HC Deb 10 June 1992 vol 209 cc322-9

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

4.7 pm

The Financial Secretary to the Treasury (Mr. Stephen Dorrell)

The purpose of the Bill is to set the small company rate of corporation tax for the year 1992–93. As the House will be aware, clause 20 puts into effect the announcement that my right hon. Friend the Chancellor made in his Budget statement: that for the current financial year the small company rate should continue at the same rate as it has been for a number of years—25 per cent. on the first £250,000 of taxable profit, and a marginal rate of 35 per cent. for profits between £250,000 and £1,250,000. The average rate on profits of more than £1¼ million is 33 per cent.

The clause continues the policy that the Government have espoused since 1983 of aligning the standard rate of income tax with the small company rate of corporation tax. We believe that the policy achieves fairness between small companies, personal traders and partnerships. It reflects our belief that the small business sector should be encouraged because great economic benefits, both short and long term, flow from it.

The House might be interested to know that, among the companies which pay corporation tax, 300,000 out of a total of 380,000 now fall within the 25 per cent. band—in other words, they make profits of less than £250,000. It is a rate from which a large number of small businesses benefit and it reflects our continuing emphasis on the importance of ensuring a low marginal rate of tax on wealth creation in order to provide a proper incentive and reward for the wealth-creation process. The small companies' rate of tax is one of the clearest examples of the progress that the Government have been able to make since 1979 in the desire for a reduction in the marginal rate of tax and the encouragement of the wealth-creation process.

In 1979, the small companies' rate of corporation tax stood at 42 per cent. We have now reduced it to 25 per cent. Furthermore, in 1979 the limit above which the tax rate started to rise was profits of £70,000. If one made profits of more than £70,000 in 1979, one no longer benefited from the full small companies' rate but was moving towards the full main corporation tax rate of 52 per cent. The £70,000 limit has risen to the current level of £250,000 and the small companies' corporation tax rate has fallen from 42 per cent. to 25 per cent.

The clear result, of which the House should take due cognisance, is a more vibrant and vigorous small business sector. The effect has been to create more new businesses and jobs and a small business sector which is a more vibrant part of the economy than it was 15 years ago. Since 1979, 400,000 more businesses have been created and become active. There are now, on average, 610 more businesses in every constituency than in 1979. I strongly believe that that is the result of the more benign environment created by the Government.

Mr. A. J. Beith (Berwick-upon-Tweed)

Before the Financial Secretary gets carried away by the compelling effect of the small companies' rate of corporation tax, which I support, I hope that he will recognise that only 335,000 companies pay corporation tax compared with 1.7 million which pay value added tax. Therefore, although the clause is important, it will benefit only a minority in the small business sector.

Mr. Dorrell

I recognise that it is a minority of the total, but the small companies' rate of corporation tax is an important part of the total package of tax and other incentives available to the small business sector. What we did during the 1980s, and on which we must build in the 1990s, is to ensure that our tax and regulatory regime properly considers the interests of the small business sector because it is from that sector that the big and successful businesses of the future grow.

Clause 20 is an important part of our total commitment to improving incentives and rewards within the small business sector, and I commend it to the House.

Mr. Chris Smith (Islington, South and Finsbury)

As this is the first opportunity that I have had, I begin by welcoming you, Mr. Morris, to your post. Three Members of the House are former councillors of the London borough of Islington—you and I happen to be two of them. Two Members of the House happen to be former chairmen of housing in the London borough of Islington—again, you and I are those two hon. Members. It therefore gives me particular pleasure to welcome you to the high office that you now hold.

As the Financial Secretary outlined, clause 20 sets the small companies' rate of corporation tax at the same level as last year. We have no quarrel with the clause, although the picture that the Financial Secretary painted of the average number of additional businesses which have mushroomed in all our constituencies must be set beside the additional number of business liquidations which have also mushroomed in our constituencies. The additional number of unemployed people has become all too evident in our constituencies in the past two years.

4.15 pm
Mr. Dorrell

For the sake of clarity, I should explain that the figure that I gave is net of closures. It refers to new businesses operating today, compared with the number operating in each constituency in 1979.

Mr. Smith

I appreciate that point, which is frequently made by Ministers, but they fail to understand that the number of people without jobs and claiming benefit has risen inexorably over the past two years, and Government policies are doing nothing to assist that problem.

The Financial Secretary spoke warmly about the fact that the Government have aligned the small companies' rate of corporation tax with the standard rate of income tax. What do they intend to do about the new 20 per cent. band of income tax? It appears to be their intention, difficult though it will be to achieve, to expand the 20 per cent. band until it caters for a larger number of people than the standard rate band. What will they then do about the small companies' rate of corporation tax? It would be interesting to hear their forward thoughts on that.

Although we have no quarrel with the 20 per cent. figure in the clause, we must place it on record that the Government should be taking many other steps to assist small businesses. I will mention just two for starters. First, there should be a root-and-branch reform of the uniform business rate. The suspending measure that the Chancellor announced in the Budget was helpful, but it went nowhere near far enough to alleviate the difficulty that the uniform business rate is causing to small businesses. Secondly, there must be more effective measures than the paltry steps announced in the Budget to tackle the problem of late payment of bills, especially by large companies to small companies. For instance, the Bill does not provide for a proper system of interest payments on outstanding bills.

We shall wish to return to those issues in the course of our discussion on the Bill. In the meantime, however, we are happy to see clause 20 make reasonably swift progress to the statute book.

Mrs. Judith Chaplin (Newbury)

I shall speak on clause 20 in a moment, but I should like first to go a little wider.

It is traditional in a maiden speech to praise one's predecessor, and I have listened with interest as my fellow new Members have praised—or even damned with faint praise— their predecessors, but no hon. Member who sat in the last Parliament would not join me in my admiration for the previous hon. Member for Newbury. Sir Michael McNair-Wilson had the unenviable distinction of being the first Member of this House to suffer kidney failure, undergo dialysis and, eventually, have a kidney transplant. Hon. Members will recognise how well he continued to perform his parliamentary duties, with enormous courage. I know from many examples how diligently he continued to serve his constituency, and many kidney patients know how well he turned his experiences of illness to bring them benefits and much better facilities. I know that Sir Michael would agree with me that he could not have done that without the support of his wife, so I am sure that all hon. Members will join me in wishing him continued improved health, and them both a long and happy retirement.

The Newbury constituency takes its name from the largest town within it. It is a large constituency which stretches across the whole of west Berkshire—a beautiful area with many diverse activities. One of its most important industries is racing. Indeed, the highlight of the election campaign and of "party politics" there was unrelated to any candidate—when the horse of that name romped home in the Grand National to the extreme benefit of many of my betting constituents.

The racing industry is important. It employs enormous numbers of people not only in the stables but on the courses and in the betting shops. I welcome the announcement in the Budget that betting duty is to be cut so that £15 million can be redirected to helping this important industry. Nevertheless, the industry continues to face a substantial problem in that the value added tax at 17.5 per cent. levied on the sale of racehorses here is much higher than in France or Ireland and there may well be a real danger of auctioneers, breeders and perhaps even trainers going overseas. In the past, one of the arguments that the Government have deployed against tax harmonisation was that it removed their ability to reduce taxes in a competitive situation. This is exactly such a case. I hope that the Chancellor of the Exchequer will consider how to restore our competitiveness in this area.

Another important industry is the defence industry. The very names Aldermaston and Greenham common are synonymous with the protests of the past. Few now doubt that the protesters were wrong, that it was a strong defence policy which continued to bring the former Soviet Union back to the negotiating table, and that it was the siting of cruise missiles at. Greenham common which eventually led to the intermediate nuclear forces treaty and the abolition of a whole class of nuclear weapons. Now, the people of Newbury hope that it will not be long before Green ham common is common land once again and open to them all.

Perhaps what the Newbury constituency most exemplifies is the economic development of the 1980s. It stretches along the M4—the golden corridor—and has many young high-tech companies competitive with the best in the world. Many started as small businesses, with their founders putting capital and security at risk, and many have suffered hard in the current recession. It is important that the Government should do all that they can to restore confidence there and to help those companies begin to expand again.

I know that we have the lowest corporation tax in Europe, but other countries are bringing their rates down and we should stay ahead. As the hon. Member for Islington, South and Finsbury (Mr. Smith) said, it is to be hoped that we shall repeat that process and look to reduce company taxation in the same way as we have committed ourselves to reducing personal income tax.

The amount of corporation tax is a function of the profitability of a company, and estimates of future profitability affect companies' capital values. Businesses and farmers in my constituency welcome the proposed increase in inheritance tax relief on business assets to 100 per cent. Too often in the past firms have been damaged or even broken up in order to find liquid funds to pay the tax following an unexpected death—and death seldom comes at a convenient time for companies. That problem will now no longer occur.

That welcome change, however, could lead to an unwelcome consequence. Currently, if such assets are handed over during the donor's lifetime, capital gains tax is rolled over but not eliminated. The Finance Bill proposal may lead owners to hang on to their possessions until death to avoid capital gains tax on the increase in value of the assets, rather than handing them over at the best time for the development of that company. And who can blame them? The vast majority of capital gains tax is paid each year by a relatively small number of people selling out of firms that they have built up at considerable risk and sacrifice to themselves. They resent paying the Government nearly half the increase in the value of their companies.

In the past few years, we have seen the risks to which such companies expose themselves. Those small companies, which are started up with very little capital, are the life blood of the economy. I hope that the Chancellor will reconsider the impact of this complex and distorting tax in terms of discouraging risk-taking in this country.

Previous Conservative Chancellors have been proud to abolish a tax each year. The present Chancellor has continued that admirable tradition with the proposed abolition of the matches and mechanical lighters duty in this year's Finance Bill, but there are many other, more important taxes that I could suggest as candidates for abolition. I hope that the Government will continue to be both a tax-reforming Government and a tax-cutting Government.

Mr. A. J. Beith (Berwick-upon-Tweed)

I congratulate the hon. Member for Newbury (Mrs. Chaplin) on a cogent and well-delivered maiden speech. Her enthusiasm for Finance Bill Committee work will already have been noted by the Whips, and she has shown herself well suited to such work. If she does not want to serve on the Standing Committee, she would be well advised to say quite soon that she does not agree with the building society provisions and proposes to vote against them in Committee. I fear that that is her only hope of escaping service on the Committee now that she has shown herself so well prepared for it.

We all appreciated the hon. Lady's tribute to her predecessor, who was held in very high regard in this place and whose health and recovery were a matter of great concern to hon. Members. There grew up around the Christian fellowship in the House much prayer and support for Michael McNair-Wilson and his wife during that time, through which they both came with marvellous courage. Many in the House will remember that experience and it will be one of the ways in which they remember Michael affectionately, too.

The clause relating to corporation tax and small business has to be seen in its proper perspective, which is that a large number of small businesses do not pay any corporation tax because they are not making enough money to do so. Many of them are victims of the recession and are hanging on desperately, and although they may be worried about a number of matters —about the uniform business rate and the impact that it had on them until this year's changes, about the VAT inspector and the burdens that he places upon them and about sorting out their employees' pay-as-you-earn—corporation tax is certainly not top of their anxiety list.

One of the striking things about the tax is that most of it is paid by a relatively few companies. Some 3,500 firms—1 per cent. of the total paying corporation tax—paid 70 per cent. of the total yield of the tax, and seven firms paid 10 per cent. of that yield. Looked at another way, that means that 99 per cent. of firms paying corporation tax contribute only 30 per cent. of the yield. It follows that the administrative costs of collecting corporation tax from small businesses are relatively high, and those costs fall not just on the Government but on business. That is an argument for trying to keep small business out of the corporation tax net to a large extent, not by making it less profitable but by ensuring that the allowances and tax rates are conducive to the achievement of that end.

That is quite difficult. We cannot use the same allowance system as for personal taxation because if we did companies would simply subdivide themselves to maximise benefit from allowances. Although it is desirable to minimise the impact of corporation tax, we probably need to look to other instruments of small business taxation to give the help that the Minister seems to feel could be offered under the corporation tax provision.

The Minister cited the corporation tax rate as an example of the climate in which business operates. I understand his point, but other things will probably matter more to small businesses, one of which is obviously the uniform business rate. I welcome the changes to the uniform business rate, although we argued for going a little further than the Government. After his experiences in Bath, Mr. Chris Patten may, on reflection, be able to offer a little support for the change. The Bath experience is a good example of how the uniform business rate has hit large numbers of small businesses very hard in many parts of the country.

The tax burden on small business could be reduced in other ways and by a greater amount than through the proposals in clause 20. For example, if national insurance and income tax were integrated as systems, that would reduce the enormous administrative burden on business of running the two systems. The national insurance system imposes a kind of poll tax on business in the form of class 2 national insurance contributions which are a disincentive for the smallest businesses.

There are many opportunities for reforming the tax system to help the small business sector. Many of those opportunities lie in the administration of taxes that affect all small businesses. When judging whether the climate of taxation is as helpful to small businesses as it could be, I hope that Treasury Ministers will look far beyond corporation tax, welcome though that provision is.

4.30 pm
Mr. Dorrell

I welcome the maiden speech of my hon. Friend the Member for Newbury (Mrs. Chaplin). Hon. Members on both sides of the House will have welcomed what she said about Michael McNair-Wilson. She was entirely right to stress his courage, which was displayed on many ocasions in the Chamber, and his effective advocacy of his constituents' interests. As a former Health Minister responsible for the transplant programme, I had good reason to know what an effective advocate he was of the interests of kidney patients. I endorse everything that my hon. Friend the new Member for Newbury said about the effectivenesss, courage and personal niceness of Michael McNair-Wilson.

I have a particular link with Michael McNair-Wilson because he was my immediate predecessor as Parliamentary Private Secretary to Peter Walker.

The Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food (Mr. Nicholas Soames)

And look where that got him.

Mr. Dorrell

Indeed, look where that got everyone.

Michael McNair-Wilson showed me the ropes and taught me how to be a PPS from behind.

My hon. Friend the Member for Newbury stressed the importance of the racing industry, which is of great interest to my hon. Friend the Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food. I have noted her point about the need to ensure that the VAT charge paid by the racing industry is measured against a test of competitiveness, as well as a test of fairness, against other industries operating in this country.

My hon. Friend the Member for Newbury also reminded us, as I tried to do earlier, that the tax regime on small companies plays a vital role in the development of an effective free enterprise economy. She reminded us of the old aphorism that great oaks from little acorns grow and that, if we do not have fertile ground for the development of small business, we will not have the new businesses that become big businesses, such as those that now operate in her constituency and employ her constituents.

The point made by my hon. Friend the Member for Newbury about inheritance tax and the link with capital gains tax is well taken. If one wants to build a large company from a small business start, the year-by-year profit tax regime must be congenial to the growth of the small business and the tax system, as a whole, must also be congenial to the growth of small business.

The hon. Member for Berwick-upon-Tweed (Mr. Beith) stressed that small company corporation tax is not the only part of the system that we must ensure is congenial to small business. I agree with that. A wide range of tax and other regulatory activities impinge on the activities of small business. We must ensure that all of them are as favourable as possible so that the ground is fertile for the growth of small business.

The hon. Member for Islington, South and Finsbury (Mr. Smith) asked about the link between small company corporation tax and the standard rate of income tax. As we develop our marginal rate policy at the bottom of the income tax scale, we will obviously need to review year by year how that impacts on small company corporation tax. But we have made it clear that it is our intention to reduce the standard rate of tax to 20 per cent. By implication and extension, we could therefore, on the basis of our record, assume that we would expect and hope to be able to do the same for small company corporation tax as well.

The hon. Gentleman argued for root-and-branch reform of the uniform business rate. It is not unfair to say that he did not sketch in enormous detail what he had in mind. It is difficult to react to proposals for root-and-branch reform without a slightly greater idea of it, fleshing out the grant strategy that he obviously has in his hidden agenda, but we shall seek to winkle it out to establish precisely what he has in mind.

The importance of ensuring that effective action is taken to encourage prompt payment and to discourage late payment of bills was addressed by my right hon. Friend the Chancellor in his Budget speech. We are addressing the matter through the Government's own contracts by ensuring that, when the Government sign a prime contract, we use that contractual mechanism to ensure that not only our own prime contractors but subcontractors pay their suppliers on time.

We are addressing the matter also, as my right hon. Friend the Chancellor announced in the Budget, through a review of small claims recovery procedures to ensure that they are as effective, cheap, efficient and, perhaps most important, timely as possible.

The hon. Gentleman is on to a good point. We agree with him and we are taking action to ensure that words are turned into action.

Mr. Kenneth Purchase (Wolverhampton, North-East)

What instruction has been given to health authorities in regard to the average number of days for payment of debt? When I served on a health authority, there was an implicit instruction to increase from 32 to 35 days the average time for discharging bills.

Mr. Dorrell

The policy of the national health service is very clear and has been laid out time and again in guidance to health authorities: health authorities should pay bills on time and should organise their affairs so that they have the resources to do that. Indeed, the Government backed up that policy with action during the previous public expenditure survey, when we provided £80 million to the national health service specifically to reduce the amounts outstanding by health authorities beyond the due date. We have not only made the guidance clear but provided real money to put health authorities in a position in which they can carry out that guidance. I commend the clause to the House.

Question put and agreed to.

Clause 20 ordered to stand part of the Bill.

Forward to