Finance Bill

Indeed, but the wedge of national insurance is much larger than the 2 to 3 per cent. margins that the Government are playing with. We need some analysis of, and research on, how big the tax differentials need to be to change behaviour. We have been given no evidence so far. The second argument relates to how far the clause 3 change in tax rates is offset by changes in tax allowances. You have advised us not to get involved in the details of tax allowances, Sir Alan, but the issue of offset is crucial to the debate. The argument is that the annual investment allowance will offset the increased tax burden for small companies. The Chief Secretary intervened to make that point. What we do not know—and I do not think the Government know—is how much of the annual investment allowance will be taken up by small incorporated companies. Can the Government give us an estimate? Are they thinking of 50 per cent., 30 per cent., 20 per cent., 10 per cent. or 5 per cent.? It would be useful to know the Government’s internal estimates of how much is offset and how much is not. Quite apart from the issue of how much is offset, there is the issue of the time lag between the two measures. The tax increase takes place immediately and in three successive stages, but the offsetting investment allowance is subject to consultation, and may or may not come into effect in two years’ time. There is a gap between the two that will directly affect small companies. Then there is the point made by several Members, particularly the hon. Member for Ludlow (Mr. Dunne), about the impact differential between service companies, which do not engage in substantial capital investment, and manufacturing companies, which do. Finally, there is the much bigger question of the complicated interaction between the clause 3 increase in corporation tax, the annual investment allowance and the change in the capital allowance rules. All three will be swirling around together. It is worth looking—although not in great detail—at the evidence that the Institute of Chartered Accountants in England and Wales devoted to the issue. I will just quote a couple of lines. It states:"““The changes to capital allowances will particularly impact small companies””" because of the relationship with the tax change."““This will particularly be the case for those that claim significant amounts as plant and machinery allowances and in respect of industrial buildings.””" The institute continued:"““Examples of other family businesses that would be affected are printing companies, haulage businesses, manufacturing companies, etc. Such companies are likely to be significant businesses in the local community””." The complex inter-relationship between a tax increase and two big changes in allowances, taking place over different time horizons, will have complicated and, probably on balance, significantly negative effects for small companies. The Government would therefore be wise to heed the advice of the Treasury Committee. The hon. Member for Fareham has already quoted its conclusion that the Government should initiate a review of the policy for next year's Finance Bill because of the unpredictable nature of the outcome, but it is worth while quoting another sentence from the conclusion. It states:"““It is not clear whether measures such as the increase in the R&D tax credit and the introduction of the Annual Investment Allowance will have the desired beneficial impact on investment levels by small companies.””" In several interventions, Labour Members have asserted as a matter of dogma that the changes will increase investment, whereas the Treasury Committee, representing three parties, looked at the matter across the board and concluded that the results are likely to be entirely unpredictable. Therefore, I remain totally unpersuaded that clause 3 is justified in anything like its present form.