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We tabled three amendments, two of which have not been selected. Amendment No. 3 has been drafted to provide some mitigation for small businesses. In a brief conversation with the Paymaster General, she mentioned to me that the situation that the amendment seeks to achieve may already obtain, but that is not the perception of the various accountants with whom we have spoken. If it is, it is very fortunate, but the issue is that the zero rate band takes effect on the first pound of distributed profits. If a company distributes profits, it has a 19 per cent. tax charge on whatever is distributed. Our amendment is designed to meet the Government's declared objective better than the proposals as we understand them and as others have understood them, and to be less harsh on small businesses. It is relevant to about 300,000 small businesses.
Our two other amendments sought to defer the new tax by a year, largely because the Government have made it clear that the new 19 per cent. non-corporate distribution tax is intended to be temporary. If it is temporary, the last thing small businesses want is perpetual chopping and changing of their tax arrangements. It therefore seemed to us that there was a case for waiting until the Government had made up their mind what they wanted to do. Others have suggested that the new NCD rate should take effect only once undistributed profits at 1 April this year had been paid fully, to avoid the double taxation problem to which I referred.
There are also some deeper administrative problems with the Bill. As the Chartered Institute of Taxation has pointed out, the Government need to clarify the interpretation of the proposals and their interaction with IR35 legislation, preferably making it clear that there will be no double charge on the individual or company where that company has engagements within the intermediary legislation, and that it could be treated as having made a deemed payment.
There are various other specific issues that need to be addressed, and I hope that the Paymaster General will be able to assure us that they will be satisfactorily dealt with in the forthcoming further consultation on the arrangements. There is concern that the new provisions will discriminate unfairly against small companies that qualify for accelerated allowances and SMEsmall and medium-sized enterpriseresearch and development tax credits, because their taxable profits may be considerably less than their distributable profits.
Is it possible to provide examples to explain further how sub-paragraphs 8(3) and (4) of schedule 3 will impact on the differing accounting periods of group companies? Is it intended that the agreement to apportion the new tax between group companies should be a stand-alone claim, or will that be incorporated into the corporation tax return?
A nine-month time limit exists for making an agreement to transfer excess non-corporate distribution tax between group companies. However, there should be a move towards standardising time limits. In the case of companies, there is a 12-month filing deadline after the end of the accounting period, so why is there a nine-month time limit here? Would it not be sensible to standardise the limit at 12 months?
There seems to be a discretionary power in the arrangements to vary an allocation to an officer of the board. Will there be safeguards on the rights of the company to allocate that to its advantage?
There is a deeming provision, and it appears that if some shareholders waived their entitlement, it would be possible for a minority shareholder that is a company to be treated as a parent company if it received more than 50 per cent. of the dividend paid. Is that result intended?
There appear to be no new legislative provisions dealing with the elimination of the possible new double charge in relation to IR35. The relevant section is broad enough to deal with that, but it would be helpful to have confirmation that it will be interpreted thus, and to have clarification on that matter.
The non-corporate distribution rate is defined as
"such rate as Parliament may from time to time determine."
The rate is not specifically linked to the small companies rate of corporation tax, and we would welcome clarification on whether that is deliberate or whether it is intended that the non-corporate distribution rate may deviate from the small companies rate of corporation tax in future.
If the nil-rate band is withdrawn in the future, can we have an assurance that the current provisions in relation to the non-corporate distribution rate will also be withdrawn?
I wonder whether the original draft provisions deal fairly with a company in receipt of franked investment income when, in reality, it may well be the franked investment income that is being distributed. I hope that the Minister can assure us that there will be a fair and reasonable approach to the issue of franked income.
We question whether the existing provisions are fair, in that a group can decide how to allocate an excess of the new tax, whereas the parent must utilise as much of the new tax as it can.
In summary, many complex issues arise from the proposals. Our particular concern is for the impact on small businesses. If the Government were bona fide when they introduced the zero per cent. rate to help small businesses, it seems all the more important that the unintended consequences of their measures should be tidied up so that they do not fall harshly on small businesses. That is why we stress amendment No. 3, which is designed to ensure that small companies are not hit with a 19 per cent. tax charge on the first pound that they distribute.
Clause 28 and amendment No. 3 are the story of an accident waiting to happen to tax policy. As the Paymaster General will doubtless graciously acknowledge in her response, when the Government's zero per cent. rate was introduced, many tax
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practitionersand even many politicianssuggested that there was a serious danger that lots of people would decide to incorporate for tax avoidance purposes, resulting in a far higher cost than the Government anticipated at the time. Of course, the fear was that the Government would respond, which is precisely what happened, despite their telling us at the time that they were conscious of those risks and believed that their estimate of the revenue loss was reliable.
In the year after the Government introduced the zero per cent. tax rate, there was an increase in new incorporations of some 43 per cent., and as a result the Government's anticipated tax loss ballooned to approximately £1 billion a year. Clause 28, which is their response, rows back from the earlier zero per cent. tax rate, but because they do not want to reverse the process altogether, there is a 19 per cent. non-corporate distribution ratethe mechanism through which they intend to get the money back.
Following this year's Budget, the Institute for Fiscal Studies said in its briefing to the press, Members of Parliament and others that many practitioners and economic commentators had anticipated this problem when the measure was introduced. It also reflected on what this fiasco tells us about a Government who said that, in terms of tax policy, they would pursue stability for small and larger businesses. Robert Chote, director of the IFS, pointed out that many small companies have gone through some four different tax regimes in not many more years. The 20 per cent. small business tax rate was followed by the 10 per cent. rate, which was followed by the zero per cent. rate. Now, we have the zero per cent. rate, plus a 19 per cent. distribution rate. Of course, in a couple of years' time there will be a discussion paper andif we are luckypre-Budget consultation. That will probably be followed by an entirely new tax regime, which will affect incorporated and unincorporated small businesses. What we are debating today might then be a complete irrelevancewho knows?because the Government are likely to present us with something entirely new.
It is very depressing to have to deal with such a problem. When we reflect on today's debate on whisky duty and tax avoidance in the spirits industry, and on the persuasiveness of the Government's case in that regard, we realise how badly wrong Governments can sometimes get it. Indeed, this situation is a prime example of how wrong Governments can be.
Many of the tax practitioners and economic commentators who were conscious of this problem in the past year felt that, in many senses, the best way to deal with it was simply to cancel the zero per cent. tax rate, and to cancel the starter rate altogether. They felt that it was better to go for a much simpler system, rather than introducing the non-corporate distribution rate. The Government have not chosen that path, and one can imagine the Chancellor's embarrassment and the effect on his reputation had he announced in his Budget that he was doing away with the starter rate just two years after introducing it.
"has a lot of disappointing featuresfundamentally it is hard to get away from the simple point of "why do it?". Bringing in such a change, requiring nearly 8 pages of the Finance Bill, seems hardly
When we debated the issue briefly on Second Reading, I told the Paymaster General that, at the time the measure was introduced, I was invited to a presentation by one of the tax practitioners in my own constituency. His task was to persuade the many businesses there that it would be a good idea to pay the required fees to the tax advisers in order to take up the opportunity of exploiting the 0 per cent. tax rate. The major concern was whether any Government suffering the likely loss of revenue would suddenly change course within a couple of years. I made the terrible mistake of saying that no Government could possibly change course in such a short period and that they could rely on the fact that, at least until after the general election, they would be safe. Now these people, to whom I dare not go back, are not only going to have to pay the money to incorporate into the system in the first place, but probably pay for more advice on how best to manage the consequences of the Government's U-turn.
Clearly, the Government considered some alternatives to their proposed structure in the run-up to the Budget. Indeed, the regulatory impact assessment runs over a variety of options. It comments that increasing or abolishing the starting rate of corporation tax would run counter to the Government's aim of maintaining low rates corporation tax to encourage growth and enterprise. However, that makes an interesting counterpoint to paragraphs 23 and 24 of the same assessment, which predict that, once it is fully in operation, the new measure will raise in the order of £0.5 billion a year. One wonders whether the Government are really so concerned about not raising the tax burden on small businesses. Why do they not acknowledge that this measure will have the same effect, and recoup revenues that they did not anticipate spending when they introduced the 0 per cent. tax rate?
It would be fair to point out, as the regulatory impact assessment does, that the revenue raised by the measure is in many ways what the Exchequer inadvertently gave away a couple of years ago. As the assessment also admits, the measure will affect only companies generating less than £50,000 a year, and it goes on to say that it will help to ensure that the tax paid by those companies is more closely aligned to the tax paid by the self-employed, thereby improving the fairness of the tax system. One wonders why, if that is a priority and objective, the Government took the action that they did a couple of years ago, which made the playing field less level and gave people incentives to incorporate. That is the key to the whole issue and to the way in which the Government should pursue their policies in future. One wonders why, in any logical tax structure, there should be a significant differential between incorporated and unincorporated tax status, and whether we should be providing incentives through the tax system to change status in a particular way.
"to consider the strategic issues raised by these developments, to ensure that the tax system reflects the realities of today's changing labour market and business environment. A discussion paper will be issued at the time of the 2004 Pre-Budget Report."
Presumably, that gives it all away. We now discover that the new regime that the Government want us to approve today may not last long at all. Who knows, we may get a discussion paper in future with the conclusion that the different treatment of incorporated and unincorporated businesses makes no sense. Thenagain who knows?we may find in a couple of years' time, perhaps without any consultation whatever, that there is a new tax regime for small businesses.
It must also be a matter of concern that, before the introduction of this measure in clause 28, there was no consultation, and no proper discussion following the pre-Budget report. The regulatory impact assessment merely uses the specious excuse that consultation was not possible because of Budget confidentialitya remarkably thin excuse for something that could affect 800,000 small businesses throughout the country.
There is great disappointment that the Government have acted in that way. I hope that the Paymaster General will assure the House that she will not subject the same companies, in a couple of years, to any further instability in the tax system. We need an undertaking that the new system is permanent, or that the Paymaster General will think again about introducing it until she has conducted the review referred to in the Red Book. In that way we can movein one go, and without going through a fifth stage of instabilityto a new tax system that deals coherently with smaller businesses, be they unincorporated or incorporated.
The Chartered Institute of Taxation raised a particular point about the proposal. The shadow Chief Secretary to the Treasury touched on this matter earlier, and I shall quote directly from the institute's discussion paper on clause 28. It states:
"There is one area where we feel that significant unfairness can arise as a consequence of the proposals. Where companies have paid tax on past profits but reinvested those profits and now wish to distribute them, they will be subject to the new tax. In some cases these profits will already have borne tax at 19 per cent., and, in extreme cases such as where the business is declining, perhaps even at a higher rate of 30 per cent. They will now potentially be taxed again, and we have received representations from tax advisers whose clients are not currently profitable but who are distributing earlier accumulated profits and suffering this double charge."
I hope that the Paymaster General can deal with that concern when she responds to the debate. I am sure that she would not want the proposals to have the effect that has been described. In addition, I hope that she will reassure the House that the problem that we have experienced over the past two years will not be repeated. We need clarification on the matters that have been raised, but more than anything else, I hope that the Paymaster General will give an undertaking that the Government will delay the implementation of the proposals until there is a coherent system of taxation for smaller businesses. Alternatively, I hope that she will offer an undertaking to ensure that there will not be any further instability in a year or so, when the Government's review is complete.
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