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 pathnot 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.
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 UKs attractiveness.
HMRCs 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 Governments 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 years 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 Britains 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
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 companywe are fortunate to have such companies based in the UKin 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 doesnt 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 partys 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: 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. 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 Governments 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 Britains 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-edgedcompanies are driven out of the UK if our system is uncompetitive in relation to other jurisdictions, and people are discouraged from moving to this countrywas borne out in the City of London survey, in which respondents thought that,
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 cutevery 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.
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, Dont worry: weve 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, thats very impressive. Its 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 Conservatives proposal, but we should be honest and straightforward with the business community and not dress up such a proposal as a tax cutit is not a tax cutwhich is what the Conservative party are doing. In the Daily Mail in December, Irelands 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 UKs 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?
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, were 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 Britains 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
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. Gentlemans 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 anothers 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 Governments 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. 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
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?
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. 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. Gentlemans 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?
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 businessesand individualslike to have some ability to plan their tax affairs in advance.
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 supportperhaps not as wholehearted as that of the hon. Member for Tauntonto the comments of my hon. Friend the Member for Fareham.
I have sympathy at some level with the Governments 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 ideashe referred to Yahoo and othersare 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 Governments credit that for their first nine or 10 years they were able to maintainduring what was clement global economic weathera 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 Britains 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 measurescapital gains tax and beyond. As my hon. Friend rightly pointed out, there has been a sense of an increasingly aggressive approach by Her Majestys 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 Britains 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 Governments 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 groups 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 Ministers 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 were looking at how were 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
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 todays high rates of employment underline. Companies have also benefited from a competitive tax regime.
To maintain that position last years 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 UKs 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.
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 UKs 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 onreducing 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 1990they 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
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 Governments 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 peoples 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. Gentlemans 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 Britains
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, Weve 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 Governments 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 systema 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.
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
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 ]
Question accordingly negatived.
Clause 4 ordered to stand part of the Bill.
Further consideration adjourned.[Mr. Blizzard.]
Adjourned accordingly at fourteen minutes to Seven oclock till Thursday 8 May at Nine oclock.
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