Clause 2
Finance Bill
4:30 pm
Stephen Timms (Chief Secretary, HM Treasury; East Ham, Labour)
We are determined to maintain the best possible environment for business in the UK. With unprecedented economic stability in the past decade, businesses have been able to plan and invest more effectively for the long term, which has brought a lot of benefit, as today’s high rates of employment underline.
Companies have also benefited from a highly competitive tax regime. Since 1997, the UK has led the way among its closest competitors in reducing corporate tax rates from 33 per cent. in 1997. The main rate fell to 31 per cent. in 1998, and to 30 per cent. in 1999. Those reductions have ensured that the corporation tax rate in the UK has been the lowest in the G7 throughout the last 10 years.
The combination of stability and a competitive tax environment has proved an immensely fruitful one for UK businesses. Members of the Committee may last week have seen press coverage of the latest research from the National Institute of Economic and Social Research on productivity in the UK, commenting on the recent acceleration in UK productivity growth. The paper by Mary O’Mahoney in last month’s National Institute Economic Review shows that
“the UK has managed to close the productivity gap significantly with the US, France and Germany”,
by contrast with
“poor performance in terms of productivity growth in the early 1990s”.
That improvement is a huge prize for the UK economy and reflects steadfast determination on the part of the Government to tackle the productivity gap, but other countries are changing, too. There are now new patterns of business activity and fresh challenges arising from globalisation, and the clause takes the next step to enhance the competitiveness of our business environment in the UK.
The clause cuts the headline rate of corporation tax again, enabling it to be charged for the financial year 2008-09 and cuts the main rate for that year from30 per cent. to 28 per cent. on non-North sea ring-fenced profits, leaving the rate for profits within the North sea ring fence unchanged. That will have a number of positive effects, which the Committee will readily acknowledge. It will boost the competitiveness of UK firms and encourage greater domestic investment on their part, it will make the UK an even more attractive location for foreign direct investment, and build on the success that we had last year, when we attracted more foreign direct investment than any other country.
The cut is accompanied by a series of reforms to wider business taxation, which will feature in later debates in the Committee. As a package, they represent the biggest set of reforms of the business tax system since the 1980s. The package modernises a rather outdated system of investment allowances for plant, machinery and buildings, and gives further support to innovative businesses by developing the R and D tax credit. With the cut in the main rate of corporationtax as its centrepiece, the package is pro-investment, pro-innovation and therefore pro-growth for the UK economy.
The clause identifies the main corporation tax rate for onshore activities separately from North sea ring-fenced activities. The North sea clearly is unique for both industry and Government; for a long time, it has had a separate tax regime, which is an arrangement that is common around the world. Our regime seeksto strike a balance between encouraging investmentand ensuring a fair return for the UK on itsnatural resources. In maintaining that balance, the Government have chosen to exempt the North sea from the main business tax changes in this year’s Budget, leaving the rates and the capital allowances regime unchanged.
North sea companies will continue to benefit from the special 100 per cent. capital allowances, which have encouraged recent high levels of investment. Some have argued on behalf of North sea businesses that they also should have benefited from the rate cut, but othershave wisely acknowledged that that would have been unrealistic given the current level of the oil price. Stability is also an important virtue in the industry, particularly with regard to capital allowances. The Bill does not include a system of capital allowances for companies within the North sea ring fence, as it does for other companies.
I hope that the Committee will welcome the cut in corporation tax and the accompanying package of reforms of business taxation. We want to maintain the best possible environment for businesses in the UK. At 28 per cent., the headline corporation tax rate will be lower than that of the US, Germany, France, Japan and all our other G7 competitors. The UK rate will be firmly established as the lowest of the major economies and will be below the average of the EU 15. I commend the clause to the Committee.