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Clause 20—(Interest Paid On Arrears Of Excess Profits Duty Not To Be Allowed As A Deduction)

Volume 155: debated on Wednesday 21 June 1922

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In the computation of any profits or income for the purposes of assessment to Income Tax no deduction shall be allowed in respect of any interest paid on arrears of Excess Profits Duty or Munitions Exchequer payments.

The Amendment of the hon. Member for North-East Derby-hire (Mr. Holmes), to leave out the word "no," is out of order, as it amounts to a negation of the Clause.

Motion made, and Question proposed, "That the Clause stand part of the Bill."

May I point out the effect of this Clause as it stands? If an ordinary single individual carrying on business takes advantage of the arrangement to pay arrears of Excess Profits Duty in instalments, he pays 5 per cent. without deduction of tax, which is equal to 6, per cent. He cannot deduct the interest from the profits of business, whatever the interest may be, before he is assessed to Income Tax. But assume that he is a partner in a firm, or even a single individual making large profits, he cannot deduct the interest before he pays Income Tax, and he cannot deduct it from his income before he pays Super-tax, so in his case he loses also on the Super-tax, and the interest which he pays would be about 9 per cent. or, perhaps, even 10 per cent. In the case of a limited company it is not allowed to deduct for Income Tax or Super-tax or Corporation Profits Tax. I may ignore for the time being the private company when it pays Super-tax, having regard to the fact that Clause 14 has been taken out of the Bill. The limited company loses 5s. in the £ Income Tax. It also loses the Corporation Profits Tax, so that the figure might amount to 7 or 8 per cent. Therefore people who were led by the circular and by the announcement in the Press to think that the Chancellor of the Exchequer was going to allow them to pay their Income Tax by instalments at the rate of 5 per cent., will find that the actual rate varies, according to whether it is the case of a private firm, a partnership whether successful or not, or a limited company, from 6⅔ per cent. to about 10 per cent. The Chancellor of the Exchequer should be able to find a method by which in every case, whether that of a limited company, a well-to-do firm or a small individual trader, the same rate of interest should be paid to the Exchequer.

I am in agreement with what my hon. Friend has said with regard to the effect of the non-allowance of interest on Excess Profits Duty for Income Tax purposes on the amount of interest charged. I believe that the Chancellor is more or less actuated by fear in fixing the rate of interest that he may get the interest and may not get the principal, but I can assure him that this is a very serious matter, and many companies which want to take advantage of the deferred payments system entered into obligations some years ago and during the past year, and they were intensely relieved when they saw that the Chancellor of the Exchequer intended to give time for payment and charge only 5 per cent. But when they come to examine the rate of interest and see that it is 6⅔ per cent., as my hon. Friend has pointed out, and in some eases may go up to 10 per cent., it is a very serious matter indeed, and I would suggest to the right hon. Gentleman that he should make the rate of interest 5 per cent. and let it stay at that, and that that would be equitable for all parties concerned.

I would add my opinion in support of what the hon. Member has said as to the importance of this question of the arrears of Excess Profits Duty. It is a very serious matter for a large number of trading companies. The interest which they pay on these arrears is very severe. Seeing that the general rate of interest has fallen very much, even since this Clause was drafted, I hope that the Chancellor may be able to make some concession in this respect, which I would like to assure him is an admirable one.

I take the same view as the hon. Member for Lime-house (Sir W. Pearce). A body with which I am connected think that a flat rate of 3½ per cent, will be sufficient. As the Clause stands it is not a reasonable one. By prohibiting deduction in respect of interest paid on arrears of Excess Profits Duty, the rate of interest charged is brought up to 6⅔ per cent., and even more, instead of 5 per cent. Six and two-thirds per cent. is an unreasonable price to charge for the accommodation which is given. The Treasury have given this concession of deferred payments—I believe in order to give a direct incentive to people to raise this money as quickly as they can—but many people are not in a position to borrow at all, and for that reason I add my voice to that of those who seek to induce the Chancellor of the Exchequer to reduce what we consider a burden which is unduly severe.

The hon. Member for North-East Derbyshire (Mr. Holmes) was not quite accurate in stating what was the announcement I made in December last with regard to this matter. I made it perfectly plain then that the charge of 5 per cent. interest upon the unpaid instalments was to be without deduction of tax. There need have been absolutely no misapprehension in the minds of the industrial people of this country as to what precisely the proposal was. I understood my hon. Friend to suggest that I had created in the minds of the public, by what I had said, an impression that they were to pay 5 per cent. with a deduction of Income Tax upon that.

I did not make that statement, because I knew it was not the ease. The Chancellor of the Exchequer answered a question of mine on 20th February, and cleared away any doubt on the subject.

Evidently then I have been on a false point. The reasons which led me to make the proposal which I made were, of course, that the business community was finding itself very much hampered by the large arrears of Excess Profits Duty still to be paid. I had various suggestions made to me by representative bodies of business people, and the proposal, 'I afterwards made was based upon some of the suggestions put before me. Those who saw me did not suggest any particular rate of interest, but when I came to deal with the proposal, it seemed to me that if the arrears of Excess Profits Duty were to be allowed to stand for a period of years, necessarily some arrangement would have to be made with regard to interest. What then was an appropriate rate to charge? It is true that to-day the rate of 5 per cent., plus the Income Tax upon it, looks a high rate. At the time when I first made the proposal it did not look so high, and business men at that time were, no doubt, finding a great difficulty in borrowing at less than 5 per cent. To-day they are in a position in which, I understand, they can borrow at something less than the 6⅔ per cent. at which my proposal worked out. That is a good thing.

The criticism was levelled at me that the capitalists of the country were being allowed a latitude which was unnecessary, and that this was an example of the ordinary methods of the Government in granting concessions to people who were rich and doing very little for the rest of the people of the country, and I was asked what assurance I had that the instalments of Excess Profits Duty would be paid in the end, or that the course I was pursuing would be any benefit to the State and the taxpayer. I pointed out what seemed to me to be the very obvious consideration connected with the matter. If the rate of interest is higher than that at which the trader is able to borrow from his bank, obviously my chance of getting the arrears of Excess Profits Duty paid quickly is very much greater. The trader would prefer to go to his bank, to borrow the money, and to pay off the arrears rather than have imposed upon him the burden of paying the higher rate of interest upon the arrears. It is equally obvious that if the rate of interest were reduced to too low a point, the trader, instead of paying off the instalments, would have every inducement to allow the arrears to stand and to pay interest on the overdue instalments rather than to pay them off. Accordingly, the Exchequer would necessarily suffer. My returns in the present year would, under such circumstances, turn out to be less than I had estimated.

The point raised by the hon. Member for Central Cardiff (Mr. Gould) was, no doubt, a symptom of the difficulties and troubles in which the commercial community find themselves. He says that the difficulty is for people whose credit otherwise might be regarded as good, to borrow at all if the banks are aware that a large sum of arrears of Excess Profits Duty is still due. If that be so, I am willing to give some consideration to the argument. I quite appreciate that the difficulties of raising the necessary finance might be such that some companies would find themselves seriously embarrassed or hampered. The problem is to discover what is the best way in which I can at once serve the interests of the taxpayer and preserve the trading community from these difficulties. The proposal which the hon. Member for North-East Derbyshire made is one which I do not think I can accept. If I read his two Amendments together, that on Clause 20 and the other on Clause 24, the result would be that we should have a rate of interest, not of 5 per cent., but of £3 15s. per cent. ultimately as the flat rate of tax. To that I cannot assent. I am willing to make some concession. Obviously, I must not make a concession which will result in giving the trader a clear inducement not to pay the instalments of Excess Profits Duty. I must have a rate at which there will be some encouragement to the trader to pay the instalment rather than to rest upon his present position and to pay the interest. What I suggest is this: I shall reduce the rate from 5 per cent. to 4½ per cent. There will still be no deduction for Income Tax. As the Committee will see, that will work out at a rate of 6 per cent. over all. The reason why I do not fix the rate at 6 per cent. and make a deduction for Income Tax is that administratively the scheme is much more easily worked in the way I suggest. That is the greatest concession which in the circumstances I am able to make.

There is one point which the right hon. Gentleman has not men- tioned and which is of very great concern to us. That is in relation to the private concern liable for Excess Profits Duty. Although he has made a concession to corporations we have not received any material benefit. For even under the 4½ per cent. arrangement, the rate of interest will amount now approximately to 9 per cent. For that reason I hope it is possible for him to make some special allowance to the concerns mentioned. If, for instance, he could give authority for the extension of the time of payment, it would help. There is a great desire on the part of companies to maintain credit and faith and to pay off as quickly as possible their liabilities. I refer particularly to the engineering and shipbuilding industries. The time allowed by the Chancellor of the Exchequer is all too short for the arrears to be wiped off. I accept with grateful thanks the reduction of the interest to 4½ per cent., provided it is understood that the arrangement is not to be altered from time to time. If we accept it, we must be in the position of knowing that if next year this time the rate is raised again, we have a right to review our determination to pay off the instalments. I wish the right hon. Gentleman would consider an extension of the time for payment in certain cases to a period of—

The Chancellor of the Exchequer has missed the whole point that I was trying to make. He says that the rate he is charging people is 6⅔ per cent. The only person to whom this statement applies is the individual who has an income of less than £2,000 a year and does not pay Super-tax. The man who pays Super-tax pays, not 6⅔ per cent., but 7, 8, and even 9 per cent. interest on his arrears. As far as a limited company is concerned, it cannot deduct the interest on Excess Profits Duty arrears either for Income Tax or Corporation Profits Tax. A limited company must always be paying more than 6⅔ per cent. Corporation Profits Tax varies in its incidence, and a company may pay anything up to 8 per cent. or more. It cannot pay as little as 6⅔ per cent., unless it is carried on at a loss and is not paying Corporation Profits Tax at all. The reason given by the Chancellor of the Exchequer for his proposal is an administrative reason. He is charging everybody a different rate, and is proposing a sliding scale according to the size of a man's income and whether or not it is a company that is concerned. That hardly seems to be an equitable arrangement. Surely, whether it is a private company, a public company, an individual or a partnership, everyone ought to pay interest at exactly the same rate.

Question, "That the Clause stand part of the Bill,'' put, and agreed to.

5.0 P.M.

Clauses 21 ( Allocation of income to charity where residue is not paid to charity until after one year of death of testator), 22 (Determination of annual values for purposes of Income Tax under Schedule A and Inhabited House Duty for 1923–24), and 23 (Parishes for purposes of assessment, 1923–24), ordered to stand part of the Bill.