Finance Bill

The hon. Gentleman is right. I am not sure that those figures include limited liability partnerships, but I certainly do not think that the numbers have increased. I do not think that it is a huge number, and it certainly would not have a distorting effect on the most recent year, as the hon. Gentleman is perhaps suggesting. Let us look at the arguments that have been used. Simon Sweetman from the Federation of Small Businesses made this response to the change:"““On the face of it, the rise in the small companies rate is very disappointing for our members, because it is addressing a problem that I don’t think exists, which is the notion that people incorporate for tax reasons. It was certainly true at one point, but I don’t think it happens any more.””" The British Chambers of Commerce further argued that the rise in the small companies tax rate"““sends out a negative message to the small business community. Closing a loophole, which was initially created by Government incentives, penalises small businesses unnecessarily.””" It went on to say that it does not understand"““why the Government chose to use a blunt instrument impacting on all small businesses rather than focussing their resources on targeting those who are using Managed-Service Companies as a front for tax avoidance””." There is a serious doubt in the small business community, therefore, about whether tax motivated incorporation still persists as an issue and, if it does, that that is the way to tackle it, as there may be other ways of doing so. The Chancellor sold the package to small businesses because of the offsetting tax changes, such as the extension of the 50 per cent. first year capital allowance for this year and the changes in subsequent years, and the changes in the research and development tax credit. It is worth remembering the impact that such change will have on the profitability of businesses and their ability to invest for the future. In its comment on the Budget, the Association of Convenience Stores pointed out that"““convenience stores generally operate on a 1 to 2 per cent. net profit margin, and the increase in the rate of corporation tax on small business will further erode this.””" How on earth will they find the profits to survive as a business and create new earnings for the owners and shareholders, and will they be able to retain sufficient profits to enable them to grow and develop in the future? Many service sector companies will face that problem as a consequence of the change. I am not sure that they will benefit from the more generous capital allowances or the changes to the research and development tax credit. For many service sector companies, investment on such a scale is rare, and the Government should remember the importance of the service sector to the economy as a whole. As I said earlier, about 75 per cent. of the economy is accounted for by the service sector, so if the Government start to attack that sector and restrict its ability to grow and develop, they are creating a long-term problem. We can all identify service companies in our own constituencies that might not benefit from the change, such as hairdressers or caterers. Let us take a business that I know—a conference business run by a friend of mine. It does not need to invest very much in physical assets, but its retained profits are necessary to provide the capital to expand the business and generate the money that can be used to take risks in growing the business. Service sector businesses will be worse off as a consequence of the Budget. They will suffer the tax rise, but they will not be eligible for the reliefs that the Chancellor increased in the Budget. One argument for the tax increase is that it will tackle tax-motivated incorporation. The other argument deployed by the Chancellor is that there will be other moves to compensate for that. When we consider clause 3 in the round, we should remember the arguments put by the Chancellor. It is important to remember that the changes to capital allowances are a timing difference. Capital allowances change the phasing of permissible capital expenditure for taxation. Increasing the first year allowances accelerates the tax relief; it does not increase the amount available for tax relief over the lifetime of the asset. It is a timing difference, not a tax cut. Victor Dauppe, a tax principal at MacIntyre Hudson, was right when he said:"““Extra corporation tax is permanent, and the increased capital allowances are either temporary, not yet in place or unavailable for some companies.””" The Financial Secretary to the Treasury agreed with that. In last week’s Second Reading debate he said that"““the changes to capital allowances have a largely temporary timing effect””.—[Official Report, 23 April 2007; Vol. 459, c. 758.]" That indicates the deal that is on offer to small companies. They see a permanent increase in their rate of corporation tax which is offset—if they are eligible to make a claim—by a temporary short-term timing difference that improves their cash flow today, but is reversed later.