§ `(1) In computing the profits of the trade of a company to which this section applies for the purposes of Corporation Tax, there shall be allowed as a deduction any amount transferred to a Statutory Reserve following within subsection (3) below.—[Dr. Marek.]
§ Brought up, and read the First time.
§ Mr. Andrew Smith (Oxford, East)I beg to move, That the clause be read a Second time.
The purpose of the new clause is to enable common ownership co-operatives to secure exemption from corporation tax for allocations to a statutory reserve. I emphasise at the outset that the reserve that we are discussing would be non-distributable. That is in line with the basic definition of the purpose of common ownership co-operatives as those in which the assets of the co-operation may not be distributed to members when the co-operative is dissolved or at any other time. The new clause would not, therefore, benefit directly particular groups of individuals. It would not be a tax break whereby members of the co-operative would avoid corporation tax. It would be an incentive to investment in the co-operative and would encourage the growth of that form of enterprise by enabling it to build up its capital more easily than it can at present.
In doing that, we would not give co-operatives any preferential treatment or unfair advantage. On the contrary, we would merely go some way to removing the unjustified handicaps under which workers' co-operatives presently labour. The principal handicap is that co-operatives do not, by their nature, enjoy the corporation tax relief on distribution through what is called the imputation system. For that reason, when that system was introduced in 1972, a special rate was applied to co-operatives, as it was to small firms, and they were therefore put on an equal footing with larger private enterprises.
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The problem is that, while all companies continue to benefit today from the relief on distributed profits, the concessionary rate has not, since the Finance Act 1984, applied to co-operatives and they are therefore effectively penalised by having to pay the full corporation tax rate.
§ Mr. HanleyWill the hon. Gentleman tell the House whether the statutory reserve would include a capital redemption reserve or a share premium account?
§ Mr. SmithIt would certainly not include a share premium account. The purpose is to build up the capital on which the co-operative itself can draw for future investment and, for example, for training purposes.
The co-operatives are further penalised through the obvious reason of being ineligible for the business expansion scheme, which we have debated a great deal in respect of this Bill. The new clause is intended to put them on an equal footing, not to give them any particular advantage, although there are other grounds on which that advantage could be defended and advocated. The argument is based on plain fairness and equity, of which I hope Conservative Members will see the merit.
The new clause is necessary for other reasons. Co-operatives, like other small businesses, especially those attempting to grow quickly, find capital difficult to attract and retain. That applies particularly to co-operatives because they do not have recourse to equity share capital. Moreover, as the law on corporation tax presently stands, workers' co-operatives have, if anything, a perverse incentive to increase wages, rather than to retain profits, to minimise tax liability. The new clause would therefore give a boost to investment, enterprise and growth in workers' co-operatives. Not to support the clause would be to concede that enterprise and initiative are all very well and much to be encouraged, except when they apply to workers in common ownership of their business, as opposed to conventional capitalist institutions.
The extension of the capital base provided by the new clause would also bring substantial knock-on benefits by enabling workers' co-operatives to take advantage of private sources of finance through the improvement in their gearing position brought about by the new clause. It would also address the problem faced by many of those people drawn particularly to the co-operative mode of organisation, who are especially short of funds. The co-operative form of organisation has a particular attraction for unemployed people who have had little or no resources to invest in the business. The clause would therefore be of special benefit to them, as it would be to co-operatives organised by women and ethnic minorities, who almost certainly comprise a larger proportion of the membership of co-operatives than they do of company shareholders.
The new clause would also make a significant contribution to job generation. To date, we in Britain have been talking about relatively small numbers of workers' co-ops, but they have been expanding at an impressive rate. There were 220 new ones last year and we see much evidence of demand for more support for co-ops.
In my constituency I am pleased to see that the Oxfordshire co-operative development agency, in conjunction with a number of other co-operative development agencies across south-east England, has been able, in conjunction with local authorities and the EEC social 430 fund, to put substantial investment into training people in co-operative organisation and enterprise. That has had a quick and good take-up rate and a great deal more of the same could be done were the co-ops in a more advantageous position for raising capital.
If we really want to see just how big is the potential for growth in workers' co-ops, we must look abroad. For example, Italy has more than 15,000 co-ops. In Europe the total number employed in workers' co-ops has been estimated to be about 600,000. The fact that the new clause would bring us into line with Europe is another powerful argument in its support.
There is no doubt that among the many factors that have favoured more widespread growth of co-operatives in Europe has been the more sympathetic tax treatment that they receive and which has counted for a lot. In Italy, workers' co-ops benefit from precisely the form of exemption from undistributed reserves that we are advocating in the new clause. In France they enjoy partial exemption. We heard a good deal in Committee about 1992 and the importance of harmonisation. This is one area in which Opposition Members would welcome harmonisation with the more progressive practices being adopted in other EEC countries.
There are good grounds of equity, enterprise, the benefits of job generation and parity with our European partners for accepting the new clause, enabling worker co-ops to make contributions to an undistributable reserve, free from corporation tax.
The benefits of the co-operative mode of organisation which flow from the involvement and commitment of worker members, of local control, enhanced job satisfaction and a happier working life, are increasingly recognised across the political spectrum.
The new clause is an opportunity for Conservative Members, some of whom have taken a sympathetic interest in this area, to recognise that there are anomalies and that co-operatives are worth encouraging. The Government should at least give an undertaking to examine this area afresh, even if they are not prepared to accept the precise form of the new clause.
The House will be aware that representations have been made in the past not merely from the workers' movement but from the Co-operative Union on behalf of the retail movement, again because of the substantial disadvantages that recent changes in the corporation tax regime have meant for them. Supportive and sympathetic action is long overdue in this area on grounds of equity and fairness as well as because of the benefits of the co-operative mode of organisation that I have already described.
If we in the Labour party had our way, we would be bringing forward a battery of measures to encourage and assist co-operative developments. Instead, all we are asking for tonight is a relatively small and inexpensive change, but one of substantial benefit to a sector of the economy that has not enjoyed the largesse being handed out in other directions. It has more than earned the boost that the new clause would give it.
§ Mr. John Battle (Leeds, West)I want to say a few words in support of my hon. Friend the Member for Oxford, East (Mr. Smith). I am proud to be able to say that Leeds has a long-standing record of support for co-ops, not least because the Industrial Common Ownership Movement is based in Leeds.
431 It is interesting that throughout this century there has been little inward investment in Leeds. Most of the commercial and industrial development has been home grown and home based. That might be why Leeds has developed a strong base of locally grown co-ops.
One of those co-ops, Up-routes Removals Co-operative Ltd., is involved in the transportation industry, again a traditional industry in Leeds. It started on the bridge of the market town, the hub of the Yorkshire textile industry, processing textiles and transporting them throughout Britain, providing a convenient location for communications. It is a worker co-operative providing useful employment for some of my constituents. It is a member the Industrial Common Ownership Movement, the national federation of worker co-ops, based in Leeds.
The Up-routes Removals Co-operative has petitioned me to back a submission on taxation changes to assist the development of worker co-ops, which I am sure the Chancellor of the Exchequer and the Treasury will have received. It made the strong recommendation that
profits which are allocated to a reserve fund in a co-op should not bear Corporation Tax if these monies can never be distributed to members. This relief, available to co-ops in France and Italy"—as my hon. Friend has said—would help us to build up our capital baseMost people who have had any dealings with co-ops, directly or indirectly, will be aware that raising capital creates a problem since co-operative constitutions do not provide for share capital. Although the worker co-op movement has its own financial institutions, their lending capacity is small.In 1987, one of the largest of those financial institutions, Industrial Common Ownership Finance, raised £500,000 by way of private contributions to invest in worker co-ops. Obviously that is not sufficient to carry things forward. People who have never been involved in the establishment of co-ops often do not realise exactly what they are up against in establishing themselves and developing.
I remember going to a bank with a small co-op. The bank could not conceive that the co-op had a complex financial and management structure based on the co-operative system. The bank told the co-op to come back as a traditional business, when it might be able to deal with it. The bank was not prepared to accept the principles of the co-operative movement. Thus, the traditional means of raising finance are sometimes closed.
I hope that the Government will accept this relatively non-contentious new clause. In other areas of policy the Government push the co-operative movement as a good thing. Scarcely a week goes by without a Minister suggesting that housing co-ops should be established, and they are part of the same family of the co-operative movement. I hope that the Government will accept the new clause, making it financially possible for co-ops to get on the move. They need practical support and I hope that the Government will enable this sector of the economy to flourish.
This is a small-scale measure, but co-ops can provide help to local economies, particularly where there is long-term structural unemployment in areas with 432 declining industries. The co-ops have a role to play in local economies and I hope that the Government will take this practical step towards enabling them to flourish.
§ The Paymaster General (Mr. Peter Brooke)May I say in response to the generality of the issue in the new clause that the Government believe that co-operatives are a thoroughly valid form of private enterprise and deserve every encouragement. We also recognise that cooperatives may be a valuable way of achieving the involvement of employees in the affairs of the company in which they work. We believe that measures designed to assist business generally should also be open to co-operatives.
The purpose of new clause 5, to which the hon. Member for Oxford, East (Mr. Smith) spoke, is to allow a co-operative that expects to make a substantial investment in the future to obtain tax relief on funds put aside to meet that future expense. The hon. Member for Oxford, East may query that precise wording, but that is a fair description of new clause 5.
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I am not sure whether the hon. Member for Oxford, East made clear what would happen when the future investment was made. However, I assume from the terms of an amendment tabled in Committee, but not selected, that the intention is that the amount invested would be charged to tax. The main effect of the provision would be to allow the co-operative to use the money which would otherwise have been paid in tax. For example, if the money was put aside in year one and invested in year three, the co-operative would have the use of the money for two years. That might reduce its borrowing and interest payments, or the money might be placed on deposit and earn interest.
It is not immediately clear why co-operatives should be favoured in that way. From time to time all businesses may need to accumulate money for future investment and all face the same tax regime. They pay tax on their profits. When they make their investment, they may well qualify for capital allowances. That produces a fair result.
If the law were amended in the way suggested in new clause 5, a co-operative's tax liability would depend on whether it intended to carry out future investment. Such intention may be firm and precise or tentative and vague. It would be extremely difficult for the Inland Revenue to know whether an intention was sufficiently clear that tax relief should be given. The alternative would be to give tax relief without the co-operative having to establish a clear intention to make the investment. That would allow a co-operative, if it was so minded, to use the statutory reserve fund for tax avoidance. I am sure that the hon. Member for Oxford, East would agree that that would be wrong.
More generally, special reliefs of this kind run counter to our business tax policy.
§ Mr. BattleThe Paymaster General says that reliefs of this kind run counter to Government policy. Would it not be preferable to give a boost to the co-operative movement in the same way that a boost has been given to housing developments for landlords through the business expansion scheme,? It seems that there is a conflict in policy when the business expansion scheme can go ahead under the Budget, but the Paymaster General claims that he cannot give relief to co-operatives.
§ Mr. BrookeThe hon. Member for Oxford, East mentioned the business expansion scheme, and I intended to respond to that.
Our business tax policy is to remove, or substantially modify, incentive reliefs of this kind, which distort business behaviour and complicate the tax system. The hon. Member for Oxford, East raised a question about the tax imputation system. That system, which in effect means that shareholders receiving dividends do not have to pay income tax at the basic rate, is designed to reduce the double taxation of distributed profits that occurred under the classical system of corporation tax in force until 1972. For retained profits, co-operatives are taxed in the same way as companies, and we believe that that is fair.
In the submissions made to the Government this year, the Industrial Common Ownership Movement suggested that income tax relief should be given to investors who invest money in the loan stock of workers' co-operatives so that such investors are put on a similar footing to those investing in companies under the BES. However, the BES was introduced with the specific aim of helping unquoted trading companies raise new equity, so that, among other things, they need not be overdependent on loan finance. The proposal to allow income tax relief on money loaned to co-ops would run directly contrary to that objective.
I want now to refer to the progress made by the co-operative movement. Section 25 of the Finance Act 1981 provides for tax relief on interest on loans to buy shares in a co-operative. The Co-operative Development Agency, which the Government sponsor, has produced statistics to illustrate the significant growth of worker co-operatives over recent years, to which the hon. Member for Oxford, East referred. It estimates that there were 200 such co-operatives in 1980, and the figure for this year is 2,000. That argues that there has been very satisfactory growth during the 1980s. I salute that progress. However,I cannot commend new clause 5.
§ Mr. Andrew SmithI thank the Paymaster General for his recognition that workers' co-operatives are a valid form of enterprise. I also welcome his cognisance of the valuable work and contribution made by those co-operatives. However, I found the right hon. Gentleman's reply wholly unconvincing. It did not support the Government's commitment to co-operatives in principle, which we have welcomed, by any direct action on tax anomalies.
The Government are trapped, and appear to want to be trapped, in a circular argument. They seem to say that because workers' co-ops do not have a conventional capitalist share equity, they cannot benefit from the BES and that the tax imputation system on corporation tax does not apply to them. That means that, because they are co-operatives, they do not have access to the advantages and the assistance which the Government are giving through the BES.
I have said that there is a whole battery of other measures that we would like to implement to encourage co-ops. The thrust of my argument was that such action is necessary merely to place co-operatives on a par and a fair, level playing field with other organisations.
While we will not divide the House on this issue, the House can rest assured that Labour Members will return to this matter in future. We believe that there is strong and growing public support for workers' co-operatives as a means of harnessing people's energy, commitment and 434 enterprise in a way that is fair for all workers as they do not merely leave power in the hands of those who control share capital and the sources of finance. It is liberating being involved in a co-operative. They make a real contribution to the economy and the well-being of the individual. We therefore give a firm undertaking that we will return to this issue.
§ Question put and negatived.