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Profits Tax

Volume 486: debated on Tuesday 10 April 1951

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I now turn back to the problem of filling the gap, and I will refer first to a proposal which will not bring in much revenue this year, but which will, nevertheless, as I shall show, materially reduce the extent of this year's problem. It concerns the Profits Tax. There is no doubt that the level of company profits has recently been increasing rapidly. After a period of relative stability in 1948 and 1949, they are estimated to have increased in 1950 by nearly 14 per cent.—as against a rise in money incomes generally of nearly 7 per cent. A further substantial increase in 1951 is, I think, certain.

There are some who disapprove of profits in principle. I do not share their view. In an economy three-quarters of which is run by private enterprise, it is foolish to ignore the function of profit as an incentive. But it is one thing to recognise the justification for profit in the case of the individual firm as a reward for efficiency—perhaps with an element of luck thrown in; it is quite another to ignore a situation where, by reason of the general economic climate and not through the aptitude of individual managements, the whole level of profits, and the share of the national income taken by it, is rising. Unfortunately, in recent months not only have profits gone up, but dividends have risen too, and I have little doubt that unless some action is taken this process will continue and may even gain momentum.

A good deal less.

The figures published in the "Financial Times" show that ordinary dividends increased by 2 per cent. in the first half of 1950 compared with the corresponding period of the previous year; in the second half of 1950 the increase was 6.7 per cent., while in the first two months of 1951 the increase was 10 per cent. and in March it has been more than 14 per cent.

Over the previous year.

In present circumstances we simply cannot afford such substantial increases in dividends. Whereas a high level of corporate savings is essential, a big increase in dividends not only adds directly to inflationary pressure but also leads to claims for higher wages. I have considered very carefully whether in the circumstances we should not introduce some form of statutory control of dividends. While this is not, in my view, wholly impracticable, it would involve additional administrative work for which the manpower can ill be spared at present. Moreover, it is bound to give rise to all those difficulties associated with the fixing of a base period which were met with in the administration of the Excess Profits Tax and would be encountered again if any tax of this kind had to be reintroduced.

I have therefore come to the conclusion that, though there are arguments both ways, it is better to deal with this problem through the existing Profits Tax. I therefore propose to increase the rate of Profits Tax on distributed profits from 30 per cent. to 50 per cent., with effect from 1st January of this year, while leaving unchanged at 10 per cent. the tax on undistributed profits. If increased dividends are declared on or after today for a period before 1st January, the increase will, as on previous occasions, be subject to the increased rate of tax. The net effect of the increase in the rate of Profits Tax is, of course, only about half as big as appears at first sight because the Profits Tax is allowed as a deduction in arriving at Income Tax assessments.

In this way, we shall provide a powerful incentive to companies to put profits to reserve rather than to increase dividends. This will be supported by the new instruction to the Capital Issues Committee, to which I referred earlier, and which will involve some changes in the conditions under which bonus issues will be permitted.

As I hinted earlier, the yield from this change will be very little in the current financial year—about £5 million net: in a full year, after allowing for the loss of Income Tax at current rates, it will be £68 million. But this does not mean that it will not assist us substantially this year. Since firms will be liable to the high tax on profits earned now, in so far as they are to be distributed later, we can, I think, safely assume that from now onwards more will be set aside for tax reserve and less paid out in ordinary dividends. I put the net increase in corporate savings resulting from this change at some £30 million in the current year. This means we can make a corresponding reduction in the size of the Budget surplus which is required.

Before I leave the Profits Tax, I must mention a few more technical points. The first concerns the deduction made in respect of directors' remuneration in computing profits for Profits Tax purposes. At present, in the case of a director-controlled company, Profits Tax at the higher rate is payable—as well as Income Tax and Surtax—on the amount by which the total fees or salaries payable to the directors, other than the whole-time service directors owning less than 5 per cent. of the shares, exceed £2,500. In view of the increase in the Profits Tax, I do not think this is altogether fair on small businesses, in cases where there are a number of such directors working full time. As from 1st January, 1951, therefore, the limit of £2,500 per annum will be increased, subject to certain conditions, to £3,500 where there are two full-time directors to whom it applies—it is the total salary, of course—and to £4,500 where there are three or more directors. The net cost of this concession, after allowing for the consequential change in Income Tax, will be about £4 million in a full year and £300,000 this year.

Secondly, certain public utility undertakings, mainly bus and water undertakings, which at present enjoy complete exemption from Profits Tax, will from 1st January, 1951, be treated in the same way as nationalised undertakings, and be charged to Profits Tax at the lower rate of 10 per cent. The net yield from this change, after allowing for the consequential loss of Income Tax, will be about £1 million in a full year and £90,000 this year.

Finally, I propose to provide against avoidance of Profits Tax, in particular against arrangements for reducing Profits Tax liability by the issue of bonus shares coupled with redemption of capital, and also against avoidance of Profits Tax and Income Tax by switching profits from one associated concern to another.