asked Her Majesty's Government:
What is their response to the recent report by the National Audit Office which indicates that one-third of the United Kingdom's largest businesses pay no corporation tax.
My Lords, it is wrong to suggest that business does not pay its fair share of tax. As the NAO report notes, the Revenue raised £23.6 billion in corporation tax from large businesses in 2006-07, 54 per cent of all corporation tax raised. International studies consistently show that the UK has one of the most competitive business climates in the world. The UK's corporation tax rate is the lowest in the G7, and will be cut to its lowest ever level of 28 per cent in April 2008.
My Lords, I thank the Minister for that run of statistics, but is there not a real risk to the Treasury, given that a large proportion of our corporation taxes comes from the oil industry, insurance and banking, with hardly any coming from other areas? Is there not something rotten about the business I visited in Cornwall last week, which employs up to 20 people, having paid more corporation tax over the past two years than Sainsbury's, one of the most successful corporations not just in this country but worldwide?
My Lords, Sainsbury's has heavy investment in its pension fund, helping to explain its low level of corporation tax. More generally, the noble Lord is right that the great majority of corporation tax currently comes from the industries he has identified. Industries and corporations can of course have good reasons for their corporation tax commitment being low, not least because the Government have been concerned to put expenditure on research and development against corporation tax, which has shown itself in the development of our economy in the past decade.
My Lords, this Question is about large companies not paying tax. In the spring Budget, the previous Chancellor reduced corporation tax on large companies and increased it on small companies. As the noble Lord, Lord Baker, has just said, the current Chancellor has effectively almost doubled capital gains tax by increasing it from 10 per cent to 18 per cent, affecting SMEs and the entrepreneurial community. Why have the Government taken this backward step and used such a blunt instrument, affecting entrepreneurship and the SME community, who make up the engine of our economy?
My Lords, it is an important dimension of the economy, and we want to see enterprise rewarded and developed. But one of the insistent and consistent representations to Government about taxation is that it should be simplified and clear, and the advantage of the 18 per cent rate is that it is a simple, straightforward tax across the board.
My Lords, the Government have belatedly reduced the headline rate of corporation tax to 28 per cent, but that is still only around average for the OECD and has done nothing to restore our international tax competitiveness. Do the Government accept that there are sound arguments for the UK moving to lower rates of corporation tax that will lead to increased yields?
My Lords, I am somewhat surprised that the noble Baroness does not recognise the significance of the reduction in the rate of corporation tax. It makes the British corporation tax rate one of the lowest in the OECD. Only Germany has as low a rate, at 28 per cent. When the rate was 30 per cent, the Opposition clamoured for a reduction. It has now been reduced to 28 per cent, and I would have expected just a little greater generosity from the other side, although I might have been looking in vain.
My Lords, does my noble friend agree that it makes more sense for companies to use the allowances for investing in their own businesses rather than to pay out money in corporation tax? We should be encouraging people to invest in their businesses rather than to pay out dividends and corporation tax.
My Lords, my noble friend is right that it is important that businesses develop, grow and have the necessary investment. Although corporation tax is important, it amounts to only about one-seventh of the taxation that large companies pay across the board through other aspects of their business. It is important that the sector thrives because that benefits returns to the Treasury, the welfare of the economy and our wider society.
My Lords, does the Minister accept the support of these Benches for the principle of simplification, particularly of capital gains tax, which was announced last week? Does he also accept that there is no case for making major changes such as this in a blue funk in response to the Conservatives who, in turn, stole quite a lot of those policies from the Liberal Democrats?
My Lords, I react vigorously against the word "blue" in this framework. As far as the Government are concerned, the reduction of corporation tax, which is the basis of this Question, was not in reaction to the Conservative Party. I merely indicated that it made one of the myriad representations on this front. The Government decided this to make sure that our corporation tax was internationally competitive. I merely referred to the Conservative Party en passant in the hope of greater generosity of spirit.
My Lords, the Minister has already mentioned the virtues of the simplification of the tax system. The NAO, in its usual immaculate form, has set out a wonderful checklist of the items that the Treasury could now address with a view to closing loopholes which would win it several billions of pounds, far more than the Government would need to undo the damage to investment in private industry that was done by their legislation a week ago.
My Lords, the Government and the Treasury, in particular, take the reports of the National Audit Office very seriously and look at these issues. I assure the noble Lord that our concern is to plug loopholes. Where the NAO has identified loopholes that can be remedied, we will be working positively towards that objective.