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

Part of Finance Bill – in a Public Bill Committee at 3:39 pm on 16th May 2002.

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Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury) 3:39 pm, 16th May 2002

Before we broke, I was saying that I was concerned that the Government's estimate of the cost of the measure was an underestimate. I was using an analysis prepared by the Institute for Fiscal Studies to back up my case. The institute had established that 1.2 million self-employed people stood to gain in excess of £500 a year if they incorporated following this measure. One might ask why it chose that figure. My guess is that it decided that that was a large enough gain to act as an incentive, in conjunction with the other incentives in the system. I am told that it is possible to incorporate at around £100, although I am not suggesting that everyone can incorporate at that low figure. Many other considerations are involved in such a move, as we discussed in the previous debate, not least the hassle and time of going through the process, but they are one-off costs. The clause relates to a one-off gain—a permanent gain in the tax system. Therefore, if anything, the IFS was fairly conservative in its choice of 1.2 million self-employed who might be attracted by the measure.

The IFS tries to calculate the cost if 50 per cent. of the 1.2 million self-employed were to incorporate following the passing of the Bill. It estimates that the cost would be £1.2 billion, compared with the highest possible figure from the Government so far of £450 million. The institute also produces other costs estimates. If 75 per cent. of the 1.2 million self-employed who stand to gain more than £500 a year were to incorporate, the cost would be £1.9 billion; and if everyone in this community of 1.2 million self-employed were to incorporate, the cost would be £2.5 billion. That is the IFS estimate.

I am sure that the Paymaster General will agree that the Institute for Fiscal Studies is an independent and much esteemed body, which provides a great deal of useful research for our debates in this place. She may tell the Committee that its figures are incorrect and that it has got it completely wrong or that it has made a mistake in its methodology.