The statutory percentage rates applicable for the purpose of determining the percentage standard were as follows:—
| In the case of companies or other bodies corporate. |
In the case of private businesses. | |
|
(i.) In respect of accounting periods ended on or before Dec. 31 1916. |
6% | 7% |
|
(ii.) In respect of accounting periods ended after Dec. 31 1916 (a) In the case of a business having one or more pre-war years |
6% | 8% |
|
(b) In the case of a business having less than one pre-war year or a business commenced since the outbreak of war |
9%[1] | 11%[1] |
Provision was made, however, for an increase of the statutory percentage rate in cases where a class of trade could prove an application that special risks attached to the employment of capital in that trade. Such applications, which could only; be made on behalf of a class of trade as a whole and not by individual concerns within a class, were dealt with by a board of referees specially appointed by the Treasury.
Statutory Allowance.—In computing excess profits, a deduction of £200 per annum was allowed in the case of every business. This amount was subsequently increased in the case of small businesses:—(i.) In respect of accounting periods ended after Dec. 31 1916, by varying amounts up to a maximum addition of £400 per annum, and (ii.) in respect of accounting periods ended after Dec. 31 1919, by varying amounts up to a maximum addition of £800 per annum.
Computation of Profits.—Profits both in the accounting periods and in the pre-war years were computed by reference to the actual profits arising in those periods, and it was a general principle of the tax that a similar basis of computation should be adopted throughout. Subject to certain exceptions, the general basis of computation of profits was the same as that adopted for purposes of income tax. Income derived from investments (save in the exceptional case of investment concerns) was excluded from the computation of profits; but the income-tax method was departed from in allowing a deduction in respect of interest on borrowed money. In three other directions in particular a departure was made from the general scheme of computing profits for purposes of the income tax. In the first place, the amount allowable as a deduction in respect of the remuneration of directors and managers of a business was expressly restricted to the amount so paid in the last pre-war trade year, unless the commissioners of Inland Revenue (the assessing authority) directed otherwise. In practice, the commissioners restricted the allowance to the amount paid in the last pre-war year in cases where the director or manager was in a proprietary position. In other cases, the increased remuneration paid was in general allowed as a deduction either in whole or in part. In the second place, a deduction from profits was expressly authorized by section XI. (3) of the Finance (No. 2) Act, 1915, in respect of special depreciation due to the war of capital assets employed in the business and of expenditure on repairs deferred in consequence of the war. In the third place, recognition was given in the excess profits duty to the principle that variations of capital imply variations of profit, and where the capital employed in the accounting period varied in amount from that employed in the standard period, an adjustment was made a deduction (at the statutory percentage rate) being allowed in respect of any increase in the amount of capital in the accounting period as compared with that in the standard period, and an addition being made in respect of any corresponding decrease.
Apart from the general provisions for the computation of profits, special provisions were enacted with respect to investment companies, cooperative societies, the shipping industry and businesses carried on by municipal authorities; and the duty was extended by the Finance Act, 1918, to profits arising from certain sales of trading stock which were in the nature of capital transactions.
Set-off in Respect of a Deficiency of Profits Below the Standard.—At the time when the excess profits duty was first introduced, the view was taken that, having regard to the very high rate at which the duty was charged, it was necessary to take into consideration the general position of the trader over the whole lifetime of the duty. This view fed to the introduction into the Statute of a provision under which the taxpayer became entitled to set off, against the excess profits duty of one accounting period, a sum equivalent to the duty on the amount by which his profits in another were below the standard.
Administration of the Duty.—Unlike the income tax, many of the assessments to which are made by a number of local bodies, the administration of the excess profits duty was expressly placed by Statute in the hands of one central authority, the commissioners of Inland Revenue, by whom the assessments were made, the main part of the work being carried out under their direction by H.M. Inspectors of Taxes. By this means it was possible to secure a measure of uniformity of practice which was otherwise unattainable in the case of a tax of so novel and difficult a character. From the assessments made by the commissioners of Inland Revenue the trader had a statutory right of appeal to either the general commissioners of Income Tax (local bodies appointed for the purposes of the income tax) or to the special commissioners of Income Tax. From the decisions of those commissioners, an appeal lay to the courts on a point of law at the instance of either the trader or the assessing authority (the commissioners of Inland Revenue).
On certain specific points, the settlement of a matter in dispute between the trader and the commissioners of Inland Revenue was reserved for the board of referees appointed by the Treasury, from whose decision an appeal lay to the courts on a point of law.
The duty was collected by the commissioners of Inland Revenue, and payment was required to be made two months after the notice of assessment was issued, though the commissioners of Inland Revenue were empowered to accept payment by instalments in suitable cases. Discount at varying rates was allowed on prepayment of duty, and certain Government securities issued during the war could be tendered in satisfaction of the duty.
Termination of the Excess Profits Duty.—In the early part of 1921, Mr. Chamberlain, then Chancellor of the Exchequer, announced that the Finance bill of that year would contain proposals for bringing the excess profits duty to an end. The decision to terminate the duty gave rise to almost as many difficult problems as did its imposition, the most important being those connected with the restriction of the duty to a uniform aggregate period of charge for all businesses alike and with reliefs to compensate for the heavy drop in the values of trading stocks after the termination of the duty.
The proposals embodied in the Finance bill of 1921 contemplated that, in the case of businesses which were in existence before Aug. 4 1914, the liability to excess profits duty would terminate on such a date as would result in each business being subject to the duty for a period of seven years from the commencement of the first accounting period. As such businesses commenced liability at different dates they would terminate liability at different dates, but in no case would liability cease before Aug. 5 1920, or after Aug. 4 1921. Businesses which did not come into existence until after Aug. 4 1914, would, it was proposed, cease to be liable to the duty at a fixed date, Dec. 31 1920. As regards the valuation of trading stocks it had been recognized from 1917 onwards that traders holding stocks of commodities might be involved in very heavy losses shortly after the termination of the excess profits duty and that some relief from excess profits duty in respect of such losses might fairly be given. Provisions of a highly technical character for granting this relief were included in the Finance bill of 1921.
General Observations.—In general, the administration of the duty proceeded smoothly and without any serious friction, and this was undoubtedly due in the main to the patriotic attitude adopted by taxpayers. Recognizing the necessity of the State to levy large sums by way of taxation, the taxpayer, notwithstanding the very high rates at which the duty was imposed, was not disposed during the war to raise issues affecting his liability, unless those issues were of a serious character involving very large sums.
That the duty proved a great success from the point of view of the Exchequer is evidenced by the following figures of its yield. These figures include the yield of the munitions levy:—
| Financial Year. | Budget Estimate. | Amount paid into the Exchequer. |
| 1915-6 | — | £ 140,000 |
| 1916-7 | £ 86,000,000 | 139,920,000 |
| 1917-8 | 200,000,000 | 220,214,000 |
| 1918-9 | 300,000,000 | 285,028,000 |
| 1919-20 | 280,000,000 | 290,045,000 |
| 1920-1 | 220,000,000 | 219,181,000 |
| 1921-2 | 120,000,000 | — |
It was anticipated that in 1922-3 some further substantial amount would be yielded, approximating to £70,000,000
The following figures giving the approximate excess profits arising in the undermentioned periods may be of interest:—
| Accounting periods ended | Approximate amount of excess profits |
| Between Aug. 5 1914 and March 31 1917 | £600,000,000 |
| During the year ended March 31 1918 | 420,000,000 |
| During the year ended March 31 1919 | 460,000,000 |
| During the year ended March 31 1920 | 500,000,000 |
Although the duty proved invaluable as a means of producing revenue, experience showed that a tax of this character (i.e. one which has regard to the profits of a particular period as a standard) is one which is only suitable for adoption as a temporary measure in times of emergency. Where the circumstances are such that increased profits are being made by any considerable section of the community, an excess profits duty is certainly a most useful expedient for raising money quickly from those who are able to pay. But it is perhaps not suitable for adoption in normal times and circumstances or as part of a permanent scheme of taxation. It is in some respects unequal in its incidence as between one taxpayer
