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New Clause—(Amendment Of Limit On Amount Allowable As Deduction In Respect Of Directors' Remuneration)

Volume 440: debated on Wednesday 16 July 1947

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In paragraph 11 of the Fourth Schedule to the Finance Act, 1937 (which limits the amount of the deduction to he allowed in respect of the remuneration of certain directors in computing for the purposes of profits tax the profits arising from a trade or business carried on by a company in which the directors have a controlling interest), for the words "fifteen hundred pounds" wherever those words occur there shall be substituted the words "two thousand five hundred pounds." —[ The Solicitor-General.]

Brought up, and read the First time.

4.15 p.m.

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

Hon. Members will know that the Profits Tax is really assessed on the principles of the National Defence Contribution, to which it is a successor. The 1937 Act, which governs the basis of National Defence Contribution, lays it down, in paragraph 11 of the Fourth Schedule, that the amount which may be deducted, in computing profits as remuneration of directors other than whole-time service directors not earning more than 5 per cent. of the ordinary share capital, in the case of director-controlled companies, is not to exceed £1,500 or 15 per cent. of the profits, subject to an overall limit of £15,000. The £1,500 will, of course, apply only to small companies whose profits are not more than £10,000. It was represented during the Committee stage that in present circumstances the limit ought to be raised, and this Clause seeks to raise it to £2,500. The circumstances which give rise to the necessity for a change are the alteration in the cost of living, and that kind of circumstance. This Clause gives effect to a suggestion which originated from hon. Members opposite.

I do not know whether it is your intention, Mr. Speaker, to call the Amendment to the proposed Clause stand ing in the name of my hon. Friend the Member for Chippenham (Mr. Eccles).

Yes, but I cannot do so until the Clause has been read a Second time. When it has been read a Second time, I shall call the Amendment.

I am much obliged, because that being so, I will postpone the remarks I wished to make, except to thank the right hon. Gentleman for having met us halfway in what we asked. We shall have an opportunity to discuss the other half on the Amendment.

As I understand it, the figures in the Finance Act, 1937, are £1,500 or 15 per cent, of the net profits, whichever is the greater, subject to the overriding maximum of £15,000, and that this allowance does not apply to full-time working directors. Therefore, the whole of this sum is available to part-time directors, but not to full-time directors. In view of that, I should have thought this Clause needed a little more explanation. In any case, it will affect only very small companies.

The intention is that it shall affect only small companies. We have two upper limits, the 15 per cent. or the £1,500, and the limit of £1,500 will apply only where the 15 per cent. is less. Director-controlled companies which are very small, are very similar to partnerships, and this Clause is designed to affect these sort of small companies. After all, this has been part of our taxation legislation since 1937, and all we are doing is to alter the limit. We feel that we have hit on the right limit in the case of the small company, and that we have gone a proper distance towards meeting the suggestions which have been made.

Question put, and agreed to.

Clause read a Second time.

I beg to move, as an Amendment to the proposed Clause. in line 7, at the end, to add:

"and for the words 'fifteen thousand pounds,' there shall be substituted the words 'twenty-five thousand pounds.'"
As I understood the Solicitor-General when we were discussing this Clause, his intention is merely to alter the situation for small companies. If he will cast his mind back, he will remember that we tried at an earlier stage to make a case for all companies. That case was based on the very simple premise, that the value of money has completely changed. Whether we buy services or goods, we have to pay much more—very often double—than we paid before the war. We feel that in the case of director controlled companies, if the Government are going to make a concession, they must make a concession to cover all. No reason has been advanced from the Government Front Bench as to why only small companies should be covered. We want all companies, big or small, to get the same concession in view of the change in the value of money So far as I know, it will not cost the Government very much, and it seems only elementary justice that where circumstances have changed, and the Government admit that, they should make their concessions cover every section of industry, and not only one section

We have carefully considered the suggestion made in this Amendment. The new Clause was the result of our reflection on all the arguments which were adduced and which, as the hon. and gallant Member for New Forest and Christchurch (Colonel Crosthwaite-Eyre) has just said, were directed both to the lower and upper limit. The suggestion was that both should be altered, and what we have proposed is a compromise which affects the lower limit. The £15,000 will affect only the very large director-controlled companies whose profits exceed £100,000. It is a question of degree; the line has to be drawn somewhere, and the question is whether, in the case of the £15,000 limit, it can be said that circumstances require that that should be revised. In the case of the very small concern it is felt that that, being rather like a partnership, and having regard to the changed value of money, is not adequate. But we do not think that the same considerations can be urged with regard to what we consider a generous allowance. It will apply only to companies which are director-controlled, and whose profits exceed £100,000. I am very sorry to say that we feel that no case has been made out with regard to the upper limit, and I must therefore ask the House not to accept the Amendment

The explanation of the hon. and learned Gentleman is not very satisfactory. If we base the change in the figure in this Clause on the change in the value of money, then the value 9f money has changed equally in both cases. If there is a logical case for doing it in one instance, there is equally a logical case for doing it in the other. On the other hand, this goes some way towards what we believe to be fair, and it would be unwise and foolish to expect this Government to see sense all at one go. We are content to accept half sense this time, in the sure and certain belief that when the Chancellor has had a year to think it over, he will realise the full strength of our argument, and will give us the other half next year.

Amendment to the proposed Clause negatived.

Clause added to the Bill.