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Mr. Colin Breed (South-East Cornwall) (LD): I agree with most of what the hon. Member for Fareham (Mr. Hoban) said. We all agree that small businesses are our genuine potential for the future. The Government and perhaps previous Governments have gone wrong in not genuinely enabling small businesses to grow in the way we all want them to. Plenty of new businesses have started up but plenty have regrettably failed relatively early. Tax plays a significant part in that.
Governments in recent times have attempted to change tax rates and the way in which they support small business. We have all largely tried to support the Government's intentions. However, although we are creating small businesses, we do not sustain them for a reasonable period so that they can grow into medium-sized businesses. Far too many fail and far too many are swallowed up by larger competitors. The nurture and support that small business needs to provide the strong economy that we want has not happened. Perhaps it is indicative that tax regimes have changed and we have not got the stability for people to plan properly. Anyone who has started a small business will recognise that the first three to five years are the toughest time. The stability of the taxes that they have to pay is extremely important if they are to plan for the growth that they need. While we applaud the simplicity, we must implore the Treasury to provide stability as well.
Ed Balls (Normanton) (Lab): The hon. Gentleman makes a good point about the importance of stability supporting the growth of small businesses. Does he agree that the instability in the macro-economy, the rise in interest rates and the recession of the late 1980s did far more to damage small businesses than any changes in taxation that have taken place in the past 10 or 20 years?
Mr. Breed: The hon. Gentleman is absolutely correct. I was engaged in banking at that time, and it was one of the most difficult periods for any bank to support small businesseslet alone large onesbecause of the huge effect of high interest rates. This was not only because of the amount of interest that the businesses were paying to the banks, but because of the effect that that had on underlying security. We therefore had the double whammy of a decrease in security and an increase in borrowing. That was the main contributor to the way in which the economy died. I agree that stability in the economy and stability in the ability to plan are essential.
Whatever we now have in this regime, the loss of the zero rate will certainly increase the tax bill of many small businesses. If that is countered by the increase in the first year's capital allowances, that will make a difference to the growth of those businesses, but they need to be able to rely on that. When they make an investment in plant, machinery or business premises, they need to be able to guarantee that the tax regime will be stable and predictable for the next three to five years. While the Government's motives were correct, the way in which
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they implemented the measures have perhaps been found not to be. The change in the VAT regime will also be helpful to many small businesses. Increasing the threshold will help their cash flows.
If we really want small businesses to be the engine room of the economy, we must provide a stable tax regime and appropriate planning, as well as more clarification on research and development grants. We must also ensure that not so many businesses fail. Banks play an important part in helping businesses to get over the inevitable difficulties that they face. I regret that far too many banks do not provide adequate support over the longer term, and we see far too many businesses failing. We want to see businesses being set up, and continuing. That requires support and planning not only from the Government but from other bodies.
I want to consider the use of the term "fair and appropriate". I do not know what a fair and appropriate contribution to tax is for a business, but it will certainly change over a business's lifetime. Many businesses will find it easier to sustain a fair and appropriate contribution once they have strength and stability. If we try to tax them too early in their lives or submit them to too high a burden of regulation, they will fail and we will get no revenue from them. We need an appropriate tax regime that recognises the difficulties faced by a small business at different stages of its cycle. That would be fair and appropriate, but I am not certain that this particular small business tax regime will achieve it. However, that is what we must aim for, otherwise we will not get a fair and appropriate tax contribution from businesses. There would be far too many businesses starting and failing.
Stewart Hosie : I considered this matter at the time of the Bill's Second Reading, and spoke to representatives of the Federation of Small Businesses about it. They advised me that, when the zero per cent. rate was introduced, the number of FSB members that incorporated moved from 27 to 37 per cent., and that it has stayed broadly constant at 38 per cent. since then. Yet in the Red Book, and throughout these debates, this measure has been described as one that tackles tax-motivated incorporation. However, there does not appear to have been a significant shift in the number of FSB members that have incorporated in the past few years.
I also note that, in 200708 and 200809, that will bring the Government a yield of some £920 million£530 million in 200809 alone. Can the Treasury team tell the House how many businesses making a profit of less than £10,000 will be affected and start paying tax at 19 per cent., and how many larger ones will do so? As the provisions are described as tackling tax-motivated incorporation, how many of those businesses, which will now pay but did not do so previously, does the Treasury believe incorporated in the first place to avoid paying tax?
Saying that the Chancellor has executed a U-turn on the nil rate band of corporation tax is not entirely accurate; it is more like a three-point turn. I am heartened that the Chief Secretary has had a damascene conversion and has come to believe in the value of simplicity, but that progress is bought at a price.
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Despite being told at every stage that the nil rate band was open to exploitation, the Government pressed ahead with it in 2002. In 2004, there was wide recognition that the fear of exploitation had been realised. The Government had the opportunity at that point to choose the path of simplicity or the path of greater complexity. There are no prizes for guessing which choice prevailed. However, with the choice having been made to introduce the non-corporate distribution rate, small businesses should not be subjected to yet another change in the corporation tax rules. Stability and predictability sit alongside simplicity as the cardinal virtues of the tax code.
Our suggested amendment had a very modest objectiveto guarantee that the interests of those businesses that were lured into incorporation in 2002 were not further prejudiced by yet another change in the rules. It would have prevented the "gift horse" of 2002 from being remembered instead as the Trojan horse of 2002. In 2002, the then shadow Chief Secretary said:
Ed Balls: If we took the hon. Gentleman's advice and did not make the Government's proposed change, and instead stuck with the status quo, would that mean that the tax system was more or less complex?
Mr. Newmark: It says nothing here, actually. [Laughter.] What individual businesses, particularly small businesses, want is consistency and simplicity. Your question relates to the complexity of the tax code, and no doubt your proposed system would be more complex
"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."[Official Report, 27 April 2004; Vol. 420, c. 846.]
What is deliberate and cumulative about clause 26? The Paymaster General had an opportunity in 2004 to admit that the zero rate of corporation tax was not viable. Instead, the regulatory impact assessment to which she put her name insisted that the abolition of the nil rate band
It seems that enlightenment is contagious among Treasury Ministers this year, as the Paymaster General now seems to have reached a better understanding of how the removal of the nil-rate band will help small businesses after all. That is what this proposal is abouthelping small businesses, not hindering them.
Once again, the Government's unhealthy fascination with anti-avoidance legislation precluded sensible consultation. Once again, papering over the cracks has not kept the water out. Once again, the lofty intention of aiding small businesses has ended in a farce. The guiding principle should now be to let well enough alone. If the non-corporate distribution rate was an appropriate solution to a self-inflicted problem in 2004, what has changed since then to justify its removal? I hope that the Minister will answer that question.
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