CHARGE AND RATE OF CORPORATION TAX FOR 1991 (Hansard, 7 May 1991)

§ Mr. Chris Smith
The clause sets the rate of corporation tax prospectively for the financial year 1991–92. Our debate on clause 22 of an hour or so ago related to the rate of corporation tax which was being set retrospectively for 1990–91. We are glad that the Government are reverting in clause 23 to the principle of avoiding retrospection in setting the rate of corporation tax. It may be conceded that there is merit in retrospection in exceptional circumstances in terms of clause 22, but as a general principle it must be right that the rate of corporation tax should be set prospectively rather than retrospectively. It was one of the relatively few wise changes to the taxation system that the right hon. Member for Blaby (Mr. Lawson) made when he was Chancellor of the Exchequer.
Many of our arguments about clause 23 are precisely the same as those that we advanced a short while ago when considering clause 22. We welcome the relief that is given to many businesses by the reduction in the rate of corporation tax to 33 per cent. We must recognise, however, that the benefit is not felt substantially by smaller companies. We shall come on shortly to talk about the measures that the Government are proposing for small businesses. There will be no benefit whatsoever for companies which have profits of less than £200,000, so we are talking of a limited but welcome measure.
It must be recognised that the benefit that is brought by the clause is substantially outweighed in the relief that it gives by other measures contained in the Budget and the Bill. We must understand the impact on business of the rise in value added tax to 17.5 per cent. Many business commentators have noted perceptively that, while the rate of corporation tax gives businesses something, the rise in VAT takes something away from them. In current circumstances it is difficult for many manufacturers to increase the prices of their goods fully to reflect the additional 2.5 per cent.
I notice in passing that the Liberal Democrats have, perhaps temporarily, absented themselves from our company during these proceedings in Committee. I am surprised at that, given the importance of the clause that we are discussing.
The impact of the VAT change and its outweighing of the corporation tax measures has been commented upon in some surprising quarters. The National Federation of Self-Employed and Small Businesses Ltd., while giving a general welcome to the Budget, had one or two rather perceptive comments to make. The regional liaison officer for Yorkshire said: The really small guy is not selling at the moment and the VAT increase will push his prices up even more. The regional chairman for East Anglia said about the Budget: It's like the curate's egg, good in parts. The Chancellor has juggled with figures and not helped the cash flow problems of small businesses. It was precisely the changes to corporation tax in clauses 22 and 23 which were supposed to help with the cash flow problems of business. But clearly many business men and business women do not believe that that has happened.
Another commentator on the Bill, Coopers and Lybrand, said immediately after the Budget: 697 Most entrepreneurs are not going to believe current competition will allow them to increase prices immediately to this extent … they may well consider most of these measures"— that is most of the measures on corporation tax— are marginal to their cash flow problems in the face of the 2.5 per cent. increase in VAT and its consequences". At about the same time Phillips and Drew said: Although the reliefs on business taxation were welcome, they amount to no more than a teaspoon with which to hold back the recessionary tide. 8.30 pm
It is clear from the comments of many observers on the Bill and the measures which were supposed to help business that, while the Government's measures are welcome to a certain extent, they will not do much to help business in a real way. The verdict of Phillips and Drew that the measures will do little to stem the tide of recession will form much of the focus of our analysis of the Bill in Committee.
On clause 22 we said that the Government would have done much better to have targeted the help that they decided to give to business in order to boost investment in manufacturing industry. Precisely the same analysis applies to clause 23. In clause 22, the Government decided to allocate £380 million worth of Exchequer moneys to the relief that they provided in last year's corporation tax rate. In clause 23 they have decided to give extra relief amounting to £830 million in a full year.
Earlier the Government asked us what the Labour party's proposals would cost. Our answer is simple. The Government are spending a substantial amount in this clause on supposed support for business in the current financial year. We would have made different choices about how to spend that money. We believe that it could have been better targeted, produced better results and assisted more with the recovery that our economy needs.

§ Mr. Arbuthnot
Given the choice, would the Labour party reverse this decision? Given the choice, would it take us back to the 52 per cent. rate of corporation tax which applied when the Labour party was last in power?

§ Mr. Smith
I do not know whether the hon. Gentleman was present during our earlier debate. If he had been, he would have known precisely the answer to those questions. The answer to both questions is no. If the hon. Gentleman went on to ask how the Labour party would finance its proposals on capital allowances if we kept the rate of corporation tax envisaged in the clause, I would make one simple point to him. It is a point which Ministers and Back-Bench Conservative Members have failed to recognise about our proposals on capital allowances. We are talking about bringing forward capital allowance moneys for companies. It is money which the Exchequer would have forgone anyway in due course. We are talking about bringing the money forward into an earlier stage of the investment cycle to provide an incentive for the investment. It is not money that is forgone in the long term by the Exchequer. I hope that the hon. Gentleman understands that extremely important point.
The Opposition have recognised the absolute need to ensure that industry is encouraged to invest. At present our investment performance is sadly lacking. We have identified that as one of the cardinal problems afflicting the 698 British economy and we believe that, welcome though the Government's measures may be to some companies, they are not enough to stimulate the investment that our country needs. The firm of Rathbones prepared an extremely good analysis of many of the proposals in the Budget. It could hardly be said to be in the pocket of the Labour party. It made some interesting comments on the role of business taxation and the measures in the Budget, especially those which deal with corporation tax. It noted that there was a danger that small companies would face a disincentive to invest because of the way in which the thresholds and ceilings were set. On page 11 of its Budget briefing it says: In addition, the Chancellor has yet again ignored the calls to give specific reliefs for manufacturing industry. Presumably he feels that we are now a nation of service companies if not shopkeepers rather than manufacturers. That was not the Labour party speaking. It was a firm commenting independently on the stance that the Government have taken in the Budget and the Finance Bill. It is not a stance that the Labour party shares. We believe that the cardinal need at present is to improve our investment performance in the manufacturing sector. Of course, we welcome the reduction in corporation tax this year to 33 per cent. But we cannot possibly agree with the Government's refusal to understand that allowances to boost investment are what our economy needs and what the Government should have considered more carefully.

§ Mr. Mellor
Having spent—perhaps one should say misspent—many years hacking around this place through great long Bills, many full of impenetrable verbiage, it is rather a treat to discuss a clause that states with great simplicity: Corporation tax shall be charged for the financial year 1991 at the rate of 33 per cent. While others may spring to instantaneous understanding of even the densest clauses of Bills, I usually have to look to my crib. But on this occasion the imposing piece of paper headed "Board of Inland Revenue", which is usually my guide, simply says: This clause sets the rate of corporation tax for the financial year 1991 at 33 per cent. Whatever other reservations may have been expressed about the Bill and, referring to an earlier debate, whatever problems of draftsmanship we may find when we go through the Bill in Committee—it is always a brave man who claims that any Bill that he has introduced is devoid of mistakes—clause 23 should at least win the prize for crispness and clarity. It makes clear what we are talking about, which is a start, even if we do not draw the same conclusions from it. Tempting though it is, I shall not repeat to the vast assemblage gathered for this purpose the comments that I made earlier. I should not wish to divert my constituent, Mr. Knox, whose rise to power is much appreciated by his Member of Parliament. I shall require him to read my earlier comments in Hansard.
Plainly, there is a philosophical difference between the hon. Member for Islington, South and Finsbury (Mr. Smith) and I. I do not necessarily think that it is the end of the world if other people do not agree—it is a perfectly reasonable thing for people to fall out about—but we believe that companies, possessed of the liquidity, can better decide what to do with the money. I gave the figures for the tremendous upsurge in investment in the 1980s, and the upsurge between 1986 and 1989 had much to do with the changes that my right hon. Friend the Member for 699 Blaby (Mr. Lawson) made in his 1984 Budget. The move to 33 per cent. gives us, once again, the keenest corporation tax rate in the European Community and, indeed, among the G7 countries. In 1984, a sharp reduction was made and others followed suit; we have taken the lead again.
It is the role of the hon. Member for Islington, South and Finsbury to pick holes in the argument, even though the Labour party does not criticise us for reducing corporation tax. The hon. Gentleman peddled the argument about capital allowances. I know that several substantial organisations share his view, but the arrangements already in place provide quite a substantial incentive for machinery and plant. Capital allowances for machinery and plant are 25 per cent. on a declining balance basis, which means that for tax purposes most of the cost of an asset can be written off over seven or eight years. If the average life of machinery and plant is about 17 years, as some have estimated, the ability to write it off over seven or eight years, given the current rate of corporation tax, is an attractive basis for companies to invest. I understand that others in industry who consider themselves hard pressed may be looking for another view, but I do not agree with that other view, although we listen to it with care.
The problem is that the Labour party is seeking to ride both horses at once; it wants the benefit of being able to say "Me too." We are asked to believe that a Labour Chancellor would reduce corporation tax—a pledge was given today not to increase it—and make capital allowances. That is all very well as a debating point, but it is not a substantial or convincing basis on which to look forward, as Labour alleges it is, to a period in Government. Governments must make choices; there is no such thing as a free lunch. We are all indebted to my right hon. Friend the Member for Blaby for making that one of the great cliches of our time. Capital allowances will cost a few hundred million pounds, but that must be paid for.
I am grateful for the clear way in which the hon. Member for Islington, South and Finsbury put his argument; the trouble with clarity is that it reveals problems that a more fudged presentation does riot. The hon. Gentleman, as always, was admirably clear. We do not agree on some of the conclusions that can be drawn, but we agree that this masterly, laconic drafting makes clear what we are trying to do—reduce the rate of corporation tax for the next year to 33 per cent. I hope that the Committee will endorse the clause.