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The Financial Secretary to the Treasury (John Healey): I am pleased to open these proceedings in the Committee of the whole House. I am glad that, as is traditional, we have been able to accommodate the wishes of the Opposition parties. The first of the subjects in clause 3 to which we turn was debated quite extensively on Second Reading
That the order in which proceedings in the Committee of the whole House on the Finance Bill are taken shall be: Clauses 3, 1, 7 and 8; Schedule 1; Clauses 25 and 67; Schedule 18; Clauses 12 and 81 to 83; Schedule 22; Clause 84; Schedule 23; Clauses 20 and 21; and new Clauses relating to microgeneration. [John Healey.]
John Healey: We have so much to look forward to during these two days of deliberations in this Committee of the whole House. You can tell that Labour Members are relishing and looking forward to them, Sir Alan.
Clause 3 was debated on Second Reading. It sets the small companies rate of corporation tax at 20 per cent. for 2007-08 and sets the fraction by which the tax rate for those companies with profits between the small companies rate and the main rate thresholds is calculated at one fortieth. It also sets the small companies rate for profits derived from North sea oil activity at 19 per cent. and the fraction for those companies with profits between the thresholds at 11 four-hundredths. This clause should stand part of the Bill.
Mr. Mark Hoban (Fareham) (Con):
It is appropriate to start our consideration in Committee by discussing
the Chancellors tax raid on small businesses. He followed our lead by doing the right thing for large businesses, but he did the wrong thing for small businesses. Although the cut in the corporation tax headline rate for large companies from 30 to 28 per cent. is welcome and has grabbed the headlines, small companies face a substantial rise in the tax that they pay. The Bill increases the small companies rate from 19 to 20 per cent., although the Chancellors Budget speech set out a series of further increases, which we shall debate in subsequent Finance Bills, up to 22 per cent. from 1 April 2009.
The increase in taxation fails to acknowledge the contribution that small businesses make to the UK economy. Small businesses, about one quarter of which are small companies, employ 58 per cent. of the private sector work forceabout 12 million peopleand contribute more than 50 per cent. of UK turnover. While larger companies will benefit from a reduced corporation tax rate, smaller companies will face a tax hike. In an attempt to sweeten the blow to small companies, the Chancellor simultaneously proposed a new set of complex tax reliefs, yet many small businesses will either be ineligible for them or will fail to apply for them.
After 11 Budgets and multiple rate changes, the Chancellor has almost come full circle on the taxation of small companies. When the Government came into office, the small companies tax rate was 23p in the pound. They reduced it to 21p in 1997, and to 20 per cent. in 1998. In 1999, a new 10 per cent. rate was introduced, which was reduced to zero in 2002, only to be put back up to 19 per cent. for non-corporate distributions in 2004. In this years Budget, the small companies rate was increased from 19 to 20 per cent., with further increases proposed over the course of the next three years. There have been so many changes to the small companies tax rate, yet so little progress: by the time we reach April 2009, the rate will be just 1p lower than it was when the Government came to office in 1997. Given so many changes, one can conclude only that the Chancellor cannot make up his mind about how he regards small businesses: he cannot decide whether to encourage or discourage them; whether to congratulate them on being engines of growth or reprimand them for tax avoidance; or whether to give them reliefs or to reduce their profits.
The Chancellor may not be able to make up his mind about small businesses, but they have certainly done so about him. Following his Budget, the comments in the papers from business organisations demonstrated their thoughts about him, particularly in relation to the small companies rate. Carol Undy, of the Federation of Small Businesses said:
This is the Chancellors eleventh Budget and this years offering is no different to the othershe gives with one hand and takes with the other. Corporation tax was cut for large firms but increased for smaller ones.
Tax cuts aimed at big business will do nothing to ease the burden for the majority of the private sector.
many of our members feel let down and are dismayed by the measures taken which will hit their competitiveness and increase their tax burden.
This is no encouragement for the small business sector.
a very surprising Budget from a Chancellor who claims to be a friend of enterprise. It seems to be a case of robbing small business Peter to pay big business Paul.
One of the themes that emerges when one talks to small business organisations is that, despite the complexity of the Budget, many of their members feel that small companies are being penalised to fund the tax cuts experienced by large businesses. Chas Roy-Chowdhury commented:
This decision flies in the face of the Chancellor's previous aim to encourage more businesses to incorporate.
Many small businesses have commented individually that the Budget was aimed at wooing the City, not at wooing small businesses. Pauline Birdsall, a director of a freight forwarding company in Hayes, Middlesex, summed up the mood of many small businesses by saying:
What do we have to do to makes ends meet? The Government is clearly afraid of big businesses going abroad, but they dont seem to worry much about the small firms. As a group we are major employers and we are totally undervalued.
We are a very small company and we are being hit from all angles. We feel as though we are paying the price for big companies getting a tax break.... The Government should be helping us not hindering us.
The Chancellor may have presented his tax con as a tax cut, but small businesses saw through his sales patter and saw nothing in it for them. In a survey of 220 owners and managers of small firms conducted by the Forum of Private Business, 82 per cent. of respondents said that the tax hike in the corporation tax rate for smaller companies would be damaging to their company; 65 per cent. felt that, overall, the Budget would have a negative effect on their business; and a third felt that the plans laid out in the Budget made the tax system more complex. Only 4 per cent. regarded the Budget as positive for themonly 4 per cent., compared with 82 per cent. who felt that the Budget would damage their business.
Mr. Michael Fallon (Sevenoaks) (Con): I thank my hon. Friend for giving way so early in what I think is a rather important speech. Does he agree that many small businesses are not involved in research and development and may not invest on an annual basis that would enable them to qualify for changes in the annual investment allowance? A lot of small businesses are quite happy to be small businesses. Why should they now be discriminated against?
Mr. Hoban: My hon. Friend makes an important point. The sectoral impact of the tax changes is an issue: different sectors see the changes proposed in the Budget very differently. I shall discuss how some sectors feel in a moment. There is a sense that the way in which the Chancellor has sought to offset the tax increase favours certain types of business rather than others, and that rather than make the business environment better for all businesses, he has made it better only for some.
Mr. Brooks Newmark (Braintree) (Con): I agree with my hon. Friend the Member for Sevenoaks (Mr. Fallon). The Chancellor has admitted that he does not understand mathematics, but the clause shows that he does not understand the basics of business and that not all businesses are the same. He assumes, in a very broad-brush way, that all small businesses can benefit from the provisions when, in fact, only a small proportion do so.
Mr. Hoban: The Chancellor made his own remarks about his maths, so I shall not make any about his sums not adding up. Certainly, he cannot work out the reality of business in Britain today. Some 75 per cent. of production in our economy comes from the service sector, yet the tax changes that he has proposed primarily help asset-rich businesses that invest in fixed capital, rather than the businesses that are so typical of the service sector, which invest in human capital as well. That is an important difference to highlight.
Julia Goldsworthy (Falmouth and Camborne) (LD): Does the hon. Gentleman agree that, in addition to different sectors being affected in different ways, there will be significant regional differences in the impact of the changes? Areas such as my constituency, where the major employers are very small businesses that are almost on a micro level, will be hit disproportionately, and will suffer more than areas that have many large employers.
Mr. Hoban: The hon. Lady makes a valid point, and I suspect that she will find in her constituency, which has a high proportion of tourist-related businesses, that those businesses that do not invest in fixed assets will suffer, because they will not benefit from the offsetting tax changes that the Chancellor has made. There is a double whammy for businesses in her constituency, as there is for so many businesses across the country.
It is not surprising that a large number of businesses across the country criticised the Budget for the impact that it would have on them, but what did the Treasury say in its defence? The Economic Secretary to the Treasury, speaking at the British Chambers of Commerces annual conference, said that the Chancellor had raised the small companies tax rate to clamp down on
individuals incorporating to avoid paying their due share of tax. Without addressing this, this trend would have continued at a cost to the rest of the taxpaying population of billions of poundsmoney which could not be afforded.
the lower rates of tax have resulted in a significant number of people incorporating to take advantage of them, not to invest in business, but simply to extract the company profits in a way that reduces their personal tax and national insurance liabilities.[ Official Report, 23 April 2007; Vol. 459, c. 758.]
That has been a recurrent theme in the Treasurys defence of the change in taxation. Treasury Ministers who parade that defence seem to forget that it was they who introduced the zero per cent. rate of corporation tax in the Finance Act 2002. They sought to use the measure to encourage enterprise, and of course it led to increased incorporation. In a way, they are unpicking
their own reforms, and rather quickly. Every small company is at risk of losing out as a consequence of the Government repairing the damage that they did.
John Healey: Does the hon. Gentleman accept that in the 2002 Budget to which he referred, and the 2000 and 1999 Budgets, in which we made changes to the small companies rate, we made it clear that our policy purpose in making those changes was to encourage growth, investment and innovation?
Mr. Hoban: I think that I took part in the scrutiny of the Finance Act 2002, and I heard the Financial Secretarys colleague, the Paymaster General, make the assertions that he has just made. The error that the Government made then was to assume that companies were the only engines of enterprise. They focused on a narrow set of business organisations, forgetting that sole traders and partnerships were contributors to enterprise, too. The changes that they introduced in 2002 were focused on encouraging companies to be entrepreneurial, but they forgot that a large amount of entrepreneurial activity comes from outside the company sector, as the Financial Secretary said himself on Second Reading last weekI will come back to those comments later. Only a quarter of small businesses are incorporated; in a way, that underlines the weakness of the Governments arguments in favour of making the change back in 2002.
Mr. David Gauke (South-West Hertfordshire) (Con): Was it not widely predicted, even back in 2002, that the zero rate of corporation tax would result in a lot of small businesses incorporating in order to benefit from a better taxation system? The mess that the Government have got themselves into was entirely predictable, even in 2002.
Mr. Hoban: My hon. Friend is right. According to my hazy recollection of the scrutiny of the 2002 Finance Bill, the Institute for Fiscal Studies produced estimates of the tax cost of the zero per cent. corporation tax rate, and the Government rather dismissed those estimates at the time. The wave of incorporation was predictable, on the basis of what happened in 2002. The Government are now unpicking that move, with the aim of tackling tax-motivated incorporation, but in doing so they are harming every profitable small company, whether it employs one person or 100 people. That is the problem with the change.
Mr. Hoban: I know that the hon. Gentleman is anxious to make his first intervention in Committeein many respects it is surprising that it has taken 14 minutes for him to try to do sobut he will have to wait a moment longer. Those changes have been unpicked, and they will affect every small company, regardless of size. If they are profitable, they will have to pay more taxation, so the issue arises about the way in which the Government have sought to tackle a problem that, in part, is their own creation.
I am grateful to the hon. Gentleman for his usual generosity. I, too, served on the Standing Committee that considered the Finance Bill of 2002,
and I remember some of those argumentsthey are hazy, to use his adjective about his own memory and, indeed, about mine in some respects. However, I do not recall that he and his hon. Friends voted against that zero per cent. rate in the 2002 Standing Committee debates. Does he have a different recollection?
Mr. Hoban: This is a debate about what is happening in the aftermath of that debate. It is rather rich of the Government to come back five years later, and almost airbrush out the history of those measures, ignoring the fact that they started that process by altering the balance between incorporation and being unincorporated. The problem is that the Government are using a crude sledgehammer to crack a nut, and they are causing a problem for many small businesses.
Let us consider for a moment the issue of incorporation, because it is an argument that has been prayed in aid by the Economic Secretary and the Financial Secretary. If we look at the way in which the number of companies that have incorporated has changed in recent years, we can see that in the year that the zero rate was introduced there was an increase in the number of companies that incorporated. That trend and step change in incorporation has continued, and the year after the zero rate was scrapped the number of companies registered was 372,000, compared with 325,900 in 2002-03. It appears that there has been a general increase in the number of companies that have incorporated, and it is hard to deduce a causal link between the two, given the fact that the large number of incorporations has continued for some time afterwards.
Rob Marris: The hon. Gentleman may not have the figures, but can he possibly disaggregate them, because over the same period a new regime of limited liability partnerships came in, which enabled partnerships to incorporate, and some of them are included in the figure of 372,000 to which he referred? It does not help us greatly with this debate unless he can disaggregate.
Mr. Hoban: The hon. Gentleman is right. I am not sure that those figures include limited liability partnerships, but I certainly do not think that the numbers have increased. I do not think that it is a huge number, and it certainly would not have a distorting effect on the most recent year, as the hon. Gentleman is perhaps suggesting.
On the face of it, the rise in the small companies rate is very disappointing for our members, because it is addressing a problem that I dont think exists, which is the notion that people incorporate for tax reasons. It was certainly true at one point, but I dont think it happens any more.
sends out a negative message to the small business community. Closing a loophole, which was initially created by Government incentives, penalises small businesses unnecessarily.
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