§ Mr. David Mitchell
I beg to move amendment no. 48, in page 12, line 12, leave out '42' and insert '40'.
§ Mr. Deputy Speaker
With this we may take amendment no. 49, in page 12, line 14. at end insert—'(2A) For the financial year 1977 and subsequent financial years, if a company eligible for the small companies rate of corporation tax elects to forgo first year allowances and stock relief, they shall pay corporation tax at a composite rate of 25 per cent.'.
§ Mr. Mitchell
In view of the printing strike the House may find it helpful if I set out the terms of the amendment. 1562 Amendment no 48 seeks to reduce the rate of small firms corporation tax from 42 per cent. to 40 per cent.
I draw the attention of the House and the Minister of State to the fact that the amendment does not mention advance corporation tax. It is not intended to apply to ACT. If there should be any technical error in the drafting of the amendment, I shall be happy to assist by submitting a manuscript amendment if the right hon. Gentleman is prepared otherwise to accept the amendment.
The amendment deals with two important matters. First, it is concerned with simplification. Secondly, it is concerned with the need to increase the level of retained profits by cutting the amount of Government take, especially from small businesses.
1563 I think that the Minister will find the amendment attractive to him. It gets him off a hook on which he has become impaled. He is a Minister in a Government who claim to be interested in and concerned about the problems of small businesses, yet the blanket increase in the national insurance surcharge has done immense damage to small businesses. The increase in the Government's take throughout the whole of the business community as a result of the new tax on national insurance is extremely serious.
I am sure that the right hon. Gentleman is anxious to find a way in which he may remedy the damage that has been done to the small business sector. The amendment allows him to arrive at the same conclusion but perhaps in a different way.
The Small Business Bureau has been collecting a great deal of information on the effects of inflation and the cash needs of smaller firms. Small businesses in particular need extra cash to finance the cost of stock. When there is inflation the same volume of stock ties up more money. They need extra cash because of debtors. When a business has sold stock and is waiting to be paid there is more paper money involved in the same volume of sales. When firms venture into the export trade, which the Government wish to encourage them to do, the extended credit which is taken by an overseas buyer, used in 90 days instead of 30 days, means that substantial additional sums are required.
There is also the important problem of replacement costs. I know that there are first-year allowances, but the problem for the small business is that if it purchased a printing press, for example, for £16,000 five or seven years ago it will cost £90,000 to replace. How does that business accumulate enough money and retain it in the business to meet the higher cost of modern equipment? If the Government are genuine in their desire to see an expansion of small businesses—and the job creation potential is enormous—they must ensure that the money is available to finance that expansion.
All this means that more money is needed within the business community. But the contrary is happening. At a time when businesses require more money, the Government are taking more money from 1564 them. They are taking more money in the increased level of corporation tax. The first of our amendments seeks to take corporation tax back to the 40 per cent. level that it was when the Government came to office. It also deals with the special circumstances of the many less sophisticated companies.
Since the Minister might be doubtful about the importance of increased working capital to enable firms to remain competitive, I pray in aid the EEC study which was reported fully in The Times of 26th June. A study of small grocery stores shows that lack of working capital, rather than competition from the multiple supermarkets, is in many cases the cause of small businesses getting into financial difficulties.
§ The Minister of State, Treasury (Mr. Denzil Davies)
The hon. Member mentioned small grocery stores. I presume he is thinking of those that are incorporated.
§ Mr. Mitchell
I am dealing, as did the EEC report, with businesses which are incorporated. There is nothing peculiar about grocers. The same financial principles, problems and restrictions apply to the grocery trade as they do to a multitude of other trades.
From previous debates I suspect that the Minister is likely to reply as did the Chief Secretary when he was taxed about this on a previous occasion. He said that nobody pays corporation tax and that he did not know why we should be so excited. [HON. MEMBERS: "Hear, hear."] I hear from below the Gangway accord with what I have been saying.
The truth is not that nobody pays corporation tax but that only the unsophisticated firms pay it. The sophisticated firms find ways round paying corporation tax, whether they are genuine or artificial. I pray in aid The Sunday Times report of last week which calculated that 13 out of Britain's top 20 industrial giants paid either no profits tax last year or only a nominal sum.
Let us examine the position of individual companies in the large firms sector —the sophisticated companies. Allied Breweries with profits of £63 million, paid no mainstream corporation tax. BAT, with £374 million profit, paid £2 million. BP, which is half owned by the Government, with £1,784 million pre-tax profit, paid no corporation tax. The Ford 1565 company, with £122 million profit, paid no corporation tax. ICI, with £540 million profit, paid £12 million in corporation tax. Rio Tinto Zinc, with £279 million profit, paid no corporation tax.
§ Mr. Robert Kilroy-Silk (Ormskirk)
This is an incredible and disgraceful state of affairs, particularly in the context of the profits that these large companies are making and the huge subsidies and grants that they are receiving from the taxpayer. For them not to make a contribution to the national Exchequer is extraordinary. Yesterday the hon. Member for Basingstoke (Mr. Mitchell) and his hon. Friends wanted to tax unemployment pay. Previously they have suggested that tax should be imposed on a variety of other categories of people, including social security claimants. Will the hon. Member for Basingstoke now condemn in the same outspoken and forthright terms the large multinational and national companies which are making huge profits but making no contribution to the national Exchequer?
§ Mr. Mitchell
The Government have decided that large businesses require the opportunity not to pay corporation tax because of financial pressures and the amount of money that they need inside their businesses in order to cope with inflation. This arises mainly in the area of stock relief. The unsophisticated smaller businesses that do not have access to costly technical and professional advice end up paying corporation tax.
§ Mr. Denzil Davies
The hon. Member suggests that the large sophisticated businesses do not pay corporation tax because they are sophisticated and receive sophisticated advice. The reason why manufacturing companies, large and small, pay little corporation tax is partly the investment allowances and partly stock relief. There is nothing sophisticated about that.
§ Mr. Mitchell
That illustrates my argument. To the Financial Secretary it is clear. But if he had done as I have done and gone around the country listening to groups of small business men and hearing what happens on the ground, he would know that many small businesses do not even claim stock relief. Many small businesses' accountants advised them not to claim stock relief.
1566 I can give the House an example from Wales. In one Welsh valley there are two accountancy practices. One accountant claims stock relief for all his clients. The other does not, on principle. He says that it is a deferred liability and he prefers his clients not to have deferred liabilities hanging over their heads. That is bad professional advice, but it is the reality of what is happening in Wales.
In Birmingham an accountant said to me at a meeting that he had a client who had £370,000 of deferred tax liability and he proposed to pay off £50,000 of it because he did not like deferred liabilities on his balance sheet. The accountant asked me "What advice do you give to me to give to my client?" I am in no position to give professional advice.
I could give further examples nearer to London of other accountants who have advised clients not to claim or who have gone along with clients who have suggested that they should not claim stock relief.
There is an enormous difference between, on the one hand, the sophistication of the Financial Secretary and of hon. Members who are familiar with the legislation, and, on the other hand, the reality of what it is like outside in the ordinary small business world. A man who is good at making widgets may know nothing about the intricacies of stock relief and first year allowances.
The proposition in the second amendment is that companies should have the option—but only an option—either to pay corporation tax with the existing reliefs in the way in which they do now or to pay at 25 per cent. and forgo the right to both stock relief and first-year allowances.
§ Mr. Denzil Davies
In his amendment the hon. Gentleman is seeking to give the option to choose stock relief. If these people are so unsophisticated, what is the point of the amendment? They will not know whether to exercise that option.
§ Mr. Mitchell
I am grateful for the opportunity to explain that any small business man faced with the option of paying 25 per cent. corporation tax instead of 42 per cent. will exercise that option if he is not sufficiently sophisticated to work his way round stock relief and first-year allowances. The Minister 1567 does not have to accept my word for it. If he will go out into the sticks he will find large numbers of business men who are paying corporation tax but who would not if they were advised by someone as sophisticated as the Minister.
That explains why the second amendment should commend itself to the House. It simply provides that those who are good at their businesses but who do not have the benefit of expensive and skilled professional advice should be able to pay a much lower rate of tax. In doing so, they will release the funds necessary to enable the business to expand and provide jobs.
This is the touchstone of the Government's sincerity, which will show whether they believe in the growth of the small business sector and the provision of jobs within it.
§ Mr. Robert Edwards (Wolverhampton, South-East)
I do not wish to delay the vote on this matter, but I must comment on the speech of the hon. Member for Basingstoke (Mr. Mitchell). From his remarks one would imagine that the Government were the enemies of the small business man, but it is the big multinational companies that are driving the small man out of business. The shortage of capital for small business men arises because the great consortiums of banks are controlled by the multinationals. The boards of our banks have an interchange of directorships with ICI and all the big multinational companies. It is they who have withdrawn the credit from the small business people. The small business men are now relying on the Government for money. The Government have offered them an alternative under the Industrial Common Ownership Act. If they want to continue with new ideas they can hand their shares in trust to their workers and start a healthy common ownership organisation.
My friend the late Dr. Schumacher, whom I knew for 20 years and who sat with me on a common ownership organisation called Scott Bader as a trustee director, wrote a book entitled "Small is Beautiful" which is frequently quoted in the House by Conservative Members. But small has not always been beautiful. Some of the worst exploiters in this country have been the high street shopkeepers. 1568 I remember reacting in my youth and discussing with my friends a book called "The Ragged-Trousered Philanthropist", in which a small decorating business was the worst exploiter of all.
Do not let us exaggerate the case about small businesses. Some of these businesses are hopelessly inefficient. They do not need capital. If capital were pushed into them they would be taken over and their new ideas would be exploited by multinational companies which would usually strip their assets and close them down. That is happening in all of our constituencies, with good, old-fashioned businesses, where the owner dies and the son is not interested in carrying on. They either go broke and go into liquidation or are taken over by a multinational company. Often when that happens no money is put into them.
Do not let us exaggerate the situation, therefore. No group of business men has had more assistance from the Government than have the small businesses. I hope that the amendment will be rejected.
§ Mr. John Loveridge (Upminster)
I rise to support my hon. Friend the Member for Basingstoke (Mr. Mitchell), who has done so much for the smaller business sector and whose work on its behalf has been recognised on both sides of the House. We are grateful to the Government for the concessions that they have given to this sector. They show that the Government heed the arguments that are repeatedly put from Conservative Benches. In supporting these amendments, I hope that we shall persuade the Government to accept them as well.
All tax represents a seizure of someone's funds by the State, backed by threat of force. The Government have the power to take money from those who have it, and in this case corporation tax is money taken from small companies. My hon. Friend's amendment proposes that we should increase the differential between the amounts taken in tax from large and small companies from 10 per cent. to 12 per cent. That is not much, but it represents a change in direction. Does it serve the Government's purpose not to give this extra tax relief to the small firm?
1569 When large businesses make profits they tend to put the money into mechanisation, and that cuts their requirements for labour. The same applies to State enterprises. If we are to conquer unemployment the most obvious source for that purpose is the expansion of small businesses.
Let me take the example of a small mining area in which there is a pit closure because the seams are exhausted. That might mean 200 or 300 men looking for jobs but not wanting to move away from their homes. Two or three small businesses would be more likely than anything else to meet the demand for jobs in an area which is cut off from other areas. By moving into such an area those businesses would regenerate it. Secondary businesses would spring up and the whole of the village would be brought back to life.
Retained profits, not promises of grants, motivate small businesses, more than any other factor, to move in in this way. They make it easier for these firms to expand and to help conquer unemployment. I hope that the Government will consider that aspect in considering the proposed increase in relief for the smaller business sector.
Nothing could give a greater boost to the Government's capacity to sell gilt-edged stock to meet the public sector borrowing requirement than a boom in the small business sector. The message would carry throughout the land and even overseas. A 2 per cent. differential is not a great deal, but it would give a great incentive. Those running small businesses would feel that the Government meant to help and that it was therefore worth while expanding. It is vital for us to engender the will to expand.
Small firms have a lesser propensity to import than do many of the large companies. Many of them are highly labour-intensive and when they expand they do not suck in imports on the same scale as do their larger counterparts. Thus, encouragement given to them helps the general economic capacity of the country to grow without the inhibitions caused by balance of payments difficulties.
The Government must want an increase of demand so far as they can safely 1570 achieve it—even for electoral purposes. This is an opportunity for them not only to gain votes but to do so safely for the economy. I therefore hope that the Government will seriously consider whether this 2 per cent. reduction will benefit both them and the nation.
§ 6.30 p.m.
§ Mr. Pardoe
Of course any reduction in tax might be thought extremely attractive and any reduction for small businesses might seem even more attractive for the Liberal Party. After all—this should be emphasised again and again—this is the first Budget that has given real and positive discrimination in favour of the small business sector. That discrimination was a major plank in the agreement that my party signed with the Prime Minister 15 months ago.
No one can deny that there is an astonishing list of concessions for small business men in the Budget. None of this was achieved by the Conservative Party. This is not a case in which the Government have accepted the arguments put to them from the official Opposition or by the Conservative Party's Small Business Bureau. The hon. Member for Basingstoke (Mr. Mitchell) has been talking about small businesses for as long as anyone can remember. It seems as though there has never been a time in the history of parliamentary democracy when he has not been telling people what should be done for small businesses. He has not had the blindest bit of effect on any Government so far—not even the Governments of his own party. They have never accepted one of his recommendations.
If the hon. Gentleman wants evidence of that, he does not have to take it from me; he can take it from his great guru of the business world, the right hon. Member for Leeds, North-East (Sir K. Joseph), who admitted in a speech two or three years ago that in recent years no Government of either party has done anything for small business men.
§ Mr. David Mitchell
Has the hon. Gentleman forgotten that the Government were defeated by the Opposition on a decision on the size of a small business for the purposes of the small business rate of corporation tax in the summer of 1974, to start with? I could list further things thereafter. Has he forgotten that?
§ Mr. Pardoe
If the Conservatives had got the definition of a small business right in the first place, there would have been no need for that amendment. More has been achieved for small businesses in the last 15 months than was achieved by the Conservative Party in their three and a half years in power from 1970 or in the 1950s.
§ Mr. Pardoe
The Bolton committee was established by a Labour Government and it reported to a Conservative Government, who failed to implement the majority of the recommendations.
§ Mr. Pardoe
Again, the hon. Gentleman does not have to take it from me. He can take it from Mr. Bolton himself, who has admitted time and again in the last few years that little was done by the Conservative Government to implement the Bolton report.
§ Mr. Pardoe
I put discrimination in favour of small businesses very high on my list of priorities, not for the ludicrous reasons advanced by the Conservative Party but mainly because it is by the small businesses that the new products are created, and it is the injection of new products into world markets that is desperately needed. It might therefore be thought that I would welcome the amendment.
However, a reduction in corporation tax for small businesses, or for any kind of business, is about the last thing that I would recommend as being any good for those businesses. As we all know, the rate of corporation tax is utterly meaningless. I do not know who is paying corporation tax. I can say that no one that I am involved with is paying it if they can possibly help it, and most of them can.
There are now so many ways of avoiding paying corporation tax that any manufacturing company which ends up paying any substantial amount of its profits over to the Government in corporation tax either has a Conservative accountant who is completely useless as its adviser, or it is not attending properly to its business 1572 affairs. I therefore would not favour a reduction in corporation tax.
Reducing the rate would not necessarily mean reducing the revenue—it would be difficult to reduce zero—but even if we were to reduce the revenue from corporation tax by this means, the money would have to be made up from somewhere else and we should have to choose between personal income tax revenue and corporate income tax revenue.
When company finance directors sitting around in the City pat themselves on the back over how well they have been able to reduce their corporation tax bill, I tell them that all they have done is increase the personal income tax bill of themselves and their executives. Does the hon. Member for Basingstoke want personal income tax or corporate income tax brought down. Corporate income tax could go up in total and if we are to get personal income tax down, the corporate sector must start to pay a fair whack of the bill.
The book by Mervyn King and John Kay has only put the icing on the cake of what we all knew was the situation for a long time—that the corporate sector is paying a ludicrously low amount of tax and that until it pays more, as it does in other countries, individuals will have to pay too high a proportion of the total tax bill.
§ Mr. Denzil Davies
The hon. Member for Basingstoke (Mr. Mitchell) moved amendment no. 48, although he seemed to be more in favour of amendment no. 49, which he dealt with at slightly greater length. Perhaps I may deal with the former, nevertheless.
Amendment no. 48, seeks to reduce the rate of corporation tax for so-called small companies from 42 per cent. to 40 per cent. The cost in a full year would be about £25 million, which would have to be added to the approximately £20 million which has been provided by the increase in the relevant profit level of these companies introduced in this Finance Bill. We should then be talking of £45 million.
The hon. Member for Upminster (Mr. Loveridge) said that what was necessary was the will for expansion—that we needed to provide the basis for expansion by small companies. I agree entirely, 1573 and that is what the corporation tax system does. That is why large and small companies pay very little corporation tax especially if they are in the manufacturing sector and if they are expanding—not only replacing their plant and machinery but increasing their business and therefore expanding their stock. If there is need for expansion, the incentive is built into the present system.
That is why we have introduced—both Governments have agreed with this—generous investment allowances, and this Government introduced the stock relief provisions which have been of great help to all companies, large and small.
Therefore, the reason that we cannot accept amendment no. 48 is partly cost—£25 million is not a small amount—but also that we believe that this reduction would not benefit those companies which are seeking to expand, certainly in the manufacturing sector, because they already pay little corporation tax. This is so not because they have sophisticated advisers. Nor is it true that companies in the Welsh valleys pay more because they cannot rely on their accountants. The reason simply is that the incentives exist and that if companies have that kind of expanding business, they get the incentives. If they are not expanding, they do not get them. I see nothing particularly wrong with that state of affairs.
The hon. Member went on to amendment no. 49—
§ Mr. David Mitchell
There were many service industries with the potential to provide many jobs. The Minister referred only to manufacturing industries.
§ Mr. Davies
I found the hon. Gentleman's argument on amendment no. 49 extraordinary. It is an interesting provision. It seems to suggest that we should ignore stock relief and investment allowance and have a flat rate corporation tax. But the hon. Gentleman did not argue that point; he said that they were an unsophisticated lot, would not exercise the option anyway, and would pay the 25 per cent. corporation tax instead of bothering with stock relief and investment allowances.
The hon. Gentleman did not argue the point—and I think that there is an argument 1574 on this ground, although I do not agree with it—that perhaps one should look at corporation tax in terms of a flat rate and not give any allowances on stock relief. A by-product is that the service industries will be in a less advantageous position because the industry does not get stock relief or investment allowance. However, again the hon. Gentleman did not argue that point. He made nothing of the fact that the present system does not give so much help to the service industries. I believe that that is the right policy, and that we should discriminate in favour of manufacturing industry and of investment in plant and machinery.
I come to my final point on small businesses. This is the kind of debate to which we are treated by the Tory Party every year. It is a political exercise designed mainly to catch the headlines in tomorrow's newspapers and to satisfy various organisations. In reality, I believe that the decline in small businesses has little to do with taxation. It has more to do with the financial structure of this country—a structure which the Conservative Party supports and always has supported. It is partly because we have a sophisticated Stock Exchange, because we channel savings into these huge pension funds and life assurance funds, and because we have a centralised banking system which has lost most of its local roots that we have experienced a decline in small businesses—a decline that has not happened on the Continent. To pretend that by fiddling around with taxes one will help small businesses is ludicrous. As I have said, it is a Tory political exercise.
The hon. Member for Basingstoke, in discussing amendment no. 49, recognised that there may be some difficulty in the imputation rate system. He kindly said that he had in his pocket a manuscript amendment to put the matter right. So far as I can see, the imputation system of corporation tax cannot work if one has a corporation tax rate below the advance corporation tax rate. It is inherent in the imputation system of corporation tax that the corporation tax rate must be higher than the rate for ACT.
It may be possible to draft a convoluted amendment. If we examine the report of the Select Committee that dealt with corporation tax and consider the 1575 experience of these matters in other countries, particularly France, it will be seen that what I am saying is correct. One cannot work a system of imputation corporation tax with a lower rate. That is a technical point, but it is another reason, together with all the other reasons that I have outlined, why I believe that amendment No. 49 is unacceptable.
§ 6.45 p.m.
§ Mr. Peter Rees
The Minister of State injected a partisan, almost bitter, note into his speech when he said that this was an annual political exercise designed to catch the headlines. If that is the case, what was the point in appointing the Chancellor of the Duchy of Lancaster to cosset small businesses? I believe that when the history of these times is written my hon. Friend the Member for Basingstoke (Mr. Mitchell) will be recognised as having done more for small businesses than anything the Chancellor of the Duchy has done.
The Chancellor of the Duchy has attempted to catch the headlines by making soothing and platitudinous speeches on visits to representatives of small and large businesses, but for all the practical results that those visits have achieved, the right hon. Gentleman might as well have stayed home and played bridge.
The Minister of State said that the decline of small businesses had little to do with taxation. The decline is probably a complex phenomenon that we shall have to debate and go on probing over a considerable period of time. But if it had nothing to do with taxation, why has the Chancellor of the Duchy not claimed credit for various measures in the Budget? Furthermore, why has not the hon. Member for Cornwall, North (Mr. Pardoe) also claimed as a product of the Lib-Lab pact a gigantic package of fiscal reliefs for the small business sector?
§ Mr. Rees
If the hon. Gentleman has done so, he is at variance with the other arm of the Lib-Lab pact. He obviously does not have his heart in the fiscal reliefs that we are told are being introduced.
There are a number of misconceptions in this debate, largely due to the irrelevant intervention of the hon. Member for Ormskirk (Mr. Kilroy-Silk). The hon. Gentleman is always better at wearing 1576 a bleeding heart on his sleeve than making a positive contribution to our debates.
It is right, however, that the record should be put straight, even if rather briefly. The Chief Secretary's contribution to our debate in Standing Committee on 23rd May, when he said that the estimates for 1978–79 showed that total mainstream corporation tax would be of the order of slightly over £4 billion and advance corporation tax of £1½ billion, which is a not insignificant contribution to the finances of this country. Beyond that the hon. Member for Ormskirk overlooked the amount which companies, large and small, contribute in rates, employers' national insurance surcharge and VAT. It is not true to suggest that they are free-riders in the economy.
I am sure that the Under-Secretary of State for Industry—the hon. Member for Keighley (Mr. Cryer)—who has come in to grace our debates, would not subscribe to the view that the corporate sector does not pay its fair contribution. He stirs uneasily in his seat. We know that there is a slight divergence of view between that Minister and his right hon. Friends on exactly what should be done for the small business sector.
The hon. Member for Cornwall, North made one of his usual arrogant and slightly ill-informed speeches. Obviously his back-up on this debate is not what it is on some of the others. Let us examine one misconception on the hon. Gentleman's part, namely, that none of the recommendations of the Bolton committee was implemented by a Conservative Administration. I remind the House that the first-ever Minister with special responsibility for small businesses was appointed by a Conservative Administration and that a Conservative Administration eased the close company rules.
§ Mr. Rees
If any measure that benefits the small business sector is to be described as "headline catching", we shall not he able to move in any direction at all. Then, again, a Conservative Administration introduced the small firm rate of corporation tax, and introduced exemption to the smallest firms from training board levies. 'That is a not insignificant contribution by a Conservative Administration.
1577 The Minister of State has not proved very responsive on this occasion. He believes that a figure of £25 million is too much and says that he has done enough for small companies. I am not utterly persuaded that he has addressed his mind to the implications of capital transfer tax. I do not know whether the hon. Member for Cornwall, North and his record on capital transfer tax will stand close scrutiny by those who represent and advise small companies. But there will be other occasions to debate that factor.
I turn to the interesting suggestion of my hon. Friend the Member for Basingstoke that there should be a flat rate. This is a novel suggestion.
§ Mr. Rees
The Minister of State says that it is not novel, but he did not give the House any cogent arguments why it should be rejected.
The Opposition recognise that this subject will have to be gone into in considerable depth. I am not in any way decrying the speech made by my hon. Friend the Member for Basingstoke. I hope that the Minister of State has taken this suggestion on board and that he will ask Somerset House to look closely at it. It is not apt to be somewhat dismissive and to say that Somerset House thought about it and that there are certain difficulties. However, the Minister has not taken the House into his confidence.
I believe that this was an original suggestion, but my hon. Friend the Member for Basingstoke may recognise that this is not the moment to reach a definitive conclusion on it. I think that the whole House owes him a great debt for having yet again given us the opportunity of debating the real problems of small companies. However, I hope that on this occasion he will not feel it necessary to press the amendment to a Division.
§ Mr. David Mitchell
In the light of my hon. and learned Friend's suggestion, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.