---

Mr. Flight: I am inclined to bow to the Paymaster General's superior knowledge and advice. However, as I understand it, the amendment would have the effect—
 
27 Apr 2004 : Column 846
 
granted, it is somewhat arbitrary—that if a company with profits of £10,000 or more retained up to that amount, NCD would not apply. That is because the clause that the amendment would add to the Bill would make it a reverse condition. Arbitrary though it would be, it would exempt a certain category of company from NCD.

Dawn Primarolo: I could see that that was what the hon. Gentleman sought to achieve, but that is done by the clause as it stands. The amendment would not achieve his aim, because he is setting the hurdle at £10,000 and anything beneath that would be liable to the NCD. However, our proposals cover cases up to £10,000, and that point needs to be made.

I shall deal briefly with the point about whether the clause is temporary and amounts to a strategic change in direction. I make it clear to all the hon. Gentlemen who have spoken in the debate that it is not a strategic change of direction. I have tried to point out that the Government have introduced a wide range of measures—both regulatory and tax measures of all types—to help business. I will not go through all of them. We believe that it is important that we continue to assist with reinvestment to help companies to grow. However, we will deal with cases in which money is being taken out.

The deliberate and cumulative aim is to underpin all the measures that the Government have taken to encourage businesses to grow and to be more enterprising and productive in the medium and long term and not to operate year by year by playing around with the tax system.

Mr. Laws: Will the right hon. Lady give way?

Dawn Primarolo: I would like to make progress so that I can answer the hon. Gentleman's questions, but I will give way briefly to him.

Mr. Laws: I was not sure whether the Paymaster General was coming to my question, so may I ask her whether she can give us a cast-iron guarantee that, if the clause is passed, there will be no change in the business tax regime for small businesses even after the review that was referred to in the Budget has taken place?

Dawn Primarolo: I was going to come to that point, but it is probably best if I deal with it now. It is not possible for any Minister to say that there will never ever be a change, but I point the hon. Gentleman to the consultation document that he mentioned. At all points, the Government's strategic direction is to look at small and medium-sized enterprises, their dynamism and ability to contribute to growth and to consider whether the tax system responds to their requirements. For example, he should look at the Budget discussion document on access to finance.

The hon. Gentleman asked me a similar question in Committee in 2002 about whether I thought I had got the balance right when he pressed me on the issue of incorporation and non-incorporation on the zero rate. I believe that the balance is right and that we are assisting companies to grow. We will, of course, act in the way that Parliament would expect us to do if the provision is
 
27 Apr 2004 : Column 847
 
used in a way that the Government never intended. I could have not been clearer in the Committee about what the zero rate was for and about the reinvestment of the £10,000 of companies' initial profits.

The hon. Gentleman was right to say that the starting rate was never meant to encourage businesses to incorporate solely or mainly for the short-term tax and national insurance advantages. I am perfectly prepared to admit in the House that we did not anticipate the significant numbers that would be prepared to incorporate without taking proper regard to the wide-ranging and important commercial considerations that need to be taken into account when deciding whether a company is limited. We set up a model and the provision was discussed in Committee in 2002. We have debated the issue at length, but tax planning and encouraging companies to behave are important issues that the Government need to take on board to a far greater extent. We shall do that in the Finance Bill.

I shall briefly respond to the specific points raised by the hon. Member for Arundel and South Downs. The measure is not retrospective; it is solely concerned with determining the rate at which current, and sometimes future, profits are liable to corporation tax, so the hon. Gentleman's point about the measure being applied to the same profits twice does not apply.

The hon. Gentleman said that the scheme is unfair if the distributions are made out of reserves or in other ways, and that the Bill should give credit for the tax paid. As I said, the measure is simply a mechanism for determining the rate at which a company's current, and sometimes future, profits should be charged corporation tax; it is not in any way a tax on distributions past, present or future.

The hon. Gentleman also said that the measure hits the smallest companies when larger companies can get off free. That is not so. The measure applies to all companies with profits liable to corporation tax at below 19 per cent. if they make distributions to non-corporate persons.

I turn now to what the hon. Gentleman called the triple whammy on small business: IR35, section 660A and now the non-corporate distribution rate. He knows that IR35 is not an attack on genuine business; it tackles intermediaries such as service companies where individuals are avoiding tax. Neither is section 660A an attack on small business; the Revenue is applying legislation to those using a company or partnership to avoid tax. There is no question of a double whammy or a double tax on any of these companies. The hon. Gentleman referred to the nine-month time limit. Nine months is only a minimum time, and it ties in with the due date for payment of corporation tax—that is all. There is nothing conspiratorial about it.

The hon. Gentleman also referred to the question whether companies need to bother with the scheme, and he said that they need to know about all the legislation. That is not so. A company will know whether it is in a group, so it will know whether provisions in part 2 apply to it. Companies have advisers who know all this, as the hon. Gentleman knows.

The hon. Gentleman touched on the provision for an inspector of the board to allocate liability to other companies, and he wanted to know what safeguards
 
27 Apr 2004 : Column 848
 
there are. The measure also provides for companies to amend those allocations, so no further safeguards are necessary. It is not a one-way street in which the Government simply impose conditions.

Finally, the hon. Gentleman asked about the deeming provisions in paragraphs 14 and 15 of schedule 3. Of course, the Revenue will be issuing guidance explaining exactly how those measures work. I have spoken to him before about the marginal bands and the way we ease progression from one band to the next.

I have dealt with the point made by the hon. Member for Yeovil about incorporation and self-assessment. The point about complexity is sometimes a little overdone. The hon. Gentleman has only to cast his mind back to the arrangements for advance corporation tax, which applied to these businesses before it was abolished—that involved 50 pages of legislation.

The purpose of the clause is to fulfil the Government's intentions to deliver support to companies and encourage them to reinvest their profits, rather than distributing them. That is important, and all outside the House have welcomed the way the Government have approached the issue. Many thought that we would use national insurance or income tax.

New businesses are thriving under this Government. More than 1 million new businesses have been created since 1997, a net increase of 117,000 businesses, demonstrating that the tax system and our economic policy enable companies to open up, grow, develop, be productive and create profits for their investors. That is precisely what the clause provides, and I hope that, on that basis, the hon. Member for Arundel and South Downs will not press his amendment.

Mr. Flight: There is an apparent lack of clarity about the effect of our amendment. Our understanding of its effect is that if one retained the first £10,000, one would not be subject to the non-corporate distribution rate at all, because the amendment would add a requirement about a company not so retaining at least that sum. I will take on trust the Minister's comments that she does not believe the amendment has that desired effect.

Our opposition is, however, to clause 28 as a whole. The Paymaster General and the Chancellor have been a little disingenuous in the argument that the zero rate was always about retaining profits. I well recollect pointing out in the Finance Committee precisely how it would be used—businesses would incorporate, and would then withdraw via dividends at a lower tax rate, saving national insurance. I recollect an extremely conscientious colleague of the Paymaster General asking me whether that was really how things worked. I explained and he expressed great surprise. For the Government to argue that it was not absolutely clear that giving a biased tax rate to incorporation did not serve as a massive encouragement to sole traders to incorporate, then to distribute by dividends, is not a fair comment.

In view of the debate, I beg to ask leave to withdraw the amendment, but I urge my right hon. and hon. Friends to vote against the clause, given the whole background to it.

---