HC Deb 21 July 1977 vol 935 cc2021-32
Mr. David Mitchell

I beg to move Amendment No. 12, in page 13, line 22, leave out '42' and insert 25'.

Mr. Deputy Speaker

With this we may take Amendment No. 13, in page 13, line 24, at end insert— '(1A) Where in section 95(4) and (5) of the Finance Act 1972 provision is made for restricting the small company relief in respect of associated companies, such provision shall not reduce the total relief below the amount which would have applied if all the associated companies had been one company.'.

Mr. Mitchell

I trust that I shall have the opportunity of moving Amendment No. 13 formally at a later stage in order that we may have a vote upon it.

I should declare an interest which I contingently have in the debate. The purpose of the amendment is to help to create jobs. I admit that the amendment would be improved by the insertion of the words "trading company". If that is the Minister's objection, I am quite sure that the insertion could be made later.

The Minister is very much aware of, and he goes along with me concerning, the importance of the small business sector, but that sector needs to have two things if it is to succeed. It needs to have cash available for investment and it needs to have incentives. I am bound to tell the Minister that the Small Business Bureau, which has been conducting a survey on these matters, has come up with the lack of cash for small businesses as being one of the present largest single causes of lack of expansion and job creation.

Has the Minister had the opportunity of looking at the evidence given to the Wilson Committee which has been examining the whole question of the financing of businesses? If he has, and if he looks at the evidence given by the Association of Independent Businesses, as it now calls itself, he will see that it has set out clearly the sequence of events which will follow during the life cycle of a small and growing company. The association's memorandum states that. The initial source of finance for smaller businesses is that provided by the people actually managing them and by their friends". It states that the next source is usually ploughed-back profits. It is from ploughed-back profits that the growth of this sector comes.

I should like to take the Minister through the argument. In order to grow, shall businesses, need to plough-back profits. They add to that with borrowing from their joint stock bank. At a time of inflation, every small business requires more money in order to have the same volume of turnover.

When we have inflation at 17 per cent.—it may be 20 per cent. by the end of the year—it means that substantial additional sums have to be ploughed into businesses in order to enable them simply to have the same volume of turnover. They will need more money for debtors, more money for pre-shipment finance and more money, if they are in the exporting world, for performance bonds, and the like.

11.45 p.m.

The Government have made the situation worse by the introduction of the 2 per cent. national insurance surcharge, the 2 per cent. increase in corporation tax for the small business from 40 per cent. to 42 per cent., and so on. Then the Government have sought to relieve the situation by introducing stock relief. I give them full credit for having sought to undo the damage which their policies have caused to the small business sector, but I ask the Minister to accept that there are disadvantages which come from the system of stock relief in the financing of a small business.

First, it helps the wealthier business and not the very small business which has not enough money to buy the stock that it wants. Secondly, it helps to create inefficiency. As the Minister will know, one of the criteria by which the efficiency of a business is judged is whether it has a quick stock turnover. A high stock ratio is a guide to a business which is less efficient.

The third and most important consideration is that stock relief is only a deferred liability. It is not an end to that liability. As such, the money which is invested in a company in the form of increased stock—very large sums are being built up in companies' balance sheets in this way—is not available for borrowing from the bank for the further growth of the business.

Any banker looking at the company's balance sheet and considering what is the collateral has to take into account what happens if the proprietor walks under a bus. The business runs into financial difficulties. Stock has to be sold off. With the reduction in stock, the tax has to be paid. Therefore, with stock relief there is not the increase in the collateral and in the borrowing ability of the company.

In its evidence to the Wilson Committee, the Smaller Business Association put this neatly. It said: Few financial institutions will consider providing funds which put them in the position of financing a bigger proportion of assets than the entrepreneur himself. In other words, the higher the entrepreneur's assets in a business, the bigger his ability to borrow and to finance the expansion of that business.

To the extent that the entrepreneur's funds are represented by an increase in stock against which there is a liability in the balance sheet, he is not able to borrow and the expansion of the business is restricted. However, if the Chancellor of the Exchequer will do away with all these reliefs and bring down the level of corporation tax, for every £1 that he leaves in lower tax with the smaller business, the business can borrow another £1 from the bank, so that £2 is available for its expansion. I put it to the Minister that this is a significant and important aspect which ought not to be overlooked. I imagine that the hon. Gentleman will be prepared to accept the point.

I draw attention to two other matters. First, the Government's various policies ranging from employment protection to the whole parameters of intervention in the area of business are piling up greater and greater disincentives to anyone to start or to expand a business. It is insufficiently appreciated that the higher the disincentives, the higher must be the incentive to make it worth while for people to do it. There are, inextricably mixed and interwoven, the tax on the small business man for his company and the incentives to himself to expand the business.

Any small business man looking at his business today says "I have to pay corporation tax at 42 per cent. But if I plough back money into the business, I shall have to pay capital gains tax and I may have to pay a wealth tax and capital transfer tax." He will certainly expect to pay 30 per cent. on capital gains tax. The rough calculation that he makes on the back of an envelope will tell him that any profits he makes will be taxed at between 60 per cent. and 70 per cent., which is a massive disincentive against building up or expanding a business.

The Minister does not appear to be interested in the debate, since he is paying no attention and is chatting to his right hon. and hon. Friends. His hon. Friends below the Gangway are interested in unemployment and in people losing their jobs. It is the failure of the Government to do anything to make it worthwhile for companies to expand that has resulted in increasing unemployment. We see the level of unemployment going up week by week, month by month.

I estimate that before August is out we shall reach the alarming figure of 11 million unemployed. I do not think that Labour Members below the Gangway would like to take a bet on that. If they will not take up the bet, that is the Minister's answer. If they are not prepared to say that unemployment will not go beyond LI million by August, that is an indication of the Government's failure and the reason why they should accept the amendment. It will provide the opportunity to restore incentive to people to build up businesses and the opportunity to restore the finance with which to do it.

I have one final point to put to the Minister. In the corporate sector generally, one is rather inclined to be like those who work in local government and say "So what?" Sixty per cent. of the costs of any new office expenditure will be paid for by the Government." The Minister would be surprised at the extent to which savings could be made through a reduced rate of corporation tax. It would reduce the incentive to spend money wastefully throughout the whole business sector.

I also hope that the Minister will be prepared to accept Amendment No. 13. If he does not, we shall certainly wish to press the matter. It is a straightforward technical matter concerning the relief for small businesses whose pre-tax profits are £40,000 or less and it concerns associated companies. If there are two companies the relief will be £20,000 for each, but if one company makes £5,000 profits and the other makes £25,000 profits the pair of companies does not get the relief that would go to a single company. In fact, they would lose considerably.

I think the Minister will discover, if he consults his advisers, that the Treasury's advice would be that the amendment should be accepted. There would be no harm in accepting it, and I look forward to hearing the hon. Gentleman say that he can do so.

Mr. John Wakeham (Maldon)

I support my hon. Friend the Member for Basingstoke (Mr. Mitchell) in Amendment No. 12 and Amendment No. 13, both of which are important for small businesses. I know that it is customary on all occasions when we are discussing small businesses for hon. Members on both sides of the House to say how important small businesses are, and, of course, I go along entirely with those sentiments.

However, I am one of those who do not believe that just because a business is small it should have special tax treatment for that reason alone. I believe that small businesses have certain advantages and certain disadvantages. Among the advantages of small businesses are that in many cases they have energetic managements, happy work forces and many other things that go towards making their operations a success.

On the other hand, many small businesses have severe disadvantages. Therefore, it is right for the Government to look at their legislation to see whether small businesses should be relieved of some of the disadvantages that bear unfairly on them. One disadvantage which by definition virtually all small businesses suffer is a shortage of capital. In these inflationary times, shortage of capital has brought in its wake a number of tax disadvantages that the amendments attempt at some point to relieve.

Businesses with adequate working capital can get two tax advantages. One is an ability to make capital investments whenever necessary to get relief from corporation tax that they would otherwise have to pay. In my experience, very few small businesses are able to make such investments at will. Indeed, there is a good economic argument for saying that the quality of investment in many small companies is that much better because they do not have the ability to turn on the tap and make capital investments to defer a major tax liability which would otherwise arise. Nevertheless, we must face the fact that capital gives the larger businesses a tax advantage that is not enjoyed by the smaller businesses.

The second advantage is stock appreciation relief. Basically, the same arguments apply. A business which has the ability to borrow has the ability to stock up towards the end of its financial year and thereby defer corporation tax liability. That, too, is an advantage that capital gives to the larger businesses. Such an advantage is not available to the smaller businesses because they do not have the necessary capital.

Inflation is increasingly making a tax differential in favour of the bigger business which is denied to the smaller business. Therefore, there is a strong argument for the acceptance of Amendment No. 12. I suggest that in practice a 25 per cent. corporation tax liability that is paid is pro rata probably a higher rate than a 52 per cent. tax liability on a major company that is able to defer it. A reduction from 52 per cent. to 25 per cent. might seem substantial, but in practice I suggest that it is nowhere near as substantial as it might appear.

Amendment No. 13 seeks to correct a disadvantage applying to groups of small companies which are associated for corporation tax purposes. In many instances, when a group of companies is associated for corporation tax purposes the small business relief is divided among them, which can produce a most unfair—[Interruption.]

Mr. Deputy Speaker

Order. I am having difficulty in hearing what the hon. Gentleman is saying.

Mr. Wakeham

I do not know how much you have missed, Mr. Deputy Speaker. I hope I shall not have to go back and start again.

Mr. Deputy Speaker

I have the gist of the argument.

12 midnight

Mr. Wakeham

As a group of associated companies is not able to use the shortfall for corporation tax purposes, that not being allowed in one company against another, in many cases the group as a whole loses some of the relief that I think Parliament intended it should have as compared with a small business which is treated as one tax unit, and as one company.

In many instances, small business men have for various reasons to divide their businesses into several companies when they would not choose to do so. For example, a company dealing in an agency business selling different products might be required by the manufacturers to trade through separate companies. In no sense would that be done from the point of view of administration, tax advantage or anything of that sort. It would be done purely because the principals insisted that it should be done.

In many instances a small business finds it necessary to divide itself into separate companies to raise additional capital, either by way of loan or preference shares of some sort. That may happen when a person is prepared to invest in a business as long as he is financing only one section of it. That may be the only way in which the required investment is forthcoming.

In many instances—surely this will be welcomed on both sides of the House—small business men divide their businesses into several companies because that is a practical way of giving employee participation to someone, who might take a small stake in a company. In that way, there might be a separate unit in which the employee who is running that side of the business takes a share without necessarily being involved in the whole of the business.

At present, the arrangements for corporation tax for those small businesses are unfair because they are often denied small business relief which otherwise they would have had. In practice, we know that if a small business man goes to expensive accountants and works these things out in advance, often by introducing participation agreements and the sharing of profits, these factors can to some extent be mitigated. However, I can see no advantage for these unnecessary complications being present in the small business man's life and, therefore, I warmly support my hon. Friend the Member for Basingstoke.

Mr. Denzil Davies

The hon. Member for Basingstoke (Mr. Mitchell) has moved Amendment No. 12 and spoken to Amendment No. 13. Amendment No. 12 seeks to reduce the tax on small profits —not necessarily small businesses—from 42 per cent. to 25 per cent. That is a quite substantial reduction. The cost of the amendment would be about £200 million in a full year. As I have said previously, it seems that that is not of great concern to the Opposition.

We are concerned with small profits, not necessarily small businesses. A large business may make a small profit. If that were so, it would get this benefit. Therein lies a difficulty. Some small companies may make large profits. In that event they would not benefit from the reduction. As a result of the difficulties caused by the introduction of the imputation system of corporation tax that the hon. Gentleman supported, it is necessary to include certain provisions in the Bill. If the hon. Gentleman's party had not mucked around with corporation tax, small businesses would be much better off under the system which applied until 1970 than under the present system.

It was because of that change, and because of the effect that it would have had on small close companies—this was discussed at length in the Select Committee on Corporation Tax—that the then Conservative Government introduced this special provision. It was a rough and ready provision to try to mitigate the damage that was being caused to small businesses by the change in the imputation system which the Tory Government put through, and which the hon. Gentleman supported. The hon. Gentleman should go away and read the Select Committee's Report on Corporation Tax. If he does that, he will see what the problem was.

Small private companies which do not want to distribute their profits in the way that public companies do were better off under the old system, where the rate was 40 per cent. It was by changing the imputation system that the Tory Government damaged small businesses, and they tried to mitigate that damage by introducing this so-called small business relief which the hon. Gentleman now wants to reduce to 25 per cent.

Whatever the problems of small businesses today—and I accept that they have problems—corporation tax is not one of them. When one takes into account the stock relief provisions and the generous allowance for capital investment, one realises that small companies —indeed, any companies—do not have a problem in relation to corporation tax, especially if they are seeking to plough back their profits for further investment. They may have difficulties with capital transfer tax—this is something that we have debated on many occasions—but corporation tax is the least of the problems of small companies. They have complete exemption if they plough back profits for the sake of developing the business.

Mr. David Mitchell

Can the hon. Gentleman explain why he has completely and directly contradicted the words of his right hon. Friend the Chief Secretary on this subject on 11th May 1976, at column 419? If the hon. Gentleman wishes me to read out the damaging phrase that his right hon. Friend used, I shall do so. Can he also say how many jobs would be created by ploughing £200 million more into the small business sector?

Mr. Davies

I never contradict my right hon. Friend. It is clear that the hon. Gentleman has misread what my right hon. Friend said, just as he has misunderstood so much of the tax system.

Partly because of the cost, and partly because of the generous way in which the Government have dealt with companies in the matter of corporation tax, there is no case, and the hon. Gentleman has not made one, for a reduction from 42 per cent to 25 per cent. in the rate of small profit relief for businesses.

Mr. John MacGregor (Norfolk, South)

The hon. Gentleman made an interesting comment. He said that small businesses might have problems in relation to capital transfer tax. May we take it that, while he is not sympathetic to the amendment, he has an open mind to look at the problem of capital transfer tax over the next year?

Mr. Davies

We have had the debate on capital transfer tax. We think that the relief that we have given is generous and solves the problems of small businesses. I concede that it is possible to put that kind of argument on CTT, but it is not possible to put any respectable argument in relation to the effect of corporation tax on small, or any other, businesses, and the hon. Gentleman knows it.

I turn now to Amendment No. 13, which I understand the hon. Gentleman intends to press to a Division. I have some sympathy with this amendment, because one of the problems of introducing a relief of this kind—I stress that it is a relief—is that it had to be introduced because of the damage that the imputation system introduced by the Tory Government would have caused to small companies. There are difficulties with groups of companies, because if we introduce a lower rate of corporation tax up to certain levels of profits companies will split their operations into groups and associated companies. The Americans found this to be a problem with different rates. In 1971 the Conservative Government had to introduce provisions to prevent avoidance, and in some cases this causes a problem for companies which do not want to split up, for tax and other reasons.

These amendments would be completely unworkable in practice. Without complicated legislation it is not possible to deal with the problem, and even then I do not think that the problem would be solved. I shall read to the House what the right hon. Member for Wanstead and Woodford (Mr. Jenkin) said in the Finance Bill Committee in 1972 about a similar amendment. He said: I am sorry to have to disappoint the hon. Member, but I feel that I cannot advise the Committee to accept the amendment, if only because it would be unworkable in practice, whereas the scheme written into the Bill would be easily workable, though rough at the edges." —[Official Report, Standing Committee E, 26th June 1972; c. 1495–6.] That was the answer to the problem then and it is the answer that I must give tonight. In practice it is not possible to introduce a workable scheme, for the same reason as the right hon. Member for Wanstead and Woodford gave.

Mr. David Howell

I recognise the Minister's argument about Amendment No. 12. It is perhaps fair to say that at midnight £200 million is a large sum to expect the Minister to give away. But I am sure that there are plenty of big spenders below the Gangway who would help the hon. Gentleman to dispose of such a sum.

If it were a question of thinking about people and the creation of jobs, there would be many worse ways than this to be found in the Government's existing programmes through which they pump vast sums of money into industry to create new jobs. But I recognise the point made by the Minister and it is reasonable at this stage in the debate.

The Minister is on weaker ground on Amendment No. 13. He has used fairly traditional arguments about why nothing can be done. He has claimed that the Government do nothing but think of small businesses and how to help them and create new jobs. With the rising tide of unemployment which hangs like a pall over the country, the Minister uses arguments which have been knocking around for many years.

The Minister has done justice to my hon. Friend the Member for Basingstoke (Mr. Mitchell) on the first amendment that we are discussing. I should have liked him to take a more positive approach to the second amendment in pursuing the growth of small businesses and the jobs that that would bring.

Mr. David Mitchell

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 13 in page 13, line 24, at end insert— '(1 A) Where in section 95(4) and (5) of the Finance Act 1972 provision is made for restricting the small company relief in respect of associated companies, such provision shall not reduce the total relief below the amount which would have applied if all the associated companies had been one company.'.—[Mr. David Mitchell.]

Question put, That the amendment be made:—

The House proceeded to a division; but no Member being willing to act as Teller for the Ayes, Mr. DEPUTY SPEAKER declared that the Noes had it.

Question accordingly negatived.

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