(Clauses 5, 14, 16, 17, 33 and 49)
Considered in Committee [Progress, 15th January]. [Mr. George Thomas in the Chair]
Mrs. Margaret Thatcher (Finchley)
On a point of order, Mr. Thomas. It relates to Clause 16 and the selection of amendments. I do not query the selection as a matter of accuracy. However, the clause gives relief for certain businesses which may otherwise find themselves in financial difficulties. That relief is restricted to companies. Knowing that other people were in financial difficulties in running their businesses, it was our wish to extend that relief to sole traders and partnerships, whose need is just as great. I understand that the Opposition amendments which were tabled to enable us to discuss the scope of the tax are out of order and that the reason is that the Budget resolution has been very tightly drawn to restrict the relief to companies. What is more, another amendment has been ruled out of order because of the Budget resolution which prevents those with accounting periods falling between 31st March and 5th April from profiting by the clause.
I do not question the accuracy of your judgment. My complaint is about the Budget resolution. I understand that the Government cannot put down Budget resolutions which are so wide that hon. Members may raise any matter throughout the whole of the income tax Acts on what is, after all, a second Finance Bill. But this resolution prevents us from discussing the real scope of the tax.
Is it possible for the Government to put down an enabling resolution so as to enable hon. Members to discuss it? I should not like those who cannot claim the relief to think that we have not had their interests at heart.
I am obliged to the right hon. Member for Finchley (Mrs. Thatcher). She has interpreted the ruling much better than I was about to try to do. Resolution No.16, which this House approved on 12th November, is narrowly drawn, and Providence protects me from [column 1247]responsibility for the way that the Government draw their resolutions. I am afraid that I can only rule that the amendments are out of order because they are beyond the scope of the resolution.
I have looked at this difficulty in many ways to try to help the right hon. Lady. I am afraid that she must wait until the next Budget.
I am grateful to you, Mr. Thomas, but I am a little more impatient than that. Will it be in order to raise these matters on the Question “That the clause stand part of the Bill” ?
Yes, it will be.
Mr. Douglas Crawford (Perth and East Perthshire)
On a further point of order, Mr. Thomas. Like the right hon. Member for Finchley (Mrs. Thatcher), I do not query the accuracy of the selection of amendments. However, perhaps I might question its fairness. Neither the Scottish National Party nor Plaid Cymru is represented on the Standing Committee considering the Finance Bill. No amendment tabled in the name of either party has been selected for discussion. I suggest that none of those of us who represent the true voices of Scotland and Wales will be able to take part in any discussion of such important matters as agriculture, forestry and fishing.
If the hon. Member for Perth and East Perthshire (Mr. Crawford) tabled these amendments to the schedule, which is the proper place, he could have his discussion in the Standing Committee.
Mr. Dafydd Wigley (Caernarvon)
Further to that point of order, Mr. Thomas. The whole point is that the schedule is being considered in the Standing Committee, in which neither the Scottish National Party nor Plaid Cymru is represented. We have no voice on the Standing Committee. Indeed, the only hon. Member representing a Welsh constituency serving on the Standing Committee represents an industrial area of Wales which has nothing to do with these important social problems. That is why it is essential to discuss these matters in Committee here, if we have a chance to do so.
The hon. Member for Caernarvon (Mr. Wigley) knows that [column 1248]there will be a Report stage. At that stage it will be possible for him to table his amendments and, if they are selected, to discuss them.
Relief for Increase in Stock Values in Financial Year 1973
Mr. Cecil Parkinson (Hertfordshire, South)
I beg to move Amendment No. 13, in page 12, line 5, after ‘excess’, insert:
‘or such part thereof as the company shall claim’.
With this, we may discuss the following:
Amendment No. 79, in page 12, line 5, after ‘excess’, insert:
‘or such smaller amount as claimed;’.
Amendment No. 14, in page 12, line 6, leave out ‘excess’ and insert ‘claim’.
Amendment No. 80, in page 12, line 39, after ‘period’, insert:
‘or such smaller amount if so claimed’.
Amendment No. 75, in page 14, line 32, at end add:
‘(11) A company shall be entitled to claim any part of the relief available under this section.’.
I am sorry that we are starting the debate on this very important clause with a fairly narrow group of amendments, and I join my right hon. Friend the Member for Finchley (Mrs. Thatcher) in protesting about the way in which our discussions are having to take place.
When I thought about how to begin my remarks, my mind went back to a headline in Accountancy Age of 26th April, which read:
“Barnett slams the Budget alarmists.”
The Chief Secretary went on to say that the Budget would have only a very small effect on company liquidity. I quote briefly from that speech. He was reported to have said:
“Some companies take the view that tax should be reserved early in the year and that once reserved is no longer available for investment or any other general use. If that point of view is accepted—and it is certainly applied by a large number of companies—the surcharge on ACT does not affect net liquidity as it was in any event part of the fund reserved for corporation tax.”
In fairness, the Chief Secretary went on to say that other companies took a different point of view and regarded their tax reserves as being available for more general use. But we must assume that the right hon. Gentleman believed what he was saying, and the fact is that he said that tax reserves, by implication, were not available for general use and, therefore, that the alarm which went up about ACT and the additional corporation tax was misconceived. As he said, he “slammed” the alarmists.
I do not think that the right hon. Gentleman was right, but one must assume that he thought that he was right. If so, by the same token, a deferment tax, which is really what the Government offer in Clause 16, is of very limited benefit. It is interesting to note that the general accountancy bodies have recommended that the sum released should be set aside in a special deferred tax account and regarded as a sum which, at some time in the future—it might not be this year—will be clawed back. It will not be available as the company's general funds. It will be available, according to the right hon. Gentleman's earlier arguments, only for a very limited time or as a major source of investment in the company's business.
The fact that Clause 16 is in the Bill suggests that those who were alarmed last March and whom the right hon. Gentleman accused of being alarmist were justified in their actions, because the clause is evidence that the right hon. Gentleman has changed his mind and now accepts that the Budget last March, which, in his typically loyal way, he defended, did company liquidity considerable damage. Clause 16 is an admission that the right hon. Gentleman's remarks then were wrong. To paraphrase the Leader of the Liberal Party on another occasion, we are all alarmists now.
Secondly, in the run-up to the February election the Labour Party attacked the Conservative Government by implication for the high level of company profits then being declared in annual accounts. It was a constant theme of the Labour Party's campaign. Labour spokesmen attacked what they described as appalling profits, saying that they were a scandal.
By implication the Bill reveals once again that the Labour Party was making an entirely spurious and badly-based [column 1250]attack. The very profits then supposed to be so scandalous and unacceptable and evidence of all sorts of terrible motives in the Conservative Government are the profits which are now to be relieved by Clause 16. Far from these profits being scandalous, we are told now that they are deserving of relief, must be relieved, and that company profitability, far from being excessive at that time, was barely enough to finance the additional strains on stock and so on. Thus, once more, one of the sticks used by the Labour Party to beat the Conservative Government is revealed as having been based more on a figment of the Labour Party's imagination than on reality.
Clause 16, if anything, is the Chancellor of the Exchequer's rather complicated way of admitting that the reasoning behind the increase in corporation tax and the surcharge on advance corporation tax has been totally abandoned. It is rather typical of the Chancellor that he has chosen to make this admission by way of an extremely complicated provision. However, many of us believe that the clause, while giving a welcome relief, is slightly unfair. For example, it takes no account of the company that ran down its stock through efficiency and used the money to invest in buildings. That company gets 40 per cent. relief, but it is at a disadvantage against the possibly inefficient company which built up its stocks to a level which was unnecessary at the time. It is an arbitrary relief.
It would have been a much cleaner way of giving the relief, and perhaps would not have prejudiced the findings of the Sandilands Committee, if the Government had simply abandoned the ACT surcharge and possibly cut corporation tax, thus reversing some of the Chancellor's measures of 24th March.
Many problems arise from the rather peculiar way in which the relief is being given—for example, the fact that it really is a deferral and not a relief. As the Chief Secretary to the Treasury will know from his great practical experience, a number of companies could well find themselves at a disadvantage as a result of Clause 16 rather than at an advantage, unless Amendment No. 13 and others associated with it are accepted. These amendments have the simple basis that [column 1251]the company should be allowed to take as much of the relief as will benefit it, that it should have a choice about the amount of relief it claims.
There is no need for me to recite the various other reliefs which are open to companies which might be adversely affected if they were forced to take the whole of this relief. My hon. Friends who have put their names to the associated amendments will deal with such aspects. But I want to refer briefly to three—group relief, liability to shortfall, and relief from double taxation.
A company could well be at a disadvantage if it were forced to take the whole of this relief. We do not see that, in accepting the amendments and making the tax a little more flexible, the Government would be doing anything to prejudice their objectives. We accept that the Chief Secretary is sincere in wanting to give relief to companies, that he wants to give a benefit to them or relieve their cash problems. He would give a greater relief if he allowed apportionment.
I suggest that many of the old standard Treasury answers about cost and so on are not available to the right hon. Gentleman today, although I am sure that someone somewhere will have managed to put a cost on a highly improbable set of circumstances, with all the variables involved.
We accept that the right hon. Gentleman has now admitted that he made a mistake last March and that he is sincere in wanting to give relief. We think that the relief could be more effectively given, at no greatly increased cost to the Treasury, if this small group of amendments were accepted.
The Chief Secretary to the Treasury (Mr. Joel Barnett)
I am obliged to the hon. Member for Hertfordshire, South (Mr. Parkinson) for the very agreeable way in which he moved the amendment and for his kind quotations from my speeches, which I found interesting to hear again.
The hon. Gentleman pointed out that this is a deferral of tax. That is right. We have never hidden from the House of Commons that that is the intention of the tax, for a variety of reasons, some of which we shall come to on other amendments. [column 1252]
The hon. Gentleman made the point that the joint accountancy bodies to which we both owe some allegiance would have liked us to go much further. I know that they would like us to go much further on this and other issues, but we have to disagree with them.
The hon. Gentleman said that this is a short-term method of dealing with the problem. That is precisely what we have made clear. It is a short-term method of dealing with it, because we are giving what is, in effect, certainly not a complicated form of relief, as the hon. Gentleman suggested, but a rough and ready form of relief. We have admitted that, because we are awaiting the report of the Sandilands Committee, which we hope will be available for us for the spring Bill, when we would hope to bring in a form of relief which will be more suitable and which will meet many of the points the hon. Gentleman made.
For example, we accept that there will be companies which will not obtain relief under this clause, not necessarily because they are not limited companies or because they have less than £25,000 worth of stock but for a variety of other reasons, but would be, we hope, helped in the following years' relief that we intend to give and we have committed ourselves to giving.
I do not dispute that what we are doing in the clause is an arbitrary reform of relief. I do not propose on this narrow amendment to get involved in the argument about whether the March 1974 Budget was right or wrong. I am talking now about the substantial relief that we are giving under the clause. Because of the very nature of the representations we have received from many quarters and the fact that we recognised that many companies were having liquidity problems, we sought to help them in the short term with the tax that they would otherwise have had to pay in January of this year.
Because of that, and because of the administrative problems there would otherwise have been, given the short time span until January to enable the Revenue to make the necessary repayments where appropriate or not to collect the tax, it was crucial that the relief would be rough and ready and that by the nature of things some companies will not be helped which otherwise we would have [column 1253]wanted to, as the hon. Gentleman wants to.
The question of the ACT surcharge is a totally different matter. The hon. Gentleman said that he would have preferred action to have been taken there. That will be repayable to companies anyway, whereas this form of relief is a positive reduction in taxation in this year just at the time when there is a liquidity problem.
I hope that the hon. Gentleman will recognise that we have tried to meet an immediate problem. We will meet the later issues in the spring Budget.
It is true, as the hon. Gentleman said, that in certain instances there will be companies which will not be able to use the relief this year. The hon. Gentleman cited companies which would have been able to take group relief, some shortfall problems, and the question of double taxation relief. The hon. Gentleman is right in one sense. On the other hand, any surplus losses created by the relief given under the clause will be available to carry forward against future profits, and in that sense I do not think that it is particularly ungenerous.
Indeed, I submit that what the hon. Gentleman proposes would make the situation more complicated rather than less complicated. It would add refinements that would make it more complicated for the Revenue in dealing with the very large number of claims which will be submitted despite the fact that we have limited it.
Further, if the Committee were to allow this right of disclaimer in order to carry forward some of the relief to another year, it would go right against the whole purpose of the clause. The purpose of the clause is just to give some help for this year. What will be done in the second and later years the House of Commons will have an opportunity to decide when we have the spring Finance Bill. If we start using some of the relief which would otherwise have been available for certain companies this year and allow it to be carried forward, it will get very confused with the relief, which may be different—we do not yet know what it will be—which we propose to introduce in the spring Finance Bill.
I therefore hope that it is clear to the Committee that this clause is by no [column 1254]means the final version of the form of inflation-accounting relief that we shall eventually have in mind and that to add this further refinement and complication would not improve the situation but worsen it. I hope that the Committee will feel able to agree with me that it would be better to accept this admittedly rough and ready relief and come to the more refined form of relief when we have the spring Finance Bill.
Mr. J. Enoch Powell (Down, South)
When Chancellors of the Exchequer are preparing their Budgets it is one of the functions of their permanent advisers to remind them of certain well-tried principles of public finance of which they are in a sense the custodians. I imagine that when the Chancellor of the Exchequer was contemplating the proposal embodied in Clause 16 one such principle was brought to his attention—that is, that taxation should not be used for the purpose either of lending or of borrowing, that lending and borrowing is a separate relationship between Government and the citizen from that of taxation, and that the endeavour to confuse the one with the other always leads to more trouble than it is worth.
In the opposite sense of borrowing by taxation, we have all lived through the long and dreary experience of post-war credits which were the converse form of the use of taxation for a borrowing-lending purpose. Here, instead of offering a relief from taxation, instead of dealing with a problem directly fiscally, the Chancellor of the Exchequer has framed provisions which are a form of lending by the Government to corporations under the guise of taxation.
I predict not only that this will, as this and the succeeding series of amendments show, cause inequities, irritations and difficulties in the short run but that the object of recouping the money and clawing it back in due course will be frustrated. That is one of those things which never happen in real life when one gets to them next year or the year after.
The circumstances of each Finance Bill ought to be looked at as they stand, and they should be looked at fiscally. In framing instead a form of loan, the Chancellor of the Exchequer has created inequities between one taxpayer and another taxpayer. The present series of [column 1255]amendments draws attention to one inequity. It forces upon one group of taxpayers a loan which they may not want, a loan which may be disadvantageous to them. We shall come later on in the clause to other inequities.
I therefore believe that the principle which the Chancellor of the Exchequer has attempted to follow is wrong, and my hon. Friends and I will support the Opposition in marking their disapproval of that principle and of its consequences by this and subsequent amendments.
Mr. Peter Rees (Dover and Deal)
I had not proposed to intervene in the debate, but I am bound to tell the Chief Secretary that after having listened to his speech I was left in such a state of perplexity that I was ready to conclude that possibly he had not understood the full scope and measure of relief which he is attempting to introduce by the clause.
It is not perhaps appropriate or necessary to debate the context in which we find the clause, although I would observe that, as I understand it, the Chancellor of the Exchequer is now endeavouring to redress the wrongs which he did to the corporate sector in his March Budget.
I believe that if the clause were looked at with a clear eye, it is possibly all that the Chancellor could hope to pilot through with the support of his own party. If he had gone to his party and said “I did wrong in March. I deprived companies of cash resources which they could ill spare. I wish to make amends and reduce the rate of corporation tax” , that would have been the simple and honourable way of dealing with the problem. However, he would never have got the support which he badly needs from the 60 or 70 Left-wing members in his party for such a measure, so he searched for a more dubious way of giving relief.
One can see the apparent lack of interest on the Government benches. The Chancellor no doubt said to himself that 90 per cent. of his party would not understand it and only the remaining 10 per cent. might understand, sympathise and approve. The Chief Secretary appears to nod his head or dissent—I do not know [column 1256]which. I do not know whether he was party to these tactical thoughts of the Chancellor, but it is against that background that I judge the clause.
The Chief Secretary told us that this is a rough and ready clause. The measure of relief that it gives is haphazard in the extreme. The more efficient company which has a close measure of stock control and has limited stocks at the end of the appropriate accounting period will get little benefit from this measure of relief. The less effective company may get a considerable and perhaps unjustified measure of relief. This is inevitable when relief is dished out on this rough-and-ready basis in order apparently to obscure the issues underlying it. I hope that the Chief Secretary will come to this point later in this evening's proceedings.
Why is there to be no relief for debtors? The number of debtors at the year's end is considerably increased by the impact of inflation. Again, why exclude services? This shows that it is a crude measure of relief. Because it is a crude measure of relief I believe that the Committee should endeavour, so far as it can, to refine it. I believe that my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson), with his keen accountant's mind, has hit on one simple expedient which could be accepted by the Government, and that is to allow companies to select how much of the relief they wish to take up. My hon. Friend has demonstrated situations in which it would not be advantageous for a company to take up the full measure of relief to which it is entitled under the clause.
As has been pointed out, to refer to this as relief is a misnomer. I do not know whether I would call it a loan. At any rate, for the advantage gained in the present accounting period there will be comparable disadvantages in later accounting periods. It is very much a case of “timeo Danaos” . I look upon any purported gifts from the Chief Secretary in this context with suspicion. This is a doubtful gift, and if it is a doubtful gift at least one should give the taxpayer the opportunity to reject it in part. Let him say “I will take so much.”
I know the bureaucratic mind—not that I accuse the Chief Secretary of having a bureaucratic mind; I refer to the gentlemen in the Official Box who will be passing him notes——[column 1257]
Mr. Joel Barnett
I am delighted to know that the Chief Secretary is so confident in his grasp of the complexities of this horrifying Bill that he will be able to battle alone, unsupported not only by his hon. Friends but also by the gentlemen in the Box. This will be a unique occasion to see the Chief Secretary battling unaided, with his native wit and intelligence and with his profound grasp of the complexities of the matter.
Since I know that the bureaucratic mind gropes around for precedents, I remind that Chief Secretary that there is an established respectable precedent for allowing the taxpayer to decide how much of a particular relief advantage he may claim. That is in the most recent measure dealing with capital allowances. It escapes my mind whether it is the Finance Act 1971 or the Finance Act 1972 but the Chief Secretary, without the assistance of the gentlemen in the Box, will know at once.
There is a respectable precedent. This will refine that rather crude form of advantage which the Chief Secretary is offering. I urge him to consider a little more closely than he appears to have done the implications of what my hon. Friend is attempting to do and which he has rather summarily and, as I conceive it, without sufficient perception dismissed. I ask the Chief Secretary to reconsider this point, because it does not seem to me that he has done full justice to the implications of this measure and this amendment.
Mr. John Cope (Gloucestershire, South)
I want to address most of my remarks directly to the amendment and I do not want to prejudice what we may discuss later on the clause.
The right hon. Member for Down. South (Mr. Powell) spoke about lending and borrowing problems. It is more a question of accelerating or retarding tax payments. The date on which one pays a bill, as every householder knows these days, is of the utmost importance. It amounts in a sense to a loan, but it amounts only to an acceleration or retarding of payment.
The right hon. Member for Down, South was out of the House last summer while we discussed the advance corpora[column 1258]tion tax, which is the same thing but in the other direction. What we are now discussing is a reversal of what we were discussing in the summer on the question of the ACT. It is true that these accelerating or retarding provisions make for a certain amount of inequity as between different groups, but so would any relief, particularly on the sort of rough-and-ready basis of this relief. I do not complain about the roughness or the readiness of it. We welcome the readiness and we have to accept the roughness.
To come to this question of part claims, the Chief Secretary said that it would be more difficult for the Inland Revenue if part claims were allowed. I do not think it would be. A claim would have to be agreed, of course, but in any case the Exchequer has to agree a total claim, so I do not see that it would be more difficult for the Exchequer to agree a part claim than it would be to agree a total claim. It would make the position easier for taxpayers.
At the moment there are some—not many—who, because of the circumstances in which they find themselves, will be on the horns of a dilemma as to whether to claim or not to claim in total. It would be easier for them if they were able to claim in part, as the amendment would provide. If they are on the horns of this dilemma and they see what the Chief Secretary said, that the spring Budget and the spring Finance Bill will sort it all out in the longer term and that more permanent and presumably less rough and ready measures will be introduced, they will not be able to wait for the spring Finance Bill to receive Royal Assent because they have to claim within three months of Royal Assent to this Bill, which, whenever it may come, is very unlikely to be within three months of Royal Assent to the spring Finance Bill so far as one can see. They will, therefore, be placed on the horns of a very real dilemma.
The amendment, which allows people a part claim, would get them out of this difficulty. There are other amendments to extend the period to three months and so on, but this amendment seems to provide one way out of the difficulty and it is perhaps the way we should choose until we get a better explanation from the Chief Secretary.[column 1259]
Mr. Joel Barnett
I take first the important point raised by the right hon. Member for Down, South (Mr. Powell) on the principle of whether taxation should ever be used for lending or borrowing. I hesitate to say it to the right hon. Gentleman, but I think he has missed the serious point in the whole sphere of taxation, that it is not unusual for a taxpayer to obtain tax relief in a certain way and then at a later stage to have to repay that relief. A simple example immediately springs to mind. If a company buys a piece of plant it will obtain capital allowances on it. If later it sells the plant at a profit in excess of the written down figure for tax purposes it will have to repay that tax relief. The principle is not dissimilar for the form of relief we are considering here.
I was going to deal with this point on a later amendment, but since the right hon. Gentleman raised it I shall take it up now. The right hon. Gentleman made the point that the way in which we are giving this relief will cause great inequity between taxpayers. If we did it the way he and others are suggesting and gave it as a final relief in one year, that would create much greater inequity with other taxpayers. If a company obtains substantial relief under Clause 16 because its stock has substantially increased, possibly in volume as well as in value, and then it goes out of business shortly after the year end and sells the whole of the stock at the inflated value, it will then have had substantial tax relief which I would hope the right hon. Gentleman and many others will not think it equitable for it to have.
In that sense the principle is the same as with capital allowances. I hope, therefore, that the right hon. Gentleman realises that this is why, when we were considering what is admittedly a rough and ready measure, we decided to implement it on a postponement basis rather than on a permanent basis or on a basis complicated by the refinements that the hon. and learned Member for Dover and Deal (Mr. Rees) suggested.
Mr. Nigel Lawson (Blaby)
The Chief Secretary's comments go right to the heart of the problem of accounting in an inflationary year. If there is to be a system of inflation accounting there is no way of making it both right and fair on a continuing basis and at the same time right [column 1260]for a business which will come to an end at the end of that year. Different provisions have to be introduced for each case.
The hon. Member is entirely making my point. We accept that our proposition is not inflation-proofing, and it cannot be. We are awaiting the report of the Sandilands Committee and we did not have time to put in the refinements which many hon. Members would like or the type of refinements suggested by the hon. and learned Member for Dover and Deal in respect of relief for debtors, services and so on. It is precisely because we wanted to do something quickly, which I am sure all hon. Members want, that we brought in this haphazard measure. I was delighted that the hon. Member for Gloucestershire, South (Mr. Cope) said that he welcomed the readiness and accepted the roughness of the scheme. I am obliged for that. We wanted to help companies quickly. We could not therefore provide relief by set-offs against other years or other companies. No one pretends that this is the ideal way of dealing with the problem in the longer term, but it gives a substantial measure of tax relief and helps the liquidity of a large number of companies in January this year, and I should have thought that would be supported by all members of the Committee.
For these reasons I hope that the Opposition will feel able to accept that the amendment does not serve the purpose that I have outlined.
Mr. David Howell (Guildford)
My right hon. and hon. Friends have said enough to bring home some of the bizarre consequences that will flow from the wish of the Chief Secretary and the Government to resist these amendments. The Chief Secretary's insistence is on an all-or-nothing approach, and so the picture is conjured up of the Inland Revenue seeking to force a company which would prefer to take part of the relief or loan or whatever it is to take the full amount, to drink the last dregs from this chalice. This is a very peculiar twist in the many gyrations which the Government's taxation policies have already produced, and which the Chief Secretary has had the ill luck to promote at the Dispatch Box.
These very modest amendments, which were moved with extreme reason and [column 1261]calmness by my hon. Friend the Member for Hertfordshire, South (Mr. Parkinson) deal simply with whether the Chief Secretary should stick so doggedly to the all-or-nothing approach in the case of companies which because of their tax situation may actually suffer a loss this year, a year in which, the Chief Secretary was saying a few moments ago, the Government want to help companies. The Chief Secretary did not go so far as to say that the Government want to correct and overcome the damage done to companies by their earlier measures. If his aim is as stated the Chief Secretary should know that there are companies which will not be helped. They will be made to suffer because this is a rough and ready proposition, because the Chief Secretary insists on it being all or nothing, because in those haunting words that we have heard before— “We wanted to do something quickly” . That expression would make a marvellous epitaph on this administration's tombstone.
The Government have acted quickly and have produced a rough and ready scheme which produces the bizarre situation in which companies which the Chief Secretary said he wanted to help will be hindered and made to suffer. I think that he also said in his opening comments that losses incurred as a result of companies taking the scheme in full and it adversely affecting their overseas tax situation could be carried forward. I do not understand what he meant by that. However, if he meant that some other relief is to be generated in future years, that may be so, but it contradicts his proposition that he is trying to relieve the situation of the past year.
The Chief Secretary, his senior colleagues and the Government are leading themselves along a path to incredible complexities and difficulties with taxes of this kind. The contribution by the right hon. Member for Down, South (Mr. Powell) was the first and a timely indicator of the impossible situation into which the Government will wander before we go very much further with this Committee stage.
The Chief Secretary could easily have conceded this amendment. It was proposed in a perfectly reasonable way. By resisting it he will make much more trouble for himself and will arrive in a curious situation. I can see no reason why he should not have accepted the [column 1262]amendment. We shall examine the arguments that the Chief Secretary has advanced for resisting the amendment and we shall consider whether to raise the whole matter again on Report. I will not advise my hon. Friends to press the amendment but I make clear to the Chief Secretary that he should not for one moment interpret our moderation in the matter either as typical of our feeling towards the measure or as an indication of the way in which we intend to proceed. We think he could have given way, but he has chosen not to do so. That is disappointing but it is not surprising, because this administration seem bent on binding and entangling themselves about with the worst and silliest forms of tax provision, not merely since the “window tax” , which is the description Ian Macleod gave to SET, but since taxation was first devised to molest, bind and shackle man.
Mr. Norman Lamont (Kingston-upon-Thames)
I beg to move Amendment No. 18, in page 12, line 33, leave out subsection (4) and insert:
‘(4) For the purposes of the Corporation Tax Acts other than this section and Schedule 3 to this Act in any case where a company is entitled to relief under this section:
(a) the company's opening stock value shall be treated as increased by an amount equal to its 1973 increase in stock value, and
(b) the value of the company's trading stock at the end of the period of account which ends on the day before that on which the opening stock value is determined shall not be increased by a like amount.
.and all such adjustments shall be made in any assessment to Corporation Tax for any relevant accounting period as are necessary to give effect to any relief under this section’
As has already been made clear, we partly welcome what the Chancellor of the Exchequer has done. It is a remarkable reversal on his part and one which the Chief Secretary, with an engaging lack of patriotism for his own past ideas, has just brushed aside. I shall not quote to the right hon. Gentleman the letter I wrote to the Chancellor in May about company liquidity and the answer I received, which was extremely complacent.
The question that will be asked in these debates is whether the Chancellor has gone far enough. Profits caused by inflation will now be largely ignored for [column 1263]tax purposes, but it is noticeable that the same principles have not been included in the Price Code. Both realism and consistency require that the same principles should apply. There is the question of companies which are not paying enough tax to benefit from the provisions, a category which might be thought to include companies such as British Leyland. There is also the matter of the speed with which the deterioration of the cash position of British companies is going on. This can be seen from the debt that the corporate sector has had to raise. In 1973 it raised in debt from the market £0.7 billion. In 1974 that had soared to the astonishing figure of £4.1 billion. The whole matter must be seen in the context of the projected £5 million deficit for the corporate sector in 1975, which at the time of the Budget the Chancellor scoffed at and treated as highly alarmist.
What has brought about this astonishing reversal in the Chancellor's attitudes? I suppose that the figures that have appeared for both investment and unemployment, when the unemployment figures were being published, have worried him. But I do not believe that the provisions of the clause, unless they are made more certain, and unless some of the threats about clawing back tax deferred are removed, will have the effects that the Chancellor hopes and intends. I believe that investment will fall even faster and that unemployment will rise even faster than would otherwise have happened unless some of the uncertainties are removed.
What happens in 1974–75 is perhaps even more important than what happened in 1973–74. In 1972 stock appreciation as a percentage of trading profits was 16½ per cent.; in 1973 it was 29½ per cent.; and in the first half of 1974 it had risen to an astonishing 65¼ per cent. The problem is growing, and we must not underestimate what will be required to deal with it.
The reasons for the uncertainty caused by the Chancellor's proposal relate to the special way in which he has chosen to give this relief. Under his system, the closing stock in one year becomes the opening stock in the next year. This leaves open the possibility that the relief may be clawed back at some future date. [column 1264]
What the amendment proposes is that instead of being subtracted from the closing stock, which then becomes an incorrect opening stock, the relief should be added to the old opening stock, leaving the closing stock as the correct amount. Unless there is an amendment along the lines we suggest, companies may find that in a few years' time, when they have either reduced stocks in value or volume or have a nil closing stock position, there is a large claw-back. That could happen when a company was closing down, or it could happen simply because it had become more efficient and was using less.
Furthermore, if the restriction in relief to amounts above the 10 per cent. of trading income continued, particularly if there were falling stocks or stable prices, the relief could be clawed back each year.
By the method proposed in the amendment, the closing stock would remain at its higher, correct figure and could be used as the opening stock in the next period, when perhaps the closing stock might be diminished in volume or value perhaps in a closing-down situation. This method would lead to a correct assessment of the tax position.
Under the Chancellor's proposal, the tax would be clawed back in a closing-down situation or when stocks were being used more efficiently. In a closing-down situation, even though stocks might be sold off at cost, a high profit figure would appear because of the artificially lower opening stock resulting from the method proposed by the Government.
One objection to the amendment might be that the Government's figure allows the balance sheet to balance whilst ours does not. We have had consultations on this matter, and the answer is that when £X relief was added to the opening stock one would also add £X relief as a contra to the capital loss account.
The object of the exercise, both on our part and the Government's part, is to avoid the payment of tax on an artificial part of profits. Our method would attribute the amount to previous years' profits, but only—this is the difference—after those profits had been assessed for tax. The Chancellor's method is to say that the profit has not yet been made[column 1265]—a device which could lead to the clawing back of the relief given. In addition, the Chancellor's method of giving relief undervalues companies, a tendency that would increase as inflation accelerated.
The disadvantages of the Government's method are that it is simply a deferral of tax; that it gives no certainty for the future; that as stocks fall, perhaps through greater efficiency, the tax could be clawed back; and that, even if the present method continued and we reached a period of stabilisation of profits and tax, companies would then be in need of greater amounts of money to refinance expansion after a period of recession and slump. If a company ceased trading, the creditors would be badly affected under the Government's method because the Inland Revenue would have a substantial claim in a period in which stocks were lower, in a closing-down situation.
The method that we are proposing is one which would give greater assurances to industry. It is a cleaner and simpler method which would ensure that the relief given would not be clawed back at a higher rate of tax at some future date. The rate of corporation tax, which was 40 per cent., is now 52 per cent. The rate might well increase again at a later date.
I do not believe that as the relief is framed at present any accountant or banker when trying to assess a company's financial strength could view the relief granted as being anything other than a deferred liability. Therefore, the banking system will not be able to give credit and to underwrite the investment of industry in the way that the Government hope and expect.
I believe that the Chancellor has not gone far enough in the methods he has proposed. I believe that there will be considerable uncertainties and fears that the tax will be clawed back in future. Unless the Chief Secretary is able to accept the amendment, or one very much like it, I believe that the results that the Government wish to see from the relief will not appear.
[Mr. Alan Fitch in the Chair]
Mr. Joel Barnett
It is always agreeable to listen to the way in which the hon. Member for Kingston-upon-Thames (Mr. [column 1266]Lamont) presents his case. At least on this occasion he did not tell me what I should not say. That is his customary practice. If we both abided by that practice we would have very much quicker debates.
The amendment seeks to change the method of relief so as to make it a final relief rather than as was intended—namely, a deferral or postponement. I dealt with the matter briefly in my reply to the right hon. Member for Down, South (Mr. Powell). In most cases the deferral would be indefinite. Any normal trading company would have an indefinite deferral. In any event we made it clear that the clause is only a temporary measure until we have the spring Finance Bill. We have made that clear.
I think that the Chief Secretary said something extremely important and I want to ensure that I heard him correctly. Did he say that it would be a permanent deferral for a trading company?
I said that in most cases it will be a permanent deferral. If a trading company continues trading with its stocks at normal levels and it has its normal levels on the 1973 accounts at which it gets its present relief, and if inflation does not take a major turn downwards but stays at one level, there would be no question of any claw-back of the relief and the position would stay as it was. That would be the position until such time as a company closed down, sold off its stocks or took a similar course of action.
Mr. Peter Rees
Let us take the hypothetical figure of 8¼ per cent. when considering the rate of inflation and let us suppose that the rate dwindles from 19 per cent. to 8¼ per cent. Does it follow that the right hon. Gentleman would expect the relief to be clawed back? Is it only if inflation is at a constant 19 per cent. that the deferral is indefinite?
I am sure that the hon. and learned Gentleman understands the position clearly. I have a feeling that he is having me on. If a company has a final stock of £100 and there is 20 per cent. inflation in the stock value, there will be a stock value of £120 at the end of the following year. A company would then be able to get relief under this system. [column 1267]If the following year the rate of inflation was only 2 per cent. the value would still be higher than the previous £120. I hope that that is reasonably clear. I can see that the hon. and learned Gentleman has the point.
In saying that the relief will be indefinite—I believe that the right hon. Gentleman used the word “indefinite” —all that the Bill does is to alter the valuation of the closing stock. I am ignoring the amendment for the moment. There will be an alteration of the value of the opening stock as it becomes the closing stock. Therefore, there is an immediate claw-back under the Bill.
I was coming to that point. I have been interrupted three times before I have hardly started. The hon. Gentleman presupposes that we shall do nothing else in any future Bill. We have made it clear that if nothing else were done and the clause stood it would be a deferral that would continue indefinitely. However, we have made it clear that there will be changes in the spring Bill. We shall have a refinement of the form of inflation accounting of stock plus anything else that we might do for companies when we have the Sandilands Report. If we do not have the report in time we shall have to do something else to ensure that there is additional relief. I thought that I had made that absolutely clear.
Mr. Geoffrey Dodsworth (Hertfordshire, South-West)
I am not sure whether my comprehension is correct. If there is no further legislation it seems that deferment will be for one year only and that subsequently the tax will have to be paid. If that is not the case I shall be greatly obliged to the right hon. Gentleman if he will make it clear how it will be deferred.
There will be deferment for one year if there is no legislation to change the clause as it stands. That is clear. However, we have made it even clearer still that we intend to change it. As I have said at least half a dozen times, this is a rough and ready measure which we are introducing for one year only. If we continued with the same kind of relief it would be for many companies a continuing permanent deferral. We are not [column 1268]saying that this form of relief will be permanent. We are saying that in the spring Bill and, we hope, with the benefit of the Sandilands Report we shall introduce a more relevant form of relief.
If we did nothing else and the clause were to stand I accept that the fears which have been expressed would be understandable and that people would be right to have such fears. However, we have made it clear that we shall do something else. There is no question of automatic claw-back of the relief. I hope that I have been able to assure the Committee that the automatic claw-back of the relief is not in contemplation. If we did not intend to claw back the relief it could be argued that the amendment would be the best approach. Each year there would be a final form of relief. I have already argued that it is not the best approach to have a permanent form of stock inflation-accounting for companies and to have a permanent position year by year. I hope to show—I tried briefly to do so in reply to the right hon. Member for Down, South—that it would be inequitable to allow relief on a final basis.
I have made it clear on a number of occasions that this is a provisional form of relief. It is an advance instalment that will eventually, as we have made clear, apply to all traders and not only to companies with stocks in excess of £25,000. It is a method of giving immediate relief to companies with liquidity problems. By the very nature of things it is a rough and ready measure. It would be wrong, when the relief that we are now giving gives larger companies, or at least those with a stock in excess of £25,000, an advance instalment of the eventual permanent relief that will be on the statute book, not eventually to make large companies subject to the same rules that will be applicable to everyone else. That is why this is a temporary measure and why we do not believe it is right to give this relief on a permanent rather than a deferral basis.
Mr. John Loveridge (Upminster)
The Committee would be grateful for an assurance that none of the relief so given will be clawed back. When the Chancellor spoke on 12th November of this postponement of tax liability he said:
“If no further steps were taken, the tax forgone this year would automatically be [column 1269]clawed back in the following year. But this, of course, is not contemplation.” —[Official Report, 12th November 1974; Vol. 881, c. 265.]
What we would like is an assurance that those words were a pledge. Can the right hon. Gentleman give us that assurance?
I can give the hon. Gentleman and the Committee the assurance that it is not contemplated that there will be a general claw-back. There will be instances when relief will be clawed back. I hope the Committee will agree that it is right that there should be. Suppose a company was given 100 per cent. tax relief on a piece of plant and then it sold that plant at the full price. The tax relief is clawed back. That is not unusual. I am sure that hon. Members would agree that in such an instance it would be wrong to allow the company to retain the relief. The same principle applies to stock.
I am sorry; I must disagree with the right hon. Lady. It does. Suppose a company had increased its stock in this year we are talking about by, let us say, £100,000—not because of inflation but because of increased volume. The Government gave it this relief so that the increase was wholly tax-free. The day after that year ended the company completely sold the stock. It surely would not be right for that company to have the whole of the £100,000 tax-free.
We are not at cross-purposes here. The right hon. Gentleman knows that usually there is a different provision for cessation and there is nothing to prevent him from putting up special provisions for cessation which would be quite usual. I do not accept his analogy of capital allowances and balancing charges. It is wholly different. The balancing charge comes on a specific event for a specific amount. It is misleading and clouds the position to bring in what is not a true analogy.
I do not agree with the right hon. Lady. This instance would not only apply to cessation of business. A company could carry on trading. Its stock could have been excessively high at the 1973 year end. The stock might then have come down permanently to a much lower level. It cannot be right to give an enormous amount of relief to the [column 1270]company. This is not meant to be a permanent relief for companies which have not had inflationary increases in stock. It is to misrepresent and misunderstand the purpose of the clause to suggest that that is so.
The purpose of the clause is to give immediate relief to companies who have had inflationary stock increases. If they had not had such increases on a permanent basis it cannot be right to continue such relief indefinitely. I cannot believe that the right hon. Lady would want to spend taxpayers' money in that way. We are giving a substantial amount of relief in this way. To go beyond that, as the amendment seeks to do, would be indefensible. The hon. Member for Kingston-upon-Thames said that it would be wrong to pay tax on artificial profits. I submit that it would be even more wrong to pay tax relief on artificial losses or where there have not been losses at all.
Mr. Ian Stewart (Hitchin)
For the sake of clarity, may I ask whether the Chief Secretary is willing to give an assurance to the Committee, and to the wider audience which is taking such an interest in this discussion, to the effect that the Government will introduce measures in the spring Finance Bill which will be no less favourable to companies which benefit from the present arrangements, except only if there is a reduction in the stock level of a company carrying on a continuing business or in the theoretical possibility of an increase in the value of money and deflation takes place as opposed to inflation? The Committee needs this clear assurance because the Chief Secretary's illustrations have not made entirely clear the form of assurance he is giving.
Mr. Peter Rees
So far I find that I am being incited, as a result of the Chief Secretary's replies, to speak when I had not intended to. The replies of the right hon. Gentleman constantly leave me with the impression that he has not really grasped the inwardness of the amendment or the inwardness of the relief which he is endeavouring not to foist on the business community. [Interruption.] I say “foist” because it is an echo of our debates on the last amendment. The Chief Secretary would not have it that [column 1271]a company could pick and choose about relief. However, I do not want to reopen that particular would which the right hon. Gentleman has inflicted on the commercial life of the country.
The amendment is meant to ensure that, while there will be an advantage for a company which claims this relief in relation to the accounting period ended 1973, there will not be a corresponding disadvantage in the subsequent accounting period. The Chief Secretary appears to have missed the point. The point is that there should not be a corresponding disadvantage. The Chancellor, in his ill-judged March measures, inflicted considerable damage on the cash flow of companies. This modest measure of relief is an effort to redress that damage, to a limited degree. We are concerned to see that this, in turn, will not be offset by a corresponding disadvantage in subsequent accounting periods. That is all the amendment seeks to do.
To talk about relief being perpetuated indefinitely opens up new vistas not related to the amendment. My hon. Friends and I noted with great interest that in the light of the Sandilands Committee's report, whatever it may be, there may be an endless vista of relief for companies. This is good news. This is not what the amendment seeks to claim. It will be noted far and wide what the Chief Secretary has offered. It will be noted that he has become more generous since our debates in the dog days of June and July. We are happy to note his change of heart. I ask him to move away from the generalised generosity he has offered us—which we accept with gratitude—to the specific point made in the amendment, which is that there should not be a corresponding disadvantage in the next accounting period for any company that claims the advantage or relief in 1973.
As the Chief Secretary will have divined, it will be a matter of fine calculation for companies whether to claim the relief. Many people will not know whether or not to claim it. They will not be entirely reassured by the Chief Secretary's breezy statement that the Government will adopt Sandilands and perpetuate the relief indefinitely. For the moment, all we ask for the people who have to make this crucial decision [column 1272]is that the Chief Secretary should accept the amendment, which ensures that the relief will not be taken away by a corresponding detriment in subsequent accounting periods.
I hope that I have made myself clear to the Chief Secretary, who has not intervened. I hope, Mr. Fitch, that he will have the opportunity of catching your eye to show that he has had a change of heart from five minutes ago.
The Chief Secretary seems to have been saying that he knows that the system is a rotten one, arbitrary and unfair, but, a terrible mistake having been made in March, it is the best system that the Treasury could cobble together in a hurry before something respectable is done in the forthcoming Budget. We agree that it is a shabby way of attempting to deal with the company liquidity problem and accounting at a time of inflation. We are trying to find out more precisely from the Chief Secretary with what he proposes to replace the system. We do not wish to anticipate his right hon. Friend's Budget, but the Chief Secretary argued against the amendment chiefly by saying that there is something better in the pipeline which will put it right.
Will the Chief Secretary please cease talking about reliefs? We are talking not about a relief for the corporate sector but about getting away from a system in which, because of inflation, companies are taxed on phoney profits, which are not genuine profits but the paper creation of a mixture of inflation and orthodox accounting principles of the so-called “doomsday machine” which are putting respectable, profitable and efficient companies into bankruptcy. A measure to prevent that happening because of the high degree of inflation is not relief but a measure of justice. May it be established that we are not talking about measures of relief but about measures taken to avoid imposing ever higher burdens of taxation at a time of rapid inflation?
Will the Chief Secretary make clear that what he is talking about as a replacement for this one-off clause is not merely a more refined system of providing for the element of inflation in stock appreciation to be taken into account but inflation accounting in the fullest sense, taking into [column 1273]account the effect of depreciation, which is a major point in company accounts and profits, and that it will be introduced in the forthcoming Budget? Will the right hon. Gentleman say that it will not be confined to stock appreciation, important though that is, but will be introduced regardless of whether the Sandilands Committee has reported by that date? We want full inflationary accounting. It is a form of indexation. The Chief Secretary knows the importance attached by many Opposition Members to indexation at a time of rapid inflation, not merely for the corporate taxation sector but for individuals.
When the matter of corporate liquidity was discussed in Committee on the Finance Bill eight months ago, the Government's attitude was summed up by the Paymaster-General. I do not wish to pick on the Paymaster-General, who is probably the most well-informed member of the Treasury team on economic matters, but he said:
“I turn now to the question of company liquidity. There was a discussion about Government statements on company liquidity, and figures were given as to the net position compared with the figures which the Government had quoted after taking account of company indebtedness. The £14,000 million referred to as the current company indebtedness, which is to be set off against liquidity figures stated by the Government, is not expected to be called in.”
He came to the astonishing conclusion that we had no evidence of a serious liquidity problem. He went on to say:
“If there were to be such a problem, that would obviously be a factor of which we should have to take account.”
Later he said:
“According to our information, there is much liquidity in the possession of companies.” —[Official Report, 21st May 1974; Vol. 874, c. 232–4.]
That was manifestly nonsense at the time and it is now. Was it bigotry? It could hardly have been unawareness of the fact of inflation. Surely it could not have been lack of awareness of the consequence of inflation on profits. It could not have been unawareness of the existence of the rigid Price Code and price control which existed then and is continuing to cripple company liquidity.
How did the Government manage to get it so wrong then, and what is their view now? Do they think that there is a serious liquidity crisis now? Do they [column 1274]think that Clause 16 is adequate, or do they think that further steps need to be taken to improve company liquidity at a time when there will be a chain reaction of bankruptcies, starting with smaller companies because they are not so likely to be bailed out, if something is not done to recognise the position of British industry?
Mr. Joel Barnett
I always like to try to help the hon. and learned Member for Dover and Deal (Mr. Rees). The hon. Member for Blaby (Mr. Lawson) asked whether I know what he wants. The answer is “Yes” , and I hope that one day he will get it.
As the right hon. Gentleman has answered a question which I did no ask, will he please answer the questions I did ask?
The hon. Member for Hitchin (Mr. Stewart) asked for an assurance about the relief given by Clause 16. I thought I had made absolutely clear that if we did nothing else but Clause 16 there would be a claw-back. The Chancellor said that there would be new measures in the spring Bill, and that is why there is no general claw-back after this year. There is no question of that, and I give that assurance.
I have been accused by the hon. and learned Member for Dover and Deal of “generalised generosity” . It is true that this form of relief is arbitrary, but anything that we could have done in a short time would have been arbitrary.
Mr. Peter Rees
How about using corporation tax?
Using corporation tax would have been much more arbitrary. It would not necessarily have gone to the areas which suffer from inflation. I was surprised at the view taken by the hon. and learned Member for Dover and Deal.
Mr. Peter Rees
I cannot give way to the hon. and learned Gentleman. No doubt I shall be hearing him often in these debates. He told me that he is easily incited, and I know that only too well. But when he said that I am foisting relief on companies, I think that is taking things a little too far. If he likes to think that [column 1275]we are foisting relief on companies, I should have thought that would be generally welcome.
As I have said before, and I say again, in regard to the assurance we gave companies as to whether they should be happy with this relief and as to whether it would all be clawed back next time, the answer for most companies is that it will not be clawed back. Most companies will maintain stock levels and there will be no question of clawing back of relief. But the whole purpose behind the amendment is to give relief permanently. For the various reasons I gave previously, that cannot be right. It would not be right to give relief on a permanent basis, and I hope that the Committee will reject the amendment.
I do not think we can accept Joel Barnettthe Chief Secretary's assurance, because he has given some rather contradictory assurances. He said first that the relief will not be clawed back, and he then said that it might be taken back in certain circumstances. He then got a little muddled about permanent relief. There is nothing in the amendment to [column 1276]prevent him having a totally different method of relief. I understand that Denis Healeythe Chancellor of the Exchequer wants to give the relief during a period of inflation. We want that, too. However, by his method he is not giving relief during a period of inflation; he has deferred relief during a period of inflation.
Our amendment makes certain that relief will be given this year and cannot be taken back. It is not a permanent relief, but it is a certain relief for this year. Therefore, I think that we should vote on this amendment. The point about volume will be taken care of by the limitation to 10 per cent. on trading income. Even if it were not taken care of, the relief is inadequate in view of the liquidity position of many companies. It would not hurt the Chancellor to give a little extra relief on increased volume as well, to make certain that the companies get relief and that it is not taken away from them next year.
Question put, That the amendment be made:—
The Committee divided: Ayes 239, Noes, 273.