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

Part of Surface Water and Highway Drainage Charges (Exemption) Bill – in the House of Commons at 6:30 pm on 12th May 2009.

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

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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