I rise to speak to amendment 162 and new clauses 10 and 11, which stand in my name and those of my hon. Friends the Members for Hayes and Harlington (John McDonnell) and for Bootle (Peter Dowd). I also support new clause 5, which has been explained articulately by Kirsty Blackman, and confirm the Opposition’s support for amendment 177, which has just been spoken to articulately by Greg Mulholland.
Amendment 162 would remove clause 45 from the Bill, thereby halting the Government’s cut to the rate of corporation tax to 17% by 2020. The Government claim that cutting the corporation tax rate would make Britain even more attractive to inward investors and more competitive, and that it would support growth and investment. I would be grateful if the Minister elaborated on the evidential basis for those claims.
We all know the theory that states that if we cut tax on profits there is more cash for companies to invest in expansion, research and development and labour, and, theoretically, we become more attractive to foreign businesses. The problem is that, somewhere in the development of that theory, the Chancellor forgot to check the reality, as the figures do not support that age-old Conservative mantra.
Figures provided by the House of Commons Library show that in 1998 business investment as a percentage of GDP was 10.8%, and that in 2000 it was 10.6%. The rate of corporation tax in those years was 31% and 30% respectively. In 2015, business investment as a percentage of GDP was 9.7% and the rate of corporation tax was considerably lower than that in 2000, at 20%. Why, therefore, were businesses not in a state of investment frenzy in 2015, if, indeed, slashing corporation tax is a golden ticket to investment? Of course, I appreciate that there are many factors that affect the level of business investment in the economy, but a comparison of the figures seems to suggest that a lower rate of corporation tax does not correlate with a higher level of business investment.
Let us look at a different variable, namely foreign direct investment. The level of FDI in the UK has been steadily falling since 2005; there have been a few anomalies along the way, but the trend is most definitely downwards. That has coincided with a steady reduction in the rate of corporation tax. In 2005 the level of FDI flows into the UK was £96.8 billion and corporation tax was 30%. In 2014 FDI was £27.8 billion and corporation tax was 21%. Again, there could be many factors at play, but the figures demonstrate that there is no strong correlation between low rates of corporation tax and higher rates of investment and FDI.
I appreciate that, to a degree, low corporation tax rates may attract some companies to locate here, because they will want to pay less tax, but attracting them to truly invest in the development of industry here, as well as encouraging our UK companies to flourish, is another matter entirely, and that requires much more than just a tax break.
According to the Government’s own analysis, this cut is expected to cost the Exchequer almost £1 billion in 2020-21, in addition to the £2.5 billion cost in the same financial year of cutting corporation tax to 19% from 2017. The Institute for Fiscal Studies has also calculated that the Government’s cuts to corporation tax have cost £10.8 billion a year. That gives rise to the question of whether the money could be better spent to incentivise much-needed investment in the UK. The Minister will not be surprised to hear that the Opposition most definitely think it could.
Many businesses already have cash. The House of Commons Library has provided figures showing that the total amount of currency and deposits, or cash reserves, held by non-financial companies in the private sector is currently at a 20-year high, at £581 billion. The problem, then, is not that businesses need more cash, but that other factors in our economy need improvement, including skills, infrastructure, innovation and productivity.
The £10.8 billion estimated by the IFS is a large sum that would be better invested in filling the gaps in our economy that are failing business. We should not be engaging in a race to the bottom to become the world’s next big immoral tax haven, but providing the building blocks to make business actually succeed, and with that comes more revenue in taxes as businesses flourish and well-paid jobs are created.
The Minster would do well to take notes at this point, because Labour has committed to such investment, through a national investment bank and the bank of the north, to address specifically those areas left behind after decades of regional decline. Our national and regional development banks would help unlock £500 billion of investment and lending to small and medium-sized enterprises, including £250 billion of capital investment in the infrastructure that we urgently need and to help prevent economic slowdown. The regional focus of development banks would enable the Government to make sure that investment and lending is spread around the country, not just siphoned into the south, and that it benefits from local knowledge and expertise, thus ensuring that no area in Britain is left behind. Our bank of the north would also unlock the potential of the north of England, with a push to deliver the sort of infrastructure and investment that it has been deprived of for far too long.
We have also committed to ensuring that our workforce have the skills that business needs in a modern economy, through reinstating the education maintenance allowance and maintenance grants for poorer students, which would be funded by a corporation tax rate of 21%. That is the kind of intervention businesses are looking for—policies with a substantive impact on a company’s ability to do and develop business, not simply cuts to the headline rate of corporation tax.
The cut to corporation tax brought about by clause 45 is not the best use of public money to support businesses in the UK. I urge hon. Members on both sides of the House to join us in the Lobby to vote in favour of amendment 162.
Mark Field made some fantastic comments earlier on new clause 10, which relates to the patent box. The new clause would require the Chancellor to publish an independent review of the efficacy and value for money of the patent box legislation. The report would have to make an assessment of, first, the size and nature of the companies taking advantage of the patent box legislation; secondly, the impact of the patent box legislation on research and innovation in the UK, including supporting evidence; and, thirdly, the cost-effectiveness of the patent box legislation in incentivising research and development compared with other policy options. My hon. Friends and I are, of course, supportive of Government action to incentivise R and D, but we are not convinced that the patent box legislation has been efficient thus far in achieving that. We are not alone. Many commentators criticised the patent box, even before its introduction in 2012. The IFS has stated that the
“Patent Box is poorly targeted at research as the policy targets the income which results from patented technology, not the research itself…to the extent that a Patent Box reduces the tax rate for activity that would have occurred in the absence of government intervention, the policy includes a large deadweight cost.”
Furthermore, respected economist Mariana Mazzucato, who strongly believes in Government intervention to support R and D, made the rather damning assessment that the patent box is a
“scam with no effect on innovation”.
Let me be very clear. The Labour party wants to incentivise research and development—indeed, my hon. Friend the shadow Chancellor has repeatedly called for more intervention in this area—but we are not convinced that the patent box is the most effective way of doing so. The patent box costs the Exchequer approximately £1 billion a year, and there has been no evidence from the Government that I am aware of to demonstrate its effectiveness. If the Minister were able to provide details of any such evidence, I would be most grateful.
Interestingly, a new study from King’s College London and the Medical Research Council shows that for every £1 extra spent on public medical research, long-run private research increases by 99p. So an increase in public medical funding by £500 million—half the cost of the patent box—would boost private medical research by another £499 million. That compares quite staggeringly to the so called dead-weight loss of the patent box. That is interesting research; I am sure the Minister will agree.
I will not divide the House on new clause 10 today, but I hope that the Minister will agree that an independent assessment of the efficacy of the patent box with an examination of other policy options would clarify, for both the Government and the Opposition, the best way to achieve our shared goal.
I move on to new clause 11, which would require the Government to review the regulation of the taxation of securitisation companies in the UK. We do not oppose the Government’s proposals in the Bill in relation to the power to make regulations about the taxation of securitisation companies. However, we do think it timely for the Government to conduct a review in relation to current regulation present in the industry, so that any loopholes and destructive practices can be eradicated.
I am sure hon. Members know that the non-existent regulation of securitisation structures magnified a medium-sized crisis in the US real estate market into a fully-fledged banking crisis by 2008. There is real worry, in all parts of the House, that it has been a case of back to business as usual for our banking sector, and that the lessons learned from the 2008 crash—if indeed any were learned at all—have long been forgotten.
We heard earlier this year of a surge in the credit default swaps market, where there has been large-scale repackaging and rebranding of the potentially toxic securitisation products that arguably caused the crisis—a crisis, I must add, that was not truly paid for by the banking sector and financial operators who caused it. No, it was shored up on the backs of the people of this country, and, worst of all, on the backs of the poor and vulnerable. Furthermore, it was used as an excuse by this Government to slash and burn our public services.
Securitisation structures operate by transferring assets—sub-prime mortgages, credit card receivables or similar cash flows—into off-balance-sheet special purpose vehicles. Usually, the profits or cash flows received from those assets pass through the special purpose vehicle to the investors who have acquired bonds in that special purpose vehicle. The residual amounts that are left in the special purpose vehicle are small compared with the sums that are paid through to the investors. However, as with all such artificial financial structures, it is possible to manipulate those amounts for tax purposes. Indeed, credit default swaps, which are the most famous of the securitisation family, are deliberately flexible so as to manipulate the tax outcome. If we do not regulate the sector carefully now, we will quite simply become the drain through which the world will launder its dirty transactions. Especially in view of our exit from the EU, we must ensure that our financial our regulations are gold-plated.
New clause 11 deals with a review of the regulation of taxation on securitisation companies specifically, because we are limited by the scope of the Finance Bill. However, we would like the Minister to go much further and provide for an assessment of all aspects of the regulation of securitisation companies, thereby showing unequivocally that the Government are committed to ensuring that the tax arrangements of securitisation structures are adequately regulated. We will not divide the House on new clause 11, but I hope that the Minister will make a commitment in relation to those points.
To conclude my remarks, Labour cannot support the cut to corporation tax that we have debated today and we will, therefore, divide the House on amendment 162.