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Clause 26

Abolition of corporation tax starting rate and non-corporate distribution rate

Julia Goldsworthy: I beg to move amendment No. 27, in page 26, line 19 [Vol I], at end insert—

'( ) At the end of section 8 of ICTA there is inserted—
"(3A) Notwithstanding the provisions of this section—

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(a) corporation tax shall not be charged on the profits of a company where the profits of the company for any accounting period in question do not exceed a limit of £500;

(b) where an accounting period is shorter than 12 months that £500 limit shall be reduced in proportion to the reduction in accounting period; and

(c) where a company has associated companies, that £500 limit shall be reduced in proportion to the number of associates during the accounting period.".'.

The amendment was tabled because of concerns that many small clubs and societies will once again have to pay corporation tax on very small amounts of income as a result of the abolition of the nil rate corporation tax band, which I broadly support. Such income arises from the negligible amount of interest arising from the associated costs of dealing with tax affairs. As many as 64,000 small clubs or associations could be affected, and the compliance costs for taxpayers and HMRC are unlikely to be outweighed by any tax raised. Even if HMRC does not expend any effort in undertaking to pursue small clubs and societies for tax, the clubs themselves are technically required to provide that information, and the most responsible among them will take on that burden. They may even believe that they need to seek new or differently skilled officers, especially given the substantial coverage of the frequent changes to small business tax in the past six years. The amendment would help to prevent such a burden from being imposed once again on many small societies, and I commend it to the House.

Mr. Mark Hoban (Fareham) (Con): I support the amendment, and I should like to match the hon. Member for Falmouth and Camborne (Julia Goldsworthy) in brevity. Professional bodies have raised their concerns about the matter with Revenue and Customs, which has expressed a willingness to tackle it with a concession. However, there is anxiety that that concession may not have the legal standing that it had had prior to the Wilkinson case. The Opposition would therefore welcome confirmation that the concession stands and has legal weight, thus preventing an undue burden falling on small clubs and associations.

The Financial Secretary to the Treasury (John Healey): This has been a useful, well-targeted and focused debate. The amendment is drafted rather widely, but I commend the hon. Members for Falmouth and Camborne (Julia Goldsworthy) and for Fareham (Mr. Hoban) on focusing their contributions tightly on concerns about clubs and societies, thus reflecting representations from the Institute for Chartered Accountants. However, there is no need for an amendment to achieve the result desired by the hon. Member for Falmouth and Camborne.

For many years, the Inland Revenue and, latterly, HMRC have not sought corporation tax returns from clubs and unincorporated associations with very small tax liabilities. That practice was established before the introduction of the starting rate of corporation tax, and it will not be affected by the changes in clause 26. Any club or society that is unclear about its tax position should ask its local HMRC office for advice. Clubs and unincorporated associations with larger profits may wish to consider whether they are eligible for the generous tax reliefs resulting from Government changes
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to existing schemes for grassroots clubs that are genuinely accessible to all under community and amateur sports clubs provisions.

9 pm

The amendment would involve unnecessary costs and complexities, so I hope that the hon. Lady will feel able to withdraw it. The purpose that she mentioned and the hon. Member for Fareham repeated is not being sought. Sensible practices are already in force within HMRC to ensure that the corporation tax regime is applied reasonably in respect of clubs and unincorporated associations. Going further down the path suggested by the amendment, and particularly building it into legislation, would be counter-productive. I hope that the hon. Lady will withdraw the amendment, so that the House can move on to the more substantive questions in the clause stand part debate.

Julia Goldsworthy: I am slightly reassured by the Minister's remarks. It would be preferable for HMRC to deal with the problem through concession and, historically, that would be the most appropriate course. However, that might not be possible formally because of the House of Lords decision in the Wilkinson case of 2005, which cast doubt on the extent of HMRC's discretionary powers not to apply the strict letter of the law in appropriate circumstances.

Without HMRC being able to put its policy into effect with a public pronouncement about the position of clubs and societies, it will nevertheless have to deal with their inquiries. With its ability to deal with those concessions in doubt, I thought that the best way to bring the matter to the Committee's attention was through my amendment. I shall not seek to divide the Committee on this occasion, but I would ask the Minister to look into ways of ensuring that small societies are not adversely affected by the extra administrative burden that the reintroduction of the zero rate will impose.

In conclusion, I request that the Government consult urgently the small clubs and societies affected by the amendment and ensure that they are properly informed of their responsibilities. I also request that the Government undertake to tackle the problem of concessions, as exposed by the Wilkinson case. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

John Healey: Clause 26 essentially introduces schedule 14. Together, the effect is to replace the starting rate of corporation tax and the non-corporate distribution rate with a single small companies rate, which is currently set at 19 per cent.

There are three important aspects of the background to the provisions, which the Committee may wish to consider in deciding whether the clause should stand part of the Bill. First, there are the reasons why the Government introduced the starting rate of corporation tax. Secondly, we had a wide-ranging debate with
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business and its representatives about the proper form of taxation for small businesses. Thirdly, responses were made to our announcement last December in the pre-Budget report that, as a result of those discussions, we had decided to remove the non-corporate distribution rate and starting rates of corporation tax.

The Government have consistently supported business and enterprise. We have provided a tax regime with incentives for individuals to invest not just for their own future, but for the wider prosperity of Britain. We have also provided incentives to encourage business to expand and grow. We introduced the starting rate of corporation tax at 10 per cent. in the year 2000 and then reduced it to 0 per cent. in 2002 in order to provide the means for small companies to reinvest their profits in their business.

As the Committee knows, we always keep the tax system and its operation under close review. We did so in respect of this particular matter, as we undertook to do when we introduced the measure. We saw that the benefits of incorporation and being able to access the starting rate were being used by some small businesses not as a step to growth, but simply as a vehicle to reduce their tax and national insurance contributions liability, while continuing to trade in exactly the same way as before, drawing profits in the form of dividends and not reinvesting them in the business. We therefore introduced the non-corporate distribution rate in 2004 to ensure that the benefits of the starting rate remained focused on companies that were retaining their profits for growth.

We said at the time that the problem of tax-motivated incorporation was part of a wider issue and that the NCDR was not the end of the matter, but that we would consider the long-term strategic issues raised by these developments, to ensure that the tax system adequately reflects the realities of today's changing labour market and business environment. In the pre-Budget report in 2004 we published a discussion paper and invited views from, among others, smaller firms and their advisers on these wider issues.

The responses ranged almost as widely as the organisations. One thing is clear; there is no single fix that will level the field between all small businesses, irrespective of legal form. Although there was no consensus about the specific changes that they wanted, one overriding feature of the responses from all quarters was a strong preference for simplicity over approaches that risked introducing further complexity. Responding directly to the debate and to our own analysis of the situation, we announced in the pre-Budget report in 2005 that we would replace the starting rate and the non-corporate distribution rate with a single small companies rate. That is what clause 26 achieves.

We wanted to refocus the way that we provide incentives for small firms that invest and grow. We announced that the first year capital allowances for small businesses would be increased for the year beginning April 2006 to 50 per cent., and that the turnover threshold for the VAT annual accounting scheme would be increased to £1.35 million; doubled, in effect. We also announced that we would look to increase the threshold for the VAT cash accounting scheme to a similar threshold, pending state aids clearance from the European Commission. Rather than
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favouring the incorporated small business, these measures will assist the incorporated as well as the unincorporated small business.

About 4.2 million businesses are eligible to benefit from the increase in first-year allowances, 1.08 million small businesses are eligible to benefit from the increased threshold of the VAT annual accounting scheme, and about 733,000 businesses are eligible to benefit from the increase in the threshold for the VAT cash accounting scheme, if we can put it in place pending state aids clearance.

That move in December was welcomed by business. In response to the pre-Budget report, the Federation of Small Businesses commented:

precisely the aim of the move. Furthermore, there is a clear ongoing desire and commitment on the part of businesses and their representative organisations to continue to work with us on the longer-term future of taxation for small business.

In the Budget in March we therefore stated that we continue to believe that all individuals and businesses must pay their fair share of national insurance contributions and tax, irrespective of legal form. We also said that we would continue to review the tax and NI systems to ensure that that was the case, and that we would produce proposals for discussion consistent with a set of principles that include simplicity for compliant businesses, support for businesses in their aspirations to grow, and maintaining the attractiveness of the UK as a business location. These are the principles that underpin the provisions in clause 26. I commend the clause and the principles to the House.

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