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The words at the time of the Budget from the Scottish Chambers of Commerce, on this matter in particular, were especially telling. Liz Cameron, its chief executive, said:
“Alistair Darling’s first Budget was a missed opportunity for the UK... to boost Scottish businesses. He could have cancelled his plans to increase the Small Companies’ rate of Corporation Tax...but he didn’t.”
“Promises of future tax simplification and a consultation on limiting the volume of regulation are welcome, but when set against the cold, hard tax rises being experienced by many businesses, they are of little comfort.”
Over three years, a few thousand pounds extra in revenue yield might add up to a great deal of money for the Government, but if businesses do not have that kind of money, it will stop them buying a new computer, bringing someone in on a Saturday to fulfil an order, undertaking a small marketing campaign or perhaps paying the air fares to a first ever trade show. The Government do not seem to recognise that such small amounts of money are vital for growing businesses and incredibly difficult to earn, particularly in the current economic climate.
Obviously, I will back amendment No. 1 to reduce the rate. I will reserve my position on amendment No. 7 and wait to hear what the Financial Secretary has to say. I hope that she at least tries to give some justification for why she believes that increasing tax at this time—in view of all the other burdens that businesses face—is somehow a good idea, rather than the bad idea that businesses, business leaders and many in the House believe it to be.
Mr. Redwood: I am a company director and a shareholder in companies, as I have declared in the register, but not, I think, of a company that will be paying this particular tax in the current year.
I rise to support the idea that the tax should be 20 and not 21 per cent. and that it should not go up to 22 per cent. subsequently, and I ask the Government to think again about their extraordinary U-turn in their policy towards lower tax rates for people on lower income and for smaller and start-up companies that earn less profit than more mature companies that have gone on to grow for longer and perhaps more successfully.
The Government produced an attractive package when they decided to encourage incorporation by having a zero tax rate on small profits for companies that had recently incorporated, and when they decided to have a 10p capital gains tax charge on people who set up companies, who took founder shareholdings in companies or who decided to buy into companies that were small and growing and could take advantage of that privileged capital gains tax regime.
We saw a response to that favourable tax regime in the improvement in the rate of new company formation. A lot of people in the small business groups around the country were saying to Opposition representatives, as well as to Government representatives, that the Government had got something right and that that part of the tax regime was favourable. It was an encouragement that those people very much welcomed, so it is strange and
extremely disappointing that the Government should have backtracked on both elements of that attractive regime and that they have not learned the lesson from a country such as Ireland, which has persevered with a much more favourable tax regime for business across the board—businesses large and small—and has had the phenomenal success that we see in the Irish growth rate, the development of Irish business within the Republic and the collection of so much more tax revenue in general by the Irish Treasury.
As more people have got better jobs and taken more income out of smaller and larger companies, and as more smaller and larger companies have grown, been successful and produced capital gains, dividends, income and good jobs for people, so the economy as a whole has benefited from that process, and so the Irish Treasury has benefited, having more money to spend per head on public services as a result of that growth than has been available from the British Treasury’s attempts to find ever more stealth taxes to sustain more rapid growth in spending per head on public services here.
Mr. Brooks Newmark (Braintree) (Con): I appreciate my right hon. Friend’s comments about the Laffer curve, which I have gone on and on about in the three years that I have been a Member of Parliament. However, what bothers many small businesses—with which, like me, my right hon. Friend has been involved—is the timing of the tax increase. At a time when we should be supporting small businesses, it appears that we are attempting to undermine what they are trying to achieve in extremely difficult times by increasing taxes while, across the pond, the United States is doing everything it can to lower them.
Mr. Redwood: My hon. Friend is right. Ministers must know from their conversations, as he and I know from our conversations with the British Chambers of Commerce and the bodies representing small businesses in Britain, that it is becoming much more difficult to be a successful competitor from a British base. Smaller companies are feeling the increase in taxation and the growing weight of regulatory cost even more than the larger ones, but that population of small businesses must be allowed to grow more rapidly so that we can experience success in the future.
All the studies show that if there is to be sustained rapid growth in employment in private-sector activities, a lively and growing small business sector is essential. New jobs are much more likely to come from that sector than from the larger companies that have the money to automate, to mechanise and to take their labour-intensive activities offshore. They do not generate the same pace of business growth and job growth as small companies.
As the hon. Member for Taunton (Mr. Browne) observed, although we unfortunately often hear of very large casualties in the corporate world—factories closing, or large numbers of people being made redundant by the larger companies—we never hear of redundancies of the same scale in the smaller companies. They do not employ as many people to start with and, when conditions are reasonably benign, they do not sack people. As a whole, they are a growing sector, adding jobs as they
find better ways of doing things and creating new activities that the public wish to buy into. The danger is that the Government will take small businesses to tipping point with too much tax and regulation, so that, largely unseen, many jobs will be removed or new jobs will not be created and we will have a worse problem with unemployment.
Mr. Jeremy Browne: It should also be borne in mind that nearly every large business that employs vast numbers of people started off as a small business. We are not only compromising the small business sector of the economy, but running the risk that tomorrow’s big businesses will never be able to get off the ground.
Mr. Redwood: The hon. Gentleman is right, and it can be deduced from his argument that we need to lower tax and regulation on all populations of business if we want a really successful economy like the Irish economy. That is especially important in the incubator world of small business. Among the mighty population of small businesses in a vibrant economy will be a limited number that will go on to become the mega-corporations of the future. As Silicon valley demonstrates, businesses can grow from very small to very big in the space of a decade, with stunning implications for the success of the economy and the success of tax-raising on those populations of businesses, and job generation.
Mr. Newmark: We might quip that the way in which to create a small business under new Labour is to start with a big business. However, on a more serious note, let me say that my right hon. Friend has not touched on another important issue. One of the hallmarks of new Labour has been chopping and changing, but what businesses like is consistency. Only through consistency of policy, particularly tax policy, can they thrive.
Mr. Redwood: I am grateful to my hon. Friend, although the number of interruptions makes developing the argument as quickly as he would like a little more difficult. He is giving me friendly help and assistance to make sure that I do not forget the important arguments. I am genuinely grateful to him and he is absolutely right that consistency is important. Being able to forecast the tax rate to be paid not just this year but next year and the year after is extremely important when it comes to drawing up a business plan. Any small business that wishes to grow relatively quickly will need access to outside finance: a bank loan, other investors, business angels or another way of raising capital. Any of those would immediately want a business plan, not just for one year but for, say, three.
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An important element of that business plan would be to know what the net profitability would be after three years, after the start-up costs and losses. The net profitability obviously requires an assumption about the Government’s tax rate. If the tax rate is changing every year—or goes up every year—it makes forecasting accurately more difficult. It also means that net profits will be less at the three-year stage, or at the five-year stage in a five-year business plan. That makes it more difficult to raise external capital; the banks and others
living through the credit squeeze may say that they are unable to help because the net returns are not sufficiently good. Altruistic as many financiers are, they are not normally interested in how much money a business generates to pay the tax man; they are interested in how much money a business generates to pay the shareholders and other private stakeholders, which is why the tax rate is so important.
I am delighted that my Conservative Front-Bench colleagues are strongly in favour of simplicity and lower taxes and they are right to want a 20p tax ceiling on small businesses. I hope that they will also want—I am sure they will—to bring down the rate of corporation tax on larger companies closer to the 20p band. That is very important to the enhanced competitiveness of Britain that we will wish to see after the damage being done to it by higher taxes and more regulation.
I trust also that Governments will start to look at the idea, revolutionary for current political times, that we can perhaps save some of the waste and unnecessary expenditure in Governments so that we do not always have to pay for these tax reductions by finding other ways of increasing taxes. It was exactly that route of tax reform that got the Government into such difficulty on the 10p band.
Mr. Browne: I am grateful to the right hon. Gentleman for giving way to me a second time. Does he share my unease that the Conservative party is committed to taxing at exactly the same overall rate as the Labour party at the next general election? The total amount of Government spending as a percentage of GDP will be identical, if the Conservative party wins the election, to the level it would be were Labour to win. That sounds like mimicking the Government, rather than providing an alternative to them. Does he think that that is a wise approach for his party?
Mr. Redwood: The hon. Gentleman must have forgotten that I am a Conservative MP, so I do not share his unease at all, nor do I accept his premise. I am quite sure that the shadow Chancellor and his senior colleagues are serious when they say that they wish to have a lower-tax Britain than we would have under Labour. I am quite sure that we would have a lower-tax Britain than we would have under a Lib-Lab pact, because we know that Liberals are very liberal with other people’s money. Normally in the House they do not make the wonderful case for lower taxes as the hon. Gentleman seemed to be doing this afternoon. Normally they make the case for spending all sorts of sums of public money on things that may not even be desirable and are very often quite wasteful
There is only one party that seriously believes in lower taxation for the whole of the UK and has a chance of winning a national general election in this country and that is the Conservative party. The Scottish National party now seems to believe in lower business taxation, but it is not in a position to do very much about it because most of the powers on these matters rest in the UK Parliament.
I say to my hon. Friends on the Front Bench that it is a privilege to be able to support this very sensible proposal for a 20p tax on business. It would be to the benefit of the small business community, and the Government’s relations with it, if the Government listened,
in the way that we hear the Prime Minister is now listening on the 10p tax band. It is another example of how dangerous the Government’s tax reform can be, particularly now they are destroying the only good tax ideas that they ever had. I was with them on the 10p income tax band and on zero tax on smaller businesses and they are throwing it all away.
Mr. Newmark: Before I begin my speech, I wish to draw Members’ attention to my entry in the Register of Members’ Interests. I also wish to make an observation: there is not a single Labour Back Bencher present to contribute to this debate on this extremely important clause. [Interruption.] I agree that the hon. Member for Stoke-on-Trent, North (Joan Walley) is present, and she may well contribute to our debates later on, but I have not yet heard any contribution on this clause.
I am delighted to contribute to our deliberations on the vital issue of the taxation of small businesses. Small businesses are often lauded as the real wealth creators and the dynamo of the economy, as, indeed, they are, but it often appears that the Government have taken this image too literally in creating a tax policy for them that resembles a dynamo only in so far as it spins in circles.
If there was ever any doubt about the Prime Minister’s new-found fondness of Blairite political theatre, it was dispelled during this year’s Budget, which began the escalation of the small companies rate. After years of debate in Parliament and elsewhere about taxation acting as an incentive to incorporation and encouraging distortion, the Prime Minister’s final act of political theatre was to propose a Budget that cut the main rate of corporation tax to 28 per cent. while the small companies rate was simultaneously to be raised to 22 per cent. over three years.
More than that, years of debate about the disparity between personal taxation and business taxation rates influencing behaviour in undesirable ways by encouraging avoidance were further muddled by the fact that the small companies rate is set to rise above the basic rate of income tax. Having encouraged thousands of sole traders to incorporate, the Prime Minister aims to leave the small companies rate at just 1p below the level where he found it when he became Chancellor. The result of his small business taxation odyssey is that he has boxed thousands of taxpayers into a structure that may no longer be appropriate for them.
I know that the Treasury’s response will be that such people can simply elect to pay themselves a salary rather than dividends, but that neglects the fact that many small businesses face significant increases in administration and compliance costs as a result of incorporation. A former Financial Secretary has quantified that the incentive for a self-employed person earning £30,000 to incorporate and take income from dividends will reduce by £1,000 by 2009-10. For some, that could be just the start of the additional costs. That would, perhaps, be more acceptable if disincorporation were a simple proposition, but it is not. Tax advisers were already warning last year that there was no method for businesses to disincorporate tax-free
without Her Majesty’s Revenue and Customs making a case that there is a deemed transfer of goodwill out of the business and back to the sole trader.
If the Treasury’s aim really is the encouragement of disincorporation, the Minister will no doubt be able to tell us what steps the Treasury is taking to remove barriers to disincorporation and to assist small businesses to unwind their tax affairs. However, if the Treasury is actively pursuing disincorporation, the Minister must also admit that it has led the small business community on a wild goose chase for the past few years. Indeed, a tax policy that simply brings the Prime Minister back to where he began is certainly a novel interpretation of the role of the business cycle. Unfortunately, his changes have been counter-cyclical, if not counter-productive, and he has committed his successor to increasing the tax burden on small businesses at a time when they can least afford such a move—I made that point to my right hon. Friend the Member for Wokingham (Mr. Redwood).
The small companies rate has been discussed in whole libraries of paperwork over a number of years. Formerly, criticism focused on the sporadic nature of the Prime Minister’s changes. The Institute of Chartered Accountants was typical in its condemnation, stating:
“This type of ‘stop-start’ tax tinkering is creating a climate of uncertainty for businesses.”
Before he moved on to greater things at the Treasury, Edward Troup also regularly called for not only certainty but simplicity. He is notable for having expressed his hope to the Treasury Committee that the Government would “do a graceful U-turn” on the subject of the 0 per cent. small companies rate in favour of incentives that were both better targeted and workable. It seems that this time at least the Treasury has been fruitful in the U-turn department, even if none of the U-turns has been particularly graceful.
I hope to return to Mr. Troup’s influence on policy later in the Committee’s deliberations; suffice it to say that if anyone’s hand is on the tiller of the ship of state as it tacks and gybes towards the rocks, it may well be his. In the meantime, I want to dwell briefly on the reason underpinning the change of direction by examining the supposedly better targeted and more workable incentives.
The Prime Minister presented small businesses with a regime of research and development and investment allowances, and that is all well and good for businesses able to make use of them, as my hon. Friend the Member for Fareham (Mr. Hoban) outlined. Unfortunately, the system entrenches an unwelcome distinction between businesses operating in the manufacturing and service sectors—between those that are capital intensive and those that are not. The Government argue that they support targeted reliefs, but perhaps Ministers can explain the justification for favouring one sector over another in that way?
Mr. Redwood: Will my hon. Friend be extending the argument that the Government’s concern seems odd, because someone who decides to draw more money out in salary or in dividend has to pay tax, so the Government are clearly targeting money that would otherwise stay in, and be profitably used in, the business?
Mr. Newmark: My right hon. Friend makes an excellent point; the Government’s lack of consistency bedevils many businesses, both small and large.
The Government argue that they support targeted reliefs, and I look forward to the Minister’s explanation of the justification. We addressed the issue last year, while I still had the pleasure of serving on the Treasury Committee. Our sceptical conclusion bears repeating now:
“It is not clear whether measures such as the increase in the R&D tax credit and the introduction of the Annual Investment Allowance will have the desired beneficial impact on investment levels by small companies.”
Instead of committing to an escalation of the small companies rate, the Government should take a step back and take stock of their continuing to pull in different directions.
Commercial decisions in small businesses are still being influenced by legitimate concerns about the benefits or disincentives of incorporation, and the dust has not yet settled. The Government occasionally manage to evoke a sense of continuity in their fiscal policies. For example, let us consider the following quotation from Malcolm Dunn, writing in the journal Taxation:
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