appeared as a secondary feature in the scheme. Both bases, either separately or in combination, appeared in the schemes adopted in other countries.
United Kingdom.—The taxation of excess profits in the United Kingdom was effected by means of two separate and distinct imposts, viz. the munitions exchequer payments (commonly known as the munitions levy) and the excess profits duty. The character and the causes which led to the introduction of these two imposts were essentially different. The munitions levy, which applied only to a restricted class of concerns, viz. those engaged on the production of munitions of war or work allied thereto, was not primarily designed for the purpose of raising revenue. Owing to the urgent need of producing munitions in enormous and ever-growing quantities, it became necessary in the early part of 1915 that the Government should control the operations of these concerns and lay down conditions as to the employment of labour therein, conditions which were regarded as prejudicial to labour interests, and it was ultimately arranged that, while on the one hand labour would accept the proposed conditions, the owners of such concerns would for their part agree to hand over to the Government any amount by which their profits exceeded a certain standard. The amount so handed over was the munitions levy, and this levy was thus imposed as part of what may be termed a bargain made between capital, labour and the State, in order to secure increased production of necessary war materials.
The excess profits duty, on the other hand, was imposed purely for fiscal purposes, and, unlike the munitions levy, was a tax on trades and businesses in general. But while it was essentially a means of raising large amounts of revenue, the excess profits duty met a growing popular demand for a curtailment of the large profits made in many classes of trade owing to the war. Early in the war it had become obvious that, owing to restricted supplies of, and enormously increased demands for, various commodities, huge profits were being reaped by those who traded in those commodities (see Profiteering), and there was an ever-increasing volume of opinion, which became more and more insistent as the war continued, that those huge profits, due directly to war conditions, must not be allowed to remain in the possession of private traders, but should be appropriated by the State either in whole or in part, and applied towards meeting the cost of the war. It was this growth of public feeling, the feeling that the war must not become a means whereby certain citizens could enrich themselves at the expense of the community while others were dying on the battlefield, as well as the urgent financial needs of the State, which led in the middle of 1915 to the proposals for the taxation of excess profits, and then to the actual imposition of the excess profits duty.
In the following outline the excess profits duty, although it was imposed at a later date than the munitions levy, is dealt with first, as the more important and more general.
General Scheme of the Excess Profits Duty.—The excess profits duty, which was first imposed by the Finance (No. 2) Act, 1915, was charged on the excess profits of businesses which were either carried on in the United Kingdom or carried on abroad and owned by persons residing in the United Kingdom. The duty extended to all classes of business, including agency, with the following exceptions, viz.: (a) husbandry in the United Kingdom, (b) offices or employments, (c) professions, and (d) commercial travellers. The duty was charged upon profits, in excess of a pre-war standard of profits, arising in an accounting period, i.e. a period, not exceeding 12 months in length, which normally corresponded with the period for which the accounts of the business were made up. Although the Finance (No. 2) Act, 1915, was not passed until the end of 1915, the duty was imposed with retroactive effect and charged by that Act upon the excess profits arising in any accounting period which ended after Aug. 4 1914 (the date of the commencement of the war) and before July 1 1915. The duty was regularly continued by each annual Finance Act to the year 1920 inclusive and in each case the period of charge was extended for what was practically another year. These later Acts, while introducing certain modifications of detail, did not materially affect the general scheme of the duty.
Rate of Duty.—The excess profits duty was originally imposed at the rate of 50%, but that rate was varied in succeeding Acts. The changes in the rate of duty at successive periods are set out in the following table.
Table showing Variations in the Rate of Excess Profits Duty, 1915-21.
| Period of Incidence | Rate of duty on excess profit per cent. |
| For a year from the commencement of the first | |
| accounting period | 50 |
| From the end of the first year to Dec. 31 1916 | 60 |
| From Jan. 1 1917 to Dec. 31 1918 | 80 |
| From Jan. 1 1919 to Dec. 31 1919 | 40 |
| From Jan. 1 1920 to the termination of the duty, | |
| viz. the end of the final accounting period | 60 |
In the case of a business which commenced after Aug. 4 1914, the rate of duty was 50% in respect of any accounting period ending on or before Aug. 4 1915, and 60% for any other accounting period or part of an accounting period up to Dec. 31 1916.
Pre-War Standard of Profits.— As stated above, the duty was charged on profits in excess of a pre-war standard. This standard was based upon the pre-war profits of the business; but in order to avoid the imposition of too heavy a burden upon the taxpayer in cases where the pre-war profits were small in amount, alternative methods of measuring the pre-war standard were provided, the tax- payer being given the choice of adopting that standard which was most favourable to him. It must, however, be made clear that, whatever standard was adopted, it was a standard based upon actual facts and not upon hypothetical conditions. The normal standard was one based upon the average profits of the business in the best two out of the last three pre-war years. Where there had been only two years of pre-war trading, the standard was the average profits of those two years, or (at the option of the taxpayer) the profits of the second of those two years. Where there had been only one year of pre-war trading, the standard was for that year.
Alternative methods of computing the standard, which could be adopted by the taxpayer, if he so desired, were as follows:—(i.) A standard based on the average profits of four out of the last six pre-war years (restricted to cases in which the average profits of the last three pre-war years were 25% less than those of the preceding three years), and (ii.) a percentage standard, i.e. a standard computed at the statutory percentage rate upon the capital employed in the business. (The basis on which capital was computed and particulars of the statutory percentage rate are set out and explained in the section which follows.)
In the case of a business which had less than one year of pre-war trading or was not commenced until after the outbreak of the war, the standard was normally a percentage standard; but an alternative standard was provided, computed by reference to the pre-war earnings of the proprietor of the business, whether those earnings arose from a profession or employment or from some other business.
As regards accounting periods ended after Dec. 1919, a further alternative standard was provided (by the Finance Act, 1920) applicable in general to businesses carried on by individual owners, partnerships and private companies, whether those businesses were commenced before or after the outbreak of war. This standard, known as the substituted standard, only took effect for accounting periods ended after Dec. 31 1919. The substituted standard was computed by adding to the percentage standard a sum of £500 in respect of each proprietor working full time in the business—subject to the limitation that the standard was not to exceed £750 for each working proprietor.
Capital and the Statutory Percentage Rates.—The capital taken into account for purposes of excess profits duty was broadly speaking the proprietor's capital actually employed in the business, and was computed by deducting the amount of the liabilities from the value of the business assets. In making that computation the following principles were followed:—(i.) Investments outside the business were not taken into account (except in the case of investment, etc., companies), as the capital they represent was not capital employed in the business, (ii.) Debentures and other loan capital were treated as liabilities, and the amount thereof was consequently deducted in making the computation, (iii.) Assets in general (apart from cash or debts) were valued at cost (or, if not acquired by purchase, at their value when they first became assets of the business), subject to any proper deduction for wear and tear, etc. The result of a computation on these lines was an amount which, though it might differ from the amount of capital shown in the balance sheet, was a measure of the proprietor's capital, including reserves, employed in the business.
For ascertaining the percentage standard, the statutory percentage rates prescribed in the Acts relating to the excess profits duty were applied to the capital computed on the above basis.
The percentage rates, some of which were varied from time to time during the lifetime of the duty, differentiated between companies on the one hand and private businesses on the other, a lower rate being prescribed in the case of companies on the ground that in their case a deduction from profits was normally allowed in respect of remuneration paid to the directors and managers, whereas no deduction was allowed for remuneration paid to the proprietor of, or partner in, a private business.
