Clause 32 - Corporation tax starting rate and fraction for financial year 2002

Part of Finance Bill – in a Public Bill Committee at 4:00 pm on 16th May 2002.

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Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:00 pm, 16th May 2002

Thank you so much, Mr. Gale. I do not want to go down Ted's route at all, thank you.

The clause provides for the starting rate of corporation tax from 1 April 2002 to be zero. About 150,000 small companies, and other corporation tax payers that have taxable profits of less than £10,000, will therefore pay no corporation tax. When the starting rate first took effect two years ago it was set at 10 per cent.-- the lowest rate for small companies in the European Union, and indeed among all major industrialised countries. About 250,000 small businesses—around 60 per cent. of all corporation tax payers—benefited from the starting rate directly or indirectly through the marginal rate.

In his Budget statement, my right hon. Friend the Chancellor went further, saying that he wanted to send out the strongest signal about the importance that the Government attach to small businesses and the creation of wealth. The measure recognises that businesses growing beyond a certain size will often be companies. We believe that cutting corporation tax is an effective way of targeting support at small and growing businesses. It also encourages would-be entrepreneurs to set up new companies.

If we consider the Budget as a whole, in terms of where the Government are intervening to assist business, we see that there is a total package of measures assisting business worth about £1.6 billion. It goes from the research and development tax credit, to the cut in the small corporate tax rate from 10p to zero, to the reduction of administrative burdens on VAT and the introduction of the community investment tax credit. Each of those interventions will specifically help a part of the economy.

The hon. Member for Kingston and Surbiton asked about the figures in the Red Book. It is not possible to disaggregate the costs of the two cuts—I shall come on to the Institute for Fiscal Studies—because the 160,000 companies paying at the marginal rate will benefit from both the issues. The costings given in the ''Financial Statement and Budget Report'' take account of anticipated behavioural effects of some self-employed people converting their businesses into companies to take advantage of the zero and the 19 per cent. rates. That is in the calculations and explained in the FSBR.

The next set of issues concern the estimates. As a result of the zero rate, 150 companies will pay no corporate tax and a further 160 companies will pay less corporation tax. The estimated impact also takes into account likely significant or quantifiable effects on behaviour. The estimates have been made on the basis of the likely shift, but the economic rationale is clear. The measure is a targeted reduction in tax to help small and new companies thrive and grow. A great deal of activity has taken place to reform that area for entrepreneurs and growing companies.

Turning to briefing note No. 24 from the Institute for Fiscal Studies, I shall start by saying that it is an illustrious body, although why people should consider it to be more able than the full might of Her Majesty's Treasury has always puzzled me. It does a lot of very interesting work and puts out a lot of figures. Sometimes its figures are nearly right and sometimes they are spectacularly wrong. It puts out those figures in order to engender debates and tease out choices that are being made. When we introduced the working families tax credit, it published spectacularly large estimates of how much the child care tax element would cost. It was unbelievable how off beam those estimates were, and the Treasury was right.

An Opposition Member said that neither the IFS nor the Treasury always gets it right, which is true. We do our best to make forecasts on difficult issues. Let us examine how the IFS reached its £2.5 billion figure. It assumed that every single unincorporated business would move, given a theoretical gain of £500. That has

not happened, and we can question whether it will happen and whether we should expect it to happen. The IFS certainly has a different way of approaching behavioural impact analysis and, therefore, forecasting.

Some 78 per cent. of businesses—nearly 3 million of them—are unincorporated, despite the fact that there are already theoretical tax benefits for incorporating that would demonstrate to those companies that they could be better off. There is no shortage of tax advisers seeking to earn a fee from advising companies that that is the best way forward, but we have still not seen that change. The Government stand by their estimate in the Red Book of costs rising to £450 million.

Let me return to the point made by the right hon. Member for Fylde. The estimate is based on careful modelling of the impact of the measure that reflects the facts of real business behaviour, rather than dubious assumptions or sweeping decisions. As he knows, I cannot disclose the details of such modelling in the House of Commons. When he was a Minister the situation was the same, and analysis and calculations were not always revealed.