Clause 2
Finance Bill
4:45 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I welcome you to the chairmanship of the Committee, Mr. Gale. I look forward to serving under you during our scrutiny of the Bill.
It is perhaps appropriate to start our consideration of the Bill on a rare note of consensus. We supportthe move that the Government announced in the Budget in March to reduce to 28p the mainstream rate of corporation tax. It was not as ambitious as the proposal that was set out by my hon. Friend the shadow Chancellor to cut the rate by 3 per cent., but we congratulate the Government for making the change. It responds to the concerns that businesses had highlighted that the mainstream rate had become uncompetitive when compared with the rate in other major industrial countries.
Prior to the Budget, the UK’s corporation tax rate was about 1.4 per cent. above the Organisation for Economic Co-operation and Development average, having been 3.6 per cent. below it in 2000, so there had been a gradual deterioration in our rate in comparison with other major industrialised countries. In 2005, only 12 OECD countries had headline rates above that of the UK, compared with 20 in 2000. The Chief Secretary pointed out the cuts that had been made to the corporation tax rate prior to 2000, but no cuts were made subsequent to that date. Between 2000 and 2005, however, 25 of the 30 OECD countries cut their corporation tax rates, so we were lagging behind our industrial competitors in that respect.
It is worth reflecting for a moment on the impact that that had on the UK economy. A number of businesses chose to relocate their headquarters overseas. The Economic Secretary will know as well as I do the cases of Hiscox, Omega and Catlin in the insurance sector; they relocated from the UK to Bermuda for tax and regulatory reasons. When businesses undertook corporate transactions, it was interesting to see where they chose their domicile for tax purposes. So, when Experian de-merged from GUS, it decided to relocate its headquarters to Dublin, although it remained a UK-listed company.
Articles in The Sunday Telegraph have suggestedthat Colt Telecommunications, which moved to Luxembourg in the first half of last year, chose to do so for tax-related reasons. Also, according to an article in The Times, in the summer of last year, 40 major companies were said to be considering a move because of the uncompetitiveness of the UK tax regime. Indeed, the Government’s skills envoy, when he was director general of the CBI, said:
“A lot of our biggest businesses are now looking at whether they want to be domiciled here, because of the tax system.”
KPMG, in a submission to the independent Tax Reform Commission, said:
“It is not uncommon for groups to move unskilled and back-office activities overseas, but we are aware that some organisations are also actively considering moving white-collar jobs, and even the group holding location, for reasons which include tax considerations.”
There are complex reasons why companies seek to relocate overseas, but there tends to be a trend towards a low-tax jurisdiction. I am sure that Ministers have had the same discussions that my hon. Friends and I have had with major UK corporates and their advisers about the impact that high tax rates have on the choice of jurisdiction and on competitiveness.
We also have some quantitative analysis; it is not just anecdotal evidence that underpins the sense that the Government have allowed the tax competitiveness of the UK economy to deteriorate. In a recent survey,60 per cent. of businesses said that the UK tax system was having a negative impact on the UK’s international competitiveness, and only 10 per cent. of the businesses surveyed disagreed with that statement. So there is a consensus within business that the Government have allowed the tax system to get out of kilter with our competitors.
Of course, when a company chooses to relocate overseas, it is not just the corporation tax revenue that we lose, but other business taxes, such as VAT, employers’ national insurance contributions and rates on property that they occupy. Indeed, a report from PricewaterhouseCoopers estimated that, in 2004-05, FTSE 100 companies contributed £9.1 billion of corporation tax revenues and another £9.1 billion in other business taxes. So there is an important knock-on effect; where businesses locate in the UK, not only do they pay additional corporation tax, but they pay a significant amount in other corporate taxes, to the benefit of the Exchequer and the public services that are funded by these taxes. Of course, that analysis by PWC does not take into account PAYE, employees’ national insurance contributions and other such taxes.
This process is not just about companies leaving the UK because of uncompetitive mainstream corporation tax rates; it is also about inward investment going elsewhere. Google, Microsoft and Intel, among others, have chosen to set up significant operations in Dublin in Ireland as a consequence of the low tax rate there.
The Dutch Government are also mindful of the way in which lower corporation tax rates can act as a magnet to businesses, such that businesses will choose to go the Netherlands rather than locate to a high-tax economy. So they reduced their headline rate of corporation tax to 25.5 per cent. this year, to makethe Netherlands more attractive to international businesses. Part of the challenge that the Government have responded to here is that, because other countries were reducing their corporation tax rate, it was making the UK unattractive to those businesses when they made decisions about where to locate. Perhaps the lower rate of corporation tax in the Netherlands is one reason why Barclays might move its headquarters to the Netherlands if its bid for ABN Amro is successful.
In a sense, therefore, what I am trying to set out is that the rate of mainstream corporation tax has an impact on business decisions more widely and we cannot look at those decisions in isolation. As a former Internal Revenue Service commissioner in the United States said:
“We cannot, absolutely cannot, hope to compete in a global economy by setting corporation taxes in isolation.”
That is an important factor to bear in mind, and it is why we support the move by the Government to reduce the mainstream rate of corporation tax.
I accept, however, that maintaining tax competitiveness is not simply about reducing the rate of corporation tax; it is about the complexity and stability of the tax code, too. By the time the Bill concludes its legislative process, the UK will have a longer tax code than India. Indeed, we shall have the longest tax code in the world, and that complexity will bring its own costs. I am sure that my hon. Friend the shadow Chief Secretary to the Treasury will be able to use that fact again later in our considerations, although I do not want to come to that yet. There are strong arguments for supporting the Government in their aim of reducing mainstream corporation tax. When the Government do the right thing, we are prepared to support them. That is the principle of an Opposition who take their duties seriously.
The Chief Secretary touched upon the other consequential changes to tax and capital allowances, which are being used to fund the reduction in the mainstream rate of corporation tax. We have some concerns about how the Government have sought to fund that reduction, so we shall explore those issues at some length when we reach the appropriate clause.
We are grateful that the Chancellor sought to respond so positively and enthusiastically to the representations that my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor, made just before the Budget and to the compelling case for simpler, lower corporation tax that was set out in a report by the independent Tax Reform Commission chaired by our noble Friend Lord Forsyth. It is good that the Government listened to and understood those arguments, and put them into practice, because they are to the benefit of all large businesses in the UK paying on profits of more than £1.5 million. That is why we support the Government in clause 2.