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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:

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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:

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:

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:

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He said that the IFS calculated that

Typically, the Paymaster General was trenchant in her remarks, batting away the IFS, saying:

She went on:

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:

She heralded the measure as

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:

Bill Midgley, president of the British Chambers of Commerce, commented that

Let us remember what the Paymaster General said in 2002:

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:

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:

In 2002, the Paymaster General said:

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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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