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Businesses (Taxation)

Volume 458: debated on Thursday 22 March 2007

4. What recent discussions he has had with the Chancellor of the Exchequer on the effects of taxation on businesses. (128950)

I am grateful for that answer. Most enterprises in my constituency, and in Wales as a whole, are small businesses, primarily in the non-capital intensive service sector. Could the Secretary of State explain how such small companies are expected to develop and grow when they are to be subjected to an additional tax burden of 3p in the pound, and indeed will be taxed at a higher rate than when Labour to power in 1997?

First, I am glad that the hon. Gentleman found my answer so helpful. On his second point, about small companies, one of the problems that became apparent was that an increasing number of people were incorporating and becoming small companies to avoid paying tax and national insurance. Any Chancellor must have regard to a pattern of behaviour that leads to people avoiding payment of tax when it is not right that they should do so. The answer to the hon. Gentleman’s friends is, first, that incorporated businesses will benefit from the reduction in corporation and, secondly, that unincorporated businesses will benefit from the reduction in the basic rate of income tax. Firms that invest will benefit from the allowance of up to £50,000 that the Chancellor announced yesterday. All in all, I believe that the changes are welcome and I am surprised that the hon. Gentleman did not welcome them, especially as the shadow Chancellor gave the distinct impression earlier in the week that he wanted to see those changes, too.

Unless I am very much mistaken the Scottish National party Whip is sitting next to me and has been there for 10 minutes. Incidentally, there is not one Scottish Labour Back Bencher in the Chamber—people in glasshouses.

To reinforce the point that has already been made, 90 per cent. of employment in Wales is in the small business sector. All the baloney about R and D is absolute nonsense, because only one in five ever have an interest in taking it up.

But should we not be encouraging more companies to invest in research and development? The hon. Gentleman must know that our future lies in our ability to innovate and to undertake research and development, yet we have it officially from Plaid Cymru that it is all baloney. Surely, that is no way to build a successful Wales or a successful Britain. The changes we announced yesterday in relation to reducing the rate of both corporation tax and basic income tax will help businesses. On top of that, the fact that we are simplifying allowances, making sure that there is relief and help for companies that invest up to £50,000, demonstrates the differences between Labour and the hon. Gentleman’s party: we want to encourage enterprise and innovation.

In the bipartisan spirit that is appropriate for the Chairman of the Select Committee on Trade and Industry, may I urge the Secretary of State to reflect with more care on the answers he has just given? I am deeply concerned that the service sector—small businesses in particular—can take no advantage of the reliefs that are offered in the Budget and face massive increases in their basic corporation tax bill. Indeed, the one relief they might have been able to claim—for cars, which are very important for getting around and meeting suppliers and customers—is specifically excluded from the new annual investment allowance, so I have deep concern that the Budget is actually rather bad news for the vast majority of small businesses in this country.

I do not agree with the hon. Gentleman. The changes that we announced yesterday will be beneficial both for large companies—those paying corporation tax will see their rate reduced—and for small companies, which are taxed on their income, because the basic rate of income tax will come down. It is absolutely right that we have a more up to date system of allowances; at the moment, it is nonsense that people can claim allowances for investing in foreign plantations yet not for investing in a science park, for example. I would have thought—again in the bipartisan spirit in which the hon. Gentleman approaches these things—that we should have an up to date system of allowances rather than relying on a system that was largely put in place after the second world war when we were more interested in reconstruction than in dealing with the problems we face at the beginning of the 21st century.

The Budget delivered by the Chancellor yesterday had the net effect of piling an extra £1 billion in tax on to UK business next year. Is that bad news for business the result of the Secretary of State having no influence at all around the Cabinet table or, now that he no longer expects to be Chancellor himself, is it the result of him choosing not to use what little influence he seems to have?

The reduction in corporation tax is a tremendous help. Indeed, businesses and companies have for a long time called for a reduction in that tax. Interestingly, on Monday the shadow Chancellor—he had clearly thought up his new corporation tax policy at the weekend—said that he wanted to reduce corporation tax. He said:

“There will be some people who make particular use of capital reliefs. The judgment I’ve made is that even they would end up being beneficiaries of a much simpler and more competitive tax system.”

Yet he reached the judgment that it was worth getting rid of those reliefs—we are introducing new capital reliefs, while the Tories are not proposing any.

We welcome the fact that the Chancellor has been listening to our advice by reducing the headline rate of corporation tax, but will he not accept that, behind his headline rate, tax on business will still increase by £1 billion and that small businesses will be hit most severely by his 3p in the pound increase in tax rates?

As I said to the hon. Member for Clwyd, West (Mr. Jones) earlier, we are making changes to the taxation of small businesses because we need to deal with the growing problem of people who are incorporating to avoid paying tax. If the hon. Gentleman is saying that that is all right by the Tories, I do not agree with him. It is far better to move to a simpler system with two rates of allowances running at the same time so that we can encourage businesses to invest. Increased allowances of up to £50,000 are being made available, but the lower rates of corporation tax and income tax will help businesses. That is exactly what is needed to meet the long-term challenges that we face in the future.