Finance Bill

It is always a pleasure to follow the hon. Member for Wolverhampton, South-West (Rob Marris), who made a wide-ranging contribution. I intend to confine my comments to a narrower issue: the treatment of small businesses and, in particular, the introduction of the provisions to increase the corporation taxation rates for small businesses to 22 per cent. from 19 per cent. We have heard much debate in the House, today and previously, about the fact that that increase in taxation on small businesses is intended to be neutral. The argument is made that the annual investment allowance of £50,000, intended for businesses to invest to grow, will counteract the increase in the headline rate. That certainly has not been the impression gained by small businesses. The chairman of the Federation of Small Businesses said:"““This is the Chancellor’s eleventh Budget and this year’s offering is no different to the others—he gives with one hand and takes with the other. However, this year, after some welcome initiatives for our members he throws it all away with a tax hike aimed at small businesses. Corporation tax was cut for large firms but increased for smaller ones. Small businesses employ fifty eight per cent. of the private sector workforce—over twelve million people—and the increase in their tax rate fails to acknowledge their contribution.?" That comment reveals the concerns felt by small businesses across the country about what the changes will mean. The British Chambers of Commerce has talked of"““the damaging increase in the Small Companies’ Rate?." The head of taxation for the Association of Chartered Certified Accountants said:"““This decision flies in the face of the Chancellor’s previous aim to encourage more businesses to incorporate and shows an irrational hostility to micro enterprises.?" The CBI, which does not necessarily focus on smaller businesses, has suggested that the changes will lead to ““some significant losers?. The changes certainly give the impression that rather than its being simplified for smaller businesses, the tax system is being made more complex. It also comes against a background of change in the way in which tax is levied on smaller businesses. In 1997, the Chancellor cut the rate of taxation for smaller businesses from 23 per cent. to 21 per cent. He cut it to 20 per cent. in 1998. In 1999, he introduced the new 10 per cent. rate and in 2002 he cut the 10 per cent. rate to zero and the small companies rate to 19 per cent. In 2004, he reversed the zero percentage rate on distributed profits and in 2005 he abolished the zero rate altogether. In this Bill, the tax rate has gone up again, this time to 22 per cent. Such fluidity—so much change in a comparatively short period—makes it very difficult for small businesses to plan and work out a strategy. It is therefore interesting to consider the rationale advanced for the changes in the Bill. Paragraph 1.18 of the Red Book says that the change has been introduced"““to tackle individuals incorporating to minimise tax and national insurance liabilities?." In other words, it is an anti-avoidance measure, although we have not had the precise rationale explained at any point. I hope that when the Minister winds up the debate we will get some clarity about why such a draconian measure was felt necessary to combat that pattern of behaviour. The issue was recognised and debated when the zero rate band was introduced in the first place. Many businesses were actively encouraged to incorporate as a consequence of the prevailing tax regime. It is interesting to look back at the consideration of the Finance Bill in 2002, when that point was raised. It was argued that the zero rate would force companies into incorporation. The Paymaster General said in response:"““We seek to strike a balance as best we can in not driving businesses into a particular structure. The balance is not perfect. The decisions that businesses take, the access they have to different relief and their structure are very much choices for them.?––[Official Report, Standing Committee F, 16 May 2002; c. 104.]" That may be true, but the Paymaster General seemed to recognise that the possibility of small businesses taking advantage of the incorporation measures had been actively considered. It was understood that the changes in the tax regime might have that implication. I hope that the Financial Secretary may be able to comment on what went wrong and whether it was contemplated that companies that incorporated as a result of those changes might be in an uncomfortable position if the measure were reversed. Companies incorporate for legitimate reasons. The action is not necessarily driven by taxation reasons, and that factor should be understood in the context of such a big change to tax rates for smaller businesses. My fear is that some small businesses that incorporated under the earlier regime—in many ways, the Government encouraged them to do so—will be trapped now that the tax regime is changing completely, with the implication that tax rates will be higher. As a former corporate lawyer—no longer practising—I know that changing from incorporated to unincorporated status is not without cost. Lawyers and accountants are required so that the company can break out of the incorporated mechanism. Many small companies that have legitimately incorporated, for whatever reason, will be in the difficult situation of having to decide whether to accept higher taxes or higher professional costs to change from an incorporated to an unincorporated structure—possibly their former status. Reference has already been made to small service companies. It will obviously be difficult for them to take advantage of the new tax breaks proposed by the Government as an offset mechanism. There is a strange irony in the fact that the Government are saying, ““We shall increase your tax but you can take it back from us?. The proposals underline the complexity of the Government’s mindset. We need to address the valid concerns about companies that may be in financial difficulty. An increase in the tax rates applied to them might tip them over the edge if they were already in a precarious financial position, because they would certainly not be able to take advantage of the new mechanisms and benefits for companies that can invest. Evidently, they cannot invest because they are already in a difficult financial position. Given the problems that may arise, the neutrality of the measure is not as straightforward as has been suggested. The provisions on corporate taxation are complex—like the Budget itself. I was struck by a comment made by Andrew Tenon, a tax director at Tenon advisers, in an edition of Taxation. He said:"““We spent several hours on Budget day running numbers through spreadsheets trying to make sense of the various hints that we could pick up in the small print about what precisely the figures would be. It is a sign of just how complex this all is that, between us, with at least 100 years of combined tax experience, we could not agree on what the impact of the changes will actually be.?" If even learned tax advisers find it difficult to assess the effect on smaller companies of the changes in the Bill, it will be tricky, to say the least, for the companies themselves to work out what the impact will be and how to take advantage of the investment regime to ensure that the benefits are effectively applied. That comment and others clearly show the problems that arise from the complexity of the provisions and their application to small businesses. There seems to have been a complete reversal of the Government’s approach to the treatment of small businesses over the 10-year period. We have almost come full circle in the latest Finance Bill. There is real concern that the Government are turning their face against small businesses, notwithstanding the fact that 99 per cent. of all enterprises are small. A huge number of small companies contribute a large amount to our economy, ensuring that it is vibrant and strong and continues to employ people and generate wealth in this country.