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Finance Bill

Finance Bill

Column Number: 95

Standing Committee F

Thursday 16 May 2002

[Mr. Roger Gale in the Chair]

Finance Bill

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38){**qc**}

2.30 pm

The Chairman: I apologise that the centre door is locked and any inconvenience that may have caused. It is being unlocked as I speak. I understand that the Committee has made rapid progress.

Clause 30

Charge and main rate for financial year 2003

Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 7, page 22, line 3, at end add—

    '(2) In respect of that and subsequent financial years, if the retail prices index for the month of September preceding a financial year is higher than it was for the previous September, then, unless Parliament otherwise determines:

    (a) section 13(3) and section 13AA(4) of the Taxes Act 1988 (''the relevant provisions'') shall have effect for that year as if for each of the amounts specified in the relevant provisions as they applied for the previous year (whether by virtue of this section or otherwise) there were substituted higher amounts;

    (b) such higher amounts shall be arrived at by increasing the respective amounts for the previous financial year by the same percentage as the percentage increase in the retail prices index; and

    (c) if the results are not (in the case of section 13(3) of the Taxes Act 1988) multiples of £10,000 or (in the case of section 13AA(4) of the Taxes Act 1988) multiples of £1,000, rounding them up to the nearest respective amounts which are such multiples.'.

I welcome you to the Chair, Mr. Gale. We now come to more technical clauses and schedules. We have done our best, with the support of lawyers and the Clerks, to draft our amendments correctly. I apologise if they are not perfect, but the points are there to be made.

We welcome the latter provisions in clauses 31 and 32 to assist smaller businesses, but amendment No. 7 covers the obvious point that without indexation of smaller-company tax rates, the reality in trading and profitability terms is that the size of businesses that qualify for those tax rates will become smaller and smaller. Not to index them is a form of stealth tax if one believes in giving smaller companies fiscal advantages. Amendment No. 7 is straightforward and would index the limits by reference to which mainstream and starting rate corporation tax is calculated, so avoid the inadvertent effect that I have described.

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The Paymaster General (Dawn Primarolo): I welcome you, Mr. Gale, to our proceedings.

It can be taken as read that it is difficult in Opposition to draft amendments and I accept the caveat of the hon. Member for Arundel and South Downs (Mr. Flight), although we may sometimes have fun with some of the wording. [Hon. Members: ''When?''] Now. [Laughter.] It depends on how well we get on.

I shall explain why I am not attracted to the amendment. As I understand his underlying point, the hon. Gentleman wants to ensure that the number of small companies qualifying for the lower rate should continue to receive the Government's attention once they have started up and are growing. Putting the most generous spin on his comments, I imagine that he is expressing a hope that this is not a once-and-for-all, set-in-stone provision that would diminish in time if all new companies were successful. I assure him that our commitment in setting corporate tax levels for small and medium-sized as well as other companies is designed specifically to assist with other tax changes, the creation of companies, entrepreneurial activity and the growth of those companies. I know that Opposition Members take a slightly different view about what would be the best measures, but I am happy to reassure the hon. Gentleman about our intention.

The clause sets the corporate tax rate at 30 per cent. We are keeping it at that rate, having already reduced it twice since taking office. The amendment is an attempt at a Rooker-Wise amendment for corporate tax. I should like to offer the hon. Gentleman congratulations on his ingenuity, but I am not attracted to it and I will explain why. The amendment would introduce an annual programme of up rating the profit limits using a calculated entitlement to the small company rate and the starting rate of corporation tax.

The profit limits used to compute UK corporation tax are already high compared with other Organisation for Economic Co-operation and Development countries. We already have a higher level. Companies with profits of up to £1.5 million gain some benefit from the lower rates of tax, and how they interact with the 30 per cent. rate. It would have been possible for the Government to increase profit limits this year, and it is acknowledged that that would have had a positive effect on some companies, but not all of them and particularly not smaller ones. We are trying to consider how all tax rates work, in particular for small companies.

Instead, the Government decided that we would obtain greater benefit from reducing the tax rates than from changing the limit. As I have said before to the Committee, the Government favour ''targeting'' relief where they can, so that the economy can benefit to the greatest extent, rather than using blunt instruments such as a year-by-year increase in profit limits.

Apart from the fact that changing the rate is better than the mechanism proposed by the hon. Gentleman, because it maximises the benefits to the smaller companies, I also have technical objections. I am not

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talking about whether the amendment is technically correct; I am talking about how the hon. Gentleman has constructed the amendment. At first sight, it seems that a requirement to upgrade the profit limit in line with inflation might seem reasonable. However, the inflationary adjustments in the hon. Gentleman's proposals are rounded up to the nearest £1,000 for the limits relating to the starting rate, or £10,000 for those relating to the small companies rate. I can understand why he may have done that, and I am sure that he will understand why I do not want to. However, the effect of rounding up the increase would be to increase the limits by five times the current rate of inflation. Having said that that was indexation, it is given a big push by rounding up. Every year, the amendment would mean that the profit limits would increase in real terms, leading continually to a real terms reduction in the amount of tax that companies pay. That may well be the hon. Gentleman's intention, but it is not the Government's. The Government intend that there should be fair levels of tax and we should look at that for all companies.

Mr. John Bercow (Buckingham): The Paymaster General's point about rounding up and its consequences is clear enough, and the Committee can make its own judgment of the merits of that point. It would be helpful if she were now to provide a specific example of the way in which the rounding up to which she objects operates in practice, so as to vindicate her point about an increase of five times.

Dawn Primarolo: I was intending to come on to that when showing how the formula would work in the legislation and how it would, therefore, change every year. It would cut straight across the principle of companies having certainty in their ability to plan what their tax rates will be.

The rounding-up formula would be different every year. The boost that the rounding up would give would be much greater than the amendment appears to intend at initial sight and would be beyond what the Government consider necessary. The amendment would also make the relationship between the various profit limits unstable from year to year. That comes to the point that the hon. Member for Buckingham (Mr. Bercow) made. That is important for the computation of corporation tax reliefs on the relative amounts between each limit. If the amendment were accepted, there would be a required change in the fraction used to calculate the marginal relief.

This year, those fractions would have to be 209 over 4,000 and 341 over 12,000. Although I accept the principle that the hon. Member for Arundel and South Downs wishes to explore, I do not believe that his intention is to require legislation every year, automatically to change how all those limits are calculated and, therefore, to require companies to begin to engage in mathematical gymnastics over the planning of their liabilities. The amendment would

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also mean that the calculations would be increasingly complicated year after year, as we sought to achieve the right balance.

I take the amendment in the spirit in which I hope it was intended. I think that the hon. Member for Arundel and South Downs wants to have on record, again, the Government's commitment to continue actively to scrutinise corporate taxation levels, whether for large or small and medium-sized companies. I think he also wants to ensure that the rules that interlock with the corporate tax rate continue to produce a highly competitive tax rate for British companies in terms of international competition—a point that we may discuss in later debates—and provide the certainty that our companies need in understanding their tax concerns.

On that basis, I hope that the hon. Member for Arundel and South Downs, while wishing to put on record that he favours that type of mechanism, will accept that although it looks good in principle, I am not attracted to it in practice. I am prepared to say that we will, of course, always continue to look critically at issues that are put forward, not least because the hon. Gentleman is very thoughtful and has, in previous Finance Bills, occasionally discovered things that we should have discovered, and which we went on to do. I hope that the Committee will not support the amendment if it is pressed to a vote.

2.45 pm

Mr. Flight: I thank the Paymaster General for her kind comments. I accept that a Rooker-Wise approach has its problems. The issue here is not just being internationally competitive; the basic issue is that if the favourable tax limits for small companies remain at a nominal sum, in real terms, they will reduce each year. I should be interested to know whether the Government have the obvious alternative in mind, which is simply to review the limits every year and potentially to raise them in nominal terms to keep up in real terms.

The issue about rounding up was not included as a clever device, but merely for tidiness. To some extent, I take the point that it has its problems.


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