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Clause 7 — Charge and main rates for financial year 2010

Surface Water and Highway Drainage Charges (Exemption) Bill – in the House of Commons at 3:49 pm on 12th May 2009.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 3:49 pm, 12th May 2009

I beg to move amendment 1, page 3, line 16, leave out '28%' and insert '25%'.

After that rather shaky start, Sir Alan, I am sure that the rest of our Committee proceedings will move more smoothly.

Clause 7 sets the main rate of corporation tax at 28 per cent., but the amendment—which I also tabled in Committee to last year's Finance Bill—would reduce that to 25 per cent. We have tabled amendment 1 for the same reasons that applied last year. We believe that the headline rate of corporation tax is uncompetitive, and that it impacts on the UK's attractiveness as a place to do business. If we are to look forward to how the economy will develop once the recession is over, we need to think about making sure that we are as competitive as possible when compared with other nations.

Some may argue that now is not the time to think about reducing the headline rate of corporation tax and that we should focus first on the current economic and fiscal crisis, but I do not believe that we can afford to ignore the UK's competitive position at this time. I shall set out in more detail why I think the amendment is important and necessary and why I believe the Committee should support it.

Five years ago, Britain had the fourth lowest corporation tax rate in the EU. Now, even after the reduction in the headline rate from 30p to 28p in the 2007 Budget, we have the 19th lowest rate. The average in the OECD is 22.5 per cent., so Britain's rate is some 5.5 per cent. higher than that. We need to address that. Without a change, we are likely to find ourselves slipping further down the OECD table and putting ourselves at a competitive disadvantage to other members of the OECD, the G20 and the EU.

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Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

We can take it for granted that everyone wants to reduce taxes when they can, and no doubt we will come on to how much the proposal would cost and how the Opposition intend to pay for it. On the point of comparison, however, does the hon. Gentleman agree that our present 28 per cent. rate is distinctly lower than the various forms of corporation tax in France or Germany, taken together? They are our principal competitors, so there is not a great deal to be gained from the comparisons that the hon. Gentleman makes.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman has long experience of business, both in the UK and overseas. He will understand the importance of remaining competitive and of always being vigilant about what other nations are doing. Tax has become an increasingly important issue when it comes to the location of businesses and, given that both capital and labour are very mobile now, we need to pay attention to it. It is not good enough to say, "Okay, France and Germany have higher rates than we do." We need to look at the broad perspective, because there are other countries that are happy to compete for inward investment and people to join their work forces.

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Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

Will the hon. Gentleman confirm the fact that we have a more competitive corporation tax rate than France or Germany?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

But we have also slipped down the table: our rate used to be the fourth lowest, and now it is the 19th lowest. We can pick and choose our comparisons, but the reality is that we have moved down the league table. That is what we need to reflect on. I would not want always to benchmark myself against the performance of the French and German economies. The Prime Minister has always boasted about how we have performed better than other countries, but I do not think that that is a very fruitful route to go down.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

Is it not potentially misleading to concentrate solely on the rate of corporation tax? We have to include comparators such as incentives, concessions, allowances and the regulatory frameworks in other nations. The headline rate of corporation tax may or may not be a significant factor in decisions to invest or relocate.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman makes an important point. I do not argue that my proposal is a magic bullet—that all our problems would be dealt with overnight by reducing the headline rate from 28 to 25 per cent. Within the confines of the debate, I hope to touch on that briefly later in my speech. He is right: there are other factors that businesses bear in mind when thinking about the location of their business. They include the predictability and certainty of the tax system, which again are perceived to be weaknesses in the UK tax regime. Our tax system is not seen to be as predictable and as certain is it could be. In attracting businesses to the UK and keeping in the UK those that are already here, I am the first to accept that the amendment is not a magic bullet.

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Photo of John Redwood John Redwood Conservative, Wokingham

Is my hon. Friend, like me, concerned to see Shell, for example, deciding to locate its headquarters and taxable operations in Holland rather than here, because the Dutch have a lower tax rate? Does he think that the Irish rate is extremely attractive to many businesses thinking about an English-speaking location? Is he worried by the flight of much of our insurance industry out of this country for tax reasons?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My right hon. Friend makes some important points. I shall discuss later some of the companies that have relocated from the UK to overseas jurisdictions because of tax regimes and rates. A number of Lloyd's-based insurers have moved to Bermuda, in part for regulatory reasons, but in part because of the rate of corporation tax in Bermuda. Canada is setting a clear policy goal of having the most competitive rate within the G7, because the Canadians recognise how easy it is to move from one jurisdiction to another, particularly among English-speaking countries, and how important tax is—perhaps following the Irish example, where a very low corporation tax rate was set to attract businesses into the country.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

People regard such tax policies as a way to gain competitive advantage and we need to bear that in mind. When I first spoke on a Budget from the Dispatch Box, in 2006, when Ed Balls was Economic Secretary, the Government dismissed this issue as though it did not matter. I thought that that was a disappointing, short-sighted view of the importance of tax to attracting businesses to the UK. The present Financial Secretary is much more aware of these matters and I expect us to discuss some of the reforms to the taxation of foreign profits later. The Government have been slow on the uptake, however, which has damaged our competitiveness.

I thought that the right hon. Gentleman wished to intervene earlier. Does he wish to do so now?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I am grateful for the invitation. The hon. Gentleman was getting on to firmer ground when he talked about comparisons with other G7 countries. I think that he will acknowledge that, since 1997, the UK has had the lowest corporation tax rate in the G7.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

But Canada has stated a clear ambition in that respect, and our competitors are to be found outside the G7 as well. The very fact that we have had to expand to the G20 demonstrates the importance of other nations as competitors to the UK.

Let me give a few examples of countries with lower tax rates than ours. My right hon. Friend Mr. Redwood referred to the Netherlands, where the corporate income tax rate is 25.5 per cent. Norway and Sweden are in line with us, but Canada—a member of the G7—has a rate of 19.5 per cent.; our position in the G7 is therefore under threat from Canada. Within the EU, the Czech Republic, one of the new accession states, has a rate of 21 per cent., and Portugal, Greece, Denmark and Austria all have a rate of 25 per cent. Although the rate in Germany is a central Government rate, clearly there are federal rates, too. The headline rate in Germany is 15.83 per cent. There are a range of views. We can pick and choose, but the general picture is that we have moved backwards, not ahead, in the league tables; that is the point that we want to make.

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Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West 4:00 pm, 12th May 2009

Surely the point is that when we make a judgment we have to take the most meaningful comparators. We could include whatever country we liked from across the world, if we took what the hon. Gentleman says literally and took it to its logical yet absurd conclusion. Surely it is therefore right to consider the members of the G7, which are our real competitors in such areas. Perhaps focusing on that at this point of time, when we are at a crossroads, is not the most relevant thing to do. He has to see the matter in that context.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I think that this argument about the G7 is a bit sterile and a bit stale. It says that the G7 economies are the only ones that we should care about, yet we held the G20 summit in London just last month because we recognised that the global economy is changing. Countries that were previously of relatively little economic importance to the world are becoming increasingly important to the shape of the global economy. We cannot rest on our laurels by assuming that the G7 will always remain in pole position; we cannot take that view. If that was the view that the hon. Gentleman took when he was in government, I am disappointed and surprised at him.

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

I agree that the G7 argument is spurious. Workers in my constituency have recently lost their jobs to Hungary and China. We will never compete with those countries on wage costs, but does the hon. Gentleman not agree that a reduction in corporation tax simply helps to create a competitive package? It would at least make it a tough decision, and not an easy choice, for boards of directors to move their businesses elsewhere.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman makes an important point about his experience of jobs in his constituency moving to China and Hungary. There may be situations in which we cannot compete with such economies, but we should make sure that we have the best possible competitive environment—an environment that will encourage businesses to invest in the UK, and ensure that businesses based in the UK see our tax system as a reason for being here.

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Photo of Kerry McCarthy Kerry McCarthy Labour, Bristol East

Mr. Redwood drew a comparison with Ireland. During my time on the Treasury Committee, its Conservative members frequently made comparisons with Ireland; they said that its tax rates and deregulation were important pull factors for companies that chose to locate there, or that it was always a threat that they would locate there. Given the economic situation in Ireland—businesses are closing down and leaving that country—is it really a valid comparison? Is that really the model that we should look to? Does that point not shore up what my colleagues on the Labour Benches have been saying—that we should be making a comparison with members of the G7 and our real competitors, such as France and Germany, instead?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Labour Members say, "The Irish economy has collapsed, so we should throw out the idea that low tax rates and a proportionate regulatory environment are means by which to achieve economic growth." I know that that is a seductive argument, but part of the problem for the Irish economy, as I understand it, is that because of the euro there were low interest rates when the economy was booming. There was an asset price bubble in Ireland, which has burst, as it burst in the UK. Some of Ireland's problems flow from that, rather than from the fact that it has a low corporation tax rate or a particular regulatory environment.

We have to be careful to understand correctly the causes of success in Ireland, and the cause of its current economic problems. I would argue that its problems have to do with the macro economy, and the way in which the euro does not necessarily meet the needs of every economy in the eurozone—a point that my right hon. and hon. Friends would very much recognise. I suspect that even the Government recognise that point from time to time; that is probably why we are not in the euro. The convergence criteria have yet to be met, even if they are still being measured over in the Treasury.

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Photo of Kerry McCarthy Kerry McCarthy Labour, Bristol East

Is the hon. Gentleman saying that the regulatory environment in Ireland is not a factor in its economic problems?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not sure that it is the main cause, which is the asset price bubble that built up because credit was cheap, thus enabling people to borrow, pushing up prices in the housing market. That is exactly what has happened in the UK. We have a solution in macro-prudential regulation and in giving the Bank of England greater control over the amount of debt in the economy, which will tackle issues relevant to the asset price bubble at a time when inflation rates are lower. The hon. Lady may be right to identify the lack of macro-prudential regulation as a weakness in the Irish economy, but it is a weakness, too, in our economy, which is why reform is needed.

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am grateful to the hon. Gentleman for his usual generosity in giving way.

These are difficult issues, but from looking at the figures in the Red Book, I would imagine that the Treasury has taken corporate relocation into account, so if the amendment were accepted, tax revenues in the United Kingdom would drop by £3.7 billion, as a rough estimate. Why is the hon. Gentleman not pursuing the logic of his position in going for the OECD average of 22.5 per cent. corporation tax which, again on those figures, would cut corporation tax revenues in the UK by £6.8 billion? Where is the money coming from?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the hon. Gentleman for raising the issue of costs, and I shall tackle it within the narrow confines of our debate. I think that that was his first contribution to the Committee of the whole House, but he has featured in previous Finance Bill Committees, bringing his detailed knowledge of explanatory notes to the fore. I hope that he will be tempted by the usual channels to serve on the Public Bill Committee again, because we missed him last year. It would be nice to see him again this year, taking part in debate on probably the last substantive Finance Bill before the general election.

It is important that we have a competitive rate of corporation tax. One of the great strengths of the UK is that we have an open economy, which is the basis on which the City of London, the global financial centre, has grown. There has been a free flow of capital and people into London, which has made it a successful centre. The fact that businesses are prepared to move to this country means that—

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Perhaps the hon. Gentleman wishes to add his support to the point I am making.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I share the hon. Gentleman's enthusiasm for the notion that Rob Marris should serve on the Public Bill Committee, but I would be interested to hear him develop his response to the intervention. Even if we were minded to support the amendment, there would be cost implications, so given that we have a budget deficit of £175 billion, is the hon. Gentleman confident that that cost gap can be bridged, and does he anticipate that the extra industry of the type that Mr. Redwood often describes in these debates will be sufficient to generate the extra revenue to make up the shortfall identified by the hon. Member for Wolverhampton, South-West?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I had forgotten that we had the voice of fiscal conservatism to the left of our Benches.

I will, as I said earlier, return to the issue of costs. However, I have not yet addressed the issue of whether we are dependent on an increase in tax revenue flowing from a reduction in corporation tax to fill the gap. We have not factored that into our costings—that would be a windfall to accounts. My right hon. Friend the Member for Wokingham is a great proponent of the Laffer curve, but I am a bit more cautious than him about its impact and banking those gains, as it were, at this point. I would rather have a cost-neutral package of reform—and I will explain how we will fill the gap in a minute—than presume that we would get an instant flow of tax revenues. As the fiscal environment improves, I hope that that means that more companies will want to come to the UK, which will strengthen the flow of tax revenues to the Exchequer. Goodness knows, we need it at the moment.

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Photo of Robert Syms Robert Syms Conservative, Poole

I thank my hon. Friend for his generosity in giving way. Clearly, our financial problems are spread over more than one year, so a lower rate sends a signal. One would hope to keep companies in the UK, or encourage them to relocate to the UK, so that they would pay tax over three or four years. One year, if the figures are out, will not make much difference, but it will make a difference if a company is here for three or four years.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed. A big part of the issue is sending a clear signal about what a tax regime's direction of travel should be. One of the criticisms that people could make of the Government is that, at times, there has been a lack of clarity about that direction of travel. I shall touch on that in my remarks on clause 8.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I am grateful to the hon. Gentleman for giving way once more, and I am sorry for interrupting his flow. He said that the additional location or additional output of businesses were not factored into his financial calculations, so he has still not answered Rob Marris, who made two points. The first was that, in his estimate, the cost would be £6 billion and he asked where the Conservative party would find that money; the second was to ask why Mr. Hoban did not follow the logic of his own argument and reduce the rate to 22.5 per cent. I am thinking particularly of the first point: if there is not going to be extra industry and growth to bridge the gap, how does the hon. Gentleman propose to finance it?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am just getting going on the amendment. I have said to both Rob Marris and Mr. Browne that I will come to that point. I am not using a debating or rhetorical device to avoid answering the questions, but I want to deal with the issue in sequence. I ask them both to be patient; the day is still young.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed—we literally have all night. Let me continue to make the case for why it is important for us to deal with the issue.

As I was saying, our economy is an open one. Businesses choose to locate here; we have few barriers to prevent them from doing that, and few that prevent them from moving offshore. Because we are so open, we cannot tax businesses on the basis that they have no choice but to stay here. The evidence has shown that businesses move. During the period covering the last Finance Bill, when we debated the same issue, companies such as United Business Media, Shire, Kraft, Experian and Google had moved outside the UK. To pick up on the point made by my right hon. Friend the Member for Wokingham, since then, Beazley, a Lloyd's of London insurer; WPP, the advertising giant; Regus, which provides office services; Henderson, a major fund manager; and Charter, an engineering company have all done the same. The fact that they constitute a broad spectrum of businesses from a wide range of industries is telling.

We have had warnings. Richard Lambert, the director general of the CBI, said:

"In today's world of global markets, companies have many more choices to make about where to invest their capital and their talent than they did in the past. Business tax is one of the most important considerations that firms have to take into account, and it is easily measured...business leaders believe the UK's corporate tax regime is more burdensome than it was five years ago, and that this is making the UK less attractive as an international business location.

The worry is that on current trends our position relative to other developed economies will deteriorate further over the next two or three years."

Mr. Lambert made that statement in 2006. Time moved on, but the CBI returned to the same point last year in its publication "UK business tax: a compelling case for change", which concluded:

"Comparatively high tax rates, increasing complexity and a lack of certainty are all contributing to declining tax competitiveness."

The report called for a more strategic approach to corporation tax. So the voices making the point are not only those of Conservative Members; people in industry are also making it. Richard Lambert touched on the point raised by David Taylor: the issue is not only the rate but other aspects of the tax regime. I remind Members of what Mr. Lambert said:

"increasing complexity and a lack of certainty are all contributing to declining tax competitiveness."

This theme has emerged elsewhere—it does not just come from the CBI. Last year, the City of London corporation published a report, "The Impact of Taxation on Financial Services Business Location Decisions", which discussed how "sticky" London is with regard to business staying put in spite of the tax regime, not because of it. It compared the UK's corporate tax regime with those of other financial jurisdictions, and found that the UK had among the worst scores in two categories: "Certainty of Interpretation" and "Attitude and Approach".

There is a growing consensus that says, yes, rates are important, but it is not just about rates. In a report commissioned by the Mayor of London

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

It is very clear who the Mayor of London is. [ Interruption. ] If I meant the lord mayor, I would refer to the lord mayor of the City of London. [ Interruption. ] I am not sure that the previous Mayor would have been that interested in the tax regime, whereas I think that Boris Johnson is a bit more interested in the competitive position of London compared with other jurisdictions.

The executives interviewed for that report concluded that the UK's reputation for predictable, competitive and constructively applied taxation is in decline, and the call was for a strategic policy on corporation tax.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I happily give way before moving on to the favourite topic of the hon. Member for Wolverhampton, South-West—Canada.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

When a detailed analysis was done in 2006, it was found that the de facto corporation tax rate for larger companies in the UK was not 30 per cent., the official rate at the time, but 22.5 per cent. because of the activities of avoidance vehicles and companies. Is the hon. Gentleman reassured by their ingenuity? If this is such a crushing burden on British industry, why do the majority of FTSE 100 companies pay no tax, or nugatory amounts, and did so even before the recession reduced their profit base?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman had an Adjournment debate on this issue last week when we were debating the Second Reading of the Finance Bill; I am sorry that I could not listen to his remarks. There is an issue about the tax take and what a tax gap is. One comment made about research by the TUC is that it does not take into account some of structural reliefs that are in place in the UK tax system. It is important that companies pay the tax they are due to pay and do so promptly and fairly. However, we live in a complex global economy. Several of the companies listed in the FTSE 100 are not necessarily UK trading companies, so they will be subject to a different tax regime. It is a difficult comparison to make. Just as Mr. Robinson picked holes in my analysis of where we are in relation to the OECD, some would pick holes in an analysis of the tax gap. It is not as clear-cut as people would suggest.

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Photo of Robert Smith Robert Smith Shadow Deputy Leader of the House of Commons, Opposition Whip (Commons)

I am interested in what the hon. Gentleman is saying about complexity and differences in the tax system. Before he moves on to Canada, will he expand on why he chose not to extend his proposed cut to ring-fenced profits and to apply it only to non-ring-fenced profits? I declare an interest as a shareholder in Shell, and an interest in North sea investments through my constituency and my membership of the offshore oil and gas industry all-party group.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman makes an important point. When I thought about the amendment's impact, I considered whether it should deal with changing the ring-fenced profits rate as well, but I was conscious that that might take me into a new field of argument about oil taxation, which my hon. Friend Mr. Hands will deal with in Committee. There is a complex set of interactions for us to discuss carefully, but I wanted a narrowly framed amendment to avoid detaining the Committee for too long.

I turn to Canada, which the hon. Member for Wolverhampton, South-West mentions quite often. He prayed it in aid in relation to VAT in last week's debate on the Bill. I do not know whether he has seen Canada's aspiration for corporation tax rates, which was highlighted in the report produced by Bob Wigley for Boris Johnson. It stated that Canada's mission statement on tax was that:

"To improve productivity, employment and prosperity in an uncertain world, a bold, new tax reduction initiative will reduce the general federal corporate income tax rate to 15 per cent. by 2012 from its current rate of 22.1 per cent. The general corporate income tax rate will decline by 7.12 percentage points between 2007 and 2012—giving Canada the lowest overall tax rate on new business investment in the Group of Seven (G7) by 2011 and the lowest statutory tax rate in the G7 by 2012."

That is a very clear statement of intent from the Canadian Government about the direction of travel, and I am sure that people thinking about the relocation of businesses will take it into account.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

For completeness, will the hon. Gentleman confirm that the separate provinces of Canada charge additional tax?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed, and that is why I carefully quoted the report, pointing out that the quotation related to the general federal rate. The report flags up the scale of the reduction—7 percentage points—in the federal rate of tax. The Canadian Government believe that that will provide the lowest overall rate of tax on new business investment in the G7, which is a clear statement of direction. In thinking about how economies move out of recession and plan for the future, countries that can afford such tax changes will think very carefully about making them.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

The hon. Gentleman is extolling, I think, the advantages of a country having the lowest corporation tax rate in the G7. Is he now confirming that he believes, contrary to what he said earlier, that that is a good thing?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not taking a position on where we should be in the league tables. I am saying that other countries are looking at how they can use their headline rate of corporation tax as a tool, to use the words from Canada, to

"improve productivity, employment and prosperity in an uncertain world".

I am not suggesting that a target should be set for the UK's headline rate of corporation tax; I am just pointing out to the Committee that it is an important tool that countries use to attract and retain businesses. We must be mindful of that when thinking about overall tax policy in the UK.

I believe that there is a consensus on this issue. The Prime Minister said last year at the Institute of Directors conference:

"Our aim is to reduce corporation tax even further when we can afford to do so...and we're looking at how we're going to do it."

I shall come to how we can pay for that in a second, but I shall wait until the hon. Member for Taunton returns to his place so that he can hear that bit of fiscal prudence.

The Financial Secretary might remark that the Government have taken some measures to reform the taxation of foreign profits. I acknowledge that, although it has not been an entirely straightforward process and the Government have had a couple of consultations to attempt to get the right structure in place. The sense from industry is that that is now broadly in place, but no one should say, "The job is done, we have dealt with this issue, let's move on to something else." The listed publishing group Informa moved its tax domicile from London to Switzerland not long after the Budget, once it knew broadly what the shape of the taxation of foreign profits would be. We therefore cannot afford to rest on our laurels in any way, and that is why I tabled the amendment.

Given the Government's dire fiscal position, I appreciate that the room for manoeuvre is limited. When borrowing this year is £175 billion and next year's forecast is for £173 billion, there is not much money left in the kitty to cut the burden of taxes. That is why the package we propose today is cost-neutral. We have long made it clear that our reforms to the headline rate of corporation tax, reducing it from 28 per cent. to 25 per cent., will be funded by simplifying reliefs and allowances. [ Interruption. ] Right on time, the hon. Member for Taunton returns. We will bring the rate of capital allowances more closely into line with the accounting measure for depreciation, which is meant to reflect the deterioration in value of assets over their life. That is how we will fund the package of reforms. We set out that position clearly when we announced the policy, and we will continue to use that approach of funding changes in the headline rate of corporation tax by simplifying the tax system and trying to align the accounting and tax definitions of profit more closely.

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am rather bemused by the hon. Gentleman's explanation of the cost-neutrality, which makes it sound as though the amendment were mere window-dressing. It will not remove any tax burden on UK-based businesses if, taken as a whole, the package is cost-neutral, with counter-balancing increases from the business sector. It sounds like grandstanding and window-dressing.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman cannot have it both ways. He must either accept that our proposal is a funded tax package, or believe that it is grandstanding, which will do nothing for business. He can criticise us for one or the other, but just one at a time.

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I thank the hon. Gentleman for his generosity in giving way. On the projections for corporation tax this year—I do not say he accepts those figures—the amendment would cost the Exchequer £3.7 billion. If he proposes a cost-neutral package, the £3.7 billion will be raised from businesses through other mechanisms—for example, changes in allowances. How would the amendment, as part of such an overall package, have any effect on whether a company decided to relocate to Switzerland? A company would examine the total tax burden, including allowances, not simply the headline rate of corporation tax.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I do not agree and I shall explain why. The hon. Gentleman argues that there is a clear relationship between businesses that pay corporation tax and those that benefit from capital allowances. He claims that they are alike in their profile, but I do not think that that is the case. The headline rate sends a powerful signal to business about the advantages of locating in the UK. Perhaps some businesses are not interested in capital allowances; that depends on the nature of the business—on whether it is service-oriented or invests more in capital equipment. There is a mixture of incentives, and there will be some winners and losers. However, it is important to send a signal about the direction of travel. There is no money available for tax cuts, so a funded package is the sensible way to send the right signal to business about the importance to us of the UK tax system's remaining competitive.

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Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

The debate is interesting. As the hon. Gentleman said, we often had it in the Treasury, and the headline rate seems attractive. However, as my hon. Friend Rob Marris said, the tax burden remains the same. Will the hon. Gentleman bear in mind the massive impact of £3.7 billion a year on capital allowances? It cannot simply be dismissed as a compensating factor. The problem with much of British industry, particularly the manufacturing sector, is the UK's persistent tendency to under-invest in capital. Increasingly, we say that we will have cheaper and more flexible labour and we chase that market down, but it does not get us anywhere. Let us consider what the Germans have done. Germany is the biggest exporter in the world. Its manufacturing sector is strong because of its continuing capital investment in its industry. By how much would the £3.7 billion a year reduce capital allowances? Has the hon. Gentleman taken that into account? Can he give us that figure?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 4:30 pm, 12th May 2009

According to some examples, the general plant and machinery capital allowance will be about 12.5 per cent., and the long-life plant and machinery capital allowance will be about 6 per cent., bringing them more closely into line with the accounting rates of depreciation.

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Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

Bringing those allowances into line with depreciation is no good at all. That means we will barely be investing at the replacement level, which was one of the big problems with the old General Electric Company. Tight though Lord Weinstock's controls were, investment often ran at less than the depreciation rate. Manufacturing is a bit more in the spotlight now—rightly so, I think, and not just because I represent a manufacturing constituency in Coventry, in the west midlands—and it is regaining importance, given the imbalance that the collapse in the financial sector has caused, which we need to remove. However, having a target to drive capital investment down to the level of depreciation is a suicidal policy.

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The Chairman:

Order. We are beginning to lose track of who is making the speech and who is making an intervention. Let us try to keep interventions in proportion.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the hon. Gentleman for his rather lengthy intervention, because it enabled me to find a quotation. I will not hold a competition with hon. Members afterwards to see whether they know who the author was; rather, I will tell them. The quotation says:

"Promote investment and growth—by...reducing tax-driven distortions on commercial activity, ensuring that business decisions are based on commercial rather than tax considerations; stimulating higher levels of foreign and domestic investment through a lower CT rate on a broader tax base".

That is a good summary of our policy. What particularly pleases me about that quotation is that it is from the Treasury, from a document entitled "Business tax reform: capital allowance changes", a technical note from December 2007. Clearly, the debate has moved on since the hon. Gentleman was sat around the table watching TV with the former Chancellor—wherever he watched TV.

That is why I said what I said earlier, when I teased Government Members about there being a consensus on the issue. The Treasury recognises the power of the argument. Indeed, David Taylor, who is a great campaigner against the tax gap, will be very concerned about distortions in the tax system that led to particular types of behaviour. I just think that the hon. Member for Coventry, North-West should be a little more careful not to state the Government's case too boldly.

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

Is there not a slight paradox, given the argument being made? Only last year, there were significant changes to plant and machinery allowances and a massive reduction in industrial buildings allowances, which was commented on at the time. I am pretty sure that the arguments made by the Government on that occasion were rather different from those that we have heard this afternoon.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed. I am pleased that the hon. Gentleman, who is a fellow veteran of previous Finance Bill Committee proceedings, has reminded me of that. We have had debates in Committee about reformed capital allowances before. The Financial Secretary and I had a debate about the abolition of the industrial buildings and agricultural buildings allowances. [ Interruption. ] The Minister says from a sedentary position, "You were against it." We argued that the issue should be explored in more detail—so that the competitive impact could be considered—and that the Government had rushed into things without proper thought.

There are issues on both sides of the argument, although I take on board the important comment that the hon. Member for Coventry, North-West made about manufacturing. I know from my experience of visiting manufacturing companies in my constituency that compete at the top end, producing high value-added items that compete with the best—that is, if they are not the best in the world themselves—that there is a mixture of plant in those operations. There are some very old, faithful bits of kit in those factories, as well as some very new, modern equipment. It has been pointed out that the life of some of the more modern pieces is quite short, in relation to their contribution to the top end of manufacturing, and that they might therefore require a shorter depreciation period and a steeper write-off. We need to think about that.

I do not wish to stray too far from the subject, Sir Alan, but one issue that has emerged from the economic crisis is the need to broaden the base of British business, and manufacturing is important in that regard. We must be mindful of that. We are not blind to the concerns expressed by the hon. Member for Coventry, North-West, but we do not want to see distortion in the tax system.

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Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

Distortion in the tax system is one thing, and we have had the arguments about neutrality. I am sorry that I was not at the previous meetings of the Committee. May I just plead that we do not build into Conservative thinking the idea that the Treasury or the Department for Business, Enterprise and Regulatory Reform have ever had the policy—which the hon. Gentleman is now adopting—of reducing capital allowances down to the bare minimum of depreciation? That cannot be a proper theoretical or practical position to take up.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

This is about trying to reduce distortions in the tax system to ensure that decisions are not being driven by tax considerations. The rate of the capital allowance is a cash flow issue. Over the life of an asset, a business will get full relief on that asset, assuming that it uses it until it is scrapped. It is a question of timing as to when that relief arises. I am sure that, at a later stage in Committee, we shall have a debate about the 40 per cent. first-year allowance being introduced in the Bill. Perhaps such a measure is right in a crisis, but for the purposes of the long-term reform and simplification of corporation tax, we need to look at reducing the distortions in the system.

In so doing, we should consider reducing the headline rate of corporation tax. That would send a clear message to businesses, which are fed up with the complexity and distortions in the tax system. A lot of the tax planning that takes place is a consequence of the distortions that are built in to encourage particular types of behaviour. A less complex, more straightforward system would yield benefits to the economy as a whole and make it more attractive to inward investment. Companies' compliance costs would also be reduced, and my old employer, PricewaterhouseCoopers, might not get quite the same revenue flow from tax planning as it had in the past. That might be a price worth paying, however.

I have spoken for rather longer than I hoped to, but the Committee will be pleased to know that I have almost completed my remarks on this subject. It is important for Britain's competitive position in the global economy that we have a corporation tax regime that is fit for purpose. Part of that can be achieved through tackling complexity, improving predictability and certainty, and having a proper consultation process in place. A fundamental part of the package, however, is to reduce the headline rate of corporation tax.

The amendment is part of a package that would ensure that the measure was cost-neutral. Regrettably, I cannot table amendments that would increase the tax take, so I cannot propose the flipside to this package, which would change capital allowances. However, we have set out a clear package of measures to reform corporation tax, in order to improve the competitiveness of the UK economy. As we look beyond the recession, we need to ensure that we are competitive not only with the G7 but with other global economies, so as to make the best of the advantages that we have, to broaden the base of the economy and to bring wealth and prosperity back to the UK.

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Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

Having been lucky enough to catch your eye, Sir Alan, I wish briefly to revert to the question of effectively reducing the capital allowances, which would come into effect in year one. Given the recession and its likely progression, immediate cash-benefit to companies is the very thing we need at the moment. Despite the seeming good news today, I think we all know that we are still in a precarious position and should not take anything for granted. The real need is for cash flows to companies now, so reducing capital allowances at this point in time would hit the very thing we need for the future, which is investment. The timing is particularly perverse.

Apart from the wrong timing, we would be hitting the very area where we are already weakest, and Mr. Hoban, who led for the Opposition, should realise that. We already have a relatively low depreciation charge, which arises directly from the fact that our manufacturing sector is weak compared to our main competitors in exports and world markets—India and China, for example, are taking the lead on many consumer goods. Where we have to compete, we already have a low depreciation charge arising from our relative under-investment over the years, so driving it down still further would hit the very sector that most of our policies should be directed at improving.

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Photo of John Redwood John Redwood Conservative, Wokingham

Is the hon. Gentleman aware that the parlous plight of British manufacturing today means that a very large number of otherwise very good companies are loss-making, so his case in the short term falls?

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Photo of Geoffrey Robinson Geoffrey Robinson Labour, Coventry North West

If they are loss-making, they are not going to benefit from a reduction in corporation tax. That is the whole point. They are losing money in part because of under-investment but mainly because of the world situation. The right hon. Gentleman has, surprisingly, made precisely my point for me. In the short term, those companies will not benefit from any reduction in corporation tax, so we should be trying to get them what they need by securing money for them from the various schemes that have been announced. Of course, I am the first to acknowledge, in front of the Secretary of State for Business, Enterprise and Regulatory Reform, that we have been slow to get those schemes off the ground. The Conservative party offers no help, however, by suggesting that we have £50 billion in our pockets and that it be should doled out to anybody who wants it. That is not serious.

I put it to the hon. Member for Fareham that what he proposes is wrong. I accept that getting the headline rate down is important, and the first thing we did in government, if the hon. Gentleman remembers, was to introduce a whole range of tax changes, including moving to a new system of corporation tax and other measures. Of course, we reduced the headline rate of corporation tax—it was the first thing we did in our first Budget. I do not underestimate the importance of that, but it is important that we send the right signal and timing is so important. It is no good sending a signal at the wrong time. No one is coming here to invest at the moment. However well we are doing in other respects, the important thing is to get money to the worst-hit sector at the moment, which is manufacturing.

I highlight the manufacturing sector, because, despite the dire forecasts of the City of LondonMr. Redwood knows far more about that than I will ever know; indeed, he has probably forgotten far more than I will ever know, and probably to his own benefit—comparatively speaking, the City has not been so badly hit. Not yet, at any rate, so the losses are occurring where they always occur—in my own area, that of my hon. Friend Rob Marris and that of my right hon. Friend the Secretary of State for Business, Enterprise and Regulatory Reform— [Interruption.] Yes, in the area of my hon. Friend Mr. Winnick, too.

In sum, now is the wrong time and this is the wrong target. The Conservatives should reconsider and put off their proposal. In fact, I know that their proposal to reduce capital gains is not remotely serious—it is a talking-point, and quite a good one in a way. However, I believe, Sir Alan, that now is not the time and what is offered is directed at the wrong target. The amendment should not be pressed and we should not accept it.

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Photo of John Redwood John Redwood Conservative, Wokingham

I am a director of two companies, as declared in the Register of Members' Interests, but I wish to make some general remarks about the tax system.

My hon. Friend Mr. Hoban has been quite right to say that a lower headline rate of tax could be very important in attracting more business to this country. I think he could have added that it will also affect the judgments of quite a lot of multinational businesses that already have some representation in Britain but have options over where they could carry out their various activities.

Quite rightly, it is not legal for a company to fiddle its transfer prices by suppressing profit in a high-tax regime in order to allow the transfer of that profit to a low-tax regime by artificial means. Under this and previous Governments, the Treasury has rightly adopted methods of preventing or stopping that practice. It is, however, an entirely legitimate business strategy for a multinational with factories, service areas and operational centres around the world to decide where, at any given time, it is best to allocate particular types of business. Obviously, if a multinational has footloose business of a high-technology, high-value-added, high-growth kind which will produce a high margin and plenty of profit, it will look very carefully at the effective and, especially, the headline tax rates around the world. All other things being equal, it may then decide to put more of its high-value, high-profit business into the parts of the world that offer the most competitive headline rates.

I am sure that, in their saner moments, Treasury Ministers agree that that is the case. They know that it happens and that it is a real possibility now, which is one of the additional reasons why I think my hon. Friend the Member for Fareham is right to press them again on whether they are certain that 28 per cent. is a sufficiently competitive rate at a time when the whole world is hungry for jobs and for higher-technology and high-value-added business, and when there is not enough business to go round and there are not enough jobs to go round.

It is true that our debate takes place against the background of a sharp devaluation of the pound. Such a devaluation has many drawbacks. It makes us all poorer, and it pushes up inflation—although it has one important advantage in that it makes our industrial and service activity much more competitive in the short term from a British base, which I trust will limit the damage in Britain compared with that in some of our competitor economies. However, we need to think beyond the one-off impact of the devaluation. We need to think beyond the present trough of the recession. We cannot be sure how long it will take, but there will be recovery, and we need to ask ourselves that fundamental question: is 28 per cent. a sufficiently competitive rate at the present time?

Mr. Robinson rightly pointed out that the present Government had continued the previous Government's policy of cutting the headline rate. That was very sensible, but I think that they got stuck. I do not think that they realised how rapidly the rest of the world had moved on. In the opening exchanges today, my hon. Friend the Member for Fareham was asked if he recognised that all that we needed was one of the more competitive rates in the G7, and that if we had it we would be all right. Of course we will not be all right. The world has been completely transformed. The Prime Minister accepted that in hosting and chairing the G20. The serious competitive threat to keeping manufacturing in Britain or attracting it to Britain today comes primarily from China and India. It is a serious option for most multinational companies to switch production from the United Kingdom or Germany to China or India. Most multinational companies already have several factories in those countries, as well as having manufacturing capability in Britain, Germany, the United States or some combination of all three.

The proposal that we are discussing goes to the heart of that issue. Why are we talking about the headline rate? We are doing so because it is the headline rate that people usually use in their simulations, models and forecasts when considering where to put their future investment. They also look at the underlying trend of policy. If, as in Canada, it is clearly a commitment to make the current rate the maximum and to say that in future it will be reduced, that will be a fairly influential factor when it comes to the judgment on the back of the numbers. If people see a Government who face a monumental deficit and who seem to think that it is only possible to secure more tax revenue by raising tax rates—itself a very dubious argument, in my view—they may well say to themselves that the Government could not be bothered to cut the rate below 28 per cent. although they knew that 28 per cent. was no longer particularly competitive, and that in a year's time they, or some other Government, might be forced to put the rate up. That is not a good background against which to make an investment judgment.

I urge Treasury Ministers to think again. I urge them to understand that our prime competitors have much lower tax rates than we have, as well as having lower remuneration and other competitive advantages. I urge them to understand that the big investment players in manufacturing in this world already have capacity around the world, and the ability to switch. I also urge them to understand that we are talking about not just where the new factory goes, but where the work is allocated around the different factories of the world, and that if we allow our country to be perceived as more hostile to business—less competitive in tax and regulatory terms—we will start to be on the wrong end of business judgments. The people in the American, Japanese or Chinese multinational will start to say, "Well, we'll leave the old, low value-added, less profitable business in Britain because of the tax rate," and that means that Britain will lose jobs rather than create them, and that, in the end, the British plant will be the one most likely to face the closure notice because—surprise, surprise—it has the worst business and then it has the worst figures. The people in the multinationals will forget that that particular country has less good factory results because, for tax reasons, they chose to locate a less profitable business in it. Therefore, if countries are not careful, they can find that they are on a very slippery slope indeed.

In today's exchanges, we have already heard Labour Members voicing scepticism about whether the setting of a 10 per cent. rate in Ireland was the reason so much business was attracted there. I can assure Labour Members that, from conversations I have had on account of my work on the policy review and for other purposes, it is clear that the low headline rate of corporation tax has probably been the number one attraction to footloose international businesses in choosing to go to the Republic of Ireland. They did not go there for the European Union grants; most of those were paid to agriculture, which was not a particularly successful sector. They did not go there to join the euro either, because they have to deal in a multi-currency world and what matters to them is the rate into the dollar, the renminbi and the rupee, so the euro is not that important. What mattered to them was that they assumed that they would run profitable businesses—and for quite a lot of years, many of them did—and it makes a huge difference to their forecast cash flows on an investment if they are keeping 90 per cent. of them rather than only 70 or 72 per cent. of them with the rest going to the Government. The Financial Secretary is a clever man, and he knows the power of compound arithmetic. The compound effects of taxing at 10 per cent. are so much more benign than the compound effects of taxing at 28 per cent.

I do have one, friendly, disagreement with my Conservative Front-Bench colleagues in that I believe that the Laffer curve works—they are sitting up and taking notice, Sir Alan. I am trying to make our lives easier, because I believe that this is one of those rare cases where we can have our cake and eat it. I believe that if a country is brave enough to set a lower tax rate, as the Irish were in spades, it can attract a huge extra amount of business, because world business is very footloose and very sensitive to the individual tax rates on offer. The Irish moved from being a lot poorer than the United Kingdom to being a lot richer. At the same time, they moved from spending less per head to being able to spend a lot more on public services because the low rates brought in so much more revenue. Such low rates can therefore have an extremely benign effect, but there is also the reverse effect: if a country allows itself to become too uncompetitive on the headline rate, it discovers that even putting it up does not solve its revenue problem, but can actually make the revenue problem worse.

Fortunately, so far, although we have had a run of companies leaving the country, such departures have been paced out and the Government have managed to suppress a lot of bad commentary on that, but I suggest to them that they should not push their luck any further. My hon. Friend the Member for Fareham produced a partial list of those companies that have gone. There are others as well, and in certain sectors, such as insurance, it is becoming a rush to get to the exit on time. The situation could be the same for some of the higher charging investment management companies, one of which my hon. Friend mentioned. This is a serious problem for the United Kingdom. To those on the Labour Benches who say, "Well, we don't want to keep those sorts of businesses if they're that sensitive to the tax rate and do not want to pay their fair due", I say that that is a very short-sighted view. Businesses are, on the whole, motivated by profit and money as well as by wishing to serve the public, but they know they have to serve the public well to generate the revenues—that is the deal—and if we are too cavalier in our approach to taxing them, we do not just lose the tax revenue they were paying in terms of corporation tax, but we lose the tax revenue they were paying in terms of the tax on their employees, the national insurance and the VAT on the money their employees would have spent in the shops. We lose a great deal of tax revenue if we become too cavalier about where businesses are to be located.

The case is very straightforward: cutting the rate from 28 per cent. to 25 per cent. would send a very strong signal to our international competitors and, more importantly, to international manufacturing investors that this country is serious about remaining tax competitive. I hope that my Front-Bench colleagues agree that a change to 25 per cent. is the minimum that we need to do and that it is not the final resting place. I would be much happier with a rate of 20 per cent., because that would make a huge statement, would catapult us back to being a place that people talked about as a desirable location for investment and would definitely illustrate the Laffer curve—one might say that one would be "Laffing" all the way to the bank if one was to do that, because so much more business would be attracted and so much more revenue would be coming in.

As a result of these straitened times, my hon. Friend the Member for Fareham says that we should be absolutely sure and pay for this proposal out of removing allowances. That is my second-best option—I would rather just cut the rate—but it makes more sense than doing nothing, because it does take the trick on the headline rate and I do not believe it does the damage that the hon. Member for Coventry, North-West, who is no longer in his place, seemed to suggest. Past corporation tax reforms have cut allowances and cut rates, and they have been helpful and benign; they have usually resulted in more flows of business as long as they establish a competitive international rate that we can work with and of which we can be proud.

I do not think that those on the Treasury Bench are communicating a strong enough sense of the danger to our economy that the current situation represents. Perhaps they are resting on the laurels of the devaluation and perhaps they do not understand how tough the situation is, particularly in the manufacturing heartlands. They are not energetic enough in making the case within government that if we are serious about rebuilding our manufacturing, we need to put in place a package of measures, and this considerably lower corporation tax headline rate would be an important first step.

I would like this country to export more and make more, as that is part of the necessary process for recovery. A lower corporation tax rate would help to do that. I do not despise financial services. I would like us to grow and improve our financial services offering in Britain and keep London as a very important financial centre. That, too, is very dependent on a very competitive corporation tax regime. The Financial Secretary knows that I am not happy with the huge sums tipped into banks, which have grossly distorted the economy's adjustment process and have delayed the necessary adjustment in those banks. I wanted to keep them going at a much lower cost.

Of course I did not want the banks to go bankrupt, but it is a disgrace that so much money has been absorbed in them. If we had not wasted all that money in the banks, even the Financial Secretary could have afforded my 20p in the pound proposal for corporation tax, given his view that it does not generate the extra revenue that I believe it does. That option would have been a much better competitive package for Britain than losing billions in RBS and delaying the time when RBS sorts itself out and actually generates some money for British taxpayers and for the Treasury, instead of taking away all the money that we need in order to offer a more competitive package. I hope that the Treasury will also go away and think about squeezing some money out of the banks to make the rest of British business profitable, rather than squeezing the rest of British business to try to buttress the banks.

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 4:45 pm, 12th May 2009

If one looks at table C6 on page 231 of the Red Book, one sees that the projected receipts from corporation tax for the financial year 2009-10 are £34.7 billion. The amendment would cut corporation tax by three 28ths—from 28 to 25 per cent. In round terms, three 28ths of the projected revenues of £34.7 billion is £3.7 billion. If one were to cut our corporation tax rate to the OECD average, which the hon. Member for Fareham helpfully informed us is 22.5 per cent., that would be a five and a half 28ths cut in £34.7 billion, which would be a £6.8 billion cut.

That is not before us tonight. I suspect, from what Mr. Hoban said—although he did not say so directly—that he would not pursue the logic of his position and seek to put the UK at the average rate of the OECD, but cut only from 28 to 25 per cent. That was because he wanted a revenue-neutral package, and that the counter-balancing measures that he outlined to make up for that loss—which I calculated at £3.7 billion, although I appreciate that he does not accept that figure—would come to £3.7 billion. His countervailing measures did not come to £6.8 billion and therefore he could not go the whole hog to cut corporation tax to 22. 5 per cent. When I hear the phrase "revenue neutral", it has the same effect as the words "efficiency savings" and my scepticism meter starts twitching markedly—

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Photo of John Redwood John Redwood Conservative, Wokingham 5:00 pm, 12th May 2009

Does the hon. Gentleman recall that under a Conservative Government corporation tax rates were cut and income tax higher rates were cut, and in both cases there was a revenue surge?

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I am not saying that it cannot happen: I simply said that my scepticism meter starts twitching. Following the probing and then the speech by my hon. Friend Mr. Robinson, and the measures that the hon. Member for Fareham said that he was not allowed to table tonight, it appears that the countervailing measures to achieve the other half of this package—to make up for the lost revenues in corporation tax, were that cut to be enacted—are precisely the sort of measures that would hit manufacturing.

Parenthetically, I would say to the hon. Member for Fareham that my understanding of the procedure of the House is that he could have tabled his amendments, so that we could have seen them, but the Chairman of Ways and Means would not have selected them— [ Interruption. ] Well, there is chuckling from Conservative Members, but it would have been useful to see the countervailing measures proposed. Instead, they were outlined by the hon. Gentleman, and from what I understand, they would hit manufacturing. Mr. Redwood talks about footloose manufacturing companies, but his Front-Bench colleagues favour a tax regime for business that would hit manufacturing. It would be the loser under the countervailing measures and other parts of British business would gain. As a Member of Parliament in the west midlands—my hon. Friend the Economic Secretary is in his place, and my hon. Friends the Members for Walsall, North (Mr. Winnick) and for Coventry, North-West were here earlier—the current plight of manufacturing is a considerable concern, without changing the tax regime in a way that would make things worse.

I understand the aspiration towards lower corporation tax, but the hon. Gentleman has to be careful about pushing the Canadian model too far. There are many jurisdictions in Canada, and those subject to federal taxation are federally incorporated and make up a tiny minority of companies, engaged in activities such as telecommunications and transport that, under the Canadian constitution from 1982 and the British North America Act 1867, are the federal preserve. Almost all business in Canada is the provincial preserve, and the huge trade barriers between provinces are an issue that bedevils that country. I understand that the hon. Gentleman aspires to that model, and it does raise some money at the federal level, but he should not push it too far.

I do not accept the concept of distortion—although I am not sure that that is the argument that has been made—because people change their behaviour. There is no natural way for people to behave that is somehow then distorted, because to say that is to buy in to the whole nonsense about perfect competition, which never exists, even on eBay. We have taxation measures to encourage certain forms of behaviour, and some of those behaviours are related to commercial matters, including for example, the lack of VAT on newspapers and books, and the company car taxation regime. So, corporation tax as part of a package of taxation measures will have an effect on behaviour and one must be very careful about that so as not to drive business out. I reject any suggestion that we have perfect competition and that we should not intervene at all.

We should have a capital allowance regime that encourages manufacturing and capital investment, as my hon. Friend the Member for Coventry, North-West said. I remember that a few years ago, when we had a 100 per cent. first year writing down allowance for investment in computers, that measure found favour on both sides of the House, although some might have said that it was a distortion. I favour capital allowances that help manufacturing and I urge Labour Members to reject the amendment tonight.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman referred to the 100 per cent. first year writing down allowance for computers. Did he object to its withdrawal?

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Yes. It was cut by this Government and I do not think that it should have been. It should have been kept for longer—that is the simple answer—because computers are used across British industry, including in manufacturing.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman is characteristically honest, but does he not recognise that decisions are taken to reduce allowances because they have perhaps distorted behaviour or outlived themselves and changes need to be made? We need to get people to act in a way that is consistent with their economic and commercial drivers rather than simply distorting behaviour for a short-term objective.

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I will not be tempted too far down that line, Sir Alan. However, I think that there is a role for writing down allowances and tax and capital allowances to encourage certain behaviour in the economy, even though it might be seen by some—and perhaps by the hon. Gentleman—as a distortion. That is why I think that the computer writing down allowance should have continued for a bit longer, until we had even more computers in the economy. That allowance was very helpful. I urge my hon. Friends to reject the amendment, because it is part of an overall package that would hit manufacturing and would be bad for British industry and bad for jobs in the west midlands.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

The measure proposed by those on the Conservative Front Bench is actually rather simple and modest. One would think from the attempt to draw dividing lines, as is fashionable in politics at the moment, and from the length of the speech made by Mr. Hoban that a huge point of principle was being proposed that distinguished the Conservative party from the Government. If the sentiments expressed by Mr. Redwood had been the substance of the amendment, that would have been true. He made a serious ideological point that distinguished between what he thought was the best way forward for the British economy and the Government's proposed way forward for the British economy. The distinction made by the amendment is not nearly as substantial and as impressive.

The right hon. Member for Wokingham said that there was great value in cutting headline rates. I think there is some truth in that, although it is not always as straightforward as he might think, as shown by the Prime Minister's experience in his last Budget as Chancellor of the Exchequer. He cut the headline basic rate of income tax to 20p, thinking that that would be extremely popular and would incentivise a lot of people on low to middle incomes to do more work. It appeared not to have that effect when people realised that it was revenue-neutral and that some would be disadvantaged as they would have to pay additional taxes to make up the shortfall arising from the money that was lost by cutting the headline rate. Cutting headline rates is not always as popular as politicians and legislators might think.

I was also interested in the point made by the right hon. Member for Wokingham about the Laffer curve, although he appeared to suggest that the Laffer curve's principal benefit is attracting investment from other countries into the jurisdiction where that applies. I would have been more interested if he had gone on to advance the view that it would generate more money from companies within the existing area of jurisdiction. He appeared to dwell less on that point, although I suspect that that is also his view.

By way of contrast, the amendment attempts to create an impression that, at this time of recession, the Conservative party would like to give British companies preferable tax treatment. However, having heard the explanation from the hon. Member for Fareham, one understands that that is not the case and that the proposal is revenue-neutral with regard to the total tax take. For that reason, his speech could have lasted two minutes rather 50—he could simply have said, "This amendment seeks to redistribute but not reduce the tax burden on British businesses." Given that our budget deficit will be £175 billion this year and £173 billion next year, and that we do not have huge amounts of surplus revenue sloshing around to use to reduce taxes, I and my party are minded to support the amendment precisely because of its modesty.

Three principles are worth observing— [ Interruption. ] I hear mutterings from off stage, but my point is that, although the ideas of the right hon. Member for Wokingham are more interesting and ideologically adventurous, they would create a real distinction—something that the Conservative party wants only to give an impression of doing. In a way, there is nothing very interesting about the amendment.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I will in a moment. We are considering not how much business is taxed, but whether the burden on different aspects of business should be redistributed in a way that renders the total tax take more reasonable. By and large, I think there is scope for collecting the same amount of tax revenue in a more simple way, and I shall set out my three principles for doing so. Before I do, however, I shall give way to the right hon. Gentleman.

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Photo of John Redwood John Redwood Conservative, Wokingham

Do I understand the hon. Gentleman correctly? Does he think—unfairly—that, because the proposal from my hon. Friend Mr. Hoban is potty, it is now good Liberal Democrat policy?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

That would have been funnier if the timing had been better. As it was, it was a typical Back-Bench attempt to be conservatively amusing.

The Conservative party believes it is here to argue the case for British business. That is reasonable, but it is trying to create the impression that it wants to cut the tax burden on British business. In reality, though, it does not want to do anything of the sort, and that is why I said that the amendment could have been dealt with rather more quickly. Had the Opposition proposed from the Front Bench the measures articulated by the right hon. Member for Wokingham, that would have been worth debating all of today and tomorrow because it would have represented a massive change in economic and tax policy. However, that is not what the Conservatives are trying to do: they are trying to give that impression, but they are not really trying to achieve that.

Even so, for the reasons that I am about to outline, I think the amendment is probably a step in the right direction. The first principle that I think ought to govern these matters is stability. Stability is beneficial: the Government have kept the rate unchanged, and that is a reasonable step in the right direction. It would help if they gave an indication of how long the rate will be kept at that level. I realise that future Finance Bills and general elections make it harder for them to give a firm commitment, but it would be helpful if business could have a feel for where corporation tax rates are going.

The second principle is simplicity, and it is in that regard that I think the amendment is most worthy of support. Removing lots of rates and reliefs and concentrating on a lower headline rate makes the system easier to understand for companies. It is harder for people to dodge tax, and complying with tax obligations is less of an administrative burden.

The third principle is transparency. I caution Conservative Members against creating the impression that they wish to cut business taxes when the reality is that they want nothing of the sort. They are in harmony with the Labour Government in thinking that the overall tax burden on business is exactly right, but this modest amendment at least advances the cause of simplicity and, on that basis, I see no reason to oppose it.

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Photo of Brian Binley Brian Binley Conservative, Northampton South 5:15 pm, 12th May 2009

I declare an interest as the chairman of an SME that employs about 140 people and that pays well below the corporate tax rate affected by the present discussion, although we hope that, one day, we will get there. We do, however, service a number of companies that are in the relevant tax bracket, and therein lies my interest, because supply chains are a vital component of the whole structure.

I shall talk about how people think about tax as much as about how accountants evaluate tax. Business men tend in the main to be more creative than accountants and they tend to dwell less on detail. It is that degree of creativity that makes the amendment interesting and it is why I commend it so strongly. What the amendment proposes would create a feeling of the worth of being involved and of using money to gain more money and to grow on behalf of the nation, as well as on behalf of the people we employ. It reflects an attitude of mind —one that is often not understood by Government Members.

Many in business get the impression that Labour Members think that business men are there to make profit and that that undertaking is in some way dubious—or even, some of the worst sort of that thinking suggests, crooked. In fact, many business men are there to create, to build and to grow, and that very objective is the driving force that creates jobs in this country. Therein lies the importance of the amendment: it would encourage creativity, which in turn encourages jobs. That is a vital part of the process in which we need to be engaged right now if we are take advantage of the green shoots that will appear, as my right hon. Friend Mr. Redwood and my hon. Friend Mr. Hoban have said. When those green shoots appear, we need to be in a position to exploit them to the advantage of our nation. High taxation in any form does not help us to do that.

Another point touched on by my right hon. Friend is the need to attract to this country businesses and big companies from other nations. I am amazed by the arguments advanced by some Government Members, who seem to think that our real opponents are Germany and France—that those countries should be our comparators and that, as long as we are lined up relatively sensibly with them, the world is okay. Let me tell Ministers that the world is changing dramatically and the G7 may not always be in pole position. In fact, I believe that the present elements of the G7 will not be in pole position for very much longer, because I perceive a massive, dynamic change in the world, which the present recession will only enhance. The Government need to understand that, but I see no understanding among them of that trend.

Let me explain part of the reason I think that. I have just returned from a Department for Business, Enterprise and Regulatory Reform trip to the United Arab Emirates and Saudi Arabia, and I went to Dubai. Some might say that Dubai is having a pretty bad time, and indeed it is, because it is not a major oil-producing part of the world, but it is a hub for a massive region. People there said to me time and again, "We used to look to the west; we now look to the east." Business man after business man in Saudi Arabia and the Emirates told me that. Of course, many of them were not nationals of those countries. They were European business men who decided to settle their businesses in that part of the world because of the potential that it provided. That is what we are competing against. It is against that background that this debate is so important. It is about ensuring the recharging of Britain's natural entrepreneurial spirit. That creativity is vital, and lower tax rates inspire that creativity. I beg the Government to recognise the connection in the amendment, even at this late stage.

I was rather surprised at Mr. Robinson, whom I admire enormously. He is one of the few members of the Labour party with real business experience. I was particularly surprised that, although he recognised that we created the lowest corporate rates of taxation in the G7, he did not seem to think that that was too important. That was a very confusing argument. I recognise the points made about the overall tax basis, but he did not see the creative, imaginative elements of the proposal, as I would expect a business man to do. That surprised me in a business man of his stature.

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Photo of John Redwood John Redwood Conservative, Wokingham

Drawing on his business experience, does my hon. Friend find, as I do, that business people in big companies will go to enormous lengths—within the law, we trust—to try to avoid paying higher taxes? That is important when they do business across the world.

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Photo of Brian Binley Brian Binley Conservative, Northampton South

Of course my right hon. Friend is correct. Many of the greatest business supporters of the current Government were the proponents of such exercises. The hon. Member for Coventry, North-West—I repeat that I hold him in great esteem—said that the argument was about timing. That was the essence of why he did not want to support a cut to 25 per cent. at this moment. I would argue that it is precisely because of the timing that we need to make the change. I was one of those people who saw, from '79 onwards, a great rebirth of entrepreneurial spirit in this nation. I saw what that did for people like me, who wanted to go out and be their own boss, to build and create, and to drive forward the jobs that were so successfully created in the next years.

At the time, one of the major motivations for me, and for many other people like me, was the fact that the Government wanted to get off the back of business, free business up, and encourage business to build. Therein lies the import of the cut to 25 per cent. Like my right hon. Friend the Member for Wokingham, I want further cuts as time progresses, but timing is vital if we are to grab the green shoots that will surely appear. That is why it is important that we make the change now, and that we tell people we want to support business and entrepreneurism. We want to grow jobs and businesses and we want to attract businesses so that my children and grandchildren do not see that movement to the east as the end of their hopes and aspirations.

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

I do not have a problem with lower business taxes, and I am very supportive of lower corporation tax. I have said so many times that, as part of an overall competitive framework for business, that is a prerequisite for solid economic growth. When we look back over the medium term, we can see that many countries that, when they reduced their business tax burden, in fact experienced a business tax increase year on year as the rates came down.

None of those comments will come as a surprise to those on the Conservative Front Bench, as I have made them on many occasions. It is the case, however, as we have discussed before, that concerns arose when business taxes were kept high. Even when allowances and reliefs for investment were extended, there were concerns that that regime failed to support the good businesses that were simply getting on and running their companies, and supported only the companies or firms that invested in particular areas. I shall return to that in a moment.

Mr. Hoban suggested that the proposed tax cuts would fundamentally be paid for by reducing or removing allowances or reliefs, by simplifying the allowance or relief system. Although I agree with the need for a simpler tax allowance and relief system in general, I have a couple of questions about his amendment. What assessment has he made of the value of lost investments—investments that might be cancelled or delayed as a result of the proposals—if those allowances or reliefs have already been budgeted into the costs? Why has he proceeded at this point with the cut, rather than proposing a longer time scale for changes to the tax and allowance regime, which would allow the economy to benefit from the announcement effect, as we have seen elsewhere, whereby businesses come and set up in preparation for lower taxes, while mitigating the risk of investment projects being cancelled or postponed?

I am very supportive of a lower corporation tax rate—our aspiration is to reduce it to 20 per cent.—and I am in favour of a simpler tax system, which is a good thing, as it reduces costs and burdens, and is easier for business people, their offices and their staff, to understand. However, I question the timing of the proposal. Why not say that it would take place in future, to benefit from the announcement effect, and why not tie that into a longer lead time for the abolition or simplification of allowances? Importantly, what assessment has the hon. Gentleman made of the risk of investment projects being cancelled? I want to support the proposal, but it would be useful to hear his thinking.

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Photo of John Redwood John Redwood Conservative, Wokingham

From the point of view of the hon. Gentleman's party, what would be a competitive corporation tax rate for the United Kingdom?

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

We suggested a reduction to 20 per cent. That was our favoured route, and we thought it would be the optimal position. We must not have a race to the bottom, but we cannot compete with the lowest-cost economies: there must be a competitive package—that is the key. At the same time, we made it clear that that would not be done on day one. There must be a lead time, and where that has happened—and there is empirical evidence of this—the announcement effect on businesses coming here in preparation increased the tax yield even before the rates went down. If the hon. Member for Fareham responded to those points, I would be extremely grateful.

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Photo of Robert Syms Robert Syms Conservative, Poole

First, I should like to draw hon. Members' attention to my interest in the Register of Members' Interests as a director of a family building business.

We have had an interesting debate, and when we talk about first principles—tax, tax rates and competition—we often have such a debate. At the beginning of debate on the Finance Bill, we had almost a Cook's tour of Canada, Bahrain, Dubai, China and Dundee, East. That shows that we live in a competitive world environment that is not getting any easier year by year, but is becoming far more competitive. One of the examples that I used was Ireland, and a key message that has come across is that low taxes generate more revenue and jobs, attracting people to locate there. Ireland is one of our competitors and, notwithstanding its short-term difficulties, which are similar to ours as a result of asset price deflation and everything else, we must accept that this is a competitive world.

We should not look at the question on a year-by-year basis; we need to look at the medium term. Our economic problems relate not to one year alone, but to half a dozen years. We have to keep business in the UK and attract it to the UK. Setting a rate, a direction of travel, of 25 per cent. will make things a little easier than if we set a rate of 28 per cent.

One of the messages to come from our financial problems has been how big some of the banks and international companies are in relation to our economy. We know that people sitting in various capitals around the world look at the various competitive differences of language, productivity and tax; all those things feed in. Although we do not necessarily need the lowest tax, we do not want to tax too much more than our competitors. That is a black mark when people are considering where they are going to invest and to locate their businesses.

Paying for the measure by restricting the capital allowances reliefs is probably right. Most businesses that have to invest in equipment and machinery do so for reasons to do with the business and not because of the tax advantages. Mr. Robinson has already told us that there may be an impact on manufacturing. Of course: the pound has devalued against the euro and interest rates have massively reduced. All those things should—fingers crossed—help west midlands manufacturing. So what I have been discussing is a rather good way to go about things.

My hon. Friend Mr. Hoban mentioned companies such as Google and insurance companies, some of which are moving for regulatory reasons as well as the reason of rate. Such companies are more mobile. Manufacturing can move, but it is a hassle to move a plant; it is easier for an insurance company, bank, investment fund or software company such as Google to move. It is perfectly possible for my hon. Friend to come up with a calculation for amendment 1 whereby the burden on UK business would be the same but the pot might be bigger, because we might retain businesses that would otherwise consider moving—whether to Bermuda, southern Ireland or the Netherlands—and we might well attract businesses in. We have tremendous advantages as a nation. We are creative and hard-working, and the English language is a tremendous asset. That also means that we have to be competitive because a lot of other people speak English and can compete with us. Reducing the rate from 28 to 25 per cent. by restricting capital allowances and reliefs is sensible.

My hon. Friend made some compelling arguments. At the beginning of this debate he said that five years ago we had the fourth lowest headline rate in the EU and that today we had the 19th lowest. However, as we have heard, our competition comes not only from the EU—let us face it; many EU countries are rich and successful and will get through the problems—but from the whole world. Setting a lower rate is therefore important.

Mr. Browne made some good points. A simple proposal that is more certain and not as avoidable is far better than having a higher rate and lots of reliefs and allowances. We see the direction of travel, but countries in the rest of the world are trying to get our business. They want to attract our companies, and they are doing so by setting more competitive rates. Unless we respond to that, we will not be defending the wealth, jobs and investment in the UK. We have to look beyond our current economic difficulties. Let us face it—we know that the corporation tax take is going to take a hit and that, even when recovery comes, there will be a lag. However, we also know that international businesses plan on a three, five, seven or 10-year basis. We should therefore plan our economic renaissance on the basis of setting rates to encourage people to look towards the medium term.

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Photo of John Redwood John Redwood Conservative, Wokingham 5:30 pm, 12th May 2009

Is my hon. Friend worried for firms in his constituency that are part of multinationals given that, at a time when a lot of capacity worldwide will be removed and plants will be closed, too high a headline rate might be what tips the balance against a British plant?

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Photo of Robert Syms Robert Syms Conservative, Poole

There is over-capacity within the car industry, and there will be cutbacks there; and we have already seen bad news from Teesside as regards steel. Many international businesses will be looking to see where they want to expand in future. We face great competition, and the tax rate is one of the things that might encourage people at least to consider staying here at a difficult time. Many of our major manufacturing plants are hanging in there by their fingernails. We hope that we will get through the current problems. However, it is important to send a message in terms of public policy, setting rates and stating a direction of travel if we are to retain people and stop them moving abroad. I was surprised when my hon. Friend the Member for Fareham listed some of the companies that have moved. I was aware of some, but perhaps I am not as glued to the financial pages as somebody who does the Treasury job full time and is a chartered accountant.

The amendment deals with lost revenue to UK plc that could be spent on important alternatives. It is therefore an excellent proposal, and I commend it to the House.

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Photo of John Howell John Howell Conservative, Henley

I apologise for not having realised that in order to participate in this debate one had to be an expert on Canada, but having returned from Canada only on Saturday morning let me give the Committee the benefit of an update on the situation there. The economic situation was encouraging, as were the conversations that I had with Ministers, including those in the finance team. They had a realistic view of Canada's position and direction and were keen to go out around the world and "sell" the country. Canada started with a good situation in terms of its approach to the current crisis. The stock market was doing rather well last week—not that I had time to undertake any speculation—and unemployment was under control.

There is one great difference between Canada and the UK: Canada has a Conservative Government. One of the Committees that I have served on over the past few months considered the Corporation Tax Bill. Nothing new was introduced into that Bill—it was part of a tidying-up exercise; "simplification" was the euphemism used—but the fact that it had some 1,300 clauses shows that we have some problems in our corporation tax system. It was evident that what was required was not just telling the press about closing loopholes but genuine simplification of a regime of allowances and reliefs that interact with each other, are extremely complex and set a very confusing picture for foreign investors who come to this country. It is a shame that the opportunity was not taken to make more of simplifying the corporation tax system as part of the way out of the current crisis.

There is huge scope for simplifying the system even further. For several years, I was an inspector of taxes— [ Interruption. ] I hear cries of "Shame!" from my hon. Friends. I remember that when I first started, all the income and corporation tax Acts could be put into a reasonably small box that could be put into one's briefcase and taken home. That is no longer so, which is a great shame. Even then, one had to deal with huge areas of enormous complexity, such as transfer pricing.

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Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. May I ask the hon. Gentleman to speak a bit more about the amendment as opposed to the generality of corporation tax?

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Photo of John Howell John Howell Conservative, Henley

Thank you, Mr. Hood. I shall try to do that. That complexity, though, is very much part of the balance that needs to be struck in deciding what reduction in corporation tax is required and how it can be adjusted.

A lot of hon. Members have spoken about competitiveness in reducing the rate, and I endorse the many comments that have been made about the role of a lower rate of corporation tax in encouraging foreign investment into this country. For a number of years, it was very much the UK that set the agenda in encouraging newly developing countries in how they should approach their financial systems and set their own rates. I remember being involved in discussions how the countries of central and eastern Europe, as they emerged, could get the right balance between the rate of corporation tax and the need to bring in foreign investment through other means. That was always a difficult discussion, because countries always want to encourage companies to come in initially through means other than reducing corporation tax. It takes quite a lot of maturity for a country to get to the point of reducing it, as the amendment proposes.

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Photo of John Redwood John Redwood Conservative, Wokingham

When my hon. Friend was in Canada, did he find people taking great delight in the fact that the UK rate was so much higher than the Canadian rate? Did they believe that that gave them a great competitive advantage?

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Photo of John Howell John Howell Conservative, Henley

My right hon. Friend is right—there was a certain pleasure in that, although perhaps I should not use the word "pleasure", as they are, after all, our cousins and still part of the Commonwealth.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I may have misheard, but I believe that the intervention was factually incorrect. The corporation tax rate in Canada is higher than that in the UK.

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Photo of John Howell John Howell Conservative, Henley

I think that my right hon. Friend Mr. Redwood was talking about the overall direction in which it was going—at least, that was what I understood.

To return to the example of countries needing to reach maturity to consider reductions in corporation tax, the country that sticks in my mind is Poland, which has reduced its corporation tax rate to 19 per cent. Of course, the UK was very much behind the reforms there in the whole tax and financial system. It is a great irony, particularly given the advice that Poland gave the Prime Minister recently, that Poland was ready to take advice from the Conservatives but the Prime Minister was not. There we have something that will continue in future.

In the businesses that I have advised and examined, there is great attraction to the headline rate of corporation tax.

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

May I caution the hon. Gentleman about praying in aid Canada and Poland? He will find that both countries have a rather higher unemployment rate than we do. I appreciate that ours is getting worse and is worrying, but I think that both those countries have higher rates. Canada certainly does.

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Photo of John Howell John Howell Conservative, Henley

I thank the hon. Gentleman for his intervention. There is always a limit to the use that we can make of examples, but those of Canada and Poland still have merit to the extent that I have indicated.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

The hon. Gentleman has rapidly developed a reputation in the House for being a rather more subdued and rational person than his predecessor, which does not take a lot. He says that the direction in which things are going is all that matters. Does he believe that if investors and industrialists were looking at a country with a highish corporation tax rate that was heading down slightly, and at another country with a lowish corporation tax rate that was heading up slightly, a rational organisation or individual would choose the former because the direction was downward? I do not think so.

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Photo of John Howell John Howell Conservative, Henley

I am not sure whether to thank the hon. Gentleman or whether his remarks comparing me with my predecessor were even a half-hearted attempt at a compliment, but I will take them at face value and hope that I continue to make the gap bigger in his appreciation.

In my experience of advising companies and Governments about how to set up foreign investment regimes, companies consider the headline rate. They do not look at it on its own, and the comments about not considering it in isolation are correct. However, companies consider the direction in which it is going and are prepared to take a punt on that, and to examine other circumstances, such as the simplicity of the tax system. An incredibly complex system will offset some of the advantages of reducing the tax rate. It is therefore right to proceed with simplification.

Companies examine the whole complex pattern, but I cannot emphasise enough that the starting point is the one thing that one can always grab hold of—the amount and direction of corporation tax. Earlier remarks about considering the whole package are important, but there must be one guiding figure: the rate of corporation tax.

I have done enough of a world tour to my two favourite spots, Canada and Poland. I hope that other hon. Members will consider other countries. As my hon. Friend Mr. Binley said, the middle east is an important area. His comments about attitude, direction, perception and the changes people make are vital because we can be sure that, when the crisis is over, people will not look at the world, or countries' approach to their tax systems, in the same way. They will look for simple tax systems that focus on the nation's priorities and reflect the changes in people's experience when, for example, they examine the amount of debt on the books.

I fully endorse the amendment and look forward to the vote on it.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills) 5:45 pm, 12th May 2009

The debate has been interesting. I want to underline the Government's determination to maintain the best possible environment for business in the UK, help the economy recover from the current downturn and provide the right conditions for long-term growth.

Since 1997, the UK has led the way among its peers in reducing corporate tax rates. We reduced the main rate from 33 per cent. in 1997 to 31 per cent. in 1998, to 30 per cent. in 1999 and to 28 per cent. last year. The UK corporation tax rate has been the lowest in the G7 since the Government were elected in 1997. The rate has consistently come down.

From listening to some comments, one could be forgiven for concluding that the rate had gone up, was going up or was set to go up. It has not—the main rate has consistently decreased. Indeed, we have set a target to maintain the most competitive main rate of corporation tax of the major economies. Mr. Hoban said that he did not have a target. We do. Our target is to maintain that most competitive rate, and we will continue to assess the case for further reductions in the corporation tax rate, consistent with our wider objectives.

This debate, like many in the past, has been enlivened and enlightened—

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Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

May I take my right hon. Friend back a few sentences? I think that he said that the Government's aim was to keep the UK's corporation tax the lowest in the G7. Does that mean that, if Jim Flaherty in Canada achieved his aspiration of dropping corporation tax to 15 per cent., the UK Labour Government would follow that figure on a beggar-my-neighbour downwards approach?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I was coming to precisely the point about Canada, which, thanks to my hon. Friend's contribution and those of others, has been an interesting aspect of this debate. As I understand the current position in Canada, the rate is 33.5 per cent.—at least for most companies—compared with 28 per cent. in the UK. However, as we have heard, the Canadian Government have announced an aspiration to reduce that rate and, in due course, for Canada to have the lowest rate in the G7. Clearly, there cannot be two countries— [ Interruption. ] It is possible, I suppose, to have two, if both countries set the same rate. It is worth pointing out, however, that that aspiration was set before the problems in the world economy that we have seen over the past 18 months. There have been big changes in the world economy and Canada may wish to reconsider how best to address the fiscal consequences of the past 18 months. However, our intention—which was set some time ago and which Canada said a little while ago it wanted to emulate or even better—remains, but of course we will need to see what happens.

It is worth bearing it in mind that tax competitiveness is about more than just the headline rate of corporation tax, as has been pointed out. The UK tax system certainly has significant advantages, including a generous and well-developed system of research and development tax credits, relatively low administrative burdens for business, a large tax treaty network and no withholding tax on dividends paid. We are introducing a package of measures in the Finance Bill to reform the taxation of foreign profits, which the hon. Member for Fareham mentioned, enhancing the UK's competitive position as a location for multinational business. We will debate that in due course.

We in the UK also perform well on other measures, according to the hon. Gentleman's former employer. In "Paying Taxes", a publication by PricewaterhouseCoopers and the World Bank, we rank first in the G7 for ease of paying taxes. We were ranked by KPMG last year as the most friendly country in the world for VAT arrangements.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I refer the right hon. Gentleman to the authoritative KPMG survey of more than 500 multinational companies that reached that conclusion. The World Bank's "Doing Business 2009" study ranks the UK sixth in the world. The evidence is clear: we are in a strongly competitive position, and it is important that we should retain that.

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Photo of John Redwood John Redwood Conservative, Wokingham

If everything is so wonderful, why have so many companies left for tax reasons and why have there been such strong representations in recent months about how hostile the climate now is on tax?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

The climate is certainly not hostile on tax. Of course it is true that, from time to time, some companies choose to locate elsewhere. It is also true, however, that over a long period we have consistently attracted more foreign direct investment into the UK than any other country in the world, with the exception of the US, and in one year—I forget exactly when; it was three or four years ago—we got more in than the US as well. We have an absolutely stunning record on attracting foreign direct investment, which is a reflection of the strongly competitive character of the UK business environment.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

I am pleased to hear the views of international businesses about the user-friendliness of HMRC. The prompt payment code, which the Government have signed up to, requires the payment of invoices by the public sector and the Government within 10 days where there is the equivalent of an invoice, such as an acknowledged refund of corporation tax that is due. Is it the case that those payments, which are vital to the continuity of the businesses concerned, sometimes take weeks and weeks, because of peaks of work in the relevant tax offices, which is partly because of cuts in the headcount of staff? That is not good, is it?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

No, it certainly is not, although I do not agree that our announcements about changing the way in which Revenue and Customs is organised, for instance, would lead to that kind of difficulty. If my hon. Friend is aware of a particular problem, I would be happy to hear about it from him and will gladly investigate. However, he is certainly right that such repayments should be made promptly.

In opening the debate, the hon. Member for Fareham seemed to say at one point that the change could be funded by simplifying taxation. Indeed, it would be a wonderful idea if one could simplify everything and thereby fund the reduction of corporation tax from 28 to 25 per cent. However, as we explored what he is proposing further, the position became clearer. Cutting the rate of capital allowances further could produce an effective rate of tax depreciation significantly below the average depreciation rate used by businesses.

Businesses with good commercial reason to invest would then find the tax system discouraging them from doing so, which would be a very undesirable state of affairs, discouraging investment by sectors such as manufacturing, transport, communications, retail and utilities, and certainly damaging our international competitiveness by reducing investment in those sectors. My hon. Friend Mr. Robinson was absolutely right to underline that point with his experience of working in manufacturing. Indeed, my hon. Friend Rob Marris made that point as well. Mr. Syms did not think that that mattered, because of other benefits that the manufacturing sector was experiencing. It is certainly true that, for example, the change in the exchange rate over recent months has been helpful for manufacturing. However, he would be very ill advised indeed to rob manufacturing in particular of the significant benefits of the current arrangements for allowances. We simplified capital allowances in the Finance Act 2008 to pay for the reduction in the headline rate. Going further could create serious problems. Indeed, Stewart Hosie was right to query the timing of the hon. Gentleman's proposition.

I hope that the House will reject the amendment. Nevertheless, I underline the Government's commitment to maintaining the attractive tax environment for business that we have in the UK, not least through having the lowest headline main rate of corporation tax in the G7.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

We have had a wide-ranging and thorough debate on the amendment about reducing the headline rate of corporation tax. It was interesting that the Minister acknowledged the fact that, in the Finance Act 2008, the Government were able to fund a reduction in the headline rate of corporation tax by simplifying the allowances. We discussed the reforms to the industrial buildings allowance and the agricultural buildings allowances in Committee. There is therefore a track record of using the proceeds of simplifying capital allowances—that is, reducing the rates—to fund reductions in the headline rate of corporation tax. Our view is that we could go further and reduce the rate to 25 per cent.

My right hon. Friend Mr. Redwood was acting in his customary role as a critical friend, supportive of where we had moved so far, but perhaps keen for us to move further in the direction of reducing the headline rate of corporation tax. My other hon. Friends cited their business experience in talking about competitiveness and about what businesses bear in mind when locating activity.

Mention has been made of the way in which Governments focus on tax as a means of competing, and I think that more reference was made to Canada in today's debate than perhaps at any time since it was a dominion and part of the empire. It was good that my hon. Friend John Howell, a former tax inspector, joined Rob Marris as an aficionado of Canada and a spokesman on its behalf.

We discussed the fact that Canada has a federal rate and provincial rates of tax. I note that the OECD figures suggest that it has a combined rate of 33.5 per cent. If Canada were to achieve its aspiration of reducing the federal rate by 7 per cent., that would bring its combined rate down to 26.5 per cent., which is below the present UK tax rate. If the Minister is keen to match the Canadian rates, some progress clearly needs to be made.

We discussed the impact of the proposal on capital investment and the possible reaction of businesses to it. Part of the problem that we need to address is the fact that the structure of capital allowances has been so unpredictable in this country. That has made it difficult for businesses to factor into their plans an understanding of what the capital allowance rate might be. For example, businesses planning on the basis of a 25 per cent. writing-down allowance might be surprised to find that there will be a 40 per cent. first-year allowance for this year only. The extent to which that provision will create an incentive for businesses to invest this year is unclear. Many businesses with a longer planning horizon might not be able to respond to such a short-term incentive.

It is important to have predictability so that businesses can make their plans. That is one reason why we are so keen to flag up our intention to reduce the headline rate of corporation tax, and to fund that reduction through a reduction in the rate of capital allowances. The broader economy would gain huge benefits from moving to a lower headline rate. Such a move would send a clear signal to inward investment that this is the place to come for lower corporation tax rates.

Such a move would also tackle the issue of businesses moving out of the United Kingdom. I think that my hon. Friend Mr. Syms was impressed by my lengthy list of businesses leaving the UK. Part of the problem is that, when the first few businesses moved, it was newsworthy and people paid attention, but subsequently, a stream of businesses leaving have left. It has become more commonplace and less noteworthy, and people now accept that it is happening. But the fact that it is less newsworthy does not mean that it is less important for us to take action.

The Financial Secretary to the Treasury talked of several firsts. He said that the UK was the best place for tax compliance and the best place for VAT, but let us not forget our other first. We also have the longest tax code in the world. We beat India by a country mile in that regard. International comparisons do not always work in our favour.

It is important for Britain to have a competitive tax rate. It is important for inward investment, and for strengthening the economy to make Britain a place where people want to do business. This proposal is only one part of a series of reforms of the corporation tax system that would lead to a better system for business in this country, but it is important that we send a signal that this is something that we are committed to. That is why I shall press the amendment to a vote this evening.

Question put, That the amendment be made.

The Committee proceeded to a Division.

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The Committee having divided: Ayes 200, Noes 302.

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Division number 117 Surface Water and Highway Drainage Charges (Exemption) Bill — Clause 7 — Charge and main rates for financial year 2010

Aye: 200 MPs

No: 302 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

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Question accordingly negatived.

Clause 7 ordered to stand part of the Bill.

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