HC Deb 11 May 1976 vol 911 cc407-19
Mr. David Mitchell

I beg to move Amendment No. 39, in page 14, line 24, leave out "42 per cent." and insert shall be three quarters of the standard rate of corporation tax as Parliament may from time to time determine".

The Deputy Chairman

With this Amendment we may discuss the following amendments;

No. 38, in page 14, line 24, leave out "42" and insert "35".

No. 40, in page 14, line 24, leave out "42", and insert "25".

No. 41, in page 14, line 30, leave out "£30,000" and insert "£35,000".

No. 42, in page 14, line 30, leave out "£30,000" and insert "£50,000".

No. 43, in page 14, line 30, leave out "£30,000" and insert "£100,000".

No. 44, in page 14, line 31, leave out "£50,000" and insert "£80,000".

No. 45, in page 14, line 31, at end insert— Provided always that if by 5th April 1977 the official Retail Prices Index shall have risen by more than 5 per cent. since 6th April 1976 then the Treasury shall by order substitute for the said sums of "£30,000" and "£50,000" such higher sums as shall increase the said sums of "£30,000", and £50,000" by a percentage equal to the percentage rise of the official Retail Price Index between the last date on which it was announced before 6th April 1976 and the last date it shall be announced before 5th April 1977.

Mr. Mitchell

The purpose of Amendment No. 39 is to reduce the rate of corporation tax paid by small businesses to three-quarters of the standard rate. Taking the standard rate as 52 per cent. as it is today, that would mean that the small business rate would be 39 per cent.—a reduction of 42 per cent. from the current level.

To understand the reasons behind the amendment it is necessary to consider the peculiar, separate and different financial position of a small business. It has to rely on the retention of profits and bank borrowings to meet the three categories of expenses to make up for the inroads of inflation, the give the company that degree of financial security which safeguards employment, and to finance expansion. I hope that the Treasury will accept the argument for this reduction.

Inflation is not allowed against tax, even with the present generous stock relief and investment allowances. Extra working capital is needed for financing debtors, improving commercial buildings and financing exports. That is important because the Government are seeking a switch to a higher proportion of export trade. When exporting, a business has to give longer credit terms than for internal trade, and there is no allowance for repaying bank borrowings to do that.

Money to finance job security is required to improve the financial strength of the company. That is one of the major financial needs throughout industry. Companies have been through a difficult period. Many had geared themselves for higher production levels, borrowed substantial sums of money, and then found a collapse in demand as trade receded, and they were left with substantial borrowings which had to be serviced. Therefore, they have been short of money.

There is a crying need to build up the financial strength of industry if jobs are to be made secure. Large companies do that through the Stock Exchange. In the last 12 months £1,270 million has been raised by large companies through rights issues on the Stock Exchange. But what happens to the small business which has the same need? Where does the small business get the money? It cannot go to the Stock Exchange for it, so it must get it by ploughing back its profits.

12.30 a.m.

Therefore, there is a need to see that the tax levied on those profits which are ploughed back is considerably lower than it is today. In Germany, one of our competitors, the rate of corporation tax on ploughed-back profits is 22 per cent. My hon. Friends and I have been very moderate. We have suggested that the Government should reduce the rate to 39 per cent., three-quarters of the standard rate. I hope that the suggestion will be accepted.

My third reason is that the Government hope for and expect an expansion of trade during the coming year. Small businesses get their money from ploughing back and borrowing. The extent to which they can borrow from the bank is limited by the proprietor's equity stake in the business. Unless there is a bigger equity base in the business, one cannot borrow more—the banks will not lend. Therefore, to enable companies to be in a position to finance their expansion we must build up their equity base. That means leaving more money in the business, taking out less in corporation tax.

I turn to the case for the definition of a small business for the purposes of small business relief being enlarged. Now I am talking about Amendment No. 42 and the other later amendments. The question before the Committee is how to define a small business. Does one define it with profits ending at £30,000, as the Government propose, or with profits ending at £50,000 or £100,000, as my hon. Friends and I have suggested in alternative amendments?

The sum of £30,000 pre-tax profits is not nearly enough, because the peculiar position of smaller unquoted companies is that they can obtain their working capital only through retentions. The company which is just over the level for small business corporation tax relief is paying 50 per cent.

I shall not embarrass the Chief Secretary by quoting at length from his speeches during the passage of the 1972 Finance Act. A Select Committee had been looking into whether we should change to the imputation system or retain what the right hon. Gentleman is pleased to call the classic system of corporation tax. The Select Committee found that the Inland Revenue accepted that companies which had to rely on retained profits for expansion would be adversely affected by that change. The right hon. Gentleman went out of his way, speaking from the Opposition Benches, to say that the rate of corporation tax paid by those companies was being increased by 25 per cent. That is one way of describing it. It certainly was an increase from 40 per cent. to 50 per cent. He opposed it, I believe rightly.

Tonight the Chief Secretary has the opportunity to carry his opposition to the increased taxation on ploughed-back profits of small businesses to the point at which he can put right the wrong that he believed was committed in 1972. Accordingly, I invite him to support our amendment taking the definition up to £50,000 or the logical one taking it up to £100,000, as one cannot hope to obtain a Stock Exchange quotation even at that figure.

The best way to achieve the aim of expanding small businesses is to reduce the level of corporation tax levied on them and the size of company to which that benefit applies. Therefore, I ask the right hon. Gentleman to accept the amendments.

Mr. Younger

I wish to add two comments which I hope will persuade the Chief Secretary to look on these amendments favourably. I hope that he will not think this year that this is a normal routine exercise to probe the intentions of the Government towards small businesses. This year something more has to be done for small businesses if the Government are to achieve their objective of an expansion in the economy and particularly an increase in our exports.

As I am sure the Chief Secretary will know, it is a fact of our economy that we forget at our peril that a large proportion of the economic success or failure or the country depends not on the big names or huge companies about which we hear a lot in the news, but on a multitude of small businesses. They are of all sorts and sizes and they are in all parts of the country and they make all sorts of things and are involved in all sorts of activities. It is on their success and prosperity that much of the Government's aims will depend.

I emphasise what has been said about what an essential part in their success is played by their being able to have the maximum retention for expanding or financing operations. The difficulties that small companies have in financing operations are great at any time, but particularly at this time, as I am sure the Chief Secretary will agree, when inflation is at a totally unprecedented level and when it is almost impossible for small companies to keep their heads above water, let alone cope with new problems.

It is my experience that all small companies—certainly all the business men to whom I have spoken over the past four or five months have said this in the clearest possible terms and with a great deal of detail—are anxious about what will happen when the economy begins its up-turn. Their anxiety is about how they will be able to find the resources to cope with expansion. They are not crying "Wolf". They genuinely want to be able to feel that they will be able to respond to the expansion in the economy, and at the moment they are genuinely unable to put their fingers on the means to do so.

I am not referring to companies in great difficulties, companies that are badly managed or in other difficulties that would be a problem at any time. I am speaking of the small companies that are highly successful, that have been able to do good business even in difficult times, small companies that are well managed. I hope that the Chief Secretary will regard this as a serious attempt to advise the Government how things stand and to say that if they make no alteration, the contribution by small businesses to the expansion that we all want will be inadequate or, worse, may not occur at all.

I should like to mention the small scale on which small businesses operate. It is easy for us, thinking as we do of matters at a national level, to concentrate our attention on the large companies in our constituencies, those employing the majority of our constituents and requiring a great deal of attention. We tend to forget the small scale upon which small businesses have to operate. It is not so much that the difficulties of modern business, the administration of the tax system, and the returns which have to be made by all businesses, are in any way different for small businesses, but large or medium-sized businesses have much larger resources in personnel, equipment, and machinery with which to deal with these things.

Small businesses inevitably rely on a small number of people operating in a limited time to try to keep up the standards required of them. In this regard it is absolutely critical that we should do our best to help them by allowing them to retain as much of their profits as possible.

It would be an imaginative concept for the Government to allow a three-quarter rate of corporation tax for small businesses. I accept that this would be, perhaps, just a temporary measure. I would not necessarily expect it to be brought in for all time. But at this time, unless the Government do something more, small businesses are not going to be able to respond—however willing they may be—to what the Government want them to do, and that would be a tragedy for them and for the Government, too.

Mr. Pardoe

I want to refer specifically to Amendments Nos. 42, 44 and 45. Amendment No. 42 has already been mentioned by the hon. Member for Basingstoke (Mr. Mitchell), my right hon. and hon. Friends and I put down this amendment. I agree with everything the hon. Member said about raising the threshold for small company relief. Basically, Clause 24 amends Section 95 of the Finance Act 1972, which provides for the mitigation of corporation tax liability on small companies.

Originally the mitigation was for companies with profits under £15,000. This figure was raised to £25,000 in 1974—and two years is a pretty long gap; the rate of inflation being what it is, we need it raised every year—and now we have an increase to £30,000. This is a pathetically small increase in face of inflation.

There is no doubt that small companies need to plough back profits in order to grow, and we should not think of hitting those companies which achieve profits of over £30,000. I think that we should raise the limit to £50,000 because there should be serious consideration of the facts of British industrial performance. Perhaps the limit should be raised much more, or perhaps the whole of corporation tax should be abandoned for a band of companies at the lower level.

What would be the cost? We are talking about 95 per cent. of the companies in this country, which are not paying corporation tax, or paying the small company rate, or getting the marginal relief. Only about 5 per cent. pay the full amount. The total revenue involved in small company relief is around £250 million—that is what the Treasury estimates this year.

If we bring in marginal relief, the total cost will be about £400 million. Is there any other section of the whole tax structure where, with expenditure of between £250 million and £400 million we could make a more direct and instant impact on the industrial performance and growth rate of the British economy and exports? I hope that the response from the Chief Secretary will be that the Treasury is beginning to think along those lines and that we shall see proposals to that effect.

12.45 a.m.

Amendment No. 45 is an indexation amendment. It is late—or perhaps at this stage I should say early—in the day to deploy the full argument for indexation. In any case I do not have the support or presence of the hon. Member for Blaby (Mr. Lawson), and how could anyone talk about indexation without the hon. Member being here? That would be like Hamlet without the prince.

Whatever protestations we hear from the Chief Secretary about how every year he and his officials carefully look over all these amounts and assess them against the Retail Price Index, upgrading and updating the figures, we know only too well that Governments never do that every year. We see that the allowances have been left to fester, and it is time that Parliament insisted that Governments gave it the real figures.

If after indexation they wanted to propose a reduction in the threshold at some future date, that would be the subject of a different debate. It would, however, be wise to write an indexation provision in to the whole subject of mitigation for small companies from corporation tax, and that is what Amendment No. 45 seeks to do.

Mr. Nott

The Committee owes a considerable debt of gratitude to my hon. Friend the Member for Basingstoke (Mr. Mitchell) for the relentless way in which he pursues the cause of the small company. Perhaps I should declare an interest in that I am a shareholder and the chairman of a small company which benefits from the lower rate of corporation tax. I should be delighted if the threshold could be raised and also if the suggestions by the hon Member for Cornwall, North (Mr. Pardoe) could be accepted by the Government.

As was fully recognised in the report of the Select Committee, the small company is in a different situation from the larger company. I am well aware of the arguments that we had in the 1972 de- bates in Committee, and I have read what the right hon. Member for Heywood and Royton (Mr. Barnett) said and what my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) said in reply from the Government Front Bench. The arguments are much the same now as they were then. The impact of the imputation system remains as it was on the small company. There have been changes in tax which have benefited small manufacturing companies, but the general position of the company sector has deteriorated, although the Chancellor has done something recently to repair the damage he did in the first year of the Labour Government.

Small companies are not afflicted just by the level of corporation tax. They are hit by the whole range and panoply of bureaucratic regulations and Acts of the past year or so. These have placed an intolerable burden of additional work on small companies. There is the Employment Protection Act and the Health and Safety at Work Act.

The other day at the company which my friends and I recently established in Bedford the whole process of manufacturing was interrupted by an inspector. He saw a machine which had just been installed. He was strung around with cameras and he took photographs of the machine from every angle. We were quite happy to do whatever he wanted and he was most charming and pleasant about it. But he must have been there for about three or four hours. He held up production and took photographs. The whole thing could have been dealt with in minutes. It is these niggling things which happen in factories throughout the country which upset businessmen.

My hon. Friend the Member for Basingstoke has made an important point. He is saying that the principle established with the Select Committee and incorporated in the 1972 Act for a lower rate for small companies should be extended. Certainly he made his points fairly and I am sure that the Chief Secretary will wish to answer.

Mr. Joel Barnett

As I think those who have attended the debates on small companies over the years will know and as the hon. Member for Basingstoke (Mr. Mitchell) knows, I do not have to be persuaded about the value of small companies. I acted for large numbers of small and medium-sized companies and I have and do again declare an interest in that I have share in small companies. I am well aware of the value of this type of company.

I much appreciate what the hon. Member for St. Ives (Mr Nott) said about niggling things which upset small manufacturing companies. I am told of examples by friends of mine and if the hon. Member cares to approach the responsible Minister—it sounds like the Department of Employment—and mention the point, I am sure—I hope—that somebody will be interested to see that it does not happen again.

Mr. Nott

The only principle which motivates me as an individual in business is to keep the furthest possible distance from Government and anything to do with it.

Mr. Barnett

The hon. Member is not quite fair. If there are circumstances in which there are difficulties for small companies, most Ministers would be happy to look into them to see whether they can help. I am sure that will have been the hon. Gentleman's experience in Government.

Perhaps I may mention the costs involved. Amendment No. 39—to insert three-quarters of the standard rate of corporation tax—would cost about £30 million and No. 38 would cost about £70 million.

Mr. David Mitchell

When the matter was discussed on Second Reading, the Minister indicated—column 885 of Hansard—that the vast majority of companies did not pay corporation tax. How does he find so large a cost for our moderate amendment?

Mr. Barnett

Because the vast majority of companies do not pay corporation tax, and I shall be coming to that. That applies even more today, because the vast majority of companies are small companies, many of which do not pay corporation tax at all and their very small profits are distributed to the directors, reasonably and properly, and they plough back the profits. It is argued that that is what happens in most small companies.

I do not dispute that, and I am glad that the hon. Member noted what I said about imputation and the classical system. I do not claim ownership of the definition of the difference between the system we had, the classical system, and imputation.

Small companies in the main obtain their financial requirements from ploughed-back profits. Most companies, including public companies, get most of their investment from ploughed-back profits. This applies especially to small companies because they do not have the facilities to go to the market or to raise money by debentures or fixed interest loans; nor can they raise the same amounts from the banks by ovedraft as can large concerns. I am well aware of their problems.

The main reason we have done nothing about switching to the classical system is that although the shareholders and directors of small companies might prefer it, they would prefer even more strongly to have no change and to have stability in the tax system as it affects them. Hon. Members who have spoken in the debate have underestimated how much has already been done for trading companies. The hon. Member for St. Ives said we had done something to help manufacturing companies, but he was less than generous. It is help for trading as well as manufacturing companies, and it is more than "something".

It is generally recognised in industry, the City and elsewhere that the stock relief and the 100 per cent. first year capital allowance can mitigate the worst effects of the imputation system for small manufacturing and trading companies. I recognise that it does nothing for small financial, investment, or property companies, but we are seeking to help small trading companies and, with these generous allowances, the vast majority of small companies—even if they previously paid corporation tax—will pay no corporation tax if they are increasing investment in stocks and capital.

Mr. John Cope (Gloucestershire. South)

Is the Chief Secretary aware that a large part of what he claims to be the benefit of stock relief only undoes the damage of inflation, which has pushed up the tax bills of companies because, with the vast increase in inflation, their stock has increased in value?

Mr. Barnett

I do not agree with the hon. Member. The kind of stock relief we have chosen does not deal only with the inflation element. If a small company is expanding and building up its volume of stocks, it will certainly not pay corporation tax. A rapidly expanding small trading company will be helped to an even greater extent. I know of a company which has had a colossal growth in the past two or three years and which, despite a substantial growth in profits, has paid hardly any corporation tax.

Mr. Cope

I accept what the Chief Secretary says about individual companies, The effect varies from company to company, according to what they are doing, but the general effect in the company sector is as I have described it.

Mr. Barnett

I do not accept that.

A reduction in the rate of corporation tax is a wholly non-selective way of helping those we wish to help. It would help all small companies. I am not saying that investment or financial companies are bad, but we want to help particularly the small trading and manufacturing companies.

Because of the imputation system and the way corporation tax has worked in the past, there are not that many individuals seeking to go into small financial, investment or even property companies and there are substantial tax disadvantages in so doing. These are not the sort of companies we are most seeking to help. My view is that if we want to give selective help to trading and manufacturing companies, the way to do it is as we have done it—namely, through stock relief and 100 per cent. capital allowances.

I say in passing that Amendment No. 40, in the name of the hon. Member for Basingstoke, which seeks to reduce the 42 per cent. to 25 per cent., would cost £165 million. I assume that he does not want to press the amendment. Indeed, he has not spoken to it.

Mr. David Mitchell

When the right hon. Gentleman indicates the high cost of the amendment he destroys his argument that only a small amount of corporation tax is paid.

1.0 a.m.

Mr. Barnett

There are still companies that pay it. I have not suggested that companies no longer pay corporation tax. However, the relief has been substantial for trading and manufacturing companies. It is generally recognised as being substantial. They are the companies that will have been paying either none or much less than would otherwise be the case.

The next group of amendments that has been referred to by the hon. Member for Cornwall, North (Mr. Pardoe) and others relate to limits. I think that the hon. Gentleman described the increase we have made as pathetically small. I agree that it is not a massive increase, but it will cover over 95 per cent. of companies. It surely is not reasonable to say that it is a pathetically small increase.

If we went as far as has been suggested, if we did away with corporation tax altogether or reduced the tax for small companies to negligible proportions, on the lines of some amendments, it would be necessary to bear in mind that many small businesses are not limited companies. Many of them trade as partnerships, for example, and many of them are highly successful. If we were giving substantial relief in reducing the effective rate of tax for small companies, we should have to think in terms of giving additional relief to small traders and small partnerships. It is not unreasonable that we should take account of that factor.

I hope that the Committee will feel that I have answered most of the points that have been raised. I hope that the hon. Member for Cornwall, North will net expect me once again to deal with indexation, especially in the absence of the hon. Member for Blaby (Mr. Lawson), who has been very upset about my replies on the subject. I hope that the Committee will feel that we have done a great deal in terms of corporation tax relief for small companies. Of course, we shall never be wholly satisfied, and we shall keep the whole matter under constant review.

Mr. David Mitchell

Will the right hon. Gentleman take up a matter which he has totally ignored so far—namely, the need for small companies to build up their financial strength and repay bank borrowings so as to put themselves in a position that will enable them to borrow again from the banks to finance expansion? That is an important factor. If a large company has taken action in that direction through a rights issue, it will be necessary for small companies to plough back. If they are not offered financial incentives, as the right hon. Gentleman has described them, to take such action, they will not be able to expand.

Mr. Barnett

The definition that the hon. Gentleman has used gives the answer. He referred to small companies ploughing back profits. When a company enters into additional investment in new stock, for example, it will not pay corporation tax.

I entirely accept that that company will still have financing problems. Of course it will. But, equally, it is fair to say that bank managers are particularly good with the board of a small company making substantial profits, ploughing them back and not taking very much out. In those circumstances the assets are there as a secure base on which to borrow to a greater extent than the company with no growth record and no assets on which to borrow.

The answer is implicit in the point the hon. Gentleman made. The kind of company we both seek to help is the one that has ploughed back its profits, and I doubt that a further reduction in corporation tax would particularly help that kind of company.

Amendment negatived.

Clause 24 ordered to stand part of the Bill.

To report progress and ask leave to sit again.—[Mr. Coleman.]

Committee report progress; to sit again tomorrow.