HC Deb 14 July 1981 vol 8 cc1123-7

'(1) In section 95 of the Finance Act 1972— (a) Insert new subsection (1A) at the beginning as follows: (1A) Where a trading company resident in the United Kingdom has no associated company at any time in an accounting period, corporation tax shall be charged on its profits at such reduced rates (to be known as the 'independent companies rates') as Parliament may from time to time determine in respect of so much of its profits as does not exceed £2,000 and the next £3,000, £5,000, £5,000, £5,000, £10,000, £10,000, £10,000 and £10,000 respectively. (b) In subsection (1) after "company" in line 1 insert "which is" and after "United Kingdom" insert "and which is not within subsection (1A) above". (c) In subsection (4) delete "subsection" and substitute "subsections (1A) and (d) In subsection (7) after "with the addition" insert "for the purposes of subsections (1) and (2) above". (e) Insert— (9) In subsection (1A) above 'trading company' has the meaning given in section 37(12) of the Finance Act 1980".'.

(2) In Clause 20 of the Finance Bill 1981 insert— (4) For the financial year 1980 and subsequent financial years the independent companies rates mentioned in subsection (1A) of the said section 95 shall be as specified in the table below:

Profits Rates
The first £2,000 Nil
The next £3,000 10 per cent.
The next £5,000 15 per cent.
The next £5,000 20 per cent.
The next £5,000 25 per cent.
The next £10,000 30 per cent.
The next £10,000 35 per cent.
The next £10,000 40 per cent.
The next £10,000 45 per cent.".'.

—[Mr. Loveridge.]

Brought up, and read the First time.

Mr. John Loveridge (Upminster)

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

The clause corrects an anomaly that affects firms growing from small to medium size—at least, it will correct it if the Government, as I hope, accept it. I am glad to move the new clause as chairman of the Conservative smaller businesses committee. I am grateful for the support of my hon. Friends the Members for Hertfordshire, South-West (Mr. Page), Luton, East (Mr. Bright), Bristol, West (Mr. Waldegrave) and Surrey, North-West (Mr. Grylls).

The new clause is important for firms that are growing—just those firms that should provide jobs as the recession eases. The Government have done much for the smallest firms—for example, through the loan guarantee scheme and loans for start-up firms. We welcome the amendments that they accepted as the Finance Bill progressed. We are also grateful that many of the suggestions put forward by the smaller businesses committee have been acted upon, so much so that it is now fair to say that for the smallest firms in Britain the climate has entirely changed. They barely need the revival of the economy to play their part in creating new jobs. However, the medium-sized firms are not so well placed. The new clause is important for them.

The anomaly arises because of the way in which the special low rate of corporation tax for small firms is phased out by marginal relief. That creates an eccentric hump—an area of higher taxation through which a company must pass as it grows. The effect is that 40 per cent. corporation tax is paid up to £80,000 of profits. The 52 per cent. rate is paid over £200,000 of profits. But in between those figures there is a no-man's-land—or hump—where the corporation tax is 60 per cent. That is paid on between £80,000 and £200,000 of profits. That is clearly anomalous.

It is an incentive for any company nearing the £80,000 threshold not to grow through the wide band ahead of it where it will be charged suddenly at a 50 per cent. higher rate of tax. Such a company must grow two and a half times in profit terms before the rate of tax comes back to that paid by its larger competitors. This offends common sense, especially when we want medium-sized firms to grow and create more jobs.

The new clause would put the matter right by a progressive scale that passes directly from a low rate of corporation tax to 52 per cent. on all profits over £60,000 or thereabouts. The clause involves a limited amount of extra relief from the Government. However, that is not essential. The scale could have its progression altered easily by the Government as my hon. Friends and I are not necessarily asking for any more total tax relief.

We want a scale that removes the hump, which is the unsatisfactory and discouraging feature. It is possible that the scale can ascend gently to the rate of 52 per cent. without the Government forgoing 1p of tax. The idea need cost them no more. Progressive scales work comparatively simply in normal income tax and would work simply for corporation tax.

The error is to discourage growth. The Government have recognised that because they paid heed to our representations made during the consideration of last year's Finance Bill. In this year's Bill they have reduced the hump by lowering the 66 per cent. rate to 60 per cent. That is welcome, but it would be far better and simpler if there were a natural progression to the 52 per cent. rate.

This kingdom is badly off for medium-sized companies and yet they are precisely those that are most needed. The Government have done much to improve the lot of small and medium-sized firms, but they have concentrated mainly on the small firms. I ask them to accept the new clause so that they may encourage small firms to grow to become large firms. The anomaly can easily be removed.

Mr. Richard Page

In supporting the principle of the new clause, I do not wish to appear ungrateful to the Government for the moves that have already been made within the Bill to widen and flatten the hump and reduce the rate of corporation tax that is presently placed upon small companies. The stark rate of about 40 per cent. has been extended to £80,000 and the full rate now starts after £200,000. However, the longer hump of corporation tax presents a series of barriers to companies that wish to expand and develop once the 40 per cent. level of corporation tax has been reached.

The barriers are more than psychological, although the psychological argument of company managements being dissuaded from further effort or expansion, and dissuaded from going through the difficulties that my hon. Friend the Member for Upminster (Mr. Loveridge) has described before they can break through to the other side to the 52 per cent. rate of full corporation tax, is enough in itself to justify the fairly deep consideration of any proposed changes.

The new clause is set out in a way that will not discourage companies from increasing their profitability at any set point. The very much lower rates at the initial stages will be a positive encouragement to allow small businesses to build up capital for expansion. Employers faced with a choice between the personal rates of taxation and the lower starting rate of corporation tax, which would leave far more capital in the company, especially at a formative stage in its development, will lean far more readily to choose the latter course.

The rate bands set out in the new clause embody only the principle. With the limited resources at our command, it is impossible to ensure that the total tax from these rate bands would be exactly the same as that at present received from corporation tax. As my hon. Friend the Member for Upminster said, our intention is not to deprive the Revenue of any corporation tax but merely to spread the load in a more equitable fashion.

2 am

It seems logical to have a simple graded system of corporation tax rather than the present rather complex system. It will help smaller businesses at the bottom of the ladder, at the start of their formative years, to build up a little more capital for growth. I believe that it will also remove any psychological barriers which may exist and help companies improve and progress in their economic life. If the Minister is not prepared to consider it this year, I hope that it will be given an in-depth review for presentation probably next year.

Mr. Graham Bright (Luton, East)

I wish briefly to support my colleagues and to stress that the principle behind the new clause is to do away with the terrible barrier beyond which people suddenly have to pay corporation tax. The barrier is certainly real. I know personally of companies which have desperately avoided growing to the level at which they would have to pay it. Legislation which deters a company from growing and expanding is a very bad thing. As has been pointed out, the idea behind the new clause is to ensure careful phasing so that there is not this built-in barrier and companies gradually move up to paying the full rate of corporation tax.

I ask the Government to consider taking on board the principle, because it is a good one. No one is trying to take any money away from them. If they take this on board and consider it carefully, I am sure that they will be able to find a formula for a graduated scheme for corporation tax which will not lose them any money. We are trying not to take money away from them but merely to amend the system to encourage growth, which is the one thing that all of us, certainly on the Conservative side, wish to see in the next two or three years.

Mr. Michael Grylls (Surrey, North-West)

I wish briefly to support the new clause. I am delighted to see that the Minister with responsibility for small businesses, the Under-Secretary of State for Industry, is present as he has done so much for small businesses. I know that he will do more in the future to keep up the good work, and no doubt he would like to support the clause. This is a form of corporate taxation for smaller firms which the United States has used for years. For 30 years it has had a very low graduation of corporation tax in which the percentage rates in the lower bands have always been very low.

This seems a very sensible system. We wish to help the small, growing company to retain as much of its profits in the early years as it possibly can. It does not seem very sensible for everyone to start off at a rate of 42 per cent. The graduated rates proposed in the new clause, rising in bands of 5 per cent., therefore seem sensible. I believe that the new clause would do a great deal to help companies retain their profits and also encourage them to expand.

It seems crazy that as companies increase their profits and cross the threshold, they forfeit all the advantages of the reduced rates. Again, the new clause would introduce a very simple system whereby all the advantages of the reduced rate bands were kept up to a limit of £60,000, beyond which the full rate of taxation would apply.

I hope that the Government will look at this matter carefully and will not just thrust it to one side, saying that it is adding a complication to life. Perhaps it is adding a little complication, but surely that is worth tolerating if it means that we shall help our smaller companies to grow faster and to employ the people we want to be employed. It is a constructive clause and the Government should give it the most serious consideration.

Mr. Lawson

I shall do my best to be brief. That is the general sense of the House, and it is an hour at which brevity is appropriate.

I am grateful to my hon. Friend the Member for Upminster (Mr. Loveridge) for the kind things he said about what the Government have already done for small businesses. All of those who have spoken have said that we should look at the proposal carefully. I suspect that we have looked at it more carefully than they may like. The more carefully one looks at it, the less attractive it appears.

There is a dilemma that faced the Conservative Government who introduced the small companies corporation tax rate in 1972 and has faced Governments since. There is a choice. Either relief can be confined to small businesses—defined, of course, in terms of profits—with marginal provisions that ensure that the relief tapers out and that large companies are denied relief. Or relief can be given to the bottom slice or slices, tapered in any way one likes, of the income of all companies. That is what the clause seeks.

The first method has the disadvantage of the highish marginal rate as soon as the limits for relief are exceeded. But the second method is a most inefficient way of helping small companies, if that is the aim. Anything that is revenue—neutral—my hon. Friends said, and I respect them for it, that they wanted something that would cost the Revenue nothing—in the form that they suggest would leave a large number of small companies much worse off than they are under the present arrangements. That is inevitable. Anything that was designed to make no company worse off but was along the lines that my hon. Friends are suggesting would cost hundreds of millions of pounds.

That was why we decided that the right way to tackle the problem of the high marginal rate was to retain the fundamentals of the existing system but substantially to widen the band, as we have done in the Bill, so that it runs from £80,000 to £200,000. That has the effect of reducing the effective marginal rate at its highest from 66 per cent. to 60 per cent., as one of my hon. Friends pointed out. The method that my hon. Friends are suggesting would, if it were revenue-neutral, as is the essence of their proposal, leave many small companies much worse off. In the light of that, I shall be grateful if my hon. Friend will see fit to withdraw the clause.

Mr. Loveridge

In the light of my right hon. Friend's explanation that many small firms would be worse off if the clause were accepted, I shall seek to withdraw the clause. In doing so, I ask the Government to think again about the ridiculous circumstance in which a medium-size firm pays a higher rate of corporation tax than does its larger competitor. I hope that they will consider that for next year.

I beg to ask leave to withdraw the clause.

Motion and clause, by leave, withdrawn.

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