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New Clause—(Standard Profits Where There Were No Profits In Standard Period Or Profits In That Period Were Low)

Volume 390: debated on Thursday 3 June 1943

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"The references in Sub-sections (5) and (6) of Section twenty-seven of the Finance Act, 1940, to 6 per cent. shall be amended to 8 per cent., and the references to 8 per cent. shall he amended to 10 per cent. This Section applies to any direction of the Commissioners in respect of the standard profits of a trade or business for any chargeable accounting period ending after the end of March, nineteen hundred and forty, subject, however, as respects any such chargeable accounting period which begins before the said end of March to the provisions of Section thirty-three of the Finance Act, 1941."—[ Mr. Colegate.]

Brought up, and read the First time.

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

This new Clause deals with a comparatively small question and concerns almost entirely small businesses. At the present time a small business which had no income during the standard period is limited to earning 6 per cent. on its capital, and on new capital which is raised it is allowed 8 per cent. I am not going into this subject in any detail, but I ask the Chancellor whether he cannot increase the 6 per cent. to 8 per cent. and the 8 per cent. to 10 per cent. The businesses concerned are mostly small businesses which underwent difficult experiences or else were in a period of development. Many of them are paying out in taxation more than the total amount of the income left, because they are only allowed 6 per cent., which is 3 per cent. after payment of Income Tax, and they are not allowed to deduct for Income Tax purposes their war damage premiums and certain other payments. The result is that there are actual instances of businesses, almost entirely very small businesses, where the 6 per cent. does involve the company, after the payment of tax, in an annual loss.

I regret that I cannot advise the Committee to accept this Clause. At this stage I cannot, I am afraid, increase these allowances. I should be in further difficulty if I did so in this case, because if the rate were increased to 10 per cent: the capital of the company would be treated in the same way as new capital, for which at present we are allowing 10 per cent. There was a special reason for that, and that was to encourage capital coming into a business, but if I were to accept this Clause the next thing would be that some of my hon. Friends would come along and say, "We want another 2 per cent. for the new capital," and I should then get to the question of having to allow 12 per cent. I hope the hon. Member will appreciate my difficulties, but I really cannot take this matter further.

I really do not think the Chancellor can expect us to be satisfied with the explanation he has given. I am sure that he does not want injustice to be done, as it is being done at present, to many industrial undertakings, and not only small ones. There are many firms who are in the fortunate position of having had during the standard years very satisfactory profits, which enabled them to pay in pre-war years 10, 15 or 20 per cent. dividends, and it is quite easy for them in the war years to continue to pay such dividends; but there are other concerns which were in the stage of development or were going through a period of depression in the pre-war years and had no profits at all. Their standard was so low that in present circumstances they are contributing immeasurably to the national effort and yet getting less than nothing for doing so. It would be quite easy for the Commissioners of Inland Revenue to bring before the Chancellor convincing facts showing the gross unfairness of the present system towards this type of undertaking. I doubt very much whether, when it was originally suggested that 6 per cent. or 8 per cent. should be a reasonable return on the capital, it was ever expected that we should reach an Income Tax of los. in the pound. If a company makes 6 per cent., the Income Tax reduces it to 3 per cent., and after you have to take out of the small residue the compulsory contributions towards war damage and pay what may be quite a reasonably small reward to the directors of the company, who may be whole-time directors. What inducement is there to such a concern, apart from the impelling motive of doing what they can for the national effort, to expand their business when they will get absolutely no reward?

Further than that, capital has been found by private holders of capital for the development of these businesses at a time when they will receive only this puny reward, and they have no idea whether that capital itself will not be lost or will depreciate considerably after the war when the type of business now being carried on may no longer be required or there may be only half the present volume of work. If the Chancellor wants to do justice all round, he ought to take this special case into consideration. All we are asking for is recognition to the extent of a miserable per cent. It does not sound very much, but it does make a difference whether you get 3 or 3½ or 4 per cent. on your money. In view of the moderation of the demand behind the Clause, I ask the Chancellor whether he will not soften his heart instead of keeping it quite so hard.

Question, "That the Clause be read a Second time," put, and negatived.