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Mr. Hoban: I am grateful for the opportunity to debate clause 26. The Financial Secretary briefly discussed the history of the measure, and I want to spend a little more time on that, because I think it important to understand why we are where we are. The current situation is not a surprise, because there were indications along the way that it would happen. In the Finance Bill, the Government are taking more than £800 million out of small businesses over the next three years with scant compensation for the additional costs that those businesses must bear at a time when small businesses are facing higher burdens through not only tax but regulation.
The Chancellor introduced the measure to stimulate business but later restricted it with complex legislation around the non-corporate distribution rate, which added to the complexity of the system. He then announced the measure's abolition, saying that it was a bold move to simplify the system, but he was simplifying his own handiwork and the damage that he had created.
As the Financial Secretary has said, the corporation tax starting rate was introduced by the Chancellor at 10 per cent. on profits up to £10,000. In his 1999 Budget speech, the Chancellor said:
"I want to create an even lower rate, which will give new incentives for men and women to start their own businesses and work their way up . . . The legislation will ensure that the beneficiaries are genuinely those who take risks. And 85 per cent.
- of the firms gaining from the 10p tax rate will have fewer than 10 employees—the very firms that we most want to see grow; the very firms whose growth will create the greatest number of new jobs."—[Official Report, 9 March 1999; Vol. 327, c. 177.]
The measure was clearly targeted to stimulate business. To reinforce its impact, the Chancellor reduced the starting rate from 10 per cent. to 1 per cent. in his 2002 Budget. Hon. Members may remember that that was also the Budget in which he increased national insurance contributions, so perhaps the reduction was seen as compensation for small businesses for the increase in national insurance.
When we debated those changes in Committee and on the Floor of the House, hon. Members identified some of the risks. In 2002, we supported the introduction of the zero rate, and we oppose its being scrapped in the Finance Bill. We welcomed the relief that it provided for small businesses and object to the burdens that it places on them today. We want to support our small businesses, not attack them when they feel vulnerable because of increased regulation and red tape.
I want to highlight three issues: the bias towards incorporation created by the measure; the cost of the zero rate against the money that the measure will save; and the economic benefit accruing from the zero rate. It was clear in 2002 that there would be an incentive for unincorporated businesses to become limited companies. Indeed, I made that point in Standing Committee in 2002, where I pointed out the concern among unincorporated businesses about the fiscal advantage of incorporation:
"Many unincorporated businesses feel that the Government are trying to drive them towards incorporation. They do not wish to incur the additional costs of incorporation, but the tax regime is such that they feel almost obliged to do so because if they did not, they would be significantly worse off."—[Official Report, Standing Committee F, 16 May 2002; c. 104.]
Both the hon. Member for Kingston and Surbiton (Mr. Davey), who served on that Committee and the Institute for Fiscal Studies have commented on that matter.
In Committee, the Paymaster General chose to dismiss the views of not only a new Back Bencher but the Institute for Fiscal Studies. She highlighted incentives for unincorporated businesses and attempted to explain why they should not automatically seek to take up incorporation:
"It is not a question of the Government making companies choose between incorporation or unincorporation . . . but of demonstrating clearly the steps to help businesses".—[Official Report, 30 April 2002; Vol. 404, c. 912.]
Given the strength of those incentives, it is remarkable that any business embarked on the route that this year's Red Book described as "tackling tax motivated incorporation", since the attractions, according to the Paymaster General, of the other support for business were such that they should not feel the need to be incorporated. The Government highlighted the cost of the zero rate of corporation tax. That was the subject of the report that the IFS produced during the consideration of the Finance Bill 2002. The hon. Member for Kingston and Surbiton said of that report:
"Through its analysis of the survey on personal incomes 1998–9, it says that 1.2 million self-employed people each stand to gain in excess of £500."
He said that the IFS calculated that
"the cost would be £1.2 billion, compared with the highest possible figure from the Government so far of £450 million."—[Official Report, Standing Committee F, 16 May 2002; c. 108.]
Typically, the Paymaster General was trenchant in her remarks, batting away the IFS, saying:
"The Government stand by their estimates in the Red Book of costs rising to £450 million."—[Official Report, Standing Committee F, 16 May 2002; c. 114–115.]
On that occasion, the Paymaster General was right, as it was spectacularly wrong. The Red Book shows that the saving to Government in 2008–09 through scrapping the zero rate of corporation tax—£530 million—is not that dissimilar from the highest cost that she predicted in those debates back in 2002.
The other issue that we debated then concerned the economic benefits and what would happen as a consequence of the zero rate being introduced. Again, the Paymaster General mounted a robust defence:
"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."
"a targeted reduction in tax to help small and new companies thrive and grow."—[Official Report, Standing Committee F, 16 May 2002; c. 114.]
It is rather difficult, four years later, to see why the Paymaster General and the Treasury have deviated from their robust line of defence of the zero rate of corporation tax. The measure went through after detailed and robust scrutiny on both sides of the House. The then Member for Arundel and South Downs tried to make amendments to extend some of the benefits for incorporated companies to unincorporated companies, but the Paymaster General's remarks show that she vigorously defended of the attractiveness of remaining an unincorporated business.
The Treasury then started to get cold feet. Having looked again, it introduced the non-corporate distribution rate. By the time of the 2003 pre-Budget report, it was clear that many businesses had incorporated, which was described as "avoidance" by the Revenue. In the PBR speech, the Chancellor talked about the need to ensure that small companies paid the right amount of tax. Following those remarks, in the Finance Bill 2004, we saw the introduction of the non-corporate distribution rate, which was to ensure that where dividends were paid to shareholders, they were taxed at 19 per cent. rather than 0 per cent. But the mechanics of the NCDR impose differential rates of corporation tax between distributed and non-distributed profits. That is complicated to manage and added to the complexity of the tax system.
Despite all that, the Government threatened further complexity to try to tighten the system. It is no surprise that most respondents to the PBR consultation said that they favoured simplification over options that risked additional complexity. But who created the additional complexity? It was the Chancellor, who is trying to unpick the problems that he himself has created.
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The tax relief granted to stimulate enterprise was restricted by increasing the complexity of the tax code, and then scrapped to reduce the complexity of the tax system, with little by way of compensation to stimulate small businesses. It is therefore not surprising that many business groups have been hostile to the change. The Financial Secretary prayed in aid the Federation of Small Businesses. At the time of the pre-Budget report, the Confederation of British Industry stated:
"While the CBI support simplification of the corporation tax structure, this measure will mean that companies with profits of less than £50,000 per year could face a tax increase".
Bill Midgley, president of the British Chambers of Commerce, commented that
"we have concerns that the removal of the 0 per cent. starting rate of corporation tax will harm the growth of some of the smallest firms."
Let us remember what the Paymaster General said in 2002:
"The measure is a targeted reduction in tax to help small and new companies thrive and grow."—[Official Report, Standing Committee F, 16 May 2002; c. 114.]
Four years later, the Government are introducing measures that the president of the British Chambers of Commerce believed would harm the growth of some of the smallest firms.
After the Budget, Nick Goulding, chief executive of the Forum of Private Business, commented:
"Small businesses operating on tight profit margins will have found this tax break extremely useful. Business that incorporated to take advantage of this tax break now find they have all the bureaucracy and costs of incorporation and no financial advantage. How can businesses plan effectively when the Chancellor keeps changing his mind?"
Why did the Chancellor start to unpick that valuable tax relief, on which small businesses relied? The Red Book tells the whole story. The measure is planned to raise £870 million for the Exchequer in only three years. The small businesses that depend on such tax breaks are confronted with an increasing burden of regulation and will stump up an extra £870 million for the Treasury.
It is worth remembering, in the context of the measures announced in either the 2005 pre-Budget report or this year's Budget that, in the first full year in which the provision takes effect, in 2008–09, the tax increase is the second highest in raking in revenue for the Treasury. It is second only to the huge hike in tax revenues from the oil industry. So much for the rhetoric of helping small businesses. They are bailing out the Government and trying to plug the Government's black hole.
Small companies will end up paying an extra £1,900 tax, discouraging them from further growth and from expanding. In 1999, the Chancellor said:
"I want to do more. I want to create an even lower rate, which will give incentives for men and women to start their own businesses and work their way up."—[Official Report, 9 March 1999; Vol. 327, c. 177.]
In 2002, the Paymaster General said:
"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."—[Official Report, Standing Committee F, 16 May 2002; c. 114.]
The decision to scrap that lower rate, which was designed to promote enterprise and small business, tells the business community everything that it needs to know about the Chancellor. When the chips are down, he raises taxes from them. They are no more immune from the Chancellor's grab to increase tax revenues than any other sector of the economy.
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