HC Deb 12 July 1983 vol 45 cc812-7
Mr. Robert Sheldon (Ashton-under-Lyne)

I beg to move amendment No. 5, in page 2, line 18, leave out `£500,000' and insert `£250,000'.

Clause 2 deals with the tapering of the reduced rate of corporation tax. I appreciate, as the Committee always appreciates, that when there are two rates of corporation tax a company qualifying for the higher rate incurs a high marginal rate of tax. Moreover, if the difference between the two rates of corporation tax is increased the marginal rate of tax is also increased. The result is something analogous to the poverty trap. It is, as it were, a prosperity trap. As a company moves from the 38 per cent. rate towards the 52 per cent. rate of corporation tax, it incurs a higher marginal rate of tax.

The argument for extending the tapering provision is to reduce that high marginal rate of tax. I understand the reasons for that. If an expanding company starts to incur rates of tax higher than 38 per cent. there will be a disincentive to expand further. I am not sure that that is so. An expanding company can get through that barrier more quickly if the barrier is small than if it is extended. The rights or wrongs of this type of taxation are consequent on the arithmetic of the proposition. If one accepts the argument for a reduction in the marginal rate of tax, one might also argue that £500,000 is not enough for the taper. A figure of £1 million or £2 million would produce an even lower marginal rate. The basic justification for a tapering relief would then become absurd. I believe that the £500,000 is already absurd. There is something wrong about calling a company that makes £500,000 profits a small company, thereby justifying a lower rate of tax.

We must consider, in more tranquil circumstances, what to do about a system of corporation tax that behaves in a way that an untutored observer might well regard as irrational. I believe that the classical system that we had in the 1960s was far more sensible. Companies knew, could work out and, most importantly, could anticipate, the tax that they would have to pay on their profits.

The tax system is not the cure for all our economic ills and I understand the reluctance to examine these matters again. We need only to look at the nonsenses in other countries to realise that the relationship between the tax system and economic success is far from as obvious as so many people in this country believe it to be.

Small company relief which extends to profits of £500,000 a year is not just a distortion but a violation of the term "small companies". It presupposes that companies would organise their affairs to avoid such a high marginal rate of tax. I do not believe that is so. I remain unconvinced that they will be numerous or important enough to justify this type of treatment. Although this is by no means the most important part of the Finance Bill, I believe that the Opposition amendment is a far better way to deal with the issue than that proposed by the Treasury and the Financial Secretary.

Mr. Ridley

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) referred to our general system of corporation tax, but the chances of going back to the classical tax are remote indeed. Because of the views of industry, if for no other reason, we need some stability and certainty in our tax affairs, especially corporation tax. There have been too many changes in the past. I believe that the overwhelming feeling is that we should stay with the present system, warts and all. The Government sought to improve the position for small companies because we set great store on encouraging them to make, to keep and to invest profits so that they may grow as part of our campaign to secure more jobs.

Perhaps I should give the history of this relief. It now stands at 38 per cent., but when we came to power the small companies' profits rate was 42 per cent. That reduction has been a major help to companies in retaining more of their profits.

The question at issue in the amendment is not the rate of tax but the limits over which the lower rate of tax will be phased out to the higher rate of 52 per cent., as the right hon. Gentleman rightly said. The crucial point here is that the range of profits over which company taxation has to go from 38 per cent. to 52 per cent. must, by a mathematical certainty, result in a marginal rate that is higher than 52 per cent. The Government have sought to reduce the marginal rate as much as possible. It was 67 per cent. when it extended between £60,000 and £100,000 of company profits in 1979. In 1982, we brought the marginal rate down to 60 per cent., when the figures were £90,000 to £225,000. This year, my right hon. and learned Friend brought down the marginal rate to 55.5 per cent. in the proposal that the transitional range of profits should go from £100,000 to £500,000. That is only three and a half points above the 52 per cent. rate.

The right hon. Gentleman's amendment would put the marginal rate back to 61.7 per cent. That would not be a good idea. The right hon. Gentleman is not totally right when he says that it is not a major objective of industry and business to have this marginal rate reduced. Both the Association of British Chambers of Commerce and the Institute of Directors pressed strongly in their Budget submissions for the marginal rate to be reduced, and many of my right hon. and hon. Friends take the same attitude. Indeed, some of them suggested that we should have a slice system instead of the present slab system. However, the Government feel that it is easier to help small companies if we stick with the present system, instead of a slice system.

The relief tapers off the higher profits. For instance, the maximum relief that can be achieved under the clause is for a company with profits of £100,000, when the relief is worth £14,000 less corporation tax. If the profits are £300,000, for instance, the relief is worth only £7,000, as it tapers out. The effect of the relief is still heavily tapered on small companies, and fades away as profits rise.

I do not know whether a company making profits of £500,000 is a small company, but that is not the point. We must reduce the disincentive to expand that is identified in this marginal rate. In the Government's view it is just as important to help people to create new companies as to help them to expand in the difficult period before they are big enough to go to the Stock Exchange for a quotation. This limit of £500,000, the taper for the phasing out of the lower rate of corporation tax, is a considerable contribution in that respect.

I hope that the right hon. Gentleman will be persuaded by my argument. The cost is not large but it is a good use of the money in an endeavour to do all that we can to help small and growing companies to provide more jobs for the future.

Amendment negatived.

Question proposed, That the clause stand part of the Bill.

Mr. Campbell-Savours

I rise to speak in the "clause stand part" debate because it is the only opportunity that we have in our debates on the Finance Bill to address ourselves more generally to the problems of small businesses and to the extent that we believe corporation tax reductions will benefit those small businesses. I am not confident that reductions in corporation tax for small businesses are helpful. Tax liability is incurred only by those who make profits. This Committee should address itself to the real problems of small businesses—in other words, the absence of markets, which results from reduced demand in the British economy.

7.15 pm

Wherever I go, certainly in my constituency, I discuss these matters and try to establish what most small business men in Workington believe is in their best interests. They refer repeatedly to the problem of reduced orders. We know that that problem depends very much on the central thrust of the Government's economic strategy. It would be churlish not to pay regard to the innumerable measures that have been introduced by this Government to help small businesses, and for that they are all very grateful. The principal measures are, of course, the small business startup scheme, which has been modified, and the enterprise allowance and loan guarantee schemes, all of which are important initiatives taken by this Government. However, small business men say that those initiatives are of little use unless demand is created in the British economy, and they await a Government strategy to deal with that problem.

First, the ability of local economies to generate small business activity varies in different parts of the country. Small business men find it much easier to set up in London and the major conurbations. In other parts of the country —the northern region, Scotland, parts of Wales, and the south-west—it is more difficult to start up. The reasons are clear. In the major conurbations there are greater markets and opportunities for people to go into business. In the outer fringes of the British economy there is less opportunity to do so. Local markets in west Cumberland do not provide the same opportunities as do local markets in the central conurbations and in London. The small business strategy of any Government — reductions in corporation tax must be part of that strategy — should take into account the lack of opportunity in various parts of the United Kingdom.

Secondly, we are not on the doorstep of the major financial institutions. Where major financial institutions are located there is clearly more opportunity for people in business to raise money. It was made clear during the interviews that took place at a recent seminar of the Department of Industry in my constituency, that small business people objected to the lack of support from the local banking system.

Thirdly, people in the outer regions are required to pay higher costs for the infrastructure services, which are important to the development of smaller industries. One example is the cost of transport. To ship one's products from the outer regions to the main markets, whether in Europe or in the major conurbations in the United Kingdom, costs substantially more than for small businesses located in a central market conurbation. Government incentives to small businesses should take into account the major problem of increased transport costs.

There is an increasing problem which derives from the Government's policy on regional strategy. Many parts of the United Kingdom, including my own, have lost the high level of regional support that was available under former Labour Governments. It has been reduced to service the substantial reduction—over half—in the Government's regional budget.

Finally, we lack the major centres of learning which are crucial to the development of small businesses, particularly in high technology. The Government repeatedly, as a background statement to the thrust of their economic strategy, which includes the reduction in corporation tax, tell us that future job opportunities in the economy will be very much centred on high technology and its development. It is in that area, irrespective of the reductions in taxation, that those of us in the regions find that we are unable even to get on to the first rung of the ladder. We cannot attract that activity which, in the Government's view, is central to our development.

I have come up with a package based on a high technology enterprise park. Instead of allocating money in the form of reduced corporation tax liability, the Government should channel it far more selectively into hi-tech development by designating several enterprise zones in parts of the United Kingdom which, due to their present arrangement, are unable to attract such development. Those enterprise zones, which would be known as hi-tech enterprise parks, would also enjoy special development area status, separate from other similarly designated areas within the region. They would automatically be allowed the higher level of enterprise allowance which the Government made available nationally in the Budget this year. In addition, they would enjoy any other forms of sectoral support that the Government might be willing to introduce to favour that particular form of industrial development.

That would be of particular interest to an area such as mine. West Cumbria has failed to attract those industries which we shall need in the future. All we have is the Lake District, people's natural skills and their eagerness to go out and support whatever industrial enterprise we are able to attract. The Government should consider setting up such an enterprise park within the national park, where the land lies low, where it can be seen by few, but where it will serve to attract this very important type of industry which is central to the regeneration of declining industrial areas. To invest in that form of industrial development would be a far better way of spending money on small business than supporting reductions in corporation tax, as is proposed in the Bill.

Mr. Ridley

The hon. Member for Workington (Mr. Campbell-Savours) will forgive me if I reply to him briefly because we are straying somewhat from the clause. I question whether he is right to say that industry would prefer to see such money as is involved in the clause going to the sort of enterprise that he suggested rather than going in tax relief.

The hon. Gentleman complained about the absence of demand, but that is not sustainable. Last year in the British economy total demand increased by 3 per cent. What was depressing was that 2 per cent. of it was met by imports and 1 per cent. by increased production. It is only through greater competitiveness that we can get that 3 per cent. We can get even more through increased exports. High technology enterprise parks such as the hon. Gentleman suggested do exist in Belgium, but I doubt whether they would result in increased competitiveness, which is the real point.

The hon. Gentleman mentioned the difficulties of the area that he represents, which I know well. He mentioned its remoteness from other markets and centres of industrial activity and its high transport costs. They are all factors in competitiveness. Those costs must be taken into account when setting up in business to price a product and sell it. We should put a high proportion of our resources into increased competitiveness because that is the way in which firms will increase their production and sell more. If a reduction in corporation tax enables firms to retain more of their profits, it will be a substantial contribution to increased competitiveness.

I question whether there is a better way to use all our resources than to allow companies to modernise themselves so that they can capture markets and overcome the natural difficulties of the environment in which they exist. I am grateful to the hon. Gentleman for what he said about the Government's measures to assist small businesses. I am glad that he recognises what we have tried to do. I hope that he will recognise that all those measures, including the reduction in corporation tax in the Bill, are specifically and properly designed to help companies become more viable, more competitive, better able to capture markets, and thus better able to provide more jobs for those in regions such as his own

Mr. Campbell-Savours

Does the right hon. Gentleman accept that many of our overseas competitors, particularly Japan, have sectorally invested in high technology in the way that I have suggested and will reap the rewards? Is there not a duty on Government, if finance is available, to help small businesses to ensure that we reap the rewards in the way that others have done?

Mr. Ridley

Yes, I do not deny that. The hon. Gentleman will know that much money has been spent by the Department of Industry on the small firms investment scheme and on high technology in all its different forms. However, it would be a disaster greatly to increase the taxation on industry in order to spend more on this sort of project. We must find the right balance between the recycling of industrial profits by the Government for the benefit of industry and the point at which it is better to allow industry to invest its profits as it sees fit. I would not like to go further than we have gone in the Bill.

Question put and agreed to.

Clause 2 ordered to stand part of the Bill.

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