Clause 2

Finance Bill – in a Public Bill Committee at 4:30 pm on 8th May 2007.

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Charge and main rates for financial year 2008

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

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

We are determined to maintain the best possible environment for business in the UK. With unprecedented economic stability in the past decade, businesses have been able to plan and invest more effectively for the long term, which has brought a lot of benefit, as today’s high rates of employment underline.

Companies have also benefited from a highly competitive tax regime. Since 1997, the UK has led the way among its closest competitors in reducing corporate tax rates from 33 per cent. in 1997. The main rate fell to 31 per cent. in 1998, and to 30 per cent. in 1999. Those reductions have ensured that the corporation tax rate in the UK has been the lowest in the G7 throughout the last 10 years.

The combination of stability and a competitive tax environment has proved an immensely fruitful one for UK businesses. Members of the Committee may last week have seen press coverage of the latest research from the National Institute of Economic and Social Research on productivity in the UK, commenting on the recent acceleration in UK productivity growth. The paper by Mary O’Mahoney in last month’s National Institute Economic Review shows that

“the UK has managed to close the productivity gap significantly with the US, France and Germany”,

by contrast with

“poor performance in terms of productivity growth in the early 1990s”.

That improvement is a huge prize for the UK economy and reflects steadfast determination on the part of the Government to tackle the productivity gap, but other countries are changing, too. There are now new patterns of business activity and fresh challenges arising from globalisation, and the clause takes the next step to enhance the competitiveness of our business environment in the UK.

The clause cuts the headline rate of corporation tax again, enabling it to be charged for the financial year 2008-09 and cuts the main rate for that year from30 per cent. to 28 per cent. on non-North sea ring-fenced profits, leaving the rate for profits within the North sea ring fence unchanged. That will have a number of positive effects, which the Committee will readily acknowledge. It will boost the competitiveness of UK firms and encourage greater domestic investment on their part, it will make the UK an even more attractive location for foreign direct investment, and build on the success that we had last year, when we attracted more foreign direct investment than any other country.

The cut is accompanied by a series of reforms to wider business taxation, which will feature in later debates in the Committee. As a package, they represent the biggest set of reforms of the business tax system since the 1980s. The package modernises a rather outdated system of investment allowances for plant, machinery and buildings, and gives further support to innovative businesses by developing the R and D tax credit. With the cut in the main rate of corporationtax as its centrepiece, the package is pro-investment, pro-innovation and therefore pro-growth for the UK economy.

The clause identifies the main corporation tax rate for onshore activities separately from North sea ring-fenced activities. The North sea clearly is unique for both industry and Government; for a long time, it has had a separate tax regime, which is an arrangement that is common around the world. Our regime seeksto strike a balance between encouraging investmentand ensuring a fair return for the UK on itsnatural resources. In maintaining that balance, the Government have chosen to exempt the North sea from the main business tax changes in this year’s Budget, leaving the rates and the capital allowances regime unchanged.

North sea companies will continue to benefit from the special 100 per cent. capital allowances, which have encouraged recent high levels of investment. Some have argued on behalf of North sea businesses that they also should have benefited from the rate cut, but othershave wisely acknowledged that that would have been unrealistic given the current level of the oil price. Stability is also an important virtue in the industry, particularly with regard to capital allowances. The Bill does not include a system of capital allowances for companies within the North sea ring fence, as it does for other companies.

I hope that the Committee will welcome the cut in corporation tax and the accompanying package of reforms of business taxation. We want to maintain the best possible environment for businesses in the UK. At 28 per cent., the headline corporation tax rate will be lower than that of the US, Germany, France, Japan and all our other G7 competitors. The UK rate will be firmly established as the lowest of the major economies and will be below the average of the EU 15. I commend the clause to the Committee.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 4:45 pm, 8th May 2007

I welcome you to the chairmanship of the Committee, Mr. Gale. I look forward to serving under you during our scrutiny of the Bill.

It is perhaps appropriate to start our consideration of the Bill on a rare note of consensus. We supportthe move that the Government announced in the Budget in March to reduce to 28p the mainstream rate of corporation tax. It was not as ambitious as the proposal that was set out by my hon. Friend the shadow Chancellor to cut the rate by 3 per cent., but we congratulate the Government for making the change. It responds to the concerns that businesses had highlighted that the mainstream rate had become uncompetitive when compared with the rate in other major industrial countries.

Prior to the Budget, the UK’s corporation tax rate was about 1.4 per cent. above the Organisation for Economic Co-operation and Development average, having been 3.6 per cent. below it in 2000, so there had been a gradual deterioration in our rate in comparison with other major industrialised countries. In 2005, only 12 OECD countries had headline rates above that of the UK, compared with 20 in 2000. The Chief Secretary pointed out the cuts that had been made to the corporation tax rate prior to 2000, but no cuts were made subsequent to that date. Between 2000 and 2005, however, 25 of the 30 OECD countries cut their corporation tax rates, so we were lagging behind our industrial competitors in that respect.

It is worth reflecting for a moment on the impact that that had on the UK economy. A number of businesses chose to relocate their headquarters overseas. The Economic Secretary will know as well as I do the cases of Hiscox, Omega and Catlin in the insurance sector; they relocated from the UK to Bermuda for tax and regulatory reasons. When businesses undertook corporate transactions, it was interesting to see where they chose their domicile for tax purposes. So, when Experian de-merged from GUS, it decided to relocate its headquarters to Dublin, although it remained a UK-listed company.

Articles in The Sunday Telegraph have suggestedthat Colt Telecommunications, which moved to Luxembourg in the first half of last year, chose to do so for tax-related reasons. Also, according to an article in The Times, in the summer of last year, 40 major companies were said to be considering a move because of the uncompetitiveness of the UK tax regime. Indeed, the Government’s skills envoy, when he was director general of the CBI, said:

“A lot of our biggest businesses are now looking at whether they want to be domiciled here, because of the tax system.”

KPMG, in a submission to the independent Tax Reform Commission, said:

“It is not uncommon for groups to move unskilled and back-office activities overseas, but we are aware that some organisations are also actively considering moving white-collar jobs, and even the group holding location, for reasons which include tax considerations.”

There are complex reasons why companies seek to relocate overseas, but there tends to be a trend towards a low-tax jurisdiction. I am sure that Ministers have had the same discussions that my hon. Friends and I have had with major UK corporates and their advisers about the impact that high tax rates have on the choice of jurisdiction and on competitiveness.

We also have some quantitative analysis; it is not just anecdotal evidence that underpins the sense that the Government have allowed the tax competitiveness of the UK economy to deteriorate. In a recent survey,60 per cent. of businesses said that the UK tax system was having a negative impact on the UK’s international competitiveness, and only 10 per cent. of the businesses surveyed disagreed with that statement. So there is a consensus within business that the Government have allowed the tax system to get out of kilter with our competitors.

Of course, when a company chooses to relocate overseas, it is not just the corporation tax revenue that we lose, but other business taxes, such as VAT, employers’ national insurance contributions and rates on property that they occupy. Indeed, a report from PricewaterhouseCoopers estimated that, in 2004-05, FTSE 100 companies contributed £9.1 billion of corporation tax revenues and another £9.1 billion in other business taxes. So there is an important knock-on effect; where businesses locate in the UK, not only do they pay additional corporation tax, but they pay a significant amount in other corporate taxes, to the benefit of the Exchequer and the public services that are funded by these taxes. Of course, that analysis by PWC does not take into account PAYE, employees’ national insurance contributions and other such taxes.

This process is not just about companies leaving the UK because of uncompetitive mainstream corporation tax rates; it is also about inward investment going elsewhere. Google, Microsoft and Intel, among others, have chosen to set up significant operations in Dublin in Ireland as a consequence of the low tax rate there.

The Dutch Government are also mindful of the way in which lower corporation tax rates can act as a magnet to businesses, such that businesses will choose to go the Netherlands rather than locate to a high-tax economy. So they reduced their headline rate of corporation tax to 25.5 per cent. this year, to makethe Netherlands more attractive to international businesses. Part of the challenge that the Government  have responded to here is that, because other countries were reducing their corporation tax rate, it was making the UK unattractive to those businesses when they made decisions about where to locate. Perhaps the lower rate of corporation tax in the Netherlands is one reason why Barclays might move its headquarters to the Netherlands if its bid for ABN Amro is successful.

In a sense, therefore, what I am trying to set out is that the rate of mainstream corporation tax has an impact on business decisions more widely and we cannot look at those decisions in isolation. As a former Internal Revenue Service commissioner in the United States said:

“We cannot, absolutely cannot, hope to compete in a global economy by setting corporation taxes in isolation.”

That is an important factor to bear in mind, and it is why we support the move by the Government to reduce the mainstream rate of corporation tax.

I accept, however, that maintaining tax competitiveness is not simply about reducing the rate of corporation tax; it is about the complexity and stability of the tax code, too. By the time the Bill concludes its legislative process, the UK will have a longer tax code than India. Indeed, we shall have the longest tax code in the world, and that complexity will bring its own costs. I am sure that my hon. Friend the shadow Chief Secretary to the Treasury will be able to use that fact again later in our considerations, although I do not want to come to that yet. There are strong arguments for supporting the Government in their aim of reducing mainstream corporation tax. When the Government do the right thing, we are prepared to support them. That is the principle of an Opposition who take their duties seriously.

The Chief Secretary touched upon the other consequential changes to tax and capital allowances, which are being used to fund the reduction in the mainstream rate of corporation tax. We have some concerns about how the Government have sought to fund that reduction, so we shall explore those issues at some length when we reach the appropriate clause.

We are grateful that the Chancellor sought to respond so positively and enthusiastically to the representations that my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor, made just before the Budget and to the compelling case for simpler, lower corporation tax that was set out in a report by the independent Tax Reform Commission chaired by our noble Friend Lord Forsyth. It is good that the Government listened to and understood those arguments, and put them into practice, because they are to the benefit of all large businesses in the UK paying on profits of more than £1.5 million. That is why we support the Government in clause 2.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

I rise to speak to clause 2 largely from a business and economic perspective. The clause is certainly to be welcomed. In a competitive tax environment—to a certain degree, a global market in corporation tax, as it were—the United Kingdom needs to look at its corporation tax rates, particularly those for larger businesses, whose relocation would perhaps disproportionately affect their employees. I also welcome the recognition by the Government, and by the Chancellor in particular, that  tax competition does exist, that there is a market and that we are part of that market, whether we like it or not.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

Does my hon. Friend share my concern that it is those very businesses, such as Google, which are growing fastest and creating jobs, that are seeking to flee this country and set up in the Republic of Ireland and elsewhere, notwithstanding the moves by the Government and the Chancellor in the Budget? Ultimately, that will cost jobs in this country, particularly in the high-tech sector.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

I do not disagree with my hon. Friend’s comments. It is not only Google that has been affected—we have heard about Hiscox and many other organisations. It is particularly those cutting-edge organisations in high technology or information services—organisations that can relocate almost at the drop of a hat—that would have been threatened if something had not been done to the corporationtax rate.

What I particularly welcome is that someone whom one might argue is a socialist Chancellor has clearly and unambiguously embraced the concept of markets. I have several concerns, however. There is no doubt that business is the engine of the economy. It generates all the jobs, all the taxes, all the income and all the livelihoods for everyone in Britain, and that includes Government employees and the voluntary sector. Without small and medium-sized enterprises and large businesses, there would be no jobs, no salaries and no incomes at all to support any of the good things that we want in society. I therefore welcome the reduction, but it raises many questions.

First, why is the reduction being introduced in the tax year 2008? We can see from clause 3 and many other clauses of the Bill—without straying into them now—that many of the other tax increases have been introduced in 2007, with immediate effect. So the question has to be answered: why 2008? Why are we waiting for a year to introduce the reduction in corporation tax?

A second question also needs to be answered. Clearly, by reducing corporation tax overall, we are reducing the Treasury’s tax take in the short and medium term. On the other hand, again without straying into clause 3, small business taxation is being increased. The question is: how does the Treasury estimate that the tax reduction—what is recovered in corporation tax—will compare with the tax increase on small and medium-sized enterprises? I have said that business is the engine of the economy. I would argue that the faster revving engine—the faster growingarea of the economy—is small and medium-sized businesses, so why has the Chancellor chosen to increase taxation on small and medium-sized enterprises, thereby dampening that engine, and reduce taxation on corporate enterprises? It is important that we have an answer to that, given that small and medium-sized enterprises have been encouraged to change mode over the past several years.

Another concern arises because, having scanned through the publications and documentation behind the Bill, I have not yet managed to spot a figure for the number of organisations that will be affected by the corporation tax change. Again, I should be much obliged if the Chief Secretary would make it clearhow many businesses—and, therefore, how many employees—will be affected by the changes. If the Treasury has embraced the notion that there is tax competition, why 28 per cent.? Why not 27 or 26 per cent.? Again, perhaps the right hon. Gentleman will explain the reasoning behind the choice of 28 per cent. rather than another figure. [Interruption.]

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 5:00 pm, 8th May 2007

I appreciate my hon. Friend’s indulgence in giving way. I heard the Economic Secretary muttering under his breath from a sedentary position, “How are we going to pay for it?” If he understands the Laffer curve and looks at the example of the Republic of Ireland, he will see that tax competition and the lowering of corporation tax have increased the revenues that the Exchequer has managed to collect in Ireland.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

The Laffer curve is a fascinating curve; it is not to be laughed at. However, there is a slight problem with it in that there is a delay between the reduction in a tax rate and the eventual increase in the tax take. Therefore, there is an issue about the timing of the introduction of tax reductions. Certainly there is little controversy about the fact that the Laffer curve brings about a more vibrant economy and a better environment for business in the long term. It increases the tax take in the longer term because there is more enterprise, and more profit is generated in the economy.

I have a background question that is conceptual rather than ideological. What sort of tax system is the Bill trying to create? We originally had the classic systemcompany profits were taxed and dividends were not. Now it seems that we are halfway between an imputational tax system and the classic system. Can the Chief Secretary explain towards which tax system clause 2 is taking us? Are we looking for an amalgam—a fudge in the middle—heading back towards the classic system, or just dilly-dallying before moving back to the imputational system? What is the general direction of the change? Perhaps he could explain on which model this particular corporation tax reduction is based.

There is no doubt that all parties welcome the reduction in corporation tax on large businesses. We can argue about the levels and the timing, but there is no question that the reduction is to be welcomed. Personally, I welcome it because it demonstrates a shift in the mentality of the Government and shows that they recognise that markets, international markets and competition, particularly in relation to taxation, are important. Government should not try to control the levels of profit as it is for the Government to remove the obstacles to wealth creation and to ensure that Britain is a vibrant place with which to trade and do business. On balance, the changes are welcome, but I would like a few answers to the key questions: how many businesses are affected; what level of revenue change is expected; and what direction are we taking in clause 2?

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I will not challenge such an early consensus in the proceedings on this year’s Finance Bill. The Liberal Democrats and other organisations welcome the headline cut in the main rate of corporation tax from 30 to 28 per cent. starting at the beginning of the next financial year.

I have two questions to which I hope the Minister will respond. First, why will ring-fenced profits forthe first time be separated off from other profitsand charged at a different rate of corporation tax? Secondly, will he confirm whether, because of the other changes to capital allowances, the tax changes in the clause will move the tax burden around rather than cut it overall? Has he assessed who the winners and losers of the tax changes will be in terms of types and sizes of company? There has not been an overall net reduction in the tax burden for many businesses because the headline cut will be offset by changes to the capital allowance system elsewhere.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I begin by drawing hon. Members’ attention to my entry in the Register of Members’ Interests. I am a company director, but not of a large company, and that is what the clause relates to.

In paying attention to the detail of the Bill, I picked up the explanatory notes as soon as I heard the Chancellor’s speech because I was interested to hear that he was cutting the corporation tax rate, which is always a good thing. In the summary, the explanatory notes state:

“This clause charges corporation tax for the financial year”.

I was then hoping to read “2007”, but it states:

“for the financial year beginning 1 April 2008”,

which I thought was fair enough; the Chancellor was putting things off for a year to give people time to sort things out. However, on clause 3, which relates to small companies, the explanatory notes state:

“This clause sets the small companies’ rate of corporation tax for the financial year beginning 1 April 2007”.

I wondered why the Chancellor was so keen to halt the reduction in tax rates by one year for big companies, but was in a rush to increase it for small companies. I then looked at the Red Book and onpage 281, table C8, it states that the estimated receiptsare due to go up by £5 billion, from £44.9 billion to£50 billion. Is the real reason for the delay in reducing the main rate to avoid forgoing the increase of£5 billion from £44.9 billion to £50 billion? My first question concerns timing. Why was there a difference in timing? Was it to do with the extra £5 billion that the Government are seeking to grab from companies?

My second question has to do more with the point that I raised with my hon. Friend the Member for Windsor. What are the projections for 2008? We did not see much about that. Has the Treasury has conducted a study of the Laffer curve effect of the dropping rate of taxation and the anticipated receipts that will result? Is there a sensitivity analysis? The Economic Secretary, who has similar economic training to me, has no doubt spent many hours burning the midnight oil and carrying out a sensitivity analysis, as I would in his position.

As a great believer in and proponent of the Laffer curve, I suggest that the Economic Secretary considers the real-life example of the Republic of Ireland. The  more that that country reduces the tax rate for companies, the more tax revenues it collects. That is an interesting conundrum, which the left traditionallyhas a hard time grasping. However, the Economic Secretary is an intelligent man and he looks for evidence-based examples. If he has considered Ireland, it would be interesting to know what sensitivity analysis he has done. As my hon. Friend asked: why did the Government chose the 28 per cent. rate? If they dropped it to 26 per cent., would they collect more tax revenues?

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

The hon. Gentleman will know from his economic studies that the original Laffer curve was drawn up to advise Ronald Reagan on his approach to taxation and budget matters. What lessons did the hon. Gentleman draw from Ronald Reagan’s experience with budget policy making?

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

The good thing is that for at leastthe next three years—or perhaps two—we in the Opposition ask the questions. In two or three years’ time, the Economic Secretary might have the opportunity to ask me such questions. However, my example, which is a recent one and not from ancient history—from Ronald Reagan’s time, when the Economic Secretary and I were both students—is the real-life example of the Republic of Ireland.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

May I suggest that when the hon. Gentleman talks about real-life examples, he considers what the distinguished Canadian economist and Nobel laureate, John Kenneth Galbraith, said about Reagan’s trickle-down theory, which is closely connected to what he is talking about? To put it graphically, Galbraith saidthat the trickle-down theory was about as effective as feeding horses oats in the hope that birds wouldeat more.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

As always, I appreciate the hon. Gentleman’s intervention. John Kenneth Galbraith, of whom I was a student, was someone I greatly admired. He took some of the Friedmanite bite from my intellectual approach to economics and softened the edges. That was an interesting quote, but it had no relevance whatsoever to the Laffer curve and my point about the Republic of Ireland.

My final point is about Britain and where it stands relative to the rest of Europe—or, indeed, the rest of the world—on tax competition. Notwithstanding the good move that the Government have made in trying to reduce corporation tax, which I would not want to criticise, I do criticise the depth to which they seek to cut it.

How do we sit in respect of corporation tax competition when we consider the broader world, our partners in Europe and, more importantly, what is going on in the world? How do we sit not only on tax competition but on the point made by my hon. Friend the Member for Fareham about the complexity of our tax system, which seems to be getting more and more  intricate? There is a study called the “Burdens Barometer” which I watch avidly as the complexity and cost seem to increase year after year. I notice that the revenue projected from tax receipts in the Red Book is expected to rise to £50 billion next year. It is interesting that this very figure is mirrored by the £50 billion of additional cost to business caused by Government over-regulation.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury) 5:15 pm, 8th May 2007

There are strong arguments for cutting corporation tax. I am delighted to hear the Chief Secretary pitch this cut as an attempt to increase economic growth. That is something that we tend to call for in Scotland. In the25 years since 1980, we have seen a 1.8 per cent. growth in Scotland as opposed to 2.3 per cent. in the UK as a whole and an average increase of 1.3 per cent. in a small European country. Our worst position in the past 10 years was a large gap of 2 per cent. in Scotland, around 2.8 cent. in the UK and approaching an average of 4 per cent. for the small European country. The cut in corporation tax is an essential driver of economic growth. It provides one of the bases of business and national competitiveness.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

The Chief Secretary said that this cut would be pro-investment, pro-innovation and pro-growth for large businesses. Does the hon. Gentleman have any idea why that same principle does not apply to small and medium-sized businesses, which it appears is where the money is coming from?

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

I have no idea what goes through the minds of Treasury Ministers, but I think I agree in principle that small businesses provide the essential driver of local economies. All it takes is one verysmall business to become a Microsoft and the whole economy benefits. The hon. Gentleman is right in principle, but it is up to the Treasury team to tell us how they have reached their conclusions.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

The hon. Gentleman makes an excellent point. Is it not ironic that while the Government are reducing tax rates for big businesses, they are trying to increase it for small businesses and therefore reducing the incentives for those very businesses that should be the drivers of our economy?

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

I think it is more paradoxical than ironic. It is also the wrong thing to do, particularly when there are other pressures on small businesses, not least the pressure of local business rates, which in many local economies remain a massive burden, taking a far larger share of turnover and profit than they should, certainly compared with large stores or large businesses in and around cities.

While welcoming the tax cuts, the Chief Secretary said that this was part of the biggest ever set of reforms in tax and allowances. He is absolutely correct. My worry is that however welcome this modest cut is—it could be more ambitious—the £3.7 billion that will be taken in 2008-09 and 2009-10 from the change to plant and machinery capital allowances alone outweighs the £3.6 billion that will be given back to businesses in the reduction in corporation tax yields.

I welcome the fact that the Government have recognised at last that tax competition is important. I am concerned that the overall package, which sees more yield coming in from one change to allowances than is given back in the tax cut, may not deliver its objectives, and as part of the overall change intax and allowance reform, particularly for small businesses—we have heard concerns about that—I may allow us not to see the competitiveness and the increase in economic growth that I am sure the Chief Secretary wants; we certainly want it for Scotland.

The performance of the cut will be measured carefully over the next year or two, but I suspect that if we are going to be serious about using the taxation system, particularly the corporation tax system, to drive business competitiveness, to stop companies leaving the UK and to make them competitive without putting downward pressure on wages, the Government will have to be far more ambitious in the changes that they make to the tax.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

May I say what a pleasure it is to serve under your chairmanship, Mr. Gale? May I also apologise to the Chief Secretary for missing his opening remarks because I was otherwise engaged?

There is undoubtedly a consensus in the Committee that in 1997 the UK was in a very strong positionin respect of business tax rates. Over the following10 years, that competitive advantage has been eroded, not because business tax rates have gone up, but because many of our competitors in the rest of the world have cut business tax rates substantially. Our corporation tax rates are by no means exceptionally low; indeed, they are higher than many others.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

My hon. Friend refers to the fact that overall corporation tax rates have not gone up. He will be aware that other types of taxation on business have increased significantly.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

My hon. Friend makes a valuable point, which I was about to raise. Corporation tax ratesare only one of the range of taxes that businessesface. Some research suggests that corporation tax constitutes at most 50 per cent. of the taxes that businesses pay.

The logic of the change announced in the Budget and implemented in the Finance Bill is to reduce the rate, but it does not reduce the burden. That is not a criticism, because there is something to be said for reducing the headline rate regardless of reducing the burden. Will the Chief Secretary confirm that an objective of Government policy is to reduce the rate itself, almost regardless of the burden, and that it is worth while achieving that in any event? Does he agree that a reduction in the burden is also important, and that that has not been achieved in this announcement?

I think we all acknowledge that businesses are mobile. The chance of businesses moving to a country, or a jurisdiction, that has a lower rate of taxation has increased in the past 10 years as the world has become more global, as shown in the good examples given by my hon. Friend the Member for Fareham. First, does the Chief Secretary accept that that argument might  apply to other types of taxation. I am thinking in particular of research published recently by the Institute for Fiscal Studies showing that income tax can also be competitive and can cause businesses and people to move from one jurisdiction to another. Secondly, if he accepts that argument for corporation tax—that mobility exists in a globalised world—would it also apply to other taxes, such as income tax?

Thirdly, the proposal appears to simplify corporation tax. Do the Government recognise that simplification of the tax system itself is a worthwhile objective? Fourthly, if they do recognise that that is a good thing, how does the Chief Secretary assess the Government’s success or otherwise in making the tax system simpler?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

There has been an interesting exchange on the clause. The hon. Member for Fareham started very well by congratulating the Government. I hope we will hear more of that as the Committee goes through its work. However, his contribution deteriorated after that, when he gave us an unduly gloomy account of what has happened in the British economy of late.

I remind him of what I said in my opening remarks: there was more foreign direct investment into the UK last year than to any other country on the planet, which reflects the point that companies can more readily choose to locate almost anywhere in the world. The UK continues to be a very big gainer from that development. We must ensure that that continues, and it is important that we maintain a competitive tax regime. As I said, we have had the lowest headline rate of corporation tax in the G7 throughout the past decade. The change ensures that that position is maintained, but we must be competitive in other respects, too.

Photo of Philip Dunne Philip Dunne Conservative, Ludlow

Will the Chief Secretary clarify what proportion of the statistic that he just quoted on the record level of inward investment was accounted for by a single transaction in the reorganisation of Shell?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Quite a substantial proportion, so it is instructive to look at the figures when the transaction is removed. I do not think that it should be, but if it is, the UK is second in the world, with £91 billion of inward investment. The US is in first place with £99 billion. The UK’s achievement on foreign direct investmentlast year was pretty extraordinary, reflecting thestrong competitiveness of its tax system and every other aspect of its business environment.

The hon. Member for Fareham made some remarks about complexity in the UK, of which we will no doubt hear more. I remind him that the tax law rewrite project is successfully simplifying tax legislation with all-party support. However, implementing the changes that arise from it will require legislation.

The hon. Member for Falmouth and Camborne and one or two others asked me what we thought would be the package’s economic impact. We have modelled its impact on the marginal cost of capital and on effective tax rates for a variety of investments. As I have said, the indication is that the package will increase the trend rate of investment.

The hon. Member for South-West Hertfordshire asked whether I agreed that having a low headline rate of corporation was a good thing in itself. The evidence suggests that the answer is yes. A lower corporation tax headline rate attracts foreign direct investment, which is one reason why the provisions are important. One would need to look at separate evidence for other headline rates, but there is no doubt in my mind andin the Government’s mind that tax competition is a reality.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

What dynamic forecasting does the Treasury undertake to assess the impact of reducing the headline rate on inward and other forms of investment?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

As the hon. Gentleman well knows, we have a well-developed model that is accessible to others. We have carefully modelled the impact of the proposed change on that basis and, to pick up another point that was made from the Opposition Benches, our modelling shows clearly that although the Bill will not change the overall burden of taxation—the amount taken from large companies—over the next few years, the overall impact will be an increase in the trend rate of investment.

The hon. Member for Falmouth and Camborne asked about the differential arrangement that we are introducing for the North sea, and it is not currently possible to make even a partly compelling case for reducing the level of taxation on the oil industry. Medium-term oil price predictions remain high, companies continue to generate very high returns on capital employed pre- and post-tax, and we recognise the importance of stability for the industry. It would not be appropriate to change the levels of taxation imposed on the North sea at the current time. I expect the very high recent investment in the North sea to be maintained.

The hon. Members for Windsor and for Braintree asked why the Bill gives a year’s notice of the change. The answer is that large companies pay their corporation tax in quarterly instalments, often in advance, throughout the year. Therefore, we need to set the main corporation tax rate a year in advance to give large companies certainty about their affairs.

The hon. Member for Windsor also asked how many companies would be affected. Some 41,000 large companies will pay corporation tax at a lower main rate as a result of the change. The hon. Member for Braintree asked where we stand compared with others. I can confirm that our corporation tax rate will again be the lowest in the G7, as it has been throughout the past decade. It will also be lower than the EU 15 average. After the change, that will be just over 28 per cent., so we will come in just under it. A wide range of studies shows that, on all sorts of bases, the UK continues to have a competitive tax and regulatory regime for business. This change will help to ensure that that continues to be the case.

I am glad that the Committee has warmly welcomed the clause.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 5:30 pm, 8th May 2007

I appreciate the Chief Secretary’s answer on the timing issue, but I am curious to know whether he—or the Economic Secretary or the Treasury—considered the Irish example of lowering corporation tax by 1 per cent., 2 per cent. or 3 per cent. Has he done any sensitivity analysis on the Laffer curve about the collection of tax revenues to see whether lowering the rate would enable the Treasury to collect more taxes? I am trying to help the Treasury out; it clearly wants to collect tax revenues.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

If corporation tax were reduced by a further percentage point, that would reduce the yield to the Treasury by £1.5 billion. It is incumbent on those who argue for such a change to explain what the source of that £1.5 billion would be, because the reduction would happen immediately. It could be resolved by a reduction in spending of the same amount, or an increase in taxation elsewhere.

Photo of Wayne David Wayne David Labour, Caerphilly

Conservative Members frequently quote the example of the economic growth in the Republic of Ireland. Certainly, the reduction in corporation tax has been a factor there. However, is it not the case that there have been other factors, not least the significant sums of money that have been received from the European Union, which have been used very effectively? We all know the attitude of Opposition Members towards the European Union.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

My hon. Friend is right. The Irish economy has enjoyed a good deal of success over the past few years. The corporation tax regime has contributed to that, but there have been a number of other factors, not least investment in education. Ireland has been very strong in that regard, and we need to learn from that.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I want to come back to the Chief Secretary’s estimate of the cost of a further 1p reduction in corporation tax. He said in answer to an earlier intervention of mine that, according to the Treasury’s model, the reduction in this Budget would lead to an increase in investment. Does his estimate of the £1.5 billion cost of that 1p reduction in the corporation tax rate include the offsetting effect of the increase in investments?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

No. That is the straight reduction in yield to the Treasury following the change. The offsetting reduction that the hon. Gentleman describes would take some time to accrue. In many ways, I am surprised that there is no amendment seeking to reduce the rate further, given the proposals made by the shadow Chancellor. I do not know what was in the minds of Opposition Members to cause them not to table such an amendment. However, had one been tabled, it would have been necessary to explain where the extra £1.5 billion would come from.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

No, I ought to conclude now. I have tried the patience of the Committee for long enough. I am pleased that the clause has been so widely supported, and I commend it to the Committee.