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New Clauser—(Provision As To Deduction In Computing Excess Profits)

Volume 390: debated on Thursday 3 June 1943

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(1) In Subsection (2) of Section thirty-three Of the Finance Act, 1940 (which deals with

the computation of profits for excess profits-tax), the following proviso shall be inserted after the words "as the Commissioners think proper,"—

Provided that, no such deduction shall be treated in such a manner as to increase the amount of the liability to the excess profits tax above the amount which would have been payable if the expenditure represented by the deduction had not been incurred.

2) The amendment effected by this section shall have effect with respect to tax for all

chargeable accounting periods, whether before or after the passing of this Act.—[ Mr. Craven-Ellis.]

Brought up, and read the First, time.

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

The object of this new Clause is to endeavour to get rid of what many Members consider to be a great injustice under the Excess Profits Tax. I would refer the Chancellor to Subsection (2) of Section 33 of the 1940 Finance Act, in which the Commissioner has the opportunity of accepting or not accepting definite expenditure, say for repairs, and of deciding that the expenditure shall be spread over a period. He has, to a large extent, to investigate when similar repairs were required previous to the expenditure in question. It may be decided, that the period is to years and the Commissioner will say that the expenditure shall be spread over 10 years. I will quote one or two figures. I do not intend to burden the Committee with the whole of a complicated statement which I have prepared to support my Clause, so I will hand it to the Chancellor when I have finished. Suppose there is an expenditure of £10,000 in 1941. That is spread over Io years, which means that in that year only one-tenth is brought into account. The balance is carried back to previous accounts. These accounts can be re-opened, and I should like to ask the Chancellor whether the Statute of Limitations does not come into question? If the 10 years is the period of spread, what will be the position for those years which do not come within the six years in which it is allowed to re-open the accounts? I should like the Chancellor to give the Treasury view on that point.

The £10,000 having been treated in this way, it means that in 1941 the profits would be increased by nine-tenths. Then the one-tenth will be accounted for in the accounting period in question, that is 1941. This means that the total payment of E.P.T. is £10,000. It is true that Income Tax is lost by the Exchequer to the extent of £5,000. What is the position in subsequent years? This is a point I want to stress, because it seems to me that there is some injustice in the operation of this Section. It means first that the profits are increased by the reduction of standard profit by £10,000 a year. Then there is the question of capital adjustment. I am taking the period from 1941 when the expenditure was incurred to 1947 to give an example of the effect of the cost in terms of E.P.T. The result of this decision by the Commissioner is rather interesting but somewhat alarming. It means that in seven years the E.P.T. payable is more than twice the amount of the cost of the repairs. It is made up in this way. The cost of the full allowance in 1941 is £10,000, the cost of the decrease in Standard profit for 1942–47 £10,000, and the cost of the consequential capital readjustment £4,132. From 1941 to 1947 the total cost which is incurred for this £10,000 expenditure is £20,132 and it will continue accumulating as long as E.P.T. is on the Statute Book.

I am the last to say that there should be any profit in war, but I must draw the attention of the Committee to the possibility of these anomalies. They are not intentional and it is how things work out, but when anomalies arise we must try to correct them. If these anomalies are not adjusted, I fear that we shall shake the whole foundation of industry. If we do that we shall be in a difficult position in regard to getting full employment when the war is over. We must have regard to what the post-war position may be, however sincere and determined we are that the first consideration must be the wining of the war. Charging expenditure on repairs in this way is no encouragement for the owners of industrial property to keep them in proper repair. We do not want to have a policy of taxation which will lead to a lower standard in that respect.

As my hon. Friend recognises, these points are a little difficult to follow in Debate. My right hon. Friend will certainly look at the Case which my, hon. Friend has put forward and the table of figures which he has prepared with regard to it. We cannot accept the principle in the new Clause and I feel sure that my hon. Friend will not press it. The principle is that

"no deduction shall be treated in such a manner as to increase the amount of the liability to the Excess Profits Tax above the amount which would have been payable if the expenditure represented by the deduction had not been incurred."
If you are dealing solely with expenditure in the chargeable period no doubt that is a principle on which one can work to see how far there can be any departures from it. But if you consider an expenditure covering more than one year of the standard period which obviously has to beg, spread back, then necessarily the taxpayer's liability would be greater. I understand from what my hon. Friend said that the case he has in mind is one in which the expenditure was made in the chargeable period and was then spread backwards. I do not think the Statute of Limitations comes into it, because that really deals with the question of how far you can recover money or tax by legal process. The point of this Section is to enable sums payable in one year to be spread over other years in order to arrive at the proper figure. I hope that my hon. Friend will be content with the assurance of my right hon. Friend that he will look into this case.

On that assurance and that explanation I beg to ask leave to withdraw the Clause.

Motion and Clause, by leave, withdrawn.