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Mr. Binley: My hon. Friend makes a vital point. Many small businesses that were thinking in the longer term have ceased to do so. Many of them are simply looking to the next six to nine months in the hope that they will still be around. As I said, cash is king, and the amendment would provide a little more cash for such
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businesses at the end of the financial year to enable survival, after which they can think about growth. They have to survive first, and that is the point that I wish to make to the Government. The amendment would give small businesses sizeable encouragement, which would be most welcome.

John Howell: I wonder whether my hon. Friend’s experience is similar to mine in that, because of the vulnerability of small and medium-sized companies, even the smallest amount of tax reduction has a huge effect on them.

Mr. Binley: I am grateful to my hon. Friend for making that point, because it allows me to point out that just a £2,000 bad debt can be the end of a very small company. That sort of saving might ensure its survival, which is why I seek the Government’s support for the amendment. If that is not forthcoming, I hope they will think about this matter more constructively than they have to date. I am told that the road to Damascus is a most attractive route.

Mr. Syms: Clause 8 is important and amendment 2 would be very helpful. We have already heard how important small businesses are—probably more for the employment they provide and the taxes thus generated, rather than for their profits and corporation tax purposes. Many companies in the small business sector are under-capitalised. It is therefore important that when they make money, it be retained within the business. Many of the capitalist entrepreneurs who run such companies pay the tax and leave the money in the company instead of taking a dividend, so that the company can grow.

If we are to get through these economic problems, we will need people who are determined, who are good managers and who have a vision for running a business. Many small businesses do not make a profit, but giving a signal to the small business sector by reducing, rather than increasing, the rate is potentially very important. Many people are in business out of sheer awkwardness—they have run the business for years and are determined to keep faith with their employees. Those people are looking for better times ahead. Many of them have risked their homes, put off holidays and even ruined marriages over their businesses, so it is important that we give them a signal that they will be able to retain more of what they do make in profit.

Today’s small business is the potential medium or large company of tomorrow. We have seen several examples over the past 10 to 15 years of small businesses growing and providing many jobs and innovation. It is important to tend, encourage and provide direction for small businesses so that they provide jobs, make profits and produce a return for those who take the risks.

The Government are already set on a course of raising national insurance on employees. That is not the right approach, but the amendment would enable us to reinvigorate and encourage small businesses, which will, we hope, be the great successes of tomorrow.

John Howell: I wish to draw Members’ attention to my entry in the register, as I am the director of a family company—my own family company, for the sake of clarification.

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I thank the hon. Member for Taunton (Mr. Browne) for giving the statistics on the small business sector. It was a helpful tour d’horizon and has set the scene for this debate. However, it does not emphasise enough that the problem faced by small and medium-sized businesses comes down, essentially, to the credit squeeze and their inability to access credit to develop their businesses.

7 pm

Mr. Jeremy Browne: I am grateful to the hon. Gentleman for giving way, because he has only just started to speak. I am also grateful for his kind words. The one other point that I omitted to make during my speech is that most of the big multinational companies started as small businesses. The benefit of this sector is measurable in terms of not only current small businesses but many companies, employing thousands of people, that had to get off the ground initially.

John Howell: The hon. Gentleman makes a good point. We all need to bear in mind and to stress the support provided by the interrelationship between small and medium-sized companies and larger companies. Many of the points that I made during our debate on amendment 1 are just as relevant to amendment 2. Other hon. Members have mentioned the effect on small businesses of uncertainty within the tax system and the need to get rid of that, as well as of the system’s inherent complexity. Indeed, I would argue that those two elements are especially important considerations for the small business sector.

Getting rid of uncertainty is vital and there is no benefit to anyone in maintaining a complex tax system for small businesses driven by entrepreneurs. It is totally unnecessary to make things complicated or more expensive. Entrepreneurs can be a funny bunch. They are very focused on their idea. I am sure that there are some very good examples of such people on the Conservative Benches and that they will take these comments in good spirit. That focus is why their business ideas work and why they are successful. However, as well as doing all the things that a business needs, they have to undertake a range of other activities, from being the head cook and bottle washer to being the bookkeeper. I know that—I have been there and have experienced the pressures of going out and getting business while ensuring that the cash flow is working and that there is back-up. The Budget presented a handful of measures for the small business sector, but it did not address the important issue of cash flow. The amendment seeks to address that problem.

Earlier, reference was made to comments from the Federation of Small Businesses and its chairman, John Wright. The quotation was:

The most important word in that quotation is “crucial”. His point is borne out in the quotation from the chief executive of the Forum of Private Business, who said:

That point has already been made eloquently by my hon. Friend the Member for Northampton, South (Mr. Binley). It is crucial, because this is about survival.
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Many of our small businesses are just surviving, and the rate reduction could be of extreme benefit to them.

We like to think in terms of protecting vulnerable institutions but we rarely think of small businesses as vulnerable. Last night, I was privileged to have in the House members of the Henley-on-Thames partnership, many of whom represent small and medium-sized businesses in and around the town. They individually employ relatively small numbers of people, but collectively they make a major contribution to the life of the town and to its business life in particular.

In small towns such as Henley, lay-offs are personal. People know each other and there is a family atmosphere, even when the companies are not necessarily owned by the same families, among the companies that work and do business in the town. It is crucial to reduce the threat that any possible downturn could pose to those companies. Anything that can improve the cash flow, as amendment 2 does, is to be welcomed.

As I said at the beginning, the vulnerability of such companies results principally from a lack of credit. However, many are vulnerable because they have already had to make cuts in order to save costs. In some cases they have laid people off, and in others they have found different means to make savings. Also, as a result of the recession, many of the service sectors are already witnessing a decline in the number of people seeking their business. When businesses have made all those efforts and cuts in order to stay afloat, it does not go down well at all when they see the money that they have saved going on higher taxes. That is nonsense for them. They do not understand it and it does not encourage entrepreneurs into the system, particularly to begin start-ups.

Mr. Binley: I am listening intently to my hon. Friend’s speech, and I congratulate him. I meet many small business people who are beginning to despair and feel that the burdens are getting too heavy for them to continue the journey. This is about spirit as well as money; it is about giving a sign of encouragement as well as taxation. Does my hon. Friend agree?

John Howell: I completely agree. An important point that emerged in our debate on the headline corporation tax rate concerned its importance as a signal of the country’s competitiveness. In this case, we are giving out a signal about the importance of a very vulnerable sector, which lives on the margins, as my hon. Friend has described so well. I, too, meet representatives from many businesses in a similar situation in my constituency and as I go around the country.

I have never been in despair about the business, but I know that one has to deal with many things as part of running a business while yet more tasks are piled on top. The lack of recognition and appreciation of the role played by small businesses in the economy bites into one’s enthusiasm and energy. The amendment sends a powerful signal to a business sector on which we all rely.

Mr. Timms: Opposition Members are right to underline the crucial importance of small businesses to the UK economy and I agree with those points, as well as with their points about the large proportion of UK employment provided by small businesses. However, I disagree with their overstatement of the significance of the small
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companies rate. They have also underestimated the important measures that the Government have put in place to support small businesses specifically—in fact, they have rather ignored them.

The UK has about 4.7 million small businesses, three quarters of which are made up of self-employed people who would therefore not benefit from a reduction in the small companies rate of corporation tax. About 400,000 companies pay no corporation tax, so they would not benefit either. The small companies rate is, in reality, a small profits rate. Any company with profits up to £300,000 benefits from that lower rate, regardless of its size.

We are introducing a wide range of measures to support businesses in the downturn, including additional targeted support for new investment through the temporary increase in the main capital allowance rate to 40 per cent., which is a significant boon for many businesses.

Mr. Binley: May I give the example of a small company in my constituency that sells wood-burning fires for companies? They cost £200,000 whereas the very big ones cost £500,000. A sizeable grant is available, but what I hear is, “People cannot afford the stuff even though they get a very good grant.” That is what I mean about survival. People are not spending, even though the grant incentive is sizeable. Would he accept that?

Mr. Timms: I do not accept the hon. Gentleman’s conclusion, and I was about to make an extremely important point about the effectiveness of HMRC’s business payment support service, which we introduced in November. It has addressed exactly his concerns about the survival of businesses, as it means that those businesses that for cash-flow reasons need to or would like to defer a tax payment can do so by ringing up HMRC. Very often, they can make an agreement on the spot in that call. More than 100,000 companies have benefited from the scheme, and between them they have deferred about £2.3 billion in tax. It is undoubtedly the case that a significant number of companies that would have “given up”, to quote the hon. Member for Northampton, South (Mr. Binley), in the downturn have been able to survive, go on to do well and keep up with their repayments as well.

Mr. Binley: The Minister is most generous in giving way again, and I am most grateful. I accept the value of the benefits that the Minister has outlined—it would be churlish not to—but my point is that the customers of the business to which I referred say that, even though they get a lot of grant, they simply do not have the money that they need to put in themselves. They get a 40 per cent. grant, but they cannot afford the remainder, however they might want to pay it.

Mr. Timms: We are undoubtedly in a very serious world economic downturn, and the measures that the Government have taken are helping to support the economy through it. I was speaking to an accountant yesterday, and he told me that his colleagues who work in liquidation are less busy this year than they were last year. He thought that that was because of the success of the business payment support service and the large number of companies that have gained a significant
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cash-flow benefit from it. The service has been very valuable for business survival, and its scope was widened further in the Budget.

The hon. Member for Fareham (Mr. Hoban) spoke about the fairness of the UK’s corporation tax arrangements for small companies. At £300,000, the UK threshold for the small company rate is the highest in the G7. It is perfectly true that rates in some other countries are lower, though not many are. For example, the small companies rate in the US is 15 per cent., but that applies to only about £30,000 of profit, compared with £300,000 in the UK. The fact that the threshold in Britain is the highest in any of the G7 countries means that companies making a profit of, say, £250,000, or up to the threshold pay the lowest marginal rate on that profit in the G7. Finally, as we discussed earlier, we performed very well in an international analysis of competitiveness.

The amendments proposed by the hon. Member for Fareham would raise a serious problem of fairness. He acknowledged, I think, the problems that arose when the small companies rate was reduced significantly, as the result was a large incidence of businesses being incorporated, which was motivated purely by tax. The problem with his amendment 2 is that it would return us to precisely that problem.

It would not be fair to encourage people to incorporate purely to gain an advantage in terms of tax and national insurance payments. We have set out a range of measures to make the tax system fairer across all small businesses, and to reduce the competitive disadvantage faced by unincorporated businesses. The amendment would make that disadvantage greater.

The number of incorporations per year increased from 230,000 to 320,000 with the introduction of the zero per cent. starting rate. They reached a record high of 450,000 in 2006-07, but they have declined since, following the increase in the small company rate. The amendments tabled by the hon. Member for Fareham would reignite the problem, which would be unfair and a mistake.

7.15 pm

The amendments also pose a substantial fiscal risk—by the way, I accept that the hon. Member for Fareham has got his arithmetic correct this year—because a permanent reduction in the rate would cost about £500 million per year. He suggested that more changes to capital allowances would pay for that, but he did not give us any information about what they would be. I simply point him to the concerns that I expressed when we debated similar changes to the previous clause.

I agree with the hon. Member for Taunton (Mr. Browne) about the crucial importance of very small companies to the UK economy, although he accepted that his amendment 6 might not be the best way to identify them. I was not quite clear about what relief he had in mind, but he made some important points.

Mr. Mark Field (Cities of London and Westminster) (Con): The Minister professed the crucial importance of small and growing businesses, but is he not concerned that one of the biggest impacts of the income tax changes proposed by the Treasury for the years to come
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will be that the owners of such businesses will have even less incentive and available collateral to grow them? Businesses like that are very often run by a single individual using his own pocket and energies, so being taxed at a much higher level post £150,000 of earnings will cause them to suffer most. Does he agree that, as a result, the growth of small businesses that is so crucial to the economy will be undermined?

Mr. Timms: No, I do not agree with that. The entrepreneurs whom I know and admire earn a long way short of £150,000 a year. Moreover, the owners of businesses occupying premises with quite low rateable values will not, on the whole, have earnings of over £150,000 a year. For those reasons, I do not agree with the hon. Gentleman.

I hope that I have demonstrated to the House’s satisfaction that the amendments would not help the majority of small businesses. They do not recognise the importance of fairness, which is a very important consideration in tax matters. In addition, the debate did not properly reflect the impact of the substantial measures that the Government have put in place to support small businesses. I hope that the House will decline to agree the amendments.

Mr. Hoban: This has been a useful debate, as it drew on the experience of my hon. Friends the Members for Poole (Mr. Syms), for Henley (John Howell) and for Northampton, South (Mr. Binley), in small businesses. My experience before entering Parliament was largely confined to large businesses; in my professional practice, I had little contact with small businesses, but I have got to know the sector well in my role as a constituency Member of Parliament.

I have a great deal of respect for small business men, because they really do put themselves on the line in growing their businesses and taking day-to-day responsibility, not only for their own future, but for that of their staff. My conversations with them over the past few months have brought home to me how tough they are finding it to survive in the present economic climate. They are worried about their cash flow, for example. The Financial Secretary talked the tax payment deferral scheme, which I welcome, but before the Government announced their scheme, the Conservatives proposed a six-month deferral of payment of VAT, recognising the importance of cash flows. The hon. Member for Taunton (Mr. Browne) talked about smaller businesses. We also proposed measures on national insurance that particularly affected micro-businesses employing four or fewer members of staff.

There is a judgment call to be made on the small companies tax rate. The Minister is right to point out that not all small companies are small businesses. He says that there are 4.7 million small businesses in this country, three quarters of which are unincorporated, leaving about 1.2 million small companies, of which 400,000 pay no corporation tax. We are therefore talking about 800,000 businesses across the country that fall into the small companies’ rate of taxation. This debate is important to them.

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