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“Small businesses continue to be let down by the Government with regards to taxation and were understandably extremely disappointed by the announcement in Budget 2007 to increase the small firms rate of corporation tax from 19 to 22 per cent. This was a draconian measure to tackle a problem of tax avoidance that did not exist and will have a highly detrimental effect on many small businesses.”
The Forum of Private Business said that politicians should give the same attention to the increase in the lower rate of corporation tax as they gave to the abolition of the 10p rate, and 76 per cent. of respondents to its survey said that
“reversing the decision to increase the small firms rate of corporation tax would encourage them to reinvest in their business, with 49 per cent. indicating that they would have extra funds to invest in skills and training”.
The response from individual companies has been equally hostile. Tim Rhodes of Skypark Freight Ltd in Liverpool said of the Government:
“They don’t seem to be thinking of tomorrow. Small businesses are quite resilient and tend to bounce back, but all of these additional taxes are very trying. Often, it comes to the point where you ask if it’s worth carrying on—we can hold on only for so long, after that, unfortunately, job losses will be the result.”
Matt Hardman, who runs a bacon slicing business in Bury, called the decision to increase the small companies rate a “kick in the teeth”. There is widespread concern among business communities about the increase in the small companies rate by 1 per cent. to 21 per cent. this year and then 22 per cent. next year. Businesses will be asking themselves why the Government are attacking small companies in this way. What have they done to get to a stage where the small companies rate of tax had fallen to 19 per cent. but is now back on that upper curve?
The genesis of the increase stems from the decision in the 2002 Budget to introduce the 0 per cent. rate of corporation tax for profits of less than £10,000. That triggered a wave of incorporations of companies, which some predicted at the time. I believe that the Government’s analysis of the situation is this: that a tax change that was meant to stimulate entrepreneurial activity led to that mass incorporation by people seeking to take advantage of the lower 0 per cent. rate
of tax, which gave them an advantage comparable to self-employed and employed people earning the same income. The analysis produced by the Institute for Fiscal Studies bears out that analysis, which was then, however, used to justify the abolition of the 0 per cent. rate and is now being used to justify the increase in rate from 19 to 22 per cent.—2p higher than the basic rate of tax that people who earn a comparable amount of income would be paying through the income tax system. The Government’s introduction of the 0 per cent. rate created a significant incentive for businesses to incorporate. The abolition of the 0 per cent. rate has narrowed the gap between the effective tax rate that small companies enjoy and the effective tax rate that individuals enjoy when they are employed, but there is now a sense that the Government are seeking to go further and further in narrowing that gap.
Part of the Government’s action is that which is before us today—the increase in the small companies corporation tax rate—but they have also taken other steps to deal with the issue. Last year’s Finance Act introduced changes on managed service companies, and the pre-Budget report included proposals on income shifting—again, targeted at incorporated small businesses. Those proposals have been deferred for a year, and business organisations welcome that, but they are concerned that they might return in next year’s Finance Bill and are looking to have a proper dialogue with Her Majesty’s Revenue and Customs and the Treasury to tackle those issues. A series of measures is being taken to tackle the gap in the effective rate of tax, but it is not clear to small business organisations just how far the Government intend to go in dealing with the issue. It would be helpful in the context of this debate if the Financial Secretary could clearly set out the basis of Government policy on the taxation of small companies and businesses, because significant concern is building up that the Government are turning their backs on small companies, that they do not show any understanding of how small companies operate, and that that is creating a culture in which entrepreneurial activity is penalised.
A significant cost arises from the Government’s approach because companies that are already finding it difficult to trade profitably will see their taxable profits decline. The tax bill of any company with profits of less than £300,000 will increase regardless of whether it employs one person, 10 people, 100 people or 1,000 people. That illustrates the crude nature of the Government’s step. If this tax increase is motivated by a concern about incorporation, the Government need to recognise that it catches out many businesses, not only one-man bands. That is part of the unfairness that people perceive in the system. They see the tax rate and the tax bill for small companies increase in the Budget, as it did in the last Budget and as it will in the next Budget. The Government argue that the annual investment allowance will compensate for that. However there are two flaws to that approach.
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First, the allowance is available to all small businesses—that is a much wider pool than all small companies. While the pain is concentrated on one group, the gain is spread more thinly. Last year, I estimated that small companies’ average loss would be approximately £1,000, whereas the gain to small businesses would be less
than £100. Proper compensation is therefore not being paid to the small companies that will lose out through the increase in the small companies corporation tax rate.
Secondly, the compensation rewards a specific type of business activity—investing in physical assets—and does not recognise the other sorts of investment that companies can make, such as in training, human development and so on. The Government are trying to incentivise only one form of behaviour when firms could operate in other ways to improve their businesses, for example, through investing in people by developing skills and so on. They are introducing the annual investment allowance when the Red Book forecasts a fall in growth in business investment from 3.75 per cent. in 2007 to between 1.75 and 2.25 per cent. this year.
Stewart Hosie (Dundee, East) (SNP): Does the hon. Gentleman perceive a contradiction in Government policy in relation to the annual investment allowance? At a time when the Government, rightly and understandably, seek to capture the cost of intangible investment in research and development, one of their tools for genuine investment—the annual investment allowance—is directed only at physical assets, not process?
Mr. Hoban: The hon. Gentleman makes, as he often does, a perceptive comment. There is a problem with that sort of behavioural device because it supports one specific activity, rather than recognising different ways in which people might invest in their business. That is especially relevant given our economy’s increasing dependence on the service sector. That is why Conservative Members believe that the best solution is to reduce the small companies rate of taxation, as the amendment proposes, and give companies and businesses the ability to determine where they will invest and spend their profits. That is a much better—non-distortionary—way of proceeding. It tells businesses that they know the best way in which to grow and allows them to decide how to act rather than relying on central Government and the Treasury to recognise their improvement in performance only so long as they invest in physical assets. That is the difference between the Conservative party and the Government.
We believe that restructuring reliefs and allowances will provide us with the tax revenue to enable us to reduce, in this case, the small companies rate of corporation tax—a change that is tax neutral overall, but gives businesses the freedom that they need to decide where to invest and avoid going through a fairly lengthy, potentially complex process about annual investment allowances. It will also give companies the responsibility for and opportunity of deciding for themselves how best to spend their money. Reducing the small companies rate would benefit companies, whether they employ one person or 1,000 people.
Mr. John Redwood (Wokingham) (Con): My hon. Friend is making a powerful case. Does he believe that it is even more interesting that the Government are limiting investment to such a narrow definition, yet when they speak about their spending patterns, almost all their revenue spending—much of it wasteful—is called “investment”?
Mr. Hoban: My right hon. Friend makes a good point. I, too, have been frustrated at how anything that the Government spend their money on counts as investment, when sometimes, as I know from the parliamentary questions that I have tabled, it does not necessarily equate to spending that helps taxpayers.
To return to amendment No. 1, because of the nature of our proceedings, we have not tabled amendments in the Committee of the whole House that deal with the annual investment allowance, which we want to scrutinise in some detail in Committee. However, we believe that we should scrap the annual investment allowance and use the proceeds to fund a cut in the small companies rate of tax to 20 per cent. That would be in the best interests of business and is entirely consistent with our approach of having simpler, flatter and fairer taxes, by broadening the tax base through reducing distortionary relief and using the revenue gain to reduce the rate of corporation tax.
Amendment No. 7, which the hon. Member for Dundee, East (Stewart Hosie) has tabled, has much to commend it and gets to the nub of the problem, which is the impact that the rate has on competition. It is important to consider the competitive impact of the rates of corporation tax paid in this country. The week before last we heard about the pharmaceuticals company Shire, relocating out of the UK because of tax, while United Business Media, which was formerly chaired by the Labour peer, Lord Hollick, made a similar announcement today about its domicile for tax purposes. Clearly there is a significant issue with the competitiveness of the UK tax system and how it compares with those of other major economies. That competitive position is not just about rates, but about a range of issues, including predictability, stability and certainty.
My only concern about amendment No. 7 is that, as I understand from its drafting, there will be some uncertainty for small companies, because the rate change will be made only once the report has been laid before the House and voted on. If the House were minded to reject the Government’s report, that would delay the implementation of the small companies rate. That would cause some uncertainty—although I gather that Parliament now has a much greater say on tax, thanks to the right hon. Member for Birkenhead (Mr. Field), who seems to have extended parliamentary control—and I am not sure whether, under the circumstances, we can allow that for the small companies rate. I would much rather the Government listened to our proposal and reduced the rate of tax now, rather than waiting until the report is published later in the year. I would therefore urge the hon. Gentleman to support us, should we push amendment No. 1 to a vote.
Mr. Jim Cunningham (Coventry, South) (Lab): I apologise for coming in a little late—the hon. Gentleman might have already answered this question—but can he tell me how small businesses would benefit if the Government were to adopt his amendment?
Mr. Hoban:
My argument is that one of the problems that the Government have created in tackling the issue is that they have said that the pain should be borne by small companies, but that the gain should be spread widely and thinly on small businesses. My proposal would ensure that the small companies tax rate for the
financial year 2007-08 was kept stable. That is in the best interests of small companies. Part of the issue is the complexity of the treatment of sole traders, the self-employed and so on, but in principle small companies should have a lower tax rate and should not be forced to pay a higher tax bill as a consequence of the Government changing their mind about how they deal with their tax affairs.
The Government have got themselves into that position. The weapon that they have chosen to tackle the issue is crude, will hit small companies regardless of the number of people whom they employ and will be damaging to small companies as a group. That is why the Government should think again about the proposal and why amendment No. 1 seeks to keep the small companies rate at the level that existed for the previous tax year.
Mr. Jeremy Browne (Taunton) (LD): This is my first Finance Bill Committee, and I admit to a degree of trepidation as I embark on this adventure, which will occupy a large part of my time for the next few months. I was reading an obituary of Humphrey Lyttelton on the train from Taunton this morning, and I thought that his comments about his period as a restaurant critic were relevant to my feelings. He said:
“In a moment of self-doubt, I said to George Melly...who had been doing the film reviews for The Observer, ‘I’m sure they’re going to find out one day that I know nothing about it’. His answer was convoluted but true: ‘Yes, but in my experience, by the time they find out you know nothing about it, you will know something about it’.”
I hope that is my experience during the remainder of our sittings.
I am sure that my unease about the Bill is nothing compared with that felt by the Government in recent days and weeks. Our deliberations have focused primarily on the 10p rate being doubled. Although the public as a whole, and people who watch politics carefully, inevitably tend to have a great preoccupation with taxation on personal income, taxes on small businesses are just as relevant—sometimes more so—to the prosperity of the individuals whom we represent as the taxes that are levied directly on their income. The Chancellor is championing the 2p cut in the main rate of corporation tax, but if we look at the small companies rate, we see that it was 19 per cent. in 2006, 20 per cent. in 2007, 21 per cent. in 2008 and that it will be 22 per cent. next year. There is no clearer direction of travel than that. People in my constituency and elsewhere who work for, or who are related to, people who work in the small business sector are understandably concerned about the impact of that increase on its profitability and competitiveness. The chief executive of the Forum of Private Business, Phil Orford, has said of the Budget:
“While there are some welcome initiatives, they do little, if anything, to offset the tax burden due to be implemented in April. The Chancellor has missed a golden opportunity to convince the small business community that he is on their side.”
When I speak to those who work in small businesses, they frequently say that it is becoming increasingly difficult for them to remain competitive. The burden of tax and regulation, not all of which is tax based—some of it relates to health and safety provisions—compromises those businesses’ competitiveness. There are not many large corporations in my constituency.
Inevitably, when a large business goes bust or makes several hundred employees redundant, people tend to focus on that, but the cumulative effect of lots of small businesses laying off a person here and a person there, which is much less readily observed by the media and by the general population, is none the less a problem for us if we wish to have a successful economy in the UK.
I agree with many of the points that have been made by the hon. Member for Fareham (Mr. Hoban), and I shall not repeat them simply because we are able to carry on for as long as we want to in today’s debate. I agree particularly with him about the unease in many quarters regarding the small business provisions in the Budget. If he chooses to press the amendment to a vote, we will support the Conservative party.
Stewart Hosie: The hon. Member for Fareham (Mr. Hoban) asked whether I would be likely to support him on amendment No. 1. Given that my name is attached to the amendment, I should say that it is highly likely that I shall. He may take that for granted.
Before I speak to amendments Nos. 1 and 7, both of which I support, let me say that I was struck by the fact that the Liberal Democrats have not tabled any amendments on important matters such as business tax, capital gains tax, gaming or the abolition of the 10p rate. There are none until we get to the next group of clauses. Perhaps I am going wide of the mark, but I was surprised by that.
I rise, however, to speak to amendments Nos. 1 and 7. I offer the simple argument that imposing new and extra taxation on small businesses is fundamentally wrong. Amendment No. 1 would leave the small companies rate at 20 per cent. and amendment No. 7 would give the Government the opportunity to make an assessment and justify to the House why they believe that increasing the rate to 21 per cent. now and 22 per cent. in the future would be beneficial to business and make it more competitive. It would then be for the Government to explain why other measures in the Budget, or that they announced in the pre-Budget report and previous Budgets, would compensate and ensure that business competitiveness remained as it is or would get better. I have to say that I am sceptical of whether the Government could come up with an assessment to prove that, and I am very suspicious that they could come up with an assessment that would say anything other than that business competitiveness would be weakened by an increase in the small companies rate at this time.
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Let me explain further. Businesses are operating at a time of high and rising fuel costs, which are unlikely significantly to be moderated at any time soon, and within a framework of high transportation costs—and every haulier I speak to tells me that that is unlikely to change in the near future. Businesses are seeing prices for raw materials skyrocket and I can evidence that with an example from my own constituency, where the Patak’s food company factory recently closed down. Swingeing rises in the prices of its raw materials—mainly chicken, rice and dairy products—forced the factory to close as it became utterly uneconomic and completely unprofitable. That resulted in many very loyal workers losing their jobs. Nor is that an isolated
or anecdotal story, as we are hearing and seeing similar examples from around the country. Indeed, the hon. Member for Fareham referred earlier to the pharmaceutical company, Shire, and to United Business Media in respect of corporation tax being too high.
Given that businesses are operating in the midst of a credit squeeze, as a result of which any investment they might wish to make and their ability to absorb price increases will have to come from their own resources, now is the wrong time to be putting up tax on the money they make. That is the key point. As prices for fuel, energy, transportation and raw materials go up, and as the external funding that companies used to rely on either dries up because of the credit squeeze or becomes much more expensive, we should not be taxing the money that small companies make in the way that we are with the rise in the small companies rate.
Mr. Redwood: It is heart warming to hear that the hon. Gentleman is such an advocate of lower taxes on business—a cause that he knows I support. Will he tell us what his party recommends for Scotland by way of a company tax rate either for larger or smaller companies?
Stewart Hosie: We have focused our attention historically on the main companies rate, which we want to see reduced to 20 per cent. in order to create a real competitive advantage in Scotland. With regard to smaller businesses generally, the right hon. Gentleman will know that we have already taken steps to reduce or remove completely the business rates burden from 150,000 Scottish businesses. However they slice and dice us and from wherever we get that competitive advantage, we need to take such action through budgets. We think that we have done the right thing with business rates in Scotland and we now want to go much further on the main rate of tax. That is the approach that we would take.
We want the increase in the small companies rate to be reversed, as we believe that would allow companies to make the investment to create the jobs that we all want as we move, I hope at some point, towards full employment. In the current economic circumstances, a tax rise will simply denude businesses of the money that they need to make that investment.
We know that that investment would be made. The Forum of Private Business survey last autumn—at the time of the pre-Budget report—was interesting in showing that 67 per cent. of members who responded said that, should the rate increase be reversed, it would encourage them to reinvest in their businesses. Almost half said that a reversal would give them the extra funds to invest in skills and training and almost half said that it would make them more likely to seek to grow their businesses. It is highly likely, I suggest, that should the increase go ahead, a much smaller number of businesses would have the cash to make the investment that they were talking about last autumn.
That is a particular concern in Scotland. At the last count, there were 279,495 businesses in Scotland, of which 273,745 employed fewer than 50 people. Another 3,500 employed between 50 and 249, and only 2,265 are large businesses employing more than 250 people. We believe that the impact of the £1.2 billion—estimated by the CBI—taken as a result of the increase in the small companies rate is likely to be disproportionate in Scotland.
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