Finance Bill

The hon. Gentleman is leading me in the direction of a wider discussion of PFI, and he makes his point well. My intention, however, was to raise a specific point in the context of the changes to corporation tax allowances announced in the Budget. The issue of small businesses is more controversial, and there is an incoherence in the Government’s approach to distinguishing between incorporated and unincorporated businesses. Admittedly, the Government face a difficult problem: incorporated businesses can distribute profits either through dividends or salaries. If they do so through dividends, the taxation system for companies will apply; if they do so through salaries, income tax will apply. That issue has become more substantial and difficult for the Government in recent years, as corporate taxes have fallen relative to personal taxes. That is partly because of cuts in rates. My right hon. Friend the Member for Wokingham said how the international climate has changed substantially for corporation tax rates. We have also seen increases in national insurance contributions. However, the differential between the two systems has increased substantially in recent years. As my hon. Friend the Member for Hornchurch (James Brokenshire) said, Government policy has driven that. There are various rates. The history of the zero percentage rate, an issue arsing from last year’s Finance Bill, is instructive. The 10 per cent. band was introduced in 1999. By 2002, it had become a zero per cent. band, introduced for the purpose of encouraging growth and entrepreneurial spirit. Inevitably, as predicted by the Institute for Fiscal Studies and accepted by the Government, sole traders incorporated. It was an entirely rational thing for them to do. The consequence was that the Government perceived that they were losing too much revenue—hence the introduction in 2004 of complex anti-avoidance measures and the abolition in 2006 of the zero per cent. band. During the entire period, enormous time, effort and cost were incurred by various individuals incorporating. Indeed, the Government appeared to be encouraging them to do that and benefit from a lower tax regime. The consequence was that they were castigated and treated as tax avoiders. They were practically treated as cheats. That did nothing for the relationship between small businesses and the Government, and it increased the difficulties of the two systems running in parallel. Even following the abolition of the zero per cent. band, it is still advantageous to be incorporated in most cases. In that context, the Government have changed the system once again by raising rates, as announced in the Budget, beginning with the increase from 19 to 20 per cent. in the Bill. I do not know whether the Government’s intention ultimately is for the two systems to be tax neutral. We are some way from that. In most cases, it is still better to be incorporated because there is just corporation tax, whereas with employment there are income tax and national insurance contributions. However, if the intention is to be tax neutral, will the Government do anything to encourage those companies that have moved into the incorporated sector to move out again? If so, many small businesses will be concerned that a decision to disincorporate will be treated as a deemed transfer of goodwill, and they will want disincorporation relief to secure their financial position. Again, it is not entirely clear what the Government want to do. I said that the approach is incoherent. In an attempt to solve the perceived problem with incorporation, the Government have increased the rate of corporation tax, but they have also raised the application of national insurance contributions, as announced in the Budget, while also increasing the threshold for higher rate income tax, which means that it would be possible to receive a higher amount of dividends without paying any tax. The two approaches do not entirely fit together. Again, it demonstrates an incoherence. On the one hand, one part of the Treasury is attempting to address the difference between the two structures, while on the other it is raising the higher rate threshold, which I support, and encouraging more sole traders to incorporate. The problem remains much the same. I am also unclear on the Government’s defence of the changes when they state that they are tax neutral. They say that the increase in rates will always be put into increased allowances for small businesses. Of course it will apply only to small businesses that invest, but that does not mean that it will target entrepreneurial companies with the potential for growth. A consultancy may well not be the type of business that can invest heavily, yet may be exactly the sort of potentially high-growth entrepreneurial business that the Government should try to encourage, and profess to want to encourage. During our debates on the Budget, Conservative Front Benchers made clear that we would oppose those changes, and I have a distinct recollection of Ministers’ saying, ““Well, that is a £1 billion hole in the public finances.? Unless I am missing something, I cannot quite see how opposing a tax-neutral proposal will create a £1 billion hole in the public finances, unless there is an additional argument about tackling avoidance. If that is the case, I can see where Ministers are coming from, but it still means £1 billion of extra taxes that would not otherwise have been imposed on small businesses. Small businesses are vital to our economy. They are a potential source of larger businesses, and they nurture an entrepreneurial spirit. However, they also suffer disproportionately from high compliance costs. One of the reasons why they have suffered in recent years is ever-increasing tax complexity. If we are to have a Budget and a Finance Bill for small businesses, we must tackle that complexity and reduce the compliance burden, whether in tax or elsewhere. That is how we can best preserve and nurture our small businesses. If the Government are not prepared to reduce the tax burden on small businesses as a whole, which is what will happen if they do not address the issue of incorporation, a more fundamental and careful review of our taxation system will be necessary. In a piecemeal manner, by adjusting rates here or there, the Government are trying to address the conundrum of corporation tax. However, there may come a time when we shall need to examine the issue more fundamentally, and perhaps consider altering the schedular way in which tax is calculated so that distinctions between taxation of companies and taxation of individuals diminish. A competitive and friendly tax environment is vital for small businesses. The Budget and the Finance Bill have failed to provide that environment.