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“increasing complexity and a lack of certainty are all contributing to declining tax competitiveness.”
This theme has emerged elsewhere—it does not just come from the CBI. Last year, the City of London corporation published a report, “The Impact of Taxation on Financial Services Business Location Decisions”, which discussed how “sticky” London is with regard to business staying put in spite of the tax regime, not because of it. It compared the UK’s corporate tax regime with those of other financial jurisdictions, and found that the UK had among the worst scores in two categories: “Certainty of Interpretation” and “Attitude and Approach”.
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There is a growing consensus that says, yes, rates are important, but it is not just about rates. In a report commissioned by the Mayor of London—
Mr. Hoban: It is very clear who the Mayor of London is. [ Interruption. ] If I meant the lord mayor, I would refer to the lord mayor of the City of London. [ Interruption. ] I am not sure that the previous Mayor would have been that interested in the tax regime, whereas I think that Boris Johnson is a bit more interested in the competitive position of London compared with other jurisdictions.
The executives interviewed for that report concluded that the UK’s reputation for predictable, competitive and constructively applied taxation is in decline, and the call was for a strategic policy on corporation tax.
Mr. Hoban: I happily give way before moving on to the favourite topic of the hon. Member for Wolverhampton, South-West—Canada.
David Taylor: When a detailed analysis was done in 2006, it was found that the de facto corporation tax rate for larger companies in the UK was not 30 per cent., the official rate at the time, but 22.5 per cent. because of the activities of avoidance vehicles and companies. Is the hon. Gentleman reassured by their ingenuity? If this is such a crushing burden on British industry, why do the majority of FTSE 100 companies pay no tax, or nugatory amounts, and did so even before the recession reduced their profit base?
Mr. Hoban:
The hon. Gentleman had an Adjournment debate on this issue last week when we were debating the Second Reading of the Finance Bill; I am sorry that I could not listen to his remarks. There is an issue about the tax take and what a tax gap is. One comment made about research by the TUC is that it does not take into account some of structural reliefs that are in place in the UK tax system. It is important that companies pay the tax they are due to pay and do so promptly and fairly. However, we live in a complex global economy. Several of the companies listed in the FTSE 100 are not necessarily UK trading companies, so they will be subject
to a different tax regime. It is a difficult comparison to make. Just as the hon. Member for Coventry, North-West (Mr. Robinson) picked holes in my analysis of where we are in relation to the OECD, some would pick holes in an analysis of the tax gap. It is not as clear-cut as people would suggest.
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): I am interested in what the hon. Gentleman is saying about complexity and differences in the tax system. Before he moves on to Canada, will he expand on why he chose not to extend his proposed cut to ring-fenced profits and to apply it only to non-ring-fenced profits? I declare an interest as a shareholder in Shell, and an interest in North sea investments through my constituency and my membership of the offshore oil and gas industry all-party group.
Mr. Hoban: The hon. Gentleman makes an important point. When I thought about the amendment’s impact, I considered whether it should deal with changing the ring-fenced profits rate as well, but I was conscious that that might take me into a new field of argument about oil taxation, which my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) will deal with in Committee. There is a complex set of interactions for us to discuss carefully, but I wanted a narrowly framed amendment to avoid detaining the Committee for too long.
I turn to Canada, which the hon. Member for Wolverhampton, South-West mentions quite often. He prayed it in aid in relation to VAT in last week’s debate on the Bill. I do not know whether he has seen Canada’s aspiration for corporation tax rates, which was highlighted in the report produced by Bob Wigley for Boris Johnson. It stated that Canada’s mission statement on tax was that:
“To improve productivity, employment and prosperity in an uncertain world, a bold, new tax reduction initiative will reduce the general federal corporate income tax rate to 15 per cent. by 2012 from its current rate of 22.1 per cent. The general corporate income tax rate will decline by 7.12 percentage points between 2007 and 2012—giving Canada the lowest overall tax rate on new business investment in the Group of Seven (G7) by 2011 and the lowest statutory tax rate in the G7 by 2012.”
That is a very clear statement of intent from the Canadian Government about the direction of travel, and I am sure that people thinking about the relocation of businesses will take it into account.
Mr. Timms: For completeness, will the hon. Gentleman confirm that the separate provinces of Canada charge additional tax?
Mr. Hoban: Indeed, and that is why I carefully quoted the report, pointing out that the quotation related to the general federal rate. The report flags up the scale of the reduction—7 percentage points—in the federal rate of tax. The Canadian Government believe that that will provide the lowest overall rate of tax on new business investment in the G7, which is a clear statement of direction. In thinking about how economies move out of recession and plan for the future, countries that can afford such tax changes will think very carefully about making them.
Mr. Timms: The hon. Gentleman is extolling, I think, the advantages of a country having the lowest corporation tax rate in the G7. Is he now confirming that he believes, contrary to what he said earlier, that that is a good thing?
Mr. Hoban: I am not taking a position on where we should be in the league tables. I am saying that other countries are looking at how they can use their headline rate of corporation tax as a tool, to use the words from Canada, to
“improve productivity, employment and prosperity in an uncertain world”.
I am not suggesting that a target should be set for the UK’s headline rate of corporation tax; I am just pointing out to the Committee that it is an important tool that countries use to attract and retain businesses. We must be mindful of that when thinking about overall tax policy in the UK.
I believe that there is a consensus on this issue. The Prime Minister said last year at the Institute of Directors conference:
“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.”
I shall come to how we can pay for that in a second, but I shall wait until the hon. Member for Taunton returns to his place so that he can hear that bit of fiscal prudence.
The Financial Secretary might remark that the Government have taken some measures to reform the taxation of foreign profits. I acknowledge that, although it has not been an entirely straightforward process and the Government have had a couple of consultations to attempt to get the right structure in place. The sense from industry is that that is now broadly in place, but no one should say, “The job is done, we have dealt with this issue, let’s move on to something else.” The listed publishing group Informa moved its tax domicile from London to Switzerland not long after the Budget, once it knew broadly what the shape of the taxation of foreign profits would be. We therefore cannot afford to rest on our laurels in any way, and that is why I tabled the amendment.
Given the Government’s dire fiscal position, I appreciate that the room for manoeuvre is limited. When borrowing this year is £175 billion and next year’s forecast is for £173 billion, there is not much money left in the kitty to cut the burden of taxes. That is why the package we propose today is cost-neutral. We have long made it clear that our reforms to the headline rate of corporation tax, reducing it from 28 per cent. to 25 per cent., will be funded by simplifying reliefs and allowances. [ Interruption. ] Right on time, the hon. Member for Taunton returns. We will bring the rate of capital allowances more closely into line with the accounting measure for depreciation, which is meant to reflect the deterioration in value of assets over their life. That is how we will fund the package of reforms. We set out that position clearly when we announced the policy, and we will continue to use that approach of funding changes in the headline rate of corporation tax by simplifying the tax system and trying to align the accounting and tax definitions of profit more closely.
Rob Marris: I am rather bemused by the hon. Gentleman’s explanation of the cost-neutrality, which makes it sound as though the amendment were mere window-dressing. It will not remove any tax burden on UK-based businesses if, taken as a whole, the package is cost-neutral, with counter-balancing increases from the business sector. It sounds like grandstanding and window-dressing.
Mr. Hoban: The hon. Gentleman cannot have it both ways. He must either accept that our proposal is a funded tax package, or believe that it is grandstanding, which will do nothing for business. He can criticise us for one or the other, but just one at a time.
Rob Marris: I thank the hon. Gentleman for his generosity in giving way. On the projections for corporation tax this year—I do not say he accepts those figures—the amendment would cost the Exchequer £3.7 billion. If he proposes a cost-neutral package, the £3.7 billion will be raised from businesses through other mechanisms—for example, changes in allowances. How would the amendment, as part of such an overall package, have any effect on whether a company decided to relocate to Switzerland? A company would examine the total tax burden, including allowances, not simply the headline rate of corporation tax.
Mr. Hoban: I do not agree and I shall explain why. The hon. Gentleman argues that there is a clear relationship between businesses that pay corporation tax and those that benefit from capital allowances. He claims that they are alike in their profile, but I do not think that that is the case. The headline rate sends a powerful signal to business about the advantages of locating in the UK. Perhaps some businesses are not interested in capital allowances; that depends on the nature of the business—on whether it is service-oriented or invests more in capital equipment. There is a mixture of incentives, and there will be some winners and losers. However, it is important to send a signal about the direction of travel. There is no money available for tax cuts, so a funded package is the sensible way to send the right signal to business about the importance to us of the UK tax system’s remaining competitive.
Mr. Geoffrey Robinson: The debate is interesting. As the hon. Gentleman said, we often had it in the Treasury, and the headline rate seems attractive. However, as my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) said, the tax burden remains the same. Will the hon. Gentleman bear in mind the massive impact of £3.7 billion a year on capital allowances? It cannot simply be dismissed as a compensating factor. The problem with much of British industry, particularly the manufacturing sector, is the UK’s persistent tendency to under-invest in capital. Increasingly, we say that we will have cheaper and more flexible labour and we chase that market down, but it does not get us anywhere. Let us consider what the Germans have done. Germany is the biggest exporter in the world. Its manufacturing sector is strong because of its continuing capital investment in its industry. By how much would the £3.7 billion a year reduce capital allowances? Has the hon. Gentleman taken that into account? Can he give us that figure?
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Mr. Hoban: According to some examples, the general plant and machinery capital allowance will be about 12.5 per cent., and the long-life plant and machinery capital allowance will be about 6 per cent., bringing them more closely into line with the accounting rates of depreciation.
Mr. Robinson: Bringing those allowances into line with depreciation is no good at all. That means we will barely be investing at the replacement level, which was one of the big problems with the old General Electric Company. Tight though Lord Weinstock’s controls were, investment often ran at less than the depreciation rate. Manufacturing is a bit more in the spotlight now—rightly so, I think, and not just because I represent a manufacturing constituency in Coventry, in the west midlands—and it is regaining importance, given the imbalance that the collapse in the financial sector has caused, which we need to remove. However, having a target to drive capital investment down to the level of depreciation is a suicidal policy.
The Chairman: Order. We are beginning to lose track of who is making the speech and who is making an intervention. Let us try to keep interventions in proportion.
Mr. Hoban: I am grateful to the hon. Gentleman for his rather lengthy intervention, because it enabled me to find a quotation. I will not hold a competition with hon. Members afterwards to see whether they know who the author was; rather, I will tell them. The quotation says:
“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 is a good summary of our policy. What particularly pleases me about that quotation is that it is from the Treasury, from a document entitled “Business tax reform: capital allowance changes”, a technical note from December 2007. Clearly, the debate has moved on since the hon. Gentleman was sat around the table watching TV with the former Chancellor—wherever he watched TV.
That is why I said what I said earlier, when I teased Government Members about there being a consensus on the issue. The Treasury recognises the power of the argument. Indeed, the hon. Member for North-West Leicestershire (David Taylor), who is a great campaigner against the tax gap, will be very concerned about distortions in the tax system that led to particular types of behaviour. I just think that the hon. Member for Coventry, North-West should be a little more careful not to state the Government’s case too boldly.
Stewart Hosie: Is there not a slight paradox, given the argument being made? Only last year, there were significant changes to plant and machinery allowances and a massive reduction in industrial buildings allowances, which was commented on at the time. I am pretty sure that the arguments made by the Government on that occasion were rather different from those that we have heard this afternoon.
Mr. Hoban:
Indeed. I am pleased that the hon. Gentleman, who is a fellow veteran of previous Finance Bill Committee proceedings, has reminded me of that.
We have had debates in Committee about reformed capital allowances before. The Financial Secretary and I had a debate about the abolition of the industrial buildings and agricultural buildings allowances. [ Interruption. ] The Minister says from a sedentary position, “You were against it.” We argued that the issue should be explored in more detail—so that the competitive impact could be considered—and that the Government had rushed into things without proper thought.
There are issues on both sides of the argument, although I take on board the important comment that the hon. Member for Coventry, North-West made about manufacturing. I know from my experience of visiting manufacturing companies in my constituency that compete at the top end, producing high value-added items that compete with the best—that is, if they are not the best in the world themselves—that there is a mixture of plant in those operations. There are some very old, faithful bits of kit in those factories, as well as some very new, modern equipment. It has been pointed out that the life of some of the more modern pieces is quite short, in relation to their contribution to the top end of manufacturing, and that they might therefore require a shorter depreciation period and a steeper write-off. We need to think about that.
I do not wish to stray too far from the subject, Sir Alan, but one issue that has emerged from the economic crisis is the need to broaden the base of British business, and manufacturing is important in that regard. We must be mindful of that. We are not blind to the concerns expressed by the hon. Member for Coventry, North-West, but we do not want to see distortion in the tax system.
Mr. Robinson: Distortion in the tax system is one thing, and we have had the arguments about neutrality. I am sorry that I was not at the previous meetings of the Committee. May I just plead that we do not build into Conservative thinking the idea that the Treasury or the Department for Business, Enterprise and Regulatory Reform have ever had the policy—which the hon. Gentleman is now adopting—of reducing capital allowances down to the bare minimum of depreciation? That cannot be a proper theoretical or practical position to take up.
Mr. Hoban: This is about trying to reduce distortions in the tax system to ensure that decisions are not being driven by tax considerations. The rate of the capital allowance is a cash flow issue. Over the life of an asset, a business will get full relief on that asset, assuming that it uses it until it is scrapped. It is a question of timing as to when that relief arises. I am sure that, at a later stage in Committee, we shall have a debate about the 40 per cent. first-year allowance being introduced in the Bill. Perhaps such a measure is right in a crisis, but for the purposes of the long-term reform and simplification of corporation tax, we need to look at reducing the distortions in the system.
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