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House of Commons
Session 1997-98
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Standing Committee Debates
Finance (No. 2) Bill

Finance (No. 2) Bill

Standing Committee E

Tuesday 19 May 1998


[Part I]

[Mr. Roger Gale in the Chair]

Finance (No. 2) Bill

(Except clauses 1, 7, 10, 11, 25, 27, 30, 75, 119 and 147)

4.30 pm

The Chairman: Good afternoon, ladies and gentlemen. For those who have not already anticipated the understanding and generosity of the Chair, hon. Members may remove their jackets if they want to do so. It may also be for the convenience of the Committee if I say that I was fortunate enough to be present for this morning's deliberations, so hon. Members will not need to do me the courtesy of repeating arguments that have already been heard.

Clause 36

Arrangements with respect to payment of corporation tax

Amendment proposed [this day]: No. 8, in page 21, line 39, at end insert--

    `(da) may make provision for cases in which some or all of the members of a group of companies are subject to seasonal variations in taxable profits;'.--[Mr. Gibb.]

Question again proposed, That the amendment be made.

The Chairman: I remind the Committee that with this it will be convenient to discuss amendment No. 9, in page 21, line 39, at end insert--

    `(da) may make provision for members of a group of companies to elect to base their corporation tax payments on the previous year's taxable profits;'.

The Paymaster General (Mr. Geoffrey Robinson): I shall not do you that discourtesy, Mr. Gale. Indeed, I shall proceed from the point where I left off. We shall resist amendments Nos. 8 and 9 for the compelling reasons that I have already explained to the Committee. I do not want to detain the Committee further on them.

Mr. Michael Fallon (Sevenoaks): The extent to which the reasons are compelling is subjective. The Paymaster General describes his own reasoning as compelling. He was in a remarkably genial mood before we broke for lunch, perhaps in anticipation of the lunch that he was about to have. He was helpful on amendment No. 8; he has gone some way to reassure the Committee that he will explore whether the rules could help companies that have imbalanced profits because of the seasonal nature of their trading.

I fear that we still differ over amendment No. 9, about which the Paymaster General did not do so much to reassure the Committee. He spoke rather airily about various companies with which he had been involved having different cash flows. I am not fully aware of all the companies with which the Paymaster General has been involved; some of them are well known, others are not known. The only company of which I have been a director had remarkably good cash flow. Although monthly forecasts can change against the budget, cash flow depends on the complexity of the company, the extent to which it trades overseas and sterling movements. It might have been helpful if the Paymaster General had given us some comfort on that.

The Paymaster General neglected to answer why he could not consider an element of choice. If some companies can show year after year that it is difficult to forecast profits on a current-year basis, why can such companies not have the choice to revert to a prior-year basis? Is it dogma? Is there a practical reason why companies could not elect on the basis of their trading experience, with the agreement of the Revenue, to revert to a prior-year system? Another amendment could be tabled on Report.

Mr. Nick St. Aubyn (Guildford): I agree with my hon. Friend the Member for Sevenoaks (Mr. Fallon) that we have heard far less from the Paymaster General about amendment No. 9, which speaks for itself. I suppose that we might draw comfort from one aspect: the Government's decisions and statements are driven mainly by what the Revenue tells them. Generally, the Inland Revenue is in favour of clauses and amendments that will yield more money, and against those that will yield less. We must, therefore, assume that it believes that amendment No. 9 would somehow cost revenue because of when it is collected. From that, we surmise that it expects the economy to grow and believes that, on balance, the profitability of the largest companies will increase year on year, so that if such companies were allowed to assess their profits on the basis of a previous year's profits, it would assess them on a lower figure than if it had to assess them on this year's profits. It is merely the Revenue's avaricious instincts that drive the Paymaster General's hostility to the amendment, which shows the Government's short-sightedness. They say that they are against driving the economy into boom and bust, but in order to sustain--

4.34 pm

Sitting suspended for a Division in the House.

4.49 pm

On resuming--

Mr. St. Aubyn: I was about to come to the heart of my argument about the Inland Revenue's attitude that lies behind the response of the Paymaster General to amendment No. 9, which is that it is a way of getting more money in faster. Profits are expected to rise on the whole, as a result of which the accretion of taxes will be higher if companies have to pay tax on the basis of their current year's profits.

In the glorious period of 18 years of Conservative rule, we demonstrated that cutting the amount of money that is taken from companies enables them to invest it in their future and generate more profit. During that time, the profitability of British companies shot up. We transformed the situation in which British companies were deeply unprofitable and when many did not make economic sense to a situation in which we have one of the most successful large company sectors in the world. Some of the largest companies in Europe are British. The most successful companies will be hit because those that are growing the fastest will have to pay more the fastest.

What about companies in high-risk areas? The Government often tell us how much they want to help the risk takers who are providing many new jobs in our economy. Yet, under the provision, a company that is growing fast, as a result of which its profits are growing fast, will find that, because of the need to pay a much higher tax rate on this year's profits than it would have on last year's profits, funding for investment business is constrained.

Mr. Geraint Davies (Croydon, Central) rose--

Mr. St. Aubyn: I give way to the highly knowledgeable hon. Member for Croydon, Central (Mr. Davies) who, as we have heard, knows so much about large companies.

Mr. Davies: Members of the Committee know of my background in Unilever and Colgate rather than in bean counting. Given the hon. Gentleman's analysis, is he happy to discriminate against those companies that are going through difficult times and of which profitability is decreasing? Does he want them to be taxed on the basis of the previous year's profitability or, on reflection, do you agree with the Government that it is much fairer to--

The Chairman: Order. I do not agree with anything.

Mr. St. Aubyn: The hon. Member for Croydon, Central (Mr. Davies), whose grasp of the matter is somewhat stretched, does not realise that the amendment would make provision for a group of companies to elect to base their payments on the previous year's tax performance. We are not obliging companies to choose the previous year's profits. The hon. Gentleman is displaying a lack of understanding of the commercial world.

Mr. Davies rose--

Mr. St. Aubyn: I shall give way when I have answered his earlier point--to the extent that any of us can understand it. As large companies are growing so fast, they need money in their business. If they are to be pulled back by the much higher tax charges on a current-year basis, their growth will be constrained. It will have an impact on their share price at the time when they may need to raise more capital to develop new ideas and technology. If the Government do not accept the amendment, the fastest growing companies will be the hardest hit.

Mr. Davies: In that case, the Opposition amendment is designed to discriminate in favour of very large companies that are growing fast. It would ensure that they paid less tax on the cash flow benefit while smaller companies that were declining lost. Is that the basic thrust of the amendment?

Mr. St. Aubyn: I marvel at the ability of members of the Labour party to perform a 180 degree turn. The hon. Gentleman accused us of discriminating against certain types of companies, but we are now told that we are discriminating in favour of them. We support flexibility. It is the lack of flexibility in the Government's proposals that discriminates against the entire corporate sector. In the current year, a fast-growing, large company should enjoy at least some benefit from having its profits assessed on the basis of the previous year to determine what it must pay this year, just as a small company that is below the threshold for the new payment regime will pay tax only on last year's profits in the current year. If the Government want to help the small companies sector by relieving it of these provisions, they must also want to help the large, fast-growing companies sector. If a fast-growing small company creates jobs, a fast-growing large company creates, broadly speaking, many more jobs.

I suspect that the background to clause 36 and to the new system of payment is that originally the Government were targeting the small companies sector, and that when problems came to light in imposing the new system on the small companies sector, they said, ``Well, at least we can carry on with it for the large company sector''. As a result, however, they are left with a system that, as someone said to me last night, is not a step forward but a step back to the classic system of double taxation. One of the problems of that system was its lack of flexibility, and one of the problems of clause 36 is its lack of flexibility. The Paymaster General should show a modicum of common sense and accept an amendment that makes the system a little more bearable.


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