Clause 5 — Small companies' rates and fractions for financial year 2008 etc

Orders of the Day – in the House of Commons at 3:33 pm on 28th April 2008.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 3:33 pm, 28th April 2008

I beg to move amendment No. 1, page 2, line 36, leave out '21%' and insert '20%'.

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Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

With this it will be convenient to discuss the following amendments: No. 7, line 37, at end insert—

'(1A) Subsection (1)(a) shall come into force on a day which the Treasury may by order appoint.

(1B) No order may be made under subsection (1A) until—

(a) the Treasury has compiled and laid before the House of Commons a report containing an assessment of the impact on the competitiveness of small companies as a result of changes to the small companies rate of corporation tax, and

(b) the report has been approved by a resolution of the House of Commons.'.

No. 2, in page 3, line 1, leave out '7/400ths' and insert '1/40th'.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Amendments Nos. 1 and 2 would reduce the small companies rate of corporation tax to 20 per cent. and make the appropriate change to the fraction. At a time when small companies are under pressure, facing higher costs and a more uncertain economy, it is beyond belief that the Government feel that the answer to their problems is to increase the small companies rate of corporation tax.

As in the case of the 10p rate, which we will debate later, the author of the tax increase is not the current Chancellor of the Exchequer, but his predecessor—the Prime Minister. As Chancellor during last year's Budget, he announced that he would increase the small companies rate from 19 per cent. to 22 per cent. in three successive Finance Bills. That has sent out a confused and confusing message to the small business community, which has had a decade of instability in respect of the small companies rate of tax.

The Committee should remember that the rate is now on an upward curve, having fallen from 24 per cent. in 1996-97 to 19 per cent. in 2002-03. There will have been six changes to the small companies rate of corporation tax between 1996-97 and 2009-10; that is before we take into account the starting rate of 10 per cent., which was introduced in 2000-01 and which the Prime Minister, when Chancellor, reduced to zero in 2002-03. In 2004-05, he overlaid it with a 19 per cent. tax rate on distributions to shareholders. He scrapped it completely in 2006-07. For small businesses seeking to navigate their way around the rate of corporation tax, there has been a significant amount of change. At this time, businesses want stability, predictability and certainty, rather than the only certainty that they have had in the past decade—that the rate will continually change.

It is not surprising that the verdict of business organisations and small businesses has been hostile. In its Budget submission for this year, the Federation of Small Businesses pulled no punches. It said that

"The Government's approach to the taxation of small businesses remains alarmingly disjointed and inconsistent. What has been received is a never-ending raft of badly thought through last minute measures, designed to tackle problems in one part of the tax regime, but ending up creating several more elsewhere."

It goes on to say that

"Small businesses continue to be let down by the Government with regards to taxation and were understandably extremely disappointed by the announcement in Budget 2007 to increase the small firms rate of corporation tax from 19 to 22 per cent. This was a draconian measure to tackle a problem of tax avoidance that did not exist and will have a highly detrimental effect on many small businesses."

The Forum of Private Business said that politicians should give the same attention to the increase in the lower rate of corporation tax as they gave to the abolition of the 10p rate, and 76 per cent. of respondents to its survey said that

"reversing the decision to increase the small firms rate of corporation tax would encourage them to reinvest in their business, with 49 per cent. indicating that they would have extra funds to invest in skills and training".

The response from individual companies has been equally hostile. Tim Rhodes of Skypark Freight Ltd in Liverpool said of the Government:

"They don't seem to be thinking of tomorrow. Small businesses are quite resilient and tend to bounce back, but all of these additional taxes are very trying. Often, it comes to the point where you ask if it's worth carrying on—we can hold on only for so long, after that, unfortunately, job losses will be the result."

Matt Hardman, who runs a bacon slicing business in Bury, called the decision to increase the small companies rate a "kick in the teeth". There is widespread concern among business communities about the increase in the small companies rate by 1 per cent. to 21 per cent. this year and then 22 per cent. next year. Businesses will be asking themselves why the Government are attacking small companies in this way. What have they done to get to a stage where the small companies rate of tax had fallen to 19 per cent. but is now back on that upper curve?

The genesis of the increase stems from the decision in the 2002 Budget to introduce the 0 per cent. rate of corporation tax for profits of less than £10,000. That triggered a wave of incorporations of companies, which some predicted at the time. I believe that the Government's analysis of the situation is this: that a tax change that was meant to stimulate entrepreneurial activity led to that mass incorporation by people seeking to take advantage of the lower 0 per cent. rate of tax, which gave them an advantage comparable to self-employed and employed people earning the same income. The analysis produced by the Institute for Fiscal Studies bears out that analysis, which was then, however, used to justify the abolition of the 0 per cent. rate and is now being used to justify the increase in rate from 19 to 22 per cent.—2p higher than the basic rate of tax that people who earn a comparable amount of income would be paying through the income tax system. The Government's introduction of the 0 per cent. rate created a significant incentive for businesses to incorporate. The abolition of the 0 per cent. rate has narrowed the gap between the effective tax rate that small companies enjoy and the effective tax rate that individuals enjoy when they are employed, but there is now a sense that the Government are seeking to go further and further in narrowing that gap.

Part of the Government's action is that which is before us today—the increase in the small companies corporation tax rate—but they have also taken other steps to deal with the issue. Last year's Finance Act introduced changes on managed service companies, and the pre-Budget report included proposals on income shifting—again, targeted at incorporated small businesses. Those proposals have been deferred for a year, and business organisations welcome that, but they are concerned that they might return in next year's Finance Bill and are looking to have a proper dialogue with Her Majesty's Revenue and Customs and the Treasury to tackle those issues. A series of measures is being taken to tackle the gap in the effective rate of tax, but it is not clear to small business organisations just how far the Government intend to go in dealing with the issue. It would be helpful in the context of this debate if the Financial Secretary could clearly set out the basis of Government policy on the taxation of small companies and businesses, because significant concern is building up that the Government are turning their backs on small companies, that they do not show any understanding of how small companies operate, and that that is creating a culture in which entrepreneurial activity is penalised.

A significant cost arises from the Government's approach because companies that are already finding it difficult to trade profitably will see their taxable profits decline. The tax bill of any company with profits of less than £300,000 will increase regardless of whether it employs one person, 10 people, 100 people or 1,000 people. That illustrates the crude nature of the Government's step. If this tax increase is motivated by a concern about incorporation, the Government need to recognise that it catches out many businesses, not only one-man bands. That is part of the unfairness that people perceive in the system. They see the tax rate and the tax bill for small companies increase in the Budget, as it did in the last Budget and as it will in the next Budget. The Government argue that the annual investment allowance will compensate for that. However there are two flaws to that approach.

First, the allowance is available to all small businesses—that is a much wider pool than all small companies. While the pain is concentrated on one group, the gain is spread more thinly. Last year, I estimated that small companies' average loss would be approximately £1,000, whereas the gain to small businesses would be less than £100. Proper compensation is therefore not being paid to the small companies that will lose out through the increase in the small companies corporation tax rate.

Secondly, the compensation rewards a specific type of business activity—investing in physical assets—and does not recognise the other sorts of investment that companies can make, such as in training, human development and so on. The Government are trying to incentivise only one form of behaviour when firms could operate in other ways to improve their businesses, for example, through investing in people by developing skills and so on. They are introducing the annual investment allowance when the Red Book forecasts a fall in growth in business investment from 3.75 per cent. in 2007 to between 1.75 and 2.25 per cent. this year.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury) 3:45 pm, 28th April 2008

Does the hon. Gentleman perceive a contradiction in Government policy in relation to the annual investment allowance? At a time when the Government, rightly and understandably, seek to capture the cost of intangible investment in research and development, one of their tools for genuine investment—the annual investment allowance—is directed only at physical assets, not process?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman makes, as he often does, a perceptive comment. There is a problem with that sort of behavioural device because it supports one specific activity, rather than recognising different ways in which people might invest in their business. That is especially relevant given our economy's increasing dependence on the service sector. That is why Conservative Members believe that the best solution is to reduce the small companies rate of taxation, as the amendment proposes, and give companies and businesses the ability to determine where they will invest and spend their profits. That is a much better—non-distortionary—way of proceeding. It tells businesses that they know the best way in which to grow and allows them to decide how to act rather than relying on central Government and the Treasury to recognise their improvement in performance only so long as they invest in physical assets. That is the difference between the Conservative party and the Government.

We believe that restructuring reliefs and allowances will provide us with the tax revenue to enable us to reduce, in this case, the small companies rate of corporation tax—a change that is tax neutral overall, but gives businesses the freedom that they need to decide where to invest and avoid going through a fairly lengthy, potentially complex process about annual investment allowances. It will also give companies the responsibility for and opportunity of deciding for themselves how best to spend their money. Reducing the small companies rate would benefit companies, whether they employ one person or 1,000 people.

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Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend is making a powerful case. Does he believe that it is even more interesting that the Government are limiting investment to such a narrow definition, yet when they speak about their spending patterns, almost all their revenue spending—much of it wasteful—is called "investment"?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My right hon. Friend makes a good point. I, too, have been frustrated at how anything that the Government spend their money on counts as investment, when sometimes, as I know from the parliamentary questions that I have tabled, it does not necessarily equate to spending that helps taxpayers.

To return to amendment No. 1, because of the nature of our proceedings, we have not tabled amendments in the Committee of the whole House that deal with the annual investment allowance, which we want to scrutinise in some detail in Committee. However, we believe that we should scrap the annual investment allowance and use the proceeds to fund a cut in the small companies rate of tax to 20 per cent. That would be in the best interests of business and is entirely consistent with our approach of having simpler, flatter and fairer taxes, by broadening the tax base through reducing distortionary relief and using the revenue gain to reduce the rate of corporation tax.

Amendment No. 7, which Stewart Hosie has tabled, has much to commend it and gets to the nub of the problem, which is the impact that the rate has on competition. It is important to consider the competitive impact of the rates of corporation tax paid in this country. The week before last we heard about the pharmaceuticals company Shire, relocating out of the UK because of tax, while United Business Media, which was formerly chaired by the Labour peer, Lord Hollick, made a similar announcement today about its domicile for tax purposes. Clearly there is a significant issue with the competitiveness of the UK tax system and how it compares with those of other major economies. That competitive position is not just about rates, but about a range of issues, including predictability, stability and certainty.

My only concern about amendment No. 7 is that, as I understand from its drafting, there will be some uncertainty for small companies, because the rate change will be made only once the report has been laid before the House and voted on. If the House were minded to reject the Government's report, that would delay the implementation of the small companies rate. That would cause some uncertainty—although I gather that Parliament now has a much greater say on tax, thanks to Mr. Field, who seems to have extended parliamentary control—and I am not sure whether, under the circumstances, we can allow that for the small companies rate. I would much rather the Government listened to our proposal and reduced the rate of tax now, rather than waiting until the report is published later in the year. I would therefore urge the hon. Gentleman to support us, should we push amendment No. 1 to a vote.

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Photo of Jim Cunningham Jim Cunningham PPS (Mr Mike O'Brien, Minister of State), Department for Work and Pensions

I apologise for coming in a little late—the hon. Gentleman might have already answered this question—but can he tell me how small businesses would benefit if the Government were to adopt his amendment?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My argument is that one of the problems that the Government have created in tackling the issue is that they have said that the pain should be borne by small companies, but that the gain should be spread widely and thinly on small businesses. My proposal would ensure that the small companies tax rate for the financial year 2007-08 was kept stable. That is in the best interests of small companies. Part of the issue is the complexity of the treatment of sole traders, the self-employed and so on, but in principle small companies should have a lower tax rate and should not be forced to pay a higher tax bill as a consequence of the Government changing their mind about how they deal with their tax affairs.

The Government have got themselves into that position. The weapon that they have chosen to tackle the issue is crude, will hit small companies regardless of the number of people whom they employ and will be damaging to small companies as a group. That is why the Government should think again about the proposal and why amendment No. 1 seeks to keep the small companies rate at the level that existed for the previous tax year.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

This is my first Finance Bill Committee, and I admit to a degree of trepidation as I embark on this adventure, which will occupy a large part of my time for the next few months. I was reading an obituary of Humphrey Lyttelton on the train from Taunton this morning, and I thought that his comments about his period as a restaurant critic were relevant to my feelings. He said:

"In a moment of self-doubt, I said to George Melly...who had been doing the film reviews for The Observer, 'I'm sure they're going to find out one day that I know nothing about it'. His answer was convoluted but true: 'Yes, but in my experience, by the time they find out you know nothing about it, you will know something about it'."

I hope that is my experience during the remainder of our sittings.

I am sure that my unease about the Bill is nothing compared with that felt by the Government in recent days and weeks. Our deliberations have focused primarily on the 10p rate being doubled. Although the public as a whole, and people who watch politics carefully, inevitably tend to have a great preoccupation with taxation on personal income, taxes on small businesses are just as relevant—sometimes more so—to the prosperity of the individuals whom we represent as the taxes that are levied directly on their income. The Chancellor is championing the 2p cut in the main rate of corporation tax, but if we look at the small companies rate, we see that it was 19 per cent. in 2006, 20 per cent. in 2007, 21 per cent. in 2008 and that it will be 22 per cent. next year. There is no clearer direction of travel than that. People in my constituency and elsewhere who work for, or who are related to, people who work in the small business sector are understandably concerned about the impact of that increase on its profitability and competitiveness. The chief executive of the Forum of Private Business, Phil Orford, has said of the Budget:

"While there are some welcome initiatives, they do little, if anything, to offset the tax burden due to be implemented in April. The Chancellor has missed a golden opportunity to convince the small business community that he is on their side."

When I speak to those who work in small businesses, they frequently say that it is becoming increasingly difficult for them to remain competitive. The burden of tax and regulation, not all of which is tax based—some of it relates to health and safety provisions—compromises those businesses' competitiveness. There are not many large corporations in my constituency. Inevitably, when a large business goes bust or makes several hundred employees redundant, people tend to focus on that, but the cumulative effect of lots of small businesses laying off a person here and a person there, which is much less readily observed by the media and by the general population, is none the less a problem for us if we wish to have a successful economy in the UK.

I agree with many of the points that have been made by Mr. Hoban, and I shall not repeat them simply because we are able to carry on for as long as we want to in today's debate. I agree particularly with him about the unease in many quarters regarding the small business provisions in the Budget. If he chooses to press the amendment to a vote, we will support the Conservative party.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

Mr. Hoban asked whether I would be likely to support him on amendment No. 1. Given that my name is attached to the amendment, I should say that it is highly likely that I shall. He may take that for granted.

Before I speak to amendments Nos. 1 and 7, both of which I support, let me say that I was struck by the fact that the Liberal Democrats have not tabled any amendments on important matters such as business tax, capital gains tax, gaming or the abolition of the 10p rate. There are none until we get to the next group of clauses. Perhaps I am going wide of the mark, but I was surprised by that.

I rise, however, to speak to amendments Nos. 1 and 7. I offer the simple argument that imposing new and extra taxation on small businesses is fundamentally wrong. Amendment No. 1 would leave the small companies rate at 20 per cent. and amendment No. 7 would give the Government the opportunity to make an assessment and justify to the House why they believe that increasing the rate to 21 per cent. now and 22 per cent. in the future would be beneficial to business and make it more competitive. It would then be for the Government to explain why other measures in the Budget, or that they announced in the pre-Budget report and previous Budgets, would compensate and ensure that business competitiveness remained as it is or would get better. I have to say that I am sceptical of whether the Government could come up with an assessment to prove that, and I am very suspicious that they could come up with an assessment that would say anything other than that business competitiveness would be weakened by an increase in the small companies rate at this time.

Let me explain further. Businesses are operating at a time of high and rising fuel costs, which are unlikely significantly to be moderated at any time soon, and within a framework of high transportation costs—and every haulier I speak to tells me that that is unlikely to change in the near future. Businesses are seeing prices for raw materials skyrocket and I can evidence that with an example from my own constituency, where the Patak's food company factory recently closed down. Swingeing rises in the prices of its raw materials—mainly chicken, rice and dairy products—forced the factory to close as it became utterly uneconomic and completely unprofitable. That resulted in many very loyal workers losing their jobs. Nor is that an isolated or anecdotal story, as we are hearing and seeing similar examples from around the country. Indeed, the hon. Member for Fareham referred earlier to the pharmaceutical company, Shire, and to United Business Media in respect of corporation tax being too high.

Given that businesses are operating in the midst of a credit squeeze, as a result of which any investment they might wish to make and their ability to absorb price increases will have to come from their own resources, now is the wrong time to be putting up tax on the money they make. That is the key point. As prices for fuel, energy, transportation and raw materials go up, and as the external funding that companies used to rely on either dries up because of the credit squeeze or becomes much more expensive, we should not be taxing the money that small companies make in the way that we are with the rise in the small companies rate.

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Photo of John Redwood John Redwood Conservative, Wokingham 4:00 pm, 28th April 2008

It is heart warming to hear that the hon. Gentleman is such an advocate of lower taxes on business—a cause that he knows I support. Will he tell us what his party recommends for Scotland by way of a company tax rate either for larger or smaller companies?

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

We have focused our attention historically on the main companies rate, which we want to see reduced to 20 per cent. in order to create a real competitive advantage in Scotland. With regard to smaller businesses generally, the right hon. Gentleman will know that we have already taken steps to reduce or remove completely the business rates burden from 150,000 Scottish businesses. However they slice and dice us and from wherever we get that competitive advantage, we need to take such action through budgets. We think that we have done the right thing with business rates in Scotland and we now want to go much further on the main rate of tax. That is the approach that we would take.

We want the increase in the small companies rate to be reversed, as we believe that would allow companies to make the investment to create the jobs that we all want as we move, I hope at some point, towards full employment. In the current economic circumstances, a tax rise will simply denude businesses of the money that they need to make that investment.

We know that that investment would be made. The Forum of Private Business survey last autumn—at the time of the pre-Budget report—was interesting in showing that 67 per cent. of members who responded said that, should the rate increase be reversed, it would encourage them to reinvest in their businesses. Almost half said that a reversal would give them the extra funds to invest in skills and training and almost half said that it would make them more likely to seek to grow their businesses. It is highly likely, I suggest, that should the increase go ahead, a much smaller number of businesses would have the cash to make the investment that they were talking about last autumn.

That is a particular concern in Scotland. At the last count, there were 279,495 businesses in Scotland, of which 273,745 employed fewer than 50 people. Another 3,500 employed between 50 and 249, and only 2,265 are large businesses employing more than 250 people. We believe that the impact of the £1.2 billion—estimated by the CBI—taken as a result of the increase in the small companies rate is likely to be disproportionate in Scotland.

The words at the time of the Budget from the Scottish Chambers of Commerce, on this matter in particular, were especially telling. Liz Cameron, its chief executive, said:

"Alistair Darling's first Budget was a missed opportunity for the UK... to boost Scottish businesses. He could have cancelled his plans to increase the Small Companies' rate of Corporation Tax...but he didn't."

She went on:

"Promises of future tax simplification and a consultation on limiting the volume of regulation are welcome, but when set against the cold, hard tax rises being experienced by many businesses, they are of little comfort."

I wholeheartedly concur.

Over three years, a few thousand pounds extra in revenue yield might add up to a great deal of money for the Government, but if businesses do not have that kind of money, it will stop them buying a new computer, bringing someone in on a Saturday to fulfil an order, undertaking a small marketing campaign or perhaps paying the air fares to a first ever trade show. The Government do not seem to recognise that such small amounts of money are vital for growing businesses and incredibly difficult to earn, particularly in the current economic climate.

Obviously, I will back amendment No. 1 to reduce the rate. I will reserve my position on amendment No. 7 and wait to hear what the Financial Secretary has to say. I hope that she at least tries to give some justification for why she believes that increasing tax at this time—in view of all the other burdens that businesses face—is somehow a good idea, rather than the bad idea that businesses, business leaders and many in the House believe it to be.

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Photo of John Redwood John Redwood Conservative, Wokingham

I am a company director and a shareholder in companies, as I have declared in the register, but not, I think, of a company that will be paying this particular tax in the current year.

I rise to support the idea that the tax should be 20 and not 21 per cent. and that it should not go up to 22 per cent. subsequently, and I ask the Government to think again about their extraordinary U-turn in their policy towards lower tax rates for people on lower income and for smaller and start-up companies that earn less profit than more mature companies that have gone on to grow for longer and perhaps more successfully.

The Government produced an attractive package when they decided to encourage incorporation by having a zero tax rate on small profits for companies that had recently incorporated, and when they decided to have a 10p capital gains tax charge on people who set up companies, who took founder shareholdings in companies or who decided to buy into companies that were small and growing and could take advantage of that privileged capital gains tax regime.

We saw a response to that favourable tax regime in the improvement in the rate of new company formation. A lot of people in the small business groups around the country were saying to Opposition representatives, as well as to Government representatives, that the Government had got something right and that that part of the tax regime was favourable. It was an encouragement that those people very much welcomed, so it is strange and extremely disappointing that the Government should have backtracked on both elements of that attractive regime and that they have not learned the lesson from a country such as Ireland, which has persevered with a much more favourable tax regime for business across the board—businesses large and small—and has had the phenomenal success that we see in the Irish growth rate, the development of Irish business within the Republic and the collection of so much more tax revenue in general by the Irish Treasury.

As more people have got better jobs and taken more income out of smaller and larger companies, and as more smaller and larger companies have grown, been successful and produced capital gains, dividends, income and good jobs for people, so the economy as a whole has benefited from that process, and so the Irish Treasury has benefited, having more money to spend per head on public services as a result of that growth than has been available from the British Treasury's attempts to find ever more stealth taxes to sustain more rapid growth in spending per head on public services here.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

I appreciate my right hon. Friend's comments about the Laffer curve, which I have gone on and on about in the three years that I have been a Member of Parliament. However, what bothers many small businesses—with which, like me, my right hon. Friend has been involved—is the timing of the tax increase. At a time when we should be supporting small businesses, it appears that we are attempting to undermine what they are trying to achieve in extremely difficult times by increasing taxes while, across the pond, the United States is doing everything it can to lower them.

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Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend is right. Ministers must know from their conversations, as he and I know from our conversations with the British Chambers of Commerce and the bodies representing small businesses in Britain, that it is becoming much more difficult to be a successful competitor from a British base. Smaller companies are feeling the increase in taxation and the growing weight of regulatory cost even more than the larger ones, but that population of small businesses must be allowed to grow more rapidly so that we can experience success in the future.

All the studies show that if there is to be sustained rapid growth in employment in private-sector activities, a lively and growing small business sector is essential. New jobs are much more likely to come from that sector than from the larger companies that have the money to automate, to mechanise and to take their labour-intensive activities offshore. They do not generate the same pace of business growth and job growth as small companies.

As Mr. Browne observed, although we unfortunately often hear of very large casualties in the corporate world—factories closing, or large numbers of people being made redundant by the larger companies—we never hear of redundancies of the same scale in the smaller companies. They do not employ as many people to start with and, when conditions are reasonably benign, they do not sack people. As a whole, they are a growing sector, adding jobs as they find better ways of doing things and creating new activities that the public wish to buy into. The danger is that the Government will take small businesses to tipping point with too much tax and regulation, so that, largely unseen, many jobs will be removed or new jobs will not be created and we will have a worse problem with unemployment.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

It should also be borne in mind that nearly every large business that employs vast numbers of people started off as a small business. We are not only compromising the small business sector of the economy, but running the risk that tomorrow's big businesses will never be able to get off the ground.

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Photo of John Redwood John Redwood Conservative, Wokingham

The hon. Gentleman is right, and it can be deduced from his argument that we need to lower tax and regulation on all populations of business if we want a really successful economy like the Irish economy. That is especially important in the incubator world of small business. Among the mighty population of small businesses in a vibrant economy will be a limited number that will go on to become the mega-corporations of the future. As Silicon valley demonstrates, businesses can grow from very small to very big in the space of a decade, with stunning implications for the success of the economy and the success of tax-raising on those populations of businesses, and job generation.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

We might quip that the way in which to create a small business under new Labour is to start with a big business. However, on a more serious note, let me say that my right hon. Friend has not touched on another important issue. One of the hallmarks of new Labour has been chopping and changing, but what businesses like is consistency. Only through consistency of policy, particularly tax policy, can they thrive.

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Photo of John Redwood John Redwood Conservative, Wokingham

I am grateful to my hon. Friend, although the number of interruptions makes developing the argument as quickly as he would like a little more difficult. He is giving me friendly help and assistance to make sure that I do not forget the important arguments. I am genuinely grateful to him and he is absolutely right that consistency is important. Being able to forecast the tax rate to be paid not just this year but next year and the year after is extremely important when it comes to drawing up a business plan. Any small business that wishes to grow relatively quickly will need access to outside finance: a bank loan, other investors, business angels or another way of raising capital. Any of those would immediately want a business plan, not just for one year but for, say, three.

An important element of that business plan would be to know what the net profitability would be after three years, after the start-up costs and losses. The net profitability obviously requires an assumption about the Government's tax rate. If the tax rate is changing every year—or goes up every year—it makes forecasting accurately more difficult. It also means that net profits will be less at the three-year stage, or at the five-year stage in a five-year business plan. That makes it more difficult to raise external capital; the banks and others living through the credit squeeze may say that they are unable to help because the net returns are not sufficiently good. Altruistic as many financiers are, they are not normally interested in how much money a business generates to pay the tax man; they are interested in how much money a business generates to pay the shareholders and other private stakeholders, which is why the tax rate is so important.

I am delighted that my Conservative Front-Bench colleagues are strongly in favour of simplicity and lower taxes and they are right to want a 20p tax ceiling on small businesses. I hope that they will also want—I am sure they will—to bring down the rate of corporation tax on larger companies closer to the 20p band. That is very important to the enhanced competitiveness of Britain that we will wish to see after the damage being done to it by higher taxes and more regulation.

I trust also that Governments will start to look at the idea, revolutionary for current political times, that we can perhaps save some of the waste and unnecessary expenditure in Governments so that we do not always have to pay for these tax reductions by finding other ways of increasing taxes. It was exactly that route of tax reform that got the Government into such difficulty on the 10p band.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 4:15 pm, 28th April 2008

I am grateful to the right hon. Gentleman for giving way to me a second time. Does he share my unease that the Conservative party is committed to taxing at exactly the same overall rate as the Labour party at the next general election? The total amount of Government spending as a percentage of GDP will be identical, if the Conservative party wins the election, to the level it would be were Labour to win. That sounds like mimicking the Government, rather than providing an alternative to them. Does he think that that is a wise approach for his party?

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Photo of John Redwood John Redwood Conservative, Wokingham

The hon. Gentleman must have forgotten that I am a Conservative MP, so I do not share his unease at all, nor do I accept his premise. I am quite sure that the shadow Chancellor and his senior colleagues are serious when they say that they wish to have a lower-tax Britain than we would have under Labour. I am quite sure that we would have a lower-tax Britain than we would have under a Lib-Lab pact, because we know that Liberals are very liberal with other people's money. Normally in the House they do not make the wonderful case for lower taxes as the hon. Gentleman seemed to be doing this afternoon. Normally they make the case for spending all sorts of sums of public money on things that may not even be desirable and are very often quite wasteful

There is only one party that seriously believes in lower taxation for the whole of the UK and has a chance of winning a national general election in this country and that is the Conservative party. The Scottish National party now seems to believe in lower business taxation, but it is not in a position to do very much about it because most of the powers on these matters rest in the UK Parliament.

I say to my hon. Friends on the Front Bench that it is a privilege to be able to support this very sensible proposal for a 20p tax on business. It would be to the benefit of the small business community, and the Government's relations with it, if the Government listened, in the way that we hear the Prime Minister is now listening on the 10p tax band. It is another example of how dangerous the Government's tax reform can be, particularly now they are destroying the only good tax ideas that they ever had. I was with them on the 10p income tax band and on zero tax on smaller businesses and they are throwing it all away.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

Before I begin my speech, I wish to draw Members' attention to my entry in the Register of Members' Interests. I also wish to make an observation: there is not a single Labour Back Bencher present to contribute to this debate on this extremely important clause. [Interruption.] I agree that Joan Walley is present, and she may well contribute to our debates later on, but I have not yet heard any contribution on this clause.

I am delighted to contribute to our deliberations on the vital issue of the taxation of small businesses. Small businesses are often lauded as the real wealth creators and the dynamo of the economy, as, indeed, they are, but it often appears that the Government have taken this image too literally in creating a tax policy for them that resembles a dynamo only in so far as it spins in circles.

If there was ever any doubt about the Prime Minister's new-found fondness of Blairite political theatre, it was dispelled during this year's Budget, which began the escalation of the small companies rate. After years of debate in Parliament and elsewhere about taxation acting as an incentive to incorporation and encouraging distortion, the Prime Minister's final act of political theatre was to propose a Budget that cut the main rate of corporation tax to 28 per cent. while the small companies rate was simultaneously to be raised to 22 per cent. over three years.

More than that, years of debate about the disparity between personal taxation and business taxation rates influencing behaviour in undesirable ways by encouraging avoidance were further muddled by the fact that the small companies rate is set to rise above the basic rate of income tax. Having encouraged thousands of sole traders to incorporate, the Prime Minister aims to leave the small companies rate at just 1p below the level where he found it when he became Chancellor. The result of his small business taxation odyssey is that he has boxed thousands of taxpayers into a structure that may no longer be appropriate for them.

I know that the Treasury's response will be that such people can simply elect to pay themselves a salary rather than dividends, but that neglects the fact that many small businesses face significant increases in administration and compliance costs as a result of incorporation. A former Financial Secretary has quantified that the incentive for a self-employed person earning £30,000 to incorporate and take income from dividends will reduce by £1,000 by 2009-10. For some, that could be just the start of the additional costs. That would, perhaps, be more acceptable if disincorporation were a simple proposition, but it is not. Tax advisers were already warning last year that there was no method for businesses to disincorporate tax-free without Her Majesty's Revenue and Customs making a case that there is a deemed transfer of goodwill out of the business and back to the sole trader.

If the Treasury's aim really is the encouragement of disincorporation, the Minister will no doubt be able to tell us what steps the Treasury is taking to remove barriers to disincorporation and to assist small businesses to unwind their tax affairs. However, if the Treasury is actively pursuing disincorporation, the Minister must also admit that it has led the small business community on a wild goose chase for the past few years. Indeed, a tax policy that simply brings the Prime Minister back to where he began is certainly a novel interpretation of the role of the business cycle. Unfortunately, his changes have been counter-cyclical, if not counter-productive, and he has committed his successor to increasing the tax burden on small businesses at a time when they can least afford such a move—I made that point to my right hon. Friend Mr. Redwood.

The small companies rate has been discussed in whole libraries of paperwork over a number of years. Formerly, criticism focused on the sporadic nature of the Prime Minister's changes. The Institute of Chartered Accountants was typical in its condemnation, stating:

"This type of 'stop-start' tax tinkering is creating a climate of uncertainty for businesses."

Before he moved on to greater things at the Treasury, Edward Troup also regularly called for not only certainty but simplicity. He is notable for having expressed his hope to the Treasury Committee that the Government would "do a graceful U-turn" on the subject of the 0 per cent. small companies rate in favour of incentives that were both better targeted and workable. It seems that this time at least the Treasury has been fruitful in the U-turn department, even if none of the U-turns has been particularly graceful.

I hope to return to Mr. Troup's influence on policy later in the Committee's deliberations; suffice it to say that if anyone's hand is on the tiller of the ship of state as it tacks and gybes towards the rocks, it may well be his. In the meantime, I want to dwell briefly on the reason underpinning the change of direction by examining the supposedly better targeted and more workable incentives.

The Prime Minister presented small businesses with a regime of research and development and investment allowances, and that is all well and good for businesses able to make use of them, as my hon. Friend Mr. Hoban outlined. Unfortunately, the system entrenches an unwelcome distinction between businesses operating in the manufacturing and service sectors—between those that are capital intensive and those that are not. The Government argue that they support targeted reliefs, but perhaps Ministers can explain the justification for favouring one sector over another in that way?

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Photo of John Redwood John Redwood Conservative, Wokingham

Will my hon. Friend be extending the argument that the Government's concern seems odd, because someone who decides to draw more money out in salary or in dividend has to pay tax, so the Government are clearly targeting money that would otherwise stay in, and be profitably used in, the business?

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

My right hon. Friend makes an excellent point; the Government's lack of consistency bedevils many businesses, both small and large.

The Government argue that they support targeted reliefs, and I look forward to the Minister's explanation of the justification. We addressed the issue last year, while I still had the pleasure of serving on the Treasury Committee. Our sceptical conclusion bears repeating now:

"It is not clear whether measures such as the increase in the R&D tax credit and the introduction of the Annual Investment Allowance will have the desired beneficial impact on investment levels by small companies."

Instead of committing to an escalation of the small companies rate, the Government should take a step back and take stock of their continuing to pull in different directions.

Commercial decisions in small businesses are still being influenced by legitimate concerns about the benefits or disincentives of incorporation, and the dust has not yet settled. The Government occasionally manage to evoke a sense of continuity in their fiscal policies. For example, let us consider the following quotation from Malcolm Dunn, writing in the journal Taxation:

"It is a bizarre form of socialism which leaves the rich virtually unaffected but hits the poorest the hardest".

I do not want to presage too much of tonight's debate, so I should make it clear that he was writing in 2004 about the introduction of the minimum 19 per cent. rate for non-corporate distributions. The comparison between that and other poorly timed simplifications with disproportionate effects bears noting, and we should not forget that the increase in the small companies rate came in very handy when the Prime Minister was trying to balance the books after he cut the main rate from 30 to 28 per cent. as part of his pre-election stunt.

The proposals in clause 5 are at least part of a three-year escalation and businesses can be grateful that they have been given a time line for increases in their further tax burdens, but we are still talking about tax increases. I speak in favour of amendments Nos. 1 and 2 in the hope that the Government will think again about committing to escalating the small companies rate to 22 per cent. by next year. The original decision was made both in more benign economic conditions than those today and by a different Chancellor.

What is more, the Government have shown in the past few months that they have a firm track record in only one respect: the rapid reversal of fiscal policy. I hope that I can encourage the Minister to think again, if only because the third time is the charm, and to come back to the House on Report with a small companies rate that does not increase the burdens falling on small businesses that are ill equipped to deal with them. If the Government are looking to do something that might restore the trust of the small business community, they need look no further than a freeze on the current rate and a moratorium on fresh uncertainties.

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Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 4:30 pm, 28th April 2008

It has been an interesting debate to warm us up for later proceedings. Mr. Redwood lumped this proposal with others and described it as a stealth tax. It is not so stealthy that hon. Members are not protesting against it, as witnessed by this debate. I have noted the fact that the Opposition voted against this measure in the Budget.

Mr. Hoban, in his opening comments, moved quickly to the differences between us. It is interesting that his right hon. Friend Mr. Cameron was quoted as saying that people should

"never believe a politician about tax or borrowing, unless they are prepared to take tough decisions about public spending."

I see the hon. Gentleman nodding in agreement, and I shall return to that comment in my closing remarks. In the mean time, I invite the Committee to consider it.

The Government announced changes in last year's Budget to encourage investment and innovation. The small companies rate of corporation tax remains highly competitive internationally and has by far the highest threshold in the G7 at £300,000—a fact that one would hope would be welcomed. The average threshold for other G7 members with a small companies rate is just over £23,000.

If I may, Sir Alan, I will stray slightly wide—although not, of course, wide of the amendments—in responding to some of the criticisms that have been levelled at the Government and in explaining our proposals and why we seek to resist the amendments. The World Economic Forum ranks the UK as one of the top 10 most competitive countries, ahead of France, Canada and Australia, and the World Bank ranks the UK sixth in the world in doing business, ahead of Germany, France and Japan. We are also first in the G7 for ease of paying taxes, which is an important factor for small businesses. The Government are committed to tax simplification and have announced a package of more than 20 measures, including simplification of the associated companies rules and a new review of CT calculations for small businesses, all of which have been welcomed by small and medium enterprises.

I welcome Mr. Browne and his L-plates—I have great sympathy for some of the comments that he made on that score. He stated that the UK tax system imposes significant burdens on small businesses compared with other countries. I do not accept that statement. At the Budget 2008, Her Majesty's Revenue and Customs published details of how it is improving services for small businesses, including progress against its administrative burden reduction targets. According to the PricewaterhouseCoopers World Bank publication "Paying taxes 2008: The global picture", a standard UK company spends less time complying with the tax system than a similar company in any other G7 country. The Government have outlined in their enterprise strategy, published at Budget 2008, how they will build on their targeted net reduction in the administrative burden of regulation by 25 per cent. by 2010. It is therefore wrong to claim that the changes to the small companies rate of corporation tax affect all businesses.

The UK has around 4.4 million small businesses. Of those, 75 per cent. are the self-employed, and they are not affected by the changes to the small companies rate of corporation tax. Additionally, about 400,000 companies pay no corporation tax, so they will not be affected by changes to corporation tax rates. Of those companies that pay corporation tax, a quarter of large companies and more than half of medium-sized companies pay tax at the small companies rate. It is important to realise that the rate is in fact a small profits rate. Any company with profits up to £300,000 benefits from that low corporation tax rate, regardless of its size.

Both groups can benefit from one of the other changes in the Bill: the annual investment allowance for expenditure up to £50,000, which has been maligned by Opposition Members. Both the hon. Member for Hoban— [ Interruption. ] I apologise to the hon. Member for Fareham; that is why I increasingly need my reading glasses. The hon. Members for Fareham and for Dundee, East (Stewart Hosie) said that the AIA did not go far enough. The hon. Member for Dundee, East in particular, speaking for the Scottish National party, criticised the AIA's ability to help with the costs of training staff, improving staff capability and other intangible investments. I am sure that he knows this, but it is worth bearing in mind the fact that the cost of employees can already be offset against tax. The AIA will allow businesses to offset £50,000 of capital expenditure in a similar way.

The Government are expanding and improving Train to Gain, with funding rising to £1 billion by 2010-11. The other forms of investment mentioned by the hon. Gentleman are directly deductible for tax purposes. Indeed, the Government have introduced a generous research and development tax credit, which was picked up on by other speakers, that provides more than 100 per cent. relief—it provides 150 per cent. relief against tax for small companies.

In debating the amendments, it is necessary to understand the changes to small business taxation in a wider context. The Government have lowered corporation tax rates for small companies over the years in order to encourage investment. We have reduced the small companies rate from 23 to 19 per cent. and introduced a starting rate of corporation tax for those with profits below £10,000.

Those lower rates of tax resulted in a significant number of people incorporating, not to invest and reinvest in their businesses but simply to extract the profits in a way that reduces their personal tax and national insurance contribution liabilities. I shall not quarrel with the point made by the hon. Member for Fareham that we were warned of that at the time, but those who take such action carry out the same economic activity as they did before they incorporated but pay lower rates of tax than those who remain unincorporated and than employees.

Such people are not using incorporation as a launch pad for growth. Instead of concentrating on their core business and being advised on how to expand and become more profitable, they and their advisers are treating incorporation as a tax break, which is being subsidised by ordinary taxpayers and the self-employed businesses that suffer a competitive disadvantage. The increase in the small companies rate will reduce the differential in tax paid between the incorporated and the self-employed.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Financial Secretary's arguments are reminiscent of those used by her predecessor in the debate last year. It is almost a Yogi Berra moment; it is déjà vu all over again. What research has the Treasury done to prove what proportion of companies incorporate to take advantage of the 0 per cent. corporation tax rate? Are companies continuing to use that despite the fact that the 0 per cent. rate was scrapped?

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Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

It is too early to say what the total impact of last year's proposals will be. I shall commission work to answer the hon. Gentleman's point, and when I have that sort of detail, I shall communicate it to him. I am sure that we will have the opportunity to return to the subject in the Public Bill Committee in a few days' time.

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Photo of John Redwood John Redwood Conservative, Wokingham

Does the Financial Secretary not accept that someone who had incorporated in order to take advantage of the lower tax rate would have to pay full income tax if they wished to pay themselves a higher salary or dividends after profit?

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Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The difference in the tax burden for those who are incorporated and those who are unincorporated is clear and accepted, and our proposals have been phased in, to allow companies to take those changes into account, and to recreate, as it were, a fair and level playing field between small businesses competing in the same sector that may not be incorporated for tax purposes. The increase in the small companies rate reduces the differential between the incorporated and the self-employed. That means that the 3.3 million unincorporated businesses will be relatively more competitive—thus, as I said, levelling the playing field.

Last year, we announced a package of business tax reforms to improve competitiveness and encourage investment and growth. The changes to the small companies rate are part of that package, which refocuses the incentives for small businesses on the activity of investment, and is designed to promote fairness across all 4.4 million small businesses. The hon. Member for Fareham asked why a targeted solution to the tax-motivated incorporation problem was not adopted instead of increasing the small companies rate. We have done extensive work on the issue of small business taxation, balancing incentives for small business growth with fairness in the tax system for all, and the changes to the taxation of small businesses announced in the Budget last year provide a good balance between those objectives.

It would be wrong, however, to consider the small companies rate in isolation, and the change in that rate was only one component of the small businesses package announced in the 2007 Budget. That package refocuses the manner in which the Government provide incentives for small businesses on the activity of investment, and it would be wrong, as I have said, to take it in isolation.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

We face difficult economic times, and I am trying to understand the logic of increasing taxation in a period that is particularly difficult for small businesses. How does that provide them with an incentive to continue to grow their business, and what have we done to encourage businesses to come and set up in this country, as they can actually see that business has increased year in, year out? [ Interruption. ]

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Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

My hon. Friend the Exchequer Secretary reminds me that a figure of 700,000 new businesses is not a discouraging one. Mr. Newmark asked me a general question about the economic climate in which we have made these changes. As I have just explained, they are intended to re-establish fair competition for those who have been incorporated for tax purposes, and thus enable them to take advantage of arrangements that ought to have been made for investment in business for growth purposes. By levelling the playing field, we will restore the motivation for companies to focus less on how to use incorporation to avoid tax liabilities, and encourage them instead to focus on growing their business.

The annual investment allowance, as I have mentioned, will target assistance directly on those businesses that invest their profits, regardless of their legal form. It will be available to all 4.4 million businesses, and will allow them to offset up to £50,000 of capital expenditure in the same way as they offset other costs such as employment costs. To increase the sense of déjà vu experienced by the hon. Member for Fareham, I repeat that the package is important: it was introduced last year, and it is part of the ongoing debate. Simon Sweetman, chair of the Federation of Small Businesses tax committee, said:

"The Annual Investment Allowance will be significant for small business, both incorporated and unincorporated...and has the added benefit of being a simplification."

The allowance should be welcomed, rather than dismissed as some speakers have done.

The Government also announced an increase in the small and medium enterprise R and D tax credit rate from 150 per cent. to 175 per cent.—we will come on to debate that later in other clauses—and that will also help small companies investing in new technology. All these measures taken together refocus tax support on investment rather than on low profits.

Thank you for bearing with me, Sir Alan. I will now deal with the proposed amendments in detail and in turn. I fear that the amendments would pose a serious risk to fairness. The Government have set out how they will make the tax system fairer across all small businesses, reducing the competitive disadvantage, as I have said, faced by unincorporated businesses. However, the Opposition believe that all 3.3 million of them should continue to be disadvantaged in this way.

Amendment No. 1 would encourage further tax-motivated incorporation, counteracting the moves towards fairness that the Government support. Furthermore, the small companies rate will still be lower than it was in 1997 when it was 23 per cent., even as we take the proposals forward.

Amendment No. 2 proposes to maintain the current fraction of marginal relief as 1/40th. In proposing the amendment however, the Opposition have not done their sums properly, setting out a perverse incentive to have profits within the marginal relief band. The fraction for marginal relief ensures that there is a smooth rise in the rate of tax applied to companies with profits between the thresholds for the small companies and main rates of corporation tax. In proposing that the small companies rate and marginal fraction both be maintained at last year's level, the Opposition fail to take account of the reduction in the main rate of corporation tax from 30 to 28 per cent.

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Photo of John Redwood John Redwood Conservative, Wokingham 4:45 pm, 28th April 2008

Will the Minister explain how it came to pass that the previous Chancellor created such an unfair system in her view that the Government now have to amend it in this direction of creating greater fairness? Is it not rather the case that the previous Chancellor gave a poisoned pill to his successor in the form of higher taxes across the piece?

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Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

As I have said, and as the right hon. Gentleman will remember, the intention of the changes that have led to advice given by tax advisers to incorporate to avoid tax was to encourage investment and growth, particularly in small businesses. We are now correcting an imbalance that has developed as a result of the behaviour in response to those changes.

As I have said, the amendment would negate the purpose of marginal small companies relief. By way of illustration, if the Committee were to accept the amendment, a company making profits of £301,000 would pay more than £5,500 less in tax than a company making profits of only £299,000. It would do nothing to benefit the vast majority of small businesses in the UK.

Amendment No. 7 proposes that an assessment of the impact of the changes to the small companies rate should be undertaken before any change is made. Again, it shows that Opposition Members misunderstand the changes put forward by the Government, which are about improving competitiveness across all small businesses. Reducing the differential in tax between the unincorporated and incorporated will allow better direct competition. Delaying implementation of this change will allow the differential to remain. Furthermore, the changes to the small companies rate are part of a wider package that encourages all businesses to invest and innovate to assist future growth. The introduction of the annual investment allowance benefits all businesses, allowing them to compete more fairly.

It is appropriate that I should make clear the substantial fiscal risk that the amendments pose. Together, they would cost the Exchequer more than £300 million next year. That brings me back to the statement by the right hon. Member for Witney that I quoted earlier. The Committee should consider the amendments in the context of the fact that the main Opposition party voted against all the revenue-raising measures proposed in the 2008 Budget. Given that the country is looking for a Government who are wedded to economic responsibility, I do not believe that such amendments should be accepted. They would do nothing for the majority of small businesses and fail to recognise the importance of fairness across the board in the tax system.

I would ask the hon. Member for Fareham to withdraw the amendment; however, having heard his opening speech, I am clear that he is unlikely to do so. In that case, I ask the Committee to resist the amendments.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

First, I want to say something to Mr. Browne, who, to use the words of the Minister, has his L-plates on. Thinking back to the hon. Gentleman's reference to an obituary of Humphrey Lyttelton, I should say that tax is rather like the game Mornington Crescent: the rules are there if we look carefully, and they will become discernible apparently.

I take issue with the introduction and conclusion of the Minister's speech; they were written without the arguments for the amendments having been heard. It was clear from what I said that our proposed cut in the small companies rate of corporation tax would be funded through the scrapping of the annual investment allowance. We have made that clear, not only today but in debates earlier this year and around the time of the Budget. We believe fundamentally that by restructuring the current allowances and reliefs we can make savings that would pay for reductions in the main and small companies rate of corporation tax. We are proposing a funded tax cut.

On several occasions, the Minister came back to the point that the Government's measure was to tackle what she claimed was an unfairness in the tax system which encouraged incorporation. Yet at the same time, as the Minister said in response to an intervention of mine, the Government have not done the work to understand whether last year's scrapping of the 0 per cent. rate was sufficient to discourage tax motivated incorporation. She further undermined her arguments by highlighting that larger businesses would also be affected by the tax increase. She referred to the proportions of larger and medium-sized companies that also paid the small companies rate of corporation tax.

If we look at the rate of incorporation for companies in the past six years, yes, we see that there has been a 50 per cent. increase in the number of companies incorporating with only one employee. Companies with between one and nine employees are running at about 37 or 38 per cent. in that regard, and for those with more than 10 employees, the figure is just under 20 per cent. We are seeing significant increases in the incorporation of companies of all sizes. Given the long tail of owner-managed businesses, with no employees, that I see in my constituency, perhaps it is not surprising that a large number of them incorporate.

The Government's measure is meant to deal with the issue of fairness, but it imposes an additional tax burden on small companies at a time when they do not need it—they are struggling with higher costs and economic uncertainty. I will press amendment No. 1 to a Division because of the problems that face small companies. They want a Government who are on their side and are not working against them. By increasing the small companies rate of tax from 19 to 23 per cent., the Government are damaging those businesses when they need help and support. Conservative Members and, I believe, other Opposition Members recognise the importance of supporting small companies. I hope that those Opposition Members will back us in the Division Lobby.

Question put, That the amendment be made:—

The Committee proceeded to a Division.

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The Chairman:

Order. I ask the Serjeant at Arms to investigate the delay in the No Lobby.

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The Committee having divided: Ayes 193, Noes 296.

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Question accordingly negatived.

Clause 5 ordered to stand part of the Bill.

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