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We have had a wide-ranging and thorough debate on the amendment about reducing the headline rate of corporation tax. It was interesting that the Minister acknowledged the fact that, in the Finance Act 2008, the Government were able to fund a reduction in the headline rate of corporation tax by simplifying the allowances. We discussed the reforms to the industrial buildings allowance and the agricultural buildings
allowances in Committee. There is therefore a track record of using the proceeds of simplifying capital allowancesthat is, reducing the ratesto fund reductions in the headline rate of corporation tax. Our view is that we could go further and reduce the rate to 25 per cent.
My right hon. Friend the Member for Wokingham (Mr. Redwood) was acting in his customary role as a critical friend, supportive of where we had moved so far, but perhaps keen for us to move further in the direction of reducing the headline rate of corporation tax. My other hon. Friends cited their business experience in talking about competitiveness and about what businesses bear in mind when locating activity.
Mention has been made of the way in which Governments focus on tax as a means of competing, and I think that more reference was made to Canada in todays debate than perhaps at any time since it was a dominion and part of the empire. It was good that my hon. Friend the Member for Henley (John Howell), a former tax inspector, joined the hon. Member for Wolverhampton, South-West (Rob Marris) as an aficionado of Canada and a spokesman on its behalf.
We discussed the fact that Canada has a federal rate and provincial rates of tax. I note that the OECD figures suggest that it has a combined rate of 33.5 per cent. If Canada were to achieve its aspiration of reducing the federal rate by 7 per cent., that would bring its combined rate down to 26.5 per cent., which is below the present UK tax rate. If the Minister is keen to match the Canadian rates, some progress clearly needs to be made.
We discussed the impact of the proposal on capital investment and the possible reaction of businesses to it. Part of the problem that we need to address is the fact that the structure of capital allowances has been so unpredictable in this country. That has made it difficult for businesses to factor into their plans an understanding of what the capital allowance rate might be. For example, businesses planning on the basis of a 25 per cent. writing-down allowance might be surprised to find that there will be a 40 per cent. first-year allowance for this year only. The extent to which that provision will create an incentive for businesses to invest this year is unclear. Many businesses with a longer planning horizon might not be able to respond to such a short-term incentive.
It is important to have predictability so that businesses can make their plans. That is one reason why we are so keen to flag up our intention to reduce the headline rate of corporation tax, and to fund that reduction through a reduction in the rate of capital allowances. The broader economy would gain huge benefits from moving to a lower headline rate. Such a move would send a clear signal to inward investment that this is the place to come for lower corporation tax rates.
Such a move would also tackle the issue of businesses moving out of the United Kingdom. I think that my hon. Friend the Member for Poole (Mr. Syms) was impressed by my lengthy list of businesses leaving the UK. Part of the problem is that, when the first few businesses moved, it was newsworthy and people paid attention, but subsequently, a stream of businesses leaving have left. It has become more commonplace and less noteworthy, and people now accept that it is happening.
But the fact that it is less newsworthy does not mean that it is less important for us to take action.
The Financial Secretary to the Treasury talked of several firsts. He said that the UK was the best place for tax compliance and the best place for VAT, but let us not forget our other first. We also have the longest tax code in the world. We beat India by a country mile in that regard. International comparisons do not always work in our favour.
It is important for Britain to have a competitive tax rate. It is important for inward investment, and for strengthening the economy to make Britain a place where people want to do business. This proposal is only one part of a series of reforms of the corporation tax system that would lead to a better system for business in this country, but it is important that we send a signal that this is something that we are committed to. That is why I shall press the amendment to a vote this evening.
(1A) The Treasury may by regulations provide for the introduction of a very small companies relief from the small companies rate under subsection (1) for businesses with a rateable value of less than £25,000.
Mr. Hoban: Having engaged in a helpful and thorough debate on amendment 1, relating to the main rate of corporation tax, we must now deal with the small companies rate. Amendment 2, tabled by me and by two of my hon. Friends, seeks to reduce the headline rate from 21 per cent. to 20 per cent., while amendment 3 seeks to change the fraction from 7/400 to 1/50. I shall say more about amendment 3 a little later. Many of the points made during our debate on amendment 1 about the unpredictability, complexity and uncertainty of the corporation tax system apply to small companies as well, but in the case of small companies there is a more pressing issue.
There is a little bit of history attached to amendment 2. There has been a long-running debate in Government about the taxation of small companies, and about what tax rate has been appropriate. When I first served on a Finance Bill Committee as a Back Bencher in 2002, the then Chancellornow Prime Ministerhad proposed a zero per cent. corporation tax rate on profits of less than £10,000. What the Government said at the time suggested that they saw the proposed rate as a spur to enterprise which would reinvigorate British business, but that rested on a key assumption which was misplaced then and which, in a sense, has led to some of our present problems: the assumption that only companies were entrepreneurial. That assumption ignored the contribution that can be made by partnerships and other unincorporated businesses to the dynamism of the British economy.
The flaw in the Governments proposal was that it did not merely overlook the fact that other types of business organisation could be equally dynamic, but triggered a behavioural change. A raft of unincorporated businesses became limited companies, because a gap had opened up between the rates of tax that would be paid by, say, a
plumber, depending on whether he was employed, self-employed or a limited company. I believe that it was adequately flagged up at the time that that would happen.
David Taylor: I recall the decision and its implementation, and I recall the massive wave of incorporation that took place. It was not one of the best decisions that we have made in government. Does the hon. Gentleman agree with meand, indeed with most management consultantsthat, in the context of the framework for business, the decision whether to incorporate should never, or at best very rarely, be made for fiscal reasons?
Mr. Hoban: That is an important question. It returns us to what was said earlier about distortions in the tax system, and about attempts to persuade people to make decisions that reflect commercial realities rather than being driven by tax considerations. A difficult position arose. Very small businessesone-man bandsbecame incorporated in order to take advantage of the fiscal position, which I believed was a flawed decision. I argued at the time that it would lead to a wave of incorporations.
The problem is that small companies are not measured in terms of numbers: in terms of whether they have one employee or two, three, four or five. They are measured in terms of the amount of profit that they make. On the one hand, there is the wish to create a level playing field for the plumber, the carpenter, the engineer and the IT software support worker, while on the other hand there is a range of businesses that are also incorporated and that are much bigger. In the latter case, the decision to incorporate was probably made on grounds of logic or to admit liabilities.
What is happening now, however, is that larger companies that nevertheless fall within the profit threshold for small companies are paying the price of the Governments early mistakes. Following the introduction of the zero per cent. rate in 2002, the Government saw what was happening and responded by introducing such measures as a higher tax charge on distributions. Gradually, a point was reached at which, rather than piling complexity on complexity, the Government decided to increase the small companies rate of corporation tax in an attempt to narrow the gap between the rate paid by people working by themselves as small companies and the rate that they would pay if they were employees or self-employed.
In 2007, the Government finally decided that enough was enough. They scrapped the system, and introduced a 19 per cent. rate. They then set out to increase corporation tax for small companies by 1 per cent. per annum until it reached a top rate of 22 per cent. This was meant to be the year in which it would reach that rate, but, in the light of the current economic circumstances, the Government decided to put the increase on hold. Let me ask the Minister a question that I asked on Second Reading last week. Can the Government give any indication of whether they intend next year to raise the rate to 22 per cent., and to continue on that upward path?
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