HC Deb 16 July 1980 vol 988 cc1615-21

After subsection (2) of section 30 of the Finance Act 1978 there shall be inserted the following subsection— (2A) With effect from the year 1980–81, subject to the provisions of this section, relief shall be given from income tax on an amount of the claimant's income equal to the amount of the loss, being income for the five years of assessment last preceding that in which the loss is sustained, taking income for an earlier year before income for a later year."—[Mr. Love-ridge.]

Brought up, and read the First time

Mr. John Loveridge (Upminster)

I beg to move, That the clause be read a Second time.

The purpose of the clause is to amend section 30(2) of the Finance Act 1978 and to provide from 1980–81 that the relief given to an individual or partner when setting up a small busines—by which a business man can offset losses in the firms early period against his previous income in a jo—should be extended to cover five years of his previous employment, instead of three.

My colleagues and fellow officers in the Smaller Businesses Committee have tabled several amendments to the Finance Bill. We are glad that this clause has been selected for debate. A similar amendment of ours suggested that such relief should apply to companies as well as to individuals. As the Government have not felt able to accept that, it would be helpful if they would accept this limited amendment. The reasons for the extension from three to five years are simple. A new small business may, in its early years of trading, experience trading losses, and the cost of equipment. It may desire to occupy 2,500 sq. ft. in one of the new, small workshops. Such expenditure would be subject to relief.

New small businesses cannot get the benefit that the Government wish to give them—apart from the three-year provision—until they make adequate profits.

For example, if a married man has a mortgage and earns £10,000 a year, his taxable income might be £7,000 per annum. His tax bill might be about £2,000 a year. If he starts his own business and loses £5,000 in the first year, £5,000 in the second year—as he might well do in the initial stages of getting that business off the ground—and spends £10,000 on plant and equipment, he will have spent £20,000. That amount could be claimed against the three years in his previous job. That is the position under existing legislation.

So far, so good. The man is covered by the three-year provision. Let us suppose that the same man wants as well to buy one of the new small workships of 2,500 sq. ft. That would not represent a great scale of operation but he might need to buy since it is difficult for new small businesses to find rented accommodation. If the man buys, he might well find that he cannot get the benefit of the allowance that the Government want him to take up—in order to encourage the expansion of small businesses—until years later, when profits come in, because the three year rule is not enough for him to claim the allowances that he has accrued. If the period were five years he could get the benefit. Our proposal to add two years would be helpful to the Government's design. It would help this man move into a small factory of 2,500 sq. ft. or less. It would help him to expand and to keep solvent at a time when in the second, third or fourth years of founding a business he might be at his greatest risk and in greatest difficulty. This is even more important if a man has borrowed the money in order to try to expand.

9.30 pm

Although the amendment is small, none the less its importance to the nation is much more substantial than appears at first sight. Many hon. Members will remember the well-known Massachusetts Institute of Technology survey in the United States which showed that two-thirds of new jobs there came from firms that had fewer than 20 staff at the start of the survey and the bulk of which were less than five years old. What is not so generally known is that more than half the jobs came from the very fast expansion of young firms—those which, during the period of the survey, had grown from fewer than 20 to more than 100 employees.

If the same applies in this country—and it probably does—in order to get new jobs we need a very fast expansion of very small new firms. I believe that we shall not get the full employment that we want for this nation unless we expand them. Although the amendment is small it would nevertheless be helpful in achieving fresh employment. It would speed the growth of very small firms in the third and fourth years of their foundation. I hope that the Government will agree to this concession. It would not cost them much, but it would be a great practical and psychological help to the small business man and would encourage him to expand.

It is equally important that it should be possible for a such a man to get the same concession from the Government if he incorporates his business in the form of a company. Limited liability should be encouraged for small men.

Even if the Government cannot go that far this year I hope they will accept this small amendment to extend the 1978 Act to increase relief from three to five years. I congratulate the Government on all they have done for smaller businesses in the Budget. They have helped to change the atmosphere for small businesses and the attitude of people towards small businesses. More are being founded and that is encouraging. I hope that the Government will encourage them further by accepting the amendment.

Mr. Dalyell

I have listened very carefully to the arguments for this new clause because I have had a couple of requests to support it. However, I wonder whether it is as small as hon. Members suggest. I put the question that I put many times in Committee. What is the Government's price tag on this? I understand that a number of hypothetical assumptions may have to be built in, but I have a suspicion that the clause is not as small as it is made out to be.

Secondly, does it not lend itself to many of the things we have been saying about the "black economy"? The new clause would assume knowledge of what happened three, four or five years earlier—knowledge which may not be freely available to the Inland Revenue. For that reason I cast a somewhat beady eye on the new clause.

Mr. Graham Bright (Luton, East)

I support the new clause and the com- ments of my hon. Friend the Member for Upminster (Mr. Loveridge). There has been a growing recognition of the contribution of small businesses in generating new jobs, producing new goods and generally supporting the economy.

The biggest problem that new businesses face is finding capital. Promoters sometimes have to pledge their homes or borrow from families and friends or banks and other institutions. However the capital is raised, it costs money. We unfortunately do not have a loan guarantee scheme, but I hope that we shall in due course. Our immediate task is to suggest measures that will further assist small business men immediately. That is why we have moved this new clause.

Many small business men have to accept that they will make a loss for two or three years, or possibly even longer, particularly if their business involves high technology and requires a great deal of investment in research and development. The contribution already made to the State could offset the burden placed on newly created businesses, which will already be meeting their own tax burden. It is an indirect means of enlarging the credit facilities available to small businesses. Because of the intervening price movements, it may prove to be a relatively cheap means of achieving the objective.

Those who contribute to the country's prosperity by creating new goods and jobs deserve that modest encouragement. All the evidence suggests that it is in the initial five years that small firms find it most difficult to obtain credit and survive losses. Our competitors in Japan and France have taken special measures to ensure that small businesses emerge from that stage.

The new clause is imaginative and responds to the existing problem. I recognise the constructive measures that the Government have taken to help small businesses. This new clause is a further step, and their acceptance of it will confirm their commitment to practical help for small businesses. I appeal to the Government whole heartedly to support it.

Mr. Peter Rees

My hon. Friend the Member for Uxbridge (Mr. Loveridge) moved the new clause with his customary moderation and grasp of the commercial realities of the situation. [Interruption.] The scepticism of Opposition Front Bench Members has never been more clearly demonstrated than by their comments from a sitting position on this serious problem.

My hon. Friend, ably supported by my hon. Friend the Member for Luton East (Mr. Bright), has focused the attention of the House, not for the first time, on the problems that will inevitably occur time and time again. I commend the work of my hon. Friend the Member for Hertfordshire, South-West (Mr. Page), who put forward a series of amendments that enabled us to debate the problem in Committee.

My hon. Friend the Member for Uxbridge invites the House to consider a clause that would build on a relief—and I give this to the Opposition in spite of its deep cynicism on the subject—introduced in the 1978 Finance Bill, which enables a loss in the first year or so of a new business to be set against the taxpayer's income for the previous two years. My hon. Friend invites the House to consider extending that relief to the previous five years.

I am sympathetic to the objectives underlying the clause, and I hope that our commitment to them is clearly demonstrated by the range of measures that we have proposed in this Bill to support small businesses. However, I am not entirely persuaded that this is the right way to offer a solid measure of support to the small business sector.

The appropriate number of years for which the relief can be carried back must be a matter of judgment. I do not believe that in the two years that the relief has been running we are able to form a firm view on how effective itis and how far it should be extended. I should prefer to consider the matter over a more extended period.

If we accepted the new clause, we should have two periods of relief, one for losses incurred before the Bill becomes law and one for losses incurred thereafter. That would cause considerable administrative complication to the Inland Revenue and to those advising small business men.

I am always a little reluctant to dwell on technical defects, but it is a little uncertain exactly to which losses the new clause would be extended. We are sympathetic to the general objectives, but I hope that my hon. Friends will feel, on reflection, that there are more practical ways to demonstrate our sympathy and support.

The hon. Member for West Lothian (Mr.Dalyell) asked two specific questions. The first concerned the price tag on the new clause. My brief says "Cost—small". If I were to be more precise, the House would be sceptical about the figures, because this is an area which must be hedged around with uncertainty and assumptions that I do not feel entitled to make.

The hon. Member for West Lothian asked whether the new clause would not give an undue stimulus to the black economy, because it would go back for a period of five years for which no records might be available. I do not think that that is a valid argument for rejecting the new clause, because the taxpayer making a claim would have to prove his tax liability over each of the five years.

Mr. Michael Grylls (Surrey, North-West)

My hon. and learned Friend said that the cost would be small. Can he give any indication of the cost of the current relief scheme that was started two years ago?

Mr. Rees

I cannot do so at this stage, but I shall see whether any worthwhile evidence can be turned up. The scheme has not been running for long and people are sometimes in arrears with such claims. If I can turn up any worthwhile information, I shall write to my hon. Friend. I know that he takes a keen interest in these matters.

As my hon. Friend the Member for Upminster has chosen to build on a relief contained in the Finance Act 1978, I hope that there is unanimity in the House that this is an area in which Governments should be sensitive and should endeavour to develop assistance and encouragement for small businesses. However, I hope that my hon. Friend will feel that the new clause would not be the most effective way of channelling a limited measure of relief. We owe him a debt of gratitude for enabling us to debate this important question, but I hope that he will withdraw his motion.

Mr. Loveridge

I am glad to have confirmation that the cost of implementing the proposal in the new clause is likely to be small. I note that the Government would like longer to consider the implications of the 1978 relief, but I hope that the consideration will not take too long, because the need is urgent. While liquidity is low in small businesses and general unemployment is high, we need such measures acted upon as urgently as possible.

I shall look forward with some small measure of confidence not only to the Government's bringing forward relief in due course, but to further measures to help the small business sector to promote the improvement of the economy.

In view of all that the Government have done for the small business sector; the gratitude of the sector for that action and the good that has been done to the country as a result, and in spite of my words of warning to the Government, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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