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

Part of Finance Bill – in a Public Bill Committee at 3:45 pm on 16th May 2002.

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Photo of Michael Jack Michael Jack Conservative, Fylde 3:45 pm, 16th May 2002

The hon. Gentleman made some of the points that I wanted to make because he and I read the same briefing from the Institute for Fiscal Studies. Therefore, I will not go over the points again, but I am intrigued, as he was, by the reason for that. There is no indication in the explanatory notes as to what the economic result is supposed to be—whether the amount is a small expenditure, as witnessed by the Red Book, or the much larger numbers to which the hon. Gentleman has rightly drawn the Committee's attention. The example that the Government use in the explanatory notes shows a company saving £875, which is the equivalent of £74 a month. Anyone would rather have than not have an extra £74 a month, but what would they actually do with it? I do not intend to give a detailed exposition of that.

My first thought was that the measure was a sop to small and medium-sized companies for the extra burden that they will bear in national insurance charges. Obviously, for companies that are low on profitability but high on employability, it would be a drop in the ocean. I then wondered whether it had something to do with investment. The Paymaster General could have encouraged investment in the small and medium-sized sector in many different ways. It begs the question, why this way?

As the hon. Member for Kingston and Surbiton said, there is a friction between incorporation and unincorporation. He gave the example of a person on £15,000 who did not choose the incorporation rate having to pay £3,827. I noted the body language of the Paymaster General at that point. She was almost ready to explode with disagreement. If she disagrees with that calculation, I look forward to her demonstration of why the IFS figures are incorrect.

The Paymaster General used a very interesting term—''targeted help''—in her remarks on the previous clause. I wondered why she felt that the

companies at the lower end of profitability—the companies that would benefit from the measure—all needed help. One of the guiding principles of Government expenditure is to avoid a deadweight cost, if possible. I suspect that there is a lot of deadweight cost in the measure. Many companies might have been glad of some form of assistance, but through another route.

For example, in justifying their approach on oil taxation, the Government told us that they had enhanced first-year allowances for new North sea fields facing an additional 10 per cent. levy on corporation tax. The 100 per cent. write-off in year one was the key to inducing further investment and, by the magic of arithmetic, the Government tried to demonstrate to the Committee of the whole House that in some way companies would be better off. If that is a better way, why not visit that sum of money on enhanced allowances, for example? We do not have before us any form of compare-and-contrast analysis that would allow Parliament to decide whether the money is being used in the best way. The Government have decided on tinkering, to a certain extent. Someone with profit of £10,000 would get back £1,000 in monetary value.

What is the economic effect of using money in an across-the-board way as opposed to a more targeted relief, which the Paymaster General clearly favours? I should be grateful if she would give us some economic and business rationale and possibly agree to place in the Library the analysis—the Paymaster General looks pained.