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In so doing, we should consider reducing the headline rate of corporation tax. That would send a clear message to businesses, which are fed up with the complexity and distortions in the tax system. A lot of the tax planning that takes place is a consequence of the distortions that are built in to encourage particular types of behaviour. A less complex, more straightforward system would yield benefits to the economy as a whole and make it
more attractive to inward investment. Companies compliance costs would also be reduced, and my old employer, PricewaterhouseCoopers, might not get quite the same revenue flow from tax planning as it had in the past. That might be a price worth paying, however.
I have spoken for rather longer than I hoped to, but the Committee will be pleased to know that I have almost completed my remarks on this subject. It is important for Britains competitive position in the global economy that we have a corporation tax regime that is fit for purpose. Part of that can be achieved through tackling complexity, improving predictability and certainty, and having a proper consultation process in place. A fundamental part of the package, however, is to reduce the headline rate of corporation tax.
The amendment is part of a package that would ensure that the measure was cost-neutral. Regrettably, I cannot table amendments that would increase the tax take, so I cannot propose the flipside to this package, which would change capital allowances. However, we have set out a clear package of measures to reform corporation tax, in order to improve the competitiveness of the UK economy. As we look beyond the recession, we need to ensure that we are competitive not only with the G7 but with other global economies, so as to make the best of the advantages that we have, to broaden the base of the economy and to bring wealth and prosperity back to the UK.
Mr. Geoffrey Robinson: Having been lucky enough to catch your eye, Sir Alan, I wish briefly to revert to the question of effectively reducing the capital allowances, which would come into effect in year one. Given the recession and its likely progression, immediate cash-benefit to companies is the very thing we need at the moment. Despite the seeming good news today, I think we all know that we are still in a precarious position and should not take anything for granted. The real need is for cash flows to companies now, so reducing capital allowances at this point in time would hit the very thing we need for the future, which is investment. The timing is particularly perverse.
Apart from the wrong timing, we would be hitting the very area where we are already weakest, and the hon. Member for Fareham (Mr. Hoban), who led for the Opposition, should realise that. We already have a relatively low depreciation charge, which arises directly from the fact that our manufacturing sector is weak compared to our main competitors in exports and world marketsIndia and China, for example, are taking the lead on many consumer goods. Where we have to compete, we already have a low depreciation charge arising from our relative under-investment over the years, so driving it down still further would hit the very sector that most of our policies should be directed at improving.
Mr. Redwood: Is the hon. Gentleman aware that the parlous plight of British manufacturing today means that a very large number of otherwise very good companies are loss-making, so his case in the short term falls?
If they are loss-making, they are not going to benefit from a reduction in corporation tax. That is the whole point. They are losing money in part because of under-investment but mainly because of the
world situation. The right hon. Gentleman has, surprisingly, made precisely my point for me. In the short term, those companies will not benefit from any reduction in corporation tax, so we should be trying to get them what they need by securing money for them from the various schemes that have been announced. Of course, I am the first to acknowledge, in front of the Secretary of State for Business, Enterprise and Regulatory Reform, that we have been slow to get those schemes off the ground. The Conservative party offers no help, however, by suggesting that we have £50 billion in our pockets and that it be should doled out to anybody who wants it. That is not serious.
I put it to the hon. Member for Fareham that what he proposes is wrong. I accept that getting the headline rate down is important, and the first thing we did in government, if the hon. Gentleman remembers, was to introduce a whole range of tax changes, including moving to a new system of corporation tax and other measures. Of course, we reduced the headline rate of corporation taxit was the first thing we did in our first Budget. I do not underestimate the importance of that, but it is important that we send the right signal and timing is so important. It is no good sending a signal at the wrong time. No one is coming here to invest at the moment. However well we are doing in other respects, the important thing is to get money to the worst-hit sector at the moment, which is manufacturing.
I highlight the manufacturing sector, because, despite the dire forecasts of the City of Londonthe right hon. Member for Wokingham (Mr. Redwood) knows far more about that than I will ever know; indeed, he has probably forgotten far more than I will ever know, and probably to his own benefitcomparatively speaking, the City has not been so badly hit. Not yet, at any rate, so the losses are occurring where they always occurin my own area, that of my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) and that of my right hon. Friend the Secretary of State for Business, Enterprise and Regulatory Reform [Interruption.] Yes, in the area of my hon. Friend the Member for Walsall, North (Mr. Winnick), too.
In sum, now is the wrong time and this is the wrong target. The Conservatives should reconsider and put off their proposal. In fact, I know that their proposal to reduce capital gains is not remotely seriousit is a talking-point, and quite a good one in a way. However, I believe, Sir Alan, that now is not the time and what is offered is directed at the wrong target. The amendment should not be pressed and we should not accept it.
My hon. Friend the Member for Fareham (Mr. Hoban) has been quite right to say that a lower headline rate of tax could be very important in attracting more business to this country. I think he could have added that it will also affect the judgments of quite a lot of multinational businesses that already have some representation in Britain but have options over where they could carry out their various activities.
Quite rightly, it is not legal for a company to fiddle its transfer prices by suppressing profit in a high-tax regime in order to allow the transfer of that profit to a low-tax regime by artificial means. Under this and previous Governments, the Treasury has rightly adopted methods of preventing or stopping that practice. It is, however, an entirely legitimate business strategy for a multinational with factories, service areas and operational centres around the world to decide where, at any given time, it is best to allocate particular types of business. Obviously, if a multinational has footloose business of a high-technology, high-value-added, high-growth kind which will produce a high margin and plenty of profit, it will look very carefully at the effective and, especially, the headline tax rates around the world. All other things being equal, it may then decide to put more of its high-value, high-profit business into the parts of the world that offer the most competitive headline rates.
I am sure that, in their saner moments, Treasury Ministers agree that that is the case. They know that it happens and that it is a real possibility now, which is one of the additional reasons why I think my hon. Friend the Member for Fareham is right to press them again on whether they are certain that 28 per cent. is a sufficiently competitive rate at a time when the whole world is hungry for jobs and for higher-technology and high-value-added business, and when there is not enough business to go round and there are not enough jobs to go round.
It is true that our debate takes place against the background of a sharp devaluation of the pound. Such a devaluation has many drawbacks. It makes us all poorer, and it pushes up inflationalthough it has one important advantage in that it makes our industrial and service activity much more competitive in the short term from a British base, which I trust will limit the damage in Britain compared with that in some of our competitor economies. However, we need to think beyond the one-off impact of the devaluation. We need to think beyond the present trough of the recession. We cannot be sure how long it will take, but there will be recovery, and we need to ask ourselves that fundamental question: is 28 per cent. a sufficiently competitive rate at the present time?
The hon. Member for Coventry, North-West (Mr. Robinson) rightly pointed out that the present Government had continued the previous Governments policy of cutting the headline rate. That was very sensible, but I think that they got stuck. I do not think that they realised how rapidly the rest of the world had moved on. In the opening exchanges today, my hon. Friend the Member for Fareham was asked if he recognised that all that we needed was one of the more competitive rates in the G7, and that if we had it we would be all right. Of course we will not be all right. The world has been completely transformed. The Prime Minister accepted that in hosting and chairing the G20. The serious competitive threat to keeping manufacturing in Britain or attracting it to Britain today comes primarily from China and India. It is a serious option for most multinational companies to switch production from the United Kingdom or Germany to China or India. Most multinational companies already have several factories in those countries, as well as having manufacturing
capability in Britain, Germany, the United States or some combination of all three.
The proposal that we are discussing goes to the heart of that issue. Why are we talking about the headline rate? We are doing so because it is the headline rate that people usually use in their simulations, models and forecasts when considering where to put their future investment. They also look at the underlying trend of policy. If, as in Canada, it is clearly a commitment to make the current rate the maximum and to say that in future it will be reduced, that will be a fairly influential factor when it comes to the judgment on the back of the numbers. If people see a Government who face a monumental deficit and who seem to think that it is only possible to secure more tax revenue by raising tax ratesitself a very dubious argument, in my viewthey may well say to themselves that the Government could not be bothered to cut the rate below 28 per cent. although they knew that 28 per cent. was no longer particularly competitive, and that in a years time they, or some other Government, might be forced to put the rate up. That is not a good background against which to make an investment judgment.
I urge Treasury Ministers to think again. I urge them to understand that our prime competitors have much lower tax rates than we have, as well as having lower remuneration and other competitive advantages. I urge them to understand that the big investment players in manufacturing in this world already have capacity around the world, and the ability to switch. I also urge them to understand that we are talking about not just where the new factory goes, but where the work is allocated around the different factories of the world, and that if we allow our country to be perceived as more hostile to businessless competitive in tax and regulatory termswe will start to be on the wrong end of business judgments. The people in the American, Japanese or Chinese multinational will start to say, Well, well leave the old, low value-added, less profitable business in Britain because of the tax rate, and that means that Britain will lose jobs rather than create them, and that, in the end, the British plant will be the one most likely to face the closure notice becausesurprise, surpriseit has the worst business and then it has the worst figures. The people in the multinationals will forget that that particular country has less good factory results because, for tax reasons, they chose to locate a less profitable business in it. Therefore, if countries are not careful, they can find that they are on a very slippery slope indeed.
In todays exchanges, we have already heard Labour Members voicing scepticism about whether the setting of a 10 per cent. rate in Ireland was the reason so much business was attracted there. I can assure Labour Members that, from conversations I have had on account of my work on the policy review and for other purposes, it is clear that the low headline rate of corporation tax has probably been the number one attraction to footloose international businesses in choosing to go to the Republic of Ireland. They did not go there for the European Union grants; most of those were paid to agriculture, which was not a particularly successful sector. They did not go there to join the euro either, because they have to deal in a multi-currency world and what matters to them is the rate into the dollar, the renminbi and the rupee, so the euro is not that important. What mattered to them was that they assumed that they would run profitable businessesand for quite a lot of years,
many of them didand it makes a huge difference to their forecast cash flows on an investment if they are keeping 90 per cent. of them rather than only 70 or 72 per cent. of them with the rest going to the Government. The Financial Secretary is a clever man, and he knows the power of compound arithmetic. The compound effects of taxing at 10 per cent. are so much more benign than the compound effects of taxing at 28 per cent.
I do have one, friendly, disagreement with my Conservative Front-Bench colleagues in that I believe that the Laffer curve worksthey are sitting up and taking notice, Sir Alan. I am trying to make our lives easier, because I believe that this is one of those rare cases where we can have our cake and eat it. I believe that if a country is brave enough to set a lower tax rate, as the Irish were in spades, it can attract a huge extra amount of business, because world business is very footloose and very sensitive to the individual tax rates on offer. The Irish moved from being a lot poorer than the United Kingdom to being a lot richer. At the same time, they moved from spending less per head to being able to spend a lot more on public services because the low rates brought in so much more revenue. Such low rates can therefore have an extremely benign effect, but there is also the reverse effect: if a country allows itself to become too uncompetitive on the headline rate, it discovers that even putting it up does not solve its revenue problem, but can actually make the revenue problem worse.
Fortunately, so far, although we have had a run of companies leaving the country, such departures have been paced out and the Government have managed to suppress a lot of bad commentary on that, but I suggest to them that they should not push their luck any further. My hon. Friend the Member for Fareham produced a partial list of those companies that have gone. There are others as well, and in certain sectors, such as insurance, it is becoming a rush to get to the exit on time. The situation could be the same for some of the higher charging investment management companies, one of which my hon. Friend mentioned. This is a serious problem for the United Kingdom. To those on the Labour Benches who say, Well, we dont want to keep those sorts of businesses if theyre that sensitive to the tax rate and do not want to pay their fair due, I say that that is a very short-sighted view. Businesses are, on the whole, motivated by profit and money as well as by wishing to serve the public, but they know they have to serve the public well to generate the revenuesthat is the dealand if we are too cavalier in our approach to taxing them, we do not just lose the tax revenue they were paying in terms of corporation tax, but we lose the tax revenue they were paying in terms of the tax on their employees, the national insurance and the VAT on the money their employees would have spent in the shops. We lose a great deal of tax revenue if we become too cavalier about where businesses are to be located.
The case is very straightforward: cutting the rate from 28 per cent. to 25 per cent. would send a very strong signal to our international competitors and, more importantly, to international manufacturing investors that this country is serious about remaining tax competitive. I hope that my Front-Bench colleagues agree that a change to 25 per cent. is the minimum that we need to do and that it is not the final resting place. I would be much happier with a rate of 20 per cent., because that
would make a huge statement, would catapult us back to being a place that people talked about as a desirable location for investment and would definitely illustrate the Laffer curveone might say that one would be Laffing all the way to the bank if one was to do that, because so much more business would be attracted and so much more revenue would be coming in.
As a result of these straitened times, my hon. Friend the Member for Fareham says that we should be absolutely sure and pay for this proposal out of removing allowances. That is my second-best optionI would rather just cut the ratebut it makes more sense than doing nothing, because it does take the trick on the headline rate and I do not believe it does the damage that the hon. Member for Coventry, North-West, who is no longer in his place, seemed to suggest. Past corporation tax reforms have cut allowances and cut rates, and they have been helpful and benign; they have usually resulted in more flows of business as long as they establish a competitive international rate that we can work with and of which we can be proud.
I do not think that those on the Treasury Bench are communicating a strong enough sense of the danger to our economy that the current situation represents. Perhaps they are resting on the laurels of the devaluation and perhaps they do not understand how tough the situation is, particularly in the manufacturing heartlands. They are not energetic enough in making the case within government that if we are serious about rebuilding our manufacturing, we need to put in place a package of measures, and this considerably lower corporation tax headline rate would be an important first step.
I would like this country to export more and make more, as that is part of the necessary process for recovery. A lower corporation tax rate would help to do that. I do not despise financial services. I would like us to grow and improve our financial services offering in Britain and keep London as a very important financial centre. That, too, is very dependent on a very competitive corporation tax regime. The Financial Secretary knows that I am not happy with the huge sums tipped into banks, which have grossly distorted the economys adjustment process and have delayed the necessary adjustment in those banks. I wanted to keep them going at a much lower cost.
Of course I did not want the banks to go bankrupt, but it is a disgrace that so much money has been absorbed in them. If we had not wasted all that money in the banks, even the Financial Secretary could have afforded my 20p in the pound proposal for corporation tax, given his view that it does not generate the extra revenue that I believe it does. That option would have been a much better competitive package for Britain than losing billions in RBS and delaying the time when RBS sorts itself out and actually generates some money for British taxpayers and for the Treasury, instead of taking away all the money that we need in order to offer a more competitive package. I hope that the Treasury will also go away and think about squeezing some money out of the banks to make the rest of British business profitable, rather than squeezing the rest of British business to try to buttress the banks.
If one looks at table C6 on page 231 of the Red Book, one sees that the projected receipts from corporation tax for the financial year 2009-10 are
£34.7 billion. The amendment would cut corporation tax by three 28thsfrom 28 to 25 per cent. In round terms, three 28ths of the projected revenues of £34.7 billion is £3.7 billion. If one were to cut our corporation tax rate to the OECD average, which the hon. Member for Fareham helpfully informed us is 22.5 per cent., that would be a five and a half 28ths cut in £34.7 billion, which would be a £6.8 billion cut.
That is not before us tonight. I suspect, from what the hon. Member for Fareham (Mr. Hoban) saidalthough he did not say so directlythat he would not pursue the logic of his position and seek to put the UK at the average rate of the OECD, but cut only from 28 to 25 per cent. That was because he wanted a revenue-neutral package, and that the counter-balancing measures that he outlined to make up for that losswhich I calculated at £3.7 billion, although I appreciate that he does not accept that figurewould come to £3.7 billion. His countervailing measures did not come to £6.8 billion and therefore he could not go the whole hog to cut corporation tax to 22. 5 per cent. When I hear the phrase revenue neutral, it has the same effect as the words efficiency savings and my scepticism meter starts twitching markedly
Rob Marris: I am not saying that it cannot happen: I simply said that my scepticism meter starts twitching. Following the probing and then the speech by my hon. Friend the Member for Coventry, North-West (Mr. Robinson), and the measures that the hon. Member for Fareham said that he was not allowed to table tonight, it appears that the countervailing measures to achieve the other half of this packageto make up for the lost revenues in corporation tax, were that cut to be enactedare precisely the sort of measures that would hit manufacturing.
Parenthetically, I would say to the hon. Member for Fareham that my understanding of the procedure of the House is that he could have tabled his amendments, so that we could have seen them, but the Chairman of Ways and Means would not have selected them [ Interruption. ] Well, there is chuckling from Conservative Members, but it would have been useful to see the countervailing measures proposed. Instead, they were outlined by the hon. Gentleman, and from what I understand, they would hit manufacturing. The right hon. Member for Wokingham (Mr. Redwood) talks about footloose manufacturing companies, but his Front-Bench colleagues favour a tax regime for business that would hit manufacturing. It would be the loser under the countervailing measures and other parts of British business would gain. As a Member of Parliament in the west midlandsmy hon. Friend the Economic Secretary is in his place, and my hon. Friends the Members for Walsall, North (Mr. Winnick) and for Coventry, North-West were here earlierthe current plight of manufacturing is a considerable concern, without changing the tax regime in a way that would make things worse.
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