Clause 6

Finance (No. 3) Bill – in a Public Bill Committee at 6:00 pm on 10th May 2011.

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Photo of David Hanson David Hanson Shadow Minister (Treasury) 6:00 pm, 10th May 2011

I beg to move amendment 5, in clause 6, page 2, line 33, at end add—

‘(4) The Chancellor shall publish, by 30 September 2011, his plans for future tax arrangements for small companies.’.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

With this it will be convenient to discuss clause stand part.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I hope that we can dispose of this matter relatively quickly, because we have so far had a good debate on corporation tax matters relating to clauses 4 and 5. Clause 6, however, sets the rate for smaller companies with profits below £300,000 at 20% in 2011. Companies with profits between £300,000 and £1.5 million pay at a rate between the main and lower rates, worked out on a sliding scale.

The amendment calls on the Treasury to provide, in effect, a corporate tax road map for smaller companies, because, as we have debated, the corporation tax cuts that are proposed in clauses 4 and 5 are going predominantly to larger, or a least larger profit, companies. The main rate and lower rate are coming closer together as a result. We need clarity from the Minister, therefore, as to the Government’s intentions for the lower rate of corporation tax for smaller companies who have the lower rate of profit. We have had a good debate on these matters, but most of the benefit will go to large companies, rather than small. In benefit terms, for every £1 going to small companies, more than £4 goes to large companies.

We have picked up from representations to the Committee that small businesses across the country want to know what the strategic vision is, what certainty there is on taxation policy, and what the Government’s intentions are over this Parliament. I say that again because the arguments that I have made in previous discussions, including when discussing clauses 4 and 5—relating to the strength of the economy, the levels of unemployment in UK regions, the level of growth and business activity—are particularly important for the level of small business activity, and for small business growth.

With due respect to all our businesses, in my constituency Airbus produces world-class planes, the wings for corporate jets, carries out a range of large-scale manufacturing activity, and will benefit from the corporation tax cuts proposed in earlier clauses, but equally important are the many small businesses that supply materials, goods and services to those bigger businesses. They have a lower rate of profitability and turnover, yet now find themselves getting closer to the corporation tax rate set for larger companies. The measures before us in clauses 4 and 5, and now in clause 6, make those changes to corporation tax. The amendment asks the Minister to discuss with the Committee how he sees the potential growth of small businesses around the country.

We know that the Minister has tried to encourage small businesses to employ people in certain regions through the national insurance holiday proposal that was discussed in depth before Christmas in another Committee. In Treasury questions today it was clear that, as my right hon. Friend the Member for Morley and Outwood (Ed Balls) said, that has not yet taken off to the extent that we wish in terms of creating employment in those sectors. The corporation tax proposals are extremely important in helping small businesses, not just large ones. The amendment is probing, and we could undoubtedly have discussed this in the clause stand part debate. I wanted to place on record that we would welcome the Minister’s comments on where he sees potential over the next four years for corporation tax to help small businesses as well as the larger businesses that we have discussed to date.

Photo of Tom Blenkinsop Tom Blenkinsop Labour, Middlesbrough South and East Cleveland

Looking at the amendment, I think that it is fairly straightforward. Other questions need to be asked. For instance, how many small companies would benefit from such a measure? How many self-employed people already benefit? Would that number of people increase? Would the number of SMEs benefiting from such a policy increase? Those are sensible questions to ask.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The reason why I have tabled the amendment is that we are facing an effective convergence over the next two years of the higher and lower rates of companies and corporation tax. The corporation tax that has been proposed, discussed and agreed in clauses 4 and 5 has led to a lower rate for predominantly larger companies, or companies with higher profitability. Clause 6 provides for a lower rate of 20% on company profits other than ring-fenced profits, and 19% on ring-fenced profits. In my view, that is closer to the main rate of corporation tax under clause 4, which has been discussed and agreed.

My purpose is simply to give the Minister an opportunity to outline his view of corporation tax changes for small businesses. I think that he and I agree that small businesses are the economic generator of many levels of employment in our constituencies, and they need Government support to ensure that they are not disadvantaged by the changes proposed elsewhere in the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 6 sets the small profits rate of corporation tax for the financial year beginning 1 April 2011, reducing it to 20%. The clause also sets the fraction of relief from the main rate of corporation tax given to those companies with profits between the small profits rate and main rate at 3/200. Amendment 6 seeks to probe our future plans, to which I shall come shortly.

The competitiveness of our tax system has been eroded and our small companies have faced increasing rates of tax. We have debated a 5% reduction in the main rate of corporation tax over four years, but it is vital that the UK’s smaller companies can benefit from lower rates of corporation tax. That is why we will cut the small profits rate to 20%. The right hon. Member for Delyn observed a convergence between the small profits rate and the main rate of corporation tax. It is worth reminding the Committee that the previous Government’s plan was to increase the small profits rate to 22% from April 2011. One could say that that was a convergence, but going the wrong way. I am pleased that if the gap is narrowing, it is because we are reducing taxes, not raising them.

A reduction in corporation tax rates is part of the Government’s strategy for ensuring that the private sector leads the economic recovery. As a result of the reduction, at least 850,000 companies with profits of up to £300,000 will be able to retain a greater share of their profits to reinvest and grow, and more than 40,000 companies with profits above £300,000 but below £1.5 million will continue to benefit from marginal relief from the main rate of corporation tax. The relief will ensure that they pay a marginally increasing rate of corporation tax as their profits rise. As a whole, the changes that we are making will lead to a further £13 billion of investment, as I said earlier.

The small profits rate is a long-standing feature of the British tax system. Many other countries, including France and Belgium, also support smaller profit companies with a lower rate of corporation tax. The UK’s £300,000 threshold is the most generous in the EU. Other countries set theirs far lower; for example, France’s lower rate is only available to companies with profits up to the equivalent of £33,000, while Belgium’s is only available to companies with profits up to the equivalent of £21,000. It is right that the UK Government continue to offer that tax incentive to encourage future entrepreneurs and support existing companies by reducing the burden of taxation. The reduction in the small profits rate, alongside the wider package of corporate tax reforms, will provide the certainty and stability that small profit companies need to plan for the future.

Turning to amendment 5, the Government have provided a clear strategy in our approach to business. In November 2010, we published our corporate tax road map, which set out our plans for reform mainly for the larger side of business. I am pleased that setting out a corporate tax  road map has so impressed the right hon. Member for Delyn that he seeks to apply the same approach to smaller businesses.

The Government also recognise the important role of small business in building a sustainable economy, so in the Budget last year we announced a reduction in the small profits rate. The Budget this year announced an increase in the lifetime limit on gains eligible for entrepreneurs’ relief from £5 million to £10 million to encourage serial entrepreneurs who want to grow and expand their business by reinvesting gains. Alongside that, the Government’s plan for growth announced the creation of 21 new enterprise zones. From October 2011, the small business rates relief holiday will be extended by a year. The 2011 Budget also announced support to help small business get better access to finance through significant reform to the enterprise investment scheme and venture capital trusts, subject to state aid approval.

In addition, the Office of Tax Simplification has started its review of small business tax, IR35, with its interim report, which was published in March. That report identified a wide range of small business tax issues and long-term structural priorities for reform, such as the integration of income tax and national insurance contributions. The report also identified measures that could be taken forward on a shorter timetable and options on IR35. The Government have asked the OTS to take forward its work and report on small businesses’ experience of tax administration, with a view to recommending possible reforms ahead of Budget 2012. Further detail on that work, the Government’s response to the small business tax review and subsequent work by the OTS will be announced before the end of the summer.

The Government’s new approach to tax policy-making aims to restore the UK tax system’s reputation for predictability, stability and simplicity, and small businesses will benefit from that. Following the publication of the document, “Tax policy making: a new approach” alongside last year’s Budget, the Budget this year is the first Budget where the new approach has been put into practice.

As to the specific rates of tax, I am sure that hon. Members will understand that such announcements are made at Budgets, and that the Government keep all taxes under review. We are committed to a stable tax environment for small businesses and ensure appropriate consultation for any changes. For those reasons, the Government believe that there is no case for accepting the amendment, although I appreciate the probing nature in which the right hon. Member for Delyn set out his case.

To conclude, the clause sets the small profits rate of corporation tax for 2011-12 at 20%, and represents the Government’s commitment to supporting growth and investment in small business. We are taking significant steps to help small businesses in a range of ways. I therefore ask the right hon. Gentleman to withdraw his amendment.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 6:15 pm, 10th May 2011

I shall be happy to withdraw the amendment, which was intended to create discussion. We could have done that on clause stand part, but we felt that we needed to have some indication of where the Government feel the trajectory is on corporation tax for small businesses.  As the Minister has indicated, we are now quite keen on road maps. It is good to have certainty. I am pleased that there is agreement between us on certain matters before the Committee. We will also support the clause stand part. With those comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 6 ordered to stand part of the Bill.