Finance Bill

As we are talking about corporation tax, I draw Members’ attention to my entry in the Register of Members’ Interests. One of the keys to having fair taxation is stability. Robert Chote of the Institute for Fiscal Studies told the Treasury Committee during its hearing on the 2005 pre-Budget report:"““A little bit of stability in this area would now be welcome.””" It is now two years later, and it would still be welcome. Speaking during the debate on last year’s Finance Bill, the Financial Secretary mentioned the responses that the Government had received to the consultation paper on the taxation of small business issued in 2004. He said that businesses had"““a strong preference for simplicity over approaches that risked introducing further complexity.””—[Official Report, 2 May 2006; Vol. 445, c. 926.]" That is a principle on which we can all agree, but it is not one that has much currency at the Treasury, it would seem. This year’s Finance Bill has been reduced to one volume but, unfortunately, the House of Commons Library has had to produce two volumes of briefing notes on the taxation of small businesses—one covering changes between 2000 and 2006, and a second covering recent developments, which no doubt the hon. Member for Wolverhampton, South-West (Rob Marris) has perused in detail. This is the third time that I have been involved in a Finance Bill debate, and I am already developing a sense of déjà vu. The first instalment of the phased increase of the small companies rate in clause 3 will push small businesses one step closer to where they started, before they were hit with a decade of chopping-and-changing confusion from the Chancellor. The reason for all this confusion is disarmingly simple: tax incentives originally intended to encourage business investment and business growth suddenly became perceived as loopholes. It is tempting to say that one man’s incentive is another’s loophole, but unfortunately the Chancellor’s incentives always seem to become his loopholes if they are given a little time. It did not matter that everyone warned the Chancellor that radical changes to the small companies rate would act as a direct incentive for incorporation; in fact, there has probably never been so many Cassandras offering unheeded prophecy. He went ahead anyway, and all the changes since then have attempted to restore a balance between incentivising small businesses and preventing the erosion of the tax base, both of which I can recognise as sane objectives on the Treasury’s part. The IFS ““green Budget”” contained the plea that"““we can only hope that the Treasury will draw appropriate lessons from this unfortunate experience.””" However, I question whether the lesson has actually been learned. For several years now, the reaction to the Chancellor’s treatment of small business taxation has been dominated by one image: the U-turn. For a little variety, last year I dubbed the abolition of the non-corporate distribution rate a three-point turn. This year, it has become even clearer that the Chancellor is simply going round in circles. However, my real concern is that providing incentives to small business is no longer front and centre in the Treasury’s strategy, and that the emphasis has now shifted on to deciding whether using a tax incentive constitutes avoidance. It all comes back to the Chancellor’s nebulous reasoning about what constitutes a ““fair and appropriate”” share of tax, or simply the ““right amount”” of tax. This is an unfocused way of looking at the broader issue of what small businesses contribute to the economy and what the Government should do to help them. The Paymaster General—unfortunately, she is not with us today—said back in 2004, in the middle of the long-winded debacle surrounding the small companies rate—that"““The deliberate and cumulative aim is to underpin all the measures that the Government have taken to encourage businesses to grow and to be more enterprising and productive in the medium and long term and not to operate year by year by playing around with the tax system.””—[Official Report, 27 April 2004; Vol. 420, c. 846.]" On this point, I have to agree with her; indeed, that is a more useful guiding principle and intention. However, we would be forgiven for thinking that there is something wrong with the Treasury’s deliberation, and that its policies have not been cumulative at all. Certainty and continuity in the tax system are helpful to all businesses but particularly small ones, which have less capacity to adapt quickly or take specialist tax advice. The rate changes and forthcoming proposals for a new annual investment allowance only deepen the artificial gulf between small businesses and larger firms. The Chancellor has in fact taken the muddle of the small companies rate and created a paradox. Reducing the main rate of corporation tax and capital allowances leads to a cut in the tax rate and to an increase in the tax base for larger businesses. However, small businesses are being pulled in the opposite direction through an increase in the tax rate and a narrowing of the tax base, because fewer businesses will be able to make full use of the new investment allowances of which we have heard much during this afternoon’s debate. The Chancellor has made the fatal assumption that because all small businesses, in whatever sector, will theoretically be able to make use of the investment allowance, all will do so. That was the justification he gave to my hon. Friend the Member for Gosport (Peter Viggers) during the Treasury Committee’s inquiry. The Chancellor also defended the changes on the grounds that they appear to be revenue-neutral—perhaps that is just another example of a tax cut being a tax con. However, even if we are inclined to accept that reasoning, the AIA will not take effect until next year, leaving a guaranteed tax rise over the next year. I want to probe behind the modelling that led to the assumption of revenue neutrality and establish exactly how many of the UK’s 1.3 million incorporated businesses are expected to make use of the allowance and to what extent. Perhaps the information will be forthcoming later when the Minister responds to the debate.