Finance Bill

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Mr. Jack: The hon. Gentleman made some of the points that I wanted to make because he and I read the same briefing from the Institute for Fiscal Studies. Therefore, I will not go over the points again, but I am intrigued, as he was, by the reason for that. There is no indication in the explanatory notes as to what the economic result is supposed to be—whether the amount is a small expenditure, as witnessed by the Red Book, or the much larger numbers to which the hon. Gentleman has rightly drawn the Committee's attention. The example that the Government use in the explanatory notes shows a company saving £875, which is the equivalent of £74 a month. Anyone would rather have than not have an extra £74 a month, but what would they actually do with it? I do not intend to give a detailed exposition of that.

My first thought was that the measure was a sop to small and medium-sized companies for the extra burden that they will bear in national insurance charges. Obviously, for companies that are low on profitability but high on employability, it would be a drop in the ocean. I then wondered whether it had something to do with investment. The Paymaster General could have encouraged investment in the small and medium-sized sector in many different ways. It begs the question, why this way?

As the hon. Member for Kingston and Surbiton said, there is a friction between incorporation and unincorporation. He gave the example of a person on £15,000 who did not choose the incorporation rate having to pay £3,827. I noted the body language of the Paymaster General at that point. She was almost ready to explode with disagreement. If she disagrees with that calculation, I look forward to her demonstration of why the IFS figures are incorrect.

The Paymaster General used a very interesting term—''targeted help''—in her remarks on the previous clause. I wondered why she felt that the

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companies at the lower end of profitability—the companies that would benefit from the measure—all needed help. One of the guiding principles of Government expenditure is to avoid a deadweight cost, if possible. I suspect that there is a lot of deadweight cost in the measure. Many companies might have been glad of some form of assistance, but through another route.

For example, in justifying their approach on oil taxation, the Government told us that they had enhanced first-year allowances for new North sea fields facing an additional 10 per cent. levy on corporation tax. The 100 per cent. write-off in year one was the key to inducing further investment and, by the magic of arithmetic, the Government tried to demonstrate to the Committee of the whole House that in some way companies would be better off. If that is a better way, why not visit that sum of money on enhanced allowances, for example? We do not have before us any form of compare-and-contrast analysis that would allow Parliament to decide whether the money is being used in the best way. The Government have decided on tinkering, to a certain extent. Someone with profit of £10,000 would get back £1,000 in monetary value.

What is the economic effect of using money in an across-the-board way as opposed to a more targeted relief, which the Paymaster General clearly favours? I should be grateful if she would give us some economic and business rationale and possibly agree to place in the Library the analysis—the Paymaster General looks pained.

Dawn Primarolo: The only reason that I look pained is that the right hon. Gentleman, who was a Financial Secretary in a previous Government, knows that certain elements of the modelling work that the Treasury undertakes cannot be disclosed. He implies that Ministers are withholding information that they could disclose. That is not the case, and he knows that he cannot plead for confidential Treasury information to be put in the Library. That is why I looked pained. I do my best to help him, but he stretches credulity.

Mr. Jack: If I had been asking for detailed company-by-company information, I would entirely accept what the Paymaster General says. However, the idea that the Treasury cannot provide some rational explanation—[Interruption.] I am sorry, but I do not accept that. There must have been a way in which the Treasury decided that that, rather than other alternatives, was a good use of public money to achieve an as yet unstated policy objective.

The Government are very happy when they believe that they have the justification to put on record gains such as economic growth or an increase in employment. The Paymaster General cannot have her cake and eat it. The Government are happy to put in the public domain, when things are going their way, the gains that they think can be made. It is different when I ask her in this Room to give a compare-and-contrast analysis of why this method has been chosen. If she simply said that the Government wanted to

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reduce the level of tax on that company, that would be fine; I would respect that point of view, but if there are alternative reasons, Parliament should hear them.

I do not think it unreasonable to ask whether alternative ways of helping small and medium-sized enterprises were considered. Any reduction in taxation will leave more money with those companies but, using the arguments that I put forward on deadweight costs, there might have been a better, more targeted—to use the Paymaster General's own language—and therefore more appropriate way of using that money.

Rob Marris (Wolverhampton, South-West): I am confused by this debate, which I think is very important, because the hon. Member for Kingston and Surbiton talked about amounts of up to £2.5 billion. He cited some figures, as did the hon. Member for Fareham. I confess that I was a solicitor before I entered this House in June, not an accountant. I get confused on this debate because I do not quite understand the figures and I have not had the benefit of the briefing from the Institute for Fiscal Studies. For some reason, it did not see fit to send me one.

Mr. Davey: It is on the internet.

Rob Marris: Right, but I have not had the benefit of it, so perhaps those who have will explain it to me. Let us take a simple example. I shall talk in round figures, because that is how my mind is working, and I stand to be corrected, because I am not an accountant. Ted's Window Cleaning, as a sole trader, turns over £15,000. My understanding is that Ted will pay low national insurance, although I am leaving that out of the equation for now. On his £15,000 a year, in round terms, he gets a personal allowance of £5,000 and, as a sole trader, he pays 22 per cent. on the £10,000, which is £2,200.

If Ted decides to incorporate his window-cleaning company, that company has a revenue of £15,000 and employs Ted for £5,000 a year as an employee, with higher national insurance contributions. He gets that £5,000 in his pocket. He leaves the £10,000 in the company and because it is below the level, his company is not paying any corporation tax on it. The following month, after the year ends, his daughter announces that she is getting married. He says, ''I haven't got any money.'' She says, ''Yes you have, dad, you've got this company with £10,000 in the bank.'' He says, ''You're right.'' As the shareholder, he takes it out of the company. He has extended his income. Does he not pay 22 per cent. income tax on that? I shall give way, because I am standing to be corrected.

Mr. Flight: He takes it as a dividend after the company has suffered the appropriate corporation tax on it and, as such, if he is paying only standard rate tax, there should not be any further taxation on it.

Rob Marris: I am grateful for that explanation. I am still not with it, and I stress that that may be my ignorance, but when Ted takes £10,000 out of his company, the company has not paid any corporation tax on it because it is below the threshold. He then has an income of £10,000 from the company—a dividend

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income as the shareholder. [Interruption.] Is the hon. Gentleman telling me that he pays no income tax on that?

Mr. Flight: My understanding is—no doubt the Paymaster General can correct me—that because the company has paid whatever its corporation tax due is, the money paid out by way of dividend will qualify as a dividend that has suffered corporation tax. The recipient would pay further tax on such a dividend only if he were paying higher tax rates. This recipient would, therefore, not pay any further tax on that dividend.

Rob Marris: I confess that I am getting more confused. My local brewery, the Wolverhampton and Dudley Breweries plc—the largest independent brewer in the country, which makes good beer—pays corporation tax on its profits. If I were to have shares in it, and I stress to the Committee that I do not, and it paid me a dividend as a shareholder, having paid corporation tax, is the hon. Gentleman saying that I then do not pay income tax at all on that dividend, or that I only pay it if I am a higher rate taxpayer?

Mr. Flight rose—

Dawn Primarolo: I hope that the advice that the hon. Gentleman is giving my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) is free.

Mr. Flight: It clearly depends on one's tax rate. Personal taxation on dividends is complicated. The Government's 10 per cent. credit is soon to be abolished. In simple terms, unless the hon. Member for Wolverhampton, South-West pays higher rate tax, which he does, he would not have a further tax liability that was material.

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Rob Marris: I shall leave it there. The window cleaner in my example would not be paying higher rate tax. I shall leave it for the Paymaster General to explain further.

The Chairman: Order. I am conscious that some extremely expensive advice is being offered free to hon. Members this afternoon, but I think that we had better come back to the matter in hand.

Dawn Primarolo: Thank you so much, Mr. Gale. I do not want to go down Ted's route at all, thank you.

The clause provides for the starting rate of corporation tax from 1 April 2002 to be zero. About 150,000 small companies, and other corporation tax payers that have taxable profits of less than £10,000, will therefore pay no corporation tax. When the starting rate first took effect two years ago it was set at 10 per cent.-- the lowest rate for small companies in the European Union, and indeed among all major industrialised countries. About 250,000 small businesses—around 60 per cent. of all corporation tax payers—benefited from the starting rate directly or indirectly through the marginal rate.

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In his Budget statement, my right hon. Friend the Chancellor went further, saying that he wanted to send out the strongest signal about the importance that the Government attach to small businesses and the creation of wealth. The measure recognises that businesses growing beyond a certain size will often be companies. We believe that cutting corporation tax is an effective way of targeting support at small and growing businesses. It also encourages would-be entrepreneurs to set up new companies.

If we consider the Budget as a whole, in terms of where the Government are intervening to assist business, we see that there is a total package of measures assisting business worth about £1.6 billion. It goes from the research and development tax credit, to the cut in the small corporate tax rate from 10p to zero, to the reduction of administrative burdens on VAT and the introduction of the community investment tax credit. Each of those interventions will specifically help a part of the economy.

The hon. Member for Kingston and Surbiton asked about the figures in the Red Book. It is not possible to disaggregate the costs of the two cuts—I shall come on to the Institute for Fiscal Studies—because the 160,000 companies paying at the marginal rate will benefit from both the issues. The costings given in the ''Financial Statement and Budget Report'' take account of anticipated behavioural effects of some self-employed people converting their businesses into companies to take advantage of the zero and the 19 per cent. rates. That is in the calculations and explained in the FSBR.

The next set of issues concern the estimates. As a result of the zero rate, 150 companies will pay no corporate tax and a further 160 companies will pay less corporation tax. The estimated impact also takes into account likely significant or quantifiable effects on behaviour. The estimates have been made on the basis of the likely shift, but the economic rationale is clear. The measure is a targeted reduction in tax to help small and new companies thrive and grow. A great deal of activity has taken place to reform that area for entrepreneurs and growing companies.

Turning to briefing note No. 24 from the Institute for Fiscal Studies, I shall start by saying that it is an illustrious body, although why people should consider it to be more able than the full might of Her Majesty's Treasury has always puzzled me. It does a lot of very interesting work and puts out a lot of figures. Sometimes its figures are nearly right and sometimes they are spectacularly wrong. It puts out those figures in order to engender debates and tease out choices that are being made. When we introduced the working families tax credit, it published spectacularly large estimates of how much the child care tax element would cost. It was unbelievable how off beam those estimates were, and the Treasury was right.

An Opposition Member said that neither the IFS nor the Treasury always gets it right, which is true. We do our best to make forecasts on difficult issues. Let us examine how the IFS reached its £2.5 billion figure. It assumed that every single unincorporated business would move, given a theoretical gain of £500. That has

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not happened, and we can question whether it will happen and whether we should expect it to happen. The IFS certainly has a different way of approaching behavioural impact analysis and, therefore, forecasting.

Some 78 per cent. of businesses—nearly 3 million of them—are unincorporated, despite the fact that there are already theoretical tax benefits for incorporating that would demonstrate to those companies that they could be better off. There is no shortage of tax advisers seeking to earn a fee from advising companies that that is the best way forward, but we have still not seen that change. The Government stand by their estimate in the Red Book of costs rising to £450 million.

Let me return to the point made by the right hon. Member for Fylde. The estimate is based on careful modelling of the impact of the measure that reflects the facts of real business behaviour, rather than dubious assumptions or sweeping decisions. As he knows, I cannot disclose the details of such modelling in the House of Commons. When he was a Minister the situation was the same, and analysis and calculations were not always revealed.

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