I beg to move amendment No. 3, in page 22, line 26, insert 'and—
(c) the company does not retain at least £10,000 of its distributable profits for the period.'.
The amendment seeks to deal with a specific aspect of the problems caused by the clause and the related schedule. I think there is a general view that the clause and the whole territory constitute an unfortunate example of the Government's incompetence, and their tendency to meddle for spin reasons without fully appreciating where their measures will lead. As we all know, the Finance Act 2002 introduced a zero per cent. rate on the first £10,000 of profits. During the debate on that, the Government were well warned that it would cause massive incorporation by small businesses. We have already heard much quoting of the Paymaster General's "gift horse" comment—that she realised that it was a big fiscal inducement to incorporation. Now the volume of lost revenue appears to be significantly greater than the Government anticipated, and we have been presented with a rather hasty and not fully thought out measure to deal with the problem.
In his Budget speech, the Chancellor claimed that he expected small businesses to retain £10,000 worth of profits. That was, I think, a somewhat disingenuous excuse for these measures, which present a variety of problems. For one thing, an unfair arrangement will operate when companies that have paid tax on past profits want to distribute those profits in a subsequent year. Our understanding is that they will be liable to the new 19 per cent. tax. In the past they could have borne tax of between 19 and 30 per cent., so there could well be an element of double taxation. Companies that are currently not profitable but are distributing earlier years' profits will also be penalised for past investment, as they too will pay 19 per cent. on the profits distributed.
We think it should be made clear that paragraph 9 applies only when companies continue to be under the control of those who had control immediately before the degrouping. The definition of a group for the purposes of new section 13AB and schedule 3 is very wide, and will treat companies with little economic interest in one another as being grouped. Surely what is needed is an amended version of the definition that applies for the purposes of corporation tax on chargeable gains, in order to go on applying the definition of a group to companies likely to have a significant common interest.
The proposals are particularly harsh on small businesses with modest profits where the owners need to withdraw profits in order to live. In a sense, the only people who can benefit from the zero per cent. band are now those who have profits below £50,000 and do not need to withdraw more than £10,000 as a dividend. The tax relief thus ends up particularly benefiting the passive type of income-generating businesses, hobby businesses or businesses with spouses.
The 19 per cent. rule sounds simple, but in practice, because it makes dividends payable out of after-tax income, the calculations that it leads to are quite complex. Let us look at the calculation of profits available to be paid out as dividends where taxable profits are, say, between £10,000 and £50,000. If P is taken as the algebra for the profit for a full year, the calculation for distribution is P x 0.7625 x P + £2,375 ÷ 0.9525 x P + £2,375. It is not at all straightforward.
If dividends paid in one year exceed current taxable profits, the excess is carried forward and treated as paid in the following period, so again small businesses need to record the carry-forward, or they may be caught out by an unexpected tax bill. Double taxation credit relief where it may be relevant is ignored in applying the new 19 per cent. rule. The new rule is worked out first and any double taxation could reduce it afterwards.
We tabled three amendments, two of which have not been selected. Amendment No. 3 has been drafted to provide some mitigation for small businesses. In a brief conversation with the Paymaster General, she mentioned to me that the situation that the amendment seeks to achieve may already obtain, but that is not the perception of the various accountants with whom we have spoken. If it is, it is very fortunate, but the issue is that the zero rate band takes effect on the first pound of distributed profits. If a company distributes profits, it has a 19 per cent. tax charge on whatever is distributed. Our amendment is designed to meet the Government's declared objective better than the proposals as we understand them and as others have understood them, and to be less harsh on small businesses. It is relevant to about 300,000 small businesses.
Our two other amendments sought to defer the new tax by a year, largely because the Government have made it clear that the new 19 per cent. non-corporate distribution tax is intended to be temporary. If it is temporary, the last thing small businesses want is perpetual chopping and changing of their tax arrangements. It therefore seemed to us that there was a case for waiting until the Government had made up their mind what they wanted to do. Others have suggested that the new NCD rate should take effect only once undistributed profits at
There are also some deeper administrative problems with the Bill. As the Chartered Institute of Taxation has pointed out, the Government need to clarify the interpretation of the proposals and their interaction with IR35 legislation, preferably making it clear that there will be no double charge on the individual or company where that company has engagements within the intermediary legislation, and that it could be treated as having made a deemed payment.
There are various other specific issues that need to be addressed, and I hope that the Paymaster General will be able to assure us that they will be satisfactorily dealt with in the forthcoming further consultation on the arrangements. There is concern that the new provisions will discriminate unfairly against small companies that qualify for accelerated allowances and SME—small and medium-sized enterprise—research and development tax credits, because their taxable profits may be considerably less than their distributable profits.
Is it possible to provide examples to explain further how sub-paragraphs 8(3) and (4) of schedule 3 will impact on the differing accounting periods of group companies? Is it intended that the agreement to apportion the new tax between group companies should be a stand-alone claim, or will that be incorporated into the corporation tax return?
A nine-month time limit exists for making an agreement to transfer excess non-corporate distribution tax between group companies. However, there should be a move towards standardising time limits. In the case of companies, there is a 12-month filing deadline after the end of the accounting period, so why is there a nine-month time limit here? Would it not be sensible to standardise the limit at 12 months?
There seems to be a discretionary power in the arrangements to vary an allocation to an officer of the board. Will there be safeguards on the rights of the company to allocate that to its advantage?
There is a deeming provision, and it appears that if some shareholders waived their entitlement, it would be possible for a minority shareholder that is a company to be treated as a parent company if it received more than 50 per cent. of the dividend paid. Is that result intended?
There appear to be no new legislative provisions dealing with the elimination of the possible new double charge in relation to IR35. The relevant section is broad enough to deal with that, but it would be helpful to have confirmation that it will be interpreted thus, and to have clarification on that matter.
The non-corporate distribution rate is defined as
"such rate as Parliament may from time to time determine."
The rate is not specifically linked to the small companies rate of corporation tax, and we would welcome clarification on whether that is deliberate or whether it is intended that the non-corporate distribution rate may deviate from the small companies rate of corporation tax in future.
If the nil-rate band is withdrawn in the future, can we have an assurance that the current provisions in relation to the non-corporate distribution rate will also be withdrawn?
I wonder whether the original draft provisions deal fairly with a company in receipt of franked investment income when, in reality, it may well be the franked investment income that is being distributed. I hope that the Minister can assure us that there will be a fair and reasonable approach to the issue of franked income.
We question whether the existing provisions are fair, in that a group can decide how to allocate an excess of the new tax, whereas the parent must utilise as much of the new tax as it can.
In summary, many complex issues arise from the proposals. Our particular concern is for the impact on small businesses. If the Government were bona fide when they introduced the zero per cent. rate to help small businesses, it seems all the more important that the unintended consequences of their measures should be tidied up so that they do not fall harshly on small businesses. That is why we stress amendment No. 3, which is designed to ensure that small companies are not hit with a 19 per cent. tax charge on the first pound that they distribute.
Clause 28 and amendment No. 3 are the story of an accident waiting to happen to tax policy. As the Paymaster General will doubtless graciously acknowledge in her response, when the Government's zero per cent. rate was introduced, many tax practitioners—and even many politicians—suggested that there was a serious danger that lots of people would decide to incorporate for tax avoidance purposes, resulting in a far higher cost than the Government anticipated at the time. Of course, the fear was that the Government would respond, which is precisely what happened, despite their telling us at the time that they were conscious of those risks and believed that their estimate of the revenue loss was reliable.
In the year after the Government introduced the zero per cent. tax rate, there was an increase in new incorporations of some 43 per cent., and as a result the Government's anticipated tax loss ballooned to approximately £1 billion a year. Clause 28, which is their response, rows back from the earlier zero per cent. tax rate, but because they do not want to reverse the process altogether, there is a 19 per cent. non-corporate distribution rate—the mechanism through which they intend to get the money back.
Following this year's Budget, the Institute for Fiscal Studies said in its briefing to the press, Members of Parliament and others that many practitioners and economic commentators had anticipated this problem when the measure was introduced. It also reflected on what this fiasco tells us about a Government who said that, in terms of tax policy, they would pursue stability for small and larger businesses. Robert Chote, director of the IFS, pointed out that many small companies have gone through some four different tax regimes in not many more years. The 20 per cent. small business tax rate was followed by the 10 per cent. rate, which was followed by the zero per cent. rate. Now, we have the zero per cent. rate, plus a 19 per cent. distribution rate. Of course, in a couple of years' time there will be a discussion paper and—if we are lucky—pre-Budget consultation. That will probably be followed by an entirely new tax regime, which will affect incorporated and unincorporated small businesses. What we are debating today might then be a complete irrelevance—who knows?—because the Government are likely to present us with something entirely new.
It is very depressing to have to deal with such a problem. When we reflect on today's debate on whisky duty and tax avoidance in the spirits industry, and on the persuasiveness of the Government's case in that regard, we realise how badly wrong Governments can sometimes get it. Indeed, this situation is a prime example of how wrong Governments can be.
Many of the tax practitioners and economic commentators who were conscious of this problem in the past year felt that, in many senses, the best way to deal with it was simply to cancel the zero per cent. tax rate, and to cancel the starter rate altogether. They felt that it was better to go for a much simpler system, rather than introducing the non-corporate distribution rate. The Government have not chosen that path, and one can imagine the Chancellor's embarrassment and the effect on his reputation had he announced in his Budget that he was doing away with the starter rate just two years after introducing it.
There remains real concern at the way in which the Government have decided to solve this problem. John Whiting, of PricewaterhouseCoopers, said that clause 28
"has a lot of disappointing features—fundamentally it is hard to get away from the simple point of "why do it?". Bringing in such a change, requiring nearly 8 pages of the Finance Bill, seems hardly appropriate when one thinks that this is a measure to get at the smallest company. This will undoubtedly force more small businesses to take professional advice if only to make sure that they are complying with this new self-assessed charge."
When we debated the issue briefly on Second Reading, I told the Paymaster General that, at the time the measure was introduced, I was invited to a presentation by one of the tax practitioners in my own constituency. His task was to persuade the many businesses there that it would be a good idea to pay the required fees to the tax advisers in order to take up the opportunity of exploiting the 0 per cent. tax rate. The major concern was whether any Government suffering the likely loss of revenue would suddenly change course within a couple of years. I made the terrible mistake of saying that no Government could possibly change course in such a short period and that they could rely on the fact that, at least until after the general election, they would be safe. Now these people, to whom I dare not go back, are not only going to have to pay the money to incorporate into the system in the first place, but probably pay for more advice on how best to manage the consequences of the Government's U-turn.
Clearly, the Government considered some alternatives to their proposed structure in the run-up to the Budget. Indeed, the regulatory impact assessment runs over a variety of options. It comments that increasing or abolishing the starting rate of corporation tax would run counter to the Government's aim of maintaining low rates corporation tax to encourage growth and enterprise. However, that makes an interesting counterpoint to paragraphs 23 and 24 of the same assessment, which predict that, once it is fully in operation, the new measure will raise in the order of £0.5 billion a year. One wonders whether the Government are really so concerned about not raising the tax burden on small businesses. Why do they not acknowledge that this measure will have the same effect, and recoup revenues that they did not anticipate spending when they introduced the 0 per cent. tax rate?
It would be fair to point out, as the regulatory impact assessment does, that the revenue raised by the measure is in many ways what the Exchequer inadvertently gave away a couple of years ago. As the assessment also admits, the measure will affect only companies generating less than £50,000 a year, and it goes on to say that it will help to ensure that the tax paid by those companies is more closely aligned to the tax paid by the self-employed, thereby improving the fairness of the tax system. One wonders why, if that is a priority and objective, the Government took the action that they did a couple of years ago, which made the playing field less level and gave people incentives to incorporate. That is the key to the whole issue and to the way in which the Government should pursue their policies in future. One wonders why, in any logical tax structure, there should be a significant differential between incorporated and unincorporated tax status, and whether we should be providing incentives through the tax system to change status in a particular way.
Paragraph 5.95 of the Red Book states that the Government propose
"to consider the strategic issues raised by these developments, to ensure that the tax system reflects the realities of today's changing labour market and business environment. A discussion paper will be issued at the time of the 2004 Pre-Budget Report."
Presumably, that gives it all away. We now discover that the new regime that the Government want us to approve today may not last long at all. Who knows, we may get a discussion paper in future with the conclusion that the different treatment of incorporated and unincorporated businesses makes no sense. Then—again who knows?—we may find in a couple of years' time, perhaps without any consultation whatever, that there is a new tax regime for small businesses.
It must also be a matter of concern that, before the introduction of this measure in clause 28, there was no consultation, and no proper discussion following the pre-Budget report. The regulatory impact assessment merely uses the specious excuse that consultation was not possible because of Budget confidentiality—a remarkably thin excuse for something that could affect 800,000 small businesses throughout the country.
There is great disappointment that the Government have acted in that way. I hope that the Paymaster General will assure the House that she will not subject the same companies, in a couple of years, to any further instability in the tax system. We need an undertaking that the new system is permanent, or that the Paymaster General will think again about introducing it until she has conducted the review referred to in the Red Book. In that way we can move—in one go, and without going through a fifth stage of instability—to a new tax system that deals coherently with smaller businesses, be they unincorporated or incorporated.
The Chartered Institute of Taxation raised a particular point about the proposal. The shadow Chief Secretary to the Treasury touched on this matter earlier, and I shall quote directly from the institute's discussion paper on clause 28. It states:
"There is one area where we feel that significant unfairness can arise as a consequence of the proposals. Where companies have paid tax on past profits but reinvested those profits and now wish to distribute them, they will be subject to the new tax. In some cases these profits will already have borne tax at 19 per cent., and, in extreme cases such as where the business is declining, perhaps even at a higher rate of 30 per cent. They will now potentially be taxed again, and we have received representations from tax advisers whose clients are not currently profitable but who are distributing earlier accumulated profits and suffering this double charge."
I hope that the Paymaster General can deal with that concern when she responds to the debate. I am sure that she would not want the proposals to have the effect that has been described. In addition, I hope that she will reassure the House that the problem that we have experienced over the past two years will not be repeated. We need clarification on the matters that have been raised, but more than anything else, I hope that the Paymaster General will give an undertaking that the Government will delay the implementation of the proposals until there is a coherent system of taxation for smaller businesses. Alternatively, I hope that she will offer an undertaking to ensure that there will not be any further instability in a year or so, when the Government's review is complete.
I refer the Committee to the declaration of my interests in the Register of Members' Interests. I want to suggest to the Paymaster General that she reflect on the debate and imagine herself in the place of the owner of a small business affected by the proposals. What will be the effect on people trying to do all that is needed to run a small business? Small businesses are about people doing everything from accounting to selling, and all the rest of it.
When a mistake is made, it is difficult for a Government to reverse it. I understand that, and it would be curmudgeonly to press the point too hard. However, the problem is that a bog up has been made, and it is increasingly difficult to know what the Government mean about the simplification of the tax system. What do they mean about their care for small businesses? Small businesses are finding it more and more difficult to handle changes in the tax regime without resorting to the sort of expensive professional help for which the Government should not be providing an employment exchange.
A measure such as this makes it extremely difficult for honest people to run their businesses in a cost-effective way. I beg the Paymaster General to think again, and to see whether the proposal can be made much more simple. I hope that she will accept some of the recommendations that have been made, and that she will put off the effects of the measures until simplification has been achieved.
I suspect that most small business people will make neither head nor tail of much of what has been said in this debate. That is not proper for people trying to earn wealth for themselves and for the rest of society. For that reason, the Government are condemned on this issue—as they are on many of the matters referred to in the Bill.
Mr. Gummer spoke about trying to achieve a simplified tax system. That is very important, and a goal that many people who take part in these debates aspire to, although we rarely see the outcome of their attempts.
The burden on people in business, and the complications that they face, are becoming very depressing. The Government have promised to bring in a new companies Bill to streamline the law in that area, but it is languishing in draft form. The final version never seems to come any nearer. The Government also promised to make life simpler for small businesses by having a basic de minimis system of regulation for them, and a more complicated system for larger concerns. Yet the way that the Treasury has made tax matters more complicated means that life has become increasingly difficult to understand, especially for people whose main priority is to get on and run a business.
If the Chancellor were genuine about wanting small business to assist in making the economy grow, he would try to make more use of the expertise of small business people in respect of their particular businesses. He would not be looking to their overall commercial skills in accountancy and tax law. What we need is a climate that allows small businesses to focus as much as possible, within the wider world with which they must comply, on the thing that drove them into the business in the first place.
As the Paymaster General knows, my constituency contains many people who operate small businesses, and she and I have had many exchanges on IR35 over the years. One frustration expressed to me by many constituents in the run-up to this debate is that they have been lured into a trap. Having gone to all the expense of incorporation, they feel trapped, in that the benefit that the Chancellor said they should get for going through all the hoops is to be taken away. It is much more difficult to unincorporate than it is to sort out the mess that they have got into, and for those people, there is a real compliance burden.
I reinforce what my hon. Friend Mr. Laws said: if yet another upheaval in the whole system of taxation is coming down the tracks, especially if it affects smaller companies, it would make sense to bring the whole thing together so that people need climb only one learning curve during the main transition to take the whole thing on board.
I am worried by what I have heard about the distribution of past profits. This is where the Chancellor's gimmick has backfired and created even more of a muddle. He created the gimmick to get headlines, which was the start of the problem. Having done that, he then had to create a solution that did not leave too much egg on his face. That might tackle some of the problems his gimmick created, but it creates a trap for people who never intended to exploit the gimmick but who were lured in. The solution will hit them on their past profits, unless the Paymaster General has some reassurance to offer on that. I urge her to go down the road of stability and embrace what has been offered to her by my hon. Friend. She should try to bring the whole thing together, genuinely practising what the DTI has preached about a simpler climate for small business by delivering that climate.
In responding to Sir Robert Smith and Mr. Gummer on the approach that businesses should make to professional advisers, I want to say two things. First, as businesses consider whether to be incorporated, they, and presumably their advisers, may read Tolley's Tax Digest, which lists a huge number of points about the tax consequences for or the obligations on someone who is self-employed, in a partnership or who chooses to incorporate. The decision for a company on whether or not to incorporate has far more complexities, particularly if the company wants to plan its growth and move from self-employment to expand, than whether there is a zero rate on the first 10 per cent. of profits. In addition, the Government made it absolutely clear when we introduced that zero rate that we intended reinvestment of profits into the company for growth. That was the purpose of the rate—to encourage growth, not to have money taken out as dividends or as salary by another name.
I shall come to the points made by the hon. Members for Yeovil (Mr. Laws) and for Arundel and South Downs (Mr. Flight). Let us be clear, however. The Government's intention has always been to remain neutral with regard to the operation of the tax system on whether a self-employed person decides to incorporate. At that point, those people need to take advice. The Government placed a mechanism in the tax system that meant that if companies chose to incorporate and to reinvest the first £10,000 of profits, they would be taxed at a zero rate, in order to help them to grow. That remains the case.
I am always happy to see measures intended to promote business growth, but the amendment would not achieve what the hon. Member for Arundel and South Downs suggests, as I told him earlier. In fact, it would work against the companies with the smallest profits—the very ones that we want to see grow. For example, a company owned by an individual with profits of less than £10,000 in an accounting period can, inevitably, only retain less than £10,000. It has no more profits to retain. However, the company would be liable for the non-corporate distribution rate if it paid a dividend. I agree that that might act as an extra incentive for the company to grow and earn profits exceeding £10,000, but such an incentive is neither equitable nor good for business.
The amendment has a substantial flaw. Corporation tax works so that it smoothes the transition from one rate to another, but the amendment provides that a difference of £1 of profits retained could have a tax impact greatly exceeding £1. For example, a company retaining £9,999 of profit would be liable, under the amendment, to the non-corporate distribution rate in relation to profits matched by its non-corporate distribution. However, if the company retained £10,000 of profit, it would not be liable at all at that rate. That is unduly harsh. The clause has no such unfair distortion. It is important to make that point because the hon. Gentleman challenged me on it.
The amendment would have a further harsh consequence. There is no provision to adjust the £10,000 threshold to take account of a shorter accounting period. For example, the threshold for a company with a six-month accounting period would not be reduced, under the amendment, to £5,000. The amendment would also put groups of companies at a disadvantage. If a group had two trades, the £10,000 threshold that is proposed would apply to its retained profits for both activities. However, if it made commercial sense to separate the activities into two subsidiaries, the £10,000 threshold would apply to both. In other words, the amendment would increase the threshold to £20,000 of retained profits.
Clause 28, as drafted, suffers none of those drawbacks. It will encourage all businesses with small profits to retain some or all of them, so that they can be applied to investment and growth. That is precisely the point that I made when addressing the issue in deliberation on the Finance Bill in 2002. By contrast, the amendment would favour companies with £10,000 or more profits available for reinvestment and would put less fortunate companies at a disadvantage. I do not believe that that was the hon. Gentleman's intention, but he will be voting on a highly defective amendment—if he is prepared to take my word on that.
I am inclined to bow to the Paymaster General's superior knowledge and advice. However, as I understand it, the amendment would have the effect— granted, it is somewhat arbitrary—that if a company with profits of £10,000 or more retained up to that amount, NCD would not apply. That is because the clause that the amendment would add to the Bill would make it a reverse condition. Arbitrary though it would be, it would exempt a certain category of company from NCD.
I could see that that was what the hon. Gentleman sought to achieve, but that is done by the clause as it stands. The amendment would not achieve his aim, because he is setting the hurdle at £10,000 and anything beneath that would be liable to the NCD. However, our proposals cover cases up to £10,000, and that point needs to be made.
I shall deal briefly with the point about whether the clause is temporary and amounts to a strategic change in direction. I make it clear to all the hon. Gentlemen who have spoken in the debate that it is not a strategic change of direction. I have tried to point out that the Government have introduced a wide range of measures—both regulatory and tax measures of all types—to help business. I will not go through all of them. We believe that it is important that we continue to assist with reinvestment to help companies to grow. However, we will deal with cases in which money is being taken out.
The deliberate and cumulative aim is to underpin all the measures that the Government have taken to encourage businesses to grow and to be more enterprising and productive in the medium and long term and not to operate year by year by playing around with the tax system.
I was not sure whether the Paymaster General was coming to my question, so may I ask her whether she can give us a cast-iron guarantee that, if the clause is passed, there will be no change in the business tax regime for small businesses even after the review that was referred to in the Budget has taken place?
I was going to come to that point, but it is probably best if I deal with it now. It is not possible for any Minister to say that there will never ever be a change, but I point the hon. Gentleman to the consultation document that he mentioned. At all points, the Government's strategic direction is to look at small and medium-sized enterprises, their dynamism and ability to contribute to growth and to consider whether the tax system responds to their requirements. For example, he should look at the Budget discussion document on access to finance.
The hon. Gentleman asked me a similar question in Committee in 2002 about whether I thought I had got the balance right when he pressed me on the issue of incorporation and non-incorporation on the zero rate. I believe that the balance is right and that we are assisting companies to grow. We will, of course, act in the way that Parliament would expect us to do if the provision is used in a way that the Government never intended. I could have not been clearer in the Committee about what the zero rate was for and about the reinvestment of the £10,000 of companies' initial profits.
The hon. Gentleman was right to say that the starting rate was never meant to encourage businesses to incorporate solely or mainly for the short-term tax and national insurance advantages. I am perfectly prepared to admit in the House that we did not anticipate the significant numbers that would be prepared to incorporate without taking proper regard to the wide-ranging and important commercial considerations that need to be taken into account when deciding whether a company is limited. We set up a model and the provision was discussed in Committee in 2002. We have debated the issue at length, but tax planning and encouraging companies to behave are important issues that the Government need to take on board to a far greater extent. We shall do that in the Finance Bill.
I shall briefly respond to the specific points raised by the hon. Member for Arundel and South Downs. The measure is not retrospective; it is solely concerned with determining the rate at which current, and sometimes future, profits are liable to corporation tax, so the hon. Gentleman's point about the measure being applied to the same profits twice does not apply.
The hon. Gentleman said that the scheme is unfair if the distributions are made out of reserves or in other ways, and that the Bill should give credit for the tax paid. As I said, the measure is simply a mechanism for determining the rate at which a company's current, and sometimes future, profits should be charged corporation tax; it is not in any way a tax on distributions past, present or future.
The hon. Gentleman also said that the measure hits the smallest companies when larger companies can get off free. That is not so. The measure applies to all companies with profits liable to corporation tax at below 19 per cent. if they make distributions to non-corporate persons.
I turn now to what the hon. Gentleman called the triple whammy on small business: IR35, section 660A and now the non-corporate distribution rate. He knows that IR35 is not an attack on genuine business; it tackles intermediaries such as service companies where individuals are avoiding tax. Neither is section 660A an attack on small business; the Revenue is applying legislation to those using a company or partnership to avoid tax. There is no question of a double whammy or a double tax on any of these companies. The hon. Gentleman referred to the nine-month time limit. Nine months is only a minimum time, and it ties in with the due date for payment of corporation tax—that is all. There is nothing conspiratorial about it.
The hon. Gentleman also referred to the question whether companies need to bother with the scheme, and he said that they need to know about all the legislation. That is not so. A company will know whether it is in a group, so it will know whether provisions in part 2 apply to it. Companies have advisers who know all this, as the hon. Gentleman knows.
The hon. Gentleman touched on the provision for an inspector of the board to allocate liability to other companies, and he wanted to know what safeguards there are. The measure also provides for companies to amend those allocations, so no further safeguards are necessary. It is not a one-way street in which the Government simply impose conditions.
Finally, the hon. Gentleman asked about the deeming provisions in paragraphs 14 and 15 of schedule 3. Of course, the Revenue will be issuing guidance explaining exactly how those measures work. I have spoken to him before about the marginal bands and the way we ease progression from one band to the next.
I have dealt with the point made by the hon. Member for Yeovil about incorporation and self-assessment. The point about complexity is sometimes a little overdone. The hon. Gentleman has only to cast his mind back to the arrangements for advance corporation tax, which applied to these businesses before it was abolished—that involved 50 pages of legislation.
The purpose of the clause is to fulfil the Government's intentions to deliver support to companies and encourage them to reinvest their profits, rather than distributing them. That is important, and all outside the House have welcomed the way the Government have approached the issue. Many thought that we would use national insurance or income tax.
New businesses are thriving under this Government. More than 1 million new businesses have been created since 1997, a net increase of 117,000 businesses, demonstrating that the tax system and our economic policy enable companies to open up, grow, develop, be productive and create profits for their investors. That is precisely what the clause provides, and I hope that, on that basis, the hon. Member for Arundel and South Downs will not press his amendment.
There is an apparent lack of clarity about the effect of our amendment. Our understanding of its effect is that if one retained the first £10,000, one would not be subject to the non-corporate distribution rate at all, because the amendment would add a requirement about a company not so retaining at least that sum. I will take on trust the Minister's comments that she does not believe the amendment has that desired effect.
Our opposition is, however, to clause 28 as a whole. The Paymaster General and the Chancellor have been a little disingenuous in the argument that the zero rate was always about retaining profits. I well recollect pointing out in the Finance Committee precisely how it would be used—businesses would incorporate, and would then withdraw via dividends at a lower tax rate, saving national insurance. I recollect an extremely conscientious colleague of the Paymaster General asking me whether that was really how things worked. I explained and he expressed great surprise. For the Government to argue that it was not absolutely clear that giving a biased tax rate to incorporation did not serve as a massive encouragement to sole traders to incorporate, then to distribute by dividends, is not a fair comment.
In view of the debate, I beg to ask leave to withdraw the amendment, but I urge my right hon. and hon. Friends to vote against the clause, given the whole background to it.
Amendment, by leave, withdrawn.