Corporation Tax: Small Companies

Orders of the Day — Finance Bill – in the House of Commons at 10:15 pm on 9th May 1989.

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Photo of Alan Beith Alan Beith Shadow Spokesperson (Treasury) 10:15 pm, 9th May 1989

I beg to move amendment No. 14, in page 23, line 5, leave out '£150,000' and insert '£250,000'.

This concerns a form of relief to small businesses and I am bound to say that it is a much better way of spending taxpayers' money than on tendentious leaflets about the community charge, which I have received since my copy has already come through the door. Moreover, I think that those for whom this amendment is designed as a benefit, small companies, which contribute so largely to the public revenues, will feel very strongly that the funds they contribute through taxation should not be used for propaganda in pursuit of Government policies.

I am sure that in considering my amendment the Minister will feel even more impelled to accept the greater relief I am suggesting, covered as he is with guilt through the activities of the Government in publishing at taxpayers' expense leaflets about the community charge.

Photo of Mr Max Madden Mr Max Madden , Bradford West

Does the hon. Gentleman, think, like me, that it is very important that this Committee, as it is concerned with small businesses and the business rate system, should be told what action the Government will take to recover the leaflets which have been put through the letter boxes of many of our constituents?

The First Deputy Chairman:

Order. I am sure that the hon. Gentleman will not spoil his amendment by getting out of order.

Photo of Alan Beith Alan Beith Shadow Spokesperson (Treasury)

I will certainly do my best to keep within order, Sir Paul, and to avoid your chastening.

It is the sense of many small businesses that this Budget is certainly one of some disappointment. There are many specific measures that small businesses would have liked to see in the Budget in a number of areas. The area in which the Government have taken some action on the lines which we proposed is one on which I will argue that they ought to have gone considerably further.

In our Budget proposals before Budget day we put forward the view that the threshold below which small businesses pay the lower level of corporation tax should be raised to £250,000. The Government agreed to a much smaller increase to a threshold of £150,000 based on a rate fixed in 1982, so it has remained at that level for a long time. There is an argument for making the relief more extensive. However, while the amendment would benefit many small manufacturing firms, it does not cover the whole range of small business including sole traders and very small firms, whose activities fall far below the scope even of the relief I propose.

The Government recognise that the present rate of corporation tax for small businesses is one on which relief could reasonably be raised. The Government get a great deal of money out of corporation tax. It is one of the most buoyant elements of revenue, and the Government continue quietly collecting that money without much public recognition of the contribution that business makes. The Chancellor is happy to talk about his Budget surplus and what he plans doing with it, but he does not seem so keen to explain how much of that surplus comes from asset sales and how much from corporation tax.

One paradox is that corporation tax rates in this country are lower than in competitor countries, but that British companies pay more corporation tax than their European competitors. One can speculate as to why that is so. It could be because of greater compliance, more stringent enforcement, or different systems of relief. The fact remains that British businesses pay heavier amounts of corporation tax than do their Community competitors.

One business sector particularly in need of relief is smaller manufacturing companies. Many of them are bearing the heaviest burden of the present high interest and high exchange rates. Some of the largest companies have considerable cash mountains at their disposal and are not the victims of high interest rates. Many gain substantially from them. All those involved in exports are affected by exchange rates, but the combined effect of high interest and high exchange rates bears most heavily on smaller firms. Companies that should now be preparing for 1992 face increasing costs, such as those involved in third party verification of products standards. Nevertheless, they feel a compelling need to improve their export performance. The Chancellor's whole Budget strategy is based on the assumption that there will be a massive improvement in our country's export performance. The major contributors to any such improvement must be smaller manufacturing companies, for whom I argue that a greater level of relief should be provided.

The Government's main argument against reducing corporation tax is that that might add to wage inflation by reducing pressure on employers to control their labour costs. That contention cannot apply to smaller companies, which are not the culprits in fuelling wage inflation. They are not usually the leaders in the pay round, and often are among those that have worked hardest to trim their costs so that they can stay in business.

The threshold at which those smaller companies become eligible for the higher rate of corporation tax should be raised not just to £150,000 but to £250,000. A related amendment increases the other end of the scale from £750,000 to £1 million, so that it will remain smooth between those two points. That is one way that the Budget can be made more helpful to small firms, and one that Conservative Members should find to their liking. I hope that some hon. and right hon. Members who have stayed on to listen to this short debate will join us in the Lobby tonight and support a higher level of relief for smaller businesses than is proposed in the Budget. I invite them to do so.

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party 10:30 pm, 9th May 1989

The hon. Member for Berwick-upon-Tweed (Mr. Beith) moved his amendment concisely and briskly. He paid tribute to the interest his party has in small businesses and in that he is echoing the interest that the Government have. My hon. Friend the Member for Taunton (Mr. Nicholson) put a shrewd question to my right hon. Friend the Chancellor of the Exchequer on 27 April about tax concessions, which was specifically directed to small businesses since 1979, which was answered by my right hon. Friend the Financial Secretary. It ran to two and a half columns in the Official Report. I have no doubt at all that small business men in Somerset, who read eagerly the questions put down by my hon. Friend the Member for Taunton, responded enthusiastically to that information and that that was in part responsible for Somerset being wrested from the hon. Member's party during the recent county council elections.

The hon. Member asked why, with lower rates of corporation tax, we achieved higher yields, and suggested it was either compliance or the quality of the surveillance by the Inland Revenue. The answer of course is the extremely successful and high rates of profitability being earned by British companies during the economic expansion we have enjoyed for the last seven or eight years. He made reference to interest rates, but small companies in particular wish to see a reduction in inflation, to which those interest rates are directed.

As to the merits of the hon. Member's amendment, the background to the lower rate of corporation tax, the small companies' rate, is familiar to the Committee. Clause 33 increases the profit limits for the small companies rate and the associated marginal relief to £150,000 and £750,000 respectively, as the hon. Member said. The Government's changes in recent years have concentrated on bringing the rate of corporation tax down, so increasing the profit limits has not been a high priority and the limits have remained unchanged since 1983. This year we thought it right to increase the limits substantially.

The two amendments which the hon. Member has tabled would increase the profit limits even further. In our view, those limits would be too high. Clause 33 already increases both limits by 50 per cent., which is more than enough to take account of inflation over the period since the limits were last raised. Over 20,000 companies will pay less tax as a result of this change. This represents half of those companies which were previously paying corporation tax at a higher rate than the small companies' rate. We think the new limits we have proposed are high enough.

There is another objection to adopting the limits the amendments propose. Under our present proposal the special rate of corporation tax which applies to company profits between £150,000 and £750,000 will remain at 37½ per cent., because we are increasing both limits by the same proportion. If the limits were raised, as the hon. Member's amendments propose, to £250,000 and £1 million, the marginal rate would have to be 381/3 per cent. I know that some companies are convinced about the disincentive effect of high marginal rates, and we would be very reluctant to increase the marginal rate even by a small amount.

Finally, I have seen the hon. Member's press release which accompanied this amendment. We are looking forward very much to the hon. Member being on the Committee upstairs, but I hope that he will be able to manage something more substantial in his next press release than he has done tonight.

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

The Minister is quite right to raise the attendance of the hon. Member for Berwick-upon-Tweed (Mr. Beith) at the Finance Committee. The Minister will remember that the hon. Gentleman was a member of the Finance Bill Committee last year and attended only three of the 15 sittings. In fact, his absence from that Committee stage was commented on almost every day of the proceedings.

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

The hon. Member for Newcastle upon Tyne, East (Mr. Brown) is quite right in his recollection of those events. There passed through my mind as I surveyed the empty seat of the hon. Member last year that remark of Sir Winston Churchill concerning the Margrave of Baden, who was one of the allies of the first Duke, of whom it was said that his military epitaph for all time should be that the two greatest captains of his age thought his absence from the field as an ally well worth 15,000 men.

I urge my hon. and right hon. Friends to resist this amendment.

Photo of Alan Beith Alan Beith Shadow Spokesperson (Treasury)

The hon. Member for Newcastle upon Tyne, East (Mr. Brown) and the Paymaster General must be the only two Members in the Committee who did not notice where I went in July last year or how I occupied my time during that month. I am glad to say that my hon. Friend the Member for Orkney and Shetland (Mr. Wallace) discharged an excellent service in that Committee's far smaller number of sittings, during which I fought a certain election.

If that is the only reason that the Government can think of for not allowing a higher level of relief for small business, and the only reason that the Labour party can think of for not supporting it—[HON. MEMBERS: "What about the policy review?"] Indeed, perhaps the matter could be brought into the Labour party's policy review. The dearth of serious argument, however, leads me to believe that my hon. Friends should be given the opportunity to invite those who genuinely support small business to come into the Lobby and vote for the amendment.

Question put, That the amendment be made:—

The Committee divided: Ayes 14, Noes 179.

Division No. 192][10.35 pm
AYES
Beith, A. J.Livsey, Richard
Campbell, Menzies (Fife NE)McGrady, Eddie
Carlile, Alex (Mont'g)Michie, Mrs Ray (Arg'l & Bute)
Ewing, Mrs Margaret (Moray)Salmond, Alex
Fearn, RonaldWelsh, Andrew (Angus E)
Hughes, Simon (Southwark)
Jones, leuan (Ynys Mön)Tellers for the Ayes:
Kennedy, CharlesMr. James Wallace and
Kirkwood ArchyMr. Matthew Taylor.
NOES
Aitken, JonathanBellingham, Henry
Alexander, RichardBennett, Nicholas (Pembroke)
Alison, Rt Hon MichaelBlackburn, Dr John G.
Amess, DavidBlaker, Rt Hon Sir Peter
Amos, AlanBoscawen, Hon Robert
Arbuthnot, JamesBoswell, Tim
Arnold, Tom (Hazel Grove)Bottomley, Peter
Batiste, SpencerBottomley, Mrs Virginia
Beaumont-Dark, AnthonyBowis, John
Braine, Rt Hon Sir BernardGarel-Jones, Tristan
Brandon-Bravo, MartinGill, Christopher
Brazier, JulianGlyn, Dr Alan
Bright, GrahamGoodson-Wickes, Dr Charles
Brooke, Rt Hon PeterGow, Ian
Brown, Michael (Brigg & Cl't's)Greenway, John (Ryedale)
Buck, Sir AntonyGregory, Conal
Burns, SimonGriffiths, Peter (Portsmouth N)
Burt, AlistairGrist, Ian
Butler, ChrisGummer, Rt Hon John Selwyn
Butterfill, JohnHague, William
Carlisle, Kenneth (Lincoln)Hamilton, Hon Archie (Epsom)
Carrington, MatthewHamilton, Neil (Tatton)
Chapman, SydneyHanley, Jeremy
Chope, ChristopherHannam, John
Churchill, MrHargreaves, A. (B'ham H'll Gr')
Clark, Sir W. (Croydon S)Harris, David
Colvin, MichaelHawkins, Christopher
Conway, DerekHayward, Robert
Coombs, Anthony (Wyre F'rest)Heddle, John
Cope, Rt Hon JohnHicks, Mrs Maureen (Wolv' NE)
Couchman, JamesHicks, Robert (Cornwall SE)
Cran, JamesHind, Kenneth
Currie, Mrs EdwinaHogg, Hon Douglas (Gr'th'm)
Curry, DavidHowarth, Alan (Strat'd-on-A)
Davies, Q. (Stamf'd & Spald'g)Howarth, G. (Cannock & B'wd)
Davis, David (Boothferry)Howell, Rt Hon David (G'dford)
Day, StephenHunt, David (Wirral W)
Dorrell, StephenHunter, Andrew
Douglas-Hamilton, Lord JamesIrvine, Michael
Dunn, BobJack, Michael
Durant, TonyJackson, Robert
Evans, David (Welwyn Hatf'd)Janman, Tim
Fallon, MichaelJones, Gwilym (Cardiff N)
Favell, TonyJones, Robert B (Herts W)
Forman, NigelKing, Roger (B'ham N'thfield)
Forsyth, Michael (Stirling)Kirkhope, Timothy
Forth, EricKnapman, Roger
Fowler, Rt Hon NormanKnowles, Michael
Franks, CecilLamont, Rt Hon Norman
Freeman, RogerLatham, Michael
French, DouglasLawrence, Ivan
Lennox-Boyd, Hon MarkRaffan, Keith
Lester, Jim (Broxtowe)Redwood, John
Lightbown, DavidRhodes James, Robert
Lilley, PeterRiddick, Graham
Lloyd, Peter (Fareham)Rowe, Andrew
Macfarlane, Sir NeilShaw, Sir Giles (Pudsey)
MacGregor, Rt Hon JohnShepherd, Colin (Hereford)
Maclean, DavidSpeller, Tony
McLoughlin, PatrickStern, Michael
Major, Rt Hon JohnStewart, Andy (Sherwood)
Mans, KeithStradling Thomas, Sir John
Marland, PaulSumberg, David
Marshall, John (Hendon S)Taylor, Ian (Esher)
Martin, David (Portsmouth S)Taylor, Teddy (S'end E)
Mates, MichaelTebbit, Rt Hon Norman
Maude, Hon FrancisTemple-Morris, Peter
Mayhew, Rt Hon Sir PatrickThompson, D. (Calder Valley)
Miller, Sir HalThompson, Patrick (Norwich N)
Mills, IainThorne, Neil
Mitchell, Andrew (Gedling)Thumham, Peter
Mitchell, Sir DavidTracey, Richard
Moate, RogerTredinnick, David
Monro, Sir HectorTrotter, Neville
Morris, M (N'hampton S)Twinn, Dr Ian
Morrison, Sir CharlesWaddington, Rt Hon David
Moss, MalcolmWalden, George
Neale, GerrardWalker, Bill (T'side North)
Nelson, AnthonyWardle, Charles (Bexhill)
Neubert, MichaelWatts, John
Nicholls, PatrickWells, Bowen
Nicholson, David (Taunton)Wheeler, John
Nicholson, Emma (Devon West)Widdecombe, Ann
Onslow, Rt Hon CranleyWinterton, Mrs Ann
Oppenheim, PhillipWood, Timothy
Page, RichardYeo, Tim
Paice, JamesYounger, Rt Hon George
Patnick, Irvine
Pattie, Rt Hon Sir GeoffreyTellers for the Noes:
Pawsey, JamesMr. John M. Taylor and
Porter, David (Waveney)Mr. David Heathcoat-Amory.
Price, Sir David

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury) 10:45 pm, 9th May 1989

There is less to clause 33 than meets the eye, and certainly less than the Government have claimed for it. Opposition Members are very understanding people, and we understand that it is a political necessity for the Conservative party to pretend to help small businesses. Of course it is necessary for the Minister and his colleagues to have something to tell their constituency parties. We are not unused to those circumstances. However, it is stretching the facts substantially further than is plausible to say, as the Chancellor of the Exchequer said in his Budget speech: but I propose to increase the small companies' rate band substantially, by 50 per cent."—[Official Report, 14 March 1989; Vol. 149, c. 298.] Perhaps uniquely on the Opposition Treasury team, I am a fan of the Chancellor's increasingly frequent forays into self-parody and I am sure that that was one example of it.

The truth is that the increase in the profit limit for the rate of small companies' corporation tax and the increase in the marginal relief threshold represent the first adjustment that the Government have made to those thresholds since 1982. It is in that context that the word "substantial" should be considered. If it is right to help small businesses in this way this year, one wonders why it was not right to do so last year, the year before that, and so on, back to 1982. The Government's arguments this year would have had similar force last year. If the measure is necessary to help small businesses, why was it not necessary last year? I ask the Paymaster General why this measure was not brought in last year, or the year before.

It may be helpful to the Committee if I spell out the minimum amount in profits prepaying the higher marginal tax rate that applied from 1974 onwards. The House will see that the amount rose steadily. In 1974 the figure was £25,000; in 1975, it was £30,000; in 1976, £40,000; in 1977, £50,000; in 1978, £60,000; in 1979, £70,000; in 1980, £80,000; in 1981, £90,000; and in 1982, it was £100,000. With equivalent rises in the maximum amount of profits prepaying the highest marginal tax rate, there the levels remained. The figure remained at £100,000 from 1982 until this year's Budget. If the Government claim to be helping small businesses, they need to explain why the figure was frozen for that period.

Photo of Alan Beith Alan Beith Shadow Spokesperson (Treasury)

As the hon. Gentleman has criticised the Government for failing for so long to uprate the limit, will he explain why he did not feel able to invite his colleagues to join us in the Lobby in support of a higher threshold or to say during the debate why he was not going to do so?

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

I am addressing my remarks to the clause stand part debate.

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

If the hon. Gentleman breaks the habit of a lifetime and stays to listen to the debate, he will find out about the Labour party's position, and he will discover that we believe that rates are now about right.

Photo of Jim Wallace Jim Wallace , Orkney and Shetland

How does the hon. Gentleman work that out?

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

I shall explain. It is worked out by taking the indexation that applied to the thresholds under the last Labour Government and applying that forward. If that indexation, which we accepted as right, had been applied throughout the period of Conservative Government, the rates would have been £140,000 and £705,000, respectively. That is not so very different from the thresholds that the Government propose. The difference, of course, is that, under a Labour Government, small businesses would have had the advantage of a year-by-year increase.

Photo of Mr Dale Campbell-Savours Mr Dale Campbell-Savours , Workington

Is there not an additional factor? The Labour Government introduced the stock relief scheme against corporation tax, which had a marked effect on the corporation tax paid by companies.

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

That is correct as well. My contention is that many small businesses would have been advantaged by the regime that pertained when we were in power.

Photo of Jim Wallace Jim Wallace , Orkney and Shetland

The hon. Gentlemen has just agreed with his hon. Friend the Member for Workington (Mr. Campbell-Savours) that stock relief was an additional advantage. Now that it has gone, does he not think that the indexation that he has just used in a mechanistic and arithmetical way is an inadequate method of evaluating the benefit given? He should have been willing to support a figure higher than the one that he is ready to support.

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

It is self-evident that I do not think that; I have just said so. I think that the approach that I have outlined, which has belatedly been adopted by the Government, is the right one. As Treasury Ministers frequently tell us, and as I shall be telling people one day, I suppose, it is always difficult to strike a balance in these matters. It is not illogical to say that that is how we arrived at the figure.

Photo of Mr Dale Campbell-Savours Mr Dale Campbell-Savours , Workington

Is not the answer to the hon. Member for Orkney and Shetland (Mr. Wallace) that the stock relief scheme was brought in to deal with the inflation problems that followed the oil price increases in 1974, and that we are not dealing with the same conditions now?

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

My hon. Friend is absolutely right, although I was trying to refrain from discussing the oil crisis and the subsequent inflation, and to stick to the narrower topic of corporation tax relief.

The difference between the Labour party's position and that of the Government on this matter—

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

No, I shall not; the matter has already been given a good airing. No doubt the hon. Gentleman wishes to ask me to repeat what I said five minutes ago. That seems to have been the thrust of most of his interventions, and I will do that if he likes, but I would much rather explain the difference between the Labour party and the Government on this matter. The difference between us is that the Labour party believes that there should have been an annual uprating, whereas the Government chose to freeze the allowances for six years. The Government should address themselves to that, rather than to the more spurious points that the Liberal party is raising.

The Government certainly cannot describe today's increase as substantial. In any event, the savings to small businesses are not as great as the Government are trying to suggest, and in many cases they will certainly not be sufficient to make up for the far more damaging effects of interest rate rises, which amount to 5·5 per cent. since May 1988. Rising interest rates, rather than the small business corporation tax rate, represent the most significant problem that small businesses face today.

In January this year the Small Business Research Trust stated that the biggest problem facing smaller firms is finance and interest rates. Interestingly enough, the second biggest problem facing small businesses was not corporation tax but skill shortages—again according to the Small Business Research Trust, although the trust did not go on to make the obvious point that skill shortages are caused by Government cuts in funds made available for education and training—indeed, by their failure even to admit that they should be addressing the problem.

At the same time, the National Federation of Self Employed and Small Businesses was drawing our attention to the increasing burdens that were being placed on small businesses by the necessity of having to go to law on issues such as bad debts—surely an unfair burden on businesses and an indication of the real health, or otherwise, of at least part of the economy.

Let me return to the major problem facing the small business community today—interest rates. All of us in the House would like to help our constituents who are running small businesses. Those whom I meet echo the comments of their local trade associations.

Most Members of Parliament will have heard small business men say they are working not for themselves, but for the bank. The banks, of course, make a considerable effort through their television advertising to present themselves as partners in enterprise, but most small businesses find that venture capital can be obtained only in exchange for a first charge on the small business man's family home. In those circumstances, the banks could scarcely claim that the risk has been evenly shared or even that the banks are taking any risk at all.

Government failure to develop an effective venture capital project, particularly for the regions—either through Government agencies or in partnership with private sector financial institutions—is a far greater restraint on the growth of small businesses than any change in corporation tax thresholds.

Photo of Ian Taylor Ian Taylor , Esher

The hon. Gentleman has overlooked the fact that the venture capital industry has grown dramatically in recent years and that it is now dealing with a whole range of small companies and providing them with the much-needed equity capital that eases the interest rate problems that many of them face.

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

I am well aware of the activities of private sector venture capital banks and other financial institutions, but they operate very much at the margins. Many small businesses say that they cannot raise venture capital except at usurious rates of interest or by providing some form of security which leaves no risk for the venture capitalist, but leaves a great risk for the business man. In other words, it is an unacceptable risk for the business man. Small businesses need financial investing partners, which are not provided by private sector venture capital schemes. If the private sector takes high risks, it requires high rates of return on its money. It also wants whatever security it can get. It is not enough for the Government to leave it to the private sector. The Government have a duty, either in partnership with the private sector or on their own, to make some sort of scheme available for the small business community.

11 pm

The charge that many small business men level against the banking community is that the banks will only lend money to those who are sufficiently wealthy not to need to borrow. In those circumstances, the recent interest rate rises prove to be an additional and in some cases an insuperable, rather than just a first hurdle for small businesses.

A survey of regional chambers of commerce highlights this point. The overseas trades committee of t he Nottinghamshire chamber of commerce concluded in January of this year that it was difficult to reconcile the interest of British exporters with increasing interest rates, and pointed out that foreign companies exist in a quite different regime of interest rates.

The Manchester chamber of commerce reported that 76 per cent. of its members had called for lower interest rates in its last survey. On Teesside the chamber of commerce felt that interest rate rises would make small businesses think twice about their investment decisions over the next six months. The secretary of the Glasgow chamber of commerce pointed out that high interest rates choke off marginal investment for small companies and that the service sector would be forced to load the additional cost on to clients, which could, in turn, mean that those clients would decide to make do with less services.

Those are the views—perfectly rational and understandable—of the authentic voice of the small business community. The Government's endeavours to help small businesses are more cosmetic than real. Their schemes are cheap rather than effective. The National Audit Office told us last autumn, when it looked at the enterprise allowance scheme and the loan guarantee scheme, that 43 per cent. of the enterprise allowance scheme's small businesses failed completely after three years. It found, too, that 42 per cent. of the loans extended under the loan guarantee scheme were the subject of default. The Government's breezy optimism at the launch of the scheme claimed that it was intended to be self-financing. It has, of course, consistently lost money because defaults outweigh the returns on the successful schemes. The Government may very well not care about that.

The reasoning behind the schemes were political and not economic. Boosting enterprise is a necessary political claim in a Conservative party, where there is also a marked reluctance to look at the realities that sit alongside those devices. It is nonsense to assume that every redundant shipyard worker can be converted into a small business man with £40 a week and a one-day induction course. To set 43 per cent. of applicants on the enterprise allowance scheme up for failure after three years is a cruel and unnecessary further blow to inflict on people, many of whom will already have been through the traumas of redundancy. The failure of new small businesses will bring further despair to their owners and their families. They may well also waste the financial compensation received in an earlier redundancy round. There is not much help to small businesses there, and there is no chance for such people to benefit from the enhanced thresholds in the corporation tax review that we are discussing.

If the Government really intended to help small businesses, they would have listened to the Labour party's Treasury team in the last Parliament, when we sought to amend the regulations covering the collection of VAT.

Many small businesses resent the amount of work that they put into collecting taxes for the Government. When businesses fail, the Inland Revenue and the Customs and Excise are almost always substantial creditors. It was not unreasonable for the Government to tighten up the collection regulations, so that debts to the public purse could not steadily accumulate. What was totally unreasonable and particularly unfair to small businesses was to deny a "good cause" defence to a business man who was in difficulties with VAT returns. Very small businesses will not be the beneficiaries of the corporation tax changes.

The sudden illness of the owner-manager of a small business can be a near-fatal blow to the prospects of the whole enterprise. In those circumstances it is wholly unreasonable for the Customs and Excise to harass the small business man when seeking its VAT payments. Indeed, it may be counter-productive. At a difficult time such pressures may force an otherwise viable business under. Clearly, a public interest defence of good cause could be advanced in those circumstances and I am amazed that a Government who claim to represent the small business community could not see that and legislate for it. It was left to the Labour party to advance such a proposition and the Conservative Government were left to reject it.

Those are the real burdens on small businesses and this measure is the real agenda for small business men. The small business community would like the issues of interest rates and skills shortages to be addressed by the Government in the Finance Bill and elsewhere. The Conservative party will, of course, try to claim credit for the Bill but I conclude, as I opened, by saying that there is substantially less to this than meets the eye.

Photo of Alan Beith Alan Beith Shadow Spokesperson (Treasury)

The hon. Member for Newcastle upon Tyne, East (Mr. Brown) has just produced some strangely conflicting remarks. At one point he seemed to imply that the Government had conquered the problem of inflation. He sought to argue that the reason that it was not necessary to take into account the disappearance of stock relief, which was a feature of the Labour Government's changes for small businesses, was that that problem was designed to deal with inflation. I must advise the hon. Gentleman that inflation is rising and is now at a serious level. Indeed, that is the plain justification for the Government's interest rate policy. Therefore, the absence of that feature must be one of the factors that one considers when trying to decide whether it would be appropriate to give small companies a higher level of relief than the Government propose.

The hon. Gentleman then argued that the Government had got it about right because if one projects on a year-by-year index basis the position under the Labour Government, one arrives at almost the figure that the Government have proposed. If that is what he thinks, why did he not vote with the Government? It seems perfectly logical to vote with the Government and to support their proposition if one thinks that they have got it right, rather than to skulk in the corner unable to vote either for or against the proposition that the relief should be considerably higher.

The hon. Member for Newcastle upon Tyne, East was right to say that the corporation tax relief is a benefit that will not deal with many of the problems of the smallest businesses and that at all levels of small business the problems of the level of interest rates and specifically that of VAT collection loom large. There is clearly a strong case for relieving some of the burden of corporation tax, which is why we support what the Government are doing in default of the larger measure of relief that we have just sought to persuade the Committee to accept.

I trust that having abstained in the previous Division the Labour party will not seek to oppose the inclusion of the clause in the Bill and that we can get on with these other matters when we reach the appropriate point.

Photo of Mr Dale Campbell-Savours Mr Dale Campbell-Savours , Workington

The amendment that the hon. Member for Berwick-upon-Tweed (Mr. Beith) moved on behalf of the Social and Liberal Democratic party was not supported by my hon. Friends, for a simple reason—and I shall tell him what was said as we went through the Lobby. It was because we sat through a Bill in Committee last year without Liberal participation in debates on these matters and because, while we voted on such matters, no Liberal Member voted with us that we could not take his amendment seriously.

If the hon. Gentleman thinks that he can come to the House on such an evening and move an amendment, having issued a press release, in the knowledge that in a previous year his hon. Friends refused to turn up and debate these matters at length, and if he thinks that at the same time, he can gather the credibility of the House of Commons, he is making a grave error of judgment. It may be that he had a very good case: I do not know. We did not consider it. It was not relevant. If he wishes to be taken seriously, he should ensure that his hon. Friends turn up to a Committee on the Finance Bill when we debate these matters again.

I turn briefly to stock relief and its effect on many small businesses during the period of the Labour Government. In many ways that was the largest concession ever given, under corporation tax law, by any Government that I can recall. The intention was to ensure that businesses were compensated for stock increases that arose from the inflation which existed during the period of the Labour Government and which derived from the oil price increases of 1974. However, most accountants, when drawing up accounts on these matters, did not take into account merely inflationary increases in stocks, but stock volumes.

During this period many companies were able to inflate their stock volumes to a major extent and yet, at the same time, claim relief on it. In my view, if the letter of the law had been strictly applied, those companies might have been subject to corporation tax during that period. Due to the complications of annual inventories and the difficulties of assessing the amount of stocks that companies were carrying, it was difficult for company accountants to assess what values could be attributed to inflationary factors, rather than stock volume increases.

Therefore, I submit that this major tax concession, which was introduced by the Labour Government, cost the Exchequer thousands of millions of pounds over that period. If I recall correctly, during that period a number of large companies in this country paid no corporation tax, while they made healthy profits. They were able to hide behind the arrangements—some might say sloppy arrangements—that operated during the period of stock relief concession. I do not condemn them for that.

Photo of Mr Dale Campbell-Savours Mr Dale Campbell-Savours , Workington

It was an important principle. I predict that if the Government do not deal with the problems of the balance of payments, they may find that they have to introduce another stock relief scheme to deal with the inflationary problems that will inevitably arise. We cannot continue as we are at the moment.

Some months ago, I asked the Chancellor a question at Question Time which, if I might say so modestly, was interesting. I asked whether it was fair to say that high penal interest rates were no more than a form of taxation paid to the private sector and private institutions. If a company pays high interest rates to what, in effect, is a private sector bank, it could be said that that is no more than a substitute for what in other conditions, perhaps of lower interest rates, might be a higher level of tax paid to the Exchequer in the form of corporation tax liability.

When we discuss interest rates, particularly as they affect the small business sector, we should remember that we are talking about taxation. Penal interest rates are nothing but taxes paid to private banks. If we see them in that context, the premium that we pay in higher interest rates, rather than more moderate and sensible rates, is a tax imposed by Government—possibly because of the inadequacy of their economic policy—and paid to the private sector and private institutions.

It is unreasonable of the Government not to concede this case. It is their economic policy and strategy that requires them to use interest rates as the weapon, in their view, to reduce the inflation level, and to deal with their other economic problems. In so far as it is a Government-inspired move to drive up interest rates to today's levels, they must take the responsibility, and accept and concede the principle that those high rates are no more than a form of taxation.

When those high interest rates, particularly their impact on small businesses, are taken into account when the lower rate of corporation tax and the raising of the profit limit thresholds are being considered, as they are this evening, the other burdens that have fallen on small businesses over the last few years should also be taken into account.

Another interesting factor that might be deemed a form of taxation is the large increase in commercial property rentals of the past two years. In the part of Lancashire in which I was once in business many years ago, one could regularly buy freehold square footage in the 1970s, for £1·50. The freehold price of a mill in Lancashire was rarely more than 75p a square foot. Today, even in the north, where there is still industrial recession, we pay £2 or £2·50 a square foot, not freehold but rental. Using the rental and the original capital cost multiplier, one can work out that the value of freehold industrial property in recent years has increased twenty to thirtyfold.

11.15 pm

In many ways, this has come about because there is not enough factory space on the market. If the Government built more factory space, through English Industrial Estates or similar organisations, or through local authorities, more commercial property would come on to the market, which would have a knock-on effect on the costs of freehold acquisition and the rental prices of industrial and commercial property. But that is not happening. The scarcity of property is driving up rentals. This inflationary effect on property prices has been induced by the Government, and I submit that that is another form of taxation.

This taxation may be paid to private landlords, but it is a form of taxation because it derives directly from Government policy, which does not provide for the building of sufficient industrial work space. In many parts of the country—certainly in Lancashire and parts of Yorkshire—there is a dearth of industrial and commercial property and rentals are being driven up, even in my constituency. I can remember that, even as late as 1979, square footage in Workington was sold for as little as 50p freehold. Now, people looking for space in west Cumberland will pay £2 or £2·50 a square foot for annual rental—a massive increase.

Another factor to be taken into account in assessing the Government's tax regime for small businesses is the impact of the cuts in regional assistance. Regional support has been dramatically cut, so that in many parts of the country, of which my constituency is an example, a traditional capital-intensive industry such as Thamesboard Mills required such a large amount of Government money to set up its plant in Workington during a big expansion that a special Bill had to be passed to ensure that the company received its regional assistance, which exceeded the levels of grant that Ministers could sanction without such legislation.

We no longer attract this sort of industry. We no longer get the Leyland Nationals, the Ektona Fibres, the Thamesboard Mills and other large capital-intensive industries. They are no longer interested in Workington because we have nothing to offer by way of substantial regional assistance.

We are still an assisted area and we have development area status, but the level of assistance is substantially less than it used to be, and we are competing with other parts of the United Kingdom which have equally high levels of unemployment. In those areas are pools of unemployed and they are nearer to the great conurbations and market centres. In many ways they are winning against us in our bid to attract capital intensive industries.

The burden on small businesses in my constituency, including the cuts in regional assistance and the fact that they are paying higher interest rates and higher rentals for their properties, puts them at a considerable disadvantage. So the concessions on corporation tax which the Government have announced today for small businesses are small compared with the added burdens that those businesses have acquired in recent years.

Other cuts have applied to small businesses that would like to get into export markets to achieve growth, finding that they are hemmed in by saturation of the domestic market. Many small businesses used to use the British Overseas Trade Board as the vehicle for getting into foreign markets. I refer to businesses with perhaps half a dozen or a dozen employees, the very companies that are today in potentially expanding sectors. They have been clobbered, in effect, by the new rules under which the BOTB does not sponsor, in the way it did in the past, the small firms of which I speak.

I was sent to Tokyo, Japan, in 1973 on a trade exhibition, paid for by the Department of Trade, where we secured a number of new accounts for the manufacturers with which I was involved. I also attended on a number of occasions the Milan trade exhibition and other such gatherings in various parts of Europe, always sponsored by the BOTB or by sectional bodies within the industry which, in turn, were sponsore on group stands. I am told that much of that has ended. I attended an exhibition in Birmingham a couple of months ago to talk to people in the trade that I was in originally, and they told me that the level of support now for people in our markets is minimal.

Photo of Mr Jeremy Hanley Mr Jeremy Hanley , Richmond and Barnes

If what the hon. Gentleman is saying is true, can he explain why more companies are now registered at Companies house than at any time in our history, allowing for the number of companies that have come off the register?

Photo of Mr Dale Campbell-Savours Mr Dale Campbell-Savours , Workington

That may not be too correct a measure; we may be talking of small incorporated businesses involving two or three people who, for whatever reason, have been advised by their accountants to seek incorporation. What matters is how much wealth we produce, how many people are employed, how secure one's markets are at home, whether one will be wiped by the cool breeze of recession and whether one can get into export markets.

Let us remember that export markets are a great plus for industry generally and certainly for smaller businesses. Such markets for small businesses often produce large orders. People who go abroad to sell do not want small orders; they want to do substantial business. Often in the 1970s I came across small business men whose major markets on the continent were store and wholesale groups and so on. It seems that much of that has gone because the contact point—the BOTB-sponsored exhibition—has, in effect, been lost from the support point of view, and many of those people no longer exhibit in overseas markets. That type of cost must be taken into account for businesses that want to enter those markets, and that cost must come into our evaluation of the real value of this concession for small businesses.

Historically, the tourist industry has been well supported by Government. We now learn that the Government have placed a moratorium on payments under one of the sections dealing with grants under tourist legislation with the effect that many projects are being put in jeopardy. Those that are will have their profitability affected by the loss of that grant. When we evaluate the worth of a concession in corporation tax, we cannot take it in isolation. We must see it in the context of all those factors and many others that I have not mentioned this evening.

My final point concerns the exchange rate and its effect on small businesses. I remember going to a trade exhibition in New York in 1980 to see some colleagues whom I had known when I was in business in the 1970s. We discussed the impact of the rise in sterling against the dollar on our ability to export to our overseas markets. One thing that rang out clearly throughout our conversations was that a high exchange rate was damaging Britain's exports.

Following that meeting, I met people from many companies which were severely damaged by the high exchange rate in 1980, 1981 and 1982 when sterling was so valuable. I am sure that I am not alone in that experience. I am sure that if hon. Members are truthful, they will remember that period well. We lost markets then, and now the exchange rate is over-valued. Until a decision is taken to reduce the exchange rate and come down to something like $1·40 to the pound, the trade deficit will not be closed. A convoluted argument was produced last year that a high exchange rate could lead to a reduction in the trade deficit, but I never subscribed to that view, although it was interesting. I think that the Government have changed their position on that.

It is critical to close that trade deficit because that will provide the basis on which a real spark and some fire can be given to small business development in Britain. We need a way of ensuring that British manufacturers substitute for foreign imports. The only way that we can do that is by giving them some sort of competitive edge. That drop of 25 or 30 cents in the exchange rate will be critical in helping many companies to import substitute. That is what we have to do.

When the Paymaster General discusses those matters with his colleagues in the Treasury, he must realise that he cannot go on like this, when he has at his fingertips a weapon that he can use which within months, or certainly within a few years, could have an immeasurable effect on the opportunities and potential for small businesses.

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

This has been an interesting and valuable debate, opened by the hon. Member for Newcastle upon Tyne, East (Mr. Brown) who began his speech by saying that the clause less than met the eye and concluded his speech with the same words. He also passed judgment on my right hon. Friend the Chancellor's use of the word "substantially". It was an agreeable metaphysical passage in his speech. The most metaphysical of all economic phenomena are invisible earnings.

This is a debate about small companies which have been highly visible. My hon. Friend the Member for Richmond and Barnes (Mr. Hanley) said that for the past eight years, and particularly for the past two or three years, there has been a notable and rapid expansion in the number of small companies that have entered business.

The hon. Member for Newcastle upon Tyne, East confirmed in his speech what I said in my speech on the amendment No. 14 and I shall now confirm that he was right. As the Bellman said in "The Hunting of the Snark", "What I tell you three times is true".

The hon. Gentleman asked why the Government had not changed these bands earlier. The reason was, as I said in my speech on the earlier amendment, that during the period to which he was referring we had been engaged in bringing the rate down. We brought the small companies rate down from 42 per cent. to 25 per cent. between 1979 and 1988.

The hon. Gentleman said that so far as the Labour party was concerned the rates were now about right. I think he probably meant the bands. We follow with the keenest interest anything that the Labour party says about rates because we notice a certain reticence about indicating precisely at what level various rates will strike. I am greatly reassured to hear that the hon. Gentleman thinks in this instance that the rates are about right.

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

I referred to the rates at which the bands are set.

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party 11:30 pm, 9th May 1989

At any rate, I have sought to give the hon. Gentleman a response to what he said.

He went on to talk about interest rates and the hon. Member for Workington (Mr. Campbell-Savours) also addressed that subject. We all come here with the various impedimenta of our experience. I always enjoy listening to the hon. Member for Workington—and I hope he will forgive me for saying so—talking about his experience in the private sector before he entered the House. I ran a business for 18 years before coming into the House and I think that those of us who run businesses of the sort of size that I did and, I suspect, the hon. Gentleman did are accustomed to aspects of the business cycle and to living through them. I certainly can remember living through the difficulties of the mid-1960s and the mid-1970s. I would have lived through the difficulties of the recession of 1969–71 if I had not been in New York, where the Wall Street Journal somewhat surprised me by being sufficiently frivolous as to say that the recession had become so serious that the Mafia had had to lay off two judges in New Jersey.

The important thing for anybody running a small business is a sense of steadiness in the economic framework within which he is asked to operate, and that is something which the Government have sought to provide.

Photo of Mr Ted Rowlands Mr Ted Rowlands , Merthyr Tydfil and Rhymney

May I ask the right hon. Gentleman one simple question? How does he justify a stituation in which interest rates are virtually double the rate of inflation?

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

I think the hon. Gentleman is familiar with the relationship between the mortgage interest rate and the RPI in this country, which only applies elsewhere in Ireland and Canada.

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

The hon. Gentleman asked me about the inflation rate and I was saying that, since the interest rate and the mortgage interest rate, which flows from it, are part of the RPI, necessarily when inflation is rising it provides an upward stimulus and when it is falling it provides a very strong downward stimulus.

Photo of Mr Ted Rowlands Mr Ted Rowlands , Merthyr Tydfil and Rhymney

I did not say anything about the mortgage rate. I asked a simple question. Why should interest rates be nearly double the rate of inflation?

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

I genuinely misunderstood the hon. Gentleman's question. I think he is taking us slightly wide of the clause; I shall watch you, Sir Paul, out of the corner of my eye. If the hon. Gentleman will refer to a table in a relatively recent copy of the Bank of England Quarterly Bulletin he will see the real interest rates in the United Kingdom, Japan and Germany and their relationship to the movements in wages and unit labour costs. The real rate of interest in this country being an offset to the fact that unit labour costs have been rising faster, one sees from the chart a rate which is comparable in the three places.

Photo of Mr Dale Campbell-Savours Mr Dale Campbell-Savours , Workington

Is not the real reason the fact that the Chancellor wants all this hot money in London to pay for the trade deficit? Why does not the right hon. Gentleman be honest with the House?

The First Deputy Chairman:

Order. This debate is new getting rather wide. We must stick to the clause which we are discussing.

Photo of Mr Peter Brooke Mr Peter Brooke Paymaster General (HM Treasury), Party Chair, Conservative Party

In the spirit of the question which the hon. Member for Workington asked, he knows that, because the balancing item is now larger than the deficit, it is difficult to know whether it is British exports which are being understated and what precisely is the nature of the capital inflow. I agree that we would be able to have a more interesting debate if we had precision on those figures.

The hon. Member for Workington made reference to stock relief and went through an analysis in relation to inflation. I will not go into a discussion with him as to what caused inflation during that period but I can echo some of the things that he said about stock relief. In the 1980s, that provision became much less important as we reduced the rate of inflation, and it was abolished in 1984 as part of a package of measures enabling the rate of corporation tax to be reduced. Both the main and small companies rates are much lower than when we came to office.

The hon. Gentleman referred to rentals for industrial space in his part of the country. I am delighted that on the basis of his analysis the demand for industrial space to which he also referred seems likely to increase the amount of space available. There was the slightest constituency dimension to the hon. Gentleman's speech, and, as to his comments on development areas, it is the case that, in the first 10 days after I was born my father anonymously contributed three articles to The Times on the subject of County Durham that all the historians of the 1930s say were responsible for the creation of development areas. My father is now dead, and although he was sympathetic and a stimulus to the concept of development areas in the 1930s, I am certain that he would be delighted that the manner in which the market is operating is causing the enterprise culture to flourish in all parts of the country.

The hon. Gentleman's concluding remarks concerned the exchange rate. 1 was the financial correspondent for the Financial Times in Switzerland at a time when there were 12 deutschmarks to the pound and 12 Swiss francs to the pound. The remarkable achievement of Switzerland and Germany has been to run balance of payments surpluses over the ensuing nearly 30 years while enjoying a steady increase in the value of their currencies. In the early 1980s—the very period to which the hon. Gentleman referred—there was a swing of 2·8 per cent. in terms of Japan's trade position as a percentage of gross domestic product at a time when it had an appreciating currency.

In the first quarter of this year, export volumes increased by 6·5 per cent. by comparison with the last quarter of 1988, at a time when import volumes increased by only 3·5 per cent. That is clear evidence that the reduction in demand for imports is improving our trading position.

We have strayed some way from the terms of clause 33. The hon. Member for Newcastle upon Tyne, East sought to suggest that there was less to clause 33 than meets the eye. I am certain that the small business men, seeing that the bands have changed, will regard it as a very worthwhile clause, and I commend it to the Committee.

Question put and agreed to.