Finance Bill

I shall come to the small companies corporation tax rate in a moment, but let me say a little more about how we are funding the welcome and significant reduction in the main rate. It is being funded by modernising and streamlining the capital allowances system, which has been largely unchanged for the past 20 years and which, in part, still reflects the needs of post-war redevelopment. This is the most extensive reform of investment allowances since the 1980s, better aligning allowances for buildings and plant with economic depreciation, removing tax-driven distortions in business decisions and giving incentives for long-term investment. My right hon. Friend announced just two rates in future for capital allowances—20 per cent. for short life assets and 10 per cent. for long life assets. Clause 35 paves the way for phasing out over four years industrial and agricultural buildings allowances, so removing a selective and outdated subsidy for some buildings, which is not available, for example, for commercial office space or for science parks. It is a strong package, pro-growth and pro-investment, which is expected to add 0.2 percentage points per annum to investment above the trend rate, strengthening our global competitiveness. The Bill also sets the small companies rate of corporation tax at 20 per cent. for 2007. We have announced that we will raise it further to 22 per cent. from April 2009 as we remove incentives to incorporate solely for tax reasons. As the Red Book shows, setting out the figures for this year and the following two years, all the proceeds from that increase will be recycled to small businesses that invest, through a package that reduces the tax due from them and gives them incentives to invest, with current first year capital allowances for small firms maintained in the Bill at 50 per cent. until April 2008, and the Finance Bill next year to introduce a 100 per cent. annual investment allowance of £50,000 for all firms. That shifts the incentives in favour of investment, which will further strengthen small firms.