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Mr. John Gummer (Suffolk, Coastal) (Con): I refer the Committee to the declaration of my interests in the
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Register of Members' Interests. I want to suggest to the Paymaster General that she reflect on the debate and imagine herself in the place of the owner of a small business affected by the proposals. What will be the effect on people trying to do all that is needed to run a small business? Small businesses are about people doing everything from accounting to selling, and all the rest of it.

When a mistake is made, it is difficult for a Government to reverse it. I understand that, and it would be curmudgeonly to press the point too hard. However, the problem is that a bog up has been made, and it is increasingly difficult to know what the Government mean about the simplification of the tax system. What do they mean about their care for small businesses? Small businesses are finding it more and more difficult to handle changes in the tax regime without resorting to the sort of expensive professional help for which the Government should not be providing an employment exchange.

A measure such as this makes it extremely difficult for honest people to run their businesses in a cost-effective way. I beg the Paymaster General to think again, and to see whether the proposal can be made much more simple. I hope that she will accept some of the recommendations that have been made, and that she will put off the effects of the measures until simplification has been achieved.

I suspect that most small business people will make neither head nor tail of much of what has been said in this debate. That is not proper for people trying to earn wealth for themselves and for the rest of society. For that reason, the Government are condemned on this issue—as they are on many of the matters referred to in the Bill.

Sir Robert Smith: The right hon. Member for Suffolk, Coastal (Mr. Gummer) spoke about trying to achieve a simplified tax system. That is very important, and a goal that many people who take part in these debates aspire to, although we rarely see the outcome of their attempts.

The burden on people in business, and the complications that they face, are becoming very depressing. The Government have promised to bring in a new companies Bill to streamline the law in that area, but it is languishing in draft form. The final version never seems to come any nearer. The Government also promised to make life simpler for small businesses by having a basic de minimis system of regulation for them, and a more complicated system for larger concerns. Yet the way that the Treasury has made tax matters more complicated means that life has become increasingly difficult to understand, especially for people whose main priority is to get on and run a business.

If the Chancellor were genuine about wanting small business to assist in making the economy grow, he would try to make more use of the expertise of small business people in respect of their particular businesses. He would not be looking to their overall commercial skills in accountancy and tax law. What we need is a climate that allows small businesses to focus as much as possible, within the wider world with which they must comply, on the thing that drove them into the business in the first place.
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As the Paymaster General knows, my constituency contains many people who operate small businesses, and she and I have had many exchanges on IR35 over the years. One frustration expressed to me by many constituents in the run-up to this debate is that they have been lured into a trap. Having gone to all the expense of incorporation, they feel trapped, in that the benefit that the Chancellor said they should get for going through all the hoops is to be taken away. It is much more difficult to unincorporate than it is to sort out the mess that they have got into, and for those people, there is a real compliance burden.

I reinforce what my hon. Friend the Member for Yeovil (Mr. Laws) said: if yet another upheaval in the whole system of taxation is coming down the tracks, especially if it affects smaller companies, it would make sense to bring the whole thing together so that people need climb only one learning curve during the main transition to take the whole thing on board.

I am worried by what I have heard about the distribution of past profits. This is where the Chancellor's gimmick has backfired and created even more of a muddle. He created the gimmick to get headlines, which was the start of the problem. Having done that, he then had to create a solution that did not leave too much egg on his face. That might tackle some of the problems his gimmick created, but it creates a trap for people who never intended to exploit the gimmick but who were lured in. The solution will hit them on their past profits, unless the Paymaster General has some reassurance to offer on that. I urge her to go down the road of stability and embrace what has been offered to her by my hon. Friend. She should try to bring the whole thing together, genuinely practising what the DTI has preached about a simpler climate for small business by delivering that climate.

The Paymaster General (Dawn Primarolo): In responding to the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) and the right hon. Member for Suffolk, Coastal (Mr. Gummer) on the approach that businesses should make to professional advisers, I want to say two things. First, as businesses consider whether to be incorporated, they, and presumably their advisers, may read Tolley's Tax Digest, which lists a huge number of points about the tax consequences for or the obligations on someone who is self-employed, in a partnership or who chooses to incorporate. The decision for a company on whether or not to incorporate has far more complexities, particularly if the company wants to plan its growth and move from self-employment to expand, than whether there is a zero rate on the first 10 per cent. of profits. In addition, the Government made it absolutely clear when we introduced that zero rate that we intended reinvestment of profits into the company for growth. That was the purpose of the rate—to encourage growth, not to have money taken out as dividends or as salary by another name.

I shall come to the points made by the hon. Members for Yeovil (Mr. Laws) and for Arundel and South Downs (Mr. Flight). Let us be clear, however. The Government's intention has always been to remain neutral with regard to the operation of the tax system on whether a self-employed person decides to incorporate. At that point, those people need to take advice. The
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Government placed a mechanism in the tax system that meant that if companies chose to incorporate and to reinvest the first £10,000 of profits, they would be taxed at a zero rate, in order to help them to grow. That remains the case.

I am always happy to see measures intended to promote business growth, but the amendment would not achieve what the hon. Member for Arundel and South Downs suggests, as I told him earlier. In fact, it would work against the companies with the smallest profits—the very ones that we want to see grow. For example, a company owned by an individual with profits of less than £10,000 in an accounting period can, inevitably, only retain less than £10,000. It has no more profits to retain. However, the company would be liable for the non-corporate distribution rate if it paid a dividend. I agree that that might act as an extra incentive for the company to grow and earn profits exceeding £10,000, but such an incentive is neither equitable nor good for business.

The amendment has a substantial flaw. Corporation tax works so that it smoothes the transition from one rate to another, but the amendment provides that a difference of £1 of profits retained could have a tax impact greatly exceeding £1. For example, a company retaining £9,999 of profit would be liable, under the amendment, to the non-corporate distribution rate in relation to profits matched by its non-corporate distribution. However, if the company retained £10,000 of profit, it would not be liable at all at that rate. That is unduly harsh. The clause has no such unfair distortion. It is important to make that point because the hon. Gentleman challenged me on it.

6.30 pm

The amendment would have a further harsh consequence. There is no provision to adjust the £10,000 threshold to take account of a shorter accounting period. For example, the threshold for a company with a six-month accounting period would not be reduced, under the amendment, to £5,000. The amendment would also put groups of companies at a disadvantage. If a group had two trades, the £10,000 threshold that is proposed would apply to its retained profits for both activities. However, if it made commercial sense to separate the activities into two subsidiaries, the £10,000 threshold would apply to both. In other words, the amendment would increase the threshold to £20,000 of retained profits.

Clause 28, as drafted, suffers none of those drawbacks. It will encourage all businesses with small profits to retain some or all of them, so that they can be applied to investment and growth. That is precisely the point that I made when addressing the issue in deliberation on the Finance Bill in 2002. By contrast, the amendment would favour companies with £10,000 or more profits available for reinvestment and would put less fortunate companies at a disadvantage. I do not believe that that was the hon. Gentleman's intention, but he will be voting on a highly defective amendment—if he is prepared to take my word on that.

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