Clause
4
Charge
and main rates for financial year
2009
Mr.
Mark Hoban (Fareham) (Con): I beg to move amendment No. 2,
in page 2, line 30, leave out
‘28%’ and insert
‘25%’.
It
is not often that tax hits the headlines and front pages of the
newspapers, but to have two tax issues on the go at the same time
demonstrates the scale of the concern. One area of concern has been
about the 10p rate, which we discussed last week. In this case, the
rate of corporation tax and the decision of UBM and Shire to switch
their tax domicile from the UK to Ireland has propelled corporation tax
to the front of the news agenda.
The
immediate cause of the departure for both companies was the
consultation on the tax of foreign profits. Both UBM and Shire have
significant non-UK interests, and they were concerned about the
direction that the consultation is taking; but that overlooks the fact
that there are many companies now which have trodden the same
path—not necessarily for the same country of domicile, but they
have certainly chosen to leave the UK for tax purposes.
COLT
communications moved its domicile to Luxembourg. Kraft, Google,
Experian and Yahoo have all moved outside the UK. In some cases, that
was part of other transactions, but part of the reason involved the
competitiveness of the UK tax regime. In the financial services sector,
Omega, Hiscox and Catlin moved their tax domiciles to Bermuda, because
of its significantly lower tax rates and regulatory burdens on
insurance
businesses.
5.45
pm
One
of the crucial factors driving the debate about those companies and
others looking to move offshore is the headline corporation tax rate,
which has become increasingly uncompetitive. In 1997, the UK had the
fourth lowest rate in the EU; now we have the 19th. That is starting to
bite, and people are starting to think about it. A report by the City
of London corporation entitled, “The impact of taxation on
financial services business location decisions” highlights the
deterioration of our competitiveness. The summary
says:
“Until
fairly recently the UK had what was felt to be a very attractive tax
regime as regards both corporate and personal tax rates, but this has
changed.”
Some 80 per cent. of respondents to the
survey felt that the competitiveness of the UK regime had deteriorated
in the past few years. It is not just about the rates of tax that
companies pay. The report
says:
“Critical
other factors are Certainty of Interpretation and Predictability, and
Attitude and Approach of the tax
authorities.”
The UK had
the worst scores among respondents on those factors.
A complex
series of issues affect the reason why companies seek to move from the
UK into other jurisdictions. When asked about the uncertainty of the
tax system, survey respondents referred to the unpredictability of
policy. Policy changes are introduced suddenly, taxpayers and their
advisers have no sight of them and consultation does not take place. We
saw that with the changes to capital gains tax announced in the
pre-Budget report last October. Concerns were expressed about the
difficulty of obtaining a definitive position from HMRC on particular
tax planning issues. Again, that concern has undermined the UK’s
attractiveness.
HMRC’s
increasingly aggressive approach to closing the tax gap has led to
uncertainty about tax rules. Some rules have been changed, which has
had a negative impact on businesses. A helpful article appeared in
The Tax Journal last week entitled “Shire plc: will the
last one to leave please turn off the lights?” The author
commented on the approach by the Government and HMRC to tax
issues:
“The
Government’s crusade against what it calls unacceptable tax
avoidance has moved into many areas that used to be considered by HMRC
as well as taxpayers to be perfectly acceptable tax
planning”.
The article
goes on to give some examples, but I shall not detain the Committee
with them. It highlights the fact that practice has changed. It
says:
“This
type of tax planning was common within UK groups and was what enabled
such groups to compete in the global
market.”
People have
noticed a more aggressive approach to what were hitherto commonly
accepted tax planning schemes. That brings in more revenue for HMRC,
but it caused the effective tax rate for those businesses to increase,
because it was not offset by a reduction in the headline rate of
corporation tax until last year’s Budget. Although we are not in
the business of condoning aggressive tax planning, the clear lesson is
that closing down those practices has led to increased tax bills
without any compensatory decrease in the headline rate. It has made
Britain’s tax regime uncompetitive and it has put the economy at
risk.
What are the
consequences of the deterioration in the competitive position of the
headline rate of tax and the general changes in the tax system? It is
certainly clear that tax has become an increasingly important factor in
determining where firms locate their business. The City of London
survey showed a consensus that there has been a seepage of jobs and
business from London, and it highlighted the fact that competing
financial centres such as Dublin, Switzerland and the Netherlands offer
more attractive tax regimes than London. The tax and other advantages
that Dublin offers mean, according to the survey, that about 25,000
jobs are in Dublin that could and should be in London. In the interests
of balance, the survey also says that New York is seen as an
uncompetitive centre with high
taxes, a particularly aggressive tax authority and a fragmented,
difficult regulatory structure. We would be in much greater trouble if
the US sorted out that regime, which would provide a further incentive
for businesses to relocate from London to other
centres. The
report focuses on the financial services sector, which is very mobile.
People in the sector have made comments in recent months about the ease
of locating some of their business outside London. Hedge funds are
moving to Switzerland and private equity companies are moving out of
the UK. However, the problem is not specific to the financial services
sector. Shire is a pharmaceutical company and United Business Media
operates in the media sector and has relatively few UK-based assets.
Both Google and Yahoo are high-tech internet companies, and Kraft is a
food company. The concern about the deteriorating competitive position
of the UK system is clearly felt across a wide range of sectors, not
simply in the financial services
sector.
With
that in mind, it was interesting to see a quotation in the Financial
Times last week from GlaxoSmithKline, the big pharmaceutical
company—we are fortunate to have such companies based in the
UK—in which the company
said:
“We have
no plans at present to relocate our headquarters for tax
reasons...However, we believe that the UK business environment has
to be realistic so it doesn’t impair our ability to compete
globally, and it is important that the government ensures that the UK
is an attractive location for companies who have headquarters
here.”
Again, that is a
clear signal that multinational businesses, working in a flexible
global climate, are keeping an eye on all the factors that determine
whether or not the UK has a relative competitive advantage over other
locations in tax and so
on.
Having
identified the issue, what is the correct response? Amendment No. 2
proposes that we focus on the rate of corporation tax. The Government
are mindful of the importance of the matter, and last week, the
Chancellor issued a press release stating that a working party would be
set up to consider some of these issues. It was surprising that there
was so little detail in that press release. The working party’s
members had yet to be identified and its terms of reference were in
draft rather than finalised. I suspect that the Government were
responding to the news about UBM and Shire, and were trying to
demonstrate that they were doing something about it. At the Institute
of Directors conference last week, the Prime Minister hinted that
corporation tax rates could be cut. We always welcome imitation as a
sincere form of flattery on tax matters. There is a long list of tax
policies that the Government have tried to copy in recent months, and I
shall not detain the Committee by naming
them.
Stephen
Hesford (Wirral, West) (Lab): Will the hon. Gentleman give
way?
Mr.
Hoban:
Perhaps the hon. Gentleman will tempt me to run
down that
list.
Stephen
Hesford:
There is an even longer list of occasions on
which the Tories got it wrong on tax year after year in the previous 10
years, whereas we got it right. Perhaps the hon. Gentleman will take
that into account.
Mr.
Hoban:
I have to commend the hon. Gentleman: he is a trier
on these issues, and always seeks to redress the
balance.
Mr.
Hammond:
He will get his reward one
day.
Mr.
Hoban:
Time is running out for him to get that reward, but
I am sure that the Government Whip will take notice of his sterling
service in defence of the Government’s track
record.
The Prime
Minister has followed the lead that we set. Earlier this year, my hon.
Friend the Member for Tatton (Mr. Osborne) said that we
supported a cut in the rate of corporation tax to 25 per cent., as
suggested in amendment No. 2. To reassure Labour Members and the
Financial Secretary, this tax cut has been funded. We have identified
the fact that we could make further reductions in the rate of capital
allowances to fund the reduction from 28p to 25p, so it would not cause
a fundamental change in the overall fiscal position. Given that the
Prime Minister has signalled his intention to follow our approach,
Labour Back Benchers might wish to embrace that signal and support us.
If they back the measure there will not be any calls from the Prime
Minister asking them to change their minds, whether he is in the west
wing or not.
As I
said, this is not an unfunded tax cut, and we would finance the
reductions in the headline rate by reducing the rate of capital
allowances. As my hon. Friend the Member for Runnymede and Weybridge
said, by virtue of the conventions that govern these Bills we cannot
table the opposite and equal tax increases, but hon. Members should be
aware that that is our position. Our position is well expressed in the
following quote:
“Promote investment and
growth by reducing tax-driven distortions on commercial activity,
ensuring that business decisions are based on commercial rather than
tax considerations; stimulating higher levels of foreign and domestic
investment through a lower CT rate on a broader tax
base”.
That encapsulates
our policy admirably. In case any Labour Members query it and do not
think that they can support that line of attack, may I point out that
that quote was taken from “Business tax reform: couple allowance
changes technical note” (2007), produced by the Treasury.
Clearly, the Treasury has cottoned on quite quickly to the idea of
reducing capital allowances and the distortion that takes place as a
result of the Government giving tax relief to particular types of
activity, and using that to reduce the headline rates of corporation
tax. That is the right policy to tackle, as one of a series of steps,
the lack of competitiveness in the UK tax system.
If we do not
act, there is a risk that Britain’s tax base will shrink. Not
only will UK-domiciled companies seek to relocate for tax purposes
overseas, companies seeking locations in which to invest will look at
the UK and see a high rate of corporation tax that is out of step with
our European competitors, and thus seek to locate in those countries,
rather than in the UK. The impression that the impact is
double-edged—companies are driven out of the UK if our system is
uncompetitive in relation to other jurisdictions, and people are
discouraged from moving to this country—was borne out in the
City of London survey, in which respondents thought that,
based on current trends, the seepage of jobs out of London would
continue and accelerate. The report highlighted academic research that
said that low-tax regimes successfully attract inward investment over
time—the opposite is true of high-tax regimes. The amendment
recognises the truth of that statement, and it is in the
country’s best interest to reduce the headline rate in the way
that we have outlined. Given the state of public finances, the only
proven way to do so is to reform capital allowances,
too.
Mr.
Browne
:
When considering the merits or otherwise of
the amendment, we have to remember that the Conservative party is
committed to the same overall levels of spending and taxation as the
Labour Government. There is nothing in the Conservatives’
proposals that represents a net tax cut—every single proposal
that they have introduced has to be paid for somewhere else in the
system. The hon. Member for Fareham was commendably honest when he
admitted that the beneficiaries of the tax cut would be asked to fund
it themselves, so it was not as attractive a proposition for business
as it might appear to someone who was casually reading the
amendments.
6
pm
In fact, I can
almost imagine the meeting that took place. The Conservative party, to
try to reassure business that, despite their reputation for high taxes,
they were still on the side of business, went along to the meeting and
said, “Don’t worry: we’ve tabled an amendment in
the Finance Bill Committee that says that we are going to cut the rate
of corporation tax by 3p”. The business audience says,
“Wow, that’s very impressive. It’s exactly the
sort of policy that we hope the Conservative party would put forward on
our behalf”. However, the meeting was brought to hasty
conclusion before it was explained to the business audience that they
would be paying for the 3p cut through the allowances that they would
lose elsewhere in the system. I shall return to the motivation of the
Conservative
party.
The Liberal
Democrats support help for business through cuts in corporation tax,
but we have made it absolutely explicit that that would have to be
funded through removals of research and development reliefs and other
business allowances. As a party, we are not instinctively hostile to
the Conservative’s proposal, but we should be honest and
straightforward with the business community and not dress up such a
proposal as a tax cut—it is not a tax cut—which is what
the Conservative party are doing. In the Daily Mail in December,
Ireland’s decision to cut corporation tax to 12.5 per cent. was
described by the shadow Chancellor, the hon. Member for Tatton
(Mr. Osborne), as being exactly the sort of policy that the
British Government ought to follow, but he has not identified how we
will get to anything like that position. The shadow Chancellor has said
on other occasions, including on “The Andrew Marr Show”
in March this year, that there was “no scope” for cuts in
business taxes because of the UK’s budget
deficit.
Stewart
Hosie:
I must have misheard the hon. Gentleman. Did he say
that he would pay for corporation tax cuts by cutting R and D tax
credits?
Surely he meant to say capital allowances. Is he really going further to
denude UK business, which already spends only a tiny proportion of GDP
on R and D? Will he clarify that?
Mr.
Browne:
What the hon. Gentleman mentioned is part of the
package in which we are interested. There are some subsidies for
research and development, and we think that it is suitable that the
private companies that benefit from them should pay for them, as
opposed to the taxpayer. However, there are other matters on which R
and D needs to be stimulated through taxpayer subsidy. The overall
point is that the system should be simplified and the headline rate
reduced, and that that should be funded through the removal of a
complicated system of reliefs. Does that mean that we are sympathetic
to what the Conservative party aspires to do? Yes it does, but we are
not trying to dress it up as a tax cut, or persuade business audiences
that that is what it is. We are leaving that to the Conservative
party.
Mr.
Mark Field (Cities of London and Westminster) (Con): I am
reluctant to stop the hon. Gentleman while he is in full flow, but
would it be fair to summarise his policy as having his cake and eating
it while sitting on the
fence?
Mr.
Browne:
No, it would not be fair to summarise it that way
at all. I am concerned that the Conservative party is not being
straight with businesses.— [
Interruption.
]
The Conservatives think that they need only to mention Ireland to make
themselves a business-friendly party. They need to say to business:
“We are committed to the same levels of taxation as the Labour
party and a much bigger state in terms of public spending than was the
case when the Conservatives were last in Government, and we are not in
favour of reducing the overall tax burden on business. When we mention
the magic word, ‘Ireland’, we’re afraid, dear
businessman or woman, we are being wholly misleading on the policies
that the Conservative party wish to put forward at the next general
election”.
Mr.
Hoban:
Will the hon. Gentleman clarify his objection to
the policy? He said two contradictory things. First, he said that the
hypothetical meeting would be cut short before we got to the bit about
capital allowances, and that we were therefore trying to hide that part
of our tax policy. Secondly, he cited my hon. Friend the Member for
Tatton, who made it explicit on “The Andrew Marr Show”
that because of the state of the Government finances, there could be no
overall reduction of the tax burden. We are both open and closed,
according to his analysis. Which does he really
believe?
Mr.
Browne:
Let me answer that by giving the hon. Gentleman
another opportunity to intervene. Does he favour Britain’s total
tax liability on businesses being the same as it is under the Labour
Government, or lower? If he wishes to give way, I am happy for him to
do
so.
Mr.
Hoban:
I think the hon. Gentleman is giving way and I am
intervening, to get the process right. We have made it very clear that
we cannot at this point reduce
the burden of taxation, because of the poor shape in which the
Government have left the public finances. There is no great mystery
about this. It is surprising that the hon. Member for Taunton is the
only person in the Liberal party who is trying to outflank us on the
right. He will find he has a very short career if he is not
careful.
Mr.
Browne:
Hey presto, we have the answer, which is that the
Conservative Opposition criticise the Government for having an
unfriendly business tax environment but are committed to exactly the
same level of business taxation as the Labour Government they
criticise. Every single time we hear the shadow Chancellor, or a
Conservative spokesperson, in front of a Conservative audience or on
television citing Ireland or whatever other country as an example to us
all of the sort of policies we should pursue, we can look back at the
intervention from the hon. Member for Fareham and know that the
Conservative party is committed to exactly the same level of business
taxation as the Labour
Government.
Mr.
Brooks Newmark (Braintree) (Con): I am sure that the hon.
Gentleman and his colleague, the hon. Member for Twickenham (Dr.
Cable), have thought through the issue with respect to tax credits.
When our competitiveness is compared with other countries, we do not
fare particularly well as a percentage of GDP. I would therefore like
to ask him: which specific research and development tax credits are
concerned? Where is the fat in the system today and which policy
would he change? What are his
targets?
Mr.
Browne:
We are discussing a Conservative amendment, too,
so I am not going to go into a detailed discussion about that.
I have made it quite clear that my party and I are sympathetic to
proposals to simplify the system and reduce the array of relief and
credits so that the headline rate can be decreased. We are sympathetic
to what the hon. Gentleman’s party is putting forward, and we
could have an interesting discussion. However, I am trying to draw to
the attention of his Front Bench team, to him as Whip, to his party
and, indeed to the Committee as a whole, the fact that the purpose of
the Conservative party in tabling the amendment was to paint themselves
as being more instinctively pro-business that the Labour Government.
What we have just found out, interestingly, is that the Conservative
party is committed to exactly the same level of overall taxation on
British business as the Labour
party.
Jane
Kennedy:
We can have a political knockabout and have fun
at one another’s expense, but I think that the amendments tabled
by the official Opposition have drawn attention to what we acknowledge
as a problem and part of the global changes that are affecting the
decisions on investment and where to locate that global multinational
companies are making. Does the hon. Gentleman have no sensible
proposals to make, other than the rather sweeping dismissal of the
amendment and the Government’s
policies?
Mr.
Browne:
I was not trying to be either dismissive or
particularly party political. I was trying only to shine a light on the
policy that was being put forward by the Conservative party. I have
already spoken about simplifying the tax regime that faces business.
Simplifying the tax regime full stop is beneficial for businesses and
for individuals, and one of the criticisms that I and many others would
make of the Government is that the British tax system is far too
complicated and hard to decipher, and that that deters some businesses
from locating here. Quite aside from the overall level of taxation, it
is the complexity that they face.
We operate in a wider global
environment. People cite Ireland because of our cultural links and
geographic proximity, and it is interesting for those reasons. However,
I think that it is unreasonable to cite Ireland and imply that the tax
regime policy in Ireland is being pursued by a British political party,
without telling people that that political party has no intention of
reducing the overall level of tax faced by
business.
Mr.
Siôn Simon (Birmingham, Erdington) (Lab): Although
the hon. Gentleman keeps telling us that he will simplify the research
and development tax credits, is it not the case that the hon. Member
for Twickenham has had for several years a big bee in his bonnet about
R and D tax credits, which he thinks do not work or are uneconomic? The
issue is not about simplifying them but about getting rid of them,
because the hon. Gentleman has a really big, buzzing bee in his bonnet
about them. The hon. Member for Taunton does not know what is going to
happen with them. All he knows is that the hon. Member for Twickenham
does not like them and would not have them.
Mr.
Browne:
That was a fascinating analysis of the different
strands of opinion within the Liberal Democrats. The policy to which we
in my party are all committed is ensuring that public money is spent as
efficiently as possible and is as supportive as possible of British
industry. We are trying to raise the necessary money to fund public
services and to support a healthy business environment, and my hon.
Friend the Member for Twickenham and I are both enthusiastic about that
approach.
I wanted to
establish two points: first, that the Conservative party favours as
high a level of business taxes as the Labour party, which we have
established; and
secondly—
Mr.
David Gauke (South-West Hertfordshire) (Con)
rose—
Mr.
Browne:
Is the hon. Gentleman going to disagree with the
hon. Member for Fareham?
Mr.
Gauke:
Of course not. The hon. Gentleman has mentioned
that point several times. Would the Liberal Democrats reduce the burden
of taxation on business? Is that a
commitment?
Mr.
Browne:
I am grateful for the opportunity to explain our
policies to a wider audience, although, I fear, it is a rather partisan
and uneasily persuaded one. My party is not committed to raising the
overall
burden of taxation. We think that taxes are high enough in Britain.
However, we think that there is scope within the existing level of
taxation to make taxes fairer and to place the burden better. I cited
that point this morning. We could increase taxation on
pollution—on activity that is damaging to the
environment—and reduce taxation on people who are on low to
middle earnings and who require greater assistance. I do not wish to
test your patience, however, Mr. Cook. If, at the next
general election, we are able to reduce the overall burden, our
priority will be to help people who are on low earnings and at the
bottom of the income tax threshold.
The
Chairman:
Order. I have been very tolerant so far. I doubt
whether anyone could have allowed the debate to range any wider than it
has, so anyone who is hoping for a stand part debate on clause 4 will
be somewhat disappointed. Can we redress the situation and focus our
thoughts on amendment No. 2 please?
Mr.
Browne:
Thank you, Mr. Cook. I shall not be led
astray by any further interventions.
We have established that the
Conservative party favours high business taxes, as does the Labour
party. My other point, which is on the same theme of greater
simplicity, is that business in Britain has not been done a favour by
the chopping and changing of corporation tax rates over the years. As I
understand it, corporation tax has changed seven times in the 11 years
that the Labour party has been in government, and that makes it
difficult for businesses to plan ahead.
Mr.
Hoban:
Will the hon. Gentleman give
way?
Mr.
Browne:
I shall give way in a moment. Having said that I
would not, my generosity has got the better of me. Before I give way,
however, I shall leave people with this thought. The Institute for
Fiscal Studies, in its green budget, says on that very
subject:
“This
does not seem a helpful contribution to the stable business environment
that Gordon Brown has so often stated is vital for investment and
economic growth.”
Of
course, the Government must have the flexibility to make changes, but
business likes to have the security of being able to plan in
advance.
Mr.
Hoban:
Just before the hon. Gentleman’s train of
thought hits the buffers completely, is he saying that he is against
reducing the rate of corporation tax, despite saying a couple of
minutes ago that he was in favour of reducing it? He must clarify his
thought process. Is he in favour of reducing it or not? If he is, how
does he rebut the IFS argument that that creates instability in the tax
system?
6.15
pm
Mr.
Browne:
I do not believe that those positions are
contradictory. I keep explaining the same points, but I will explain
them once more. My party is in favour of reducing the rate of
corporation tax, funded by removing or reducing reliefs and allowances
elsewhere so that there is greater simplicity, but that does not
detract from the fact that businesses—and
individuals—like to have some ability to plan their tax affairs
in advance.
Therefore, if there are more years when changes are made than years when
changes are not made, that potentially builds uncertainty into the
system for those who seek to plan ahead for their business taxation.
Our view is that this would be the right way to go: if the Government
were to make changes, but less frequently, in the direction we approved
of, that would be beneficial to business.
In conclusion, the objective of
reducing the overall level of corporation tax is laudable. Simplifying
the system is laudable as well, but we must remember that we are all in
this Committee debating the changes knowing that we favour an identical
overall level of taxation on British
businesses.
Mr.
Field:
It is always a pleasure to follow the hon. Member
for Taunton, eventually. I give my wholehearted support—perhaps
not as wholehearted as that of the hon. Member for Taunton—to
the comments of my hon. Friend the Member for
Fareham.
I have
sympathy at some level with the Government’s plight in relation
to the overall rates. The Government obviously need to balance their
books, with public debt spiralling out of control, and I understand
that there is a reluctance to get into a downward auction of rates,
whether on capital gains tax or in other areas. However, as my hon.
Friend rightly pointed out, we live in a global market and all too
often too many of the new business ideas—he referred to Yahoo
and others—are very mobile. I discovered only today, chatting
with a friend who is a senior executive of an outfit called Betfair in
the gaming industry, that it has also left these shores, moving part of
its operation to Malta. That is down in part to rates, but also to
regulations, a point which my hon. Friend
addressed.
As my hon.
Friend rightly pointed out, the biggest damage is in relation to the
uncertainty that has become part and parcel of the tax regime. It is
greatly to the Government’s credit that for their first nine or
10 years they were able to maintain—during what was
clement global economic weather—a sense of a strong economy
going forward. They inherited a strong economy. Although many in
business, many of whom I represent in central London, feared the worst,
the ship sailed fairly smoothly on. Many of us feel that the biggest
problem caused by some of the botched changes that have taken place,
particularly over the past nine months, is that there is now a level of
uncertainty in the system which is doing great damage to
Britain’s global competitiveness in the business
sphere.
There
has been little proper consultation on a number of the changes in the
capital gains tax regime, on issues regarding non-domiciles, and the
like. Importantly, there should have been prior sight of many of those
changes. There is, therefore, an inherent difficulty in getting a
definitive position in relation to a range of taxation
measures—capital gains tax and beyond. As my hon. Friend rightly
pointed out, there has been a sense of an increasingly aggressive
approach by Her Majesty’s Revenue and Customs, partly I fear,
going back to my initial point, because of public finances that are
spiralling out of control. There needs to be a much clearer approach to
ensure that there is guidance from the authorities and professional
advisers of corporations in advance, so that corporations can properly
plan their tax affairs.
I fear that
the biggest problem is that uncertainty, and for that reason we tabled
the amendment. The amendment is not just about rates, but about some of
the longer-term damage that has been done to Britain’s role and
competitiveness. One can look at a range of league tables, the figures
in which can in many ways spiral, but we have also had an incredibly
solid economy in many ways, which has been dealt with fairly solidly.
We all had disagreements about particular elements of the tax regime
over the first 10 years of the Government’s administration. Over
the past nine months, however, we have seen some real problems that
will do lasting damage to our external investors, particularly in the
globalised economic world in which we live. The one thing that we can
be certain about is that international competitiveness will become ever
more important in the years and decades to come. I fear that the
biggest and most damaging legacy that this Government will pass on will
be uncertainty surrounding our economic
welfare.
Jane
Kennedy:
I am grateful to the hon. Member for Fareham for
tabling the amendment, although we might have had the debate on the
clause anyway. As he says with some justice, the weight of corporation
tax is one of the factors that is quoted by some of our major companies
when they make investment decisions. It was cited in the case of Shire
and United Business Media, when they announced that they intended to
insert a Jersey-incorporated Irish tax resident company as the top
holding company for their groups.
May I answer some of the points
made by the hon. Member for Fareham in his opening speech? Both of the
companies to which he referred have stated publicly that they do not
expect the move to have any impact on the level of activity and jobs,
which will remain in the UK. Therefore, both will continue to be liable
for UK corporation tax, as they are now, on the economic activity that
they have located here. However, inserting a non-UK tax resident
holding company on top of a multinational group provides an opportunity
for the group to escape the application of the current rules on the
taxation of the foreign profits of the group’s overseas
subsidiaries. A review of the reform of those rules is under way and
has been discussed, in detail, with business. The hon. Member for
Fareham and I would share the goal of maintaining the most competitive
corporation tax rate of the major economies. The Prime
Minister’s speech to the Institute of Directors last week
reiterated that when he
stated:
“Our
aim is to reduce corporation tax even further when we can afford to do
so...and we’re looking at how we’re going to do
it.”
We
have continued our engagement with business over recent months on the
shape of proposals for the reform of taxation of foreign profits. We
are committed to issuing a consultation document on the proposals in
the summer, and we remain committed to engaging and consulting fully
with business on those proposals both prior to and after publication.
As part of that commitment, the Chancellor announced the formation of a
working group of industry representatives to discuss with Ministers
ways in which the tax system can provide the long-term certainty that
multinational companies need considering the competitiveness and other
challenges facing both
business and Government. As businesses have become more global in their
reach, we are keen to work with them to understand how the UK’s
tax system can reflect the challenges of globalisation. Businesses have
asked us to respond to global challenges, but they have also made it
clear that they value stability and certainty. Throughout my period in office
as Financial Secretary, it has become clear, as the hon. Member for
Cities of London and Westminster rightly said, that certainty and the
ability to make planning decisions knowing what the tax implications
will be are highly prized by business. Striking a balance between the
objectives of responding to global changes and providing certainty is
not always easy. We recognise that sometimes the Government may have
reacted too quickly in responding to the need for change.
Sometimes, we may not have reacted quickly enough to keep pace with
globalisation. At the same time, other countries are also changing
their own regimes, which also affects the perception of UK
competitiveness. Ireland has been quoted a number of times as having a
very low rate of corporation tax in comparison with ours and therefore
is seen as a highly attractive place. However, I believe that The
Observer had an article this weekend in which it described the
downturn affecting the Irish economy, which is causing employment in
Ireland to reduce, the availability of jobs to reduce and the
attractiveness of working in Ireland to reduce in comparison with the
United Kingdom, which would indicate a different trend. Therefore,
there is no developed economy in the world that is not affected by the
global changes that we are dealing with.
Mr.
Colin Breed (South-East Cornwall) (LD): Does the Minister
agree that global competitiveness and global corporation tax
comparability are less to do with headline rates and more to do with
what the companies actually pay?
Jane
Kennedy:
There is some truth in what the hon. Gentleman
says. However, the headline rate is important, which is why we have
been taking steps to reduce the headline rate of corporate tax and why
we will continue to look for ways to maintain the competitiveness of
the UK
economy.
The
working group that will be set up will be an important forum in the
debate; we have responded to the requests of business in setting it up.
We have also responded to requests to avoid rushing change without full
debate and consideration of the issues. The group will be put together
from representatives of broader business and it will form an additional
element of our continuing dialogue with business, enabling me and other
Ministers to exchange views with those representatives in an informal
setting. It will not displace existing engagement with
business.
Stephen
Pound (Ealing, North) (Lab): When my right hon. Friend the
Minister is exchanging views with business representatives, would she
perhaps consider that perhaps the easiest, the most sensible and I
shall say the most economically patriotic comment that could be made is
that a pan-European fiscal harmonisation in the context of wider and
deeper European integration would surely be the
answer?
Jane
Kennedy:
I am not sure that that is the answer; it would
depend in which direction it was harmonised in. It is not a proposal
that I intend to explore at this
point.
I thought that
it would be helpful if I described to the Committee the steps that we
are taking to consider whether the rate of corporation tax is at the
right level and why we continue to keep these matters under review, as
we do with all rates of tax.
Amendment No.
2 sets out to reduce the main rate of corporation tax to 25 per cent.
for the financial year 2009. As I have said, the Government remain
determined to maintain the best possible environment for business in
the UK and with unprecedented economic stability in the UK, businesses
have been able over the past decade to plan and invest more effectively
for the long term. That has brought us a lot of benefit, as
today’s high rates of employment underline. Companies have also
benefited from a competitive tax regime.
To maintain that position last
year’s Budget saw the announcement of a further reduction in the
main rate of corporation tax to 28 per cent. That rate was legislated
for in the Finance Act 2007 and came into effect from 1 April this
year. With that step, the Government have maintained the UK’s
position as having the lowest corporate tax rate in the G7. The rate
cut was accompanied by a series of reforms to wider business taxation,
which will be discussed in later debates in this Committee. As a
package, these reforms constitute the most extensive set of reforms to
the business tax system since the 1980s. The package modernises the
outdated system of investment allowances for plant, machinery and
buildings; I know that we will return to that subject later. It also
gives further support to innovative businesses through the research and
development tax credit.
It has been a pleasure to
listen to the exchanges regarding the proposals put forward by the hon.
Member for Taunton. This Committee is proving to be far more fun than I
had anticipated it would be in studying the detail of the
Bill—[
Interruption.
]
So
far.
More than
£2.3 billion has been given in support of 30,000 claims for R
and D tax credits since they were introduced for small and medium-sized
enterprises in 2000 and for large companies in 2002. This Bill goes
further. It includes clauses that increase the generosity of both
credits, from 125 per cent. to 130 per cent. for large companies and
from 150 per cent. to 175 per cent. for
SMEs.
6.30
pm
There is no
questioning our commitment to R and D tax credits as an important and
welcome support for businesses to invest and develop. Competitiveness
is about more than just the headline rate of corporation tax. The UK
tax system has other advantages, including a generous system with R and
D tax credits, but also there is no withholding tax on dividends, which
is regarded as very welcome. We have one of the largest networks of tax
treaties in the world, and relatively low administrative burdens. We
are unusual in offering full interest
deductibility.
Looking at
the tax paid by companies also indicates the UK’s continued
competitiveness. As a share of gross domestic product, UK taxes on
corporate income amounted to 3.4 per cent. of GDP in 2005, the latest
year for which there are comparable figures. That was below the OECD
average of 3.7 per cent., and in line with the EU15 average. The OECD
ranked the UK among the most attractive places for foreign direct
investment in the world. Indeed, there have been a number of recent
examples of foreign investment with Toyota in Wales, and China Mobile
locating to London this year. However, it is important to reiterate
that we are not complacent.
On non-tax measures, the UK
consistently performs well in comparison to other competitors. Perhaps
I could turn to the amendment. The proposed reduction in the main rate
of corporation tax to 25 per cent. from next year, would cost as much
as £8.5 billion over the three years to 2011-12. That is
probably around the global figure that we could agree between us. The
hon. Member for Fareham says that this is not an unfunded tax cut, and
that he would recoup all the tax through changes and reductions in
capital allowances. The Opposition have proposed a package of
corporation tax reforms, the key parts of which are, as I have said,
the reduction of the main rate to 25 per cent., and a reversal in the
rise of the small companies rate back to 20 per cent. That would be
funded by reducing the main rate of plant and machinery capital
allowances to 125 per cent., sorry, 12.5 per cent.—one would
think I did not have my glasses on—reducing the long-life asset
of integral features of expenditure rates to 6 per cent., and
abolishing the annual investment allowance.
In putting
the package together, I do not believe that the Opposition have made
the right calculations based on the available figures. The whole
package would be funded by changes to the capital allowances. I
believe, and we have looked in some detail at the package, that that
would penalise sectors investing in shorter-life assets, for example,
technology. Capital-intensive sectors, such as transport and
manufacturing would lose out, as would utilities, and I do not believe
that the package would be sustainable in the long term. As I understand
it, the Institute for Fiscal Studies acknowledged that the figures on
which the package was based were drawn from figures available from 1971
to 1990—they do not reflect increased investment in computers or
other short-lived assets, although they include long-life assets. The
IFS acknowledged that rates of depreciation used in the accounts would
have increased since that time.
While I am grateful to the hon.
Gentleman for the opportunity to have a wider debate about the
implications of corporation tax and its importance to business, we do
not believe that the proposal in the amendment is sensible. Sticking
with our proposals and the corporation tax that we have tabled is, as
my hon. Friend the Member for Wirral, West acknowledges, part of our
ongoing work to reduce corporation tax, so long as it is done in an
affordable way and in consultation with the businesses that are
affected. Therefore, I hope that he will not press his amendment to a
vote. If he does, I hope that my hon. Friends will resist
it.
Mr.
Hoban:
We have had a useful debate on corporation tax. I
agree with you, Mr. Cook, that it would be difficult to have
a clause stand part debate, so
I missed out on my clause 4 moment on this Finance Bill, but perhaps we
might come back to that at another
occasion.
The
Exchequer Secretary to the Treasury (Angela Eagle):
That
one has been done
before.
Mr.
Hoban:
Well, there is no point in having new jokes in the
Finance Bill when we can just recycle jokes from previous
years.
The speech
made by the hon. Member for Taunton really betrayed to me his problem
in setting out his tax plans. He spent time in the Committee of the
whole House trying to establish the point about tax burdens and what we
were in favour of with regard to whether it was higher or lower, but he
managed to avoid any commitment himself until my hon. Friend the Member
for South-West Hertfordshire rather pinned him down. He said, “I
not committed to raise the burden of tax”, so it will not
increase unless his hon. Friend the Member for Twickenham (Dr. Cable)
changes his mind.
The
hon. Member for Taunton was not entirely clear that he was going to
lower the tax burden either, because he said that the measures outlined
today in his speech would be funded by the abolition of the research
and development tax credits and other reforms. This morning, he seemed
to suggest that the 4 per cent. decrease in the starting rate for
income tax would be funded through other tax increases, so unless he
has something to wow us with later in our proceedings, the logic of his
argument is that every tax cut that he proposes has to be funded by a
tax increase elsewhere. Intellectually, that is a perfectly respected
position, given the state of the Government’s finances and the
way the economy has been handled, but he should be frank and
transparent about the position that he reached, rather than forever
trying to nibble away at other people’s
views.
Mr.
Browne:
I will be frank and clear. At the last general
election, the Liberal Democrats proposed an increase in the tax burden
over and above what the Government and the Conservative party proposed.
That is not our position now. We do not wish to see the tax burden rise
and think that it is high enough as it is. Unlike the Conservative
party, however, we still hold to the possibility that we could fund
cuts in the overall tax burden. I understand that the Conservative
party is committed to an overall tax burden that is absolutely
identical to that of the Labour Government. The hon. Member for Fareham
is right that, when we propose that spending should be increased in one
area or taxes reduced in another, we are seeking for that to be offset
by changes elsewhere in the system, but we are not in favour of an
overall rise.
Mr.
Hoban:
I think that we are now clear on that, for
the time being at least. With regard to the hon. Gentleman’s
comment about instability in the tax system and the earlier comments
from my hon. Friend the Member for Cities of London and Westminster, it
is absolutely right that uncertainty is a factor in Britain’s
deteriorating position when compared to our neighbours, particularly
with regard to the competitiveness of our tax position.
The Financial
Secretary talked about the need to consult on the taxation of foreign
profits and mentioned that she would chair an informal group that
included representatives of multinationals, but part of the problem is
that business leaders will say, “We’ve heard all these
pledges to consult before.” Look at what happened in the
pre-Budget report in October. Totally unexpected and unplanned changes
in capital gains tax came from a Government who were committed to
consultation. Therefore, consultation on how the Government are
managing corporation tax will not wash with the business community at
the moment. We need a more certain and stable tax regime in which
people understand the Government’s direction of travel on tax. I
would not see any inconsistency in that if one were setting out a path
that a Government might follow to reduce the rate of corporation tax. I
do not believe that that would introduce unnecessary instability to the
system—a point that the hon. Member for Taunton made. Certainty
and predictability play a key part, and the erosion of that in the tax
system has led to a deterioration in the competitiveness of our tax
regime.
Stephen
Pound:
The hon. Gentleman is too tolerant; I am sure he
will learn.
Before we
move on from the delicious flights of fancy that are Liberal Democrat
taxation policy, I would say that the hon. Member for Cities of London
and Westminster referred to consumption on a fence. He should have
added “dreaming of jam tomorrow”. The logic of what the
hon. Member for Taunton said was that stability was so important that
business would even resist a cut in corporation tax because of the
terrifying destabilising effect. Will the hon. Member for Fareham say
whether members of his party concur with that perspective from Taunton
or whether they have a different
view?
Mr.
Hoban:
Moving an amendment that would reduce the rate of
corporation tax suggests that we do not believe that business would be
unhappy with that reduction. To be fair to the hon. Member for Taunton,
I do not think that he quite meant to refer to reductions in the
headline rate of corporation tax. As I was saying, the issue of
uncertainty, complexity and predictability is quite important for
businesses and we need to introduce reforms that help to deliver it in
a more sustainable way that can be clearly understood by the business
community.
On
the issue of the rate, I think that the Government are at risk of being
complacent, despite the protestations of the Financial Secretary. For
too long, the Government have felt that people in the City have been
crying wolf about this. The Government would rather dismiss the
concerns as the view of a narrow group of people, but the scale of
activity suggests that there is much broader concern than the
Government have hitherto recognised. One can always tell how serious
businesses are about a change when they spend real money on
it.
Conversations that
I have had with tax advisers over recent months have indicated that a
substantial number of large businesses have commissioned serious pieces
of
work on how to move their tax residence from the UK to other
territories. That is a serious issue , and we need to respond to it. It
is in the interests of the economy as a whole that we get that response
right. While I hear what the Financial Secretary is saying about the UK
having the lowest rate in the G7, the position has deteriorated. We
have moved from having the fourth lowest rate in Europe to the
nineteenth lowest. That is an important fact that we need to bear in
mind. This is not just about Ireland. There are other countries looking
at the same route which offer attractions for businesses to relocate
away from the
UK. The
Financial Secretary said that UBM and Shire were not going to move
employees out of the country, would not reduce their activities and
would continue to pay UK corporation tax. That is their position at the
moment, but who knows where they will go to? The other message is that
this matter will affect businesses looking to invest in the UK. They
look at the signal given by high corporation tax relative to our
competitors and use it as a factor in their decision making, as the
Financial Secretary recognised in her response. It is time for us to
take action. The amendment sets out a very clear path for the way that
the tax system should go and I will press it to a
vote.
Question
put, That the amendment be
made:—
The
Committee divided: Ayes 10, Noes
18.
Division No.
1
]
Blackman-Woods,
Dr.
Roberta
Question
accordingly negatived.
Clause 4 ordered to stand
part of the Bill.
The
Chairman:
May I ask the Committee to return bright-eyed
and bushy-tailed on
Thursday?
Further
consideration adjourned.—[Mr.
Blizzard.]
Adjourned
accordingly at fourteen minutes to Seven o’clock till Thursday 8
May at
Nine
o’clock.
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