With this it will be convenient to discuss the following: amendment 32, in schedule 6, page 90, line 46, leave out £50,000 and insert £100,000.
Amendment 37, in schedule 6, page 91, line 27, leave out 24 November and insert 31 December.
Amendment 33, in schedule 6, page 91, line 31, leave out £50,000 and insert £100,000.
Amendment 28, in schedule 6, page 91, line 32, leave out 24 November 2009 and insert 31 December 2010.
Amendment 34, in schedule 6, page 91, line 33, leave out £50,000 and insert £100,000.
Amendment 29, in schedule 6, page 91, line 34, leave out 24 November and insert 31 December.
Amendment 30, in schedule 6, page 91, line 37, at end insert
(3A) The limits referred to in subsubparagraphs 3(a) and (b) shall not apply to the accounting period immediately preceding the relevant accounting period in which the trading loss arose..
Amendment 36, in schedule 6, page 91, line 38, leave out subsections (4) and (5).
Amendment 35, in schedule 6, page 91, line 41, leave out £50,000 and insert £100,000.
It is a pleasure to serve under your chairmanship, Mr. Atkinson. Having spoken in the opening minutes of the first sitting, I shall now, in the sixth sitting, make some more substantive remarksat least I hope that they will be more substantive than what I said previously.
It might help the Committee if I give some background to the schedule before discussing in detail the amendments, which are probably not comprehensible without an explanation. Clause 23 and schedule 6 provide a temporary extension for carrying back trade losses for income tax and corporation tax. The provisions were originally announced in the pre-Budget report in 2008. They will enable both incorporated and unincorporated businesses to carry back their losses for three years.
The assumption is that, in the current economic conditions, a number of businesses would make losses. They are currently allowed to carry back their losses for one year, and they then carry their losses forward. Extending the carry-back by a further two years will give businesses a cash-flow advantage by reducing their tax bills for previous years. In effect, a business that expects to be profitable in future can utilise its loss relief now, rather than when it returns to profit, in a way that will generate further cash-flow advantages. The Budget changed the temporary extension from one year to two so that a company that makes a loss in 2008-09 or 2009-10 can claim tax relief for its loss. The losses that can be carried back have been capped at £50,000 a year, and amendments 31 to 35 would increase that limit to £100,000. I shall say a little more about that in a moment.
My understandingI will be grateful if the Minister confirms thisis that the rules mean that the taxpayer will get the benefit at the highest rate of tax that they pay. Someone who runs an incorporated business and pays tax at 40 per cent. will receive a benefit of up to £20,000, whereas as a business paying a combination of the starting rate or the basic rate of tax in previous years would receive a significantly lower sum. A company paying tax at the main rate would receive a maximum benefit of £14,000, while a company paying tax at the small company rate would receive less. The relief seems to provide more help to businesses who pay higher rates of tax; effectively, it provides a subsidy to businesses that are making a loss.
As I said earlier, the scheme announced in the pre-Budget report allowed only one year of losses to be carried back. However, a number of representations were made prior to the Budget, and the Institute of Chartered Accountants suggested that two years losses should be available for carry-back. The Government obviously listened, but a significant cost is attached to that change.
The total cost of the measures announced in the pre-Budget report and the Budget is £475 million, which is £180 million for the relief announced in the pre-Budget report 2008 and a further £295 million for the measures announced in the Budget. In the next clause we will consider the temporary increase in first-year allowancesfrom 20 per cent. to 40 per cent. Will the Minister give us a flavour of the Governments thinking about how they decided to split their finite pot of money for helping businesses between the loss relief provisions we have been debating and the first-year allowance provisions that we will debate under the next clause? Will he also clarify just how the Government came to their estimates of the costs of the measure?
Many people looking at this matter will think that perhaps, given the current economic climate, many businesses will be making losses and those losses will be available for carry-back. However, when I looked at the regulatory impact assessment that supports the measure, it surprised me that the Government had estimated that only 1 per cent. of incorporated taxpayers and 2 per cent. of companies would benefit from the proposal. That seems at odds with peoples assumption about where the economy is heading, given the scale and projected length of the downturn. It seems rather surprising that the proportion of businesses that the Government expect to benefit is particularly low. If that is a forecasting estimatethe Treasury is good at getting its forecasts wrongthe cost to taxpayers could be significant. If the figures are out by a factor of three, we are talking about a cost to the Exchequer of £1.5 billion, rather than £500 million. What comfort can the Minister give us about the cost of the measure, and how certain is he that the cost estimates in the Red Book are correct?
I have tabled three sets of amendments to this schedule. The first are very much probing amendments that would increase the threshold of losses from £50,000 to £100,000. I am trying to understand why the threshold was set at £50,000 rather than £100,000, or a lower amount. Clearly, this is a matter of changing the timings for businesses getting relief for losses made. There is a cash cost from increasing the threshold from £50,000 to £100,000, but over the lifetime of a business, there should be no total tax loss to the Exchequer. Will the Minister explain why the Government chose to set the limit at £50,000?
The second set of amendmentsamendments 28, 29 and 37tries to tidy up some of the drafting in the schedule. The dates that are used in the schedule are based on the date of the pre-Budget report in November 2008, so we have an odd accounting period, ending on say 23 November 2010. This set of amendments would move the accounting date to coincide with the more normal year end for businesses: 31 December 2010.
Hon. Members might ask whether that means that we are likely to increase the level of loss available for relief against profits in previous years, but again, because of the way the schedule is drafted, there is a cap of £50,000. I do not believe that that would increase the amount of losses that taxpayers would be able to relieve by virtue of the schedule. It would just tidy up the accounting dates and make tax compliance easier, from the perspective of businesses, meaning that they could look at their losses for an entire year rather than for parts of the year.
Amendment 30 addresses any confusion that there might be about how the cap will operate. Paragraph 3(3) sets out £50,000 as the limit for losses carried back for periods between 23 November 2008 and 24 November 2009, and the same limit for losses carried back for periods between 23 November 2009 and 24 November 2010. I assume that that is intended to mean that, no matter how many accounting periods end after 23 November 2008 and before 24 November 2009, the maximum extended carry-back total is still £50,000. If that is the correct interpretation, paragraph 3(4) is redundant, because it sets out rules for cases in which losses are made under a shorter accounting period and the carry-back is then in proportion to £50,000 at an annualised rate. If losses are capped strictly at £50,000, we do not need paragraph 3(4), hence my amendment to remove it. If the intention of paragraph 3(3) is not to cap the amount at £50,000 in a 12-month period, the provisions need to be redrafted.
I have a couple of final points. The Institute of Chartered Accountants has done rather well in arguing its case for a second year of losses and has decided to push the Ministers patience a bit more by asking the Government, given the continued economic uncertainty, to make it clear that there is still a window open for a review, perhaps next year, if the economy has not improved, if the Chancellors ambitious and optimistic growth forecasts have not been realised and if the recession goes on for longer than expected. It has asked whether the Government could look at a further year or more of carry-back, and I would be grateful for the Ministers comments on that.
My hon. Friend is giving a powerful speech on a technically challenging area. I declare an interest, both as a director of an incorporated business and a partner in an unincorporated business. The unincorporated business, interestingly enough, has a year end of 30 April, and unincorporated businesses with that year end will find on 30 April 2010 that they will be unable to use the relief because it will finish with the end of the tax year a few weeks before. That seems to be unfair on unincorporated businesses, when compared with the impact on incorporated businesses, which can continue if their year end stretches up to November 2010. Does my hon. Friend sympathise with their position?
I am grateful to my hon. Friend for raising that question. That is part of the challenge, because, as he stated when we discussed the reduction in small companies tax on the Floor of the House, there is a range of models for the legal structure of businesses, and some partnerships or unincorporated sole traders will be seeking to take advantage of that. Some incorporated businesses will also seek to take advantage of that, and the regulatory impact assessment sets out the proportion of people in that category. The Government expect the measure to be taken up by about 15,000 people. They will be self-employed, but deemed to be partners in companies, so it will obviously affect them. I do not know the size of my hon. Friends company, but of the 75,500 businesses that could benefit, the Government expect 30,000 small to medium-sized companies and 5,500 large companies to do so. We need to ensure that the rules are reasonable and fair and that the compliance costs are kept under control as well. That is one reason for my proposed date change, which I commented on earlier.
My hon. Friend asked about businesses with a year end on 30 April. The risk is that they will end up having to shift the two-year period, so that profits made in earlier years do not apply. However, I am sure that the Minister will want to respond to my hon. Friends comments directly.
Finally, some are concerned about the interaction between paragraphs (1) and (2) of schedule 6 and the anti-avoidance and sideways loss relief provisions in section 74A of the Income Tax Act 2007. I have been asked whether the operation of provisions in section 74A will restrict the losses that can be used in the current tax year and each of the three preceding tax years. The purpose of the discussion is threefoldto ask the Minister about tidying up the accounting periods; to look at the way in which paragraph 3(3) works in practice and whether paragraph 3(4) is redundant; and to probe the Governments thinking on the cost of this measure. Is this the most effective way of providing relief to businesses? Have the Government accurately estimated the cost to the Exchequer of introducing this measure?
I, too, warmly welcome you to the Chair of our afternoon sitting, Mr. Atkinson.
I shall respond to some of the points made by the hon. Member for Fareham. As he pointed out, clause 23 and schedule 6 provide additional support to loss-making businesses by extending the carry-back of trading losses from one to three years for losses of up to £50,000 a year. This will apply for two years from 24 November 2008 for companies, and for the 2008-09 and 2009-10 tax years for unincorporated businesses. He is right that, if someone pays the corporation tax main rate of 28 per cent., they will receive relief at 28 per cent. Similarly, a self-employed person with an unincorporated business and liable for income tax at the basic rate will receive relief at the 20 per cent. rate. He talked about benefiting from relief at the highest rate paid, which is an accurate characterisation of the way in which the measure will work.
We estimate that about 140,000 businesses will benefit over two years by an average of £4,000 per year. The hon. Gentleman asked whether that was an accurate estimate. It is based on some modelling of records of tax returns submitted by businesses and an assessment of what we can expect, given the current economic conditions. He asked whether the proportion of businesses benefiting should not be rather larger, but I remind him that substantial loss relief is available already. There is one-year carry-back for companies and non-incorporated businesses, terminal loss relief with three-year carry-back for the self-employed and companies ceasing to trade, and so on. The majority of businesses making losses in the current climate will get relief through those mechanisms, so we would expect that the number of businesses getting relief through the clause and the schedule to be of the order of magnitude that I have indicated. Is it absolutely certain that that is the right answer? No. Of course there is some uncertainty. However, it is a pretty sound estimate of what the measure is likely to cost.
The last time that I asked the Minister about elasticities he was singularly unforthcoming, although he was always polite in his reply. So, if I can follow up on the question put by my hon. Friend the Member for Fareham, I want to ask the Minister, who expressed confidence in the soundness of this estimate, what is the elasticity that might surround this estimate? In other words, how great could the losses be? Is my hon. Friend the Member for Fareham completely off the wall in suggesting that they could be three times higher than the numbers that we see before us? Can the Minister give his view on that?
I am not quite sure what the parameter would be in this case for the elasticity that the hon. Gentleman is questioning me about. All I can say to him is that some significant evaluation work has been carried out to come up with this figure. It is the best estimate that we can provide. I am not in a position to say to him that there will be a 90 per cent. range or anything of that kind, although I can understand why he might be interested in knowing that information.
As the hon. Gentleman knows, in the Red Book we set out our best estimates and I think that this estimate is quite a well-founded one. Having said that, of course he and the hon. Member for Fareham are right that there is inevitably some uncertainty about exactly what will happen in the next few months and years when this arrangement will be in place.
I take on board the Ministers comments, and it comes through in the RIA that some work has gone into assessing this number. However, what concerns me is that the proportion of businesses is quite small. I also take on board the comment that he made about the number of other available reliefs that could absorb losses made in the next couple of years.
Nevertheless, at what point does the Treasury say, Actually, we got this so badly wrong that we are just going to allow this relief to be in place for one year, effectively reversing the decision taken in the 2009 Budget to extend the relief for a further year?
We are agreeing in the schedule and in the clause, if it goes forward, to a relief that will be in place for the period that has been set out. I am not sure if it would be possible to reverse the measure in the finance Bill 2010; it probably would be possible. However, that is not something that I would expect to happen.
Let me respond to the interesting points that the hon. Gentleman raises in the amendments that he has tabled. First, amendments 28, 29 and 37 seek to extend the relief for companies to losses in accounting periods ending on or before 31 December 2010, instead of on or before 23 November 2010. He is right, of course, that company accounting periods are unlikely to align exactly with the qualifying windows. That will mean that accounting periods will straddle the start dates or end dates for the qualifying periods. That is not particularly problematic, although it is perhaps somewhat untidy. However, since companies have different accounting periods, it is inevitable that that will happen, whatever period we choose.
The measure is intended to apply for two years, for both companies and unincorporated businesses. Extending the provision for companies by an extra month to 31 December 2010, as the amendment proposes would mean that, for companies with accounting periods ending on 31 December, each of the accounting periods ending 31 December 2008, 31 December 2009 and 31 December 2010 would fall within the qualifying period. That would give companies scope to access relief for losses over a three-year period. Therefore, I suggest that it would give them an advantage over unincorporated businesses, which make up three quarters of the business population in the UK and whose interests have already been raised with us by the hon. Member for Beverley and Holderness. Those unincorporated businesses would be able to claim losses from only two years. Essentially, the argument is that we want both types of businesses to be able to claim in respect of two years, and the amendment would extend it to a third year in the case of incorporated businesses.
The hon. Gentleman is right that the £50,000 per year loss would still apply, but the amendment nevertheless gives access to the facility for a longer period for some incorporated business, depending on their accounting period, than would be the case with unincorporated businesses. In that way, there would be an element of unfairness. If we had introduced such a measure, I am sure that it would have been challenged in the Committee.
One way in which we could have introduced the measure was by starting the period on 31 December 2008. That would have delayed implementation, but we wanted to introduce the facility as quickly as possible, so we decided to do it with effect from the date of the pre-Budget report.
Amendment 36 seeks to remove the reduction to the £50,000 limit when losses arise in an accounting period shorter than a year. Paragraph 3 of schedule 6 provides extended relief for trading losses of relevant accounting periods ending within each of the qualifying periods 24 November 2008 to 23 November 2009 or 24 November 2009 to 23 November 2010subject to a limit of £50,000 on the losses from each qualifying period. With such a two-year period, there will always be accounting periods that end just outside and which therefore do not qualify for the extended relief. The rule is intended to deter a company from arranging for additional periods to qualify for relief when that is not intended. Companies can change their accounting periods and there could be some unfairness as a result.
We do not want to impose unnecessarily burdensome rules to determine the eligible losses, such as requiring profits and losses of accounting periods to be apportioned, so instead we have gone for a simple approachreducing the annual limit pro rata when an accounting period is shorter than 12 months. That is sensible and proportionate.
I think I understand now the drafting of paragraph 3(3). Is the Ministers argument that if a companys accounting period ended on, say, 31 March 2010, and then it had another accounting period ending at the end of December 2010, it could effectively try to claim two lots of £50,000 in the period, hence paragraph 3(4)?
That is absolutely right. That is what paragraphs 3(4) and (5) address.
Amendment 30 seeks to prevent the £50,000 limit applying to an accounting period immediately preceding the relevant accounting period in which the trading loss arose. I might be able to help the hon. Gentleman on that. Paragraph 3 provides for an extended loss carry-back for losses incurred in a relevant accounting periodit is available for £50,000 of losses incurred in relevant periods. However, paragraph 3 is concerned only with the £50,000 of losses that may be subject to the extended relief; it does not apply to any losses in excess of the £50,000 limit. Those further losses are available for carry-back against profits of the preceding accounting period, subject to the normal 12-month carry-back rules. I hope that that explanation reassures him that the amendment is unnecessary and I hope that I have made the measure clear.
The Minister thinks that 114,000 companies will benefit. Has he done any modelling work on how many of those would have gone out of business, but will now survive as a result of the measure? Will there be a saving to the Exchequer and what will that be?[Interruption.] The hon. Member for South Derbyshire looks despairing.
It is 140,000, not 114,000. I have some anecdotes. I was speaking to an accountant recently who told me that his colleagues who work as liquidators appear to be less busy this year than they were last year. He believes that it is because HMRCs time-to-pay arrangements, introduced around the time of the pre-Budget report, are extremely helpful in enabling some companies which would not otherwise have done so to get through a very difficult period. That is not about this relief, but it is about the related measure that we put in place in the pre-Budget report.
Despite the despairing feeling of some of the Ministers colleagues, it seems important to try to understand the impact of this. If the Treasurys dynamic model of the economywhich we would all like to seewas available, we could model this more precisely and understand the impacts on the survival of businesses and then perhaps we could see that this is a relief that should be extended for all time. If, over time, it is neutral in its impact on the Exchequer, but leads to the real survival of businesses, some of which at least must happen as a result, then this relief could be extended for a longer period. In any case, the Government should be congratulated for having brought this forward.
I am very grateful to the hon. Gentleman for that last remark. I do not have access to a model of the kind that he describes. If he is able to find one, that would be a valuable contribution.
Amendments 31 to 35 seek to raise the amount of trading losses that businesses can carry back for three years from £50,000 to £100,000. I shall urge the Committee to resist these amendments. Essentially, I am arguing that we should reject them on the grounds of cost. The measure that we put in place is proportionate and targeted in the light of the current downturn. Limiting the extended relief to £50,000 a year ensures that additional resources are targeted on smaller businesses, which are perhaps the most vulnerable at a difficult time.
It is estimated that 90 per cent. of eligible businesses will be able to claim full relief on their losses at the £50,000 limit. Doubling the limit to £100,000 would not benefit the vast majority of smaller businesses, although it would benefit some larger ones. However, it would also increase the cost of this measure by about £150 million over two years on top of, according to the estimate in the Red Book, £230 million in 2009-10, plus £215 million in 2010-11. There would be a significant additional cost and we should not be committing in this way.
Again, I draw attention to the benefits that we have seen from the business payment support service, which we also introduced at the time of the pre-Budget report. We expanded that in the Budget to allow businesses expecting to make losses this year to offset them against tax bills on profits from the previous year which they are unable to pay. That is another worthwhile extension to the help that we are providing. The hon. Gentleman explained that these were probing amendments. I hope that I have been able to give him some reassurance and some explanations. I hope that he will not feel it necessary to press the amendments to a vote.
I am grateful to the right hon. Gentleman for his comments and responses to my amendments. As I indicated, the amendments to increase the limit from £50,000 to £100,000 were probing amendments to get the Government to put on record their basis for choosing £50,000 as a threshold. The Ministers argument about cost is important, but compared to the cost of the 40 per cent. first-year allowance, which is the subject of clause 24, it does not seem a huge amount. It would be beneficial to get some cash help to businesses now.
I am grateful for the Ministers confirmation that the measure will apply for the next two years. It is important to give the taxpayer some certainty about its availability, particularly as businesses start to look at their forecasts and projections not only for this financial year but for the next one, and as they seek to understand the impact of potential losses and how they may be able to reduce their historical tax bills by taking advantage of losses that arise in the following financial year.
I am also grateful that, in his response to amendment 30, the Minister made it clear that the measure did not affect the existing tax treatment of losses set off against the preceding years profits. I therefore beg to ask leave to withdraw the amendment.