Clause 6

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

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Photo of David Gauke David Gauke The Exchequer Secretary 6:00 pm, 10th May 2011

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.