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The clause raises the small companies rate from 19 to 20 per cent. this month, with further increases to 21 and 22 per cent.

Mr. Newmark: A statement by Simon Sweetman of the Federation of Small Businesses contradicts the hon. Lady’s point about the clause. He said:

Helen Goodman: In a few moments, I shall quote some other independent commentators who said after the Budget that the problem does exist.

The object of the clause is to reduce the differential tax rate between the incorporated and the unincorporated. For the sector as whole, the three allowances are not just intended, but estimated, to be tax-neutral. The introduction of the annual investment
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allowance for 100 per cent. of expenditure up to £50,000, the 175 per cent. tax credit for R and D and the new tax credit for environmental investment offset the effect of the tax rate increase overall. Without that action, the Exchequer would lose billions of pounds, as more businesses incorporated in an attempt to avoid paying income tax and national insurance.

Mr. Dunne: How does the hon. Lady reconcile her statement about offsetting with what I said about the change to empty property relief, as a result of which businesses in this country will contribute nearly £1 billion to the Exchequer?

The Chairman: Order. I thought that I had taken that out of the equation, as it is not in the Bill.

Helen Goodman: Thank you, Sir Alan.

A further problem is that the current small companies rate benefits large companies, because it is levied on the size of profits, not on the size of the company. The change will help to focus the tax system more effectively.

To return to the point raised by the hon. Member for Braintree (Mr. Newmark), after the Budget speech Andrew Tenon, a tax director at Tenon, commented:

The Institute of Chartered Accountants said—again, after the Budget—that,

The scaremongering from Conservative Members is not justified. I suggest that they turn to chart 3.1 in the Red Book, which compares international corporate tax rates. They will see that current UK rates are below the G7 average, and that the new UK rate will be below that of the EU15. The Government continue, through a range of policies, to encourage business growth by encouraging investment and innovation.

Mr. Newmark: I am sure that in Bishop Auckland, as in Braintree, the majority of small businesses are in the service sector and are not capital-intensive. Has the hon. Lady therefore spoken to small businesses in her constituency? If so, what percentage of them think that the tax increases will benefit them?

Helen Goodman: As a matter of fact, there is a large amount of manufacturing in my constituency, and it is important to support this country’s manufacturing base.

To conclude, it is vital that, at the same time as encouraging the small business sector, we treat small businesses and self-employed people in an even-handed way.

Dr. Vincent Cable (Twickenham) (LD): I strongly agree with the approach adopted by the hon. Member for Fareham (Mr. Hoban), and with his conclusions. He set out the arguments pretty comprehensively, and I do not think I need add to them in great detail.


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It is true that, as has just been said, the Budget’s overall approach to business is neutral. It has probably been favourable to large companies and less favourable to small companies, for reasons that have already been given and particularly because of the impact of clause 3. However, what we say as Opposition spokesmen is less important than the way in which businesses themselves experience and perceive the changes. A fairly large survey conducted by the British Chambers of Commerce, which represents both large and small companies, concluded that 70 per cent. of United Kingdom businesses believed that the proposals would damage them, mainly because of the impact on small companies.

Let me deal with the two major arguments that have been advanced in defence of clause 3. The first, advanced by the hon. Member for Bishop Auckland (Helen Goodman), is the tax avoidance argument—the argument that large numbers of small entrepreneurs are constantly calculating, on the basis of the tax rate, the respective merits of taking their profits as salaries or as dividends. That may or may not be a valid point: we do not know. One of my questions to the Government is how much research they have actually done. There have been two major changes of policy, and I think it legitimate to ask how well the Government are informed by research and survey about how companies in this position behave.

The Economic Secretary asked the hon. Member for Fareham (Mr. Hoban) whether he was going to change the policy. The hon. Gentleman gave a perfectly sensible answer, although I think he could have added to it. He said, “We would change the policy if we knew what was happening in terms of behaviour.” The Government are rushing into tax changes without presenting any evidence about the way in which companies behave.

In evidence to the Select Committee, the CBI said:

If the purpose is to stop arbitrage at the boundary, why are the rates not being aligned? There may well be an answer to the CBI’s question. If so, perhaps the Minister can explain what it is.

John Healey: National insurance.

Dr. Cable: Indeed, but the wedge of national insurance is much larger than the 2 to 3 per cent. margins that the Government are playing with. We need some analysis of, and research on, how big the tax differentials need to be to change behaviour. We have been given no evidence so far.

The second argument relates to how far the clause 3 change in tax rates is offset by changes in tax allowances. You have advised us not to get involved in the details of tax allowances, Sir Alan, but the issue of offset is crucial to the debate. The argument is that the annual investment allowance will offset the increased tax burden for small companies. The Chief Secretary intervened to make that point. What we do not know—and I do not think the Government know—is how much of the annual investment allowance will be
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taken up by small incorporated companies. Can the Government give us an estimate? Are they thinking of 50 per cent., 30 per cent., 20 per cent., 10 per cent. or 5 per cent.? It would be useful to know the Government’s internal estimates of how much is offset and how much is not.

Quite apart from the issue of how much is offset, there is the issue of the time lag between the two measures. The tax increase takes place immediately and in three successive stages, but the offsetting investment allowance is subject to consultation, and may or may not come into effect in two years’ time. There is a gap between the two that will directly affect small companies.

Then there is the point made by several Members, particularly the hon. Member for Ludlow (Mr. Dunne), about the impact differential between service companies, which do not engage in substantial capital investment, and manufacturing companies, which do. Finally, there is the much bigger question of the complicated interaction between the clause 3 increase in corporation tax, the annual investment allowance and the change in the capital allowance rules. All three will be swirling around together.

It is worth looking—although not in great detail—at the evidence that the Institute of Chartered Accountants in England and Wales devoted to the issue. I will just quote a couple of lines. It states:

because of the relationship with the tax change.

The institute continued:

The complex inter-relationship between a tax increase and two big changes in allowances, taking place over different time horizons, will have complicated and, probably on balance, significantly negative effects for small companies.

4.30 pm

The Government would therefore be wise to heed the advice of the Treasury Committee. The hon. Member for Fareham has already quoted its conclusion that the Government should initiate a review of the policy for next year's Finance Bill because of the unpredictable nature of the outcome, but it is worth while quoting another sentence from the conclusion. It states:

In several interventions, Labour Members have asserted as a matter of dogma that the changes will increase investment, whereas the Treasury Committee, representing three parties, looked at the matter across the board and concluded that the results are likely to be entirely unpredictable. Therefore, I remain totally unpersuaded that clause 3 is justified in anything like its present form.


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Mr. Fallon: I, too, oppose clause 3, for many of the reasons that were put forward by my hon. Friend the Member for Fareham (Mr. Hoban) and by the hon. Member for Twickenham (Dr. Cable), whose comments I thoroughly endorse. The clause is misguided and discriminatory. It is distortive in its aim, although unlikely to be distortive in its effect. In the end it will damage many small businesses.

In justifying the clause, the Chancellor has stressed that its purpose is to prevent tax avoidance, but he has put forward no hard evidence since the Budget or indeed to the Select Committee that the great majority of small businesses are in the tax-avoidance game. That is a slur on most small businesses, and I am surprised that the hon. Member for Bishop Auckland (Helen Goodman) simply assumes that those small businesses in her constituency that do not happen to be involved in manufacturing must be involved in tax evasion or tax avoidance. That is a slur on many hard-working small businesses across County Durham.

Helen Goodman: Will the hon. Gentleman give way?

Mr. Fallon: It is a slur that is so serious that I must give the hon. Lady the opportunity to reply.

Helen Goodman: I am grateful to the hon. Gentleman for giving way. Nothing in my remarks could possibly lead any reasonable listener to conclude that that is what I was saying. That is not what I was saying. I was asserting that it is particularly important to support manufacturing industry and to protect the revenue base. The problem that we face is that the number of people who move to the incorporated sector is on the increase, so the tax base will be eroded further.

Mr. Fallon: It is clear again that the hon. Lady—I do not know why she keeps beating up her own constituency—is implying that many businesses that are not involved in manufacturing are now being incorporated simply to avoid tax. She has used the word “many” and the Chancellor has used the word “many”. However, neither of them have produced hard evidence. When we tackled the Chancellor himself on this question in the Select Committee, he said that it was not just a question of what had happened in the past. He said:

In other words, the clause is based not simply on what has happened or is happening, but on what is likely to happen across Europe. We clearly do not have sufficient evidence to justify this change.

Secondly, I am opposed to the clause because, as was brought out in our questioning earlier today, it is discriminatory. It is not neutral in its effect. A vast number of small businesses are not involved in research and development. As my hon. Friend the Member for Ludlow (Mr. Dunne) said, many small businesses do not rely on annual investment. Why? Because they are different types of businesses: they are people businesses, or skills businesses, or consultancies—or knowledge businesses. It is perverse of Ministers to prattle on
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about how they are supporting the knowledge economy and then to clobber those small businesses that are part of the knowledge economy but do not invest in old-fashioned plant and machinery and qualify for their new fancy allowances. There are knowledge businesses that will lose out because of this measure, so it is discriminatory.

Thirdly, I oppose the clause because its aim is distortive. The objective behind the clause is that Ministers want there to be more investment in research and development. Yet when we took evidence on that point, we were informed by Mr. Whiting

There we have it—and from one of the experts. Small businesses know about research and development, and simply to encourage more of them to invest in research and development through a particular tax change is unlikely to be as effective as lowering the basic rate of tax that applies to small businesses and keeping it low rather than increasing it.

I am also opposed to the clause because it will be damaging. That is not my conclusion alone. As the hon. Member for Twickenham pointed out, it was the overall conclusion of the Treasury Committee, which contains a majority of Government Members and a handful of Opposition Members. The Labour-dominated Committee was so concerned at the lack of hard evidence in support of this proposal that we concluded:

That is why we recommended that, before the final changes are put into effect in the 2009 Budget, we have a proper review of the impact of the measures so that we can establish whether they are positive across the small business sector and whether they discriminate between different parts of that sector. Until that review has taken place, the House cannot possibly support the clause.

Mr. Newmark: As we are talking about corporation tax, I draw Members’ attention to my entry in the Register of Members’ Interests.

One of the keys to having fair taxation is stability. Robert Chote of the Institute for Fiscal Studies told the Treasury Committee during its hearing on the 2005 pre-Budget report:

It is now two years later, and it would still be welcome.

Speaking during the debate on last year’s Finance Bill, the Financial Secretary mentioned the responses that the Government had received to the consultation paper on the taxation of small business issued in 2004. He said that businesses had


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That is a principle on which we can all agree, but it is not one that has much currency at the Treasury, it would seem. This year’s Finance Bill has been reduced to one volume but, unfortunately, the House of Commons Library has had to produce two volumes of briefing notes on the taxation of small businesses—one covering changes between 2000 and 2006, and a second covering recent developments, which no doubt the hon. Member for Wolverhampton, South-West (Rob Marris) has perused in detail.

This is the third time that I have been involved in a Finance Bill debate, and I am already developing a sense of déj vu. The first instalment of the phased increase of the small companies rate in clause 3 will push small businesses one step closer to where they started, before they were hit with a decade of chopping-and-changing confusion from the Chancellor. The reason for all this confusion is disarmingly simple: tax incentives originally intended to encourage business investment and business growth suddenly became perceived as loopholes. It is tempting to say that one man’s incentive is another’s loophole, but unfortunately the Chancellor’s incentives always seem to become his loopholes if they are given a little time.

It did not matter that everyone warned the Chancellor that radical changes to the small companies rate would act as a direct incentive for incorporation; in fact, there has probably never been so many Cassandras offering unheeded prophecy. He went ahead anyway, and all the changes since then have attempted to restore a balance between incentivising small businesses and preventing the erosion of the tax base, both of which I can recognise as sane objectives on the Treasury’s part. The IFS “green Budget” contained the plea that


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