MITIGATION OF CORPORATION TAX LIABILITY OF SMALL COMPANIES (Hansard, 12 July 1972)

§ Mr. David Mitchell
I beg to move Amendment No. 190, in page 76, line 25, leave out '£15,000' and insert '£100,000'.

§ Mr. Deputy Speaker (Miss Harvie Anderson)
With this we can also discuss Amendment No. 223, line 23, leave out from 'determined' to end of line 32 and insert 'from time to time by Parliament'.

§ Mr. Mitchell
This is the last Amendment to be selected for this evening, but by no means the least important. It is interesting, because this subject was one of the few occasions in Committee when the Minister failed to win the argument.
The Government's purpose in changing to the imputation system of corporation tax is to encourage distribution and to secure a better use and allocation of national resources through the media of the market. That is an approach with which I find myself in agreement.
1798 It follows that it is wholly illogical to apply that system to companies not quoted on the market and which do not raise their finance through the market. We have in the unquoted companies, particularly the smaller ones, a large group of companies which will be made worse off in many cases as a result of this change. It seems wholly illogical to apply this system to those companies since they will not react to the market and raise their resources through it, but through plough-back. It means for them an effective increase in corporation tax from 40 per cent. to 50 per cent.
I am aware that the Government will say that if the company ploughs back in full into those assets eligible for capital allowances it will not be any worse off, but the reality is that if one talks to the Small Businesses Association or to companies throughout the country they will say that it is not the money they need for ploughing into plant and equipment, which are eligible for capital allowances, but the money they need for working capital, for debtors, stock in hand, work in progress and so on. There are innumerable companies, particularly in the growth sector of the economy, which need substantially more money for working capital for a variety of purposes. They will be the sufferers if we do not secure a change.
The Amendment seeks to extend the preference rate for small companies from £15,000 to £100,000. I should like to make it apply to all unquoted companies, but I accept the Government's argument that it would be unfair to have two companies of the same size, one with a different rate from the other. It is true to say that companies which are too small to be quoted on the Stock Exchange, namely those whose profits are under £100,000 a year, ought not to be brought into this system.
In saying this I am backed by the CBI which says in a letter I have that it is anxious that the figure should be raised. It is reasonable to take as a yardstick the figure which would enable a Stock Exchange quotation to be obtained. It suggests a figure of £15,000. There is an alternative Amendment if the Government wish to accept it. Alternatively, the Engineering Industries Association suggests a figure of £100,000 which forms the basis of this Amendment.
1799 The case has been made fully in Committee and I have merely reminded the House of it tonight. The Government have not given an adequate answer and I hope that this will give them the opportunity of doing so.

§ Mr. Nicholas Ridley (Cirencester and Tewkesbury)
I apologise to the House for joining the debates on the Bill rather late. I take this opportunity of expressing my deep gratitude to my right hon. Friend the Chancellor of the Exchequer for having included the concession to small businesses. As the one-time Minister for small firms, I believe that it is of immense value. It was wise that my right hon. Friend made a concession, because this is the area from which the great businesses of the future grow.

§ Mr. Barber
A number of the changes that I made in the Budget for the benefit of small businesses were the result of the points made to me by my hon. Friend when he held the position to which he has referred.

§ Mr. Ridley
I am grateful to my right hon. Friend.
The algebraic legislation, including the fraction (M - P) X I/p for marginal profits between £15,000 and £25,000, has slightly perplexed me. Has there ever been any indication of the fraction which will be applied to this fraction to form the marginal small business rate; because I have not heard that mentioned?
It may be a mistake to include in the Bill the amount of the profits which are the minimum and maximum levels. Inflation is eroding money values, and to be committed by legislation to the values is unwise. As time passes, the figures in the Bill may be found to be too small. Perhaps we should have higher figures because of the effect on small businesses of the ravages of taxation.
We are trying to do two things—first, to help the genuinely small business which must plough back its profits to grow and to live and, second, to avoid the difficulty which occurs because a small company which distributes none of its profits is, under the new form of corporation tax, worse off than under the old form. It is right to address oneself to putting that discrepancy right. I am doubtful whether 1800 it is a good idea to give relief to small businesses irrespective of how much they distribute. We are trying to give this relief to small businesses which suffer because they do not distribute and, therefore, they pay more tax out of the savings which they retain for the purposes of further investment and growth.
Is it possible to keep the decision as to limits for small business relief to Parliament and perhaps next year to devise a scheme whereby the benefits are reserved for small companies which do not distribute and which do not, therefore, have the same advantages as floated companies which can raise money on the market?

§ Mr. Robert Redmond (Bolton, West)
My hon. Friend the Member for Basingstoke (Mr. David Mitchell) spoke of the need for companies to plough back profits to finance book debts and the like. Many small companies are trying to save up capital to pay for future investment in the way of buildings. I feel that profits retained as cash in the bank by small companies should very often be given some relief if it can be genuinely shown that some investment lies ahead.
I know that the Government will say that there is free depreciation now on plant and machinery, but many a small company is at this very moment trying to save money to pay for perhaps a new building in order to create new jobs in the areas where we want them. If we could get back to something like the old Chancellor's "umbrella" which allowed for that sort of thing, we might be able to improve this Bill or the next Finance Bill.

§ Mr. Patrick Jenkin
I cut my fiscal teeth on the Chancellor's "umbrella". I remember, if I might mix metaphors, more years ago than I now care to think of struggling in my chambers at the Bar to steer many a small company through the maze which was Sir Stafford Cripps's umbrella, which was, of course, related to the old Section 22 companies—the surtax companies—of which the successors are now the close companies. My hon. Friend the Member for Bolton, West (Mr. Redmond) will have noted, and I am sure applauded, the very substantial amelioration in the position of close companies' shortfall provisions which my right hon. Friend has made. Not only 1801 is the figure now 50 per cent., not 60 per cent., but a very large number of companies have been taken out of the shortfall provisions altogether.
I should like, if I may, to look at the suggestion of my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) that the relief for small companies should be in some way quantified to distributions made rather than to profits. I say that entirely without commitment because I have no idea what the result may be. But it is an interesting suggestion which I should like to look into. I very much endorse what my right hon. Friend said about the great value of the consultation which we in the Treasury had with my hon. Friend, with his experience as Minister in charge of small businesses.
I come, finally, to the point made by my hon. Friend the Member for Basingstoke (Mr. David Mitchell). It must, I think, be a matter of opinion as to who won the arguments in the Standing Committee on two separate occasions, and on both occasions with very full debate. The subject of the first was the Amendment moved by my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) for a suspension of the cut on unquoted companies The other debate was occasioned by the Amendment moved by my hon. Friend the Member for Basingstoke which would have cost, we estimated, £350 million. We now come, on this third occasion, to his present Amendment which, together with Amendment No. 191, would cost between £70 million and £90 million. The more modest CBI suggestion of £75,000 with a tapering up to £100,000 would cost between £50 million and £70 million. The indication of the cost is perhaps some evidence of the difficulty we would have in accepting the Amendment.
I do not want to go over all the arguments again. My hon. Friend said that one of the answers I gave was that these companies invested in plant and machinery and therefore got the benefit of the free 100 per cent. first year allowance. He must concede that I quoted a whole range of cases, including cases in, for instance, the distributive trade in which only 60 per cent. goes into investment in plant and machinery but which qualified for the 100 per cent. first year 1802 allowance, and said that whether high or low distributors or high or low investors we had failed to find a company which was worse off than would have been the case in June, 1970.
But what I did concede was that there were certainly some companies which had benefited considerably from the tax reliefs which my right hon. Friend has made hitherto but would find some part of those benefits clawed back as a result of the change to the imputation system. Perhaps I may say to the House, as I said to the Committee, that we recognised that this was the position, and while we could not concede there being two separate systems of corporation tax for two different kinds of company existing in perpetuity, we were prepared to look at some kind of transitional relief so that the period in which companies become subject to the new imputation regime new next year can be catered for. I repeat that statement tonight.
2.30 a.m.
There is only one other point I must deal with. My hon. Friend the Member for Cirencester and Tewkesbury asked me what was the marginal rate of tax under the fraction in Clause 93. The figure is about 65 per cent. for companies with profits between £15,000 and £25,000 where they taper up.
Perhaps it would be of interest to note that at £100,000 and £125,000, the figures of the Amendments proposed by my hon. Friend the Member for Basingstoke, the marginal rate in the taper would be 90 per cent. and on the CBI figures of £75,000 and £100,000, the marginal rate would be 80 per cent. Those are very high marginal rates indeed, even for a taper and would imply, if one went as high as £75,000 and £100,000, that the taper would have to be much longer than £25,000 if one were to have anything like a marginal rate of 65 per cent. as provided for under the fraction to which my hon. Friend the Member for Cirencester and Tewkesbury drew my attention.
We are very sensitive to the arguments which my hon. Friend the Member for Basingstoke and his hon. Friends have put. We have made a genuine response in reply to the Amendment moved in Standing Committee and I hope that in 1803 the circumstances, my hon. Friend will feel able to withdraw the Amendment.

§ Mr. William Clark
My hon. Friend has referred to the transitional arrangement in my Amendment in which we attempted to put the limit at £50,000 instead of £15,000. My only question is when will the House be told what the transitional arrangements will be? There is no question but that small companies, under the Bill, are to be subjected to more tax than they were originally, and the transitional arrangements are extremely important to small companies.
It is all very well for the Chief Secretary to say that transitional arrangements will be made. When will they be made and how long will the transitional period last?

§ Mr. Patrick Jenkin
With the leave of the House, may I reply that we recognise that this is of great importance to these companies and that we aim to give some indication of what we have in mind as soon as possible.
This is a very complex matter and I undertook that we would consult the interests concerned. I cannot say when we will be able to make any sort of announcement.