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Mrs. Villiers: The Chief Secretary has been extremely generous in giving way. Does he recognise the problem for many small retailers or small service businesses, which cannot make that level of investment to recoup for the tax increase? For example, a newsagent will not be able to make those high levels of investment and will end up with a higher tax bill.
Mr. Timms: Perhaps the hon. Lady will tell us when she speaks whether her party would reverse the change. We are using the tax system to improve the incentives for investment and thereby strengthening businesses, particularly the wealth-creating, job-creating businesses. I have no doubt that as a result of this package the economy will be strengthened further. It is a matter of using the available incentives in the right way, as we are doing. There will be a significant cash-flow benefit to small businesses that reinvest their profits, offsetting the small companies rate increase for small companies that are investing.
Through clause 50 and schedule 16, the Bill reforms venture capital trusts, the enterprise investment scheme and the corporate venturing scheme. Those measures will give greater certainty to investors and the companies in which they invest and help to secure the future of the schemes, which have been very valuable. All the yields from those changes are being recycled to fund enhancements in research and development tax credits to strengthen further innovation and productivity in the UK. These measures will encourage investment and innovation, promote competitiveness and help to equip the UK to meet successfully the challenges of globalisation ahead.
Stewart Hosie (Dundee, East) (SNP): The Chief Secretary is talking about the ability of companies to invest in some of the things that the Government are doing. However, of the 265,000 businesses in Scotland, 98 per cent. have fewer than 49 employees and 1.3 per cent. have between 50 and 249 employees. That leaves only a couple of thousand firms, of which 1,510 employ more than 500 people. The new definition of small and medium-sized enterprises that applies to much of the research and development tax credit stuff will apply to merely a few hundred companies out of 265,000. Is the Chief Secretary not overstating the benefits in the Finance Bill?
Mr. Timms: No, I do not think that I am. Of course, I am not familiar with the figures that the hon. Gentleman is quoting, but I suspect that he is including a large number of self-employed individuals. I am certainly not overstating the benefits. He will see in the Red Book the analysis of the additional revenue raised from the change in the small companies rate and the additional sums being relieved through the changes that I have described. Over the period set out, all the proceeds are being recycled.
The Budget extended support to hard-working families. It announced tax changes to help more people into work and to boost further the incentives for employment. But for 2007-08, in the Bill income tax rates are unchanged at 10 per cent., 22 per cent. and 40 per cent. The personal tax reforms set out in the Budget, amounting in total to a reduction in personal
taxation of £2.5 billion, will come into effect from April 2008 and will be contained in the Finance Bill next year.
Clause 4 of the present Bill will increase the nil rate band for inheritance tax to £350,000 for the financial year 2010-11, maintaining recent practice of pre-announcing nil rate band increases for future years. That means that 94 per cent. of estates are expected to pay no inheritance tax, with transfers of assets to spouses, civil partners and charities, of course, exempt.
Mr. Timms: If the hon. Lady looks at the arithmetic set out in the Red Book, she will see that the package has been carefully designed. There will be changes next year, balanced by other changes, which are all set out. The phasing of those changes is consistent with our commitments both to fairness and to stability in the economy as a whole.
Part 3 of the Bill includes important changes to ensure that everybody pays their fair share of taxation. We remain firmly committed to advancing fairness by tackling tax avoidance, as well as fraud. For example, clause 25 ensures that workers providing their services through managed service companies pay the same income tax and national insurance as those who provide their service as employees.
The Bill also takes the next steps in our response to the Stern report. It introduces further measures to protect the environment, building on the success of the climate change levy in tackling carbon emissions, supporting the introduction of carbon trading, reflecting our commitment to tackle climate change through effective international action, and providing incentives for change while maintaining our other economic and social objectives. Changes in clause 11 to vehicle excise duty sharpen the environmental signals to motorists to purchase more fuel-efficient cars. Clauses 17 to 19 introduce a range of other measures to encourage energy efficiency.
John Bercow (Buckingham) (Con): Stamp duty land tax relief for new zero-carbon homes was a feature of the Budget and is provided for in clause 19. In view of the absence of details in the list of measures, will the Chief Secretary tell the House the estimated cost of clause 19 in a full year and his latest estimate of the number of prospective beneficiaries?
Mr. Timms: The cost on introduction is small because there are very few zero-carbon homes. I am pleased to be able to tell the hon. Gentleman that a development of zero-carbon homes is going forward at Gallions Park in my constituency. We want to change the nature of house building in the UK and to provide incentives for a completely new zero-carbon approach. There is a lot of confidence in the construction industry that the measure and other mechanisms will enable us to bring about the changes that we want in the coming decade on a large scale.
Mr. Timms: A very small number, but we want a great deal more. As I said, we want to change the whole nature of house building in the UK. The important and welcome measure will contribute towards that goal.
Clauses 20 and 21 encourage the use of domestic microgeneration by helpfully and supportively clarifying the tax rules. The increases in the rates of fuel duty will help to reduce polluting emissions from road transport.
Clause 12 doubles the rate of air passenger duty with effect from 1 February 2007. I know that the principle of increasing the tax burden on aviation is supported by hon. Members on both sides of the House. The change reflects better the principle that the sector should meet its environmental costs. It is estimated that the measure will save 300,000 tonnes of carbon a year by 2010-11. Of course, we continue to work to ensure that aviation is included as soon as possible within the European Union emissions trading scheme, which is the right long-term solution. Taken together, measures outlined in the Budget will deliver a carbon saving of 6 million tonnes. They will also strengthen the UKs leadership on critically important international decisions that alone can deliver the worldwide changes that we need.
The Bill is the right next step in extending further our decade-long record of economic success, stability, growth, investment and fairness that my right hon. Friend the Chancellor set out in the Budget. It promotes the international competitiveness of the UK economy because maintaining our success on competitiveness is vital to the prosperity of every family in Britain. The Bill provides further protection for the environment to ensure not only that we stay on track to exceed our Kyoto commitment, but that we strengthen UK leadership internationally. Our aims are to build on the longest period of economic stability and sustained growth in Britains history, with a strong economy alongside a strong society, the right balance among tax, spending and borrowing, and Britain equipped to address successfully the long-term challenges of the future. The Bill takes those important next steps and I commend it to the House.
this House declines to give a second reading to the Finance Bill because it fails to equip the UK to compete in the globalised world economy in the face of ever increasing competition from countries such as China and India, penalises small companies
with higher tax rates and a more complicated tax system, hits freelance workers with more tax bureaucracy and uncertainty, involves yet further instability and U-turns on pensions policy and does nothing to tackle the UKs worsening pensions crisis, gives HM Revenue and Customs intrusive and disproportionate new powers of investigation, misses the opportunity to provide effective mechanisms for tackling climate change, fails to reform the UK tax law after years of erosion of its competitiveness, and fails to reverse the massive increase in complexity and instability which the Chancellor has inflicted on the tax system of the UK.
This Finance Bill might not be quite as long as last yearsthe Government have been able to squeeze it into a single volumebut that cannot make up for the massive increase in complexity and continuing instability that we have seen during the Chancellors 10 years in charge of our tax system. Recent reports from Grant Thornton and Ernst and Young highlight the erosion of our competitiveness that has been caused by the complexity of a tax code that has doubled in length during that decade. We believe that there is an urgent and pressing need for tax reform. If the Government shirk the challenge, there is a real risk of an outflow of jobs to other countries. The limited steps in the Bill towards simplification and reform do not meet that challenge, which is one of the key reasons why we decline to give it a Second Reading.
Let me begin with clause 1. The right hon. Member for Birkenhead (Mr. Field) asked why our reasoned amendment did not cover the income tax changes announced in the Budget. As I said in an intervention, that is because they are not in the Bill. However, we remain concerned about the proposals that will be imposed next year, and my hon. Friend the Member for Rayleigh (Mr. Francois) will deal with that matter in his winding-up speech.
Mr. Frank Field: When the time comes and an amendment is tabled to provide transitional protection for workers who will be made worse off, does the hon. Lady think that Opposition Members will support the Labour Members who table it?
I now turn to clause 3. The Chancellor has changed the tax system for small companies in every one of his 11 Budgets, which have included six rate changes. The Bill not only raises tax rates for small businesses, but makes the tax system more complicated for them. More than 12 million people in this country work for small businesses, and it is they who will lose outthe thousands of small retailers on our local high streets just trying to make a living.
a kick in the teeth for Britains small businesses.
This is a substantial rise and will hit those looking to grow their business.
Small businesses were the main victims of this Budget.
Kitty Ussher (Burnley) (Lab): I have listened to the hon. Ladys speech but I am slightly confused, because she quoted a business man saying that businesses seeking to grow would lose out, but a few moments ago another Opposition Member, the hon. Member for Falmouth and Camborne (Julia Goldsworthy), admitted that the Governments proposals will help firms that seek to invest.
Mrs. Villiers: The proposals will not help small business. They will lead to a higher tax bill for small business and a more complicated tax system, and other parts of the Finance Bill make it more difficult for small business to get advice about that complicated tax system. Most small businesses simply do not have the expertise to navigate their way around the Chancellors eye-wateringly complex system of incentives and reliefs. The average hairdresser, newsagent or owner of a rural post office will not shell out on the research and development tax credit; it just is not feasible for them. What the Chancellor and the Chief Secretary do not seem to understand is that reinvesting profits is a luxury that many small businesses cannot afford at the moment. Most of them need to take money out of their business to live on, particularly now that inflation is at a 16-year high, and mortgage rates are going up.
Mr. Doug Henderson (Newcastle upon Tyne, North) (Lab): I am not trying to be awkward, and I understand some of the points that the hon. Lady is making about the dilemma facing small businesses, but will she concede that the main factor that affects small businesses is what is happening to big businesses and to the economy generally? When the economy is operating at a high level of demand, people have more money in their pockets, and there is more work for small businesses.
Mrs. Villiers: Small businesses are affected by rising inflation, like everyone else; they are also affected by rising interest rates and a rising tax bill, and under this Government they have all three.
Julia Goldsworthy: Does the hon. Lady agree that small and medium-sized enterprises include micro-businesses with fewer than five employees, and that those are exactly the type of business that will find it so difficult to navigate the ever more complex regulations?
Mrs. Villiers: The hon. Lady makes a good point, and one of the big disadvantages of the increasing complexity in the tax system is that it is more difficult for micro-businesses to make sense of it. Small companies such as hairdressers, newsagents, post offices and one-man businesses will be badly hit by the Bill, because it is not feasible in all cases for them to invest at significant levels.
In a double whammy, the Chancellor has hit small service businesses again in schedule 3, on managed service companies. Let me make it clear that we support attempts to crack down on abuse and abusive behaviour. Of course people who are not genuine freelance contractors but are in reality in a relationship
with their end client that amounts, to all intents and purposes, to employment, should pay their fair share of tax. However, it sometimes seems as though the Government think that all freelancers are tax dodgers. They are not, and those who are genuinely outside an employment relationship should not be penalised for making that choice about their working life. Flexible contract working is an important part of our economy, and it is invaluable in allowing businesses to respond quickly to changes in demand and innovations in the market. In particular, it plays a vital role in the IT sector, which, as I am sure the Chief Secretary will agree, is a crucial area for maintaining our economic competitiveness in a globalised world.
In seeking to crack down on abusive behaviour, the Government are in danger of hitting all contractors who have incorporated and chosen to outsource some of the administration and finance connected with their company. Whether someone is a genuine freelancer is irrelevant to the operation of schedule 3. It looks as if more or less any involvement with a third-party organisation that provides regular services to contractors and assists them with the operation of their service companies could bring the freelancer and her company within the new managed service companies legislation and completely change her tax status.
One of the worrying consequences of these proposals is that many contractors who haveunderstandably, given the complexity in the tax system and in regulation allowed an adviser to take some of the burden of administration off their shoulders will have to set up their own personal service companies. They will no longer be able to outsource day-to-day corporate administration to an adviser. On top of an increase in tax rates and an increase in tax complexity, freelancers will have the hassle and bureaucracy of registering and running their own company into the bargain.
Kitty Ussher: The hon. Lady talks about complexity. Why, therefore, are more small companies operating in the British economy now than when her party was in power? Specifically, which bits of the tax code would the Conservative party abolish?
According to the Institute of Chartered Accountants, we are already seeing the symptoms of the changes involving managed service companies, because well over 56,000 new companies were registered in Februaryaround double the usual monthly figure. Freelancers, as well as having to set up their own companies and being unable to outsource, are likely to see the bill for professional advice go up because of the risk that their advisers could find themselves caught by the definition of a managed service company provider; those professionals could find themselves liable for the tax debts of their clients. It is difficult to know in advance how the carve-out for professional advisers in proposed new section 61B(3) will be interpreted. While some basic accountancy and legal services may steer clear of the rocks, how will everyday tax advice, company formation and company
secretarial work be treated? We will have to wait for a court decision before we can understand the legal position with confidence, leaving freelance workers and their professional advisers in an expensive limbo in the meantime.
this latest legislation is just part of an inevitable ongoing revenue attack. Freelance contractors are a valuable section of our flexible workforce, and once again, they feel victimised by this assault on their livelihoods.
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