SMALL COMPANIES (Hansard, 7 May 1991)

§ The Economic Secretary to the Treasury (Mr. John Maples)
Clause 24 extends the benefit of small companies' relief from the corporation tax scheme by setting new limits that are substantially increased for the third year running. This year, the lower limit is increased from 700 £200,000 to £250,000, and the higher limit from £1 million to £1.25 million, which represents a 150 per cent. increase in the past three years.
We have done much to help small companies by reducing tax rates. Since 1979, the small companies' tax rate has been reduced from 42 per cent. to 25 per cent., which is the same as the basic rate of income tax. Small companies have benefited from that major achievement. As a result of this year's increase, 3,000 more companies will benefit from the small companies' rate, at which the vast majority of tax-paying companies pay tax. More companies will benefit from the marginal relief, and about 30,000 companies will pay less tax as a result of the increase this year.

§ Mr. Chris Smith
As the Economic Secretary said, clause 24 sets the level and the parameters of the small business rates of corporation tax for 1991. It possesses less of the laconic quality of clause 23, but none the less it sets out its intentions reasonably clearly.
Clause 24 consists of three parts—it sets the rate at 25 per cent., as it has been for the past year; it sets the profits limit for the small companies rate up to £250,000; and it sets the limit for marginal relief up to £1.25 million. The latter two changes are welcome to small businesses.
We must recognise, however, that those measures provide no help to businesses below the £200,000 1990 threshold. They will be marginally helped by the carry-back provisions, which we shall discuss in Standing Committee, but the clause offers them no additional help.
The clause will bring welcome but limited help. It must be considered, however, against the background of the wider economic recession. For small businesses, that recession has been caused by two factors—the level of interest rates and the introduction of the uniform business rate. In the debate on clause 19 of last year's Finance Bill, we drew attention to the impact of high interest rates on the small business sector.
The Government took many months before listening to us. They have now reduced interest rates to a certain extent, but to far too limited an extent. It is worth remembering that, under this Government, interest rates have been above 12 per cent. since August 1988—for a longer period than the total time of all the previous Governments since the second world war put together. That is the extent of the squeeze which the Government have placed on small businesses through high interest rates.
Only the other week, I visited several small firms in Woolwich. Business man after business man in small businesses spoke to me, not about corporation tax or the thresholds and ceilings at which the small companies rate bites, but about the level of interest rates, even after the recent snail-like reductions that the Chancellor of the Exchequer has been introducing. Interest rates have been their primary concern.
The other aspect that has been affecting small businesses is the introduction of the uniform business rate. It has had a differential impact in different parts on different industrial sectors and on different sizes of properties. Last year, 250,000 firms in Britain faced 100 per cent. increases in their rates bills as a direct result of the introduction of the uniform business rate.
Recently I visited some small businesses in York, especially in the retailing sector in the inner-city area. They found that the uniform business rate, together with overall 701 interest rates, was the principal cause of the difficulties that their firms were encountering. To tinker with the level and thresholds of the small companies rate of corporation tax may help the prospects of small businesses marginally, but it will not help much. For small businesses facing a recession, clause 24 does not provide much relief. The total value of the change which the Government are introducing in clause 24 is £20 million, yet the recession is causing enormous difficulty and pain throughout the country.
It is perhaps worth looking briefly at the figures which the Building Employers Confederation issued this morning. The press release which accompanies the spring "State of Trade Enquiry" contains several interesting comments. It is worth setting this beside some of the economic hype that we have heard from the Government during the past few days. They have tried to claim that the recession has turned the corner, that the economy is about to recover, and that economic optimism is on the increase. Indeed, earlier this afternoon the Chief Secretary to the Treasury talked about economic optimism surging forward. Clearly, he had not seen the BEC figures. It is worth remembering that its members account for more than three quarters of total construction industry output.
The press release states that the BEC has charted a further sharp fall in output in the first quarter of 1991 compared with the fourth quarter of last year. The main findings of its survey include: The steep downward trend in output continuing; A further rise in spare capacity in the industry; … A sharp fall in confidence about future workload; … Further job losses anticipated. The press release continues: The repair and maintenance sectors appear to have been particularly hard hit by declining demand. It is precisely the repair and maintenance sectors of the construction industry that contain the most small businesses, as the detailed figures make clear.
Clearly, the recession has hit first companies with small numbers of employees. The percentage of firms reporting less work by size shows that, in the fourth quarter of last year, the very small firms—those with fewer than 114 employees—were suffering particularly from the recession. On average, 60 per cent. were experiencing less work than they had in the previous quarter.
Throughout this extremely interesting report from the BEC, the clear message is that business confidence is still falling, that output is still falling, that the recession is still intensifying and that it is hitting especially hard at the small companies end of that industrial sector. When the Chief Secretary tries to tell us that industry is about to flourish once again without any help from the Government, we are entitled to disbelieve him.
702 Earlier, I noted that the Chief Secretary claimed that the CBI survey, which came out last week, showed optimism on the increase. In his absence, I must tell him that it showed nothing of the sort. It showed optimism still on a downward trend and that fewer businesses were optimistic than were three months previously. Yes, the rate of decline in optimism may have slackened slightly, but declining it still is. It is important that the Government recognise that. It would be useful if from time to time they would acknowledge that rather than claim that a downturn in optimism is an upturn, because it is not.
The Government could have introduced a package of real measures to improve the prospects for industry, especially small companies. They could have accepted our proposals for investment allowances and introduced measures to implement a programme of training which is especially important for the small business sector. They could have removed the uniform business rate and returned to a locally determined form of business property taxation. They could have given a special boost to research and development. They could have transformed the business expansion scheme into something that benefited manufacturing industry instead of providing a tax haven for property speculators. They could have provided additional interest rate relief.
The Government did none of those things, which would have been a substantial package of measures for small businesses. What the clause contains may be worthy, but it is far too little, given the scale of the problems and the difficulties that afflict small businesses throughout the country. The Government have yet to recognise that truth.

§ Mr. Maples
The hon. Member for Islington, South and Finsbury (Mr. Smith) accuses this modest little part of the Finance Bill of not doing all sorts of things that it was never intended to do. It is part of a long-term programme of getting down the rates of corporation tax. While the hon. Gentleman is right to say that it will not cure the problems of the uniform business rate, or the recession, or sort out the construction industry, I think that on the whole companies would prefer to pay corporation tax at 25 per cent. rather than the 42 per cent. that they had to pay when his party was in power.
It is a measure that, to companies earning £250,000 a year, is worth £20,000. That is £20,000 more to invest in their business, either in working capital, or in plant and equipment. I should have thought that that would be welcome to them. We believe that on the whole it is better that people should pay lower rates of tax, and this is a move in that direction.