Clause 30 - Charge and main rate for financial year 2003

Finance Bill – in a Public Bill Committee at 2:30 pm on 16th May 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 2:30 pm, 16th May 2002

I beg to move amendment No. 7, page 22, line 3, at end add—

'(2) In respect of that and subsequent financial years, if the retail prices index for the month of September preceding a financial year is higher than it was for the previous September, then, unless Parliament otherwise determines:

(a) section 13(3) and section 13AA(4) of the Taxes Act 1988 (''the relevant provisions'') shall have effect for that year as if for each of the amounts specified in the relevant provisions as they applied for the previous year (whether by virtue of this section or otherwise) there were substituted higher amounts;

(b) such higher amounts shall be arrived at by increasing the respective amounts for the previous financial year by the same percentage as the percentage increase in the retail prices index; and

(c) if the results are not (in the case of section 13(3) of the Taxes Act 1988) multiples of £10,000 or (in the case of section 13AA(4) of the Taxes Act 1988) multiples of £1,000, rounding them up to the nearest respective amounts which are such multiples.'.

I welcome you to the Chair, Mr. Gale. We now come to more technical clauses and schedules. We have done our best, with the support of lawyers and the Clerks, to draft our amendments correctly. I apologise if they are not perfect, but the points are there to be made.

We welcome the latter provisions in clauses 31 and 32 to assist smaller businesses, but amendment No. 7 covers the obvious point that without indexation of smaller-company tax rates, the reality in trading and profitability terms is that the size of businesses that qualify for those tax rates will become smaller and smaller. Not to index them is a form of stealth tax if one believes in giving smaller companies fiscal advantages. Amendment No. 7 is straightforward and would index the limits by reference to which mainstream and starting rate corporation tax is calculated, so avoid the inadvertent effect that I have described.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I welcome you, Mr. Gale, to our proceedings.

It can be taken as read that it is difficult in Opposition to draft amendments and I accept the caveat of the hon. Member for Arundel and South Downs (Mr. Flight), although we may sometimes have fun with some of the wording. [Hon. Members: ''When?''] Now. [Laughter.] It depends on how well we get on.

I shall explain why I am not attracted to the amendment. As I understand his underlying point, the hon. Gentleman wants to ensure that the number of small companies qualifying for the lower rate should continue to receive the Government's attention once they have started up and are growing. Putting the most generous spin on his comments, I imagine that he is expressing a hope that this is not a once-and-for-all, set-in-stone provision that would diminish in time if all new companies were successful. I assure him that our commitment in setting corporate tax levels for small and medium-sized as well as other companies is designed specifically to assist with other tax changes, the creation of companies, entrepreneurial activity and the growth of those companies. I know that Opposition Members take a slightly different view about what would be the best measures, but I am happy to reassure the hon. Gentleman about our intention.

The clause sets the corporate tax rate at 30 per cent. We are keeping it at that rate, having already reduced it twice since taking office. The amendment is an attempt at a Rooker-Wise amendment for corporate tax. I should like to offer the hon. Gentleman congratulations on his ingenuity, but I am not attracted to it and I will explain why. The amendment would introduce an annual programme of up rating the profit limits using a calculated entitlement to the small company rate and the starting rate of corporation tax.

The profit limits used to compute UK corporation tax are already high compared with other Organisation for Economic Co-operation and Development countries. We already have a higher level. Companies with profits of up to £1.5 million gain some benefit from the lower rates of tax, and how they interact with the 30 per cent. rate. It would have been possible for the Government to increase profit limits this year, and it is acknowledged that that would have had a positive effect on some companies, but not all of them and particularly not smaller ones. We are trying to consider how all tax rates work, in particular for small companies.

Instead, the Government decided that we would obtain greater benefit from reducing the tax rates than from changing the limit. As I have said before to the Committee, the Government favour ''targeting'' relief where they can, so that the economy can benefit to the greatest extent, rather than using blunt instruments such as a year-by-year increase in profit limits.

Apart from the fact that changing the rate is better than the mechanism proposed by the hon. Gentleman, because it maximises the benefits to the smaller companies, I also have technical objections. I am not

talking about whether the amendment is technically correct; I am talking about how the hon. Gentleman has constructed the amendment. At first sight, it seems that a requirement to upgrade the profit limit in line with inflation might seem reasonable. However, the inflationary adjustments in the hon. Gentleman's proposals are rounded up to the nearest £1,000 for the limits relating to the starting rate, or £10,000 for those relating to the small companies rate. I can understand why he may have done that, and I am sure that he will understand why I do not want to. However, the effect of rounding up the increase would be to increase the limits by five times the current rate of inflation. Having said that that was indexation, it is given a big push by rounding up. Every year, the amendment would mean that the profit limits would increase in real terms, leading continually to a real terms reduction in the amount of tax that companies pay. That may well be the hon. Gentleman's intention, but it is not the Government's. The Government intend that there should be fair levels of tax and we should look at that for all companies.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

The Paymaster General's point about rounding up and its consequences is clear enough, and the Committee can make its own judgment of the merits of that point. It would be helpful if she were now to provide a specific example of the way in which the rounding up to which she objects operates in practice, so as to vindicate her point about an increase of five times.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I was intending to come on to that when showing how the formula would work in the legislation and how it would, therefore, change every year. It would cut straight across the principle of companies having certainty in their ability to plan what their tax rates will be.

The rounding-up formula would be different every year. The boost that the rounding up would give would be much greater than the amendment appears to intend at initial sight and would be beyond what the Government consider necessary. The amendment would also make the relationship between the various profit limits unstable from year to year. That comes to the point that the hon. Member for Buckingham (Mr. Bercow) made. That is important for the computation of corporation tax reliefs on the relative amounts between each limit. If the amendment were accepted, there would be a required change in the fraction used to calculate the marginal relief.

This year, those fractions would have to be 209 over 4,000 and 341 over 12,000. Although I accept the principle that the hon. Member for Arundel and South Downs wishes to explore, I do not believe that his intention is to require legislation every year, automatically to change how all those limits are calculated and, therefore, to require companies to begin to engage in mathematical gymnastics over the planning of their liabilities. The amendment would

also mean that the calculations would be increasingly complicated year after year, as we sought to achieve the right balance.

I take the amendment in the spirit in which I hope it was intended. I think that the hon. Member for Arundel and South Downs wants to have on record, again, the Government's commitment to continue actively to scrutinise corporate taxation levels, whether for large or small and medium-sized companies. I think he also wants to ensure that the rules that interlock with the corporate tax rate continue to produce a highly competitive tax rate for British companies in terms of international competition—a point that we may discuss in later debates—and provide the certainty that our companies need in understanding their tax concerns.

On that basis, I hope that the hon. Member for Arundel and South Downs, while wishing to put on record that he favours that type of mechanism, will accept that although it looks good in principle, I am not attracted to it in practice. I am prepared to say that we will, of course, always continue to look critically at issues that are put forward, not least because the hon. Gentleman is very thoughtful and has, in previous Finance Bills, occasionally discovered things that we should have discovered, and which we went on to do. I hope that the Committee will not support the amendment if it is pressed to a vote.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 2:45 pm, 16th May 2002

I thank the Paymaster General for her kind comments. I accept that a Rooker-Wise approach has its problems. The issue here is not just being internationally competitive; the basic issue is that if the favourable tax limits for small companies remain at a nominal sum, in real terms, they will reduce each year. I should be interested to know whether the Government have the obvious alternative in mind, which is simply to review the limits every year and potentially to raise them in nominal terms to keep up in real terms.

The issue about rounding up was not included as a clever device, but merely for tidiness. To some extent, I take the point that it has its problems.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am happy to put it on the record that the Government will continue to review how the tax rates are operating on an annual basis. We may take decisions that require no change for other reasons, but we do not intend to set up something that will wither on the vine.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I thank the Paymaster General for her reply. The issue is that tax rates must not wither on the vine. Without further consuming the Committee's attention, I am comfortable that the underlying point has been taken. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

There is one aspect of the operation of corporation tax that I should like briefly to raise now and come back to in more detail when we address new clause 6, which has not been included with clause 30 for technical reasons. The issue concerns companies paying their corporation tax.

Companies have presently to estimate the annual tax payable five and a half months before the end of the accounting period, and a failure to perform a reasonable estimate can lead to penalties being levied. That results in companies having to calculate their tax liabilities at least three times: once each for the payments in months seven and 10 of the accounting period and at least once for all payments after the end of the accounting period. That can be a costly administrative burden. Would it not be possible to consider arrangements that monitor a company's payments on account based on the prior year, unless there is reasonable evidence to show that the figure from the prior year is too high? As I said earlier, new clause 6 proposes a particular formula to deal with that. The regulations are in a statutory instrument, and a cost-saving approach that would not cost revenue would require some statutory changes. I am interested in the Government's view on achieving what I would view as common sense in that area, particularly when that has already been achieved for individuals.

Photo of Michael Jack Michael Jack Conservative, Fylde

In advance of my remarks on corporation tax, I remind the Committee of my business interest as a non-executive director of a plc that pays corporation tax.

I should be grateful if the Paymaster General were to comment either now or in writing on some interesting data on the impact of corporate taxation, and therefore the effect of the main rate as confirmed by clause 30, from the Inland Revenue statistics for 1997 and 2001. In 1996-97, the main rate of corporation tax was 33 per cent. At that time, the overall impact of corporation tax was 18 per cent. of net trading profits of UK enterprises and 13 per cent. of gross trading profits. If we move to 1999-2000 when the main rate was 30 per cent., which is the current situation that the clause seeks to confirm, the percentage of corporate taxation had risen to 22 per cent. of net trading profits and 16 per cent. of gross trading profits.

The Paymaster General made a very interesting comment in reply to an earlier amendment moved by my hon. Friend the Member for Arundel and South Downs in which she talked about fairness in the context of corporation tax. I wonder whether the Treasury was, in setting the main rate at 30 per cent., mindful of the impact on each sector of the economy, which has been confirmed by Inland Revenue statistics.

In 1996-97—a comparative period—agriculture, forestry and fishing paid 22 per cent. as a percentage of their net trading profits, and at that time the main rate was 33 per cent. Under the same main rate as we are being asked to confirm today, that figure rose to 24 per cent. During the same time, banking, finance and insurance rose from 20 to 28 per cent.; chemical

manufacturing, which is a sector that has been under particular pressure, rose from 15 to 18 per cent.; and distribution and repairs rose from 20 to 22 per cent.

Those figures tell us that having a main rate of 30 per cent. has created a situation in which tax take, as a percentage of net trading profits, has been increasing, although against the background of a decrease in the main rate of corporate tax in 1996-97. If we are to apply the criteria of fairness to such a hard-pressed sector as agriculture, which has been under particular pressure, we should consider that for it to find that the percentage take for net trading profits had risen would be worrying. The same message applies to manufacturing chemicals. I should be grateful for some commentary on and explanation of that phenomenon. With a decline in the main rate of corporation tax, and the confirmation of 30 per cent., those results are not what I would have expected.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

First, I shall deal with the point made by the hon. Member for Arundel and South Downs on new clause 6 and instalment payments, which he mentioned in the margins of the Committee this morning. We will closely consider the principle behind the new clause when we come to it. As he knows, the Government have already closely considered the issues of payment of instalments and penalties for late payments. I do not remember the figures exactly, but we have considered reducing substantially the interest on late payments. The substantive debate will happen under new clause 6, and I am prepared closely to consider the hon. Gentleman's point and give him a response.

In answer to the right hon. Member for Fylde (Mr. Jack), I do not have, after having leafed through my endless bits of paper, figures on a sectoral basis. He raised an interesting question however. A 10-year time sequence may also prove interesting. I cannot promise that I shall be able to get that information to him, but I shall do my best to provide an answer, which I shall ensure every member of the Committee receives.

I have the names and numbers of companies that fall into each category, and I am happy to put them on the record or send those details in writing to the hon. Gentleman. Some 340,000 companies pay no tax and make no profit; some 150,000 companies have a starting rate of zero, so their profits would be—[Interruption.]

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

Order. I reassure members of the Committee that the Officers of the House will inform us if it is necessary to take any further action in response to the alarm.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am reassured by that, Mr. Gale, because I did not know whether to carry on speaking or run for the door.

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

Order. This Committee takes a Francis Drake approach to most things.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

You mean the men will be first at the door, Mr. Gale?

I shall start again, because I do not wish to give the information in a way that is not helpful to the right hon. Gentleman. About 340,000 companies are not recorded as making profits and they are rate zero. About 150,000 have profits up to £10,000 and their starting rate, once the Bill has been agreed, will be zero. About 160,000 will be in a marginal band of between one and 18 per cent., with profits ranging from £10,001 to £50,000. There will be 155,000 companies at the smaller company rate of 19 per cent., with profits ranging from £50,001 to £300,000. About 20,000 companies will be in the marginal band of 20 to 29 per cent., and 35,000 with profits of more than £1.5 million will be subject to the main rate of 30 per cent. That is the distribution of the 860,000-odd companies.

As I said, I do not have the figures the other way round. The corporation tax rates that have existed since 1979 have varied from a main rate of 52 per cent. down to the current 30 per cent. and from a small companies rate of 40 per cent. down to the current 19-plus per cent. For the past two years we have had the 10 per cent. rate as well, and this year a zero rate. Therefore, the spread is different.

If I can give the right hon. Gentleman a sensible breakdown, given the new corporation tax structure, I shall certainly try to do so and, with his agreement, ensure that every member of the Committee has that information at the same time.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

In accordance with my declaration on the Order Paper, I should declare an interest as a director of a company that pays tax. I apologise for not having done so in my opening remarks.

On the issue of making advance payments, will the Minister focus particularly on the concept that there should be no penalties where instalment payments are wrong as a result of waiting on clarification of the tax treatment of an issue from the Inland Revenue? However, we can discuss that when we come to the new clause.

Question put and agreed to.

Clause 30 ordered to stand part of the Bill.