 House of Commons |
Session 2006 - 07 Publications on the internet General Committee Debates Finance |
Finance Bill |
The Committee consisted of the following Members:Alan
Sandall, Hannah Weston, Committee
Clerks
†
attended the Committee
Public Bill CommitteeTuesday 8 May 2007[Mr. Roger Gale in the Chair]Finance Bill(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration)4.30
pm
The
Chairman:
Good afternoon ladies and gentlemen. Welcome to
the first sitting of the 2007 Finance Bill. For the convenience and
comfort of Members, it may be interesting to note that, as long as I am
in the Chair, hon. Members may remove their jackets if they wish. I
cannot guarantee the same sartorial indulgence from Mr.
Illsley, although I dare say it is likely. That is for him to
decide.
Just before
we start there is one modest typographical error—well not modest
for the hon. Member concerned—that should be corrected. Hon.
Members may note that Helen Goodman appears on the list of Members
serving on the Committee. In fact, it should be Mr. Paul
Goodman—[Interruption.] Yes, well we have been through
all those jokes already.
May I also remind hon. Members
that adequate notice must be given of amendments? As a general rule, I
and Mr Illsley will not call starred amendments, including any starred
amendments that may be reached during an afternoon’s sitting of
the Committee. That said, I now call upon the Minister to move the
sittings motion.
That the
Committee shall
meet—
(a) on
Tuesdays at 10.30 a.m. and 4.30 p.m.,
and
(b) on Thursdays
at 9.00 a.m. and 1.00
p.m.,
when the House
is sitting.
I should
like to take the opportunity to say a few brief words. May I begin by
extending a warm welcome to you, Mr. Gale and to your
co-Chairman, Mr. Illsley? We welcome the experience and
knowledge of bothof you and we are confident that you will be
able to guide us through the Committee ensuring that our deliberations
are both thorough and to the point. We look forward to that. May I also
welcome Mr. Doig to his
role?
It has been a
number of years since I last served on the Committee. I am delighted to
be back. It is the first time for many years that the Paymaster General
is unable to be with us because of a short period in hospital. She is
now out of hospital and doing well. I am sure that the Committee will
want me to send her its good wishes.
May I extend a warm welcome to
the hon. Member for Chipping Barnet who will lead for the Opposition
and to the members of her team, the hon. Members for Rayleigh and for
Fareham and those who will be supporting them, particularly those who
are servingon this Committee for the first time, including
thehon. Member for Wycombe. [Hon.
Members: “And for Bishop Auckland.”] It did
occur to me to wonder why the numbers of our side of the Committee
looked quite as large as they did on the initial list, but that has now
been explained. I welcome the hon. Member for Wycombe to the Committee.
May I also welcome the hon. Member for Falmouth and Camborne and her
Liberal Democrat colleagues and the hon. Member for Dundee,
East?
I am joined
today and will be supported throughout these debates
by the Financial Secretary to the Treasury, and by the Economic
Secretary to the Treasury. I am delighted to see them here. I know that
they will want to join me in welcoming my hon. Friends to this
Committee.
Could I
just put on record my thanks to the many advisers and representative
bodies that have advisedus in significant ways on the Bill? We
shall welcome further contributions from them as we scrutinise the Bill
in greater depth over the coming weeks. I look forward very much to our
debates as we fulfil together our duty in examining this Bill in
Committee.
Mrs.
Theresa Villiers (Chipping Barnet) (Con): I am delighted
to be able to respond on behalf of my hon. Friends to the Chief
Secretary’s introduction, made in his characteristic bipartisan
and friendly manner that we very much welcome. It is a great pleasure
to serve under your chairmanship, Mr. Gale and under your
co-Chairman, Mr. Illsley.
I am happy to offer some brief
opening remarks on behalf of my Front-Bench team, my hon. Friends the
Members for Rayleigh, for Wycombe, for Fareham and for Bexleyheath and
Crayford. It is always a pleasure to serve alongside my colleagues on
the gruelling task that awaits us all over the new few weeks. I know
that my hon. Friends will be applying their usual forensic scrutiny to
the Bill.
I should
also welcome my Back-Bench team: my hon. Friends the Members for
Braintree, for Ludlow, for South-West Hertfordshire, for Rochford and
Southend, East and for Windsor. I am particularly impressed that my
hon. Friends the Members for Braintree, for Ludlow
and for South-West Hertfordshire have volunteered for their second
Finance Bill.
Mrs.
Villiers:
And third in the case of my hon. Friend the
Member for Braintree. Such selfless dedication to the proper scrutiny
of the nation’s tax law will not go unnoticed in high places, I
am sure. The hard work of my hon. Friends is much appreciated. I, too,
should like to welcome the hon. Members for Falmouth and Camborne and
for Member for Dundee, East. I am sure that their contributions will be
very useful.
I am
pleased to see the Chief Secretary, the Financial Secretary, and the
Economic Secretary in their places, and I look forward to debating the
Bill with all of them. We are sorry that the Paymaster General is not
able to take part in the Committee this year, but we
wish her all the best in her recovery. There are many issues over which
the Paymaster General and I disagree. However, after a decade of
Finance Bills, I think that she deserves a year off. Anyone can deserve
a year off for good behaviour. She has obviously worked extremely hard
on many Finance Bills for many years. No doubt, the Chief Secretary
will be an admirable stand-in for her.
We also look forward to
debating with Government Back Benchers. No Committee on the Finance
Bill would be complete without the hon. Member for Wolverhampton,
South-West. After his contribution during the Committee of the whole
House, I look forward to many amendments from him to change all
references to the word “premiums” in the Bill to the more
correct “premia”.
Like the Chief Secretary, I
look forward to relying on briefing and technical advice from a number
of outside advisers—in particular, the Chartered Institute of
Taxation, the Law Society, the Institute of Chartered Accountants for
England and Wales, PricewaterhouseCoopers and KPMG. My hon. Friends and
I look forward to a wide-ranging debate over the next few weeks in
which we will seek to remedy any defects in the Bill and promote
much-needed reform of the tax system to tackle complexity and to move
towards fairer, more rational and simpler
taxes.
Julia
Goldsworthy (Falmouth and Camborne) (LD): It is a great
privilege to serve under your chairmanship, Mr. Gale. I
should also like to welcome all membersof the Committee and
say how much I am looking forward to debating with them in the coming
weeks. Like the hon. Member for Chipping Barnet, I am sure that we are
all disappointed—not least the Paymaster General
herself—that the Paymaster General is not serving on an 11th and
perhaps record-breaking Finance Bill. I am sure that she can look
forward to coming back next year.
I should also like to put on
record my thanks to other organisations that have provided briefings
and technical advice. I should like to dwell for a few moments on the
procedure that we are about to go through in terms of debating the
sittings. On Second Reading, I raised the issue of receiving evidence
at the Committee sittings, as other Public Bill Committees have done
since 1 January this year. The Statistics and Registration Service
Bill, which I sat on earlier this year, was the first to undergo such a
process. The hon. Member for Wolverhampton, South-West pointed out that
no organisations had come forward to give evidence to that Bill and
that made me wonder whether any outside organisations would be
interested in participating in such a process here.
The new Public Bill Committee
process was recommended by the Select Committee on Modernisation of the
House of Commons in its first report sitting of 2005-06 entitled
“The Legislative Process”. In a summary, it
concluded:
“As
a matter of routine, Government bills should be referred to committees
which have the power to take evidence as well as to debate and amend a
bill, and these committees should be named public bill
committees.”
Unfortunately,
we are still operating under the old system and we do not have that
opportunity.
I took the
liberty of contacting some organisations to see whether they would be
willing to participate. Many of those organisations contributed to the
evidence sessions of the Select Committee on Modernisation of the House
of Commons. I want to quote a few of the comments. Given the short time
scale, a not insignificant number of organisations were keen to support
the suggestion: the Low Incomes Tax Reform Group; the Institute of
Directors, the British Chambers of Commerce; the Society of Trust and
Estate Practitioners; the Association of Taxation Technicians and the
Chartered Institute of Taxation.
The
Chairman:
Order. I hesitate to interrupt the hon. Lady so
early in our proceedings, but I fear that she is now out of order.
However, the Chief Secretary will have heard what she said and if he
chooses to make representations in the appropriate quarter and to the
Leader of the House, it is open to him to do so. There is no timetable
motion on the Bill, so there is no opportunity for the kind of evidence
to which she referred to be taken and no opportunity for the list of
possible contributors to be
heard.
Julia
Goldsworthy:
Thank you, Mr. Gale. I am sure
that the Chief Secretary heard what I said. If he would like to
respond, I should be very grateful. I have nothing further to say,
except that I am very much looking forward to working with him, with
his colleagues and with other members of the Committee for the second
year.
Question put and agreed to.
Ordered,
That
the order in which proceedings are taken shall be:Clause 2,
Clauses 4 to 6, Clauses 9 to 11, Clauses 13 to 19, Clauses 22 and 23;
Schedule 2; Clause 24; Schedule 3; Clause 26; Schedule 4; Clauses 27 to
29; Schedule 5; Clause 30; Schedule 6; Clauses 31 to 37; Schedule 7;
Clause 38; Schedule 8; Clause 39; Schedule 9; Clause 40; Schedule 10;
Clause 41; Schedule 11; Clauses 42 and 43; Schedule 12; Clauses 44 to
46; Schedules13 and 14; Clause 47; Schedule 15; Clause 48 to 50;
Schedule 16; Clause 51; Schedule 17; Clauses 52 to 66; Clause 68;
Schedule 19; Clause 69; Schedule 20; Clauses 70 to 72; Schedule 21;
Clauses 73 to 80; Clauses 85 to 96; Schedule 24; Clauses 97 to
104;Schedule 25; Clauses 105 to 108; Schedule 26; Clauses 109
and 110; new Clauses; new Schedules; Clauses 111 and 112; Schedule 27;
and Clause 113.—[Mr.
Timms.]
Clause 2Charge
and main rates for financial year
2008
Question
proposed, That the clause stand part of the
Bill.
Mr.
Timms:
We are determined to maintain the best possible
environment for business in the UK. With unprecedented economic
stability in the past decade, businesses have been able to plan and
invest more effectively for the long term, which has brought a lot of
benefit, as today’s high rates of employment underline.
Companies have also
benefited from a highly competitive tax regime. Since 1997, the UK has
led the way among its closest competitors in reducing corporate tax
rates from 33 per cent. in 1997. The main rate fell to 31 per cent. in
1998, and to 30 per cent. in 1999. Those reductions have ensured that
the corporation tax rate in the UK has been the lowest in the G7
throughout the last 10 years.
The combination of stability and
a competitive tax environment has proved an immensely fruitful one for
UK businesses. Members of the Committee may last week have seen press
coverage of the latest research from the National Institute of Economic
and Social Research on productivity in the UK, commenting on the recent
acceleration in UK productivity growth. The paper by Mary
O’Mahoney in last month’s National Institute Economic
Review shows that
“the UK
has managed to close the productivity gap significantly with the US,
France and Germany”,
by
contrast with
“poor
performance in terms of productivity growth in the early
1990s”.
That improvement
is a huge prize for the UK economy and reflects steadfast determination
on the part of the Government to tackle the productivity gap, but other
countries are changing, too. There are now new patterns of business
activity and fresh challenges arising from globalisation, and the
clause takes the next step to enhance the competitiveness of our
business environment in the UK.
The clause cuts the headline
rate of corporation tax again, enabling it to be charged for the
financial year 2008-09 and cuts the main rate for that year
from30 per cent. to 28 per cent. on non-North sea ring-fenced
profits, leaving the rate for profits within the North sea ring fence
unchanged. That will have a number of positive effects, which the
Committee will readily acknowledge. It will boost the competitiveness
of UK firms and encourage greater domestic investment on their part, it
will make the UK an even more attractive location for foreign direct
investment, and build on the success that we had last year, when we
attracted more foreign direct investment than any other
country.
4.45
pm
The cut is
accompanied by a series of reforms to wider business taxation, which
will feature in later debates in the Committee. As a package, they
represent the biggest set of reforms of the business tax system since
the 1980s. The package modernises a rather outdated system of
investment allowances for plant, machinery and buildings, and gives
further support to innovative businesses by developing the R and D tax
credit. With the cut in the main rate of corporationtax as its
centrepiece, the package is pro-investment, pro-innovation and
therefore pro-growth for the UK
economy.
The clause
identifies the main corporation tax rate for onshore activities
separately from North sea ring-fenced activities. The North sea clearly
is unique for both industry and Government; for a long time, it has had
a separate tax regime, which is an arrangement that is common around
the world. Our regime seeksto strike a balance between
encouraging investmentand ensuring a fair return for the UK on
itsnatural resources. In maintaining that balance, the
Government have chosen to exempt the North sea from the main business
tax changes in this year’s Budget, leaving the rates and the
capital allowances regime unchanged.
North sea companies will
continue to benefit from the special 100 per cent. capital allowances,
which have encouraged recent high levels of investment. Some have
argued on behalf of North sea businesses that they also should have
benefited from the rate cut, but othershave wisely
acknowledged that that would have been unrealistic given the current
level of the oil price. Stability is also an important virtue in the
industry, particularly with regard to capital allowances. The Bill does
not include a system of capital allowances for companies within the
North sea ring fence, as it does for other
companies.
I hope that
the Committee will welcome the cut in corporation tax and the
accompanying package of reforms of business taxation. We want to
maintain the best possible environment for businesses in the UK. At 28
per cent., the headline corporation tax rate will be lower than that of
the US, Germany, France, Japan and all our other G7 competitors. The UK
rate will be firmly established as the lowest of the major economies
and will be below the average of the EU 15. I commend the clause to the
Committee.
Mr.
Mark Hoban (Fareham) (Con): I welcome you to the
chairmanship of the Committee, Mr. Gale. I look forward to
serving under you during our scrutiny of the Bill.
It is perhaps appropriate to
start our consideration of the Bill on a rare note of consensus. We
supportthe move that the Government announced in the Budget in
March to reduce to 28p the mainstream rate of corporation tax. It was
not as ambitious as the proposal that was set out by my hon. Friend the
shadow Chancellor to cut the rate by 3 per cent., but we congratulate
the Government for making the change. It responds to the concerns that
businesses had highlighted that the mainstream rate had become
uncompetitive when compared with the rate in other major industrial
countries.
Prior to
the Budget, the UK’s corporation tax rate was about 1.4 per
cent. above the Organisation for Economic Co-operation and Development
average, having been 3.6 per cent. below it in 2000, so there had been
a gradual deterioration in our rate in comparison with other major
industrialised countries. In 2005, only 12 OECD countries had headline
rates above that of the UK, compared with 20 in 2000. The Chief
Secretary pointed out the cuts that had been made to the corporation
tax rate prior to 2000, but no cuts were made subsequent to that date.
Between 2000 and 2005, however, 25 of the 30 OECD countries cut their
corporation tax rates, so we were lagging behind our industrial
competitors in that respect.
It is worth reflecting for a
moment on the impact that that had on the UK economy. A number of
businesses chose to relocate their headquarters overseas. The Economic
Secretary will know as well as I do the cases of Hiscox, Omega and
Catlin in the insurance sector; they relocated from the UK to Bermuda
for tax and regulatory reasons. When businesses undertook corporate
transactions, it was interesting to see where they chose their domicile
for tax purposes. So, when Experian de-merged from GUS, it decided to
relocate its headquarters to Dublin, although it remained a UK-listed
company.
Articles in The Sunday
Telegraph have suggestedthat Colt Telecommunications,
which moved to Luxembourg in the first half of last year, chose to do
so for tax-related reasons. Also, according to an article in The
Times, in the summer of last year, 40 major companies were said to
be considering a move because of the uncompetitiveness of the UK tax
regime. Indeed, the Government’s skills envoy, when he was
director general of the CBI,
said:
“A lot of
our biggest businesses are now looking at whether they want to be
domiciled here, because of the tax
system.”
KPMG, in a
submission to the independent Tax Reform Commission,
said:
“It is
not uncommon for groups to move unskilled and back-office activities
overseas, but we are aware that some organisations are also actively
considering moving white-collar jobs, and even the group holding
location, for reasons which include tax
considerations.”
There
are complex reasons why companies seek to relocate overseas, but there
tends to be a trend towards a low-tax jurisdiction. I am sure that
Ministers have had the same discussions that my hon. Friends and I have
had with major UK corporates and their advisers about the impact that
high tax rates have on the choice of jurisdiction and on
competitiveness.
We
also have some quantitative analysis; it is not just anecdotal evidence
that underpins the sense that the Government have allowed the tax
competitiveness of the UK economy to deteriorate. In a recent
survey,60 per cent. of businesses said that the UK tax system
was having a negative impact on the UK’s international
competitiveness, and only 10 per cent. of the businesses surveyed
disagreed with that statement. So there is a consensus within business
that the Government have allowed the tax system to get out of kilter
with our
competitors.
Of
course, when a company chooses to relocate overseas, it is not just the
corporation tax revenue that we lose, but other business taxes, such as
VAT, employers’ national insurance contributions and rates on
property that they occupy. Indeed, a report from PricewaterhouseCoopers
estimated that, in 2004-05, FTSE 100 companies contributed £9.1
billion of corporation tax revenues and another £9.1 billion in
other business taxes. So there is an important knock-on effect; where
businesses locate in the UK, not only do they pay additional
corporation tax, but they pay a significant amount in other corporate
taxes, to the benefit of the Exchequer and the public services that are
funded by these taxes. Of course, that analysis by PWC does not take
into account PAYE, employees’ national insurance contributions
and other such taxes.
This process is not just about
companies leaving the UK because of uncompetitive mainstream
corporation tax rates; it is also about inward investment going
elsewhere. Google, Microsoft and Intel, among others, have chosen to
set up significant operations in Dublin in Ireland as a consequence of
the low tax rate
there.
The Dutch
Government are also mindful of the way in which lower corporation tax
rates can act as a magnet to businesses, such that businesses will
choose to go the Netherlands rather than locate to a high-tax economy.
So they reduced their headline rate of corporation tax to 25.5 per
cent. this year, to makethe Netherlands more attractive to
international businesses. Part of the challenge that the Government
have responded to here is that, because other countries were reducing
their corporation tax rate, it was making the UK unattractive to those
businesses when they made decisions about where to locate. Perhaps the
lower rate of corporation tax in the Netherlands is one reason why
Barclays might move its headquarters to the Netherlands if its bid for
ABN Amro is
successful.
In a
sense, therefore, what I am trying to set out is that the rate of
mainstream corporation tax has an impact on business decisions more
widely and we cannot look at those decisions in isolation. As a former
Internal Revenue Service commissioner in the United States
said:
“We
cannot, absolutely cannot, hope to compete in a global economy by
setting corporation taxes in
isolation.”
That is an
important factor to bear in mind, and it is why we support the move by
the Government to reduce the mainstream rate of corporation
tax.
I accept,
however, that maintaining tax competitiveness is not simply about
reducing the rate of corporation tax; it is about the complexity and
stability of the tax code, too. By the time the Bill concludes its
legislative process, the UK will have a longer tax code than India.
Indeed, we shall have the longest tax code in the world, and that
complexity will bring its own costs. I am sure that my hon. Friend the
shadow Chief Secretary to the Treasury will be able to use that fact
again later in our considerations, although I do not want to come to
that yet. There are strong arguments for supporting the Government in
their aim of reducing mainstream corporation tax. When the Government
do the right thing, we are prepared to support them. That is the
principle of an Opposition who take their duties
seriously.
The Chief
Secretary touched upon the other consequential changes to tax and
capital allowances, which are being used to fund the reduction in the
mainstream rate of corporation tax. We have some concerns about how the
Government have sought to fund that reduction, so we shall explore
those issues at some length when we reach the appropriate
clause.
We are
grateful that the Chancellor sought to respond so positively and
enthusiastically to the representations that my hon. Friend the Member
for Tatton (Mr. Osborne), the shadow Chancellor, made just
before the Budget and to the compelling case for simpler, lower
corporation tax that was set out in a report by the independent Tax
Reform Commission chaired by our noble Friend Lord Forsyth. It is good
that the Government listened to and understood those arguments, and put
them into practice, because they are to the benefit of all large
businesses in the UK paying on profits of more than £1.5
million. That is why we support the Government in clause
2.
Adam
Afriyie (Windsor) (Con): I rise to speak to clause 2
largely from a business and economic perspective. The clause is
certainly to be welcomed. In a competitive tax environment—to a
certain degree, a global market in corporation tax, as it
were—the United Kingdom needs to look at its corporation tax
rates, particularly those for larger businesses, whose relocation would
perhaps disproportionately affect their employees. I also welcome the
recognition by the Government, and by the Chancellor in particular,
that
tax competition does exist, that there is a market and that we are part
of that market, whether we like it or not.
Mr.
Newmark:
Does my hon. Friend share my concern that it is
those very businesses, such as Google, which are growing fastest and
creating jobs, that are seeking to flee this country and set up in the
Republic of Ireland and elsewhere, notwithstanding the moves by the
Government and the Chancellor in the Budget? Ultimately, that will cost
jobs in this country, particularly in the high-tech
sector.
Adam
Afriyie:
I do not disagree with my hon. Friend’s
comments. It is not only Google that has been affected—we have
heard about Hiscox and many other organisations. It is particularly
those cutting-edge organisations in high technology or information
services—organisations that can relocate almost at the drop of a
hat—that would have been threatened if something had not been
done to the corporationtax rate.
What I particularly welcome is
that someone whom one might argue is a socialist Chancellor has clearly
and unambiguously embraced the concept of markets. I have several
concerns, however. There is no doubt that business is the engine of the
economy. It generates all the jobs, all the taxes, all the income and
all the livelihoods for everyone in Britain, and that includes
Government employees and the voluntary sector. Without small and
medium-sized enterprises and large businesses, there would be no jobs,
no salaries and no incomes at all to support any of the good things
that we want in society. I therefore welcome the reduction, but it
raises many questions.
First, why is the reduction
being introduced in the tax year 2008? We can see from clause 3 and
many other clauses of the Bill—without straying into them
now—that many of the other tax increases have been introduced in
2007, with immediate effect. So the question has to be answered: why
2008? Why are we waiting for a year to introduce the reduction in
corporation
tax?
5
pm
A second
question also needs to be answered. Clearly, by reducing corporation
tax overall, we are reducing the Treasury’s tax take in the
short and medium term. On the other hand, again without straying into
clause 3, small business taxation is being increased. The question is:
how does the Treasury estimate that the tax reduction—what is
recovered in corporation tax—will compare with the tax increase
on small and medium-sized enterprises? I have said that business is the
engine of the economy. I would argue that the faster revving
engine—the faster growingarea of the economy—is
small and medium-sized businesses, so why has the Chancellor chosen to
increase taxation on small and medium-sized enterprises, thereby
dampening that engine, and reduce taxation on corporate enterprises? It
is important that we have an answer to that, given that small and
medium-sized enterprises have been encouraged to change mode over the
past several years.
Another
concern arises because, having scanned through the publications and
documentation behind the Bill, I have not yet managed to spot a figure
for the number of organisations that will be affected by the
corporation tax change. Again, I should be much obliged if the Chief
Secretary would make it clearhow many businesses—and,
therefore, how many employees—will be affected by the changes.
If the Treasury has embraced the notion that there is tax competition,
why 28 per cent.? Why not 27 or 26 per cent.? Again, perhaps the right
hon. Gentleman will explain the reasoning behind the choice of 28 per
cent. rather than another figure.
[
Interruption.]
Mr.
Newmark:
I appreciate my hon. Friend’s indulgence
in giving way. I heard the Economic Secretary muttering under his
breath from a sedentary position, “How are we going to pay for
it?” If he understands the Laffer curve and looks at the example
of the Republic of Ireland, he will see that tax competition and the
lowering of corporation tax have increased the revenues that the
Exchequer has managed to collect in
Ireland.
Adam
Afriyie:
The Laffer curve is a fascinating curve; it is
not to be laughed at. However, there is a slight problem with it in
that there is a delay between the reduction in a tax rate and the
eventual increase in the tax take. Therefore, there is an issue about
the timing of the introduction of tax reductions. Certainly there is
little controversy about the fact that the Laffer curve brings about a
more vibrant economy and a better environment for business in the long
term. It increases the tax take in the longer term because there is
more enterprise, and more profit is generated in the economy.
I have a background question
that is conceptual rather than ideological. What sort of tax system is
the Bill trying to create? We originally had the classic systemcompany
profits were taxed and dividends were not. Now it seems that we are
halfway between an imputational tax system and the classic system. Can
the Chief Secretary explain towards which tax system clause 2 is taking
us? Are we looking for an amalgam—a fudge in the
middle—heading back towards the classic system, or just
dilly-dallying before moving back to the imputational system? What is
the general direction of the change? Perhaps he could explain on which
model this particular corporation tax reduction is based.
There is no doubt that all
parties welcome the reduction in corporation tax on large businesses.
We can argue about the levels and the timing, but there is no question
that the reduction is to be welcomed. Personally, I welcome it because
it demonstrates a shift in the mentality of the Government and shows
that they recognise that markets, international markets and
competition, particularly in relation to taxation, are important.
Government should not try to control the levels of profit as it is for
the Government to remove the obstacles to wealth creation and to ensure
that Britain is a vibrant place with which to trade and do business. On
balance, the changes are welcome, but I would like a few answers to the
key questions: how many businesses are affected; what level of revenue
change is expected; and what direction are we taking in clause
2?
Julia
Goldsworthy:
I will not challenge such an early consensus
in the proceedings on this year’s Finance Bill. The Liberal
Democrats and other organisations welcome the headline cut in the main
rate of corporation tax from 30 to 28 per cent. starting at the
beginning of the next financial year.
I have two questions to which I
hope the Minister will respond. First, why will ring-fenced profits
forthe first time be separated off from other
profitsand charged at a different rate of corporation tax?
Secondly, will he confirm whether, because of the other changes to
capital allowances, the tax changes in the clause will move the tax
burden around rather than cut it overall? Has he assessed who the
winners and losers of the tax changes will be in terms of types and
sizes of company? There has not been an overall net reduction in the
tax burden for many businesses because the headline cut will be offset
by changes to the capital allowance system
elsewhere.
Mr.
Newmark:
I begin by drawing hon. Members’ attention
to my entry in the Register of Members’ Interests. I am a
company director, but not of a large company, and that is what the
clause relates to.
In
paying attention to the detail of the Bill, I picked up the explanatory
notes as soon as I heard the Chancellor’s speech because I was
interested to hear that he was cutting the corporation tax rate, which
is always a good thing. In the summary, the explanatory notes
state:
“This
clause charges corporation tax for the financial
year”.
I was then hoping
to read “2007”, but it
states:
“for the
financial year beginning 1 April
2008”,
which I thought
was fair enough; the Chancellor was putting things off for a year to
give people time to sort things out. However, on clause 3, which
relates to small companies, the explanatory notes
state:
“This
clause sets the small companies’ rate of corporation tax for the
financial year beginning 1 April
2007”.
I
wondered why the Chancellor was so keen to halt the reduction in tax
rates by one year for big companies, but was in a rush to increase it
for small companies. I then looked at the Red Book and onpage
281, table C8, it states that the estimated receiptsare due to
go up by £5 billion, from £44.9 billion
to£50 billion. Is the real reason for the delay in
reducing the main rate to avoid forgoing the increase
of£5 billion from £44.9 billion to £50
billion? My first question concerns timing. Why was there a difference
in timing? Was it to do with the extra £5 billion that the
Government are seeking to grab from companies?
My second question has to do
more with the point that I raised with my hon. Friend the Member for
Windsor. What are the projections for 2008? We did not see much about
that. Has the Treasury has conducted a study of the Laffer curve effect
of the dropping rate of taxation and the anticipated receipts that will
result? Is there a sensitivity analysis? The Economic Secretary, who
has similar economic training to me, has no doubt spent many hours
burning the midnight oil and carrying out a sensitivity analysis, as I
would in his position.
As a great believer in and
proponent of the Laffer curve, I suggest that the Economic Secretary
considers the real-life example of the Republic of Ireland. The
more that that country reduces the tax rate for companies, the more tax
revenues it collects. That is an interesting conundrum, which the left
traditionallyhas a hard time grasping. However, the Economic
Secretary is an intelligent man and he looks for evidence-based
examples. If he has considered Ireland, it would be interesting to know
what sensitivity analysis he has done. As my hon. Friend asked: why did
the Government chose the 28 per cent. rate? If they dropped it to 26
per cent., would they collect more tax
revenues?
The
Economic Secretary to the Treasury (Ed Balls):
The hon.
Gentleman will know from his economic studies that the original Laffer
curve was drawn up to advise Ronald Reagan on his approach to taxation
and budget matters. What lessons did the hon. Gentleman draw from
Ronald Reagan’s experience with budget policy
making?
Mr.
Newmark:
The good thing is that for at leastthe
next three years—or perhaps two—we in the Opposition ask
the questions. In two or three years’ time, the Economic
Secretary might have the opportunity to ask me such questions. However,
my example, which is a recent one and not from ancient
history—from Ronald Reagan’s time, when the Economic
Secretary and I were both students—is the real-life example of
the Republic of Ireland.
Rob
Marris (Wolverhampton, South-West) (Lab): May I suggest
that when the hon. Gentleman talks about real-life examples, he
considers what the distinguished Canadian economist and Nobel laureate,
John Kenneth Galbraith, said about Reagan’s trickle-down theory,
which is closely connected to what he is talking about? To put it
graphically, Galbraith saidthat the trickle-down theory was
about as effective as feeding horses oats in the hope that birds
wouldeat more.
Mr.
Newmark:
As always, I appreciate the hon.
Gentleman’s intervention. John Kenneth Galbraith, of whom I was
a student, was someone I greatly admired. He took some of the
Friedmanite bite from my intellectual approach to economics and
softened the edges. That was an interesting quote, but it had no
relevance whatsoever to the Laffer curve and my point about the
Republic of Ireland.
My final point is about Britain
and where it stands relative to the rest of Europe—or, indeed,
the rest of the world—on tax competition. Notwithstanding the
good move that the Government have made in trying to reduce corporation
tax, which I would not want to criticise, I do criticise the depth to
which they seek to cut it.
5.15
pm
How do we sit
in respect of corporation tax competition when we consider the broader
world, our partners in Europe and, more importantly, what is going on
in the world? How do we sit not only on tax competition but on the
point made by my hon. Friend the Member for Fareham about the
complexity of our tax system, which seems to be getting more and more
intricate? There is a study called the “Burdens Barometer”
which I watch avidly as the complexity and cost seem to increase year
after year. I notice that the revenue projected from tax receipts in
the Red Book is expected to rise to £50 billion next year. It is
interesting that this very figure is mirrored by the £50 billion
of additional cost to business caused by Government
over-regulation.
Stewart
Hosie (Dundee, East) (SNP): There are strong arguments for
cutting corporation tax. I am delighted to hear the Chief Secretary
pitch this cut as an attempt to increase economic growth. That is
something that we tend to call for in Scotland. In the25 years
since 1980, we have seen a 1.8 per cent. growth in Scotland as opposed
to 2.3 per cent. in the UK as a whole and an average increase of 1.3
per cent. in a small European country. Our worst position in the past
10 years was a large gap of 2 per cent. in Scotland, around 2.8 cent.
in the UK and approaching an average of 4 per cent. for the small
European country. The cut in corporation tax is an essential driver of
economic growth. It provides one of the bases of business and national
competitiveness.
Adam
Afriyie:
The Chief Secretary said that this cut would be
pro-investment, pro-innovation and pro-growth for large businesses.
Does the hon. Gentleman have any idea why that same principle does not
apply to small and medium-sized businesses, which it appears is where
the money is coming
from?
Stewart
Hosie:
I have no idea what goes through the minds of
Treasury Ministers, but I think I agree in principle that small
businesses provide the essential driver of local economies. All it
takes is one verysmall business to become a Microsoft and the
whole economy benefits. The hon. Gentleman is right in principle, but
it is up to the Treasury team to tell us how they have reached their
conclusions.
Mr.
Newmark:
The hon. Gentleman makes an excellent point. Is
it not ironic that while the Government are reducing tax rates for big
businesses, they are trying to increase it for small businesses and
therefore reducing the incentives for those very businesses that should
be the drivers of our
economy?
Stewart
Hosie:
I think it is more paradoxical than ironic. It is
also the wrong thing to do, particularly when there are other pressures
on small businesses, not least the pressure of local business rates,
which in many local economies remain a massive burden, taking a far
larger share of turnover and profit than they should, certainly
compared with large stores or large businesses in and around
cities.
While
welcoming the tax cuts, the Chief Secretary said that this was part of
the biggest ever set of reforms in tax and allowances. He is absolutely
correct. My worry is that however welcome this modest cut is—it
could be more ambitious—the £3.7 billion that will be
taken in 2008-09 and 2009-10 from the change to plant and machinery
capital allowances alone outweighs the £3.6 billion that will be
given back to businesses in the reduction in corporation tax
yields.
I welcome the fact that the
Government have recognised at last that tax competition is important. I
am concerned that the overall package, which sees more yield coming in
from one change to allowances than is given back in the tax cut, may
not deliver its objectives, and as part of the overall change
intax and allowance reform, particularly for small
businesses—we have heard concerns about that—I may allow
us not to see the competitiveness and the increase in economic growth
that I am sure the Chief Secretary wants; we certainly want it for
Scotland.
The
performance of the cut will be measured carefully over the next year or
two, but I suspect that if we are going to be serious about using the
taxation system, particularly the corporation tax system, to drive
business competitiveness, to stop companies leaving the UK and to make
them competitive without putting downward pressure on wages, the
Government will have to be far more ambitious in the changes that they
make to the
tax.
Mr.
David Gauke (South-West Hertfordshire) (Con): May I say
what a pleasure it is to serve under your chairmanship, Mr.
Gale? May I also apologise to the Chief Secretary for missing his
opening remarks because I was otherwise engaged?
There is undoubtedly a
consensus in the Committee that in 1997 the UK was in a very strong
positionin respect of business tax rates. Over the
following10 years, that competitive advantage has been eroded,
not because business tax rates have gone up, but because many of our
competitors in the rest of the world have cut business tax rates
substantially. Our corporation tax rates are by no means exceptionally
low; indeed, they are higher than many
others.
Mrs.
Villiers:
My hon. Friend refers to the fact that overall
corporation tax rates have not gone up. He will be aware that other
types of taxation on business have increased
significantly.
Mr.
Gauke:
My hon. Friend makes a valuable point, which I was
about to raise. Corporation tax ratesare only one of the range
of taxes that businessesface. Some research suggests that
corporation tax constitutes at most 50 per cent. of the taxes that
businesses pay.
The
logic of the change announced in the Budget and implemented in the
Finance Bill is to reduce the rate, but it does not reduce the burden.
That is not a criticism, because there is something to be said for
reducing the headline rate regardless of reducing the burden. Will the
Chief Secretary confirm that an objective of Government policy is to
reduce the rate itself, almost regardless of the burden, and that it is
worth while achieving that in any event? Does he agree that a reduction
in the burden is also important, and that that has not been achieved in
this announcement?
I
think we all acknowledge that businesses are mobile. The chance of
businesses moving to a country, or a jurisdiction, that has a lower
rate of taxation has increased in the past 10 years as the world has
become more global, as shown in the good examples given by my hon.
Friend the Member for Fareham. First, does the Chief Secretary accept
that that argument might
apply to other types of taxation. I am thinking in particular of
research published recently by the Institute for Fiscal Studies showing
that income tax can also be competitive and can cause businesses and
people to move from one jurisdiction to another. Secondly, if he
accepts that argument for corporation tax—that mobility exists
in a globalised world—would it also apply to other taxes, such
as income
tax?
Thirdly, the
proposal appears to simplify corporation tax. Do the Government
recognise that simplification of the tax system itself is a worthwhile
objective? Fourthly, if they do recognise that that is a good thing,
how does the Chief Secretary assess the Government’s success or
otherwise in making the tax system simpler?
Mr.
Timms:
There has been an interesting exchange on the
clause. The hon. Member for Fareham started very well by congratulating
the Government. I hope we will hear more of that as the Committee goes
through its work. However, his contribution deteriorated after that,
when he gave us an unduly gloomy account of what has happened in the
British economy of late.
I remind him of what I said in
my opening remarks: there was more foreign direct investment into the
UK last year than to any other country on the planet, which reflects
the point that companies can more readily choose to locate almost
anywhere in the world. The UK continues to be a very big gainer from
that development. We must ensure that that continues, and it is
important that we maintain a competitive tax regime. As I said, we have
had the lowest headline rate of corporation tax in the G7 throughout
the past decade. The change ensures that that position is maintained,
but we must be competitive in other respects,
too.
Mr.
Philip Dunne (Ludlow) (Con): Will the Chief Secretary
clarify what proportion of the statistic that he just quoted on the
record level of inward investment was accounted for by a single
transaction in the reorganisation of Shell?
Mr.
Timms:
Quite a substantial proportion, so it is
instructive to look at the figures when the transaction is removed. I
do not think that it should be, but if it is, the UK is second in the
world, with £91 billion of inward investment. The US is in first
place with £99 billion. The UK’s achievement on foreign
direct investmentlast year was pretty extraordinary,
reflecting thestrong competitiveness of its tax system and
every other aspect of its business environment.
The hon. Member for Fareham
made some remarks about complexity in the UK, of which we will no doubt
hear more. I remind him that the tax law rewrite project is
successfully simplifying tax legislation with all-party support.
However, implementing the changes that arise from it will require
legislation.
The hon.
Member for Falmouth and Camborne and one or two others asked me what we
thought would be the package’s economic impact. We have modelled
its impact on the marginal cost of capital and on effective tax rates
for a variety of investments. As I have said, the indication is that
the package will increase the trend rate of investment.
The hon. Member for South-West
Hertfordshire asked whether I agreed that having a low headline rate of
corporation was a good thing in itself. The evidence suggests that the
answer is yes. A lower corporation tax headline rate attracts foreign
direct investment, which is one reason why the provisions are
important. One would need to look at separate evidence for other
headline rates, but there is no doubt in my mind andin the
Government’s mind that tax competition is a
reality.
Mr.
Hoban:
What dynamic forecasting does the Treasury
undertake to assess the impact of reducing the headline rate on inward
and other forms of investment?
Mr.
Timms:
As the hon. Gentleman well knows, we have a
well-developed model that is accessible to others. We have carefully
modelled the impact of the proposed change on that basis and, to pick
up another point that was made from the Opposition Benches, our
modelling shows clearly that although the Bill will not change the
overall burden of taxation—the amount taken from large
companies—over the next few years, the overall impact will be an
increase in the trend rate of investment.
The hon. Member for Falmouth
and Camborne asked about the differential arrangement that we are
introducing for the North sea, and it is not currently possible to make
even a partly compelling case for reducing the level of taxation on the
oil industry. Medium-term oil price predictions remain high, companies
continue to generate very high returns on capital employed pre- and
post-tax, and we recognise the importance of stability for the
industry. It would not be appropriate to change the levels of taxation
imposed on the North sea at the current time. I expect the very high
recent investment in the North sea to be maintained.
The hon. Members for Windsor
and for Braintree asked why the Bill gives a year’s notice of
the change. The answer is that large companies pay their corporation
tax in quarterly instalments, often in advance, throughout the year.
Therefore, we need to set the main corporation tax rate a year in
advance to give large companies certainty about their
affairs.
5.30
pm
The hon. Member
for Windsor also asked how many companies would be affected. Some
41,000 large companies will pay corporation tax at a lower main rate as
a result of the change. The hon. Member for Braintree asked where we
stand compared with others. I can confirm that our corporation tax rate
will again be the lowest in the G7, as it has been throughout the past
decade. It will also be lower than the EU 15 average. After the change,
that will be just over 28 per cent., so we will come in just under it.
A wide range of studies shows that, on all sorts of bases, the UK
continues to have a competitive tax and regulatory regime for business.
This change will help to ensure that that continues to be the
case.
I am glad that
the Committee has warmly welcomed the
clause.
Mr.
Newmark:
I appreciate the Chief Secretary’s answer
on the timing issue, but I am curious to know whether he—or the
Economic Secretary or the Treasury—considered the Irish example
of lowering corporation tax by 1 per cent., 2 per cent. or 3 per cent.
Has he done any sensitivity analysis on the Laffer curve about the
collection of tax revenues to see whether lowering the rate would
enable the Treasury to collect more taxes? I am trying to help the
Treasury out; it clearly wants to collect tax
revenues.
Mr.
Timms:
If corporation tax were reduced by a further
percentage point, that would reduce the yield to the Treasury by
£1.5 billion. It is incumbent on those who argue for such a
change to explain what the source of that £1.5 billion would be,
because the reduction would happen immediately. It could be resolved by
a reduction in spending of the same amount, or an increase in taxation
elsewhere.
Mr.
Wayne David (Caerphilly) (Lab): Conservative Members
frequently quote the example of the economic growth in the Republic of
Ireland. Certainly, the reduction in corporation tax has been a factor
there. However, is it not the case that there have been other factors,
not least the significant sums of money that have been received from
the European Union, which have been used very effectively? We all know
the attitude of Opposition Members towards the European
Union.
Mr.
Timms:
My hon. Friend is right. The Irish economy has
enjoyed a good deal of success over the past few years. The corporation
tax regime has contributed to that, but there have been a number of
other factors, not least investment in education. Ireland has been very
strong in that regard, and we need to learn from
that.
Mr.
Hoban:
I want to come back to the Chief Secretary’s
estimate of the cost of a further 1p reduction in corporation tax. He
said in answer to an earlier intervention of mine that, according to
the Treasury’s model, the reduction in this Budget would lead to
an increase in investment. Does his estimate of the £1.5 billion
cost of that 1p reduction in the corporation tax rate include the
offsetting effect of the increase in
investments?
Mr.
Timms:
No. That is the straight reduction in yield to the
Treasury following the change. The offsetting reduction that the hon.
Gentleman describes would take some time to accrue. In many ways, I am
surprised that there is no amendment seeking to reduce the rate
further, given the proposals made by the shadow Chancellor. I do not
know what was in the minds of Opposition Members to cause them not to
table such an amendment. However, had one been tabled, it would have
been necessary to explain where the extra £1.5 billion would
come from.
Mr.
Timms:
No, I ought to conclude now. I have tried the
patience of the Committee for long enough. I am pleased that the clause
has been so widely supported, and I commend it to the
Committee.
Question put and agreed to. Clause 2 ordered to stand part of the Bill. |
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