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The usual approach has been that the Finance Bill sets the small companies rate in-year, just as it sets the rate for income tax; the preceding year sets out the large companies rate. The right hon. Gentleman is right that there is a precedent for doing it another way, but we do not believe that business has any concerns that we will fail to follow through on our promises. There is an argument for doing it the other way, but we are pursuing the approach that has been adopted for a number of years.
Why cut corporation tax? As I have explained in debates on amendments to the clause, this package of measures takes real strides towards restoring the UK's tax competitiveness, and will support economic growth in this country. It does so in a sustainable way that provides business with a clear direction on our long-term aims-a 1% cut every year for four years clearly demonstrates our position in making the UK open for business. No other legislative changes are proposed in the Finance Bill, although the small profits rate of corporation tax will reduce from
In 1997, the UK had the 10th lowest main rate of corporation tax in the current 27 EU countries, but we have now slipped to 20th. According to the World Economic Forum, the UK has fallen from the seventh most competitive economy in the world in 1997 to 13th. Richard Lambert, the chief executive of the CBI, has described our tax system as a
"ball and chain round the ankle of the UK economy", and we are throwing off the shackles, so that the private sector can be at the heart of our plan for growth. As we reduce spending-as we must if Britain is to live within her means-only the private sector can lead the recovery. We therefore need to show that Britain is open for business. The Government are taking such action immediately, showing the international business community that the UK is the right place to do business and that our tax system is one reason why. Our changes mean that by 2014, we will have the fifth lowest rate of the G20; the lowest rate of any major western economy; and the lowest rate this country has ever known.
I make four arguments for prioritising this move to reduce corporation tax. First, corporation tax rates are important in themselves in selling the UK. They are an advert for the economy and for the UK as a good place to do business. By reducing our rate we are sending the strongest possible message that Britain is open for business. Secondly, this cut is a necessary step to help to rebalance the economy. As we take tough measures to scale back the public sector, we must provide the necessary boost to the private sector. Thirdly, the OECD's estimates suggest that corporation tax is an inefficient and growth-damaging tax. Lower corporation tax rates encourage investment, which this country needs to support the recovery. Finally, far from merely being a tax cut for profitable companies, they will provide the boost to investment that is vital for Britain, and they will support jobs in the private sector.
The corporation tax package means a reduction in allowances, but it would be inappropriate to view those changes in isolation. Across the economy, the package of reductions in corporation tax rates will offset the reductions in capital allowances, making the cost of capital investment cheaper when the measures are fully implemented. That is expected to lead to an additional £13 billion of business investment between now and 2016, based on Treasury analysis.
We have taken immediate action to restore the UK's competitiveness not only by reducing corporation tax rates but by setting out how we can improve the way in which we make tax law. Competitiveness is about the wider tax environment, which can have as much influence over where a company chooses to locate as the headline rate. We will consult business on the taxation of intellectual property; on the support research and development tax credits provide for innovation; and on the proposals in James Dyson's review for making the UK the leading high-tech exporter in Europe. We will introduce a programme of reforms to the rules for taxation of foreign profits to deliver a more territorial system, including the taxation of foreign branches and the controlled foreign company rules.
The Government are committed to improving the tax system more generally, providing greater certainty, stability and simplicity. The Budget 2010 policy costings document sets out our new, more transparent approach. As I have said, we have set out a framework for developing tax policy making and tax law, set out in a discussion document published alongside the Budget.
The previous Government have left a legacy of complexity and red tape that we are determined to tackle. There is significant work to be done to correct the mistakes of the past, and we will therefore establish an independent office of tax simplification to help us to do just that.
One or two questions were raised in the course of the debate. The shadow Minister referred to the ring-fenced regime for oil and gas. We have not made any announcements on that particular matter; indeed, a period of stability is welcome after the out-of-the-blue supplementary charges introduced by our predecessors.
In setting the corporation tax rate for 2011-12 at 27%, this year's Finance Bill takes a first step towards putting Britain back on the map as an attractive place to do business. That is consistent with sound public finances.
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