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25 Jun 2007 : Column 123

25 Jun 2007 : Column 124

25 Jun 2007 : Column 125

Clause 3

Small companies’ rates and fractions for financial year 2007

10 pm

Mr. Hoban: I beg to move amendment No. 43, page 2, line 9, leave out clause 3.

Mr. Speaker: With this it will be convenient to discuss the following amendments: No. 41, page 2, line 11, leave out from ‘20%’ to end of line 12 and insert

(b) 19% for companies with either ring fence profits or five or more employees.’.

No. 42, page 2, line 14, leave out from second ‘profits’ to ‘fraction’ in line 17 and insert:

(b) 11/400ths in relation to ring-fence profits of companies and companies employing five or more people (“the standard’.

Mr. Hoban: It is difficult to understate the mess into which the Government have got themselves on the taxation of small companies. After 11 Budgets and multiple rate changes, the Chancellor has almost come full circle on the subject. When the Government came to office, the 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, reduced to zero in 2002, only to be put back up to 19 per cent. for non-corporate distributions in 2004. In this year’s Budget, the rate was increased from 19 to 20 per cent.; next year it will increase from 20p to 21p, and the following year, it will go up from 21p to 22p. By the next general election, the small companies rate will be only a penny less than it was in 1997. There have been so many changes, yet so little progress. Eight tax changes have been made, simply for the rate to fall by only 1p in the past 10 years.

That constant meddling in the small companies rate reflects a problem at the heart of the Government’s tax policy. Treasury Ministers perceive tax as a means of behavioural change; sometimes it might work and sometimes it does not. However, in 2002 some bright spark at the Treasury decided to stimulate enterprise by reducing the starting rate of corporation tax to zero. We know that that stimulated incorporation; hence the changes in later years to the starting rates, and their effects, until last year’s abolition.

In the debate in the Committee of the whole House, the hon. Member for Wolverhampton, South-West (Rob Marris) and I referred to proceedings on Second Reading of the Finance Act 2002. We both admitted that our memory was rather hazy, but I checked the debate and I found a quote, in which I thought that hon. Members might be interested. It is:

Even in 2002, some people identified the potential problem. Hon. Members may wish to know who made that speech; I must confess, with some modesty, that it was me. The Government were, therefore, warned about what might happen if the policy went ahead.

The Government, in trying to remove the incentives, have gone into overdrive by creating the position whereby by the next general election, the small companies rate of taxation will be 2p higher than the basic rate of tax. The measure’s impact on companies is crude. It is worth going back to the debate on this Bill in the Committee of the whole House, when the Financial Secretary said:

A measure that was apparently supposed to deal with unincorporated businesses becoming limited companies will lead to increases in the tax rate paid by 13,000 medium-sized companies and about 1,500 large companies.

In the spirit of consensus, may I offer to help the Government out of the hole they have got themselves into by increasing the tax rate on many businesses employing more than 50 staff? In amendments Nos. 41 and 42, they have an opportunity to focus the measure more effectively on the smallest companies, which they believe responded to their policy in 2002 to incorporate.

What is the Government’s justification for the measure? What are they using to defend that change of tax policy? The Budget note on corporation tax reform summarised the argument succinctly by setting out three main objectives of reform: enhancing the international competitiveness of UK-based business; encouraging growth through investment and innovation; and ensuring fairness across the tax system. Those are laudable objectives, but let us look more carefully at what they mean in practice for small business. The cut in mainstream corporation tax, which we support, aims to improve Britain’s international competitiveness, but only for companies earning profits of more than £300,000 a year. The Government’s attitude is, “If you earn profits lower than that, tough.” The Budget has worsened the position of such companies.

I suspect that the Financial Secretary will argue, as he did in the Committee of the whole House, that in the Budget there are changes to the annual investment allowance that will help small companies. However, that depends on businesses making decisions to invest in plant and machinery rather than in human capital. Small businesses that expected to earn the industrial buildings allowance or the agricultural buildings allowance will be hit hard by measures that we will discuss tomorrow.

The Government use the argument of fairness to justify the increase in the small companies tax rate, but I have established that it is a crude, clunking measure that hits companies of all sizes. There is a problem at
25 Jun 2007 : Column 127
the heart of the tax change, as the Government do not understand properly how small businesses work and how they are affected by the tax system. If they did, perhaps they would not be in this mess in the first place. It appears from representations made by small business groups that they do not believe that the Government understand them, either. Carol Undy of the Federation of Small Businesses was reported as saying:

About the Chancellor’s tax changes, the federation said:

The British Chambers of Commerce spoke out against the small companies corporation tax increase:

Small business organisations clearly understand, as the Treasury does not, the impact of the increase on their members and their ability to invest and grow in future. The Government have sent mixed messages for business in the Budget, and it is time for a consistent approach to company taxation. Cutting one rate but increasing another sends a confused signal to the business world. It is right to encourage businesses to grow and invest, so it is wrong for the Chancellor, who did the right thing for companies earning large profits by cutting the headline rate of corporation tax, to increase the small companies rate. Because of the mistakes that he made in the past, he is penalising all small companies that pay that rate. Why should companies suffer because he got it wrong? The Government owe them an apology, not a tax increase.

Julia Goldsworthy: I shall be brief. We have covered many of these issues on Second Reading, in the Committee of the whole House and in the Public Bill Committee. The only point that I wish to make, in addition to those made by the hon. Member for Fareham (Mr. Hoban), ties in with the previous debate.

It is not yet clear to many businesses how their tax treatment will be affected by the increase in the small business rate of corporation tax, the capital allowances and the research and development tax credits that may be available to them. Again, it would be helpful if, at the time of the Budget, information was published about what the differential impact of all the changes, in the round, will be—over time, as not all the changes occur within the same time frame; over sector, because we have heard that some capital-intensive businesses will benefit disproportionately; and by region, because in my part of the world, down in Cornwall and across the south-west, there are a disproportionate number of very small businesses. If many small businesses encounter a tax hike, areas with the highest proportion of small businesses will see that driver of their economy affected more negatively than other areas that have more big businesses or more capital-intensive businesses.

Businesses are still trying to work out how the changes will affect them, and what advantages and
25 Jun 2007 : Column 128
disadvantages there will be for them in the tax changes in the Budget and the Bill. I hope the Minister will give us an assurance that by the end of the debate on the Bill, businesses will have a clearer sense of what it will mean for them.

John Healey: As the hon. Member for Falmouth and Camborne (Julia Goldsworthy) said, we have covered much of the ground before, several times since the Budget, and we have rehearsed many of the general arguments in debates on the Bill and elsewhere. The arguments that I heard this evening from the hon. Member for Fareham (Mr. Hoban) are fundamentally flawed, first in the proposition that there should be a differential in how the small companies rate is charged, and secondly, in the way that he attempted to target those rates.

There are huge practical difficulties with attempting to fix a tax rate based on fairly arbitrary and easily manipulated criteria, such as employment figures. What is the rationale for choosing five employees as representing a real company, rather than, say, six or four? What if employment levels change throughout the year? Would a company wait until after it had filed its tax returns to cut the work force? Would it take on temporary workers in order to get above the magic level of five employees?

On a more serious level, one needs to consider the risk of distorting what should be commercial decisions because of a tax structure. That would create incentives for small companies to merge not for commercial reasons, but for tax reasons. It would also be an incentive to exaggerate employment levels in the company. The proposition is seriously flawed in a number of ways.

The core of the problem is not the practicality of introducing such arbitrary measures, but the rationale for doing so. To encourage investment, as the hon. Member for Fareham recognised, the Government have looked to reduce corporation tax rates successively since 1997, to the extent that even when we reverse that trend and return the small companies rate to 22 per cent., it will be still be lower than when we came into office in 1997. The hon. Gentleman acknowledged that earlier.

The hon. Gentleman criticised us for what he termed constant meddling with the rates, but at each stage what we have done, and the rationale for doing it, have been clearly set out. At each stage we have said that the changes that we are making in the rates were to encourage retention, reinvestment and growth. As with all elements of the tax system, we have made it clear that we would keep those changes under careful and constant review.

As hon. Members have recognised, the earlier changes and their impact were not as we intended. We saw an increase in incorporation taking place, not as a launch pad for growth but as a way of reducing personal tax and national insurance levels, while in many cases those involved were carrying out exactly the same economic activity as before.

10.15 pm

That is why we decided to change the way in which we focus incentives for growth, and we have changed the focus, not for some businesses, or those with fewer
25 Jun 2007 : Column 129
than five employees, but for all businesses—not just companies, but those that are unincorporated as well. The hon. Member for Fareham cited the Federation of Small Businesses, and I shall do so too, as I have in previous debates. It has welcomed the proposal for the annual investment allowance, which will benefit the direct activity of investment. By providing an allowance of up to £50,000 for all businesses, the arrangement will cover all the yearly expenditure of about 19 out of 20 small businesses, effectively providing them with 100 per cent. first-year allowances, moving towards a cash-flow tax system, dealing with what many small businesses constantly say is their biggest problem—their tax-flow levels. Even modest levels of investment in plant and machinery will bring significant benefits.

We recognise that there are many sound reasons for incorporation. We do not want to stop or discourage genuine commercial incorporations. We are proud of our record in encouraging the start-up and growth of small firms, not least with the stability that we have been able to bring to the general economy. The changes that we are making in the Bill build on that success. They reduce the unfair tax advantages that can distort competition between incorporated and unincorporated businesses, and they ensure that the incentives in the tax system that are designed to promote growth will do just that.

For that reason, I hope that the hon. Member for Fareham will not press amendment No. 43. Amendments Nos. 41 and 42 go directly against what businesses say to us that they want—a simple and fair tax system—so I hope that he will not press those amendments, either. If he does, I shall ask my hon. Friends to resist.

Mr. Hoban: This has been a brief debate, which is probably to the advantage of all hon. Members; as the Financial Secretary said, we have rehearsed these arguments before.

I accept that amendments Nos. 41 and 42 are quite crude amendments. In a sense, they mirror what the Government have sought to do by increasing the small companies rate, because the Government’s increase has been a very crude way of tackling a problem of their own making. Perhaps the Financial Secretary should take his own advice about measures that could end up distorting commercial decisions. Tax can distort commercial decisions, as the 2002 tax changes clearly did. He needs to reflect on that when considering future changes.

It is clear that, despite the package that the Financial Secretary described, as we established in the Committee of the whole House, the average gain for businesses from the introduction of the annual investment allowance is about £60 or £70 a business. The loss for small companies as a consequence of the increase in the tax rate is about £1,000 a company. I think that many small businesses and companies will find that a burden, and will find that they cannot invest as much as they would want to invest in developing their staff.

That sends out mixed and confused messages to companies that hear the Chancellor praising large companies and cutting their corporation tax, while small companies are penalised by this increase. That is why I wish to press amendment No. 43 to a vote—to
25 Jun 2007 : Column 130
send out a clear signal that at least on the Opposition Benches, we back small companies and want to see them grow.

Question put, That the amendment be made:—

The House divided: Ayes 191, Noes 268.
Division No. 152]
[10.19 pm


Afriyie, Adam
Ainsworth, Mr. Peter
Alexander, Danny
Amess, Mr. David
Ancram, rh Mr. Michael
Arbuthnot, rh Mr. James
Atkinson, Mr. Peter
Bacon, Mr. Richard
Baldry, Tony
Barker, Gregory
Baron, Mr. John
Beith, rh Mr. Alan
Bellingham, Mr. Henry
Benyon, Mr. Richard
Bercow, John
Beresford, Sir Paul
Blunt, Mr. Crispin
Bone, Mr. Peter
Bottomley, Peter
Brazier, Mr. Julian
Brokenshire, James
Browne, Mr. Jeremy
Browning, Angela
Burns, Mr. Simon
Burt, Alistair
Burt, Lorely
Butterfill, Sir John
Cable, Dr. Vincent
Campbell, rh Sir Menzies
Carmichael, Mr. Alistair
Carswell, Mr. Douglas
Cash, Mr. William
Chope, Mr. Christopher
Clark, Greg
Clarke, rh Mr. Kenneth
Clegg, Mr. Nick
Clifton-Brown, Mr. Geoffrey
Conway, Derek
Crabb, Mr. Stephen
Davey, Mr. Edward
Davies, David T.C. (Monmouth)
Djanogly, Mr. Jonathan
Dorries, Mrs. Nadine
Duddridge, James
Duncan, Alan
Duncan Smith, rh Mr. Iain
Dunne, Mr. Philip
Ellwood, Mr. Tobias
Evennett, Mr. David
Fabricant, Michael
Fallon, Mr. Michael
Farron, Tim
Field, Mr. Mark
Fox, Dr. Liam
Francois, Mr. Mark
Fraser, Mr. Christopher
Garnier, Mr. Edward
Gauke, Mr. David
Gibb, Mr. Nick
Gidley, Sandra
Gillan, Mrs. Cheryl
Goldsworthy, Julia
Goodman, Mr. Paul
Goodwill, Mr. Robert
Gove, Michael
Grayling, Chris
Green, Damian
Greening, Justine
Grieve, Mr. Dominic
Gummer, rh Mr. John
Hague, rh Mr. William
Hammond, Stephen
Harper, Mr. Mark
Harvey, Nick
Hayes, Mr. John
Heald, Mr. Oliver
Heath, Mr. David
Hemming, John
Hendry, Charles
Herbert, Nick
Hoban, Mr. Mark
Hogg, rh Mr. Douglas
Hollobone, Mr. Philip
Holloway, Mr. Adam
Hosie, Stewart
Howard, rh Mr. Michael
Howarth, Mr. Gerald
Hughes, Simon
Huhne, Chris
Hunt, Mr. Jeremy
Hurd, Mr. Nick
Jack, rh Mr. Michael
Jackson, Mr. Stewart
Johnson, Mr. Boris
Jones, Mr. David
Kawczynski, Daniel
Keetch, Mr. Paul
Key, Robert
Kirkbride, Miss Julie
Kramer, Susan
Laing, Mrs. Eleanor
Lamb, Norman
Lancaster, Mr. Mark
Lansley, Mr. Andrew
Leech, Mr. John
Leigh, Mr. Edward
Letwin, rh Mr. Oliver
Liddell-Grainger, Mr. Ian
Llwyd, Mr. Elfyn
Loughton, Tim
Mackay, rh Mr. Andrew
Maples, Mr. John
Mates, rh Mr. Michael
May, rh Mrs. Theresa
McCrea, Dr. William
McIntosh, Miss Anne
Mercer, Patrick
Miller, Mrs. Maria
Milton, Anne
Moore, Mr. Michael
Moss, Mr. Malcolm
Mulholland, Greg
Murrison, Dr. Andrew

Neill, Robert
Newmark, Mr. Brooks
O'Brien, Mr. Stephen
Öpik, Lembit
Paice, Mr. James
Paterson, Mr. Owen
Pelling, Mr. Andrew
Penning, Mike
Penrose, John
Pickles, Mr. Eric
Price, Adam
Prisk, Mr. Mark
Pritchard, Mark
Pugh, Dr. John
Randall, Mr. John
Reid, Mr. Alan
Rennie, Willie
Robathan, Mr. Andrew
Robertson, Angus
Robertson, Hugh
Robertson, Mr. Laurence
Rogerson, Dan
Rowen, Paul
Russell, Bob
Sanders, Mr. Adrian
Scott, Mr. Lee
Selous, Andrew
Simmonds, Mark
Simpson, Mr. Keith
Smith, Sir Robert
Soames, Mr. Nicholas
Spelman, Mrs. Caroline
Spink, Bob
Spring, Mr. Richard
Stanley, rh Sir John
Steen, Mr. Anthony
Stuart, Mr. Graham
Stunell, Andrew
Swinson, Jo
Swire, Mr. Hugo
Syms, Mr. Robert
Taylor, Mr. Ian
Taylor, Matthew
Teather, Sarah
Thurso, John
Tredinnick, David
Tyrie, Mr. Andrew
Vara, Mr. Shailesh
Viggers, Peter
Villiers, Mrs. Theresa
Walker, Mr. Charles
Wallace, Mr. Ben
Waterson, Mr. Nigel
Widdecombe, rh Miss Ann
Wiggin, Bill
Willetts, Mr. David
Williams, Hywel
Williams, Mark
Williams, Mr. Roger
Williams, Stephen
Willott, Jenny
Wilson, Mr. Rob
Winterton, Ann
Winterton, Sir Nicholas
Wishart, Pete
Wright, Jeremy
Young, rh Sir George
Younger-Ross, Richard
Tellers for the Ayes:

Angela Watkinson and
Andrew Rosindell

Abbott, Ms Diane
Ainger, Nick
Ainsworth, rh Mr. Bob
Alexander, rh Mr. Douglas
Allen, Mr. Graham
Anderson, Mr. David
Anderson, Janet
Armstrong, rh Hilary
Atkins, Charlotte
Baird, Vera
Balls, Ed
Banks, Gordon
Barlow, Ms Celia
Barron, rh Mr. Kevin
Bayley, Hugh
Begg, Miss Anne
Bell, Sir Stuart
Benn, rh Hilary
Benton, Mr. Joe
Betts, Mr. Clive
Blackman, Liz
Blackman-Woods, Dr. Roberta
Blizzard, Mr. Bob
Borrow, Mr. David S.
Bradshaw, Mr. Ben
Brennan, Kevin
Brown, Lyn
Brown, Mr. Russell
Browne, rh Des
Bryant, Chris
Buck, Ms Karen
Burden, Richard
Burgon, Colin
Burnham, Andy
Butler, Ms Dawn
Byrne, Mr. Liam
Campbell, Mr. Alan
Campbell, Mr. Ronnie
Caton, Mr. Martin
Cawsey, Mr. Ian
Challen, Colin
Chapman, Ben
Chaytor, Mr. David
Clapham, Mr. Michael
Clark, Ms Katy
Clark, Paul
Clarke, rh Mr. Charles
Clarke, rh Mr. Tom
Clwyd, rh Ann
Coaker, Mr. Vernon
Coffey, Ann
Cohen, Harry
Connarty, Michael
Cook, Frank
Cooper, Yvette
Corbyn, Jeremy
Cousins, Jim
Crausby, Mr. David
Cryer, Mrs. Ann
Cummings, John
Cunningham, Mr. Jim
Cunningham, Tony
David, Mr. Wayne
Davidson, Mr. Ian
Davies, Mr. Dai
Dean, Mrs. Janet

Denham, rh Mr. John
Devine, Mr. Jim
Dhanda, Mr. Parmjit
Dismore, Mr. Andrew
Dobbin, Jim
Dobson, rh Frank
Donohoe, Mr. Brian H.
Doran, Mr. Frank
Dowd, Jim
Drew, Mr. David
Eagle, Angela
Efford, Clive
Ellman, Mrs. Louise
Ennis, Jeff
Farrelly, Paul
Field, rh Mr. Frank
Flint, Caroline
Follett, Barbara
Francis, Dr. Hywel
Gapes, Mike
Gardiner, Barry
George, rh Mr. Bruce
Gerrard, Mr. Neil
Gibson, Dr. Ian
Gilroy, Linda
Godsiff, Mr. Roger
Goodman, Helen
Griffith, Nia
Griffiths, Nigel
Grogan, Mr. John
Gwynne, Andrew
Hall, Mr. Mike
Hall, Patrick
Hamilton, Mr. David
Hamilton, Mr. Fabian
Hanson, rh Mr. David
Harris, Mr. Tom
Havard, Mr. Dai
Healey, John
Hendrick, Mr. Mark
Hepburn, Mr. Stephen
Heppell, Mr. John
Hesford, Stephen
Hewitt, rh Ms Patricia
Heyes, David
Hill, rh Keith
Hillier, Meg
Hodge, rh Margaret
Hoey, Kate
Hood, Mr. Jim
Hope, Phil
Hopkins, Kelvin
Howarth, rh Mr. George
Hoyle, Mr. Lindsay
Hughes, rh Beverley
Humble, Mrs. Joan
Hutton, rh Mr. John
Iddon, Dr. Brian
James, Mrs. Siân C.
Jenkins, Mr. Brian
Johnson, rh Alan
Johnson, Ms Diana R.
Jones, Helen
Jones, Mr. Kevan
Jones, Lynne
Jones, Mr. Martyn
Joyce, Mr. Eric
Kaufman, rh Sir Gerald
Keeble, Ms Sally
Keeley, Barbara
Keen, Alan
Keen, Ann
Kemp, Mr. Fraser
Kennedy, rh Jane
Khan, Mr. Sadiq
Kidney, Mr. David
Kilfoyle, Mr. Peter
Knight, Jim
Kumar, Dr. Ashok
Ladyman, Dr. Stephen
Lammy, Mr. David
Lepper, David
Levitt, Tom
Lewis, Mr. Ivan
Linton, Martin
Lloyd, Tony
Love, Mr. Andrew
Lucas, Ian
Mactaggart, Fiona
Malik, Mr. Shahid
Mann, John
Marris, Rob
Marsden, Mr. Gordon
Marshall-Andrews, Mr. Robert
Martlew, Mr. Eric
McAvoy, rh Mr. Thomas
McCabe, Steve
McCarthy, Kerry
McCarthy-Fry, Sarah
McDonagh, Siobhain
McDonnell, John
McFadden, Mr. Pat
McGovern, Mr. Jim
McGuire, Mrs. Anne
McKechin, Ann
McNulty, Mr. Tony
Meacher, rh Mr. Michael
Merron, Gillian
Michael, rh Alun
Milburn, rh Mr. Alan
Miliband, rh David
Miliband, Edward
Miller, Andrew
Moffat, Anne
Moffatt, Laura
Mole, Chris
Moon, Mrs. Madeleine
Morgan, Julie
Morley, rh Mr. Elliot
Mountford, Kali
Mudie, Mr. George
Mullin, Mr. Chris
Munn, Meg
Murphy, Mr. Denis
Murphy, Mr. Jim
Murphy, rh Mr. Paul
Naysmith, Dr. Doug
O'Brien, Mr. Mike
Olner, Mr. Bill
Owen, Albert
Palmer, Dr. Nick
Pearson, Ian
Plaskitt, Mr. James
Pope, Mr. Greg
Pound, Stephen
Prentice, Bridget
Prescott, rh Mr. John
Primarolo, rh Dawn
Prosser, Gwyn
Purchase, Mr. Ken
Rammell, Bill
Raynsford, rh Mr. Nick
Reed, Mr. Andy
Reed, Mr. Jamie

Reid, rh John
Robertson, John
Robinson, Mr. Geoffrey
Rooney, Mr. Terry
Roy, Mr. Frank
Ruane, Chris
Ruddock, Joan
Russell, Christine
Ryan, Joan
Salter, Martin
Seabeck, Alison
Shaw, Jonathan
Sheerman, Mr. Barry
Sheridan, Jim
Simon, Mr. Siôn
Simpson, Alan
Singh, Mr. Marsha
Skinner, Mr. Dennis
Slaughter, Mr. Andy
Smith, rh Mr. Andrew
Smith, Ms Angela C. (Sheffield, Hillsborough)
Smith, Angela E. (Basildon)
Smith, rh Jacqui
Smith, John
Snelgrove, Anne
Soulsby, Sir Peter
Southworth, Helen
Spellar, rh Mr. John
Starkey, Dr. Phyllis
Strang, rh Dr. Gavin
Stringer, Graham
Stuart, Ms Gisela
Sutcliffe, Mr. Gerry
Tami, Mark
Taylor, Ms Dari
Taylor, David
Thomas, Mr. Gareth
Thornberry, Emily
Timms, rh Mr. Stephen
Tipping, Paddy
Touhig, rh Mr. Don
Turner, Dr. Desmond
Turner, Mr. Neil
Twigg, Derek
Walley, Joan
Waltho, Lynda
Wareing, Mr. Robert N.
Watson, Mr. Tom
Watts, Mr. Dave
Whitehead, Dr. Alan
Williams, rh Mr. Alan
Winnick, Mr. David
Winterton, rh Ms Rosie
Woodward, Mr. Shaun
Wright, David
Wright, Mr. Iain
Wright, Dr. Tony
Wyatt, Derek
Tellers for the Noes:

Huw Irranca-Davies and
Mr. Michael Foster
Question accordingly negatived.
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