Clause 8 — Small companies' rates and fractions for financial year 2009

Surface Water and Highway Drainage Charges (Exemption) Bill – in the House of Commons at 6:00 pm on 12th May 2009.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 6:00 pm, 12th May 2009

I beg to move amendment 2, page 3, line 22, leave out '21%' and insert '20%'.

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

With this it will be convenient to discuss the following:

Amendment 6, page 3, line 23, at end insert—

'(1A) The Treasury may by regulations provide for the introduction of a very small companies relief from the small companies' rate under subsection (1) for businesses with a rateable value of less than £25,000.

(1B) Regulations under subsection (1A) shall be made by statutory instrument and shall be subject to amendment in pursuance of a resolution of the House of Commons.'.

Amendment 3, page 3, line 25, leave out '7/400ths' and insert '1/50th'.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Having engaged in a helpful and thorough debate on amendment 1, relating to the main rate of corporation tax, we must now deal with the small companies rate. Amendment 2, tabled by me and by two of my hon. Friends, seeks to reduce the headline rate from 21 per cent. to 20 per cent., while amendment 3 seeks to change the fraction from 7/400 to 1/50. I shall say more about amendment 3 a little later. Many of the points made during our debate on amendment 1 about the unpredictability, complexity and uncertainty of the corporation tax system apply to small companies as well, but in the case of small companies there is a more pressing issue.

There is a little bit of history attached to amendment 2. There has been a long-running debate in Government about the taxation of small companies, and about what tax rate has been appropriate. When I first served on a Finance Bill Committee as a Back Bencher in 2002, the then Chancellor—now Prime Minister—had proposed a zero per cent. corporation tax rate on profits of less than £10,000. What the Government said at the time suggested that they saw the proposed rate as a spur to enterprise which would reinvigorate British business, but that rested on a key assumption which was misplaced then and which, in a sense, has led to some of our present problems: the assumption that only companies were entrepreneurial. That assumption ignored the contribution that can be made by partnerships and other unincorporated businesses to the dynamism of the British economy.

The flaw in the Government's proposal was that it did not merely overlook the fact that other types of business organisation could be equally dynamic, but triggered a behavioural change. A raft of unincorporated businesses became limited companies, because a gap had opened up between the rates of tax that would be paid by, say, a plumber, depending on whether he was employed, self-employed or a limited company. I believe that it was adequately flagged up at the time that that would happen.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

I recall the decision and its implementation, and I recall the massive wave of incorporation that took place. It was not one of the best decisions that we have made in government. Does the hon. Gentleman agree with me—and, indeed with most management consultants—that, in the context of the framework for business, the decision whether to incorporate should never, or at best very rarely, be made for fiscal reasons?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

That is an important question. It returns us to what was said earlier about distortions in the tax system, and about attempts to persuade people to make decisions that reflect commercial realities rather than being driven by tax considerations. A difficult position arose. Very small businesses—one-man bands—became incorporated in order to take advantage of the fiscal position, which I believed was a flawed decision. I argued at the time that it would lead to a wave of incorporations.

The problem is that small companies are not measured in terms of numbers: in terms of whether they have one employee or two, three, four or five. They are measured in terms of the amount of profit that they make. On the one hand, there is the wish to create a level playing field for the plumber, the carpenter, the engineer and the IT software support worker, while on the other hand there is a range of businesses that are also incorporated and that are much bigger. In the latter case, the decision to incorporate was probably made on grounds of logic or to admit liabilities.

What is happening now, however, is that larger companies that nevertheless fall within the profit threshold for small companies are paying the price of the Government's early mistakes. Following the introduction of the zero per cent. rate in 2002, the Government saw what was happening and responded by introducing such measures as a higher tax charge on distributions. Gradually, a point was reached at which, rather than piling complexity on complexity, the Government decided to increase the small companies rate of corporation tax in an attempt to narrow the gap between the rate paid by people working by themselves as small companies and the rate that they would pay if they were employees or self-employed.

In 2007, the Government finally decided that enough was enough. They scrapped the system, and introduced a 19 per cent. rate. They then set out to increase corporation tax for small companies by 1 per cent. per annum until it reached a top rate of 22 per cent. This was meant to be the year in which it would reach that rate, but, in the light of the current economic circumstances, the Government decided to put the increase on hold. Let me ask the Minister a question that I asked on Second Reading last week. Can the Government give any indication of whether they intend next year to raise the rate to 22 per cent., and to continue on that upward path?

It was not just the change in rate that the Government considered as a means of tackling the issue of incorporation. They introduced a raft of rules on managed service companies in the 2007 Finance Act, and conducted a long consultation on the shifting of income between husband and wife, which, as far as I can see, has been kicked into the long grass. However, I think that we need to learn the lessons of the original rate change policy. I think that it was misconceived. It triggered certain types of behaviour that the Government have sought to crack down on, and introduced a new complexity into the tax system. It is a sign of the uncertainty and unpredictability in the tax regime for small businesses.

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Photo of Lembit Öpik Lembit Öpik Liberal Democrat, Montgomeryshire

I accept that the hon. Gentleman's amendments seek to achieve specific ends, but does he more generally feel that, notwithstanding the current debate, we need to have a root-and-branch review of the complexity? That complexity does not help either tax gathering or small businesses. Businesses are burdened by an unbearable cost in time and effort because of the opacity of the system, but a more streamlined version would help both them and the taxman.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 6:30 pm, 12th May 2009

The hon. Gentleman makes an important point: we must have a less complex system. The Chancellor of the Exchequer made a commitment to simplify it when he was appointed to the post. I do not know whether the hon. Gentleman is auditioning to take part in the Public Bill Committee, but if he were he would notice that in the Bill's index there is the sub-heading of "Simplification", listed under which there are only three clauses out of a total of 126. Therefore, although everyone aspires to achieve simplification, it is clearly hard to deliver. I know that complexity is an issue for the people who run small businesses; that was raised with me on Friday, when I was talking to small businesses locally.

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Photo of Lembit Öpik Lembit Öpik Liberal Democrat, Montgomeryshire

I am grateful to the hon. Gentleman for his concurrence with my view, but for the avoidance of doubt let me make it clear to my party Whips that I am absolutely not auditioning for the honour of serving on the Public Bill Committee.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the hon. Gentleman for his comments too, but I hope that that is the end of them, as his party colleague, Mr. Browne, was very critical about the length of an earlier speech of mine, which was the result of my being overly generous in taking interventions.

I have talked about the need to look at the direction of travel of the small companies rate, and about whether holding the figure this year at 21 per cent. is a permanent feature or whether it is the Government's intention to move to 22 per cent. next year. Many small businesses are finding the current economic crisis very difficult. In October of last year, John Wright, chairman of the Federation of Small Businesses, wrote an open letter to the Prime Minister under the heading,

"Help or the UK will crumble".

In the body of the text, he implores the Government to implement Conservative proposals to reduce the rate of corporation tax for small businesses; amendment 2 would reduce the rate from 21 per cent. to 20 per cent. Not only is that a Conservative policy, but Mr. Wright clearly hoped that the Government would introduce it in the Budget. This is what Mr. Wright said after the Budget:

"In what has been the most crucial budget in decades, the FSB is disappointed that small businesses have been largely ignored".

In an FSB survey, when its members were asked if this was a Budget for small businesses, 68 per cent. said no. When asked if it would have a positive effect on their business, only 7 per cent. of respondents said yes. A survey conducted by the Forum of Private Business came to a similar conclusion: 97 per cent. of respondents said nothing had been done to ease the burden of costs that they face, and 94 per cent. felt that the Budget did not address the issues threatening the survival of their businesses.

It was not only business organisations that were critical of the Budget and its impact on small businesses. Theo Paphitis, one of the stars of the "Dragons' Den" television programme, said:

"The Chancellor forgot that small businesses exist. He also forgot that one in five households in the UK derives its income from small businesses. He also forgot that nearly half of all employees in the private sector are employed by small businesses. In fact, the Chancellor forgot a lot of things."

One way in which we can help small businesses is by reducing the headline rate of corporation tax for small companies from 21 per cent. to 20 per cent. As with the measure proposed in amendment 1, this is a funded tax cut. I know that the modesty of it will upset the hon. Member for Taunton, but it is the prudent thing to do at present. Again, we will fund the reduction in the small companies rate through simplifying the capital allowances system.

Earlier on, we engaged in debate about the competitiveness situation for small businesses and how the UK tax regime compares with those of other countries. According to the OECD, our small companies tax rate is significantly higher than that of the US and France, whose rates are 15 per cent. Earlier in the debate, the Government were very keen to highlight that the UK mainstream corporation tax rate was one of the lowest in the G7. Clearly, however, as the US and France—and, indeed, Canada—have lower rates of corporation tax for small companies, we are out of kilter with other countries. My hon. Friend John Howell will be interested in the Canada comparison, and I am sorry that Rob Marris is not present to hear about it, although I am sure he will pick it up later. We need to ensure that both the main rate of corporation tax and that for small companies are competitive.

The measure proposed in amendment 3 is very straightforward—or at least I thought it was when I tabled an amendment last year reducing the fraction concerned to one fortieth, only for the Financial Secretary's predecessor to point out that that fraction was based on the corporation tax mainstream rate being 30 per cent. I have therefore gone back to my calculator, and it is my belief that the fraction should be one fiftieth, under which there would be a very smooth transition for businesses whose profits exceed £300,000, which is the upper threshold for small companies until they reach the full rate for large companies of £1.5 million. I hope the maths of that work. If the House were to agree to amendment 2, then amendment 3 flows logically from that. In our amendments, we both reduce the rate concerned from 21 per cent. to 20 per cent. for small companies and we have got the right fraction.

May I pre-empt the hon. Member for Taunton in his comments on his amendment 6? I was intrigued by it, and I wish to flag up my understanding of it. The intention appears to be to give further tax relief to small companies based on the rateable value of their premises. Does that not create a risk of giving highly profitable businesses relief simply because they might work from small offices? I am not sure whether that is the hon. Gentleman's intention, but I am sure he will explain the situation at greater length.

The thrust of taxation for small companies has been disjointed over the past few years. The Government saw it as a spur to enterprise when they introduced the zero per cent. rate back in the 2002 Budget. They then decided that that led to all sorts of inappropriate behaviour and, sadly, by increasing the rate of tax from 19 to 22 per cent., have started to penalise businesses that fall under the definition of small companies but that are not an alternative to being self-employed or employed. I see the emerging danger that we are penalising those small companies that have not sought to incorporate to take advantage of the tax rules, but that incorporated for the right commercial and legal reasons. They are being penalised because of a flaw in the Government's thinking back in 2002. I do not believe it is appropriate for that to continue. That is why I propose this cut in the small companies rate from 21 per cent. to 20 per cent. That, again, will be funded through a reduction and simplification in capital allowances. I hope that the House will support amendment 2.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I am grateful for the opportunity to contribute to this part of our deliberations. I say at the outset that I was not criticising Mr. Hoban when I said his proposals were modest: I was praising him, and it is precisely because of their modesty that I feel able to support them. If they had been unfunded—Mr. Redwood suggested that we consider such a situation—that may have given us greater difficulty, given the overall state of the public finances.

That leads me neatly to this proposal, which, after all, is largely an extension of our discussion on the previous clause. However, as it is slightly different, I shall speak at slighter greater length to it. According to the Federation of Small Businesses, there are 4.7 million small businesses in the UK, a remarkable 97 per cent. of firms employ fewer than 20 people, and 95 per cent.—19 out of 20 companies in the United Kingdom; I am not talking about 19 out of 20 employees—employ fewer than five people, so the overwhelming majority of businesses and enterprises in this country are extremely small employers. More than 500,000 people start up their own businesses every year, small firms employ 58 per cent. of the private sector work force, 13.5 million people work in small firms, small firms contribute more than 50 per cent. of UK turnover, and 64 per cent. of commercial innovations come from small firms.

I rehearse those statistics because it is clear—this point is made so often that it is a truism—that small enterprises are extremely important to wealth creation and employment opportunities. Thus, it is important that we regard them as being a distinct entity for corporation tax purposes. That point is widely accepted, which is why the Government have a different rate for them. For the same reasons that I cited in our previous discussion, we think that stability is important. If the Government are not going to cut rates, it is good that they at least indicate that there will be stability and that the rates will be frozen, and seek to convey to businesses the understanding that the situation will endure, even though it is not necessarily in the gift of the Government to guarantee that, as clearly it is not for a longer time scale.

That statement of intent is helpful because it allows businesses to plan. However, it remains our view, as it was when we discussed the previous clause, that simplicity has a virtue and that our trying to reduce headline rates helps companies—as my hon. Friend Lembit Öpik said, it helps in terms of their administrative burden—and creates the right message for those looking to start businesses or invest in this country. For those reasons, and because I have the assurance of the hon. Member for Fareham that the Conservative proposal is costed and responsible, as I like proposals to be, it is reasonable to support it.

Amendment 6, which stands in my name and that of my colleagues, was an attempt to provide additional assistance. In an effort to be open-minded and generous-spirited, may I say that I take the hon. Gentleman's point that there are potential difficulties with the system I am proposing? It is difficult to frame amendments that cover every eventuality, because the nature of the process is that amendments have to be reasonably brief. We seek to give further assistance to particularly small businesses, which may benefit from that help, given that, as I was saying, 95 per cent. of businesses in the United Kingdom have five or fewer employees.

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Photo of David Taylor David Taylor Labour, North West Leicestershire

I am a big admirer of the FSB and I use its website and services from time to time. Has it said whether there is any correlation between rateable value and profit? Why would it be sensible to use as a proxy for a definition of small businesses something related to rateable value? Far better measures could be used, particularly for organisations and small businesses that are devolved in an electronic sense through good numbers of people working from home. How would that be handled?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

One might seek to give the greatest encouragement to precisely those businesses. I take the hon. Gentleman's point, and my doing so relates to the concession I was making only a moment ago; I only regret that he did not take the opportunity to table an amendment that he felt would be more effective in assisting the businesses I am trying to help. I think there is broad agreement on the overall point that small businesses contribute substantially to the UK economy, and it is very much in our interests that that be recognised in the tax structure.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 6:45 pm, 12th May 2009

The hon. Gentleman makes an important point about recognising the importance of small companies in the tax structure, but could he elaborate a little more as to the nature of his amendment and the relief that would be granted to businesses that fell into this category? Is he talking about a 10 or a 15 per cent. rate of corporation tax for those businesses? It is not clear where his thinking is heading on the additional relief that would be offered to them.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

There would be an additional saving to such businesses, and it would depend on the rateable value of the premises. An assessment would have to be made of that rate, and the saving would accrue at that point. Even if you propose to let me press my amendment to a Division, Mr. Hood, I do not intend to do so; I was seeking to make the point that there is merit in the Conservatives' proposal. I did not think it necessary to table an identical amendment, because I am more than happy to give my party's support to their suggestion. I was seeking to explore ways in which we could help particularly small companies that may benefit from additional assistance. If people feel there are multiple ways in which that can be achieved, I am open-minded on the matter and I hope that those will emerge during this debate and our deliberations in Committee.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

Should I give way to the Front-Bench spokesman?

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not sure how my hon. Friend defines seniority, but could the hon. Gentleman make his point a little clearer? He talked about the relief in relation to rateable value, which gave me the impression that he was talking about a reduction in the business rates a small business would pay, as opposed to a reduction in its corporation tax bill. He left hanging in the air the question of what sort of relief he means in practice.

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Photo of Brian Binley Brian Binley Conservative, Northampton South

It is. We should recognise that the seniority to which I referred was with regard to pecking order, rather than anything else. I welcome the general thrust of the hon. Gentleman's proposal; there is a need for a more graded relationship to corporate taxation, particularly for micro-companies. He has the good will of the Committee in this respect, and I hope that the Government will take that on board. The proposal does need defining further; introducing rateable value creates a more clumsy arrangement when matters need to be simplified.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I am grateful for the hon. Gentleman's intervention, because it perhaps gave the response that I may have sought to give to his Front-Bench colleague. I hope that the Equality Bill, which we debated yesterday, will address any issues he may have about seniority and discrimination in terms of pecking order. The intention behind amendment 6 was not only to say that the proposal to cut the headline rate had merit and that additional simplicity had virtue; it was also to consider whether, through this method, we could grade matters further and target specific assistance on particularly small companies such as start-up and IT companies, which have been mentioned. There is probably a feeling that this may not necessarily be the best method, but that there is some merit in trying to think along those lines. This has afforded me the opportunity to make that point.

On the lead amendment, while I welcome the Government's intention not to increase the rate, we think there is scope for decreasing the headline rate, based on tax-neutral assumptions and simplification of the system as a whole.

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Photo of Brian Binley Brian Binley Conservative, Northampton South

Of all the things the Government have done in recent months, one of the worst was to increase corporate taxes for the small business sector. The timing of this proposal has been disastrous, and the Government—and many of their supporters—recognise the problems. The increase has had a depressing effect on small businesses. It has prevented entrepreneurs from starting businesses, and it has certainly stopped small businesses growing. We need to change that situation, and amendment 2 would help to do that. That is why I am so keen that it should be accepted.

My main point concerns the importance of retained profit to small businesses. Retained profit is the very essence of their growth and survival. Small businesses tend not to have loans or be involved in over-complicated financial support—they simply have an overdraft. Therefore, the amount of money left at the end of the year is a vital consideration for their future growth, and to their protection against bad debt. That is particularly relevant at this time. For small businesses, cash is king and the more that the Government take in corporation tax, the less small businesses have to survive. The objective of most small businesses is simply to be here next year, and the Government could help enormously by accepting the amendment.

The amendment would also help businesses looking to grasp the opportunities that will be provided by the green shoots when they come. I hope that the Chancellor's projections are right. I want to see the green shoots sooner, rather than later, and a cut in corporation tax would better prepare small businesses to exploit those opportunities. I do not need to tell the Government about the growth opportunities in small business, as they have been well proved. The creativity of small businesses is very valuable for this country, and we need to have them in situ to support the supply chains for our bigger plc companies. However, they will not be in situ if they do not survive, and we will lose that infrastructure. The amendment would be a small measure to encourage small businesses, because it would give them more cash at the end of the year, which would help their survival and their growth when the recession ends.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My hon. Friend will know from his experience running small businesses about the impact that the Government's change in their approach to small business taxation has had. From his viewpoint, have the frequent changes over the last few years damaged the willingness of those businesses to invest and plan for the long term?

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Photo of Brian Binley Brian Binley Conservative, Northampton South

My hon. Friend makes a vital point. Many small businesses that were thinking in the longer term have ceased to do so. Many of them are simply looking to the next six to nine months in the hope that they will still be around. As I said, cash is king, and the amendment would provide a little more cash for such businesses at the end of the financial year to enable survival, after which they can think about growth. They have to survive first, and that is the point that I wish to make to the Government. The amendment would give small businesses sizeable encouragement, which would be most welcome.

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Photo of John Howell John Howell Conservative, Henley

I wonder whether my hon. Friend's experience is similar to mine in that, because of the vulnerability of small and medium-sized companies, even the smallest amount of tax reduction has a huge effect on them.

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Photo of Brian Binley Brian Binley Conservative, Northampton South

I am grateful to my hon. Friend for making that point, because it allows me to point out that just a £2,000 bad debt can be the end of a very small company. That sort of saving might ensure its survival, which is why I seek the Government's support for the amendment. If that is not forthcoming, I hope they will think about this matter more constructively than they have to date. I am told that the road to Damascus is a most attractive route.

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Photo of Robert Syms Robert Syms Conservative, Poole

Clause 8 is important and amendment 2 would be very helpful. We have already heard how important small businesses are—probably more for the employment they provide and the taxes thus generated, rather than for their profits and corporation tax purposes. Many companies in the small business sector are under-capitalised. It is therefore important that when they make money, it be retained within the business. Many of the capitalist entrepreneurs who run such companies pay the tax and leave the money in the company instead of taking a dividend, so that the company can grow.

If we are to get through these economic problems, we will need people who are determined, who are good managers and who have a vision for running a business. Many small businesses do not make a profit, but giving a signal to the small business sector by reducing, rather than increasing, the rate is potentially very important. Many people are in business out of sheer awkwardness—they have run the business for years and are determined to keep faith with their employees. Those people are looking for better times ahead. Many of them have risked their homes, put off holidays and even ruined marriages over their businesses, so it is important that we give them a signal that they will be able to retain more of what they do make in profit.

Today's small business is the potential medium or large company of tomorrow. We have seen several examples over the past 10 to 15 years of small businesses growing and providing many jobs and innovation. It is important to tend, encourage and provide direction for small businesses so that they provide jobs, make profits and produce a return for those who take the risks.

The Government are already set on a course of raising national insurance on employees. That is not the right approach, but the amendment would enable us to reinvigorate and encourage small businesses, which will, we hope, be the great successes of tomorrow.

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Photo of John Howell John Howell Conservative, Henley

I wish to draw Members' attention to my entry in the register, as I am the director of a family company—my own family company, for the sake of clarification.

I thank Mr. Browne for giving the statistics on the small business sector. It was a helpful tour d'horizon and has set the scene for this debate. However, it does not emphasise enough that the problem faced by small and medium-sized businesses comes down, essentially, to the credit squeeze and their inability to access credit to develop their businesses.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 7:00 pm, 12th May 2009

I am grateful to the hon. Gentleman for giving way, because he has only just started to speak. I am also grateful for his kind words. The one other point that I omitted to make during my speech is that most of the big multinational companies started as small businesses. The benefit of this sector is measurable in terms of not only current small businesses but many companies, employing thousands of people, that had to get off the ground initially.

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Photo of John Howell John Howell Conservative, Henley

The hon. Gentleman makes a good point. We all need to bear in mind and to stress the support provided by the interrelationship between small and medium-sized companies and larger companies. Many of the points that I made during our debate on amendment 1 are just as relevant to amendment 2. Other hon. Members have mentioned the effect on small businesses of uncertainty within the tax system and the need to get rid of that, as well as of the system's inherent complexity. Indeed, I would argue that those two elements are especially important considerations for the small business sector.

Getting rid of uncertainty is vital and there is no benefit to anyone in maintaining a complex tax system for small businesses driven by entrepreneurs. It is totally unnecessary to make things complicated or more expensive. Entrepreneurs can be a funny bunch. They are very focused on their idea. I am sure that there are some very good examples of such people on the Conservative Benches and that they will take these comments in good spirit. That focus is why their business ideas work and why they are successful. However, as well as doing all the things that a business needs, they have to undertake a range of other activities, from being the head cook and bottle washer to being the bookkeeper. I know that—I have been there and have experienced the pressures of going out and getting business while ensuring that the cash flow is working and that there is back-up. The Budget presented a handful of measures for the small business sector, but it did not address the important issue of cash flow. The amendment seeks to address that problem.

Earlier, reference was made to comments from the Federation of Small Businesses and its chairman, John Wright. The quotation was:

"In what has been the most crucial budget in decades, the FSB is disappointed that small businesses have been largely ignored".

The most important word in that quotation is "crucial". His point is borne out in the quotation from the chief executive of the Forum of Private Business, who said:

"The Chancellor has missed a vital opportunity to produce a Budget for business survival".

That point has already been made eloquently by my hon. Friend Mr. Binley. It is crucial, because this is about survival. Many of our small businesses are just surviving, and the rate reduction could be of extreme benefit to them.

We like to think in terms of protecting vulnerable institutions but we rarely think of small businesses as vulnerable. Last night, I was privileged to have in the House members of the Henley-on-Thames partnership, many of whom represent small and medium-sized businesses in and around the town. They individually employ relatively small numbers of people, but collectively they make a major contribution to the life of the town and to its business life in particular.

In small towns such as Henley, lay-offs are personal. People know each other and there is a family atmosphere, even when the companies are not necessarily owned by the same families, among the companies that work and do business in the town. It is crucial to reduce the threat that any possible downturn could pose to those companies. Anything that can improve the cash flow, as amendment 2 does, is to be welcomed.

As I said at the beginning, the vulnerability of such companies results principally from a lack of credit. However, many are vulnerable because they have already had to make cuts in order to save costs. In some cases they have laid people off, and in others they have found different means to make savings. Also, as a result of the recession, many of the service sectors are already witnessing a decline in the number of people seeking their business. When businesses have made all those efforts and cuts in order to stay afloat, it does not go down well at all when they see the money that they have saved going on higher taxes. That is nonsense for them. They do not understand it and it does not encourage entrepreneurs into the system, particularly to begin start-ups.

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Photo of Brian Binley Brian Binley Conservative, Northampton South

I am listening intently to my hon. Friend's speech, and I congratulate him. I meet many small business people who are beginning to despair and feel that the burdens are getting too heavy for them to continue the journey. This is about spirit as well as money; it is about giving a sign of encouragement as well as taxation. Does my hon. Friend agree?

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Photo of John Howell John Howell Conservative, Henley

I completely agree. An important point that emerged in our debate on the headline corporation tax rate concerned its importance as a signal of the country's competitiveness. In this case, we are giving out a signal about the importance of a very vulnerable sector, which lives on the margins, as my hon. Friend has described so well. I, too, meet representatives from many businesses in a similar situation in my constituency and as I go around the country.

I have never been in despair about the business, but I know that one has to deal with many things as part of running a business while yet more tasks are piled on top. The lack of recognition and appreciation of the role played by small businesses in the economy bites into one's enthusiasm and energy. The amendment sends a powerful signal to a business sector on which we all rely.

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

Opposition Members are right to underline the crucial importance of small businesses to the UK economy and I agree with those points, as well as with their points about the large proportion of UK employment provided by small businesses. However, I disagree with their overstatement of the significance of the small companies rate. They have also underestimated the important measures that the Government have put in place to support small businesses specifically—in fact, they have rather ignored them.

The UK has about 4.7 million small businesses, three quarters of which are made up of self-employed people who would therefore not benefit from a reduction in the small companies rate of corporation tax. About 400,000 companies pay no corporation tax, so they would not benefit either. The small companies rate is, in reality, a small profits rate. Any company with profits up to £300,000 benefits from that lower rate, regardless of its size.

We are introducing a wide range of measures to support businesses in the downturn, including additional targeted support for new investment through the temporary increase in the main capital allowance rate to 40 per cent., which is a significant boon for many businesses.

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Photo of Brian Binley Brian Binley Conservative, Northampton South

May I give the example of a small company in my constituency that sells wood-burning fires for companies? They cost £200,000 whereas the very big ones cost £500,000. A sizeable grant is available, but what I hear is, "People cannot afford the stuff even though they get a very good grant." That is what I mean about survival. People are not spending, even though the grant incentive is sizeable. Would he accept that?

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

I do not accept the hon. Gentleman's conclusion, and I was about to make an extremely important point about the effectiveness of HMRC's business payment support service, which we introduced in November. It has addressed exactly his concerns about the survival of businesses, as it means that those businesses that for cash-flow reasons need to or would like to defer a tax payment can do so by ringing up HMRC. Very often, they can make an agreement on the spot in that call. More than 100,000 companies have benefited from the scheme, and between them they have deferred about £2.3 billion in tax. It is undoubtedly the case that a significant number of companies that would have "given up", to quote Mr. Binley, in the downturn have been able to survive, go on to do well and keep up with their repayments as well.

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Photo of Brian Binley Brian Binley Conservative, Northampton South

The Minister is most generous in giving way again, and I am most grateful. I accept the value of the benefits that the Minister has outlined—it would be churlish not to—but my point is that the customers of the business to which I referred say that, even though they get a lot of grant, they simply do not have the money that they need to put in themselves. They get a 40 per cent. grant, but they cannot afford the remainder, however they might want to pay it.

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

We are undoubtedly in a very serious world economic downturn, and the measures that the Government have taken are helping to support the economy through it. I was speaking to an accountant yesterday, and he told me that his colleagues who work in liquidation are less busy this year than they were last year. He thought that that was because of the success of the business payment support service and the large number of companies that have gained a significant cash-flow benefit from it. The service has been very valuable for business survival, and its scope was widened further in the Budget.

Mr. Hoban spoke about the fairness of the UK's corporation tax arrangements for small companies. At £300,000, the UK threshold for the small company rate is the highest in the G7. It is perfectly true that rates in some other countries are lower, though not many are. For example, the small companies rate in the US is 15 per cent., but that applies to only about £30,000 of profit, compared with £300,000 in the UK. The fact that the threshold in Britain is the highest in any of the G7 countries means that companies making a profit of, say, £250,000, or up to the threshold pay the lowest marginal rate on that profit in the G7. Finally, as we discussed earlier, we performed very well in an international analysis of competitiveness.

The amendments proposed by the hon. Member for Fareham would raise a serious problem of fairness. He acknowledged, I think, the problems that arose when the small companies rate was reduced significantly, as the result was a large incidence of businesses being incorporated, which was motivated purely by tax. The problem with his amendment 2 is that it would return us to precisely that problem.

It would not be fair to encourage people to incorporate purely to gain an advantage in terms of tax and national insurance payments. We have set out a range of measures to make the tax system fairer across all small businesses, and to reduce the competitive disadvantage faced by unincorporated businesses. The amendment would make that disadvantage greater.

The number of incorporations per year increased from 230,000 to 320,000 with the introduction of the zero per cent. starting rate. They reached a record high of 450,000 in 2006-07, but they have declined since, following the increase in the small company rate. The amendments tabled by the hon. Member for Fareham would reignite the problem, which would be unfair and a mistake.

The amendments also pose a substantial fiscal risk—by the way, I accept that the hon. Member for Fareham has got his arithmetic correct this year—because a permanent reduction in the rate would cost about £500 million per year. He suggested that more changes to capital allowances would pay for that, but he did not give us any information about what they would be. I simply point him to the concerns that I expressed when we debated similar changes to the previous clause.

I agree with Mr. Browne about the crucial importance of very small companies to the UK economy, although he accepted that his amendment 6 might not be the best way to identify them. I was not quite clear about what relief he had in mind, but he made some important points.

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Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 7:15 pm, 12th May 2009

The Minister professed the crucial importance of small and growing businesses, but is he not concerned that one of the biggest impacts of the income tax changes proposed by the Treasury for the years to come will be that the owners of such businesses will have even less incentive and available collateral to grow them? Businesses like that are very often run by a single individual using his own pocket and energies, so being taxed at a much higher level post £150,000 of earnings will cause them to suffer most. Does he agree that, as a result, the growth of small businesses that is so crucial to the economy will be undermined?

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

No, I do not agree with that. The entrepreneurs whom I know and admire earn a long way short of £150,000 a year. Moreover, the owners of businesses occupying premises with quite low rateable values will not, on the whole, have earnings of over £150,000 a year. For those reasons, I do not agree with the hon. Gentleman.

I hope that I have demonstrated to the House's satisfaction that the amendments would not help the majority of small businesses. They do not recognise the importance of fairness, which is a very important consideration in tax matters. In addition, the debate did not properly reflect the impact of the substantial measures that the Government have put in place to support small businesses. I hope that the House will decline to agree the amendments.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

This has been a useful debate, as it drew on the experience of my hon. Friends the Members for Poole (Mr. Syms), for Henley (John Howell) and for Northampton, South (Mr. Binley), in small businesses. My experience before entering Parliament was largely confined to large businesses; in my professional practice, I had little contact with small businesses, but I have got to know the sector well in my role as a constituency Member of Parliament.

I have a great deal of respect for small business men, because they really do put themselves on the line in growing their businesses and taking day-to-day responsibility, not only for their own future, but for that of their staff. My conversations with them over the past few months have brought home to me how tough they are finding it to survive in the present economic climate. They are worried about their cash flow, for example. The Financial Secretary talked the tax payment deferral scheme, which I welcome, but before the Government announced their scheme, the Conservatives proposed a six-month deferral of payment of VAT, recognising the importance of cash flows. Mr. Browne talked about smaller businesses. We also proposed measures on national insurance that particularly affected micro-businesses employing four or fewer members of staff.

There is a judgment call to be made on the small companies tax rate. The Minister is right to point out that not all small companies are small businesses. He says that there are 4.7 million small businesses in this country, three quarters of which are unincorporated, leaving about 1.2 million small companies, of which 400,000 pay no corporation tax. We are therefore talking about 800,000 businesses across the country that fall into the small companies' rate of taxation. This debate is important to them.

We have to decide the extent to which we should be focusing on how people used incorporation for tax planning and crack down on that, or incentivising those small companies that incorporated for legitimate economic and legal reasons. That is where the division is between the Conservative party and the Government. The Government see incorporation of small companies as a way of managing down tax bills and not paying what is fair. In my view, and that of my hon. Friends who have had experience of running small companies, the increase in the small companies' rate is not a matter of fairness. We believe that the increase is having an impact on their ability to retain profits which, as my hon. Friend the Member for Northampton, South said, is important to their ability to build up reserves for the future and to fund investment.

In our judgment, the small companies rate of taxation should fall, to incentivise genuine small companies and encourage their growth and future development. The rate should not be increased, as the Government would use it, as a means of cracking down on tax avoidance. That is the dividing line between the Conservative party, which wants to support entrepreneurs, and the Government, who have seen fit to crack down on them by increasing the small companies rate of corporation tax. The Government's argument on tax-motivated incorporation is, I think, an excuse for a revenue-raising measure, increasing the tax take from small businesses. They have sought to compensate for the increase through the annual investment allowance, but that is available to all businesses, not just small companies, so on average small companies will be worse off as a consequence of the changes that the Government have announced.

Because we want to support entrepreneurs and because we recognise that people have set up limited companies for genuine purposes, and not only for the purpose that the Minister says, we want the small companies rate of corporation tax to be reduced. We have set out clearly how we would fund the reduction through reforming the system of capital allowances—our proposals are costed. I shall press the amendment to a Division, because it is important to send a clear signal to this country's small companies that we have their interests at heart—we do not regard them as tax dodgers or tax avoiders and we want them to flourish and continue to grow. That is my party's policy; it is not the Government's policy. I therefore ask my hon. Friends to vote for amendment 2.

Question put, That the amendment be made.

The Committee proceeded to a Division.

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

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

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The Committee having divided: Ayes 180, Noes 294.

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Question accordingly negatived.

Clause 8 ordered to stand part of the Bill.

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