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Clause 1 — Main rate of corporation tax for financial year 2011

Part of Finance Bill – in the House of Commons at 8:30 pm on 12th July 2010.

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Photo of Stephen Timms Stephen Timms Shadow Financial Secretary, Shadow Minister (Digital Britain) 8:30 pm, 12th July 2010

I beg to move amendment 49, page 1, line 6, at end add-

'(2) In section 2(2)(a) of the Finance Act 2010, after "companies", add "not meeting the condition in (c) below".

(3) At the end of section 2 of the Finance Act 2010 add-

"(c) 26 per cent. on profits of companies whose taxable profits will be increased by more than 1 per cent. as a result of changes in investment allowances.".'.

It is a puzzling feature of the Budget that, on the one hand, the Chancellor is gambling on a big increase in investment, and basing his Budget arithmetic on the belief that investment will grow in each of the next three years at a rate that has been achieved in only one year in the last 40. That is an heroic assumption about investment growth, and if it proves to be untrue, the Budget gamble will fail. At the same time as banking on that huge increase in investment, he has announced that he will drastically cut the incentives for investment. The rates of capital allowances will be reduced from 20% to 18%, and the annual investment allowance will be cut by three quarters, from £100,000 to just £25,000. It is hard to see how the forecast growth in investment can be reconciled with such a big cut in investment allowances. The Budget was billed as Britain being open for business, yet it will clearly reduce the prospects for growth, as the Office for Business Responsibility confirmed in its two projections, before and after the Budget. Indeed, the International Monetary Fund, in its projections last week, also downgraded its growth forecast for the UK economy as a result of the Budget.

We have here a collision of conflicting objectives, which we highlight in the amendment. We propose a lower rate of corporation tax for companies that lose out from the reduction of allowances above a certain threshold. The Institute for Fiscal Studies pointed out before the election that the losers as a result of the Conservatives' approach would be those making big investments and earning modest profits, notably

"in the manufacturing and transport sectors", and that the gainers would typically be in the financial sector.

We do not yet know what the legislation on allowances will say. The Chancellor said in his Budget speech that the change in the rate of capital allowances and the lower annual investment allowance would not take effect until 2012. Will the Minister confirm that the coalition Government are planning no reduction at all in investment allowances in the current financial year? Will the changes announced by the Chancellor in the Budget be in the Finance Bill later this year or will they be delayed until next year's Finance Bill? I hope that the Minister will also comment on the principles underlying our amendment. How can it make sense to reduce so drastically the incentives for investment in a period in which the Budget depends so heavily on an unprecedentedly large and sustained increase in investment?

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