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5.30 pm
One of the messages to come from our financial problems has been how big some of the banks and international companies are in relation to our economy. We know that people sitting in various capitals around the world look at the various competitive differences of language, productivity and tax; all those things feed in. Although we do not necessarily need the lowest tax, we do not want to tax too much more than our competitors. That is a black mark when people are considering where they are going to invest and to locate their businesses.
Paying for the measure by restricting the capital allowances reliefs is probably right. Most businesses that have to invest in equipment and machinery do so for reasons to do with the business and not because of the tax advantages. The hon. Member for Coventry, North-West (Mr. Robinson) has already told us that there may be an impact on manufacturing. Of course: the pound has devalued against the euro and interest rates have massively reduced. All those things should—fingers crossed—help west midlands manufacturing. So what I have been discussing is a rather good way to go about things.
My hon. Friend the Member for Fareham (Mr. Hoban) mentioned companies such as Google and insurance companies, some of which are moving for regulatory reasons as well as the reason of rate. Such companies are more mobile. Manufacturing can move, but it is a hassle to move a plant; it is easier for an insurance company, bank, investment fund or software company such as Google to move. It is perfectly possible for my hon. Friend to come up with a calculation for amendment 1 whereby the burden on UK business would be the same but the pot might be bigger, because we might retain businesses that would otherwise consider moving—whether to Bermuda, southern Ireland or the Netherlands—and we might well attract businesses in. We have tremendous advantages as a nation. We are creative and hard-working, and the English language is a tremendous asset. That also means that we have to be competitive because a lot
of other people speak English and can compete with us. Reducing the rate from 28 to 25 per cent. by restricting capital allowances and reliefs is sensible.
My hon. Friend made some compelling arguments. At the beginning of this debate he said that five years ago we had the fourth lowest headline rate in the EU and that today we had the 19th lowest. However, as we have heard, our competition comes not only from the EU—let us face it; many EU countries are rich and successful and will get through the problems—but from the whole world. Setting a lower rate is therefore important.
The hon. Member for Taunton (Mr. Browne) made some good points. A simple proposal that is more certain and not as avoidable is far better than having a higher rate and lots of reliefs and allowances. We see the direction of travel, but countries in the rest of the world are trying to get our business. They want to attract our companies, and they are doing so by setting more competitive rates. Unless we respond to that, we will not be defending the wealth, jobs and investment in the UK. We have to look beyond our current economic difficulties. Let us face it—we know that the corporation tax take is going to take a hit and that, even when recovery comes, there will be a lag. However, we also know that international businesses plan on a three, five, seven or 10-year basis. We should therefore plan our economic renaissance on the basis of setting rates to encourage people to look towards the medium term.
Mr. Redwood: Is my hon. Friend worried for firms in his constituency that are part of multinationals given that, at a time when a lot of capacity worldwide will be removed and plants will be closed, too high a headline rate might be what tips the balance against a British plant?
Mr. Syms: There is over-capacity within the car industry, and there will be cutbacks there; and we have already seen bad news from Teesside as regards steel. Many international businesses will be looking to see where they want to expand in future. We face great competition, and the tax rate is one of the things that might encourage people at least to consider staying here at a difficult time. Many of our major manufacturing plants are hanging in there by their fingernails. We hope that we will get through the current problems. However, it is important to send a message in terms of public policy, setting rates and stating a direction of travel if we are to retain people and stop them moving abroad. I was surprised when my hon. Friend the Member for Fareham listed some of the companies that have moved. I was aware of some, but perhaps I am not as glued to the financial pages as somebody who does the Treasury job full time and is a chartered accountant.
The amendment deals with lost revenue to UK plc that could be spent on important alternatives. It is therefore an excellent proposal, and I commend it to the House.
John Howell (Henley) (Con):
I apologise for not having realised that in order to participate in this debate one had to be an expert on Canada, but having returned from Canada only on Saturday morning let me give the Committee the benefit of an update on the situation there. The economic situation was encouraging, as were the conversations that I had with Ministers, including those in the finance team. They had a realistic view of
Canada’s position and direction and were keen to go out around the world and “sell” the country. Canada started with a good situation in terms of its approach to the current crisis. The stock market was doing rather well last week—not that I had time to undertake any speculation—and unemployment was under control.
There is one great difference between Canada and the UK: Canada has a Conservative Government. One of the Committees that I have served on over the past few months considered the Corporation Tax Bill. Nothing new was introduced into that Bill—it was part of a tidying-up exercise; “simplification” was the euphemism used—but the fact that it had some 1,300 clauses shows that we have some problems in our corporation tax system. It was evident that what was required was not just telling the press about closing loopholes but genuine simplification of a regime of allowances and reliefs that interact with each other, are extremely complex and set a very confusing picture for foreign investors who come to this country. It is a shame that the opportunity was not taken to make more of simplifying the corporation tax system as part of the way out of the current crisis.
There is huge scope for simplifying the system even further. For several years, I was an inspector of taxes— [ Interruption. ] I hear cries of “Shame!” from my hon. Friends. I remember that when I first started, all the income and corporation tax Acts could be put into a reasonably small box that could be put into one’s briefcase and taken home. That is no longer so, which is a great shame. Even then, one had to deal with huge areas of enormous complexity, such as transfer pricing.
The Temporary Chairman (Mr. Jim Hood): Order. May I ask the hon. Gentleman to speak a bit more about the amendment as opposed to the generality of corporation tax?
John Howell: Thank you, Mr. Hood. I shall try to do that. That complexity, though, is very much part of the balance that needs to be struck in deciding what reduction in corporation tax is required and how it can be adjusted.
A lot of hon. Members have spoken about competitiveness in reducing the rate, and I endorse the many comments that have been made about the role of a lower rate of corporation tax in encouraging foreign investment into this country. For a number of years, it was very much the UK that set the agenda in encouraging newly developing countries in how they should approach their financial systems and set their own rates. I remember being involved in discussions how the countries of central and eastern Europe, as they emerged, could get the right balance between the rate of corporation tax and the need to bring in foreign investment through other means. That was always a difficult discussion, because countries always want to encourage companies to come in initially through means other than reducing corporation tax. It takes quite a lot of maturity for a country to get to the point of reducing it, as the amendment proposes.
Mr. Redwood: When my hon. Friend was in Canada, did he find people taking great delight in the fact that the UK rate was so much higher than the Canadian rate? Did they believe that that gave them a great competitive advantage?
John Howell: My right hon. Friend is right—there was a certain pleasure in that, although perhaps I should not use the word “pleasure”, as they are, after all, our cousins and still part of the Commonwealth.
Mr. Timms: I may have misheard, but I believe that the intervention was factually incorrect. The corporation tax rate in Canada is higher than that in the UK.
John Howell: I think that my right hon. Friend the Member for Wokingham (Mr. Redwood) was talking about the overall direction in which it was going—at least, that was what I understood.
To return to the example of countries needing to reach maturity to consider reductions in corporation tax, the country that sticks in my mind is Poland, which has reduced its corporation tax rate to 19 per cent. Of course, the UK was very much behind the reforms there in the whole tax and financial system. It is a great irony, particularly given the advice that Poland gave the Prime Minister recently, that Poland was ready to take advice from the Conservatives but the Prime Minister was not. There we have something that will continue in future.
In the businesses that I have advised and examined, there is great attraction to the headline rate of corporation tax.
Rob Marris: May I caution the hon. Gentleman about praying in aid Canada and Poland? He will find that both countries have a rather higher unemployment rate than we do. I appreciate that ours is getting worse and is worrying, but I think that both those countries have higher rates. Canada certainly does.
John Howell: I thank the hon. Gentleman for his intervention. There is always a limit to the use that we can make of examples, but those of Canada and Poland still have merit to the extent that I have indicated.
David Taylor: The hon. Gentleman has rapidly developed a reputation in the House for being a rather more subdued and rational person than his predecessor, which does not take a lot. He says that the direction in which things are going is all that matters. Does he believe that if investors and industrialists were looking at a country with a highish corporation tax rate that was heading down slightly, and at another country with a lowish corporation tax rate that was heading up slightly, a rational organisation or individual would choose the former because the direction was downward? I do not think so.
John Howell: I am not sure whether to thank the hon. Gentleman or whether his remarks comparing me with my predecessor were even a half-hearted attempt at a compliment, but I will take them at face value and hope that I continue to make the gap bigger in his appreciation.
5.45 pm
In my experience of advising companies and Governments about how to set up foreign investment regimes, companies consider the headline rate. They do not look at it on its own, and the comments about not considering it in isolation are correct. However, companies consider the direction in which it is going and are prepared to take a punt on that, and to examine other circumstances, such as the simplicity of the tax system. An incredibly complex system will offset some of the advantages of reducing the tax rate. It is therefore right to proceed with simplification.
Companies examine the whole complex pattern, but I cannot emphasise enough that the starting point is the one thing that one can always grab hold of—the amount and direction of corporation tax. Earlier remarks about considering the whole package are important, but there must be one guiding figure: the rate of corporation tax.
I have done enough of a world tour to my two favourite spots, Canada and Poland. I hope that other hon. Members will consider other countries. As my hon. Friend the Member for Northampton, South (Mr. Binley) said, the middle east is an important area. His comments about attitude, direction, perception and the changes people make are vital because we can be sure that, when the crisis is over, people will not look at the world, or countries’ approach to their tax systems, in the same way. They will look for simple tax systems that focus on the nation’s priorities and reflect the changes in people’s experience when, for example, they examine the amount of debt on the books.
I fully endorse the amendment and look forward to the vote on it.
Mr. Timms: The debate has been interesting. I want to underline the Government’s determination to maintain the best possible environment for business in the UK, help the economy recover from the current downturn and provide the right conditions for long-term growth.
Since 1997, the UK has led the way among its peers in reducing corporate tax rates. We reduced the main rate from 33 per cent. in 1997 to 31 per cent. in 1998, to 30 per cent. in 1999 and to 28 per cent. last year. The UK corporation tax rate has been the lowest in the G7 since the Government were elected in 1997. The rate has consistently come down.
From listening to some comments, one could be forgiven for concluding that the rate had gone up, was going up or was set to go up. It has not—the main rate has consistently decreased. Indeed, we have set a target to maintain the most competitive main rate of corporation tax of the major economies. The hon. Member for Fareham (Mr. Hoban) said that he did not have a target. We do. Our target is to maintain that most competitive rate, and we will continue to assess the case for further reductions in the corporation tax rate, consistent with our wider objectives.
This debate, like many in the past, has been enlivened and enlightened—
Mr. Timms: By the contributions of my hon. Friend, to whom I gladly give way.
Rob Marris: May I take my right hon. Friend back a few sentences? I think that he said that the Government’s aim was to keep the UK’s corporation tax the lowest in the G7. Does that mean that, if Jim Flaherty in Canada achieved his aspiration of dropping corporation tax to 15 per cent., the UK Labour Government would follow that figure on a beggar-my-neighbour downwards approach?
Mr. Timms:
I was coming to precisely the point about Canada, which, thanks to my hon. Friend’s contribution and those of others, has been an interesting aspect of this debate. As I understand the current position in Canada, the rate is 33.5 per cent.—at least for most
companies—compared with 28 per cent. in the UK. However, as we have heard, the Canadian Government have announced an aspiration to reduce that rate and, in due course, for Canada to have the lowest rate in the G7. Clearly, there cannot be two countries— [ Interruption. ] It is possible, I suppose, to have two, if both countries set the same rate. It is worth pointing out, however, that that aspiration was set before the problems in the world economy that we have seen over the past 18 months. There have been big changes in the world economy and Canada may wish to reconsider how best to address the fiscal consequences of the past 18 months. However, our intention—which was set some time ago and which Canada said a little while ago it wanted to emulate or even better—remains, but of course we will need to see what happens.
It is worth bearing it in mind that tax competitiveness is about more than just the headline rate of corporation tax, as has been pointed out. The UK tax system certainly has significant advantages, including a generous and well-developed system of research and development tax credits, relatively low administrative burdens for business, a large tax treaty network and no withholding tax on dividends paid. We are introducing a package of measures in the Finance Bill to reform the taxation of foreign profits, which the hon. Member for Fareham mentioned, enhancing the UK’s competitive position as a location for multinational business. We will debate that in due course.
We in the UK also perform well on other measures, according to the hon. Gentleman’s former employer. In “Paying Taxes”, a publication by PricewaterhouseCoopers and the World Bank, we rank first in the G7 for ease of paying taxes. We were ranked by KPMG last year as the most friendly country in the world for VAT arrangements.
Mr. Timms: I refer the right hon. Gentleman to the authoritative KPMG survey of more than 500 multinational companies that reached that conclusion. The World Bank’s “Doing Business 2009” study ranks the UK sixth in the world. The evidence is clear: we are in a strongly competitive position, and it is important that we should retain that.
Mr. Redwood: If everything is so wonderful, why have so many companies left for tax reasons and why have there been such strong representations in recent months about how hostile the climate now is on tax?
Mr. Timms: The climate is certainly not hostile on tax. Of course it is true that, from time to time, some companies choose to locate elsewhere. It is also true, however, that over a long period we have consistently attracted more foreign direct investment into the UK than any other country in the world, with the exception of the US, and in one year—I forget exactly when; it was three or four years ago—we got more in than the US as well. We have an absolutely stunning record on attracting foreign direct investment, which is a reflection of the strongly competitive character of the UK business environment.
David Taylor:
I am pleased to hear the views of international businesses about the user-friendliness of HMRC. The prompt payment code, which the Government have signed up to, requires the payment of invoices by
the public sector and the Government within 10 days where there is the equivalent of an invoice, such as an acknowledged refund of corporation tax that is due. Is it the case that those payments, which are vital to the continuity of the businesses concerned, sometimes take weeks and weeks, because of peaks of work in the relevant tax offices, which is partly because of cuts in the headcount of staff? That is not good, is it?
Mr. Timms: No, it certainly is not, although I do not agree that our announcements about changing the way in which Revenue and Customs is organised, for instance, would lead to that kind of difficulty. If my hon. Friend is aware of a particular problem, I would be happy to hear about it from him and will gladly investigate. However, he is certainly right that such repayments should be made promptly.
In opening the debate, the hon. Member for Fareham seemed to say at one point that the change could be funded by simplifying taxation. Indeed, it would be a wonderful idea if one could simplify everything and thereby fund the reduction of corporation tax from 28 to 25 per cent. However, as we explored what he is proposing further, the position became clearer. Cutting the rate of capital allowances further could produce an effective rate of tax depreciation significantly below the average depreciation rate used by businesses.
Businesses with good commercial reason to invest would then find the tax system discouraging them from doing so, which would be a very undesirable state of affairs, discouraging investment by sectors such as manufacturing, transport, communications, retail and utilities, and certainly damaging our international competitiveness by reducing investment in those sectors. My hon. Friend the Member for Coventry, North-West (Mr. Robinson) was absolutely right to underline that point with his experience of working in manufacturing. Indeed, my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) made that point as well. The hon. Member for Poole (Mr. Syms) did not think that that mattered, because of other benefits that the manufacturing sector was experiencing. It is certainly true that, for example, the change in the exchange rate over recent months has been helpful for manufacturing. However, he would be very ill advised indeed to rob manufacturing in particular of the significant benefits of the current arrangements for allowances. We simplified capital allowances in the Finance Act 2008 to pay for the reduction in the headline rate. Going further could create serious problems. Indeed, the hon. Member for Dundee, East (Stewart Hosie) was right to query the timing of the hon. Gentleman’s proposition.
I hope that the House will reject the amendment. Nevertheless, I underline the Government’s commitment to maintaining the attractive tax environment for business that we have in the UK, not least through having the lowest headline main rate of corporation tax in the G7.
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