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The Bill introduces measures on small business investment that will simplify the tax system and ensure that allowances are fair and not open to abuse.
Clause 41 charges corporation tax for the financial year beginning
I will begin by setting out our broader strategy on corporation tax. The Government have been clear that taxes should be low but must be paid, and since 2010, we have made progress towards those goals. The main rate of corporation tax was 28% in 2010. By 2020, we will have cut the UK main rate by more than a third to make the UK more competitive and to support growth and investment. It will be one of the biggest boosts British business has ever seen. Further corporation tax cuts will increase the returns companies receive on their investments, and by 2020, corporation tax cuts delivered since 2010 will be saving businesses almost £15 billion a year. This will ensure that the UK has by far the lowest rate of corporation tax in the G20 and make Britain even more attractive to inward investors.
At the same time, we have taken significant measures to clamp down on tax avoidance and aggressive tax planning. The Government successfully helped initiate the G20-OECD base erosion and profits shifting project and worked internationally, including with G20 and OECD partners, to bring this to a successful conclusion in October 2015. We spent the earlier part of today’s debate considering some of the measures introduced in the Bill to address avoidance and evasion, but the Bill also takes further steps elsewhere. Key measures include tackling hybrid mismatch arrangements, introducing a restriction on the tax deductibility of corporate interest and expense, extending the UK’s withholding tax rights over royalties and ensuring non-resident property developers pay tax in the UK on profits they make in this country.
Low corporation rates enable businesses to increase investment, take on new staff, increase wages or reduce prices. This is borne out in receipts data: onshore corporation tax receipts have risen by almost 20% since 2010, despite lowering corporation tax rates. The Treasury and HMRC have modelled the economic impact of the corporation tax cuts delivered since 2010 and those announced at Budget 2016. This modelling suggests that the cuts could increase long-run GDP by more than 1%—almost £24 billion in today’s prices. The corporation tax cuts and other reforms we introduced have completely changed perceptions of the UK tax regime. The UK is now regularly cited in surveys as one of the most competitive regimes in the world.
As the Chancellor has said, in the last six years, the Government and the British people have worked hard to rebuild the British economy. We have worked systematically through a plan that means that today Britain has the strongest major advanced economy in the world. Cutting corporation tax rates has been a central part of the Government’s economic strategy, and that strategy is working.
The UK has been one of the fastest-growing economies in the G7, and the OECD forecasts the UK to be the fastest-growing G7 economy in 2016. There are 2.3 million more people in employment since 2010, and business investment is now 30% higher than it was in 2010. Tax competition is dynamic. In the last few decades, we have seen countries across the world cut their corporation tax rates. We cannot afford to stand still while others rush ahead. The UK needs to be as competitive as possible. A new 17% rate of corporation tax sends out the message loud and clear around the world that the British economy is fundamentally strong and highly competitive and that Britain is open for business. For those reasons, I urge the Committee to support those clause, and to speak in anticipation of what we are about to hear, I hope the Committee will reject amendment 21, tabled by Rob Marris, which would cancel the corporation tax cuts.
Let me move on to the other measures in this group. Clause 43 abolishes vaccine research relief from
Clause 44 makes a small change to ensure that the introduction of the research and development expenditure credit does not have the unwanted effect of reducing the amount of relief available to certain small businesses. The expenditure credit replaced the old large company R and D tax credit scheme in 2016, following a period of three years in which both were available simultaneously. We recognise that R and D tax relief plays a vital role in supporting productive investment in the UK. These two changes will ensure that R and D tax support remains effective in meeting this objective.
Clause 65 extends the current time limit for claiming enhanced capital allowances in enterprise zones to eight years from the date on which the enterprise zones are announced. Businesses operating in the 46 enterprise zones across the UK can opt either for a rebate on business rates or enhanced capital allowance covering 100% of investment. Extending the time limit for claiming enhanced capital allowances to eight years will allow all zones to enjoy it for the same duration. I am sure that hon. Members of all parties will welcome this.
Clause 66 will strengthen the existing capital allowance anti-avoidance revisions to ensure that artificial and contrived arrangements cannot be used to gain excessive capital allowances. Capital allowances allow businesses to write off amounts that they spend on plant and machinery against their taxable profits. This reflects the depreciation in the value of the assets over time. When the business disposes of the asset, the legislation is designed to subtract this disposal value so that the allowances are reduced to reflect the net cost of the asset to the business. HMRC has received several disclosures of tax-avoidance schemes where the disposal value has been manipulated to an artificially low level. This leads to excessive capital allowances being received; the tax result does not reflect commercial reality and so constitutes an avoidance of tax. Clause 66 prevents this and ensures that business pays the correct amount of tax.
Clause 67 will ensure that trading income received in non-monetary form is fully brought into account in calculating taxable profits, income tax and for corporation tax purposes. HMRC consider that existing law and practice already requires that trading and property income received in non-monetary form is brought into account in calculating taxable profits. This is an equitable position arising from a long-held principle established in case law. However, this legal principle has been challenged in some instances. Clause 67 will insert a rule to provide that the value of the moneys’ worth is to be brought into account for the purposes of calculating the profits of the trade. This will have no effect on the vast majority of trades and will put beyond doubt that such income is taxable in full.
Clause 68 repeals the renewals allowance legislation. This allowance provided a tax relief for spending by a business on the replacement and alteration of trade tools. The relief is no longer available to businesses, and relief was repealed from the effective date on
Clauses 69 and 70 make changes to the wear-and-tear allowance that currently allows landlords fully furnishing properties to claim a 10% tax deduction of their net rental income when calculating the taxable profits each year. The allowance can be claimed regardless of the actual costs incurred on replacements and can be claimed even when a landlord has not actually made any replacements. The changes made by clauses 69 and 70 will replace this with a new allowance, permitting all landlords to deduct the actual costs they incur on replacing domestic items such as furniture and appliances. In conclusion, this change will create a fairer system for landlords and for tenants where the genuine costs of replacement can be reclaimed against income tax.
Clause 71 makes changes to incorporate the revisions to the OECD transfer pricing guidelines secured as part of the joint OECD /G20 base erosion and profit-shifting project into UK domestic law. The beneficial revisions to the OECD guidelines ensure that they are refocused on appropriately rewarding real economic activity within a multinational enterprise. This is in line with the key principle that profits should be recognised where economic activity takes place. In addition, the revisions provide tax authorities with a new tool better to investigate the pricing of unique intangibles where there is no independent information with which to ascertain their value, ensuring that tax bases cannot be eroded through the mispriced transfer of the significant assets. Clause 71 will also widen the scope of materially updating the OECD guidelines, which can be incorporated within UK law by way of a Treasury order. Together, these changes will further support the work undertaken by HMRC to tackle aggressive transfer pricing positions taken by some multinational enterprise groups and ensure that these are swiftly incorporated into UK legislation.
As I have outlined, these clauses take a number of important steps to make our business tax environment one that better supports enterprise and growth, and targets reliefs where they are effective in advance of this Government’s plans for a successful economy. They implement OECD guidelines that the UK has championed on transfer pricing, and take other steps to clamp down on avoidance. They withdraw outdated and little-used allowances in favour of broader reliefs and spending programmes on vaccines. They support Britain’s enterprise zones, set up by the Government to boost growth and employment in key areas of opportunity. By bringing down the headline rate of corporation tax to 17%—the lowest in the G20—we are making it clearer than ever that Britain is open for business. These clauses should therefore stand part of the Bill.
The Labour party supports all these grouped clauses except clause 42. I will not press amendment 21 to a Division because it has not been selected, but I will be inviting all Members, particularly in the Opposition, to vote against clause 42 on corporation tax.
Clause 41 is effectively a technical change. I appreciate that it is on corporation tax and it goes with clause 42, but I think it need not detain the House now. On the abolition of vaccine research relief, paragraph 15 of the explanatory notes on clause 43 helpfully say:
“The low level of take-up of the relief suggests it does not have a significant impact on a company’s research decisions. The government believes that direct spending programmes like the recently announced Ross Fund offer a more effective and flexible approach to the production of medicines and vaccines.”
I appreciate this is not directly the Minister’s departmental responsibility, but if we are looking at things such as the Ross Fund, where the Government are directly funding rather than encouraging research through fiscal levers, I would like him to indicate whether that Ross Fund money will count as part of the 0.7% of GDP commitment for overseas aid. I again salute the Government for reaching that 0.7% target. The Labour Government of whom I was a Back Bencher for many years moved significantly towards that target, but it was the coalition Government who reached it, and it is this Government who have maintained that in spite of some pressure on occasions from what might be called their natural supporters, who have reservations about that 0.7%. I do salute the Government for reaching that, and they have the complete support of Opposition Members on maintaining that commitment, but there are always potential difficulties in how one measures what goes into that 0.7%. Whether this would come under the Department for International Development or the Department of Health in terms of vaccine research and the Ross Fund I know not, but I hope the Minister will, as a Treasury Minister, be able to give some indication as to whether this kind of thing counts towards the 0.7%, because were it to do so, some of us would raise an eyebrow, and I think one ought to know.
It also appears that the Government have decided that direct spending programmes are more effective and flexible for research than funding through fiscal measures. For us socialists, it is a welcome conversion on the part of the Government that they agree that they have a role in direct funding, but in terms of clause 43 and the abolition of vaccine research relief, this must form part of a wider canvas. I found it a bit shocking when the National Audit Office said a few months ago that there were about 1,200 tax reliefs. From memory, it found about six different sorts of measures that are often commonly called tax reliefs, and that only about 300 of them were being monitored by the Government as to their efficacy or otherwise.
It appears that the Government have monitored the efficacy of vaccine research relief and decided that it is not very efficacious. As I understand it, fewer than 10 companies were claiming the relief. I can understand that if that is the case the Government might wish to remove it, although of course in terms of pharmaceutical research, they could be 10 extremely large companies. The Government monitored that, however, and I salute them for doing so and for coming up with some results from their monitoring.
Clause 44 updates aspects of the cap on research and development aid. Broadly, we on the Opposition Benches—Labour, certainly—support this, because it was a Labour Government who introduced R and D relief for small and medium-sized companies in the Finance Act 2000, and the large companies scheme was introduced in the Finance Act 2002—I believe I sat on the Committee of that Bill as well, Sir Roger. At that time there was cross-party consensus, as there was when we were in opposition in 2013 regarding the introduction of R and D expenditure credits and their gradual replacement of the large companies scheme; we supported those measures in 2013. However, R and D tax credits have in very round terms led to £1 billion a year being claimed between the tax years of 2000-01 and 2013-14. That sounds very good and I have all kinds of figures here—helpfully supplied by the indefatigable researcher Imogen Watson, with whom the Minister will be familiar by now. I will not detain the House by reading them all out, but 33,800 different companies were claiming under the SME scheme and 7,800 were claiming under the large companies scheme.
Those figures are impressive: an average claim of £1 billion sounds impressive. However, since 2008 productivity has of course stalled in this country. One reason why successive Governments have given R and D tax reliefs of various different orders of magnitude and types is to encourage R and D, which will lead to newer products, goods and services and also to more efficient ways of doing things. Unfortunately, that has not been reflected in the productivity situation in the UK for many years, and I urge the Minister to reflect on that. In terms of the previous clause, he looked at the efficacy of the vaccine relief and decided to go in-house rather than carry on with the relief. I am not saying that the Government should take R and D in-house—I do not want to be misunderstood on that—but they should be looking at the efficacy, or otherwise, of it.
Clause 65 extends the capital allowances to designated assisted areas within enterprise zones for up to eight years. Of course the Labour party supports that. It is designed to encourage the purchase of energy-saving technologies. Again, I have a long list of qualifying technologies, which I will not read out.
I do want to ask a technical question, however, which I hope the Minister, with his usual omniscience, will be able to reply to. Pipework insulation is a qualifying technology, as are things such as high-speed hand air dryers and solar thermal systems, but I do not see on the list—it may be a lacuna on the list, or my fault—other forms of insulation other than pipework insulation. This is all part of the programme, which broadly has cross-party support from, I think, all parties in this House, that the UK should cut its CO2 emissions and greenhouse gas emissions, and one way to do that is by using fiscal levers. It would appear on the fact of it that it would be good to have on that list insulation generally, in contradistinction to just pipework insulation. If it is not on the list, no doubt the Minister can explain why in his reply.
The second point that I want to make on the extension of capital allowances, the eight-year period and so on was raised by my hon. Friend Rachel Reeves in a written question on
“The government has carefully considered the case for exempting plant and machinery from business rates. However, there would also be fundamental operational challenges to delivering an exemption on account of the way in which the plant and machinery is embedded in the premises concerned”.
I ask the Minister to look at that again. It is a long time since I practised property law—I do not know whether the Minister ever did; that may have been a good few years ago as well—but there used to be things called fixtures and fittings, and indeed I believe that they still exist. They are often set out in commercial, rather than residential, leases. I am not sure why the issue of the embedded plant and machinery to which the Minister referred in his written answer is so difficult. I may be missing something, but I should have thought that if commercial lawyers can do it for fixtures and fittings in commercial leases, HMRC could do it for plant and machinery, embedded or otherwise, and that it would be worth the Government’s looking again at the issue raised by my hon. Friend.
Clause 66 is entitled “Capital allowances: anti-avoidance relating to disposals”. I wonder whether the Minister might be able to supply figures showing how much has been lost to the Exchequer through such avoidance schemes, but of course we support a clampdown on them.
Clause 67, entitled “Trade and property business profits: money’s worth”, confirms that trading income received in non-monetary forms is fully accountable in calculations of taxable trading profits for income tax and corporation tax purposes. The fact that trading income received in non-monetary forms is assessable for those purposes would seem fairly obvious to many of us. Indeed, paragraph 12 of the explanatory notes on clause 67 refers to a 1948 decision to that effect, made by what was then the judicial Committee of the House of Lords; it would be called the Supreme Court now. I hope that the Minister will be able to tell us what has happened in the intervening 68 years to require that fact to be included in legislation, given that, presumably, there was formerly reliance on the case law precedent cited in the explanatory notes.
Furthermore—this is just a curiosity of mine, in which I hope the Minister will, with his usual patience, indulge me—if trading income received in non-monetary forms is to be thus assessable, what about the barter economy? Some people trade through barter. It is not simply an agreement between neighbours; there are trading arrangements which have traditionally been considered not to be susceptible to income tax and the like. Might it be an unintended consequence of clause 67 that such arrangements would in future be assessable?
Labour broadly supports clause 68, entitled “Replacement and alteration of tools”. However, I want to raise an issue that was raised with us by the Association of Taxation Technicians, to whom we are grateful. The clause would repeal legislation providing tax relief for expenditure incurred by a business on replacement or alteration of trade tools. We are talking about an important, although small, corner of the economy, and the proposed repeal could cause small businesses book-keeping problems. The association helpfully provided an example, and, if you will indulge me, Mr Howarth, I will read it out. It is not very long.
“One of our members has given an example of the use of the provision by a carpenter”— one of the association’s clients—
“who has to replace a saw almost every week. Treating expenditure on saws as if it was on consumables (in the same way as screws, nails and glue) makes perfect sense. If the provision is repealed”— which, of course, is what clause 68 would do—
“each of the saws will have to be capitalised and then written off for capital allowance purposes. Such repeal would make no difference at all to the trader’s actual tax position. It would simply complicate record keeping, add administrative burden and increase the risk of computational error.”
I wonder whether the Minister would have a look at that again and establish whether some kind of de minimis threshold could be introduced for businesses of that kind. Let me give an example of my own; I do not know whether it would be caught. A hairdresser who needed to replace his or her scissors every month might then have to account for that in capital terms, which would involve an awful lot of paperwork for a small business.
Clause 69 is coupled with clause 70: they are twins. In a sense, clause 69 introduces an alternative version of what clause 70 removes, namely the way in which those in the property business can claim tax relief for wear and tear. The amount was, across the board, 10%. I understand that the arrangement was fairly rough and ready and no records had to be produced, and there was a thought that some landlords were abusing it. Clause 70 gets rid of that regime, and clause 69 introduces a new regime specifying actual expenditure. It sounds fairer that someone cannot claim 10% across the board if they have not spent the money, and that they have to demonstrate what they have spent. Clause 70 gets rid of the 10% allowance, and clause 69 requires records to be produced to prove that money has been spent. The difficulty is that we are talking about small businesses, and the dilemma for any Government is the trade-off between accurate, fair accounting and taxation, and something that is a bit rough and ready but much less onerous for small businesses.
The Chartered Institute of Taxation, to which I continue to be grateful, has expressed its concern that there is no definition in statute of what constitutes a dwelling house. That is a bit worrying. I tried on two occasions to meet representatives of the Residential Landlords Association to discuss this matter, but unfortunately they had to cancel on both occasions so I am none the wiser. If the Minister could say a little more about the Government’s thinking on the rough and ready 10% rule versus the accuracy required by clause 69, and about the definition of a dwelling house, that would be helpful.
Clause 71 deals with transfer pricing applications, but I will not say a great deal on that matter because we ventilated those issues, albeit from a somewhat different angle, when we discussed amendment 1 earlier. However, there is a quote on transfer pricing that I quite like from the Tax Justice Network. In quoting Lee Sheppard, it stated:
“Transfer pricing is the leading edge of what is wrong with international taxation…The purpose of the OECD model treaty was to make life comfortable for American, British, German, and French multinationals by ensuring that the taxation of their operations by host countries is limited by separate company accounting and the permanent establishment concept. Treaties accomplish this task very well—so well, in fact, that many multinationals pay tax nowhere”— but those treaties are
“clumsy tools that affluent developed countries have used among themselves, to their collective detriment, and seek to impose on developing countries.”
I have quite a lot of sympathy with that. We read of large companies such as Apple appearing to pay almost no tax anywhere, although we can never be sure about that because of the lack of transparency. I can understand the practice of transfer pricing and I can understand multinationals acting within the law in shifting stuff—legitimately if not ethically—to the lowest tax jurisdiction, but paying no tax at all seems a bit bizarre. The UK Government should continue to take the laudable steps that they have been taking over the past 16 years, including the past six years, to clamp down on that activity.
Clause 42 deals with corporation tax. The official Opposition—and, I hope, all MPs—will be voting against clause 42 stand part, because it would lower corporation tax. The Institute for Fiscal Studies is a fountain of considerable wisdom. It is not always right, of course—no one is—but it is worth listening to. It has calculated that the Government’s cuts to corporation tax have cost £10.8 billion a year. The Minister has said, and I do not doubt him, that overall receipts are up, despite the rates being lower. However, that is not the only yardstick. We also have to look at how much higher the receipts would have been, had the rate not been slashed to the lowest in the G7 and the joint lowest in the G20.
Of course my party wants a competitive tax rate, but we also want a fair tax system. My understanding is that in 1999-2000, corporation tax as a percentage of total HMRC receipts was 11.67%. By 2015-16, that percentage had crashed to 8.31%—a huge drop. The Minister has referred to the efforts of this Government and the Government that immediately preceded them to rebuild the British economy, which he referred to as being fundamentally strong. It will not surprise him that I beg to differ. However, there are definitely good points.
While there may have been a drop from 11.7% of total receipts to 8.3%, will the hon. Gentleman accept that other new forms of taxation, such as climate change levies and other climate taxes, have been imposed on businesses and have increased total tax revenues? The cake is bigger, so the slice of corporation tax is smaller, but the total amount is larger.
The hon. Gentleman is quite right about the climate change levy. Changes in this Finance Bill effectively make the climate change levy just another tax, because it will no longer be used by the Government as a lever to change behaviour, which is why Labour dislikes the proposal. Business tax has probably gone up a bit overall, but what has happened in the economy, which the Minister described as fundamentally strong, is that employment is up by almost 2.5 million, and we salute that as a considerable achievement.
However, it has been bought on a sea of debt, on the drip, on the never-never. The national debt has gone up 60% in six years. We still have a huge annual deficit. Pay has stagnated for six years, and public sector pay will remain stagnant for another two or three years. Overall capital investment is markedly down. We have the biggest trade deficit in our history. Productivity is completely stalled. It is welcome that 2 million more people have jobs, which is good and the best route out of poverty, but almost every other economic indicator is poor and the Government propose to cut corporation tax.
I will not go too far down that route, but this Chancellor—in this sense and this sense only—has been saved by the Brexit vote. He was never going to meet his forecasts for getting the deficit down in the lifetime of this Parliament. He also completely failed when he forecast in the previous Parliament that the deficit would be down to zero by 2015. He then forecast that it would be down to zero by 2020. That was never going to happen. We predicted that and I am sad that it was the case.
Now, with the Brexit vote, as my hon. Friend Mr Cunningham says, the forecast will be nowhere near right, but no doubt the Chancellor will then use the vote as an excuse. The Brexit vote has revealed some of the underlying problems in the British economy that just about every serious economist has been pointing out for the last five years. Cutting corporation tax in this circumstance is a bad idea, and I urge all hon. and right hon. Members to vote against clause 42.
It is a pleasure to follow Rob Marris. I want to say a few words about clause 42, because although I clearly welcome the planned reduction in corporation tax by 2020, following the welcome vote last week, it may now need to be part of the picture of how we change our business tax regime over that period. Unlike earlier, there are now a few more of us present who thought the vote was welcome.
For us to capitalise on the opportunities of leaving the European Union, we will have to make our country even more attractive to outside investment to stimulate growth, a key part of which is our corporation tax system. As the Minister is planning ahead that far and as we now have the special group in the Cabinet Office under the Chancellor of the Duchy of Lancaster, I urge careful thought about what our tax system should look like by the time we leave the European Union, what signals we are giving and how we can further improve it and make it more attractive. Perhaps we could look at an even lower rate to send out a signal that we are positive about business activity and that we want more investment and will reward it further.
Perhaps we could look again at how we do capital allowances, especially for infrastructure investment and manufacturing items, for example. Perhaps we could re-examine how we give tax relief for the building of new factories. This country is not actually that generous and does not give tax relief for any industrial building, which is not a clever way of encouraging manufacturing. In fact, we are one of the least attractive tax regimes for various infrastructure investment activity because of our lack of relief for structures. Perhaps now that we have the need and the time to review that, we should ask whether it is clever to structure our tax system in a way that is not as attractive as possible for industrial building and infrastructure activity, especially as we will need a lot of investment as we go forward.
Given that we are now leaving the EU, there are some other areas on which we can capitalise. We have had to make various changes to our tax codes, especially to our corporation tax code, to comply with EU law, some of which take away some anti-avoidance rules that we would have quite liked to keep. Perhaps now would be a good time to think: should we bring those back as part of our tax system to stop assets from being moved offshore at a discount without the tax being paid? Certain examples of that were exaggerated in the campaign. None the less, there are some perfectly sensible and reasonable anti-avoidance rules that we could now bring back.
We had to introduce some compliance obligations in our system to try to make ourselves compliant with EU law which perhaps we will not need. For example, there is a measure that extends transfer pricing rules to UK transactions on the statute book but it has never really been tested or enforced. Perhaps we can sweep that away, thus taking away a compliance burden.
The vote may prompt our questioning whether our ever-expanding corporation tax code is sensible. Is now the right time, when we know that we have a big change coming, to see whether there is a better way that we can tax our businesses? Is there a simpler tax code—perhaps something closer to accounts profit—that does not need all these adjustments? Can we capitalise on our general anti-abuse rule and perhaps have not quite so many detailed technical anti-avoidance rules? Can we just now rely on a robust principle that we know those rules are there, that they work and that we are building on them? Might it not make us an even more attractive destination if we say that we now have an even simpler tax code?
As I have said, I welcome the signal that we are reducing the corporation tax rate further, but if we are to help our economy grow over the next few years, we need to send some even stronger signals. There is more that we can do to our corporation tax code over the next four years than this sector is currently planning.
I specifically want to talk about clause 43 in relation to vaccine breakthrough. I have issues with a couple of the Government’s proposals. First, it has been made clear that this measure costs the Government very little. In terms of foreign projections, the removal of the relief does not increase the Treasury’s take by a vast amount.
The explanatory notes on this were incredibly helpful and I really appreciated them, but they seem to be missing a few things. First, they say that only 10 firms claimed the relief, but they do not make it clear how many firms research and develop vaccines. After my slightly rudimentary research, I could find only about 10 firms that research and develop vaccines, which means that all of them claim the relief. Therefore, if I am correct, the uptake is quite high. That could be a reason why companies are choosing to research and develop vaccines. I would appreciate it if the Minister could confirm how many companies research and develop these things. If he does not have that information today, perhaps he could write to me with any details he has on that.
The explanatory notes mention the Ross Fund. I appreciate that the fund is a good thing and that it is good that the Government are financially supporting the development of vaccines, but it seems to me that the fund does not necessarily cover everything that the vaccine relief previously covered. The Ross Fund covers the following: antimicrobial resistance, which is a really important thing to be funding in this day and age; diseases with epidemic potential, which, given what happened with Ebola, is a really important area to be funding; and neglected tropical diseases, which is a fabulous area for the Government to support. It is really important to be putting money into the various areas of research that have previously been neglected.
From the research that I have, it seems that vaccine research relief covers HIV/AIDS, whereas the Ross Fund does not. I would really appreciate it if the Government could tell me whether HIV/AIDS research now falls through a gap, because it is an area that we need to continue to research and for which we do not currently have any vaccine or cure. I do not want it to get lost because companies are no longer able to claim aid or funding for such research.
I will not speak at too much length, as my concerns are around clause 43 and the fact that, although helpful, the explanatory notes left me with quite a few questions.
I want to add my support to clause 42, notwithstanding the important points made by my hon. Friend Nigel Mills, who set out the need for further thinking, perhaps, in light of the Brexit vote. I was on a different side of the debate to him—only marginally—because I thought that there were concerns about economic risk, but there are certainly opportunities ahead, as well.
We need to ensure that we are ready to explore and realise those opportunities and the Government are absolutely committed to doing that. I hope that the Opposition are as well. It seems that Rob Marris is indicating that. We are up for that. As a result, I am perplexed about why clause 42 is not being supported by the Opposition. Such measures were vital when the proposals were first set out, and it is now even more important to put out a clear signal that we are open for business, that we understand business, that we want business to continue to come to the UK and that we want our exporters to thrive and flourish.
The corporation tax level is an important signal and an important driver in that regard. It is noticeable that the Federation of Small Businesses stated at the time of the announcement that it saw clause 42 as an important statement of intent that will provide a boost for affected firms. Small businesses are of course the backbone of our economy, but it is clear that the clause is an important signal for bigger businesses, too. It helps to illustrate and underline that Britain is open for business.
Given the decision made by the public, which I fully respect, it will be very important that we maintain the flow and increase the levels of foreign direct investment. I thought we were exposed in that area for a period of time, and I think that that exposure is still real, but we are currently the biggest destination in Europe for foreign direct investment. We have seen the biggest increase in FDI in projects in the north-west and I want to work with the Government and whichever party is around to ensure that we continue to see that flow. I want to ensure that the success we see in the country continues and that the northern powerhouse can fulfil its full potential. Key initiatives such as the life sciences corridor in Cheshire will require clear signals to businesses in the UK and abroad that we are open and want to move further forward, which is why I will support clause 42 when we vote, as I understand we will.
I want to show our support for clause 42. In fact, I think it would be a bit strange for someone from Northern Ireland to take a different stance, especially given the fact that the Northern Ireland Government have put the reduction and devolution of corporation tax at the centre of their policy for attracting investment into Northern Ireland over the next 10 to 15 years.
There are two things. First, we must ask ourselves whether we believe that a reduction in taxation on businesses acts as an incentive. As I listened to the Opposition spokesman’s opposition to this measure, it raised a query in my mind: is the reduction of other business taxes regarded as acceptable and indeed desirable by the Labour party as a means of incentivising and helping small business? For the Opposition, it seems as though the reduction in business rates, which are a form of taxation, is desirable because it helps small businesses, but that the reduction of corporation tax seems to have no effect, or the opposite effect. If we are going to have some consistency, we must ask ourselves whether the principle of reducing taxes on businesses and their profits, and the impact that that has on the amount of money they retain for investment, is an effective means of stimulating business. If it is true of one form of tax, it is true of another. That is one of the reasons why I believe that the reduction in corporation tax is an important decision.
Secondly, during my former role as a Member of the Northern Ireland Assembly and as a Minister there, one of the things that came up consistently when we spoke to investors was corporation tax. We had an especially big problem, because we were living next door to a country—we have a land border with it—that had emphasised the reduction in corporation tax. Time and again, though not exclusively—there is no point in over-egging this pudding—investors mentioned the level of corporation tax: 12.5% in the Irish Republic and 22% then in Northern Ireland. When companies looked at the headline level of taxation, they viewed the Irish Republic as a much more desirable place to invest. Of course they looked at other things—the skills base, the availability of office and factory space, the infrastructure and so on—but corporation tax was an important factor.
May I caution the hon. Gentleman? For some of those companies—not all of them—this is a classic sob story. Corporation tax in America is roughly twice the rate that it is here. People still invest in companies in America. Corporation tax is part of an overall picture, as he says. Yes, companies should pay tax. If we followed the logic of some of the things that he has said this afternoon, we would not tax companies. That may be his position; it is not the position of Labour party.
It is not the position of the Democratic Unionist party either, because there are other ways in which companies can be held responsible for their infrastructure requirements. For example, one of the forms of taxation that the Government have introduced recently is the apprenticeship levy, where companies will be held responsible. They need trained workers, and they have to make a contribution from their profits to train those workers. There are ways to target the contribution that we require companies to make. I am not saying that companies should not pay for the infrastructure from which they benefit, but we must address one of the issues that they raise when they are considering whether we are a competitive place to invest.
The hon. Gentleman is making characteristically important points. Although there has been a nod to what has gone on in the US, it is important to look at what is happening in the UK. As we have seen a reduction in corporation tax, we have seen a strong performance in foreign direct investment. Let us look at what has happened here, which has helped to move the situation further forward—and no doubt it has done so in Northern Ireland as well as the mainland.
The hon. Gentleman is quite right: if we look at the record of companies in the United Kingdom as corporation tax has decreased, we see that we have experienced increasing foreign direct investment. Indeed, since the Northern Ireland Government announced that corporation tax will be reduced in, we hope, a year and a half’s time, there has been an upsurge of interest in the number of companies that wish to consider Northern Ireland as an investment proposition. We are already the second most successful region in the United Kingdom for foreign direct investment—I suppose that this bears out the Opposition spokesman’s point—because we have emphasised the other selling points that are available to us at present, but corporation tax is the additional one that will make things easier for us.
Coming back to something that the hon. Gentleman said earlier about the training levy, for want of a better term, employers and particularly small businesses in this country have traditionally been reluctant about that levy. What do businesses in Northern Ireland feel about the levy?
Of course, all businesses will seek to emphasise the additional costs that the levy imposes on them. However, many businesses that face a shortage skills in Northern Ireland now recognise that there must be a means to ensure that we have a supply of skilled labour. Opinions differ on how to provide that supply of skilled labour and how the apprenticeship levy should be applied and used, but people now accept, given the importance of skilled labour to firms, that they have to pay for it.
I return to the earlier point that the hon. Gentleman was making about inward investment. Does he agree that compared to Brexit, this measure is pretty marginal in its likely impact in terms of encouraging inward investment? As I am sure we are both very concerned about inward investment, does he agree that we should have an urgent debate to consider the implications of the Brexit vote?
I am reluctant to get involved because I know that the Chair will call me to order, but perhaps you will indulge me, Mr Howarth, and allow me to answer the point. I do not share the hon. Gentleman’s views about the detrimental impact of Brexit. Indeed, for businesses in Northern Ireland, where we have become export-oriented, it opens up the opportunity to look to those parts of the world where there are growing economies and allows us to make our own trade deals with them. I believe that Brexit will be of benefit to us and—
I was about to say, Mr Howarth, that the reduction in corporation tax will be an additional means by which we can capitalise on those opportunities.
I have two more points that I want to make. The first is that the reduction in corporation tax in this Budget gives the Northern Ireland Government more flexibility. I hope the Minister will be able to clarify how much this reduction in corporation tax will reduce the bill for the devolution of corporation tax to the Northern Ireland Assembly. The reduction of that bill enables the Northern Ireland Government to do one of two things: either to have a lower cost for the reduction—the 12.5% —or to reduce the rate below 12.5%, accepting that there will be a hit of £280 million. If that has already been factored into the Budget, the rate of corporation tax can be reduced even further to make us more competitive.
Lastly, if the Government had decided not to go down the route of lowering the headline rate, one way of giving incentives to firms would simply be to increase the number of capital allowances or make them more complex. Although it could be argued that that would allow the Government to target particular kinds of investment, it has two impacts. First, it increases the cost of collecting tax, and, secondly, it makes it more complex for firms to have their corporation tax calculated. For small firms that is a burden. For larger firms it may not be such a burden.
I wish to quote that famous Scottish economist, Adam Smith—I am sure my friends in the Scottish National party will be glad to hear this. He set out in his principles of taxation that in the collection of taxes there should be economy, certainty and equity. I believe that having more capital allowances militates against that and makes it more costly, and firms will have less certainty about what their eventual tax bill should be. That is one of the reasons why I welcome clause 43 and some of the other clauses that reduce the number of allowances, as that simplifies the tax system and makes taxes easier to collect.
There may be only 10 companies that claim the vaccine research relief, but that requires an infrastructure to carry out the collection and a number of civil servants to be appointed to do the job. If we want to find ways of cutting the cost of collecting taxes, it makes sense to look at reliefs that may not be widely used but still absorb resources within HMRC. For these reasons, my party and I will not support the opposition to clause 42 and we will join the Government in pushing it through.
I thank hon. Members for their contributions to the debate. I will perhaps turn to corporation tax rates and clause 42 at the end of my speech—I think we will save the most exciting element to the end. Let me first pick up some of the other points that have been raised.
Vaccine research relief is currently available only to large firms; it was removed for small and medium-sized enterprises in 2011, at the same time as the general SME R and D relief was increased. It is also worth pointing out that all vaccine producers can claim normal R and D relief on qualifying expenditure. Incentivising vaccine production remains a priority for the Government, but we believe that spending programmes such as the Ross fund are more effective at doing that. The amount claimed through VRR is less than £5 million a year, despite a generous raise.
The Ross fund was announced by my right hon. Friend the Chancellor in November 2015. It will target infectious diseases, including malaria, diseases with epidemic potential, neglected tropical diseases, which affect more than 1 billion people globally, and antimicrobial resistance, which poses a substantial and growing threat to global health. In January 2016 the Chancellor built on the announcement of the Ross fund by confirming that the Government will invest £500 million a year over the next five years in the fight to end deaths from malaria. That formed part of the £3 billion commitment between the Government and Bill Gates. The UK continues to contribute to the Global Fund to Fight AIDS, Tuberculosis and Malaria, an internationally supported organisation designed to accelerate the end of AIDS, tuberculosis and malaria as epidemics. I wanted specifically to come back on the very good point raised by Kirsty Blackman.
The Ross fund does constitute official development assistance. It is worth pointing out that all UK ODA is administered with the promotion of the economic development and welfare of developing countries as its main objective, and it is in line with internationally agreed rules on ODA, so it is perfectly reasonable that we include the fund in the 0.7%, and it can clearly make a huge difference to large numbers of people.
Rob Marris asked how much is lost to the Exchequer through some of the schemes we seek to address in clause 66. Over the scorecard period, which takes us to 2020-21, it is expected that the changes will yield about £20 million of tax that would otherwise have been avoided and that they will potentially protect much more. This is not the largest measure by any means, but it is, none the less, a contribution. By way of background, the relevant case law is the 1948 House of Lords decision, Gold Coast Selection Trust Ltd v. Humphrey—no doubt familiar to the hon. Member for Wolverhampton South West. It has been suggested that this is no longer good law as it predates generally accepted accounting practice and the enactment of current legislation setting out the rules for the calculation of trading income. Let me be very clear that HMRC does not accept this proposition. [Interruption.] As the hon. Member for Wolverhampton South West mutters, it is a case of belt and braces. HMRC’s view, and the Government’s view, is that we should change the law now as a response to the potential risk, which is in the region of £125 million in one case alone. The challenge we have seen seeks to suggest that the current case law that dictates the tax treatment is outdated. I hope that clause 67 helps to address this risk.
I think I can provide that reassurance, but perhaps it would be best if I write to the hon. Gentleman—again, on a belt and braces basis.
The hon. Gentleman raised the concern that had been put to him that clause 68 might force businesses to claim capital allowances and that that might complicate the system. He gave the example of a saw, with a carpenter potentially encountering complications in his or her tax affairs . The answer is that that is very unlikely. Most small businesses will find that their capital spending on equipment is fully relieved by the £200,000 annual investment allowance, which is now at a record permanent level. Accordingly, they would receive a full deduction for their expenditure in the year and would not usually have to calculate annual writing-down allowances. The changes will ensure that tax relief for expenditure incurred by business on replacement and alteration of tools means that all capital expenditure on equipment is dealt with in a fair and proportionate way.
I was asked whether clauses 69 and 70 will cause some complication in the old 10% wear-and-tear deduction, which was simple. Of course, Labour Members highlighted the wear-and-tear allowance as a potential saving within the tax system. It is interesting that, despite its simplicity, a significant number of interested parties agreed with the Government that the wear-and-tear allowance was not fair. It applies only to landlords of fully furnished properties, and provides relief even where landlords have not had to meet any actual expense. We have carefully considered the different ways in which a relief based on actual expenditure could be designed and implemented, and we have legislated for the simplest possible basis.
Turning to clause 42 and the wider issues, I am grateful for the supportive contributions by my hon. Friends the Members for Amber Valley (Nigel Mills) and for Macclesfield (David Rutley), and by Sammy Wilson. If the hon. Gentleman had argued a different case, I might have pointed to the many conversations that we have had over very many years in the context of devolution of corporation tax to Northern Ireland. I was struck by his point about how, when talking to international businesses, people often note the headline rate of corporation tax; international investors are aware of that. It is certainly my experience, having met many international businesses over a number of years when promoting the UK as a place in which to do business, that our low corporation tax rate, and our destination towards an even lower rate, attracts attention and a fair degree of admiration, and ultimately attracts jobs and investment to the UK. That is why we have taken steps to reduce the corporation tax rate, and I think that that has played a significant role in the fact that business investment is up significantly; that employment numbers are as high as they are; and that foreign direct investment in this country has been so strong. Of course, that is not the only factor; there are others. This country also faces particular challenges in the light of recent events, but, as my hon. Friends the Members for Amber Valley and for Macclesfield have said, it is absolutely right that we have a competitive corporation tax rate.
The message that we want to send to those businesses that may have concerns about the consequences of the referendum vote is that the UK is open for business. We continue to provide a skilled and ambitious workforce, and to offer links with much of the rest of the world. Clearly, there is a debate to be had about how much access we can continue to have to the single market, but I certainly hope that we can do that. The UK also has a competitive tax system and the 17% rate of corporation tax is absolutely key to that. In particular, it would be a grave mistake for us to step away from what we have already announced, namely our clear determination to move towards a lower rate of corporation tax, because this is a competitive world and the UK needs to make the case that we are open for business.
With those remarks, I hope that the various clauses under discussion will be supported. In particular, I hope that there will be resounding support for clause 42, which further moves the United Kingdom in the direction of having a competitive, attractive and dynamic economy.
Question put and agreed to.
Clause 41 accordingly ordered to stand part of the Bill.