Finance Bill

It is a pleasure to follow my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), who, in his forensic manner, managed to explain some of the inconsistencies in the Government’s approach to incorporated businesses, unincorporated businesses and sole traders. I intend to say a little about that as well. Members will be pleased to learn that in the time available to me—which I regret to say is rather less than the amount in which others have been able to indulge—I shall not undertake a tour d’horizon of the Bill and the Government’s economic record. I want to focus on specific measures that stem from a belief expressed earlier today in the Chief Secretary’s remarkable claim that the Bill ““strengthens investment incentives for small companies?. I think that that is what he said, but, as I shall explain, it is fundamentally not what the Bill achieves. It may be the intent, and the intent is very noble, but it will not be the outcome. I remind the House of my interest declared in the Register of Members’ Interests. Commenting specifically on these aspects of the Bill, the Institute of Chartered Accountants has said"““We are particularly concerned that measures announced in the Budget will impact on the ability of SMEs to raise finance for investment and will also increase the after tax cost of that investment in cash flow terms.?" That is the fundamental problem. Three measures lie at the heart of the problem, and I shall focus on two. The first is the abolition of industrial buildings allowances and agricultural buildings allowances as the quid pro quo for the changes to the smaller companies’ corporation tax rate. What will be the consequence of that? Those allowances respond to investment decisions for substantial capital spend that are not made overnight. It can take several years in some cases, and certainly many months, for a business to commit to a substantial investment of that kind, and to remove the allowances overnight without any interim arrangements is misguided and will introduce uncertainty into investment decision making. Business investment in this country will suffer, particularly in respect of small businesses. The Government claim to support innovation and entrepreneurship, and I support that, too; it is a laudable objective. They have made a reasonable stab at supporting it, but judging by the number of VAT registrations they are not doing as well as they did when they inherited the economy that we left them in 1997. I will not make any further historical references—other Members have done that—but let me point out that there were some 15,000 fewer new VAT registrations in 2005, the most recent year for which figures are available, than there were in 1997, and that there are some 7,000 more deregistrations per year than there were in 1997. That suggests that entrepreneurial activity is in decline, rather than growing. However, I accept that not all VAT registrations are for business; they are for charities and other non-business purposes as well. The Government have got themselves into a muddle over the form of business activity that they are seeking to encourage. According to Department of Trade and Industry statistics, some 12 per cent. of businesses are in the form of partnerships. Unincorporated businesses comprising more than one principal are partnerships, of which there are more than 500,000, and there were 515,000-plus in 2005, out of 4.3 million businesses in total. Therefore, there is a significant amount of such businesses, and they range in size. The hon. Member for Dundee, East (Stewart Hosie) referred to small-scale business activity in Scotland, and the same pattern exists across England, although the proportion of larger businesses in the rest of the United Kingdom is higher than it is in Scotland. However, there are 13 per cent. fewer partnerships than there were in 1997. I suspect that, in part, that reflects the point of my hon. Friend the Member for South-West Hertfordshire about the drive for sole traders and small businesses to incorporate to take advantage of previous Government tax incentives. The proposals contained in what are called the ““sideways loss? measures in the Budget could have a significant impact. They could have ramifications that go far beyond the Government’s acknowledged intent, which is to prevent avoidance—they fall within the anti-avoidance section. All Members are in favour of clamping down on avoidance, but why are the Government singling out the partnership structure for special penalties, and where is the logic in their position that they should treat unincorporated partners so harshly compared with incorporated businesses or sole traders? There is no logic in that; it appears to be a jumble. The Government have perceived that there is an avoidance problem and, as usual, have adopted an all-embracing measure to try to clamp down on it, ignoring the impact that it will have on bona fide business. It is curious that they are seeking to introduce rules that will drive legitimate business offshore. I am aware of examples of substantial investments by individuals that will now be taken offshore because they do not trust the tax regime enough to make the investments onshore, as they have done previously—or these measures might stop them getting off the drawing board in the first place. My hon. Friend the shadow Chief Secretary cited one or two examples in her remarks, which illustrated that point. I fear—it gives me no pleasure to say this—that these Treasury Ministers have such little experience of the real world of business that they cannot rein back the zealots in HMRC from whom, I assume, these anti-avoidance measures originate. I do not imagine that Ministers think them all up themselves. The Revenue identifies an abuse and comes up with a solution, but there is a lack of practical business experience among the Front Bench team, who are not prepared to stand up to the Revenue and say that it is overstepping the mark and that its proposals will have unintended consequences. I do not believe that such thought processes go on, although I would be delighted to be corrected by the Paymaster General when she winds up.