee that company accounts should allow for the effects of inflation, and that existing accounting conventions do not do so adequately. There are, as the Committee points out, a number of methods of adjusting for inflation, none of which, by itself, completely satisfies all the requirements of users. But the Government agree that current cost accounting, by bringing out the effects of changes in costs and prices on the fixed assets and stocks used in a business, could lead to a better understanding of the economic performance of companies. It accordingly endorses the recommendation that the detailed practical problems should be examined urgently with a view to current cost accounting becoming the future basis for company accounts.

I am pleased to be able to announce that the accountancy profession has agreed to set up a steering group, as recommended by the Committee, to consider further the practical and other issues involved, with a view to the implementation of CCA in company accounts for all periods beginning after 24th December 1977 if this proves feasible. The steering group, which will be chaired by Mr. Douglas Morpeth, will seek my guidance on any general issues arising and will keep me informed of progress. The Government will be prepared to make an appropriate contribution to the costs.

The Government will consider whether guidance is necessary, and in what form, on the amount available for distribution under the proposed accounting system. It is also necessary to consider further the desirability of showing the effects of inflation on the capital invested in the enterprise, having regard to the suggestion of the accountancy profession, and of continuing to provide historic cost figures, as a supplement to CCA figures, at least for a transitional period. I shall, of course, seek the views of the steering group on these questions.

The Committee also makes recommendations on taxation and price control which are independent from the main recommendations on company reporting. Those on taxation will need to be considered separately before the Government are in a position to give their views on them. The Chancellor of the Exchequer has, however, already accepted the principle of stock relief for the tax years ending in 1973 and 1974 and has stated his expectation of continuing it in some form. With regard to price control, the changes proposed by the Committee could in any case take full effect only when companies publish CCA accounts in some years' time. Whilst the Committee's proposals will be taken into account in future reviews of price control, there is no question of amending the present code now.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

Is the Secretary of State aware that the Opposition, particularly those of us who were in office in the Treasury or the Department of Trade and Industry when the Sandilands Committee was appointed, regard this work as being of great importance? We shall certainly wish to join with the Secretary of State in congratulating Mr. Sandilands and the Committee on the quality of their unanimous report. We welcome the establishment of a steering group. With the present rate of inflation, it is more important than ever to get the right solution to inflation accounting and to implement it at the earliest possible moment.

May I, therefore, ask the Secretary of State some questions? We agree with him that the Sandilands proposals for current cost accounting appear preferable to historic cost or current purchasing power accounting. However, he will be aware that controversy has been raging over what one might call, using a sort of shorthand, the Sandilands/Merrett camp, on the one hand, and the Peter Jay/Godley/Cripps camp, on the other hand. However, the statement that the Secretary of State has just made is very oracular on this point. He refers to distribution and capital but not to treatment of monetary assets and liabilities, which has been the main centre of controversy. This is presumably a matter not to be treated by the steering group. What are the right hon. Gentleman's own views on this point, and what scope will there be for debate upon it?

Secondly, on the question of taxation, we understand that this is a matter for his right hon. Friend the Chancellor. None the less, however, will he indicate whether it is yet the Government's view that there should be a major review of taxation of the kind which Sandilands envisages? Presumably, the Government have had adequate time to take a view on this point. Will the right hon. Gentleman also agree that no one—as far as I am aware—is advocating having two sets of accounts, both historic cost and inflation accounts, although he seems to imply that that could be even a permanent arrangement under what he is suggesting? Will he publish immediately the indices necessary for Sandilands to be used on an experimental basis and confirm that no legislation is necessary to make further progress?

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

I am glad that the hon. Gentleman has paid his tribute to the hard work done by the Committee and that he welcomes the general procedure we have outlined for carrying the matter further forward and the studies I have mentioned. On the particular questions he raises, I think that he knows very well that the controversy about how to treat monetary assets and liabilities is one which is raging not only in economic circles but more widely. This is a question to which undoubtedly we shall have to give further consideration and it will no doubt be among the matters dealt with by the steering group. But we are aware of the nature of the controversy and that it raises a number of very difficult and interesting points.

I think that it is not for me to be pressed on the matter of taxation, because my right hon. Friend the Chancellor of the Exchequer will want to say more about that at a later stage.

As regards having two sets of accounts, on the whole it would be undesirable over a substantial period of time, but what I said was that it may be necessary during a transitional period in order to have a kind of continuity of figures for comparative purposes which people may wish to use in considering company accounts.

Finally, I shall certainly consider whether and when indices can be published. I am not expecting any great difficulty.

Photo of Mr John Pardoe Mr John Pardoe , North Cornwall

The House will welcome the right hon. Gentleman's statement. However, is he aware that he did not sound too enthusiastic? Does he accept that these recommendations, if implemented, will have a substantial effect on the profitability of the private sector of industry? Does he regard the present stated level of profits of this sector to be too high, too low or about right?

Is the right hon. Gentleman aware that we feel very disappointed about the date that he gave—24th December 1977—and will he say whether the implementation of the Sandilands proposals will require legislation, or will this simply mean a change in the conventions of the accountancy profession?

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

I pass by any conclusions which can be drawn from the way in which I delivered the statement. It may be that I am still harbouring a slight cold. We shall put that point aside.

On the important questions that were raised, of course this has implications for the private sector of industry and, indeed, perhaps more widely than that. However, we should not exaggerate. What the Sandilands proposals would result in would be a more accurate picture of the general economic performance of companies, taking account of the inevitable distortions that a high rate of inflation undoubtedly brings. What conclusion or what Government policy follows from that is an entirely different and open matter and would have to be very carefully considered.

I do not think that there is a difficulty in regard to legislative change. Certainly there are no immediate difficulties in adopting the new method of current cost accounting, but there may be a problem at the moment at which it becomes mandatory. However, these are questions that we shall consider. If legislation is required and if we think that is the right thing to do as a result of these considerations, we shall come forward with it.

Photo of Dr Jeremy Bray Dr Jeremy Bray , Motherwell and Wishaw

Is my right hon. Friend aware that his announcement will be generally welcome on the Government side of the House—

Photo of Dr Jeremy Bray Dr Jeremy Bray , Motherwell and Wishaw

—but with full appreciation of the very considerable impact it will have not only on company accounting but indeed on the economy generally? Is he aware that we would wish, therefore, to have the statement debated at the earliest possible opportunity so that the appropriate reservations can be made about what response there should be, both in taxation and in company behaviour, in relation to the different picture of company profitability which will emerge? Further, will my right hon. Friend say whether it is his wish that companies should adopt the standards of current cost accounting as soon as possible, before they become mandatory, or whether he wishes them to wait until those standards are published?

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

I thank my hon. Friend for his general but qualified welcome for the statement The question whether individual companies will feel able to go ahead, on a trial basis as it were, and adopt this system must be left for them.

As for arranging a debate, I certainly appreciate that this is a subject which, from the point of view of wider explanation and appreciation of what it is and what it implies, would be particularly appropriate for a debate. However, with the Leader of the House sitting next to me, obviously I have to be very careful about what I say about that.

Photo of Mr Peter Hordern Mr Peter Hordern , Horsham and Crawley

If it is accepted now that CCA should be applied to reported company profits, surely that principle ought also to be applied to margin control by the Price Commission, because otherwise margin control will be applied to profits which are in no sense teal profits—a principle which is accepted by the Government themselves. Surely it must also be applicable to margin control by the Price Commission.

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

As I made clear in my statement, there is no intention of changing the price control during the current period. When my right hon. Friend the Secretary of State for Prices and Consumer Protection comes to look at the Price Code during the coming year, she will no doubt take account of all matters relevant to that review, and if a sufficient firmness of view is forthcoming on the Sandilands Report, no doubt she will consider that, too.

Photo of Mr Bob Cryer Mr Bob Cryer , Keighley

Does my right hon. Friend accept that there is considerable regret on the Government side of the House about the acceptance of CCA, and that we have never regarded the Chairman of Commercial Union as a friend of the British Labour movement? Will my right hon. Friend confirm that if the CCA system is adopted, it will mean handing over hundreds of millions of pounds to the private sector of industry in lost tax revenue, and that the only certain way to ensure proper scrutiny against inbuilt inflation accounting is to extend public ownership to the crucial sectors of the economy and by ensuring that the books of the private sector are much more open to public scrutiny? Has any calculation been made to show the effects on tax revenue if CCA is adopted? If greater allowances are made, what provisions will the Government introduce to ensure that the greater flow of cash will be put into productive investment instead of into fringe benefits and property speculation?

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

The later questions put by my hon. Friend went very much wider than my statement and raised the whole general question of industrial strategy and financial strategy, as I think he will understand. My hon. Friend may be in danger of confusing two separate things. As I understand it, the Sandilands Report is about a way of presenting the accounts of enterprises in a way which most of us accept—[HON. MEMBERS: "No."]—in a way which at least takes account of the impact of inflation in a manner that other systems of accounting have not done. To that extent, I should have thought that it would be helpful and positive, provided that the practical problems can be dealt with.

I understand that what my hon. Friend is concerned about is whether, a different basis of accounting having been established, there would be a whole list of consequential changes affecting tax policy, and so forth. That is a matter which is entirely open and no assumptions are to be made about it.

Tax policy has developed in some areas not closely linked to direct profitability as reported in company accounts. The fact that in the last two years stock appreciation has been excluded from taxable income is an example of how tax policy has come adrift from ordinary accounting as a basis for levying corporation tax.

Photo of Mr Timothy Renton Mr Timothy Renton , Mid Sussex

Will the Secretary of State confirm that he will also be instructing the steering group to look into the concept of holding gains and losses which flow from considering the effect of inflation on monetary assets and liabilities? Is he able to tell the House that the nationalised industries will still be pursuing their present policy and reverting to economic pricing, despite the introduction of current cost accounting?

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

The terms of reference of the Morpeth Committee have not yet been concluded, but I should have thought it right that the group should look at the problems associated with holding gains and losses.

The nationalised industries are a very useful example, in the sense that we may well get a more accurate picture of the genuine profitability, or lack of it, of nationalised industries, but nobody should assume that Governments of either persuasion, knowing the facts about the profitability of nationalised industries, necessarily allow this to be the sole determinant of their pricing policies or indeed of others of their policies in relation to those industries.

Photo of Mr Douglas Crawford Mr Douglas Crawford , Perth and East Perthshire

May I support what was said by the hon. Member for Worthing (Mr. Higgins) and draw the attention of the Minister to the view expressed by, inter alia, the Institute of Chartered Accountants of Scotland that current cost accounting by itself is not a fully comprehensive system of accounting in view of inflation and that we need a more sophisticated system of accounting based, in addition to current cost accounting, on current purchasing power? Does he not agree that the latter is especially important when dealing with non-fixed assets?

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

These are very difficult questions. I note that what the hon. Gentleman said has the authority of the Institute of Chartered Accountants of Scotland behind it, but he will note from the Sandilands Report—no doubt he has already perused it—that the CPP system comes under very serious criticism, not least because it relates cost of living indices figures in a very crude way to the very different circumstances that affect the profitability of separate companies with their very different problems.

Photo of Dennis Skinner Dennis Skinner , Bolsover

Does my right hon. Friend realise that what he is doing today constitutes another episode in a series of making concessions to the private sector and is much in line with Finance for Industry and such things? What it represents is the new mood within the Government, on the one hand, who tell workers, who suffer just as much from inflation as anybody else, possibly more so, "You will have £6 a week and no more, and come the next income policy you may even get less" and, on the other hand, my right hon. Friend, who introduces a device which will enable companies to make even greater profits to clobber the workers even further.

Is it not a scandal that my right hon. Friend has come to the House today of all days, when more than 20,000 workers have marched to the House in the cause of getting rid of unemployment, and is prepared to put even more money into the private sector and to assist in cutting down on the public sector, thereby causing increased unemployment?

Photo of Dennis Skinner Dennis Skinner , Bolsover

And that is why the Tories like the announcement.

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

My hon. Friend has misjudged both the context in which this announcement has been made and, indeed, the consequences of the serious examination of Sandilands which he fears. We are talking about a new system of accounting which we hope will, if all the problems are resolved, be available from about the beginning of 1978. So I am not quite sure that I see its direct relevance to our immediate and very pressing problems, about which I certainly share my hon. Friend's concern.

Secondly, to reflect more accurately, as I hope a system along these lines will, what are genuine problems in no sense prejudges what the Government's policy will be towards the taxation of profits or anything else.