Finance Bill

30th April 2007

During a debate on the Finance Bill, Brooks Newmark calls for stability in the taxation regime for small businesses.

Mr. Newmark: As we are talking about corporation tax, I draw Members' attention to my entry in the Register of Members' Interests.

One of the keys to having fair taxation is stability. Robert Chote of the Institute for Fiscal Studies told the Treasury Committee during its hearing on the 2005 pre-Budget report:

"A little bit of stability in this area would now be welcome."

It is now two years later, and it would still be welcome.

Speaking during the debate on last year's Finance Bill, the Financial Secretary mentioned the responses that the Government had received to the consultation paper on the taxation of small business issued in 2004. He said that businesses had

"a strong preference for simplicity over approaches that risked introducing further complexity."-[ Official Report, 2 May 2006; Vol. 445, c. 926.]

That is a principle on which we can all agree, but it is not one that has much currency at the Treasury, it would seem. This year's Finance Bill has been reduced to one volume but, unfortunately, the House of Commons Library has had to produce two volumes of briefing notes on the taxation of small businesses-one covering changes between 2000 and 2006, and a second covering recent developments, which no doubt the hon. Member for Wolverhampton, South-West (Rob Marris) has perused in detail.

This is the third time that I have been involved in a Finance Bill debate, and I am already developing a sense of déja vu. The first instalment of the phased increase of the small companies rate in clause 3 will push small businesses one step closer to where they started, before they were hit with a decade of chopping-and-changing confusion from the Chancellor. The reason for all this confusion is disarmingly simple: tax incentives originally intended to encourage business investment and business growth suddenly became perceived as loopholes. It is tempting to say that one man's incentive is another's loophole, but unfortunately the Chancellor's incentives always seem to become his loopholes if they are given a little time.

It did not matter that everyone warned the Chancellor that radical changes to the small companies rate would act as a direct incentive for incorporation; in fact, there has probably never been so many Cassandras offering unheeded prophecy. He went ahead anyway, and all the changes since then have attempted to restore a balance between incentivising small businesses and preventing the erosion of the tax base, both of which I can recognise as sane objectives on the Treasury's part. The IFS "green Budget" contained the plea that

"we can only hope that the Treasury will draw appropriate lessons from this unfortunate experience."

However, I question whether the lesson has actually been learned. For several years now, the reaction to the Chancellor's treatment of small business taxation has been dominated by one image: the U-turn. For a little variety, last year I dubbed the abolition of the non-corporate distribution rate a three-point turn. This year, it has become even clearer that the Chancellor is simply going round in circles.

However, my real concern is that providing incentives to small business is no longer front and centre in the Treasury's strategy, and that the emphasis has now shifted on to deciding whether using a tax incentive constitutes avoidance. It all comes back to the Chancellor's nebulous reasoning about what constitutes a "fair and appropriate" share of tax, or simply the "right amount" of tax. This is an unfocused way of looking at the broader issue of what small businesses contribute to the economy and what the Government should do to help them. The Paymaster General-unfortunately, she is not with us today-said back in 2004, in the middle of the long-winded debacle surrounding the small companies rate-that

"The deliberate and cumulative aim is to underpin all the measures that the Government have taken to encourage businesses to grow and to be more enterprising and productive in the medium and long term and not to operate year by year by playing around with the tax system."-[ Official Report, 27 April 2004; Vol. 420, c. 846.]

On this point, I have to agree with her; indeed, that is a more useful guiding principle and intention.

However, we would be forgiven for thinking that there is something wrong with the Treasury's deliberation, and that its policies have not been cumulative at all. Certainty and continuity in the tax system are helpful to all businesses but particularly small ones, which have less capacity to adapt quickly or take specialist tax advice. The rate changes and forthcoming proposals for a new annual investment allowance only deepen the artificial gulf between small businesses and larger firms.

The Chancellor has in fact taken the muddle of the small companies rate and created a paradox. Reducing the main rate of corporation tax and capital allowances leads to a cut in the tax rate and to an increase in the tax base for larger businesses. However, small businesses are being pulled in the opposite direction through an increase in the tax rate and a narrowing of the tax base, because fewer businesses will be able to make full use of the new investment allowances of which we have heard much during this afternoon's debate. The Chancellor has made the fatal assumption that because all small businesses, in whatever sector, will theoretically be able to make use of the investment allowance, all will do so. That was the justification he gave to my hon. Friend the Member for Gosport (Peter Viggers) during the Treasury Committee's inquiry. The Chancellor also defended the changes on the grounds that they appear to be revenue-neutral-perhaps that is just another example of a tax cut being a tax con. However, even if we are inclined to accept that reasoning, the AIA will not take effect until next year, leaving a guaranteed tax rise over the next year.

4.45 pm

I want to probe behind the modelling that led to the assumption of revenue neutrality and establish exactly how many of the UK's 1.3 million incorporated businesses are expected to make use of the allowance and to what extent. Perhaps the information will be forthcoming later when the Minister responds to the debate.

Rob Marris: The hon. Gentleman talked about phasing in the allowance, but he also said that there would be a tax rise this year. He is right, but we need to keep things in perspective. My understanding is that the tax rise will be the relatively-I stress that word-small amount of £10 million a year, which is only £2 per small business.

Mr. Newmark: I always appreciate the hon. Gentleman's interventions, but small businesses operate on the margins so £1,000-even £500-can make a huge difference. Unfortunately, the provision demonstrates yet again the Labour Government's lack of understanding of how small businesses actually work and survive from day to day.

I am only hazarding a guess, but if too many businesses make use of the annual investment allowance they could sow the seeds of the Government's next anti-avoidance strategy. Businesses that invest will come to be seen as cheating. In the words of the Federation of Small Businesses:

"It is amazing how quickly a concession to encourage enterprise can become a loophole."

In our report on the Budget, the Treasury Committee admitted:

"It is not clear whether measures such as the increase in the R&D tax credit and the introduction of the Annual Investment Allowance will have the desired beneficial impact on investment levels by small companies."

That is the very point made by my hon. Friend the Member for Sevenoaks (Mr. Fallon) earlier. We suggested that the Treasury should take stock of the impact of those changes before the 2009 Budget.

I would go a little further. If the Government are looking for a positive signal to send to small businesses, and for a policy that will have no new unintended consequences, there is one simple answer: leave the small companies rate well alone for a year or so and let small businesses and their accountants catch their breath.



Mr. Brooks Newmark (Braintree) (Con): I agree with my hon. Friend the Member for Sevenoaks (Mr. Fallon). The Chancellor has admitted that he does not understand mathematics, but the clause shows that he does not understand the basics of business and that not all businesses are the same. He assumes, in a very broad-brush way, that all small businesses can benefit from the provisions when, in fact, only a small proportion do so.

Mr. Hoban: The Chancellor made his own remarks about his maths, so I shall not make any about his sums not adding up. Certainly, he cannot work out the reality of business in Britain today. Some 75 per cent. of production in our economy comes from the service sector, yet the tax changes that he has proposed primarily help asset-rich businesses that invest in fixed capital, rather than the businesses that are so typical of the service sector, which invest in human capital as well. That is an important difference to highlight.


Mr. Newmark: Is not that another example of the Chancellor simply saying, "I'm going to take your taxes and you can claim them back as a business person but only if you do exactly as I say"? It is management by the clunking fist, not the invisible hand of Adam Smith.

Mr. Hoban: My hon. Friend makes an important point. The Chancellor is loading incentives towards a specific sort of business. If businesses invest in research and development and physical assets, the Government will give them some tax relief and allowances, but if they do not, they will not be able to claim the reliefs. A small company will have to pay more tax anyway. The Chancellor penalises small companies and spreads the benefit among all business.


Mr. Newmark: A statement by Simon Sweetman of the Federation of Small Businesses contradicts the hon. Lady's point about the clause. He said:

"It is addressing a problem that I don't think exists, which is the notion that people incorporate for tax reasons. It certainly was true at one point, but I really don't think it happens any more."

Helen Goodman: In a few moments, I shall quote some other independent commentators who said after the Budget that the problem does exist.


Mr. Newmark: I have two questions for the hon. Gentleman. First, how will it be possible for a service company-the majority of small businesses are service companies-that is not capital intensive to change its behaviour under the scheme? Secondly, why are manufacturing or capital-intensive businesses any more deserving of tax incentives than those in the service sector?

Rob Marris: I can deal with the second point. As a Member for a west midlands constituency, I am aware that the vast majority of UK exports come from the manufacturing sector and not from the service sector. Important as the service sector might be to exports, about 56 per cent. of the value of exports comes from manufacturing.


Mr. Newmark: I listened very carefully to the explanation of the incentives driving the policy. The Minister said that a third of small businesses will benefit, but that still means that the majority-two thirds-will not do so. Will he comment on that?

John Healey: I was not talking about all service companies; I was talking specifically about the business services sector. I went on to say that more than half the service companies in hotel and catering and more than half the companies in retails invest, and do so consistently. A small catering company, for instance, that makes £100,000 profits and invests £30,000 in new kitchen equipment, will pay about £2,000 less tax in the first year of the new annual investment allowance than it would do without the changes in the Budget. A self-employed builder who invests £4,000 to start up a business and earns £30,000 in the first year, will pay about £1,200 less tax and national insurance.


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