Finance Bill

I, too, oppose clause 3 for the reasons outlined by earlier speakers, but I want to explore the Government’s thinking a little further and ask some questions about their approach to the small corporation tax rate. As the hon. Member for Bishop Auckland (Helen Goodman) said, there is an issue about the two different tax regimes that may apply to a small business. As my hon. Friend the Member for Fareham (Mr. Hoban) said, if the business can be taxed as income, it will pay income tax and national insurance contributions, whereas if it is taxed as a company, it will pay corporation tax, so there can be distortions, as I would be the first to acknowledge. However, I am curious about whether the Government’s approach, as outlined in clause 3, is to make the system as tax-neutral as possible and to remove any distortion—if that is the right word—between the two systems. If so, there are a number of further questions. Do the Government acknowledge that their previous approach to the zero rate of corporation tax was wrong? It undoubtedly created an incentive for small businesses to incorporate and there was a substantial increase in incorporations. In 2001, 220,000 companies were incorporated; by 2003, the number had risen to 397,000. Undoubtedly, the zero rate of corporation tax contributed to that. As to the point made by the hon. Member for Wolverhampton, South-West (Rob Marris) in an earlier intervention about the need to disaggregate incorporations between companies and limited liability partnerships, I happen to have the numbers to hand. In fact, limited liability partnerships have made a very small contribution. In 2005-06, there were 6,570 incorporations for LLPs, whereas there were 372,000 for limited companies. Clearly, LLPs are not a substantially large part of it. The tax system has undoubtedly contributed to that position. If it were the Government’s intention to take away any tax advantage from incorporation vis-à-vis non-incorporation, their approach has been incoherent. Let us consider this Budget alone, where changes to national insurance contributions and higher rate thresholds for income tax further encouraged businesses to incorporate. There is a larger and wider standard rate of income tax and no additional income tax to be paid on dividends within the rate, yet national insurance contributions now cover a larger area, which is where the advantage lies. The hon. Member for Twickenham (Dr. Cable) raised the matter of aligning corporation tax with income tax, but there is still a difference with national insurance contributions—a problem that has got worse as a consequence of the Budget. There appears to be an incoherence in the Government’s approach. A number of hon. Members, and particularly my hon. Friend the Member for Sevenoaks (Mr. Fallon), dealt with businesses that fall outside the various permitted reliefs and allowances. Again, I question Government thinking in this area. When they introduced the zero rate band, they argued that it would encourage growth and entrepreneurial spirit, which are commendable. They then scrapped the zero rate band because it was over-used. The argument may be that it was used by businesses that were not looking for growth and a more entrepreneurial approach. Are the Government saying that the only small businesses likely to grow to create jobs and become entrepreneurial businesses are those that can use the capital allowances? If so, that seems to be entirely misconceived. It is not possible to identify a particular type of small business that is likely to be high growth. It simply does not work like that, because many service industries or high-technology businesses might not require great capital investment, but they could still be the big employers of the future. It seems to me that the Government are adopting a rough-and-ready approach to addressing this particular concern. My final point concerns the bureaucracy imposed on small businesses. My hon. Friend the Member for Fareham mentioned that research and development credit take-up tends to be very low. The reason is undoubtedly that it is difficult to claim, complicated and requires a great deal of effort. Inevitably, small businesses are not in as strong a position to respond as larger businesses. Providing greater allowances that are often hard to claim is not an adequate way of trying to mitigate the increase in tax rates. Whatever way one looks at it, it is not good for small businesses. I am afraid that pointing to the existence of those allowances—I appreciate why we cannot dwell on this particular point—amounts to a poor argument. In conclusion, the tax changes appear to be incoherent and they do not address the problem that the Government themselves recognise. We are still left with difficulties in this area.