Clause 31 - Small companies' rate and fraction for financial year 2002
Finance Bill
2:45 pm
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to move amendment No. 35, in page 22, line 5, at the beginning insert—
'(1) An individual subject to income tax on profits or gains under Schedule D Case I or II shall be entitled to claim relief in respect of tax on those profits or gains which corresponds to the difference between the income tax otherwise payable and the corporation tax which would have been payable and the corporation tax which would have been payable by a company on such profits or gains taking into account sections 13 and 13AA of the Taxes Act 1988 (small companies relief and corporation tax starting rate), provided that:
(a) profits or gains in excess of the lower relevant maximum amount (as defined in section 13 of the Income and Corporation Taxes Act 1988) shall be disregarded for the purposes of calculating any relief under this subsection; and
(b) individuals in partnership shall be treated as if they were associated companies for the purposes of the said section 13; and
(c) such relief shall only relate to profits which have been retained within the relevant trade, profession or vocation. The Treasury shall have power under regulations to specify the situations in which profits shall be regarded as having been retained within a trade, profession or vocation.
(2)'.
As hon. Members may be aware, some 3.5 million self-employed people will see their national insurance charges go up about 14 per cent. following the Budget. As I understand it, if they were to incorporate—the amendment deals with quite low levels of turnover of about £30,000 per annum—there would be net national insurance and tax savings of about £3,000 per annum. I cannot believe that the Government want every small, sole trader business to incorporate itself. If nothing else, there would be the potential loss of revenue. I am also mindful of the fact that, ultimately, from a consumer point of view, the Government's legal position is stronger against a sole trader than against an incorporated business.
Amendment No. 35 has been designed to produce fairness in this area and to address the issue presented by the new improved small company taxation rating in conjunction with the changes to national insurance. It would give unincorporated businesses the option to retain profits and take advantage of the lower rates of corporate tax offered, instead of going through the hassle of incorporation. For partnerships, the bands at which lower tax would be paid are split evenly between the partners. That is designed to avoid the criticism that we are trying to help largely wealthy partnerships such as accountants.
The clear practical point is that for incorporated businesses, money comes through in wages and pay, on which income tax is paid. Similarly, the self-employed pay income tax, but if a self-employed business is able to retain profits to grow the business, it is fair and reasonable to provide for a parallel tax treatment to allow it to function on an incorporated basis.