Taxation of Small Businesses
Brooks Newmark calls for stability and simplicity in tax code legislation rather than a succession of complex changes every few years which cause major problems for small businesses.
Mr. Newmark: Saying that the Chancellor has executed a U-turn on the nil rate band of corporation tax is not entirely accurate; it is more like a three-point turn. I am heartened that the Chief Secretary has had a damascene conversion and has come to believe in the value of simplicity, but that progress is bought at a price.
Despite being told at every stage that the nil rate band was open to exploitation, the Government pressed ahead with it in 2002. In 2004, there was wide recognition that the fear of exploitation had been realised. The Government had the opportunity at that point to choose the path of simplicity or the path of greater complexity. There are no prizes for guessing which choice prevailed. However, with the choice having been made to introduce the non-corporate distribution rate, small businesses should not be subjected to yet another change in the corporation tax rules. Stability and predictability sit alongside simplicity as the cardinal virtues of the tax code.
Our suggested amendment had a very modest objective-to guarantee that the interests of those businesses that were lured into incorporation in 2002 were not further prejudiced by yet another change in the rules. It would have prevented the "gift horse" of 2002 from being remembered instead as the Trojan horse of 2002. In 2002, the then shadow Chief Secretary said:
"I cannot believe that the Government want every small, sole trader business to incorporate itself. If nothing else, there would be the potential loss of revenue"
That sensible warning provoked a little reflection before the Paymaster General concluded:
"I hope that I am right."-[Official Report, Standing Committee F, 16 May 2002; c. 102,116.]
Ed Balls: If we took the hon. Gentleman's advice and did not make the Government's proposed change, and instead stuck with the status quo, would that mean that the tax system was more or less complex?
Mr. Ivan Lewis: What does it say there?
Mr. Newmark: It says nothing here, actually. [Laughter.] What individual businesses, particularly small businesses, want is consistency and simplicity. Your question relates to the complexity of the tax code, and no doubt your proposed system would be more complex-
The Chairman of Ways and Means (Sir Alan Haselhurst): Order. I am proposing nothing.
Mr. Newmark: You are absolutely correct, Sir Alan. It is the hon. Member for Normanton (Ed Balls) who has an idiotic proposal.
In 2004, the Paymaster General was a little more certain when she said:
"The deliberate and cumulative aim is to underpin all the measures that the Government have taken to encourage businesses to grow and to be more enterprising and productive in the medium and long term and not to operate year by year by playing around with the tax system."-[Official Report, 27 April 2004; Vol. 420, c. 846.]
What is deliberate and cumulative about clause 26? The Paymaster General had an opportunity in 2004 to admit that the zero rate of corporation tax was not viable. Instead, the regulatory impact assessment to which she put her name insisted that the abolition of the nil rate band
"would be the most straightforward option. However, it would run counter to the Government's aim of maintaining low rates of corporation tax to encourage growth and enterprise."
On Report, she reiterated that sentiment for those few Members of the House who neglect to read regulatory impact assessments by affirming:
"I fail to understand how removing the zero rate, yet keeping the 19 per cent. rate, would assist such small companies."-[Official Report, 7 July 2004; Vol. 423, c. 863.]
I hope that that answers the hon. Gentleman's question.
It seems that enlightenment is contagious among Treasury Ministers this year, as the Paymaster General now seems to have reached a better understanding of how the removal of the nil-rate band will help small businesses after all. That is what this proposal is about-helping small businesses, not hindering them.
In his submission to the Treasury Committee in December, Mr. John Whiting, a partner at PricewaterhouseCoopers, said of the current proposals
"Now we are to go back to the beginning with small business probably feeling they would rather have been left alone from the start."
In other words, small businesses like needless interference from Government even less-again, I hope that this answers the hon. Gentleman's question-than they like corporation tax.
Once again, the Government's unhealthy fascination with anti-avoidance legislation precluded sensible consultation. Once again, papering over the cracks has not kept the water out. Once again, the lofty intention of aiding small businesses has ended in a farce. The guiding principle should now be to let well enough alone. If the non-corporate distribution rate was an appropriate solution to a self-inflicted problem in 2004, what has changed since then to justify its removal? I hope that the Minister will answer that question.
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OTHER INTERVENTIONS IN THE DEBATE
Mr. Newmark: Will the Financial Secretary give way?
John Healey: I will gladly give way when I have finished making this point. We said in the pre-Budget report:
"Alongside the revenue raised by this measure, projected receipts have been further reduced as a result of an increase in the number of those incorporating simply to reduce their tax and national insurance liability."
Mr. Newmark: In addressing the important issue of fairness, I would like the Financial Secretary to deal with the point made by the Paymaster General on 7 July 2004. She said:
"I fail to understand how removing the zero rate, yet keeping the 19 per cent. rate, would assist such small companies."-[Official Report, 7 July 2004; Vol. 423, c. 863.]
What is fair about that?
John Healey: The unfairness at the heart of the system and the challenge that we face is that many companies are incorporating simply to reduce their tax liability, not because their business demands suggest that that is the proper legal form for them. Companies that do not incorporate are clearly tax-disadvantaged, compared with their competitors.