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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

We have had useful and important debates about the amendments to clause 1, but some important points remain to be discussed. I have no wish to oppose the clause, and I will not encourage my hon Friends to vote against it. However, we need to ask some significant questions, in particular about why the clause does not contain items that we might have expected.

Small companies will face a worrying and uncertain time over the next few months, and we would all sign up to the proposition that they are the lifeblood of the UK economy, yet the Bill does nothing to help them. The Budget did not do much either, but at least it included the 1 percentage point reduction in corporation tax. Inexplicably, that measure has been omitted from the Bill. Will the Minister tell us why? What was the basis for selecting the measures in the Bill? Is the Bill's purpose simply to ensure that the increase in VAT is legislated for before Liberal Democrat Members have the opportunity over the summer to learn what their constituents think about it, or perhaps before their party conference has a chance to express a view in September? Were the other measures included just to make up the numbers and pad out the Bill? Alternatively, is there another criterion-urgency, presumably-for what is included in or omitted from the Bill? If so, why was it urgent to legislate for the large companies rate but not the small companies rate? The more we look at the Bill, the more it appears to be a rag-bag of measures to give an impression of substance, when in reality it is all about railroading the VAT increase through Parliament before the Liberal Democrats wake up.

Businesses of all sizes face a worrying time. As the National Institute of Economic and Social Research pointed out last Thursday,

"Fiscal consolidation, both in the UK and the euro area, will restrict growth".

The IMF's startling post-Budget growth downgrade for the UK last week made the same point. The Daily Telegraph expressed it bluntly on Friday, "UK austerity drive threatens to snuff out recovery, IMF warns", and went on to summarise the IMF message thus:

"Britain's fledgling recovery may be nipped in the bud by the savage cuts".

A lot of other evidence points in the same direction. Last Monday, the monthly report on business confidence showed that, far from the Budget placing an "Open for business" sign above Great Britain plc as the Chancellor had hoped, business confidence suffered the biggest one-month fall ever recorded in June, the month in which the Budget announcements were made. With confidence on a sharp downward trajectory, the truth is that the Chancellor is taking an enormous and unwarranted risk with the UK economic recovery.

Our case is clear: in taking such an enormous and unjustified risk with the recovery, the Budget judgment was wrong. Businesses and their employees, as well as those who work in the public sector, will pay the price. As was mentioned earlier, small manufacturing firms will be hit particularly hard by the Budget, as the Engineering Employers Federation pointed out in its Budget response, to which my hon. Friend Mr Jones referred. The EEF said:

"Reducing the corporation tax rate over time was in principle the right course of action. But financing it, in part, by cuts to investment allowances will be a heavy price to pay, especially for smaller companies."

It might be a positive signal for large companies, but not for their suppliers.

The Budget significantly reduces the incentives for investment by small and medium-sized enterprises. I shall say more about that in a moment. Large companies will benefit from the proposed reduction in the corporation tax rate from 28% to 24% over the next four years, but small companies will not. They have been promised a reduction of only 1 percentage point in 2011, from 21% to 20%, and, inexplicably, even that has been omitted from the Bill.

It is perfectly true-as the Minister may well remind me-that before the election we proposed an increase in the small companies rate of corporation tax, rather than the decrease that I am now suggesting. However, we did not propose, as the Budget has, that the annual investment allowance should be cut by three quarters, from £100,000 to £25,000. We did not propose a cut in the rate of capital allowances either.

Now that we appear to have a firm commitment from the Government to reducing the main rate of corporation tax by four percentage points-although for some reason only one of the four is in the Bill, which I also wish to query-I hope that the Minister will be able to hold out the prospect of further reductions for small companies as well, beyond the 1 percentage point reduction announced in the Budget and, for some reason, not included in the Bill. I hope that the Minister can give some comfort to small companies that face great anxieties about what will happen over the next couple of years.

Let me return to the other puzzling omission. Given that the Chancellor made a great show of providing certainty by announcing annual reductions in the rate of corporation tax up to 2014, why does the Bill provide for only one year's reduction, rather than all four? When I queried that on Second Reading, the Chief Secretary told me:

"the practice in Finance Bills is to legislate one at a time for the changes that are needed in the following years."

I should be interested to know from the Exchequer Secretary the basis for that claim. When I queried it on Second Reading, the Chief Secretary-prompted, I believe, by the Economic Secretary to the Treasury, Justine Greening, who was sitting next to him and who will respond to the debate tonight-told me that there were

"various technical reasons... which the Exchequer Secretary will explain in his closing speech. The basic point is that our method is more business-friendly."-[ Hansard, 6 July 2010; Vol. 513, c. 207-8.]

The Exchequer Secretary did not explain that in his closing speech. As I was not present for his closing speech, I will not complain about that, but I do ask him to explain it to us today. How can the Government's method be "more business-friendly"? Certainty is key here, but in the absence of legislation there can be no certainty.

As I said on Second Reading, the precedent is very clear. Nigel Lawson, as Chancellor, announced a series of four reductions in the rate of corporation tax, from 50% down to 35%, and they were all legislated for in clause 18 of the Finance Act 1984. As far as I know, there is no other precedent for four successive annual reductions in the rate of corporation tax, so what the Chief Secretary said about practice in Finance Bills was clearly incorrect.

The debate in the House on 1 May 1984 makes interesting reading. Roy Hattersley pointed out that because the reduction in the rate was being funded by allowance cuts, there would be an increase in the tax paid by manufacturers. My hon. Friend Austin Mitchell made a notable contribution. Speaking for the then Government, the Exchequer Secretary's predecessor John Moore explained that

"The clause proposes a four-year programme of reductions in the main rate of corporation tax."-[ Hansard, 1 May 1984; Vol. 59, c. 274.]

So it is certainly not the case that the practice is to legislate a year at a time. I have been unable to find any complaints in 1984 that it was contrary to the interests of business to legislate in one go, and I find it hard to imagine that anyone would have complained. It seems much more likely that the Government simply could not be bothered to produce for the Bill the slightly longer legislation required alongside the very small clause to implement the reduction in the small companies rate of corporation tax because they were making such a headlong rush to get the all-important VAT rise on to the statute book before the summer.

One suggestion has been made for legislating only for the first year, namely the impact on deferred tax. I shall listen with great interest to the Minister's answer as to whether it is the right explanation. Accounting standards require the declaration of deferred tax assets or liabilities at the rate that has been "substantively enacted" by the date at which a balance sheet is compiled. For companies with large losses to offset for tax purposes against their future profits, a reduction in the rate of corporation tax would require them to reduce the value of their deferred tax assets on the balance sheet. For some banks that could be a very large number, which is why, to refer back to what the Minister was saying, their corporation tax for the next few years will be a lot lower than would otherwise have been the case.

The Minister may therefore be balancing the advantages of providing certainty for inward investors-of showing that Britain is open for business-and the benefits of legislating now for the next four years and of supporting manufacturers against the headache that could be caused for some banks. When the Chief Secretary says it is more business-friendly to do this one year at a time, perhaps he just means that it is helping out some banks.

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