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New Clause—(Changes In Persons Of Directors)

Volume 390: debated on Thursday 3 June 1943

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There shall be added to paragraph so (1) of Part r of the Seventh Schedule to the Finance (No. 2) Act, 1939, as amended by subsection (5) of section thirty-three of the Finance Act, 1940, the following words:

"Provided that if the standard profits of the trade or business are computed by reference to the profits of a standard period and the number or the persons of the directors in the chargeable accounting period have changed since the beginning of the standard period such increase in remuneration may be allowed as the Commissioners consider reasonable and necessary having regard to , the requirements of the trade or business in the chargeable accounting period."Ȕ[Major Gates.]

Brought up, and read the First time.

I beg to move, "That the Clause be read a Second time."

This new Clause is intended to apply to cases where at present, as far as I can see, the Commissioners have no discretion at all. We feel that E.P.T. by its nature depends on comparing the profits of the standard period with the profits of the period of liability, but it is axiomatic that like must be compared with like. No difficulty arises in achieving this object where the company has always been controlled by the directors and where the directors have not changed. The Committee will remember that where the company is under the control of directors their remuneration is disallowed in the standard period and also in the chargeable period. In other words, it is a case of comparing like with like, with the net result that any increase in remuneration is liable. The Finance Act, 1940, quite properly makes provision for the case where the company at one time has been controlled and at another time not controlled, and it does this by saying that no deductions shall be made in respect of directors' remuneration except in so far as the Commissioners otherwise direct. In other words, the Commissioners have discretion to do what is just and equitable within the spirit of the Act. The object of this new Clause is to extend that principle and continue the discretion of the Commissioners to those instances where there has been a change or alteration in the persons of the directors. The Finance Act, 1940, does not cover that situation.

I want to give one example of what we are aiming at. Take the case of a man or woman who was a salaried employee of a company in the standard period and who has since become a director, though still carrying on the same duties as formerly. In the standard period that person's salary is deducted from the profits, thus reducing the standard, but in the chargeable period the director's remuneration, which may be exactly the same as the former salary, cannot be deducted from the profits, as it would be if it were a case of like with like and, therefore, fair and just, simply because his firm, comes within the definition of a company controlled by the directors and is a case where the Commissioners have no discretion. It will be seen from my remarks on the previous new Clause that I am a believer in the discretion of the Commissioners, and we seek to have that discretion extended to this sort of case. Yesterday we were chiefly engaged in the early proceedings in discussing football, and I have been careful to keep the score so far. The Chancellor has not had a single goal scored against him, but I believe that one hon. Member may have crossed the line for a try and will have a chance to convert on the Report stage and to obtain a goal. I am hoping that as this is the first time I have moved anything in this House, I have made some little impression on the Chancellor.

I think that my hon. and gallant Friend gave the best reason for granting his request in the last observation he made. It is one which always appeals to me very much, and I wish I could accede to it. I hope that he will not regard the fact that some of the Amendments have not been carried as indicating that these Debates are a sort of contest between me and the Committee. I am always ready to meet the Committee whenever I can possibly do so, and it may be that as we progress a little a genuine goal may be achieved. I hope that after I have given an explanation of what the practice is my hon. and gallant Friend will be satisfied about the position. As I stated on a previous Clause, under the scheme of the Excess Profits Tax the director-controlled companies are treated, generally speaking, on the same lines as trades or businesses carried on by firms or individuals. In the latter type of cases no deduction is allowable in respect of the remuneration of the proprietor or proprietors. It is therefore appropriate that in the case of director-controlled companies no deduction shall be made in respect of directors' remuneration. That accounts for the fact that by the Finance Act, 1939, as amended by the Finance Act, 1940, a provision of that kind has been made.

It is a fact that the law does not make any special provision for dealing with the case where there is a change in the number or the persons of the directors between the standard period and the chargeable accounting period, but where difficulties arise in such cases they are dealt with as a matter of administration, and such adjustments are made as may be appropriate to the particular case, bearing in mind—I emphasise this—the general principle that the company is to be dealt with on the same lines as a partnership. Thus, if a person was an employee in the standard period and became a director before the chargeable accounting period his remuneration in the standard period is normally allowed to be treated as not deductable, as would be the case in law if he were a partner in a partnership who had been a mere employee in the standard period.

I think I am right in saying that this matter, perhaps in the broader aspect, was considered last year, or on a previous occasion, and I have, replied to one or two of the organisations which have made representations to me by saying that if I accepted this proposal, it would involve the negation of the principle of treating a director-controlled company as if it were a firm. I would also point out to my hon. Friends that if it were pressed to its complete conclusion, it would involve the Revenue authorities in having to adjudicate on "reasonable remuneration" in practically all the cases, and this is obviously a task which they are not particularly anxious to undertake. I hope that with this explanation of what we do administratively my hon. and gallant Friend may be content.

I am not quite sure what the right hon. Gentleman means by "dealt with administratively." If I followed his remark correctly, it would seem that this point is sympathetically dealt with administratively—using his phrase. In that case his information and mine differ, because I have come across instances which have not been dealt with administratively in a sympathetic manner, and that is why we are asking for the Commissioners to have discretion in these cases. There is the obverse of the matter which I have not put: When a manager or important salaried employee of a director-controlled firm dies or leaves, in our present man-power situation the directors may not be able to replace him and may have to do his work themselves. That is what is happening in some small firms. Formerly they would have been able to deduct that late manager's salary from the profits, but if they do the work themselves, they are not allowed to adjust their remuneration for the extra work they do.

I want to put forward two points for the consideration of the Chancellor of the Exchequer. I am sure that he does not want to make it more difficult for industries which are hampered by the shortage of man-power at the present time. If directors go abroad on active service, or die, or are called up to help in some Government Department, it may be necessary to fill the vacancies. One does not want to go outside, but to reward men who have served faithfully and well for many years in some managerial position by promoting them to the board. I am sure the Chancellor does not want to do anything which will hinder that most desirable practice. In the second place, we must have regard to the fact that the Minister of Aircraft Production, and possibly other Ministers, may find it necessary to make changes in directors. There have been cases already in which this has been done, and where it is necessary no one quarrels with it. Ministers may desire to take managers from their managerial positions and put them into positions as directors or managing directors. Those are two types of difficult cases which we are anxious about. We do not want the balance-sheet of the concern to be adversely affected by most desirable changes of that kind. Therefore, I would ask the Chancellor not to make it more difficult for some of us who are faced with this problem, and are hesitating to make changes which we think would be desirable and helpful to the national effort because of the adverse financial consequences which would follow.

I will look into what both hon. Members have said in this connection and give consideration to it and communicate with them.

In view of what the Chancellor of the Exchequer has said, I beg to ask leave to withdraw the Clause, but I would like to say that what is worrying so many of us is this question of promotions. The Army, the Navy, and the Air Force all believe in the principle of promotion and the law as it stands may have the result of preventing promotion.

Motion and Clause, by leave, withdrawn.