I beg to move amendment No. 35, in page 22, line 5, at the beginning insert—
'(1) An individual subject to income tax on profits or gains under Schedule D Case I or II shall be entitled to claim relief in respect of tax on those profits or gains which corresponds to the difference between the income tax otherwise payable and the corporation tax which would have been payable and the corporation tax which would have been payable by a company on such profits or gains taking into account sections 13 and 13AA of the Taxes Act 1988 (small companies relief and corporation tax starting rate), provided that:
(a) profits or gains in excess of the lower relevant maximum amount (as defined in section 13 of the Income and Corporation Taxes Act 1988) shall be disregarded for the purposes of calculating any relief under this subsection; and
(b) individuals in partnership shall be treated as if they were associated companies for the purposes of the said section 13; and
(c) such relief shall only relate to profits which have been retained within the relevant trade, profession or vocation. The Treasury shall have power under regulations to specify the situations in which profits shall be regarded as having been retained within a trade, profession or vocation.
As hon. Members may be aware, some 3.5 million self-employed people will see their national insurance charges go up about 14 per cent. following the Budget. As I understand it, if they were to incorporate—the amendment deals with quite low levels of turnover of about £30,000 per annum—there would be net national insurance and tax savings of about £3,000 per annum. I cannot believe that the Government want every small, sole trader business to incorporate itself. If nothing else, there would be the potential loss of revenue. I am also mindful of the fact that, ultimately, from a consumer point of view, the Government's legal position is stronger against a sole trader than against an incorporated business.
Amendment No. 35 has been designed to produce fairness in this area and to address the issue presented by the new improved small company taxation rating in conjunction with the changes to national insurance. It would give unincorporated businesses the option to retain profits and take advantage of the lower rates of corporate tax offered, instead of going through the hassle of incorporation. For partnerships, the bands at which lower tax would be paid are split evenly between the partners. That is designed to avoid the criticism that we are trying to help largely wealthy partnerships such as accountants.
The clear practical point is that for incorporated businesses, money comes through in wages and pay, on which income tax is paid. Similarly, the self-employed pay income tax, but if a self-employed business is able to retain profits to grow the business, it is fair and reasonable to provide for a parallel tax treatment to allow it to function on an incorporated basis.
I am sorry to disappoint the hon. Gentleman, but I am not attracted to this amendment, either. On the law of averages, I am sure that he will succeed on at least one amendment by the end of the Finance Bill—or more, if he is very busy and writes lots of them. However, I have not put down a challenge. I will consider very carefully the quality of the hon. Gentleman's amendments; he does not need to table them in quantity.
As I explained when we debated the previous clause, the Government want to do all that they can to support businesses large and small and to encourage investment. However, the proposal in the amendment does not help achieve that. It seeks to compare the tax charged on a self-employed person and the amount of tax that would have been charged had the individual been chargeable to corporation tax. Like the previous amendment, it sounds like an attractive proposition, on the surface. However, it would ask small
businesses, their advisers and the Revenue to indulge in fantasy to construct an alternative, hypothetical version of reality, which would make it a bit difficult to write tax legislation.
The amendment asks what tax the business would have paid if it had been a company, subject to the corporate rules for reliefs, losses and so on. The answer to that question is not only complex but impossibly difficult because it depends on the real-world choices and decisions that would have been made in the alternative reality. The amendment attempts to treat companies and individuals as though they were the same. It ignores the fact that companies are distinct entities with a distinct legal status, and it amounts to a one-way bet: unincorporated businesses could choose to be taxed on the same basis as a company without taking on the obligations that go with corporate status.
The amendment is also a convoluted way of trying to benefit small businesses, which I absolutely accept is the hon. Gentleman's intention. Small, unincorporated businesses already receive appropriate incentives; for example, special rules for start-up businesses allow them to carry back losses in the first year of business against any income earned in the previous year, and investment incentives such as enhanced capital allowances that are available to companies are also available to unincorporated businesses.
At present, the amendment is not a priority for the Government, and it would be costly. It is difficult to work out how costly it might be because the amendment does not stipulate how the retained profits of unincorporated businesses would be measured. I know that many hon. Members will understand much better than I that that is a task fraught with difficulties because the concept of retained profit is not meaningful for unincorporated businesses.
As the amendment stands, I have said to the hon. Gentleman, ''No, thank you.'' I am not attracted to it and, if it is pressed to a Division, I would ask my hon. Friends to oppose it. However, the hon. Gentleman raises, as other hon. Members have in debates on previous Finance Bills, the difficult balance between being incorporated and unincorporated, and whether the Government are trying to drive companies to be incorporated through the tax system. Since 1997 the Government's policy has been to attempt to allow companies that choice—to be incorporated or unincorporated—and to put support in place for those companies where we can. Of course, that is not perfect, and it is difficult to do that. However, it is right for every Finance Bill, and we have had this debate during proceedings on every Finance Bill that I remember. It is important to keep the debate about what any Government do to keep that balance, at the forefront of consideration.
Is the Paymaster General aware of the depth of feeling among sole traders and unincorporated businesses about the growing fiscal advantages that there appear to be to incorporation? It would appear that for a sole trader with profits of £42,000 in 1996-97, the fiscal advantage
of incorporation was about £1,400. In the 2003-04 tax year, it will be about £4,000. Many unincorporated businesses feel that the Government are trying to drive them towards incorporation. They do not wish to incur the additional costs of incorporation, but the tax regime is such that they feel almost obliged to do so because if they did not, they would be significantly worse off.
I am aware of the strength of feeling of some of those in the unincorporated sector about what they perceive as the advantages of incorporation, even though they do not choose that route for the structure of their businesses. All I can say to the hon. Gentleman is that the Government have looked carefully at that.
We seek to strike a balance as best we can in not driving businesses into a particular structure. The balance is not perfect. The decisions that businesses take, the access they have to different relief and their structure are very much choices for them. We are not deliberately driving people into incorporation: we recognise the differences. I understand and recognise the strong feelings that are held by some in the unincorporated sector. As the Minister concerned, I continue to look carefully at that, and at how the tax system works for the different company structures.
The Paymaster General has made much in discussing the clause, and clause 30, of the policy of fairness that the Government have in relation to corporation tax. How is that driving of the system towards fairness compatible with the concept that she referred to in her response to my hon. Friend the Member for Fareham (Mr. Hoban), that there should be choice for different businesses?
The hon. Gentleman has hit the nail right on the head. I have had conversations and debates with the hon. Member for Kingston and Surbiton (Mr. Davey) and with the right hon. Member for Fylde on simplification and complexity in the tax system. In considering ways to improve the design of the tax system, there is not one exclusive thing that we could do. The pursuit of fairness alone might undermine certainty. The pursuit of certainty alone might undermine choice and flexibility. There must be a balance between certainty and fairness for the taxpayer and for all other taxpayers, because we take collectively as a society the decision all to pay our fair amount in the collection of the revenue that pays for our public services.
We try to strike a balance between fairness, certainty and, where we can, simplicity, although simplicity is not always possible. We have anti-avoidance measures to try to ensure that people cannot circumvent the tax system. Of course, to return to the point made by the hon. Member for Cities of London and Westminster (Mr. Field), we are doing our best to balance the choices open to companies, depending on how they structure themselves. If the hon. Gentleman looks at the tax reforms that the Government have undertaken since 1997, he will see that we have been trying at all
points to take out of the system distortions that drive companies to take decisions based on tax rather than the decisions that they would otherwise take. I entirely agree that that is never perfect and not an exact science, but we have tried to allow companies to take decisions that will assist them, wherever possible. The Government also intervene on market failure. We are going for a broad-based, low-interventionist approach, but we intervene where there is market failure. Other clauses in the Bill are prime examples of that and we shall come to it later.
We have moved to a more academic discussion about how to balance all those underlying principles and deliver them in the broadest concept of fairness. That is the direction in which the Government are going, and each one of our reforms can be explained in those terms.
Several hon. Members rose—
Until the introduction of the stakeholder pension, the whole interaction between taxation and being incorporated or unincorporated left certain advantages to being unincorporated. The balance there was tilted that way, whereas other forms of taxation perhaps tilted it the other way. The coming of the stakeholder pension, with the ability, once incorporated, to take income by way of dividend and to use that to contribute to a stakeholder pension scheme for an owner and their spouse, has removed one of the obstacles to incorporation and made it more attractive.
Looking at that purely in a pragmatic context, my understanding is that the self-employed are virtually lining up on the streets with their auditors to become incorporated. The amendment may or may not be the perfect way of dealing with the issue, although I think that its objective is pretty clear, but if the issue is not dealt with, I think that we will see a massive and undesirable rush, such is the significant fiscal value of being incorporated, towards the incorporation of businesses that would be better left as sole traders. The impact on the revenue might not be the same as the impact of this measure, but it would go some way towards it.
Unless the Paymaster General has something to say on how the Government intend to address that matter, and the underlying fairness issue, we would like to press the amendment to a vote as a signal. The situation is not sustainable. We do not want 3 million sole traders becoming incorporated and clogging up the system.
I am grateful to you, Mr. Gale, for indicating that you will not allow a stand part debate, because I want to ask the Minister a question of fact, which relates partly to clause 32. The Red Book aggregates the cost of the measures in clauses 31 and 32. Table A.1 on page 154, item 5 under the heading, ''Supporting small businesses'' refers to:
''Corporation tax: reduce small companies' rate to 19 per cent and starting rate to 0 per cent'' and states that the cost will be £20 million in 2002-03, £265 million in 2003-04 and £450 million in 2004-05. The two polices have been grouped together in the estimates and for clarity of debate I want the Paymaster General to tell us what the cost is when those policies are separated so that we have the information when we vote on the separate measures.
I read about this specific point during the lunch break, but I cannot remember the answer to the question that I thought the hon. Gentleman might ask. Because of the complexity of the system, Mr. Gale, perhaps you will allow me to answer the question when we discuss the next clause, to which the question is also relevant. I do not want to avoid the question and do not think that I shall be allowed to.
Question put, That the amendment be made:—
The Committee divided: Ayes 9, Noes 14.