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It was not just the change in rate that the Government considered as a means of tackling the issue of incorporation. They introduced a raft of rules on managed service companies in the 2007 Finance Act, and conducted a long consultation on the shifting of income between husband and wife, which, as far as I can see, has been kicked into the long grass. However, I think that we
need to learn the lessons of the original rate change policy. I think that it was misconceived. It triggered certain types of behaviour that the Government have sought to crack down on, and introduced a new complexity into the tax system. It is a sign of the uncertainty and unpredictability in the tax regime for small businesses.
Lembit Öpik (Montgomeryshire) (LD): I accept that the hon. Gentlemans amendments seek to achieve specific ends, but does he more generally feel that, notwithstanding the current debate, we need to have a root-and-branch review of the complexity? That complexity does not help either tax gathering or small businesses. Businesses are burdened by an unbearable cost in time and effort because of the opacity of the system, but a more streamlined version would help both them and the taxman.
Mr. Hoban: The hon. Gentleman makes an important point: we must have a less complex system. The Chancellor of the Exchequer made a commitment to simplify it when he was appointed to the post. I do not know whether the hon. Gentleman is auditioning to take part in the Public Bill Committee, but if he were he would notice that in the Bills index there is the sub-heading of Simplification, listed under which there are only three clauses out of a total of 126. Therefore, although everyone aspires to achieve simplification, it is clearly hard to deliver. I know that complexity is an issue for the people who run small businesses; that was raised with me on Friday, when I was talking to small businesses locally.
Lembit Öpik: I am grateful to the hon. Gentleman for his concurrence with my view, but for the avoidance of doubt let me make it clear to my party Whips that I am absolutely not auditioning for the honour of serving on the Public Bill Committee.
Mr. Hoban: I am grateful to the hon. Gentleman for his comments too, but I hope that that is the end of them, as his party colleague, the hon. Member for Taunton (Mr. Browne), was very critical about the length of an earlier speech of mine, which was the result of my being overly generous in taking interventions.
I have talked about the need to look at the direction of travel of the small companies rate, and about whether holding the figure this year at 21 per cent. is a permanent feature or whether it is the Governments intention to move to 22 per cent. next year. Many small businesses are finding the current economic crisis very difficult. In October of last year, John Wright, chairman of the Federation of Small Businesses, wrote an open letter to the Prime Minister under the heading,
Help or the UK will crumble.
In the body of the text, he implores the Government to implement Conservative proposals to reduce the rate of corporation tax for small businesses; amendment 2 would reduce the rate from 21 per cent. to 20 per cent. Not only is that a Conservative policy, but Mr. Wright clearly hoped that the Government would introduce it in the Budget. This is what Mr. Wright said after the Budget:
In what has been the most crucial budget in decades, the FSB is disappointed that small businesses have been largely ignored.
In an FSB survey, when its members were asked if this was a Budget for small businesses, 68 per cent. said no. When asked if it would have a positive effect on their business, only 7 per cent. of respondents said yes. A survey conducted by the Forum of Private Business came to a similar conclusion: 97 per cent. of respondents said nothing had been done to ease the burden of costs that they face, and 94 per cent. felt that the Budget did not address the issues threatening the survival of their businesses.
The Chancellor forgot that small businesses exist. He also forgot that one in five households in the UK derives its income from small businesses. He also forgot that nearly half of all employees in the private sector are employed by small businesses. In fact, the Chancellor forgot a lot of things.
One way in which we can help small businesses is by reducing the headline rate of corporation tax for small companies from 21 per cent. to 20 per cent. As with the measure proposed in amendment 1, this is a funded tax cut. I know that the modesty of it will upset the hon. Member for Taunton, but it is the prudent thing to do at present. Again, we will fund the reduction in the small companies rate through simplifying the capital allowances system.
Earlier on, we engaged in debate about the competitiveness situation for small businesses and how the UK tax regime compares with those of other countries. According to the OECD, our small companies tax rate is significantly higher than that of the US and France, whose rates are 15 per cent. Earlier in the debate, the Government were very keen to highlight that the UK mainstream corporation tax rate was one of the lowest in the G7. Clearly, however, as the US and Franceand, indeed, Canadahave lower rates of corporation tax for small companies, we are out of kilter with other countries. My hon. Friend the Member for Henley (John Howell) will be interested in the Canada comparison, and I am sorry that the hon. Member for Wolverhampton, South-West (Rob Marris) is not present to hear about it, although I am sure he will pick it up later. We need to ensure that both the main rate of corporation tax and that for small companies are competitive.
The measure proposed in amendment 3 is very straightforwardor at least I thought it was when I tabled an amendment last year reducing the fraction concerned to one fortieth, only for the Financial Secretarys predecessor to point out that that fraction was based on the corporation tax mainstream rate being 30 per cent. I have therefore gone back to my calculator, and it is my belief that the fraction should be one fiftieth, under which there would be a very smooth transition for businesses whose profits exceed £300,000, which is the upper threshold for small companies until they reach the full rate for large companies of £1.5 million. I hope the maths of that work. If the House were to agree to amendment 2, then amendment 3 flows logically from that. In our amendments, we both reduce the rate concerned from 21 per cent. to 20 per cent. for small companies and we have got the right fraction.
May I pre-empt the hon. Member for Taunton in his comments on his amendment 6? I was intrigued by it, and I wish to flag up my understanding of it. The
intention appears to be to give further tax relief to small companies based on the rateable value of their premises. Does that not create a risk of giving highly profitable businesses relief simply because they might work from small offices? I am not sure whether that is the hon. Gentlemans intention, but I am sure he will explain the situation at greater length.
The thrust of taxation for small companies has been disjointed over the past few years. The Government saw it as a spur to enterprise when they introduced the zero per cent. rate back in the 2002 Budget. They then decided that that led to all sorts of inappropriate behaviour and, sadly, by increasing the rate of tax from 19 to 22 per cent., have started to penalise businesses that fall under the definition of small companies but that are not an alternative to being self-employed or employed. I see the emerging danger that we are penalising those small companies that have not sought to incorporate to take advantage of the tax rules, but that incorporated for the right commercial and legal reasons. They are being penalised because of a flaw in the Governments thinking back in 2002. I do not believe it is appropriate for that to continue. That is why I propose this cut in the small companies rate from 21 per cent. to 20 per cent. That, again, will be funded through a reduction and simplification in capital allowances. I hope that the House will support amendment 2.
Mr. Jeremy Browne: I am grateful for the opportunity to contribute to this part of our deliberations. I say at the outset that I was not criticising the hon. Member for Fareham (Mr. Hoban) when I said his proposals were modest: I was praising him, and it is precisely because of their modesty that I feel able to support them. If they had been unfundedthe right hon. Member for Wokingham (Mr. Redwood) suggested that we consider such a situationthat may have given us greater difficulty, given the overall state of the public finances.
That leads me neatly to this proposal, which, after all, is largely an extension of our discussion on the previous clause. However, as it is slightly different, I shall speak at slighter greater length to it. According to the Federation of Small Businesses, there are 4.7 million small businesses in the UK, a remarkable 97 per cent. of firms employ fewer than 20 people, and 95 per cent.19 out of 20 companies in the United Kingdom; I am not talking about 19 out of 20 employeesemploy fewer than five people, so the overwhelming majority of businesses and enterprises in this country are extremely small employers. More than 500,000 people start up their own businesses every year, small firms employ 58 per cent. of the private sector work force, 13.5 million people work in small firms, small firms contribute more than 50 per cent. of UK turnover, and 64 per cent. of commercial innovations come from small firms.
I rehearse those statistics because it is clearthis point is made so often that it is a truismthat small enterprises are extremely important to wealth creation and employment opportunities. Thus, it is important that we regard them as being a distinct entity for corporation tax purposes. That point is widely accepted, which is why the Government have a different rate for them. For the same reasons that I cited in our previous discussion, we think that stability is important. If the Government
are not going to cut rates, it is good that they at least indicate that there will be stability and that the rates will be frozen, and seek to convey to businesses the understanding that the situation will endure, even though it is not necessarily in the gift of the Government to guarantee that, as clearly it is not for a longer time scale.
That statement of intent is helpful because it allows businesses to plan. However, it remains our view, as it was when we discussed the previous clause, that simplicity has a virtue and that our trying to reduce headline rates helps companiesas my hon. Friend the Member for Montgomeryshire (Lembit Öpik) said, it helps in terms of their administrative burdenand creates the right message for those looking to start businesses or invest in this country. For those reasons, and because I have the assurance of the hon. Member for Fareham that the Conservative proposal is costed and responsible, as I like proposals to be, it is reasonable to support it.
Amendment 6, which stands in my name and that of my colleagues, was an attempt to provide additional assistance. In an effort to be open-minded and generous-spirited, may I say that I take the hon. Gentlemans point that there are potential difficulties with the system I am proposing? It is difficult to frame amendments that cover every eventuality, because the nature of the process is that amendments have to be reasonably brief. We seek to give further assistance to particularly small businesses, which may benefit from that help, given that, as I was saying, 95 per cent. of businesses in the United Kingdom have five or fewer employees.
David Taylor: I am a big admirer of the FSB and I use its website and services from time to time. Has it said whether there is any correlation between rateable value and profit? Why would it be sensible to use as a proxy for a definition of small businesses something related to rateable value? Far better measures could be used, particularly for organisations and small businesses that are devolved in an electronic sense through good numbers of people working from home. How would that be handled?
Mr. Browne: One might seek to give the greatest encouragement to precisely those businesses. I take the hon. Gentlemans point, and my doing so relates to the concession I was making only a moment ago; I only regret that he did not take the opportunity to table an amendment that he felt would be more effective in assisting the businesses I am trying to help. I think there is broad agreement on the overall point that small businesses contribute substantially to the UK economy, and it is very much in our interests that that be recognised in the tax structure.
Mr. Hoban: The hon. Gentleman makes an important point about recognising the importance of small companies in the tax structure, but could he elaborate a little more as to the nature of his amendment and the relief that would be granted to businesses that fell into this category? Is he talking about a 10 or a 15 per cent. rate of corporation tax for those businesses? It is not clear where his thinking is heading on the additional relief that would be offered to them.
Mr. Browne: There would be an additional saving to such businesses, and it would depend on the rateable value of the premises. An assessment would have to be made of that rate, and the saving would accrue at that point. Even if you propose to let me press my amendment to a Division, Mr. Hood, I do not intend to do so; I was seeking to make the point that there is merit in the Conservatives proposal. I did not think it necessary to table an identical amendment, because I am more than happy to give my partys support to their suggestion. I was seeking to explore ways in which we could help particularly small companies that may benefit from additional assistance. If people feel there are multiple ways in which that can be achieved, I am open-minded on the matter and I hope that those will emerge during this debate and our deliberations in Committee.
Mr. Hoban: I am not sure how my hon. Friend defines seniority, but could the hon. Gentleman make his point a little clearer? He talked about the relief in relation to rateable value, which gave me the impression that he was talking about a reduction in the business rates a small business would pay, as opposed to a reduction in its corporation tax bill. He left hanging in the air the question of what sort of relief he means in practice.
Mr. Binley: It is. We should recognise that the seniority to which I referred was with regard to pecking order, rather than anything else. I welcome the general thrust of the hon. Gentlemans proposal; there is a need for a more graded relationship to corporate taxation, particularly for micro-companies. He has the good will of the Committee in this respect, and I hope that the Government will take that on board. The proposal does need defining further; introducing rateable value creates a more clumsy arrangement when matters need to be simplified.
I am grateful for the hon. Gentlemans intervention, because it perhaps gave the response that I may have sought to give to his Front-Bench colleague. I hope that the Equality Bill, which we debated yesterday, will address any issues he may have about seniority and discrimination in terms of pecking order. The intention behind amendment 6 was not only to say that the proposal to cut the headline rate had merit and that additional simplicity had virtue; it was also to consider whether, through this method, we could grade matters further and target specific assistance on particularly small companies such as start-up and IT companies, which have been mentioned. There is probably a feeling that this may not necessarily be the best method, but
that there is some merit in trying to think along those lines. This has afforded me the opportunity to make that point.
On the lead amendment, while I welcome the Governments intention not to increase the rate, we think there is scope for decreasing the headline rate, based on tax-neutral assumptions and simplification of the system as a whole.
Mr. Binley: Of all the things the Government have done in recent months, one of the worst was to increase corporate taxes for the small business sector. The timing of this proposal has been disastrous, and the Governmentand many of their supportersrecognise the problems. The increase has had a depressing effect on small businesses. It has prevented entrepreneurs from starting businesses, and it has certainly stopped small businesses growing. We need to change that situation, and amendment 2 would help to do that. That is why I am so keen that it should be accepted.
My main point concerns the importance of retained profit to small businesses. Retained profit is the very essence of their growth and survival. Small businesses tend not to have loans or be involved in over-complicated financial supportthey simply have an overdraft. Therefore, the amount of money left at the end of the year is a vital consideration for their future growth, and to their protection against bad debt. That is particularly relevant at this time. For small businesses, cash is king and the more that the Government take in corporation tax, the less small businesses have to survive. The objective of most small businesses is simply to be here next year, and the Government could help enormously by accepting the amendment.
The amendment would also help businesses looking to grasp the opportunities that will be provided by the green shoots when they come. I hope that the Chancellors projections are right. I want to see the green shoots sooner, rather than later, and a cut in corporation tax would better prepare small businesses to exploit those opportunities. I do not need to tell the Government about the growth opportunities in small business, as they have been well proved. The creativity of small businesses is very valuable for this country, and we need to have them in situ to support the supply chains for our bigger plc companies. However, they will not be in situ if they do not survive, and we will lose that infrastructure. The amendment would be a small measure to encourage small businesses, because it would give them more cash at the end of the year, which would help their survival and their growth when the recession ends.
Mr. Hoban: My hon. Friend will know from his experience running small businesses about the impact that the Governments change in their approach to small business taxation has had. From his viewpoint, have the frequent changes over the last few years damaged the willingness of those businesses to invest and plan for the long term?
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