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We have to decide the extent to which we should be focusing on how people used incorporation for tax planning and crack down on that, or incentivising those small companies that incorporated for legitimate economic and legal reasons. That is where the division is between
the Conservative party and the Government. The Government see incorporation of small companies as a way of managing down tax bills and not paying what is fair. In my view, and that of my hon. Friends who have had experience of running small companies, the increase in the small companies rate is not a matter of fairness. We believe that the increase is having an impact on their ability to retain profits which, as my hon. Friend the Member for Northampton, South said, is important to their ability to build up reserves for the future and to fund investment.
In our judgment, the small companies rate of taxation should fall, to incentivise genuine small companies and encourage their growth and future development. The rate should not be increased, as the Government would use it, as a means of cracking down on tax avoidance. That is the dividing line between the Conservative party, which wants to support entrepreneurs, and the Government, who have seen fit to crack down on them by increasing the small companies rate of corporation tax. The Governments argument on tax-motivated incorporation is, I think, an excuse for a revenue-raising measure, increasing the tax take from small businesses. They have sought to compensate for the increase through the annual investment allowance, but that is available to all businesses, not just small companies, so on average small companies will be worse off as a consequence of the changes that the Government have announced.
Because we want to support entrepreneurs and because we recognise that people have set up limited companies for genuine purposes, and not only for the purpose that the Minister says, we want the small companies rate of corporation tax to be reduced. We have set out clearly how we would fund the reduction through reforming the system of capital allowancesour proposals are costed. I shall press the amendment to a Division, because it is important to send a clear signal to this countrys small companies that we have their interests at heartwe do not regard them as tax dodgers or tax avoiders and we want them to flourish and continue to grow. That is my partys policy; it is not the Governments policy. I therefore ask my hon. Friends to vote for amendment 2.
(1A) The Chancellor of the Exchequer must, not later than 1 April 2010, compile and lay before the House of Commons a report containing an assessment of the impact of the temporary VAT rate reduction on
I am grateful for the opportunity to speak on a subject that most people would regard as a central feature of our debate on the Finance Billthe Governments decision to use a reduction in VAT as a way of injecting extra money into the economy and trying to deal with the recession. Members will be familiar with many of the arguments, but before I make some slightly more general comments, I shall just explain the amendments that I tabled.
Amendment 7, which has not been selected, but which appears on the amendment paperI hope I am not out of order, Mrs. Heal, if I briefly mention it, because it illustrates the direction in which I am seeking to move Government policyseeks to bring forward the day on which the VAT reduction from 17.5 to 15 per cent. ceased to apply to the date on which the Bill receives Royal Assent, which we believe is the earliest conceivable date on which that temporary reduction could be ended. The amendment was not accepted, for entirely understandable reasons to do with revenue implications, but it nevertheless remains our intention to try to encourage or force the Government to bring forward that measure to the earliest possible date.
Amendment 8 is much more wide-ranging and benign, and provides an opportunity to review the success or otherwise of the Governments policy. Inevitably, such a review could take place only after the effects of the
policy had been experienced, so it is not as immediate as the change proposed in amendment 7 or, indeed, a proposal to reject the clause as a whole. However, it provides a useful opportunity to discuss the Governments strategy as a whole. Many right hon. and hon. Members will be familiar with that strategy.
The Government are running a massive deficit£175 billion this financial year, and £173 billion in the next financial year, if their assumptions are correctso there is a legitimate debate to be had about the extent to which the Government can afford to borrow more to stimulate the economy. My partys view is that there is merit in fiscal stimulustrying to inject an extra boost into the economy will help us to get through the recession quicker, and the best way we can address our public finance deficit is to get the economy growing again. After that, we will have to ask questions about additional tax revenue, and about savings in the public sector. The immediate task, however, is to get through the recession and out the other end, growing strongly again. Some sort of fiscal stimulus, in my partys view, is the right way forward, if it is affordable.
Mr. Nicholas Soames (Mid-Sussex) (Con): Without wanting to make a point about it, I agree about the need for fiscal stimulus. Before every Budget, I survey almost every business in my constituency and this year, for the first time, that survey received an extremely high response rate. Everyone who responded on the VAT cut was extremely critical of it. Does the hon. Gentleman acknowledge that that change is not one that commands universal support across the country and that it was not the right thing to do?
The starting point for us, for the Government and for others was whether it was possible to afford some sort of fiscal stimulus. The answer, in our view, was yes, although it would be limited in scope because of the state of the public finances. The question that then arose was what form that fiscal stimulus should take. The Governments view, as I understand it, was that a VAT cut would be a good way to go, partly because it could be introduced speedilyno doubt the Minister will put the Governments case; I do not with to misrepresent it, but I will explain my view. They thought a VAT cut would incentivise people to spend money, which would provide the sort of stimulus they believed would be advantageous in the short term. They also believed it would be beneficial for individual consumers. I remember their making the case when it was introduced that it would save money for typical households, and we were given examples of those savings. However, when some retailers did not pass on the VAT reduction, the Government then made the case that it helped the margins of those retailers. I accept that there was a degree of truth in the Governments position, even though to some extent they were having their cake and eating it: when the VAT cut was passed on, it would help consumers, and when it was not, it would help retailers and businesses.
That, as I understand it, was the Governments case for the VAT cut. It is not a case that my party finds compelling, and that view is shared by many hon. Members, including Government Members. There are
numerous reasons for that but, first, the Government unfortunately cut VAT in the run-up to Christmas, when retailers were heavily discounting their products. Many companies were introducing cuts of 20, 25, 30 or 35 per cent. and, in that context, the 2.5 per cent. reduction was rather modest. It may have led to a small extra saving for consumers, but it was unlikely to provoke them to make a purchase that they would not otherwise have made. The cuts introduced by the retailers themselves were substantially greater than the VAT cut.
There was the serious issue, too, of the administrative burdens placed on businesses as a result of the VAT cut. A number of businesses sought to reprice their goods, and if they were priced in a catalogue that had already been printed or if a similar approach had been taken, that presented even greater problems. I went into a shop in my constituency where the company introduced the discount, but did not mark it on the price that appeared on the product, as that would have resulted in extra burdens. I remember buying a birthday card for someone for £2, and I paid with two £1 coins. I was given 4p change because the shop had kept the marked price as £2, but I was given a discount, to reflect the temporary VAT reduction, which I had not anticipated. Up to a point, I appreciated it, but I did not necessarily feel incentivised to buy another card once I knew that another 4p was there for the taking. I suppose I had 4p more to spend on other goods and services, but I am not sure that the effect on the economy as a whole, even if everyone received that benefit, was as great as the Government hoped.
Lembit Öpik: I very much agree with my hon. Friends point, but is there not another marketing consideration? Something that had cost £11.99 should cost about £11.73 after the VAT cut but, as we all know, the price points are heavily determined by marketing considerationsthe prices tend to end with 99 and so on. Does my hon. Friend agree that the benefit of the VAT cut will almost inevitably gravitate back to the companies and businesses as they revert to the standard pricing points? No one can pretend that £11.73 is a natural pricing point or that it has any marketing advantage.
Mr. Browne: I take my hon. Friends point. Many retailers round their prices to a sensible point and then discount a penny to make them look more attractive. A lot of the margins might be greater than the VAT reduction, so the reduction might not have been felt in the way envisaged by the Government. With small itemsI just gave the example of a birthday cardthe saving to the consumer is small. With big items such as a new car, the saving would be greater. However, it is worth mentioning that car retailers were so desperate to turn over more of their products that the discounts by and large were bigger than the VAT reduction that was meant to incentivise consumers.
Mr. Syms: The hon. Gentleman has talked about costs to small businesses, but there are also the costs to local authorities, which charge for a range of services such as car parking spaces. Some such charges have VAT implications. That created costs for local government, which had to reduce lots of charges to be able to comply quickly with what the Government wanted.
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