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Finance Bill

Volume 459: debated on Monday 30 April 2007

[1st Allotted Day]

(Clauses Nos. 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, Schedules Nos. 1, 18, 22 and 23, and new Clauses relating to microgeneration)

Considered in Committee.

[Sir Alan Haselhurst in the Chair]

I am pleased to open these proceedings in the Committee of the whole House. I am glad that, as is traditional, we have been able to accommodate the wishes of the Opposition parties. The first of the subjects in clause 3 to which we turn was debated quite extensively on Second Reading—

I beg your pardon, Sir Alan.


That the order in which proceedings in the Committee of the whole House on the Finance Bill are taken shall be: Clauses 3, 1, 7 and 8; Schedule 1; Clauses 25 and 67; Schedule 18; Clauses 12 and 81 to 83; Schedule 22; Clause 84; Schedule 23; Clauses 20 and 21; and new Clauses relating to microgeneration. —[John Healey.]

After that difficult start, I hope that we will move on more smoothly.

Clause 3

Small companies’ rates and fractions for financial year 2007

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

We have so much to look forward to during these two days of deliberations in this Committee of the whole House. You can tell that Labour Members are relishing and looking forward to them, Sir Alan.

Clause 3 was debated on Second Reading. It sets the small companies rate of corporation tax at 20 per cent. for 2007-08 and sets the fraction by which the tax rate for those companies with profits between the small companies rate and the main rate thresholds is calculated at one fortieth. It also sets the small companies rate for profits derived from North sea oil activity at 19 per cent. and the fraction for those companies with profits between the thresholds at 11 four-hundredths. This clause should stand part of the Bill.

It is appropriate to start our consideration in Committee by discussing the Chancellor’s tax raid on small businesses. He followed our lead by doing the right thing for large businesses, but he did the wrong thing for small businesses. Although the cut in the corporation tax headline rate for large companies from 30 to 28 per cent. is welcome and has grabbed the headlines, small companies face a substantial rise in the tax that they pay. The Bill increases the small companies rate from 19 to 20 per cent., although the Chancellors’ Budget speech set out a series of further increases, which we shall debate in subsequent Finance Bills, up to 22 per cent. from 1 April 2009.

The increase in taxation fails to acknowledge the contribution that small businesses make to the UK economy. Small businesses, about one quarter of which are small companies, employ 58 per cent. of the private sector work force—about 12 million people—and contribute more than 50 per cent. of UK turnover. While larger companies will benefit from a reduced corporation tax rate, smaller companies will face a tax hike. In an attempt to sweeten the blow to small companies, the Chancellor simultaneously proposed a new set of complex tax reliefs, yet many small businesses will either be ineligible for them or will fail to apply for them.

After 11 Budgets and multiple rate changes, the Chancellor has almost come full circle on the taxation of small companies. When the Government came into office, the small companies tax rate was 23p in the pound. They reduced it to 21p in 1997, and to 20 per cent. in 1998. In 1999, a new 10 per cent. rate was introduced, which was reduced to zero in 2002, only to be put back up to 19 per cent. for non-corporate distributions in 2004. In this year’s Budget, the small companies rate was increased from 19 to 20 per cent., with further increases proposed over the course of the next three years. There have been so many changes to the small companies tax rate, yet so little progress: by the time we reach April 2009, the rate will be just 1p lower than it was when the Government came to office in 1997. Given so many changes, one can conclude only that the Chancellor cannot make up his mind about how he regards small businesses: he cannot decide whether to encourage or discourage them; whether to congratulate them on being engines of growth or reprimand them for tax avoidance; or whether to give them reliefs or to reduce their profits.

The Chancellor may not be able to make up his mind about small businesses, but they have certainly done so about him. Following his Budget, the comments in the papers from business organisations demonstrated their thoughts about him, particularly in relation to the small companies rate. Carol Undy, of the Federation of Small Businesses said:

“This is the Chancellor’s eleventh Budget and this year’s offering is no different to the others—he gives with one hand and takes with the other. Corporation tax was cut for large firms but increased for smaller ones.”

The federation went on to say:

“Tax cuts aimed at big business will do nothing to ease the burden for the majority of the private sector.”

The British Chambers of Commerce said:

“many of our members feel let down and are dismayed by the measures taken which will hit their competitiveness and increase their tax burden.”

The Association of Chartered Certified Accountants declared:

“This is no encouragement for the small business sector”.

Chas Roy-Chowdhury, the head of taxation, said it was

“a very surprising Budget from a Chancellor who claims to be a friend of enterprise. It seems to be a case of robbing small business Peter to pay big business Paul.”

One of the themes that emerges when one talks to small business organisations is that, despite the complexity of the Budget, many of their members feel that small companies are being penalised to fund the tax cuts experienced by large businesses. Chas Roy-Chowdhury commented:

“This decision flies in the face of the Chancellor's previous aim to encourage more businesses to incorporate”.

Many small businesses have commented individually that the Budget was aimed at wooing the City, not at wooing small businesses. Pauline Birdsall, a director of a freight forwarding company in Hayes, Middlesex, summed up the mood of many small businesses by saying:

“What do we have to do to makes ends meet? The Government is clearly afraid of big businesses going abroad, but they don’t seem to worry much about the small firms. As a group we are major employers and we are totally undervalued.”

A Hampshire business woman, Lynn Willrich, said that small businesses had been forgotten by this Government. She continued:

“We are a very small company and we are being hit from all angles. We feel as though we are paying the price for big companies getting a tax break…. The Government should be helping us not hindering us.”

The Chancellor may have presented his tax con as a tax cut, but small businesses saw through his sales patter and saw nothing in it for them. In a survey of 220 owners and managers of small firms conducted by the Forum of Private Business, 82 per cent. of respondents said that the tax hike in the corporation tax rate for smaller companies would be damaging to their company; 65 per cent. felt that, overall, the Budget would have a negative effect on their business; and a third felt that the plans laid out in the Budget made the tax system more complex. Only 4 per cent. regarded the Budget as positive for them—only 4 per cent., compared with 82 per cent. who felt that the Budget would damage their business.

I thank my hon. Friend for giving way so early in what I think is a rather important speech. Does he agree that many small businesses are not involved in research and development and may not invest on an annual basis that would enable them to qualify for changes in the annual investment allowance? A lot of small businesses are quite happy to be small businesses. Why should they now be discriminated against?

My hon. Friend makes an important point. The sectoral impact of the tax changes is an issue: different sectors see the changes proposed in the Budget very differently. I shall discuss how some sectors feel in a moment. There is a sense that the way in which the Chancellor has sought to offset the tax increase favours certain types of business rather than others, and that rather than make the business environment better for all businesses, he has made it better only for some.

I agree with my hon. Friend the Member for Sevenoaks (Mr. Fallon). The Chancellor has admitted that he does not understand mathematics, but the clause shows that he does not understand the basics of business and that not all businesses are the same. He assumes, in a very broad-brush way, that all small businesses can benefit from the provisions when, in fact, only a small proportion do so.

The Chancellor made his own remarks about his maths, so I shall not make any about his sums not adding up. Certainly, he cannot work out the reality of business in Britain today. Some 75 per cent. of production in our economy comes from the service sector, yet the tax changes that he has proposed primarily help asset-rich businesses that invest in fixed capital, rather than the businesses that are so typical of the service sector, which invest in human capital as well. That is an important difference to highlight.

Does the hon. Gentleman agree that, in addition to different sectors being affected in different ways, there will be significant regional differences in the impact of the changes? Areas such as my constituency, where the major employers are very small businesses that are almost on a micro level, will be hit disproportionately, and will suffer more than areas that have many large employers.

The hon. Lady makes a valid point, and I suspect that she will find in her constituency, which has a high proportion of tourist-related businesses, that those businesses that do not invest in fixed assets will suffer, because they will not benefit from the offsetting tax changes that the Chancellor has made. There is a double whammy for businesses in her constituency, as there is for so many businesses across the country.

It is not surprising that a large number of businesses across the country criticised the Budget for the impact that it would have on them, but what did the Treasury say in its defence? The Economic Secretary to the Treasury, speaking at the British Chambers of Commerce’s annual conference, said that the Chancellor had raised the small companies tax rate to clamp down on

“individuals incorporating to avoid paying their due share of tax. Without addressing this, this trend would have continued at a cost to the rest of the taxpaying population of billions of pounds—money which could not be afforded.”

At least he did not say that the Confederation of British Industry told the Government to say that.

The Financial Secretary to the Treasury has said that

“the lower rates of tax have resulted in a significant number of people incorporating to take advantage of them, not to invest in business, but simply to extract the company profits in a way that reduces their personal tax and national insurance liabilities.”—[Official Report, 23 April 2007; Vol. 459, c. 758.]

That has been a recurrent theme in the Treasury’s defence of the change in taxation. Treasury Ministers who parade that defence seem to forget that it was they who introduced the zero per cent. rate of corporation tax in the Finance Act 2002. They sought to use the measure to encourage enterprise, and of course it led to increased incorporation. In a way, they are unpicking their own reforms, and rather quickly. Every small company is at risk of losing out as a consequence of the Government repairing the damage that they did.

Does the hon. Gentleman accept that in the 2002 Budget to which he referred, and the 2000 and 1999 Budgets, in which we made changes to the small companies rate, we made it clear that our policy purpose in making those changes was to encourage growth, investment and innovation?

I think that I took part in the scrutiny of the Finance Act 2002, and I heard the Financial Secretary’s colleague, the Paymaster General, make the assertions that he has just made. The error that the Government made then was to assume that companies were the only engines of enterprise. They focused on a narrow set of business organisations, forgetting that sole traders and partnerships were contributors to enterprise, too. The changes that they introduced in 2002 were focused on encouraging companies to be entrepreneurial, but they forgot that a large amount of entrepreneurial activity comes from outside the company sector, as the Financial Secretary said himself on Second Reading last week—I will come back to those comments later. Only a quarter of small businesses are incorporated; in a way, that underlines the weakness of the Government’s arguments in favour of making the change back in 2002.

Was it not widely predicted, even back in 2002, that the zero rate of corporation tax would result in a lot of small businesses incorporating in order to benefit from a better taxation system? The mess that the Government have got themselves into was entirely predictable, even in 2002.

My hon. Friend is right. According to my hazy recollection of the scrutiny of the 2002 Finance Bill, the Institute for Fiscal Studies produced estimates of the tax cost of the zero per cent. corporation tax rate, and the Government rather dismissed those estimates at the time. The wave of incorporation was predictable, on the basis of what happened in 2002. The Government are now unpicking that move, with the aim of tackling tax-motivated incorporation, but in doing so they are harming every profitable small company, whether it employs one person or 100 people. That is the problem with the change.

I know that the hon. Gentleman is anxious to make his first intervention in Committee—in many respects it is surprising that it has taken 14 minutes for him to try to do so—but he will have to wait a moment longer. Those changes have been unpicked, and they will affect every small company, regardless of size. If they are profitable, they will have to pay more taxation, so the issue arises about the way in which the Government have sought to tackle a problem that, in part, is their own creation.

I am grateful to the hon. Gentleman for his usual generosity. I, too, served on the Standing Committee that considered the Finance Bill of 2002, and I remember some of those arguments—they are hazy, to use his adjective about his own memory and, indeed, about mine in some respects. However, I do not recall that he and his hon. Friends voted against that zero per cent. rate in the 2002 Standing Committee debates. Does he have a different recollection?

This is a debate about what is happening in the aftermath of that debate. It is rather rich of the Government to come back five years later, and almost airbrush out the history of those measures, ignoring the fact that they started that process by altering the balance between incorporation and being unincorporated. The problem is that the Government are using a crude sledgehammer to crack a nut, and they are causing a problem for many small businesses.

Let us consider for a moment the issue of incorporation, because it is an argument that has been prayed in aid by the Economic Secretary and the Financial Secretary. If we look at the way in which the number of companies that have incorporated has changed in recent years, we can see that in the year that the zero rate was introduced there was an increase in the number of companies that incorporated. That trend and step change in incorporation has continued, and the year after the zero rate was scrapped the number of companies registered was 372,000, compared with 325,900 in 2002-03. It appears that there has been a general increase in the number of companies that have incorporated, and it is hard to deduce a causal link between the two, given the fact that the large number of incorporations has continued for some time afterwards.

The hon. Gentleman may not have the figures, but can he possibly disaggregate them, because over the same period a new regime of limited liability partnerships came in, which enabled partnerships to incorporate, and some of them are included in the figure of 372,000 to which he referred? It does not help us greatly with this debate unless he can disaggregate.

The hon. Gentleman is right. I am not sure that those figures include limited liability partnerships, but I certainly do not think that the numbers have increased. I do not think that it is a huge number, and it certainly would not have a distorting effect on the most recent year, as the hon. Gentleman is perhaps suggesting.

Let us look at the arguments that have been used. Simon Sweetman from the Federation of Small Businesses made this response to the change:

“On the face of it, the rise in the small companies rate is very disappointing for our members, because it is addressing a problem that I don’t think exists, which is the notion that people incorporate for tax reasons. It was certainly true at one point, but I don’t think it happens any more.”

The British Chambers of Commerce further argued that the rise in the small companies tax rate

“sends out a negative message to the small business community. Closing a loophole, which was initially created by Government incentives, penalises small businesses unnecessarily.”

It went on to say that it does not understand

“why the Government chose to use a blunt instrument impacting on all small businesses rather than focussing their resources on targeting those who are using Managed-Service Companies as a front for tax avoidance”.

There is a serious doubt in the small business community, therefore, about whether tax-motivated incorporation still persists as an issue and, if it does, whether raising the small business rate of corporation tax is the way to tackle it, as there may be other ways of doing so.

The Chancellor sold the package to small businesses because of the offsetting tax changes, such as the extension of the 50 per cent. first year capital allowance for this year and the changes in subsequent years, and the changes in the research and development tax credit. It is worth remembering the impact that such change will have on the profitability of businesses and their ability to invest for the future. In its comment on the Budget, the Association of Convenience Stores pointed out that

“convenience stores generally operate on a 1 to 2 per cent. net profit margin, and the increase in the rate of corporation tax on small business will further erode this.”

How on earth will they find the profits to survive as a business and create new earnings for the owners and shareholders, and will they be able to retain sufficient profits to enable them to grow and develop in the future?

Many service sector companies will face that problem as a consequence of the change. I am not sure that they will benefit from the more generous capital allowances or the changes to the research and development tax credit. For many service sector companies, investment on such a scale is rare, and the Government should remember the importance of the service sector to the economy as a whole. As I said earlier, about 75 per cent. of the economy is accounted for by the service sector, so if the Government start to attack that sector and restrict its ability to grow and develop, they are creating a long-term problem.

We can all identify service companies in our own constituencies that might not benefit from the change, such as hairdressers or caterers. Let us take a business that I know—a conference business run by a friend of mine. It does not need to invest very much in physical assets, but its retained profits are necessary to provide the capital to expand the business and generate the money that can be used to take risks in growing the business. Service sector businesses will be worse off as a consequence of the Budget. They will suffer the tax rise, but they will not be eligible for the reliefs that the Chancellor increased in the Budget.

One argument for the tax increase is that it will tackle tax-motivated incorporation. The other argument deployed by the Chancellor is that there will be other moves to compensate for that. When we consider clause 3 in the round, we should remember the arguments put by the Chancellor. It is important to remember that the changes to capital allowances are a timing difference. Capital allowances change the phasing of permissible capital expenditure for taxation. Increasing the first year allowances accelerates the tax relief; it does not increase the amount available for tax relief over the lifetime of the asset. It is a timing difference, not a tax cut.

Victor Dauppe, a tax principal at MacIntyre Hudson, was right when he said:

“Extra corporation tax is permanent, and the increased capital allowances are either temporary, not yet in place or unavailable for some companies.”

The Financial Secretary to the Treasury agreed with that. In last week’s Second Reading debate he said that

“the changes to capital allowances have a largely temporary timing effect”.—[Official Report, 23 April 2007; Vol. 459, c. 758.]

That indicates the deal that is on offer to small companies. They see a permanent increase in their rate of corporation tax which is offset—if they are eligible to make a claim—by a temporary short-term timing difference that improves their cash flow today, but is reversed later.

The hon. Gentleman is right to say that the additional tax take may erode small companies’ ability to invest. He is also right to suggest that many of them will not be eligible for some of the existing reliefs. The changes this year and in the following two years will take £1.2 billion in additional revenue, and perhaps £100 million out of Scottish business. What impact does he think that will have on the 98 per cent. of Scottish businesses that employ fewer than 50 people, but which generate 41 per cent. of all revenue in Scotland? What impact does he think £100 million of their profits will have on their ability to invest in the future?

The hon. Gentleman raises an important point which reflects the issue raised earlier by the hon. Member for Falmouth and Camborne (Julia Goldsworthy) about the regional and national effects that the changes will have. I should have thought that £100 million coming out of the retained profits of Scottish companies would have a significant impact on their ability to develop, expand and grow. We need to be aware of the effect that the change will have on companies up and down the country. It looks as though the hon. Member for Bishop Auckland (Helen Goodman) is ready to intervene—but no, she is just looking very eager and anxious.

The thing to remember is that every profitable small company will pay the increase in corporation tax, but not every company will qualify for or apply for R and D tax credits or benefit from the changes. Use of the R and D tax reliefs is as low as 11 per cent. A third of companies for which the tax credits were relevant did not claim them, because according to a survey produced by PricewaterhouseCoopers in 2006 the process was perceived as too difficult. The argument that the tax increase is fine because it is offset by reliefs and allowances elsewhere does not hold true if a business feels that the process of claiming the reliefs and allowances is too complex or that they do not apply to it. The Government cannot pretend that improving the reliefs is the answer to the additional tax that they have imposed on small companies; that argument does not wash because of the low take-up and use of these reliefs.

Does my hon. Friend agree that small companies may be affected not only by the reliefs that he has just talked about but by the empty property relief—a substantial relief that is not even part of the Finance Bill but which is being restricted significantly, raising nearly £1 billion for the Chancellor? That will also have a disproportionate effect on small companies that have empty premises, perhaps through no fault of their own but because of default by a subsequent tenant.

My hon. Friend makes a valid and important point about the widespread impact of the Budget on small companies, but I will not be tempted down that route as it falls outside the scope of clause 3. I am sure that his point will be heard by those groups that take a close interest in the matter.

I was talking about the use and take-up of reliefs and their growing complexity. To offset the increase in corporation tax, small companies will have carefully to consider how they can claim R and D tax credits or capital allowances and will have to navigate their way through a complex system. A poll of members of the British Chambers of Commerce said that 69 per cent. believed that business taxes should be streamlined so that taxes were lower overall and so that the system of tax allowances and exemptions was abolished. A large proportion of businesses prefer a simpler, lower tax burden to one with higher rates offset by more generous exemptions and allowances. A survey by the Forum of Private Business showed that tax allowances designed to encourage investment in companies did not appeal to smaller businesses.

The general concern about the take-up rate for the changes to the allowances and the effects that they will have led the Treasury Committee to recommend in its report on the Budget that

“prior to the 2009 Budget, the Treasury review the impact of these measures on business investment in order to ensure that the measures are having a positive impact on investment and business growth, including the impact on small businesses that do not qualify for R and D tax credit or the Annual Investment Allowance.”

Clearly, there is widespread concern about whether the allowances will be taken up. If they are not, small companies will be hit by the increase in the small companies rate of corporation tax.

It is worth considering the impact on small companies of the increase in the small companies rate of corporate taxation. The Red Book estimates that the cost to small businesses in the 2007-08 tax year will be about £10 million; that in 2008-09 it will be £370 million; and that in 2009-10 it will be £820 million. That is a £1.2 billion tax take from small companies. How will that impact on the individual companies that are subject to the regime?

The Financial Secretary said last week on Second Reading that there were about 4.3 million small businesses in this country, that approximately three quarters of those were self-employed and therefore not affected by the increase in corporation tax in the Budget and that, of those that remained, a further quarter did not pay corporation tax because they had no declarable corporation tax profits. That means that approximately 800,000 businesses will be affected. In the 2009-10 tax year, they will pay £820 million. That implies an average increase in corporation tax to those businesses of £1,000 per business.

The hon. Gentleman refers to the table in the Red Book. Will he confirm that the revenue that he described is being recycled back to small businesses through the capital allowance measures?

That assumes that small businesses take up the allowances and reliefs that are available. The Chief Secretary was careful in his choice of words, because all small businesses can claim the increase in allowances, regardless of whether they are incorporated. The average benefit from the increase in allowances is approximately £68 per small business. Small companies will pay on average £1,000 more in corporation tax, but the group of 4.3 million will gain only about £60 a year. That is not a fair deal for small companies. The benefit is being spread rather thinly.

Is not that another example of the Chancellor simply saying, “I’m going to take your taxes and you can claim them back as a business person but only if you do exactly as I say”? It is management by the clunking fist, not the invisible hand of Adam Smith.

My hon. Friend makes an important point. The Chancellor is loading incentives towards a specific sort of business. If businesses invest in research and development and physical assets, the Government will give them some tax relief and allowances, but if they do not, they will not be able to claim the reliefs. A small company will have to pay more tax anyway. The Chancellor penalises small companies and spreads the benefit among all business.

Is not it the Conservative party’s policy to encourage small businesses to invest, because that will lead to their greater prosperity, productivity and growth? Does not the hon. Gentleman accept that a company with profits of up to £100,000 that invests half the profits will end up paying 40 per cent. less tax than it would without the Bill?

The hon. Lady makes a mistake. She assumes that investment is about the purchase of physical assets that qualify for capital allowances. However, people can invest in their businesses and get them to grow in different ways by recruiting more members of staff and developing the skills of their work force. Investment is not simply about buying machinery. Investment means that companies can grow in a range of ways, not necessarily through the acquisition of physical assets.

That is the problem with the Government’s approach to the Budget. The Chancellor appears to be interested in only a narrow group of companies. He is happy to reward businesses that buy physical assets, but penalises small companies generally through increasing the small companies tax rate. The Budget’s failure is penalising businesses that invest in people rather than machinery, equipment and plant. The hon. Lady should consider the small businesses in her constituency, especially those that do not invest in plant and machinery but want to take a risk by employing new members of staff. They will be hit most hard by the Budget—they will pay the higher rate of small companies taxation but will not receive in return the increase in capital allowances, which, when averaged out across all small businesses, amounts to about £60 per company. That is not much of an incentive, even if the hon. Lady’s argument held water.

That is why the post-Budget survey undertaken by Populus for the British Chambers of Commerce showed that only 17 per cent. of businesses thought that this year’s Budget would improve their competitiveness. That is the reality of the business reaction to the Budget on the ground. The theory that the Chancellor has put forward in the Budget, and which hon. and right hon. Labour Members have put forward, too, does not hold water. Businesses can expand in ways other than investing in fixed capital and assets. Indeed, the Chancellor is penalising those businesses that do not invest in fixed capital and assets, by increasing the small companies rate of taxation.

My hon. Friend may not have heard the Economic Secretary to the Treasury, speaking from a sedentary position, identify research and development as a possible alternative means of securing some benefit from the Budget. The Economic Secretary is of course correct in his assessment that that part of the economy can take advantage of the reliefs. However, he is completely incorrect, in that he ignores the service sector, which my hon. Friend has rightly highlighted. The service sector gains no such benefit from the £50,000 limit, from either R and D relief or capital allowances, yet it is a sector that is growing very fast. Many companies in my constituency are engaged in mail order, for instance. They might invest in a new catalogue or brochure for their customer base, but they will not benefit from either of the reliefs. There are many other examples of companies in the service sector that do not invest in R and D, or in plant and machinery for capital allowances.

Order. I should tell the Committee that I understand the link in the argument between the tax measure that is the subject of clause 3 and the allowances. However, the allowances are referred to more substantially in clauses 36 and 49, which are not due to be taken on the Floor of the House. If the debate extends too far into the question of allowances, it may be that the Chairman will not favour much debate in the Public Bill Committee.

Thank you for your guidance, Sir Alan. You are absolutely right to draw the Committee’s attention to the rather narrow nature of clause 3. I had hoped just to establish the problems inherent in how the offsetting of allowances had been set up, and why they do not justify the increase in the small companies rate of taxation. However, we shall not need to make that point for much longer, as it is a clear deficiency in the Budget, at least to the Opposition.

That brings me to the conclusion of my remarks. By increasing the small companies rate of corporation tax, the Government have sought to address a problem of their own making caused by the introduction of the zero per cent. rate back in 2002. The risks were there at the time. However, the attempt to correct the problems that arose then will mean that all small companies that are profitable will have to pay an increase in corporation tax. In order to tackle the apparent abuse of the Government’s own rules by a small group, all small companies will have to pay higher corporation tax.

Ministers may talk about large groups, but it would interesting to hear just how many businesses the Government think are taking advantage of the system. However, arguing that all small companies should be penalised and that the only way to offset the increase in corporation tax is to focus on extending reliefs and allowances, where there is no guarantee that they will be taken up, is the wrong approach to tackling the issue. Small companies are the backbone of the economy. They play an important role and are an engine of growth in the British economy. My concern is that the tax increase in question will damage the competitiveness of that important sector.

I am grateful to the hon. Gentleman for giving way, because I am anxious to put one point to him before he sits down that he has not yet covered. Will he reverse the tax change in clause 3 in future?

I am not going to stand here today and write the Budget of my hon. Friend the Member for Tatton (Mr. Osborne) for 2010. We will bring forward at the appropriate time our own proposals to stimulate the activity of small businesses and to ensure that they continue to act as the engine of economic growth. We now need to focus on the measures before us today. Small businesses up and down the country have acknowledged that this corporation tax increase will have a significant and damaging impact on them, and that it will lead to some of them being unable to expand and to invest in the future. The Chancellor has sought to extract £1.2 billion from them over three years in corporation tax. That is an attack on those companies and it will do untold damage to them. That is why I oppose the measure before us.

Order. I should perhaps mention that, as we are in Committee, the correct form of address to the Chair is not “Mr. Deputy Speaker”. It should either be “Mr. Chairman” or “Sir Alan”. In the spirit of egalitarianism, I favour neither one over the other.

I am pleased to take part in this debate, even though I did not have the pleasure and privilege of taking part in the debates on these matters in 2002. I wish to support clause 3. In considering the taxation of small and medium-sized enterprises, any Government will try to balance two factors: the health of the small business sector and the fairness of the tax system. No one here today underestimates the importance of SMEs. According to statistics produced by the Small Business Service in August 2006, 99.9 per cent. of the 4.3 million business enterprises in the UK in 2005 were SMEs, accounting for 59 per cent. of business employment and 51 per cent. of turnover. Clearly, the small business sector is a key source of innovation and enterprise, and it is important that the tax system provides incentives and rewards for those qualities. Of the 4.3 million business enterprises, 2.7 million are sole proprietors and 500,000 are partnerships, which means that only 1.1 million are companies that could possibly be affected by this change.

As well as taking account of the health of the small enterprise sector, we need to protect the revenue base. Tax must be equitable, as between individuals in similar circumstances. Businesses should not be distracted from their real purpose by tax-induced decisions or activities. Conservative Members belong to a party that seems, particularly in the light of the recent remarks of the hon. Member for Fareham (Mr. Hoban), to be anti-tax. Tax seems to be an optional extra for them. The most recent example of this involved Lord Laidlaw, who promised the Lords Appointments Commission that he would domicile himself in the UK in order to pay UK taxes—

I beg your pardon, Sir Alan. I was simply trying to make the point that it is important for the Government to promote a culture of respect for the tax system, and I feel that Conservative Members do not always show the kind of understanding that they would need to have if they were going to run an effective tax system—

The tax system will work only when the rules are perceived to be fair. People who abuse the small companies rate by moving from unincorporated to incorporated status purely to pay less income tax and avoid paying national insurance contributions are engaging in precisely the kind of tax-induced activity that does not promote a stronger economy or flourishing enterprise. It is completely unfair if some people can lower their tax bill by moving from unincorporated to incorporated status, while Joe Bloggs, who has to pay his tax through PAYE, does not have that opportunity. That is the essential point at issue in this tax change.

The Chancellor of the Exchequer made it clear in his Budget speech in March that he was introducing the change

“to deal with individuals artificially incorporating as small companies to avoid paying their due share of tax.”—[Official Report, 21 March 2007; Vol. 458, c. 815.]

The clause raises the small companies rate from 19 to 20 per cent. this month, with further increases to 21 and 22 per cent.

A statement by Simon Sweetman of the Federation of Small Businesses contradicts the hon. Lady’s point about the clause. He said:

“It is addressing a problem that I don’t think exists, which is the notion that people incorporate for tax reasons. It certainly was true at one point, but I really don’t think it happens any more.”

In a few moments, I shall quote some other independent commentators who said after the Budget that the problem does exist.

The object of the clause is to reduce the differential tax rate between the incorporated and the unincorporated. For the sector as whole, the three allowances are not just intended, but estimated, to be tax-neutral. The introduction of the annual investment allowance for 100 per cent. of expenditure up to £50,000, the 175 per cent. tax credit for R and D and the new tax credit for environmental investment offset the effect of the tax rate increase overall. Without that action, the Exchequer would lose billions of pounds, as more businesses incorporated in an attempt to avoid paying income tax and national insurance.

How does the hon. Lady reconcile her statement about offsetting with what I said about the change to empty property relief, as a result of which businesses in this country will contribute nearly £1 billion to the Exchequer?

Thank you, Sir Alan.

A further problem is that the current small companies rate benefits large companies, because it is levied on the size of profits, not on the size of the company. The change will help to focus the tax system more effectively.

To return to the point raised by the hon. Member for Braintree (Mr. Newmark), after the Budget speech Andrew Tenon, a tax director at Tenon, commented:

“There is no doubt that many people have incorporated to save tax”.

The Institute of Chartered Accountants said—again, after the Budget—that,

“the Government is concerned that the small companies rate continues to be subject to manipulation…This is probably a reasonable analysis”.

The scaremongering from Conservative Members is not justified. I suggest that they turn to chart 3.1 in the Red Book, which compares international corporate tax rates. They will see that current UK rates are below the G7 average, and that the new UK rate will be below that of the EU15. The Government continue, through a range of policies, to encourage business growth by encouraging investment and innovation.

I am sure that in Bishop Auckland, as in Braintree, the majority of small businesses are in the service sector and are not capital-intensive. Has the hon. Lady therefore spoken to small businesses in her constituency? If so, what percentage of them think that the tax increases will benefit them?

As a matter of fact, there is a large amount of manufacturing in my constituency, and it is important to support this country’s manufacturing base.

To conclude, it is vital that, at the same time as encouraging the small business sector, we treat small businesses and self-employed people in an even-handed way.

I strongly agree with the approach adopted by the hon. Member for Fareham (Mr. Hoban), and with his conclusions. He set out the arguments pretty comprehensively, and I do not think I need add to them in great detail.

It is true that, as has just been said, the Budget’s overall approach to business is neutral. It has probably been favourable to large companies and less favourable to small companies, for reasons that have already been given and particularly because of the impact of clause 3. However, what we say as Opposition spokesmen is less important than the way in which businesses themselves experience and perceive the changes. A fairly large survey conducted by the British Chambers of Commerce, which represents both large and small companies, concluded that 70 per cent. of United Kingdom businesses believed that the proposals would damage them, mainly because of the impact on small companies.

Let me deal with the two major arguments that have been advanced in defence of clause 3. The first, advanced by the hon. Member for Bishop Auckland (Helen Goodman), is the tax avoidance argument—the argument that large numbers of small entrepreneurs are constantly calculating, on the basis of the tax rate, the respective merits of taking their profits as salaries or as dividends. That may or may not be a valid point: we do not know. One of my questions to the Government is how much research they have actually done. There have been two major changes of policy, and I think it legitimate to ask how well the Government are informed by research and survey about how companies in this position behave.

The Economic Secretary asked the hon. Member for Fareham (Mr. Hoban) whether he was going to change the policy. The hon. Gentleman gave a perfectly sensible answer, although I think he could have added to it. He said, “We would change the policy if we knew what was happening in terms of behaviour.” The Government are rushing into tax changes without presenting any evidence about the way in which companies behave.

In evidence to the Select Committee, the CBI said:

“A claimed rationale for this decision was to reduce the differential between incorporated and unincorporated businesses. But in this case it is not clear why the corporation tax rate will end up above the personal income tax rate rather than being aligned with it.”

If the purpose is to stop arbitrage at the boundary, why are the rates not being aligned? There may well be an answer to the CBI’s question. If so, perhaps the Minister can explain what it is.

Indeed, but the wedge of national insurance is much larger than the 2 to 3 per cent. margins that the Government are playing with. We need some analysis of, and research on, how big the tax differentials need to be to change behaviour. We have been given no evidence so far.

The second argument relates to how far the clause 3 change in tax rates is offset by changes in tax allowances. You have advised us not to get involved in the details of tax allowances, Sir Alan, but the issue of offset is crucial to the debate. The argument is that the annual investment allowance will offset the increased tax burden for small companies. The Chief Secretary intervened to make that point. What we do not know—and I do not think the Government know—is how much of the annual investment allowance will be taken up by small incorporated companies. Can the Government give us an estimate? Are they thinking of 50 per cent., 30 per cent., 20 per cent., 10 per cent. or 5 per cent.? It would be useful to know the Government’s internal estimates of how much is offset and how much is not.

Quite apart from the issue of how much is offset, there is the issue of the time lag between the two measures. The tax increase takes place immediately and in three successive stages, but the offsetting investment allowance is subject to consultation, and may or may not come into effect in two years’ time. There is a gap between the two that will directly affect small companies.

Then there is the point made by several Members, particularly the hon. Member for Ludlow (Mr. Dunne), about the impact differential between service companies, which do not engage in substantial capital investment, and manufacturing companies, which do. Finally, there is the much bigger question of the complicated interaction between the clause 3 increase in corporation tax, the annual investment allowance and the change in the capital allowance rules. All three will be swirling around together.

It is worth looking—although not in great detail—at the evidence that the Institute of Chartered Accountants in England and Wales devoted to the issue. I will just quote a couple of lines. It states:

“The changes to capital allowances will particularly impact small companies”

because of the relationship with the tax change.

“This will particularly be the case for those that claim significant amounts as plant and machinery allowances and in respect of industrial buildings.”

The institute continued:

“Examples of other family businesses that would be affected are printing companies, haulage businesses, manufacturing companies, etc. Such companies are likely to be significant businesses in the local community”.

The complex inter-relationship between a tax increase and two big changes in allowances, taking place over different time horizons, will have complicated and, probably on balance, significantly negative effects for small companies.

The Government would therefore be wise to heed the advice of the Treasury Committee. The hon. Member for Fareham has already quoted its conclusion that the Government should initiate a review of the policy for next year's Finance Bill because of the unpredictable nature of the outcome, but it is worth while quoting another sentence from the conclusion. It states:

“It is not clear whether measures such as the increase in the R&D tax credit and the introduction of the Annual Investment Allowance will have the desired beneficial impact on investment levels by small companies.”

In several interventions, Labour Members have asserted as a matter of dogma that the changes will increase investment, whereas the Treasury Committee, representing three parties, looked at the matter across the board and concluded that the results are likely to be entirely unpredictable. Therefore, I remain totally unpersuaded that clause 3 is justified in anything like its present form.

I, too, oppose clause 3, for many of the reasons that were put forward by my hon. Friend the Member for Fareham (Mr. Hoban) and by the hon. Member for Twickenham (Dr. Cable), whose comments I thoroughly endorse. The clause is misguided and discriminatory. It is distortive in its aim, although unlikely to be distortive in its effect. In the end it will damage many small businesses.

In justifying the clause, the Chancellor has stressed that its purpose is to prevent tax avoidance, but he has put forward no hard evidence since the Budget or indeed to the Select Committee that the great majority of small businesses are in the tax-avoidance game. That is a slur on most small businesses, and I am surprised that the hon. Member for Bishop Auckland (Helen Goodman) simply assumes that those small businesses in her constituency that do not happen to be involved in manufacturing must be involved in tax evasion or tax avoidance. That is a slur on many hard-working small businesses across County Durham.

I am grateful to the hon. Gentleman for giving way. Nothing in my remarks could possibly lead any reasonable listener to conclude that that is what I was saying. That is not what I was saying. I was asserting that it is particularly important to support manufacturing industry and to protect the revenue base. The problem that we face is that the number of people who move to the incorporated sector is on the increase, so the tax base will be eroded further.

It is clear again that the hon. Lady—I do not know why she keeps beating up her own constituency—is implying that many businesses that are not involved in manufacturing are now being incorporated simply to avoid tax. She has used the word “many” and the Chancellor has used the word “many”. However, neither of them have produced hard evidence. When we tackled the Chancellor himself on this question in the Select Committee, he said that it was not just a question of what had happened in the past. He said:

“people who are coming to work in this country are being encouraged to form, and work through, managed services companies even before they come into this country. We faced the prospect of schemes that are being marketed right across Eastern Europe, encouraging people to set up companies purely for the purposes of avoiding taxation”.

In other words, the clause is based not simply on what has happened or is happening, but on what is likely to happen across Europe. We clearly do not have sufficient evidence to justify this change.

Secondly, I am opposed to the clause because, as was brought out in our questioning earlier today, it is discriminatory. It is not neutral in its effect. A vast number of small businesses are not involved in research and development. As my hon. Friend the Member for Ludlow (Mr. Dunne) said, many small businesses do not rely on annual investment. Why? Because they are different types of businesses: they are people businesses, or skills businesses, or consultancies—or knowledge businesses. It is perverse of Ministers to prattle on about how they are supporting the knowledge economy and then to clobber those small businesses that are part of the knowledge economy but do not invest in old-fashioned plant and machinery and qualify for their new fancy allowances. There are knowledge businesses that will lose out because of this measure, so it is discriminatory.

Thirdly, I oppose the clause because its aim is distortive. The objective behind the clause is that Ministers want there to be more investment in research and development. Yet when we took evidence on that point, we were informed by Mr. Whiting

“that the changes to the taxation system in the 2007 Budget were unlikely to be behaviour-changing and that businesses tended to prefer a lower tax rate and simpler taxation system to incentives to invest.”

There we have it—and from one of the experts. Small businesses know about research and development, and simply to encourage more of them to invest in research and development through a particular tax change is unlikely to be as effective as lowering the basic rate of tax that applies to small businesses and keeping it low rather than increasing it.

I am also opposed to the clause because it will be damaging. That is not my conclusion alone. As the hon. Member for Twickenham pointed out, it was the overall conclusion of the Treasury Committee, which contains a majority of Government Members and a handful of Opposition Members. The Labour-dominated Committee was so concerned at the lack of hard evidence in support of this proposal that we concluded:

“It is not clear whether measures such as the increase in the R&D tax credit and the introduction of the…Allowance will have the desired beneficial impact on investment levels by small companies.”

That is why we recommended that, before the final changes are put into effect in the 2009 Budget, we have a proper review of the impact of the measures so that we can establish whether they are positive across the small business sector and whether they discriminate between different parts of that sector. Until that review has taken place, the House cannot possibly support the clause.

As we are talking about corporation tax, I draw Members’ attention to my entry in the Register of Members’ Interests.

One of the keys to having fair taxation is stability. Robert Chote of the Institute for Fiscal Studies told the Treasury Committee during its hearing on the 2005 pre-Budget report:

“A little bit of stability in this area would now be welcome.”

It is now two years later, and it would still be welcome.

Speaking during the debate on last year’s Finance Bill, the Financial Secretary mentioned the responses that the Government had received to the consultation paper on the taxation of small business issued in 2004. He said that businesses had

“a strong preference for simplicity over approaches that risked introducing further complexity.”—[Official Report, 2 May 2006; Vol. 445, c. 926.]

That is a principle on which we can all agree, but it is not one that has much currency at the Treasury, it would seem. This year’s Finance Bill has been reduced to one volume but, unfortunately, the House of Commons Library has had to produce two volumes of briefing notes on the taxation of small businesses—one covering changes between 2000 and 2006, and a second covering recent developments, which no doubt the hon. Member for Wolverhampton, South-West (Rob Marris) has perused in detail.

This is the third time that I have been involved in a Finance Bill debate, and I am already developing a sense of déjà vu. The first instalment of the phased increase of the small companies rate in clause 3 will push small businesses one step closer to where they started, before they were hit with a decade of chopping-and-changing confusion from the Chancellor. The reason for all this confusion is disarmingly simple: tax incentives originally intended to encourage business investment and business growth suddenly became perceived as loopholes. It is tempting to say that one man’s incentive is another’s loophole, but unfortunately the Chancellor’s incentives always seem to become his loopholes if they are given a little time.

It did not matter that everyone warned the Chancellor that radical changes to the small companies rate would act as a direct incentive for incorporation; in fact, there has probably never been so many Cassandras offering unheeded prophecy. He went ahead anyway, and all the changes since then have attempted to restore a balance between incentivising small businesses and preventing the erosion of the tax base, both of which I can recognise as sane objectives on the Treasury’s part. The IFS “green Budget” contained the plea that

“we can only hope that the Treasury will draw appropriate lessons from this unfortunate experience.”

However, I question whether the lesson has actually been learned. For several years now, the reaction to the Chancellor’s treatment of small business taxation has been dominated by one image: the U-turn. For a little variety, last year I dubbed the abolition of the non-corporate distribution rate a three-point turn. This year, it has become even clearer that the Chancellor is simply going round in circles.

However, my real concern is that providing incentives to small business is no longer front and centre in the Treasury’s strategy, and that the emphasis has now shifted on to deciding whether using a tax incentive constitutes avoidance. It all comes back to the Chancellor’s nebulous reasoning about what constitutes a “fair and appropriate” share of tax, or simply the “right amount” of tax. This is an unfocused way of looking at the broader issue of what small businesses contribute to the economy and what the Government should do to help them. The Paymaster General, unfortunately, she is not with us today, said back in 2004, in the middle of the long-winded debacle surrounding the small companies rate, that

“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.]

On that point, I have to agree with her; indeed, that is a more useful guiding principle and intention.

However, we would be forgiven for thinking that there is something wrong with the Treasury’s deliberation, and that its policies have not been cumulative at all. Certainty and continuity in the tax system are helpful to all businesses but particularly small ones, which have less capacity to adapt quickly or take specialist tax advice. The rate changes and forthcoming proposals for a new annual investment allowance only deepen the artificial gulf between small businesses and larger firms.

The Chancellor has in fact taken the muddle of the small companies rate and created a paradox. Reducing the main rate of corporation tax and capital allowances leads to a cut in the tax rate and to an increase in the tax base for larger businesses. However, small businesses are being pulled in the opposite direction through an increase in the tax rate and a narrowing of the tax base, because fewer businesses will be able to make full use of the new investment allowances of which we have heard much during this afternoon’s debate. The Chancellor has made the fatal assumption that because all small businesses, in whatever sector, will theoretically be able to make use of the investment allowance, all will do so. That was the justification he gave to my hon. Friend the Member for Gosport (Peter Viggers) during the Treasury Committee’s inquiry. The Chancellor also defended the changes on the grounds that they appear to be revenue-neutral—perhaps that is just another example of a tax cut being a tax con. However, even if we are inclined to accept that reasoning, the AIA will not take effect until next year, leaving a guaranteed tax rise over the next year.

I want to probe behind the modelling that led to the assumption of revenue neutrality and establish exactly how many of the UK’s 1.3 million incorporated businesses are expected to make use of the allowance and to what extent. Perhaps the information will be forthcoming later when the Minister responds to the debate.

The hon. Gentleman talked about phasing in the allowance, but he also said that there would be a tax rise this year. He is right, but we need to keep things in perspective. My understanding is that the tax rise will be the relatively—I stress that word—small amount of £10 million a year, which is only £2 per small business.

I always appreciate the hon. Gentleman’s interventions, but small businesses operate on the margins so £1,000—even £500—can make a huge difference. Unfortunately, the provision demonstrates yet again the Labour Government’s lack of understanding of how small businesses actually work and survive from day to day.

I am only hazarding a guess, but if too many businesses make use of the annual investment allowance they could sow the seeds of the Government’s next anti-avoidance strategy. Businesses that invest will come to be seen as cheating. In the words of the Federation of Small Businesses:

“It is amazing how quickly a concession to encourage enterprise can become a loophole.”

In our report on the Budget, the Treasury Committee admitted:

“It is not clear whether measures such as the increase in the R&D tax credit and the introduction of the Annual Investment Allowance will have the desired beneficial impact on investment levels by small companies.”

That is the very point made by my hon. Friend the Member for Sevenoaks (Mr. Fallon) earlier. We suggested that the Treasury should take stock of the impact of those changes before the 2009 Budget.

I would go a little further. If the Government are looking for a positive signal to send to small businesses, and for a policy that will have no new unintended consequences, there is one simple answer: leave the small companies rate well alone for a year or so and let small businesses and their accountants catch their breath.

I, too, oppose clause 3 for the reasons outlined by earlier speakers, but I want to explore the Government’s thinking a little further and ask some questions about their approach to the small corporation tax rate.

As the hon. Member for Bishop Auckland (Helen Goodman) said, there is an issue about the two different tax regimes that may apply to a small business. As my hon. Friend the Member for Fareham (Mr. Hoban) said, if the business can be taxed as income, it will pay income tax and national insurance contributions, whereas if it is taxed as a company, it will pay corporation tax, so there can be distortions, as I would be the first to acknowledge. However, I am curious about whether the Government’s approach, as outlined in clause 3, is to make the system as tax-neutral as possible and to remove any distortion—if that is the right word—between the two systems. If so, there are a number of further questions.

Do the Government acknowledge that their previous approach to the zero rate of corporation tax was wrong? It undoubtedly created an incentive for small businesses to incorporate and there was a substantial increase in incorporations. In 2001, 220,000 companies were incorporated; by 2003, the number had risen to 397,000. Undoubtedly, the zero rate of corporation tax contributed to that. As to the point made by the hon. Member for Wolverhampton, South-West (Rob Marris) in an earlier intervention about the need to disaggregate incorporations between companies and limited liability partnerships, I happen to have the numbers to hand. In fact, limited liability partnerships have made a very small contribution. In 2005-06, there were 6,570 incorporations for LLPs, whereas there were 372,000 for limited companies. Clearly, LLPs are not a substantially large part of it. The tax system has undoubtedly contributed to that position.

If it were the Government’s intention to take away any tax advantage from incorporation vis-à-vis non-incorporation, their approach has been incoherent. Let us consider this Budget alone, where changes to national insurance contributions and higher rate thresholds for income tax further encouraged businesses to incorporate. There is a larger and wider standard rate of income tax and no additional income tax to be paid on dividends within the rate, yet national insurance contributions now cover a larger area, which is where the advantage lies. The hon. Member for Twickenham (Dr. Cable) raised the matter of aligning corporation tax with income tax, but there is still a difference with national insurance contributions—a problem that has got worse as a consequence of the Budget. There appears to be an incoherence in the Government’s approach.

A number of hon. Members, and particularly my hon. Friend the Member for Sevenoaks (Mr. Fallon), dealt with businesses that fall outside the various permitted reliefs and allowances. Again, I question Government thinking in this area. When they introduced the zero rate band, they argued that it would encourage growth and entrepreneurial spirit, which are commendable. They then scrapped the zero rate band because it was over-used. The argument may be that it was used by businesses that were not looking for growth and a more entrepreneurial approach.

Are the Government saying that the only small businesses likely to grow to create jobs and become entrepreneurial businesses are those that can use the capital allowances? If so, that seems to be entirely misconceived. It is not possible to identify a particular type of small business that is likely to be high growth. It simply does not work like that, because many service industries or high-technology businesses might not require great capital investment, but they could still be the big employers of the future. It seems to me that the Government are adopting a rough-and-ready approach to addressing this particular concern.

My final point concerns the bureaucracy imposed on small businesses. My hon. Friend the Member for Fareham mentioned that research and development credit take-up tends to be very low. The reason is undoubtedly that it is difficult to claim, complicated and requires a great deal of effort. Inevitably, small businesses are not in as strong a position to respond as larger businesses. Providing greater allowances that are often hard to claim is not an adequate way of trying to mitigate the increase in tax rates. Whatever way one looks at it, it is not good for small businesses. I am afraid that pointing to the existence of those allowances—I appreciate why we cannot dwell on this particular point—amounts to a poor argument.

In conclusion, the tax changes appear to be incoherent and they do not address the problem that the Government themselves recognise. We are still left with difficulties in this area.

I am conscious that the debate on clause 3 has gone on for some time and I do not intend to prolong it unduly. I will just reiterate some of the points that have been made by other hon. Members. In the context of one of the Budget’s declared aims, the Finance Bill provides clear evidence that the Chancellor seeks to impose a regime for small and medium-sized businesses that is not good for business. The regime is prohibitive for business. It will restrain and restrict business from generating the profits that it needs to reinvest by increasing the taxation take to the Chancellor—to the public purse. Essentially, the corporation tax increase for small business is funding the corporation tax cut for large business, but when taken in the round with the other measures—I will not try your patience any longer by straying from the clause, Sir Alan—the burden on business as a whole is significantly increased. That is a result of the clause and other measures in the Bill, and other measures outside the Bill that will have a significant impact on individual businesses.

Let us consider the Chancellor’s claim to be a business-friendly Chancellor after 10 years, given that he has introduced a taxation regime that, as we have heard from other speakers in the debate, has involved a complete volte-face. We have had measures to encourage the incorporation of businesses and now we have measures to discourage the incorporation of businesses. Businesses look for stability in tax planning. Many investment decisions—including those that I am not able to refer to—require some understanding or expectation that the tax regime will have stability for a number of years so that businesses can take advantage of the measures that give those opportunities. If the tax regime is tinkered with to the degree that it has been by this Chancellor—so frequently; year in, year out—the stability is not there, making those decisions becomes increasingly difficult, and there is a lack of trust in the conduct of taxation policy. I am afraid that this Finance Bill helps to stoke up that lack of trust.

My hon. Friend the Member for Fareham (Mr. Hoban) and other hon. Members have quoted some of the public responses to the measures and to this clause in particular. One response that struck me—I do not think that it has been mentioned so far—came from a survey conducted by the Forum of Private Business on its website. Some 82 per cent. of respondents to the survey felt that the corporation tax hike for small businesses would be damaging to their business. The Financial Secretary cannot ignore that statistic. I look forward to his response when he sums up.

I want to build on some of the remarks made by my hon. Friend the Member for Falmouth and Camborne (Julia Goldsworthy). Cornwall was fortunate—if we look at it one way—in achieving objective 1 status a few years ago. On the back of that, we had the wonderful opportunity to develop the combined universities in Cornwall to try to build some of the knowledge base and future GDP of the county, and to build up the economy. Much of that was going to be centred around relatively fledgling businesses in new knowledge-based industries, such as renewable energy, IT consultancy and marketing. Many of those small businesses have just started. They really are fledgling in that sense. Their business plans would have been predicated on certain assumptions about the tax that the businesses would be paying.

Those businesses are perhaps two or three years old now. They are not capital-intensive businesses, but they tend to want to employ relatively expensive new personnel. When new personnel come into a company, they are not immediately productive, but, of course, their salaries and their expenses have to be paid out by the company. Some of the small businesses are going to begin to stutter a little when it comes to their ability to fund some of that revenue, which would have been thought to come from the profits that they would initially begin to generate. That will no longer be the case, because some of that money will have to be paid in tax.

It is part of the issue about stability that when people are looking to create their business plans and looking to the quite considerable growth of these sorts of businesses, they consider the expenses that they will have to pay. Tax is one such expense. They would undoubtedly have made their business plans on the basis that they would not be paying tax quite as quickly as they are now going to be. I think that that will stunt some potential growth and undermine investment from European objective 1 funding. The investment’s new guise of convergence funding is even more tilted towards such businesses, rather than the old capital-intensive businesses. That funding is designed to generate more knowledge-based industries. If we are to have this new tax regime, the real benefit of boosting the economy of Cornwall, which is the essence of convergence funding, will be undermined.

What a fascinating debate. I understand why Conservative Members have spent a lot of time on this because small business is important. They talk about damage to competitiveness, yet they also say, quite properly, that the changes will largely affect service companies, which make up 75 per cent. of the small business economy. I suspect that few small service companies export much, so the competitors are medium-sized and big companies. It is surprising, given what Conservative Members have said, that the Conservative party is turning against big and medium-sized business, putting forward a positively Poujadist approach and making a fetish of small businesses.

It is somewhat extraordinary that the hon. Gentleman is arguing that service businesses, especially small service businesses, tend not to export. Several small service businesses in my constituency export a great deal overseas. The measure will thus have an impact on their competitiveness. He needs to be careful about the assertions that he is making about the propensity of small businesses to export.

In one sense, the hon. Gentleman might be right, but, in another sense, he is completely wrong. A small business cannot export a great deal because, of course, it would therefore not be a small business. However, such a business might export a large proportion of its output. I was careful to say that I suspect that most small businesses in the service sector do not export a great deal.

During the interesting remarks made by the hon. Member for Sevenoaks (Mr. Fallon), he used the adjective “distortive”, which was a new word to me. I entirely reject the approach to economics that he cited, which is based on a view that is peddled by academic economists of the worst sort: that there is such a thing as a perfect market and that that perfect market can thus be distorted. If one rejects the notion that there is such a thing as a perfect market, as I do, there is no such thing as distortion in this context, although there is such a thing as changed behaviour, or certain effects stemming from certain causes.

Changed behaviour that is driven by a tax regime is nothing new in the United Kingdom. It is often the subject of considerable debate on financial measures relating to green taxes. If the Chancellor proposes fiscal measures to encourage a change in behaviour, that is not wrong in principle, although hon. Members might think that the measures will not produce the desired effect, or that the effect that the Chancellor is trying to achieve is not one that they desire. However, I reject the suggestion—this has been the flavour of part of the debate—that the fiscal measures to change behaviour that are proposed in the clause are somehow, in and of themselves, bad things.

I have two questions for the hon. Gentleman. First, how will it be possible for a service company—the majority of small businesses are service companies—that is not capital intensive to change its behaviour under the scheme? Secondly, why are manufacturing or capital-intensive businesses any more deserving of tax incentives than those in the service sector?

I can deal with the second point. As a Member for a west midlands constituency, I am aware that the vast majority of UK exports come from the manufacturing sector and not from the service sector. Important as the service sector might be to exports, about 56 per cent. of the value of exports comes from manufacturing.

No, it is responsible for invisibles; as the hon. Lady should know—[Interruption.] They are not exports but invisibles, which are a different category in economic terms. Although they go on the balance of payments, they do not go on the balance of trade, so I stand by what I said in response to the hon. Member for Braintree (Mr. Newmark). He asked why manufacturing should have special support, and that is one reason I give him. He might not like it, but I stand by it: the majority of exports in terms of the balance of trade come from manufacturing.

I shall come on to the hon. Gentleman’s first point about manufacturing. The hon. Member for Sevenoaks cited comments made by Mr. Whiting. He is quoted in the Treasury Committee report as saying words to the effect that most businesses prefer simpler and lower taxes—I hope that he will forgive me for not having the exact wording before me, although that was broadly what he said, and I believe that he used those two adjectives. I am sure that they do. I have no direct evidence for that, other than anecdotal evidence gained from talking to business people.

The evidence is plain for all to see that in the United Kingdom for the past 100 years, until recently—even now the situation has not changed enough—as a generalisation, there has been huge underinvestment by businesses, be that in the service sector or in the manufacturing sector. I stress that that is a generalisation. It is one thing that has led to weak economic performance in the United Kingdom from the turn of the previous century for the following 90 or 100 years. Encouraging changes of behaviour that will lead to greater investment is a good thing. I share that desired aim of the Chancellor, as I suspect does the hon. Member for Sevenoaks.

Does my hon. Friend agree that it is extraordinary that Conservative Members are making such a fuss about a rise to 20 per cent. in the small companies rate? My recollection is that when the Conservatives were in power the rate was 23 per cent.

I accept the figure given by my hon. Friend, although I do not know whether the rate was 23 per cent. or not. I hope that the hon. Member for Fareham (Mr. Hoban) will correct me should I have this wrong, but I believe that he was talking about certain allowances producing an effect on 4.3 million businesses; he cited a figure of £68. Yet in year three of the changes before us—this is the figure that he did not give us in regard to those 4.3 million small businesses—the increased tax take will, on average, be £190.70 per small business. I have rounded that figure slightly. That represents £820 million given in year three divided by the 4.3 million.

The hon. Gentleman commits the same mistake as the hon. Member for Burnley (Kitty Ussher). The increase in the small companies corporation tax rate simply applies to the number of incorporated companies, whereas he has used the number of small businesses. If he were to divide the increased tax take by the number of small companies—some 800,000 of which are profitable—he would find that the average increase is £1,000 per small company. I accept that this is a difficult issue; there is confusion in respect of small businesses and small companies. I might have made the same mistake inadvertently, but it is important to distinguish between the two when we consider the gainers and the losers from these measures.

I am grateful for the hon. Gentleman’s extremely helpful intervention. Having been in small business myself, I accept that £1,000 is significant to such businesses. Given that many of us wish to encourage small business to grow, it surprises me that this whole clause stand part debate seems to have been a subsection (1) stand part debate. No reference has been made to subsection (2) and the following subsections in terms of marginal reliefs. They relate to the transitional provisions in terms of corporation tax for those companies whose profits are between £300,000 and £1.5 million per annum. They are the lower and upper profit limits for what one might call the transitional regime for the rate of corporation tax. That should benefit what one might call larger small business. I use that term rather than medium-sized business because a business may well grow to reach the level of profitability and therefore the tax bracket covering companies with profits between £300,000 and £1.5 million without crossing the threshold in terms of the number of employees that would result in its being a medium-sized business.

I also note that in response to the intervention by my hon. Friend the Financial Secretary, the hon. Member for Fareham did not say what he thought the rate should be. His response, broadly—I paraphrase, but he will correct me if I have it wrong—was, “We’re not in government now. We’ll look at it when we are in government in 2010.” That was certainly the year he cited. However, it surprises me that, even though he feels so strongly about subsection (1), which deals with the 20 per cent. rate instead of the zero rate for small companies, he has not tabled an amendment. If he did table one, he will have to forgive me for saying that, but I have not seen it listed—perhaps it was not selected. If the hon. Gentleman speaks again in this debate, will he say whether he proposes to vote against clause 3 given that, although it contains a provision that he regards as somewhat negative in subsection (1), it later sets out a measure that I suspect he regards as positive?

We have had a useful and wide-ranging debate that has served to bring out some of the broader issues in the light of which it is necessary to consider clause 3. If you will allow me, Sir Alan, I shall set out those issues as a way of helping hon. Members to consider the provisions of clause 3 in the proper context.

The hon. Member for Fareham (Mr. Hoban) admitted to having made a mistake that his right hon. Member for Witney (Mr. Cameron) has also made. In fact, there are 4.3 million small businesses in this country, more than three quarters of which are not incorporated, are not small companies and are therefore not subject to the corporation tax regime. They will not be affected by the changes in clause 3, and it is important to recognise that. Furthermore, one in four of those that are incorporated and are therefore small companies currently pay no corporation tax and are unaffected by the changes because they are not making a profit. The hon. Gentleman acknowledged that in this debate, although not on Second Reading.

An important point, which affects the hon. Gentleman’s argument, is that we estimate that the majority of the small companies that remain have incorporated with the purpose of reducing their tax and national insurance liabilities. In other words, those companies take a tax relief that is aimed at investment and growth to reduce their personal tax and national insurance contributions liabilities. In contrast, all small businesses, both self-employed and incorporated—all 4.3 million—can benefit from the associated announcement in the Budget of the new annual investment allowance for expenditure up to £50,000, which many hon. Members have mentioned this afternoon. Many of the self-employed businesses will also benefit from the personal tax changes announced in the Budget.

If we look more closely at the companies that could be affected by the changes to the small companies rate, we find that in 2004-05 some 750,000 companies paid what is known as the small companies rate, which is really a small profits rate because any company with profits of up to £300,000 in a year benefits from that low corporate tax rate. In fact, a quarter of large companies—those employing more than 250 staff—pay the small companies or small profits rate; and fully around half of medium-sized companies, which have between 50 and 250 employees, pay that rate. The question as regards future tax decisions and reforms is whether we should continue, through the small companies rate, to provide a low rate of corporation tax targeted on low-profit companies, regardless of their investment activity. That fundamental principle underpinned the package of decisions that we announced in the Budget and that we are now incorporating in law through the Finance Bill.

Since the late 1990s, we have looked carefully at small business taxation, with a view to ensuring a tax system that encourages investment and innovation and provides the fairest possible outcome for all small businesses. The hon. Member for Twickenham (Dr. Cable) said at one point that he thought that we were rushing into making the changes. He carries out his duties diligently, so I am sure that he will have read the consultation document that we published in December 2004, “Small companies, the self-employed and the tax system”. It encouraged a wide-ranging debate on how incentives for growth and enterprise can be best targeted while maintaining a system that is as fair as possible for all. The package of changes that we are proposing is a response to that debate, and it comes after careful consideration and detailed discussions with a wide range of interested groups.

One of the factors that we have to take into account is the degree of tax-motivated incorporation. Lower rates of tax have resulted in a significant number of people incorporating to take advantage of those low rates, not to reinvest in the business, but to extract the company profits in a way that reduces their personal tax and national insurance liabilities, while still allowing them access to contributed benefits. That is contrary to the aims of the reforms that we made to the small companies rate in previous years. Of course, the costs to the public purse are significant; clearly, if all self-employed people decided to incorporate, it could cost the Exchequer billions of pounds in lost revenue, and it would do little to improve productivity or growth. That tax break would be subsidised by ordinary taxpayers and self-employed businesses, which would suffer a competitive disadvantage.

We propose, in part through clause 3, to refocus the manner in which we provide investment incentives to small businesses. All the revenue raised by the small companies rate increases will be recycled back into small businesses. First, the increase in the small companies rate will reduce the difference in the tax paid by the incorporated and the self-employed. As Members may know, one noted commentator and academic, having considered the impact of the Budget changes on the tax incentive to incorporate, has said on that there is

“probably insufficient reason to incorporate at profits of less than £40,000 in the future”.

Secondly, the headline small companies research and development tax credit will increase from 150 per cent. to 175 per cent., which will help small companies, particularly those investing in innovation and new technology. The current first-year capital allowances for small firms will continue at 50 per cent. for a further year. Finally, from April next year, the annual investment allowance will target assistance directly at businesses that invest their profits, regardless of legal form. Under our package of changes, the amount of investment does not have to be significant for a small company to benefit. Some 90 per cent. of tax-paying companies will pay less in tax in the first year in which the annual investment allowance comes into effect if they reinvest as little as 23 per cent. of their profits in their business.

We know that for many small companies and businesses, whatever their legal form, cash flow is king, and that is part of the reason for the annual investment allowance. Cash flow poses the principal risk and is the principal pressure. At present—the hon. Member for South-East Cornwall (Mr. Breed) was concerned about this—labour costs are fully deductible. Employees’ wages and employers’ national insurance contributions are deductible from, and offset against, taxable profits. The annual investment allowance provides parity between capital and non-capital expenditure precisely in that way.

The hon. Member for Twickenham wondered how much of the annual investment allowance would go to small businesses. We calculate that about 90 per cent. of the cost of the annual investment allowance will go to small businesses. For example, in the financial year 2009-10, we estimate the cost of the AIA to be about £920 million, of which an estimated £805 million will go to small firms. We will obviously monitor that, and evaluate it once it has been introduced. May I tell the Committee, too, that the notion that somehow small businesses do not invest is far from the mark? In the last year for which we have firm figures, small companies invested some £6.4 billion in capital expenditure, and we expect the vast majority of small businesses making a capital investment to claim the AIA in future.

Perhaps we should dwell, too, on the perception—this argument has been made by the Opposition this afternoon—that service companies do not invest, either. Based on the analysis of data by Her Majesty’s Revenue and Customs, well over a third of small companies in the businesses service sector invest. Unincorporated businesses in the sector that do invest, invest an average of £3,500 a year. Small companies in the sector invest an average of £22,000 a year. Other service sectors demonstrate perhaps even higher levels of investment. More than half of service firms in the retail sector invest, and more than half of businesses in the hotel and catering sector do so.

I listened very carefully to the explanation of the incentives driving the policy. The Minister said that a third of small businesses will benefit, but that still means that the majority—two thirds—will not do so. Will he comment on that?

I was not talking about all service companies; I was talking specifically about the business services sector. I went on to say that more than half the service companies in hotel and catering and more than half the companies in retails invest, and do so consistently. A small catering company, for instance, that makes £100,000 profits and invests £30,000 in new kitchen equipment, will pay about £2,000 less tax in the first year of the new annual investment allowance than it would do without the changes in the Budget. A self-employed builder who invests £4,000 to start up a business and earns £30,000 in the first year, will pay about £1,200 less tax and national insurance.

The hon. Member for Fareham, whose concerns were echoed by his hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), repeated the allegation that the package of changes will make the system more complex for small businesses, but the changes to the small companies rate in clause 3 do not make any difference to the level of complexity. The annual investment allowance, in fact, makes tax simpler for small businesses. If the hon. Member for Fareham will not take it from me, perhaps he will take it from the chairman of the tax committee of the Federation of Small Businesses, Simon Sweetman, who said:

“The Annual Investment Allowance…should allow what is in effect free depreciation for small businesses on plant and machinery, and has the added benefit of being a simplification.”

I am listening carefully to the Minister’s arguments, but surely there is still a fundamental problem, as the small companies rate will go up now, but the annual investment allowance will be introduced next year. If we are to allow companies to prepare for the changes and make sure that they can offset as he described, would it not be better to introduce the changes simultaneously?

The hon. Lady is right that there is a package of changes. I am sure she wants us to get the annual investment allowance correct when we introduce it next year, but she may have missed the point that I made earlier, when I said that for a further year—this year—alongside this increase in the small companies rate, the capital relief for small businesses that are investing will be maintained at the higher rate of 50 per cent. That helps to deal with her concern.

The package of changes, including clause 3, refocuses the incentives for investment, creates a simpler system that recognises the importance of cash flow in small companies, particularly those making capital investment, and reduces the unfair differential between businesses operating as self-employed businesses and those that choose to incorporate. I hope that, having heard the breadth of the arguments, the hon. Member for Fareham will not press the matter to a Division. If he tries not to allow clause 3 to stand part, I shall have to ask my hon. Friends to ensure that the clause, as an important part of the package of changes that the Chancellor announced in the Budget, remains part of the Bill.

It has been a wide-ranging debate, reflecting the nature of the arguments used by the Government to support the increase in the small companies rate of corporation tax and the breadth of opposition to that policy. The Minister set out the argument that the Government made a mistake in 2002, when they discriminated in favour of incorporation by introducing the zero per cent. rate of corporation tax. They now seek to reverse that measure by raising the small companies rate. That will have an impact on a wide range of businesses making profits of up to £1.5 million.

We see a wide-ranging attack on those small companies and an increase in the tax that they will pay. The numbers speak for themselves. There will be an £820 million increase in the tax take from those small businesses, equivalent to £1,000 per company, yet the benefit of the offsetting package amounts to about £60 per small businesses, so businesses will be hit hard. Small companies will see an increase in their tax bill, without the offset.

As the Financial Secretary indicated, businesses that do not seek to invest in assets will be penalised. They will not benefit from the increased capital allowances on offer. There is discrimination against businesses that seek to grow by employing more staff and against knowledge-based companies. A great bias seems to be developing in the arguments put by Labour Members against the service sector, which, according to the hon. Member for Wolverhampton, South-West, (Rob Morris) does not contribute much towards exports, whereas we know that service sector businesses of all sizes make a major contribution towards exports. A large number of them export a significant amount of their turnover and play an active role in exploiting those markets.

The measure is ill thought through and ill conceived. Since the Government were elected in 1997, the large number of changes to the small companies corporation tax rate have sent out a mixed message to those companies. When they see the large companies rate of corporation tax being cut in the Budget, they wonder what the Chancellor thinks small companies are up to. They feel that the Government do not take them seriously and do not believe that they are the backbone of the economy and an important job and wealth creator. For that reason, I propose that we vote against clause 3 stand part.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 257, Noes 138.

Clause 3 ordered to stand part of the Bill.

Clause 1

Charges and rates for 2007-08

Thank you, Mrs. Heal. It is a pleasure to welcome you to the Chair.

In our discussion of clause 3, the hon. Member for Fareham (Mr. Hoban) talked about the Chancellor giving with one hand and taking away with the other. The amendments that we have tabled on the income tax clause reiterate that theme. They seek to pursue two different lines of inquiry, and pose questions that I hope will tease out the Government’s line of thinking in relation to the announcements that the Chancellor made in his final Budget.

First, we are trying to tease out the Government’s arguments behind the Chancellor’s proposal to abolish the starting rate of income tax and to cut the basic rate by 2p in the pound. That is dealt with by amendment No. 11 and by amendment No. 12, which has not been selected for debate. It will be interesting to hear the Minister’s justification of the abolition of the 10p starting rate, which will result in millions of people who currently pay 10p in the pound seeing their tax rate increase to 20p in the pound.

Secondly, we want to highlight the alternatives that the Government could have considered, given that the Chancellor talked about tax changes that would be “fairer”. This is dealt with in amendment No. 10, which, rather than increasing the 10p starting rate to 20p, would get rid of it altogether, thereby lifting people on very low incomes out of tax altogether. It would replace the 10 per cent. rate with a zero rate, which would have the opposite effect to that announced by the Chancellor. Two million people would thereby be lifted out of tax altogether. This was a proposal that our tax commission looked at, in addition to cutting the basic rate of tax by 2p, as the Chancellor has announced. Amendment No. 11 proposes to introduce the basic rate changes that the Chancellor announced with great fanfare in the Budget but which, according to the Government’s timetable, will not be introduced until the next financial year.

I shall briefly discuss the context of the proposals. The changes in income tax were announced in the final few words of the Chancellor’s final Budget. His explanation of the reasons behind the cut to the basic rate was clear. He said that

“to reward work, to ensure working families are better off and to make the tax system fairer, I will from next April cut the basic rate of income tax from 22p to 20p”.

That was very clear. My hon. Friend the Member for Twickenham (Dr. Cable) said in the debate on the Budget resolutions that that announcement had given him a frisson of excitement, because he thought that the proposals put forward by our tax commission were being imitated.

It was less clear how the proposal was to be paid for, however. While the Chancellor was clear about the 2p reduction in income tax, he also said:

“With the other decisions I have made today, we are able to hold to our pledge made at the election not to raise the basic rate of income tax.”—[Official Report, 21 March 2007; Vol. 458, c. 828.]

That is as close as he came to explaining that he was going to get rid of the 10p rate. He did not give any details of the decision to abolish the starting rate at any other point. Instead, we have to look at table 1.2 in the overview on page 13 of the Red Book. Line 15 refers to:

“Removing the starting rate of Income Tax on non-savings income”.

That is what will pay for the reduction in the basic rate of income tax to 20p.

Let us not forget, therefore, that the Government have chosen not to put these proposals in the Finance Bill. They are designed to be introduced next year. Perhaps the Chancellor is keen to leave these issues to his successor. Amendments Nos. 11 and 12 propose to introduce the changes immediately. As they would enable the Government to implement their own policy early, I would be interested to hear whether the Minister is considering supporting them. If not, perhaps he will explain why the Government are so keen to delay the changes for a year. Why does introducing them later make them any fairer?

I shall remind the House again of the Chancellor’s words: he talked about making working families “better off”. How much better off will the Government’s changes make the average family? At best—as we have seen in relation to the small business rate changes—people will be no better off. At worst, individuals will be significantly worse off, especially households on low incomes with no children, and single individuals. Ministers have talked about how tax credits will offset that, but let us not forget that large numbers of people do not claim the tax credits to which they are entitled. Many people under 25 on low incomes are not entitled to apply for tax credits in the first place. It is interesting to note that the Chancellor’s speech contained no explicit mention of young individuals or childless couples on low incomes—exactly the groups who will be worse off, and for whom the proposals will not be fairer. I would be interested to hear from the Chief Secretary exactly how the proposals make the system fairer.

The amendments are particularly pertinent given the coverage over the weekend of how the wealth of the richest in our society has grown exponentially over the past 10 years—yet the Government proposals will hit those on the lowest incomes. Would it not have been fairer to fund a basic rate tax cut, reducing that growing inequality, by raising taxes for those on very high incomes, instead of raising taxes for those on very low incomes? As the “Rich List” published in The Times at the weekend showed, the only tax that many of those very rich people pay is council tax. Why did the Government not take the opportunity provided by the Bill to introduce measures that would have made the tax system fairer, perhaps by implementing some of the Lyons review’s recommendations in the short term?

The 10p rate, which will be abolished in the next Finance Bill, was highlighted in Labour’s manifesto, and the Liberal Democrats have proposed reducing the rate to zero rather than increasing it to 20p. The Labour manifesto in 1997 stated:

“Our long-term objective is a lower starting rate of income tax of ten pence in the pound. Reducing the high marginal rates at the bottom end of the earning scale—often 70 or 80 per cent—is not only fair but desirable to encourage employment.”

If it was fair to introduce the 10p rate to try to counteract high marginal rates of taxation, why is it now fair to increase that marginal rate of taxation back to 20 per cent.? After being introduced with such a fanfare—preannounced in the manifesto, in the first Budget, and again before being finally introduced—why does the Chancellor now seem keen to dump the 10p rate on the quiet once he has left the Treasury building?

The amendments invite Treasury Ministers to face up to a decision today on the two options laid out. One of those is available to debate right now.

I know that the hon. Lady’s party has been favouring the abolition of the 10p rate, its replacement with a zero rate, and the extension of personal allowances as set out by her party’s policy document. The document indicated, however, that the change would be offset by £8 billion of environmental tax rises and other changes. Will she table amendments to the Bill setting out the detail of those changes?

As the Chief Secretary knows, there are constraints on what can be tabled and debated in relation to this year’s Finance Bill, and we must respond to the measures before us today. The amendments are about whether the system will be fairer. The Chief Secretary is absolutely right that our tax commission’s proposals were fairer, simpler and greener. We will seek to make the case for those measures as best we can, given the constraints in relation to the Finance Bill.

The hon. Lady said that there were restrictions on what can be tabled. I presume that she was referring to the tabling of any amendment that would raise a tax. Will she confirm that last year her party tabled tax-raising amendments in relation to vehicle excise duty?

The hon. Gentleman will know that such amendments can be tabled but not debated, which obviously causes difficulties in relation to the selection of amendments and the package that can be put forward. In addition, we are debating clause 1 rather than the whole Finance Bill, so, unfortunately, we have to consider the measure in isolation.

Will the Chief Secretary explain why, and on what basis, he would feel unable to support now amendment No. 11, tabled by the Liberal Democrats, which reduces the basic rate of tax to 20 per cent.? If the Government want to get rid of the 10p rate, why would that be fairer? It was clearly presented as fairer in the Budget, but in the aftermath of the Budget, Ministers were keener to present it as a simplification measure, which is certainly more logical.

The amendments provide an opportunity for the Treasury to set the record straight and follow through on its announcements in the Budget. I am not clear why it was not able to do that in this year’s Finance Bill. If the Government really consider the measure to be fairer, it makes sense to introduce it straight away. Alternatively, is the Treasury keen to postpone certain arguments until after the present Chancellor moves next door to No. 10?

I want to consider the amendments first, and then the wider background to clause 1, especially the 10p income tax band. The official Opposition will not vote in favour of the amendments if they are pressed to a Division. Our primary concern about them is that they have not been properly costed, so it would not be fiscally responsible to vote in favour of them.

We are also concerned by the claim in the Liberal Democrats’ tax policy paper that their package amounts to a “green tax switch”; it amounts to nothing of the sort. Well over half the tax rises that the Liberal Democrats say that they would use to fund the reductions have nothing whatever to do with the environment. They plan to fund £4.3 billion of their tax reductions from scrapping higher rate relief on pensions. That is an astounding proposal to put forward at a time when our pension system is in crisis, and to do so without proposing any alternative incentives to save or to tackle the pensions crisis seems wholly irresponsible.

Is the hon. Lady aware that according to the Department for Work and Pensions, tax incentives have no influence whatever on people’s propensity to save for pensions?

If that is the case, the Department for Work and Pensions does not know what it is talking about. John Lawson, of Standard Life, described the Liberal Democrat tax proposals as “extremely flawed”. He continued:

“The Lib Dems need to have a serious rethink of this proposal…Pensions under these proposals would become almost pointless”.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said that the removal of tax relief would have a

“catastrophic effect on pension funding”.

Does the hon. Lady agree that it is people contributing at the lower rate of pension tax relief who should be encouraged to save for their pensions? Those contributing larger amounts currently qualify for greater relief, so the people who are already saving more benefit more, while those who are saving less, benefit less.

How does the hon. Lady get round the problem that if one removes a significant tax incentive to save for a pension, fewer people will save for pensions, and the pensions crisis will become even more serious?

May I probe the hon. Lady further, as I am interested in the image that the Opposition are presenting of being most concerned about the poorest? Is not it true that half of all tax relief for pensions goes to those paying the higher rate of tax? Those are the people with the largest pensions, who will be well provided for in old age. Would not a new Conservative party be more interested in redistributing that revenue to those at the bottom who find it most difficult to save, even if it disagrees with the Liberal Democrat proposals for more sweeping tax reform?

We are prepared to examine a range of options to try to encourage people across the income spectrum to save for their pensions, but we simply do not think that a £4.3 billion hit on pensions savings is what our pensions system needs at the moment, and that is what the Liberal Democrats are proposing. Given that the savings ratio has been halved during the 10 years of the Chancellor’s tenure at No. 11, we think that the last thing the country needs is the complete abolition of an important incentive to save for old age, particularly when it is not accompanied by any compensating incentives elsewhere in the system.

I am not convinced that the numbers in the Liberal Democrats’ tax package add up. When it was first announced, the Institute for Fiscal Studies identified a £500 million underestimate of the cost of their proposed income tax changes. And the problems do not end there. For a start, as we have heard from the Chief Secretary, the Liberal Democrats have not produced any convincing details of how they would raise £8.1 billion in green taxes. Nor am I convinced that they have got their numbers right in the capital gains tax part of their package. They claim that those changes would raise £6.2 billion, but, they seem to have underestimated the impact on behaviour of changes in the system. After all, for many people capital gains tax is a postponable tax. When rates and reliefs are amended to become less favourable to the taxpayer, there is an incentive to sit on assets.

Order. The hon. Lady is straying a little wide of the amendments. Perhaps she will now confine her remarks to them.

I am delighted to be guided by you, Mrs. Heal. I will, however, refer in passing to an observation by the hon. Member for Falmouth and Camborne (Julia Goldsworthy), who reiterated the Liberal Democrats’ support for a local income tax. Far from supporting income tax reductions, her party wants a 4.5 per cent. increase via the local system. I suspect that that is something that her colleagues are not mentioning on the doorsteps this afternoon.

It is instructive to examine the changes in income tax rates proposed for 2008-09 by the Chancellor in his Budget speech. In particular, when we evaluate the 10p band and the 22 per cent. basic rate in clause 1—which the amendments would alter—it makes sense to consider the responses to the Chancellor’s announcements.

In reaching a conclusion on the merits of the 10p band, we should assess the Chancellor’s proposal to abolish it as from next year. It is striking that the Chancellor’s “rabbit out of a hat” announcement on the basic rate does not appear in clause 1. He began his Budget speech by saying that he did not want to follow Gladstone’s example and act as Chancellor as well as Prime Minister. However, he still seems very keen to bind the hands of his successor by pre-announcing tax changes for next year, and even later in some instances. Contrary to the spin that he tried so hard to place on the Budget, taxes on income will rise next year as a result of the changes that he announced. The Red Book shows taxes on income rising by £340 million in 2008-09, if we take into account the increases in national insurance and the scrapping of the 10p band.

Serious concern has been expressed about the impact of the loss of the 10p band on those with low incomes. The IFS calculated that 5.3 million families would be worse off as a result of the loss of that band, and other changes proposed in the Budget. That figure was confirmed as being broadly “in the right ball park” by Mark Neale, managing director of the Treasury’s Budget, tax and welfare directorate, when he gave evidence to the Treasury Select Committee.

Abolishing the 10p band will result in a transfer of the burden of tax from those on middle incomes to those on low incomes. According to the IFS, the big losers will be people earning between £5,225 and £18,500 a year, particularly those without children, whose loss will not be compensated for by tax credits. Adults without dependent children will be among the hardest hit, because the blow will not be softened to a significant extent by those tax credits. According to the IFS, the poverty rate among that group is now 4 million—the highest since records began in 1961. It is now the largest group of poor people, comprising up about one third of the total. Recent Government data show that child poverty is rising as well—it rose by 100,000 last year—and that the real incomes of the poorest 20 per cent. of the population are falling. There are now more people in entrenched poverty—below 40 per cent. of median earnings—than there were when the Chancellor took over at No. 11.

Is the hon. Lady aware that when giving evidence to the Treasury Select Committee, the IFS said that it had never been clear that the 10p rate was a particularly effective tool, and that, taken with other measures in the Budget, the Chancellor’s proposed changes appeared to be sensible?

That does not detract from the real concern expressed by many Members throughout the House about the loss of the 10p band. Let me draw the hon. Lady’s attention to what some of them have said.

At the time of the Budget debate, the hon. Member for Birmingham, Selly Oak (Lynne Jones) admitted:

“I think we have to some extent neglected poorer people who have no children. I think that’s a cause for concern. It is something that needs to be put right in the long term because there are people who are single who are struggling on low incomes.”

Even the Chancellor’s close ally, the hon. Member for Coventry, North-West (Mr. Robinson), said on the final day of the debate:

“I have a bone to pick with the Chancellor and the Treasury Front Bench about the removal of the 10 per cent. basic rate. I cannot believe that that is the last word from my right hon. and hon. Friends on the subject. It is hurting many people whom the Government never set out in any of their policies—I accept that that is a consequence and not an intention of the Budget—to hurt. Indeed, when the 10p rate was introduced it was precisely to alleviate those problems that, in part, we are now creating.” —[Official Report, 27 March 2007; Vol. 458, c. 1365.]

He went on to say that he hoped there would be a review of the decision to scrap the 10p rate.

Essentially, the Chancellor is relying on tax credits to soften the blow inflicted by the loss of the 10p band. In deciding whether it should be retained, we should examine the tax credit system. The impact of the abolition of the 10p band is even tougher on the poor and the low-paid when we take account of the fact that only 61 per cent. of people entitled to working tax credit claim it. Among people without children, the figure drops to 19 per cent. The Treasury itself has budgeted on the assumption that only 25 per cent. of the working tax credit due to childless households will actually be claimed—and who can blame people for being wary of becoming embroiled in tax credits?

Although we support tax credits in principle and believe that they can and should play a continuing role in alleviating poverty, the tax credit system is broken and in need of drastic reform. Referring to tax credits in connection with the abolition of the 10p band is simply not a complete answer. Their effectiveness in mitigating the impact of the loss of the 10p band is undermined by the current chaos in the tax credit system. The fundamental problem is its complexity. As the National Audit Office has said, that complexity underlies the problems with fraud and overpayment.

The more complex the system, the more likely it is that mistakes will be made. People claiming tax credits must fill up a 12-page form and wade through a 60-page explanatory note. Robin Williamson, of the Low Incomes Tax Reform Group, recently commented:

“A specialist in differential equations from Oxford tried to calculate someone’s entitlement”

—tax credit entitlement, that is.

“He got it wrong.”

Order. I am quite prepared to allow the hon. Lady to make a passing reference to that, but I do not think that this is the place for a detailed debate on the child tax credit system.

Again, I am grateful for your guidance, Mrs. Heal.

It is of considerable concern that the loss of the 10p band will hit people on low incomes. It will mean that more people are forced into the tax credit system, with all the serious problems that the House has debated on so many occasions. It cannot help in any way to fulfil the Chancellor’s declared intention of tackling poverty, either. The Chancellor tried to grab the headlines with an income tax cut in the last few words of his Budget statement, but the Bill gives us no such cut—nor will the legislation to come, given the other tax rises that the Chancellor plans to introduce.

As Mike Warburton of Grant Thornton said of the Budget:

“This is robbing Peter to pay Paul.”

Michael Saunders of Citigroup said that the Chancellor’s

“version of tax cuts, it appears, is one that still raises the tax burden.”

Peter Spencer, economic adviser to Ernst and Young, said:

“It is a con trick, there’s no doubt about it. I will be amazed if people are duped by it for more than five minutes.”

Clause 1 shows more clearly than ever that the Chancellor’s 11th and final Budget was a tax con, not a tax cut, and the nation has not been fooled by it.

Thank you, Mrs. Heal, for calling me. May I also thank you for exercising such judgment, which allowed the Opposition enough leeway to tell us what they were really thinking about, which is, of course, what is happening on the streets now: the fight between the Liberal Democrats and the Conservatives. I want to address my comments to the Treasury Bench, where decisions will be made this year and no doubt next year as well. My speech is on the impact of the 10p rate of tax.

Whatever views one has of the Chancellor, one has to be pretty deranged to say that he is not passionate about redistributing resources to the poorest. I willingly sign up to that message. Therefore, I am puzzled that he has allowed this aspect of his Budget to go through. My feeling is that, on this one occasion, he cannot have done his sums.

Those on the Treasury Bench know that, a month ago, I tabled questions asking how many people will be net losers as a result of the abolition of the 10p rate and how many of those people will not be compensated by the tax credit system. I am sure that, when those in the Treasury get around to answering my question a month late, they will be so appalled by the answer that they themselves will look before Report to meet those Labour Members who are going to table amendments—if we possibly can—so that those who are going to lose out will not lose out, at least for a transitionary period.

The issue is twofold: there is redistribution from poorer people to richer people, but there is also redistribution within families. I want to draw the Committee’s attention to both those aspects of redistribution, which are unsatisfactory to Labour Members. Members of Parliament, given the salaries that we are on, will benefit from the tax package, but if we let the measure go through next year, those of our constituents who earn a sixth of our salaries will pay about £3 a week more in tax. That cannot have been the aim of the move.

As I said, the redistribution occurs not only in a traditional sense—from poorer people to richer people—but within families. With most families, although not all, it is the men who are higher earners and the women who are lower earners. Therefore, if the abolition goes through, in every family in the land who are in that position, the women generally will pay more tax and their husbands will pay less tax. If the measure is unaccompanied by other protection measures, it will redistribute from women to men within families and, between families, from poorer families to richer families.

As I said earlier, no one who is in control of their marbles believes that the Chancellor is not passionate about redistributing to poorer people. Some of us may have a debate about the methods of that redistribution, but no one should doubt the intent. Therefore, it is a surprise that the measure is going through as it is. I believe that once those in the Treasury, a month late, get around to answering the question that I tabled, they will be so horrified by the findings that they themselves will look at what measures we can take, and those measures should be of a transitionary nature, not permanent.

The move that the Chancellor is making to simplify our tax system as much as possible and to make it easier for people to understand is the right one. The aim is for the standard rate of tax to be the tax rate that determines whether people work harder, train more, get jobs with greater responsibilities and push up their family income as a result. Therefore, I support the desire that the Chancellor has. I cannot believe, however, that he did the sums on the matter, in possibly his last Budget. When he has done the sums, he will not be happy at supporting a change that redistributes income in a family from lower paid women to higher paid men in that household, or more generally from lower paid workers to higher paid workers such as MPs. I hope that when we come to Report it will not be necessary for Labour Members to table amendments and that the Government themselves will make those changes.

It is a great pleasure to follow the right hon. Member for Birkenhead (Mr. Field), whose work on the matter is highly regarded by hon. Members on both sides of the House.

It is a curious amendment, but it is helpful in giving Members an opportunity to debate these matters. Amendment No. 10 would result in a starting rate of income tax of zero per cent. I know why those who tabled the amendment have proposed that, but presumably if one is paying zero per cent. one is not starting to pay income tax. It is not a starting rate; it is a threshold, but it is a useful device to enable us to discuss these matters.


It is useful to be able to discuss these matters. The changes to income tax that will be introduced next year and that we have touched on were perhaps the key consideration when analysing the Budget. The issue of the winners and losers is key. Indeed, as a member of the Treasury Committee, I am pleased that the Labour-dominated Committee has recommended that, in future, the Red Book should set out a clear analysis of winners and losers, so that it is possible to see much earlier who they are. This year, the Red Book set out some examples of winners, but not of losers—curiously. I know that journalists were complaining about the fact that it was impossible to get any losers out of the Treasury. Given that this was a broadly tax-neutral Budget, if there were some winners, presumably there must have been some losers.

The Institute for Fiscal Studies has been much more helpful on the matter. My hon. Friend the Member for Chipping Barnet (Mrs. Villiers) referred to the IFS’s analysis that stated that 5.3 million households would be losers as a consequence of the Budget changes. As we heard from my hon. Friend, that point was confirmed to the Treasury Committee by Mark Neale, a senior Treasury official. He must have felt that he was safe in saying that. He said that

“the figure…is in the right ball-park and is consistent with the Chancellor's statement that four out of five households either gain or remain in the same position as a result of the Budget measures”.

He may have felt that that was a perfectly reasonable and safe thing to say. However, Mr. Neale was due to give evidence to the Treasury Committee the day after, alongside the Chancellor, and was curiously withdrawn after the quotation was used in various newspapers. Mr. Neale’s absence was not explained, but we all worried about his safety and I hope that no harm has come to him.

The estimate that 5.3 million households would lose out as a result of the Budget was put to the Chancellor, and he was asked whether he accepted it. Given that his own officials had accepted it, one would have thought that he would not have had a problem. However, he advanced two arguments as to why he did not accept that estimate, which was made following the changes in income tax that he announced. The first was that the minimum wage was rising.

I, too, asked a parliamentary question, which was referred to the Department of Trade and Industry. Unlike the right hon. Member for Birkenhead, I have had some success in getting an answer. It contained an analysis of those people earning the national minimum wage, broken down by salary. The fact is that the majority of those on the minimum wage have an annual salary of less than £5,000, so they will be unaffected by the income tax changes. The remaining 171,000 earn over £5,000. Let us assume that all 171,000 are losers; I do not think that we can necessarily do that, but for argument’s sake let us do so. Let us assume also that they are in separate households, which is highly unlikely. That takes us to 171,000 households who are on the minimum wage and whose income therefore, one could say, will increase over the course of the year. That will not make much of a dent in the figure of 5.3 million households that the IFS estimates will lose out as a result of the Budget, and the figure of 171,000 is, perhaps, optimistic.

The minimum wage is lower for younger earners, and they will be too young to be entitled to tax credits. For those people, this will have a penal effect.

The hon. Lady’s comments bring me to the second argument that the Chancellor used in disputing the figure of 5.3 million household losers, which was the take-up of working tax credits. I will not dwell on the point, but he claimed that the take-up will substantially increase. For households with no children, the current take-up rate by expenditure is about 25 per cent., and by person it is 19 per cent.

In giving evidence to the Treasury Committee, the Chancellor produced some figures which no one had seen before. They related to working tax credit take-up as a whole, as opposed to households without children. He said that a further 100,000 were now claiming, but he was not able to give a percentage figure. I recall reading an article in The Daily Telegraph that reported that the Chancellor once tore a strip off an official who was unable to give percentage figures. The Chancellor gave an overall number, and I have tabled a parliamentary question to find out the percentage for households without children.

Given that the Chancellor had claimed that there was an increase and confidently predicted further increases, I decided to table yet another parliamentary question, and again I have had success in obtaining an answer. I do not know whether the right hon. Member for Birkenhead feels victimised by that. Perhaps I am more popular with the Chancellor than he is.

I could not be less popular with the Chancellor, as my hon. Friend points out.

I tabled a parliamentary question on the level of take-up of working tax credit that the Treasury anticipated over the next few years, to which I received the answer that the Government do not make forward projections for take-up rates.

Therefore, the Chancellor has used two arguments, neither of which holds water. It appears that the changes in income tax announced in the Budget will result in 5.3 million households losing out. If the Chief Secretary would like to dispute those figures, I would be grateful to hear that and to understand the argument. However, this is a substantial change. At a time when the economy is doing well, 5.3 million households will lose out, and those households are generally the poorest, not the richest.

I shall be brief. As an old lag who has attended many debates on pensions over a long period—and perhaps I should state that I have a personal financial interest in the basic pension, which I have been receiving for some seven years now—I can recall a pensions crisis. I recall the 17 years under the Tory Government when the level of the basic pension was cut following their severing of the link with earnings in 1980. A few years later, they cut in half the value of the state earnings-related pension scheme. The introduction of SERPS under Barbara Castle in 1975 was one of the most progressive moves ever made, and it was supported by all parties in the House. The Tory Government also promoted the personal pension scam that robbed 6 million people, who received derisory pensions compared with the amount of money put into them. It was left up to the Labour Government to put that right. Therefore, there was a pensions crisis.

We must resist the fiction that is promoted by the Opposition parties and the tabloid press in an effort to convince people, especially pensioners, that what they read in the newspapers is true and that they should not believe their own personal experience over the past 10 years. That experience has been a very successful one. For a period of six years I used to get up in the early hours of the morning—

I shall confine my remarks to the subject under discussion, although there is a temptation not to do so in one’s “anecdotage”. I certainly shall not support the amendment although, like other Members, I am very concerned about this measure in the Budget and find myself at a complete loss to explain to my constituents who are on low pay and who will not receive any compensatory payments why it will be introduced. I want to repeat what my right hon. Friend the Member for Birkenhead (Mr. Field) said to the Government: there is time to reflect and to come up with a different solution. The Chancellor’s record over the past 10 years has been splendid and there has not been a need to restore the link with earnings because the pension credit, winter fuel payments and other allowances have meant that for the first time in many years pensioners have received justice.

Will my hon. Friend briefly comment on the fact that if this measure is passed it will be an attack on many women because, generally, women are lower paid than men? Therefore, the proposal will lead to a redistribution within households from women to men.

It is strange that this measure has been introduced at the same time as the splendid Pensions Bill—for the first time in 30 years there is proposed legislation that is based not on someone putting their finger up in the air to find out which way the political wind is blowing and acting in accordance, but on evidence and facts. That Bill will give justice to women. Unfortunately, this element of the Budget will have unintended consequences, and I urge the Government to look at it again.

I, too, oppose the amendments. They are uncosted and my hunch is that they would cost billions of pounds to implement. The Conservatives also oppose the amendments. However, I agree that it is strange that the hon. Member for Chipping Barnet (Mrs. Villiers) talked about higher rate tax relief and the capital gains tax regime, both of which principally benefit the rich in our society—although it is not as if the Conservatives have ever cared about the poor. She completely overlooks the minimum wage and the fact that child poverty and pensioner poverty rose massively when the Conservatives were last in office.

However, although the amendments are uncosted, I associate myself with the remarks of my right hon. Friend the Member for Birkenhead (Mr. Field) and my hon. Friend the Member for Newport, West (Paul Flynn) about the abolition of the 10 per cent. starting rate proposed for next year’s Finance Bill by the Chancellor in his Budget this year.

The measure will adversely affect a group that has not been mentioned—I have some in my constituency, some of whom have written to me: people who have taken early retirement, often on grounds of ill health, who will therefore not benefit from the rise in personal allowances for pensioners and are not eligible for tax credits because they are not working.

I urge my right hon. Friend the Chief Secretary and his team to look again at the proposals for next year. They should reject the proposals in the Liberal Democrat amendments before us, but they should look again at the abolition of the 10 per cent. starting rate, because it will have some unintended consequences which are beginning to be teased out.

The clause to which the amendments apply imposes income tax for 2007-08—each year’s Finance Bill has to plan for subsequent years—but keeps income tax rates unchanged for the current year at 10 per cent., 22 per cent. and 40 per cent. The combined effect of the amendments would be to replace the current starting rate band by a zero rate band and to cut the basic rate for this year from 22p to 20p. The hon. Member for Chipping Barnet (Mrs. Villiers) and my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) said that that was not costed. I can tell the House that the total cost of implementing these two amendments this year would be £13.8 billion, which I would have thought is quite a tidy sum even for the Liberal Democrats. Therefore, I agree with the hon. Lady that the Liberal Democrats tax proposals are flawed. The hon. Member for Falmouth and Camborne (Julia Goldsworthy), who speaks for the Liberal Democrats on these matters, is wholly at liberty to table amendments to the Finance Bill setting out in detail how £8.1 billion in environmental taxes would be made up, along with other details of the package outlined in her party’s policy document. The great majority of Members would warmly welcome that information.

My right hon. Friend has enlightened us on the £13.8 billion figure. He might not have the information with him, but could he have a stab at saying what the higher rate referred to in clause 1(c), which is currently 40 per cent., would have to rise to in order to make up the £13.8 billion? Would it have to be 75 per cent., or 98 per cent., perchance?

It would certainly have to be a large figure. Unfortunately, I do not have that figure to hand, but—who knows?—during the course of my remarks I might be able to do the calculation that my hon. Friend asks for.

If the Chief Secretary does not have the figure, would it help if the right hon. Member for Birkenhead (Mr. Field) tabled a parliamentary question on the matter?

I hope that I can give some reassurance to my right hon. Friend the Member for Birkenhead (Mr. Field) on—

It is not necessary to table a parliamentary question. The Liberal Democrats’ programme would cost us 4p on the standard rate of tax. My constituents would not be very pleased with that.

I very much agree with my right hon. Friend on that point.

The amendments would introduce only some elements of the package of reforms to the tax and benefit system announced by my right hon. Friend the Chancellor in the Budget. The House will of course have the opportunity to debate those changes in full when they are legislated for, and I very much look forward to that debate.

Let me set out the background to the Budget announcements. There has been a major programme of reform to the tax and benefit system in the 10 years since 1997, with the aims of reducing, and over time eradicating, child poverty, which doubled during the 18 years of the previous Government; of supporting families; of promoting saving; and of ensuring security for all in old age. We have made very big changes to advance all those objectives. The Budget introduced the next stage in that programme by offering more support for work, families and pensioners. The package comprised eight separate reforms, including changes to income tax personal allowances, to national insurance thresholds and to tax credits. Between them, they amount to a total net reduction in personal taxation of £2.5 billion. Let me underline that point. It has been said in the debate, correctly, that the Budget as a whole is fiscally neutral, but the personal taxation elements constitute a net reduction of £2.5 billion.

That is very interesting, because if my memory serves me right, according to the 2006 report on income-related benefits, uncollected working tax credits alone amounted to £2.4 billion—a figure almost equal to the £2.62 billion expected to be given away in the two subsequent years. Is this not just smoke and mirrors? Is not this “balanced” Budget based on not contributing £2.5 billion a year to those entitled to collect it?

No, this certainly is not smoke and mirrors; rather, it is an actual reduction. An examination of tax, national insurance and tax credits shows a reduction of take to the Treasury of £2.5 billion. The Budget also increased taxation on polluting activities, announced a major reform of empty property rate relief, and addressed avoidance. Those three measures between them provided the resources to enable this £2.5 billion reduction in personal taxation, which I can assure the hon. Gentleman is a real reduction that will be enjoyed by his constituents.

Does the right hon. Gentleman not accept, however, that the IFS is correct in stating that 5.3 million households are worse off as a consequence of the changes announced in the Budget?

I would agree with the IFS that there are many more gainers from this package than losers. I cannot confirm the figure that the hon. Gentleman gives, for some of the reasons that he set out earlier. He will doubtless be familiar with the IFS’s analysis immediately after the Budget, which is available in slide form in a PowerPoint presentation on its website. It shows that the Budget package raises household incomes in every decile, and that the biggest proportionate increases are in the lowest three income deciles. I underline for the Committee the extent to which this Budget is consistent with the pattern of changes that we have made in the past 10 years. In particular, it improves the position of those on low incomes.

I am very grateful to the Chief Secretary for giving way. Does he agree that table C6, on page 279 of the Red Book, reveals that tax will be up by £2 billion per year when all the Budget measures announced up to 2011 kick in, on top of £2.4 billion in tax increases trailed in the year leading up to the Budget, as set out in table A2, on page 210 of the Red Book? This is not a tax-cutting Budget.

No, it is a fiscally neutral Budget, as my right hon. Friend the Chancellor said at the time. That is the correct representation of what happened in this Budget.

The changes that I described are offsetting measures to enable this very substantial reduction in personal taxation. They also simplify the tax system, while protecting and boosting the incomes of vulnerable groups. We have had some discussion of what the IFS has said, so let me quote what its director said about the Budget package:

“To reform the system in a useful way, within tight financial constraints and with only modest gains and losses should be a cause for congratulation rather than criticism.”

I hope that the Committee shares that sentiment about my right hon. Friend’s Budget,

The hon. Member for Falmouth and Camborne asked on Second Reading and again today why the package of measures was being introduced next year and not this year. A number of elements of the package cannot be introduced without further primary legislation, such as changes to the upper earnings limit for national insurance and to empty property rate relief, which will clearly take some time. In addition, the package entails significant changes to payroll systems, and it would not be reasonable to expect them to be implemented in just a few weeks. That is why the package of measures that I have identified, and which permits us to make this dramatic reduction in personal taxation of £2.5 billion, needs to be introduced next year, rather than this.

I am no supporter of the Liberals’ proposals and I certainly would not support these amendments, but the Chief Secretary is suggesting that he cannot do this year many of the things that he wants to do because they require primary legislation. Last year’s Finance Bill was twice as long—two full volumes—with three volumes of explanatory notes. This is not an argument that we can take seriously, surely.

I am interested to hear the hon. Gentleman calling for longer and more complex Finance Bills; that is rather contrary to the mood of the Committee. The changes that I am referring to would not be made in a Finance Bill; they need separate legislation.

We are of course also being careful to ensure that the benefits that this package will bring are not at the expense of the UK’s underlying economic and fiscal stability, which have made these reforms possible and have been the principal sources of Britain’s welcome economic transformation over the past decade.

As I said, the hon. Member for Falmouth and Camborne asked why these changes will be introduced from April 2008 and are not being included in this year’s Finance Bill. Income tax is an annual charge re-imposed each year in the Finance Bill, and the convention is that changes to the rates are legislated for in the year in which they come into effect. I have done a little research on that point and, as far as I have been able to establish, there have been no instances in recent decades of income tax changes being legislated for other than in the year in which they take effect, so in line with that convention, next year’s Finance Bill will legislate for the personal tax reforms for 2008-09 that were announced in this year’s Budget.

The amendment proposes removal of the starting rate and replacing it with a new zero-rate band, in effect increasing personal allowances. The total cost of those changes would, as I have said, be £13.8 billion, but it would be a very untargeted measure, which would be of most benefit to those on higher incomes.

Our policy is to target help where it is needed, so the Budget package included a major investment in tax credits. Tax credits benefit about 6 million families and 10 million children and reach far more low and moderate-income families than any previous system of income-related financial support. By using that mechanism we can continue to give extra help to low-income families, whereas simply increasing tax-free personal allowances would not have that effect, as the figures I shall give in a moment will show.

I understand the Chief Secretary’s argument that lifting the threshold is not targeted, but does not the same argument apply to cutting the basic rate of tax? That is completely untargeted and will have the disadvantage of not benefiting people on the lowest incomes, whereas raising the starting rate threshold, as we suggest, would benefit them.

That is why there is a package of measures, which includes national insurance, income tax and tax credits. The overall effect of the package will particularly benefit households on the lowest incomes, as the IFS analysis rightly shows. After all, personal allowances can only cut a family’s tax bill to zero, whereas tax credits can go further and make a payment to the family. Personal allowances cannot provide support tailored to a family’s circumstances, such as the number of children in the family or whether a disabled child is a family member. Tax credits, by contrast, can do that and are doing it.

If the Government invested £1 billion in raising personal allowances, a low-income worker would be only 68p a week better off. Using the same money to extend the working tax credit means that workers on low incomes could see an increase in their incomes of more than 10 times as much—£7.10 a week. That is why the Budget proposals are so much better than those being made by the hon. Lady and her hon. Friends.

The hon. Lady asked for specific figures. As a result of the Budget package, by April 2009, households will be £100 a year better off on average; households with children will be £200 a year better off on average; and in the least well-off fifth of the population, households with children will, on average, be £350 better off. The changes to make those figures possible will be in next year’s Finance Bill. The House will have the opportunity to debate them then and I look forward to that debate.

I shall gladly look further into the point made by my right hon. Friend the Member for Birkenhead, but I do not think that the package redistributes away from women to men, once the impact of tax credits is taken into account. Child tax credit is paid to the main carer, who is usually the mother, and the child element will rise by £150 a year above earnings indexation, so taken with the other effects of the package, there will not be the redistributive effect that my right hon. Friend suggested.

As my right hon. Friend is so confident, does it mean that I shall soon receive a reply to my question, so that his confidence can be set out in the Official Report? Three groups of people have been highlighted in the debate. Low-paid workers, who are largely women, may not qualify or might not claim. There will be redistribution in families, from the lower-paid who will pay higher tax—largely women—to the men in the household who will receive tax cuts. The third group is equally important: those who have had to take early retirement and will thus not qualify for the higher personal allowances.

I am confident that my right hon. Friend will receive an answer to his question shortly; as I fear I told him that in a previous debate, I had better make sure that it actually happens this time.

I hope that I have answered his point about redistribution from women to men. If my right hon. Friend looks at the package as a whole, including the increase in the child tax credit, he will see that it will not have that redistributive effect. He is right in the sense that some people who might otherwise be regarded as losers will, if one looks at the impact on the household as a whole, not be losers. That point occurred to me when the hon. Member for South-West Hertfordshire (Mr. Gauke) was talking about the impact of the increase in the minimum wage; some people who are not among the 170,000 to whom he referred will be in households that might otherwise be regarded as losers from the package, but the increase in the minimum wage means that in fact they may not be losers.

I think the Chief Secretary is acknowledging that were it not for the impact of tax credits a significant number of people would lose out under the Budget—5.3 million people are losing out, but the impact would be even harsher without the operation of tax credits. What is he doing to get women who are not claiming tax credit to claim it?

The hon. Lady asks me to comment on the position before 1997, before there were tax credits. It is true that the system we inherited was extremely unfair, so we changed it. She is right: tax credits are an indispensable element in the far fairer system that we have now, which improves incentives for work and, in particular, strengthens the position of families on low incomes. The take-up of tax credits among families and households with the lowest incomes is high—far higher than for family income supplement and other mechanisms that were used in the past. In that sense, tax credits have been particularly successful, but we are working to increase take-up further. Over the past few weeks, a series of pilots have been set up in three parts of the country to try out a number of mechanisms for increasing take-up and we are analysing the results. No doubt we shall be able to do more to increase take-up of tax credits, which are an indispensable element of the personal tax and benefit system.

I remind the House that all that the clause does is to keep income tax rates unchanged for the current year, at 10 per cent., 22 per cent. and 40 per cent., so I hope that the House will reject the amendments.

Despite the almost universal scorn poured on the amendments, I am pleased that we have been able to have this constructive and important debate. As the hon. Member for South-West Hertfordshire (Mr. Gauke) said, the reason why it has been so difficult to table amendments is that Opposition parties cannot cover all the aspects of the proposals announced in the Budget.

It is clear, however, where the costs will come from and where they will go. Table 1.2 shows that removal of the starting rate of income tax will raise revenue of £7.3 billion for the Treasury in the first year. The cost of reducing the basic rate will be £8 billion, which will partly be offset by aligning income tax and national insurance contributions. The Chief Secretary is right to say that changes to national insurance contributions require primary legislation, but the Finance Bill is primary legislation, so it could be used to adjust primary legislation on national insurance. He may say that in recent decades there has been no announcement of such changes to take effect in the same year, but over the past 10 years there have been no income tax changes at all.

The right hon. Gentleman is right, but that was pre-announced over many years.

I wanted to focus tightly on the clause and amendments, which is why I did not refer to local income tax. I am happy to discuss it with the hon. Member for Chipping Barnet (Mrs. Villiers), but I was referring to the recommendations of the Lyons report, which highlighted interim measures by which to deal with people living in the most valuable houses that have seen the greatest increase who may not be paying a proportionate amount. That might be a way of addressing the current inequality whereby the richest 20 per cent. of our society pay a lower proportion of their income in tax than the poorest 20 per cent. I have heard nothing from the Conservative Members about what they would do to tackle the issue, despite all the warm words.

On that very point, would not the hon. Lady make a stronger case if she were prepared to say that we should have a more progressive income tax system all the way up the income range, with much higher taxes on the very rich?

I want to make some progress on the amendment and the clause stand part debate.

There are many ways of making the tax system more transparent and progressive, and there is no shame at all in saying that that should be a goal. The fact that the Conservatives have criticised our proposals on a higher rate of pensions tax relief shows what they actually believe. They speak all these warm words about making society fairer, but they are not prepared to put their money where their mouths are.

The key concern was raised by the right hon. Member for Birkenhead (Mr. Field), who made an eloquent case. The Chancellor was beguiled. It is difficult to know whether he was beguiled more by the prospect of grabbing the headlines in his final Budget or, unfortunately, by the tax credit system. The intent behind it is incredibly worthy and no one on the Liberal Democrat Benches doubts the Chancellor’s passion about these issues. Perhaps, however, his enthusiasm for the tax credit system is misguided when take-up rates are low in some areas. The tax changes introduced next year will disproportionately affect some groups.

I wonder whether the Liberal Democrats noticed what was almost a throw-away phrase by the Chief Secretary when he said that if we reflect on the impact of the Budget within households—the transference of higher tax for women, but lower tax for men, albeit with tax credits and so forth—it becomes clear that the overall change will benefit families. I thought that the whole principle of independent taxation was that there would be a difference within families—even within families that get on well together.

The right hon. Gentleman makes a very good point. The same principle applies to tax credits. Overall, millions of families have been lifted out of tax, but unfortunately, millions of families have also encountered overpayments and are struggling to understand whether or not they have to repay them and, if so, whether it is justifiable to do so. The overall picture may look more rosy than the experience of many individuals.

The Chief Secretary is right to say that the tax proposals will make the tax system simpler. Removing the 10p starting rate will make it simpler, as will aligning national insurance with income tax bands, but there are consequences that will follow such simplification. I would therefore refer the Chief Secretary back to the Chancellor’s own remarks in the Budget speech, when he claimed that these changes would make the system fairer. He did not make enough play of the simplification, which could be accompanied by many unfair elements. It is important to recognise that.

As I said at the outset, I am not pressing the amendments, but we have had a valuable debate. We are limited in what we can do now, but I greatly look forward to further discussions and hope that Ministers will table some effective amendments on Report. I particularly hope that the Chief Secretary and his colleagues will pass on the sentiments expressed in our debate to whoever succeeds the present Chancellor so that, if we have this discussion next year, the debate will take into account the eloquent views expressed today. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The First Deputy Chairman of Ways and Means, being of the opinion that the principle of the clause and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, put forthwith the Question, pursuant to Standing Order No. 68, That the clause stand part of the Bill.

Question agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 7

Rates of gaming duty

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

Clauses 7 and 8 and schedule 1 introduce new bands and rates of gaming duty and a new duty of excise, to be known as remote gaming duty. I will start by explaining the intention behind clause 7.

Gaming duty is charged on the gross profit—in other words, stakes minus prizes—of casino table gaming such as roulette or blackjack. That is known as the gross gaming yield. It is a banded system of taxation applied at different rates to different parts of gross gaming yield. Clause 7 will introduce new bands and rates of gaming duty for accounting periods on or after 1 April this year. The 2.5 per cent. starting rate has been abolished; the 12.5 per cent. rate increased to 15 per cent; a new rate of 50 per cent. is introduced for the largest casinos; and the bands’ limits have been increased in line with inflation. It may help the Committee if I deal with each of these changes briefly in turn.

First, let me deal with abolishing the 2.5 per cent. band of gaming duty. At the time the current regime was implemented, a 2.5 per cent. starting rate was justified by regulations that restricted the ability of the small casinos to compete. However, the Gambling Act 2005 has removed many of the restrictions applying to casinos, such as a 24-hour delay between taking out membership and being able to play. Restrictions on the number of gaming machines have been increased. This is a growing sector that has seen a reduction in the number of restrictions placed on it in regulation through the Gambling Act, and in which the number of small casinos is declining. As a result, the 2.5 per cent. of gaming duty, which was paid by all casinos on the first £546,000 of gross gaming yield, was effectively acting as a subsidy to larger and more profitable casinos—casinos that we want to ensure continue to make a fair contribution to our tax base. The 2.5 per cent. starting rate has therefore been removed by clause 7.

Secondly, I shall deal with the increase from the 12.5 per cent. rate to the 15 per cent. rate. Three in every five of the existing 138 casinos pay no higher rate of gaming duty than 12.5 per cent. Increasing that to 15 per cent., alongside the abolition of the 2.5 per cent. rate, increases the effective tax rate on these casinos to 15 per cent.—consistent with the rate of general betting duty.

Thirdly, I shall explain the new 50 per cent. rate on the largest casinos. Her Majesty’s Revenue and Customs estimates that the new 50 per cent. rate on gross gaming yield in excess of £10 million per six-month accounting period is likely to capture only the super-casino and a few of the high-end London casinos. Despite that, it helps to ensure that this growing sector continues to pay a fair contribution to tax receipts. Moreover, introducing the new top rate of duty now rather than later will provide any prospective bidder for the licence for the super-casino with the degree of certainty that has been looked for.

The head of tax policy at Ernst and Young, Chris Sanger, expressed a concern back in January that not knowing what the tax liability may be for the prospective super-casino could damage the ability of a council in the area of the successful bid to generate funds for regeneration. He said:

“When the casino companies are considering how much they can bid, they will have to factor in how much they will have to pay in tax. What we don’t know at the moment is what the Treasury plans to do”.

Well, now they know.

Finally, clause 7 will increase the gaming duty bands in line with inflation for accounting periods that start on or after 1 April this year. To revalorise the duty bandings in that way is entirely in line with the industry expectation and the practice we have had in every year since 1998.

Unless I did not hear properly, the Financial Secretary skipped clause 7(2), which I understand from the explanatory notes amends the rate of duty that applies in the case of unregistered gaming, putting it up from 40 per cent. to 50 per cent. I have no problem with the percentages, but I confess that, in my naivety, I thought that all gaming was registered—apart from dominoes in the pub or something. Can he give me, now or later, some examples of unregistered gaming that will be caught by the subsection?

My hon. Friend is characteristically right. All gaming—in this case, through casinos—is required to be registered. What we have and what he refers to is a provision within the tax legislation to cover a particular eventuality. Mercifully, because we are a well regulated and well run country in that respect, we do not have to invoke the provision. The provision allows us to charge tax on the operation of what would be unregistered and therefore illegal operations, but operations that, nevertheless, may turn a profit. We would not wish them to avoid being liable for tax on that.

Clause 8 and schedule 1 impose a new duty of excise to be known as remote gaming duty, which would apply to remote gaming providers who locate in Great Britain. It might help the Committee if I explain some of the background to the measure. Remote gaming providers provide the opportunity to participate in games of chance for a prize by means of remote communication, such as the internet, television or mobile phones. As Members will be aware, it is currently illegal for a remote gaming operator to locate in the United Kingdom. Remote gaming is therefore outside the scope of the UK’s gambling tax regime. However, the Gambling Act 2005, which was ably steered through the House by my right hon. Friend the Minister for Sport —who I am glad to see is sitting on the Front Bench at the moment—will, for the first time, make it legal for a remote gaming operator to locate in Great Britain and to be regulated under the UK jurisdiction.

We announced in the 2005 pre-Budget report that, following the provision made in the Gambling Act for remote gaming licences to be offered in this country, remote gaming would be brought within the scope of gambling taxation. We intend to use clause 8 to do that. It will apply from 1 September this year—the same date as the relevant part of the Gambling Act comes into force. Schedule 1 goes on to set the rate of remote gaming duty at 15 per cent. That rate of duty is liable on net receipts—in other words, payments received minus winnings paid out from the remote gaming activity. That is consistent with the taxation of remote betting, which is subject to general betting duty at 15 per cent.

Remote gaming duty will be charged on the provision of facilities for remote gaming if the facilities are provided in relation to a remote operating licence issued by the Gambling Commission. That ensures that it is not possible to gain the legitimacy and the benefits of UK regulation without being subject to gambling taxation of any sort. If a provider of remote gaming locates in Great Britain and does not apply to hold a remote gaming licence, the provision of facilities for remote gaming by that operator will also be liable to remote gaming duty. That is a parallel provision to the one that my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) pointed out in relation to clause 7.

Businesses that choose to relocate to Great Britain will have to register and then account for remote gaming duty on their net receipts from remote gaming. As set out in the regulatory impact assessment, the regulatory costs are modest. Her Majesty’s Revenue and Customs estimates that the cost of completing a registration form will vary from £7.93 to £15.75, depending on the size of the firm. We estimate the annual cost of completing remote gaming duty returns to be about £130 for all sizes of firm. I hope that those remarks have been helpful to the Committee. I commend the clause and the schedule to the Committee.

It is a pleasure to speak in this debate and in proceedings on the Finance Bill for the first time and it a pleasure to see you in the Chair, Mrs. Heal. It is also a pleasure to see the Financial Secretary, who I suspect will be doing much of the heavy lifting for this year’s Finance Bill. I know that he looks forward to that with unrestrained enthusiasm.

I am mindful that, shortly after I was first elected to the House, I served with the hon. Member for Wolverhampton, South-West (Rob Marris) on the Work and Pensions Committee. Our then Chairman—now Lord Kirkwood of Kirkhope—used to say at particularly difficult moments of inquiries that we were merely simple seekers after truth. I am going to take that as my leitmotiv for the discussion of clauses 7 and 8. It was not in a hostile spirit that we asked for them to be debated. We simply want to get to the bottom of some of the issues that they raise.

In setting out the case for clauses 7 and 8 and schedule 1, the Financial Secretary took us through the rationale for the changes to the bands. However, I do not feel that he fully analysed the effect of the clauses on the gambling industry—doubtless he will want to take the opportunity to do that later—and that is what I want to probe him on this evening. The section of the Red Book that concerns the clauses—it is on page 131—is very brief. It does not say much about their effect.

Perhaps the best place to start is with a story that appeared in The Daily Telegraph on 23 February—roughly a month before the Budget, when pre-Budget speculation was getting going. The article said:

“Gordon Brown will announce plans in next month's Budget to encourage the beleaguered online gambling industry to be regulated and licensed by the UK Government…In a surprise move, the Chancellor will use the Budget to announce that in return for a small amount of tax—possibly as low as 2pc or 3pc—companies can obtain a UK licence and still remain based overseas.”

John O’Reilly, head of online gambling at Ladbrokes, was quoted as being pleased with the supposed deal, saying, “It’s quite a breakthrough”—as though the decision had actually been announced. The article continued:

“He confirmed that if the rate was less than 3pc Ladbrokes would almost certainly sign up for a UK licence…Andrew McIver the chief executive of Sportingbet, currently based in Antigua, said he intended to apply for a UK licence if the duty was ‘a nominal amount’.

“Clive Hawkswood, the chief executive of the Remote-Gambling Authority…justified the low rate of tax because ‘these companies have grown up in zero tax jurisdictions. They operate on very thin profit margins. A 15pc gambling duty would wipe out half the industry overnight.’”

The report does not seem to have been a one-off. Ministers and officials from the Department for Culture, Media and Sport have met representatives of the internet gambling industry no fewer than 26 times. As recently as last October, at an international summit hosted by the Government, the Secretary of State for Culture, Media and Sport said:

“Of course we … want online gambling companies to come onshore.”

As we know, the Chancellor announced on Budget day that the new remote gambling duty, for which clause 8 and schedule 1 provide, would be 15 per cent.—the very figure that Mr. Hawkswood said would wipe out half the online gambling industry overnight. Clause 7 will increase the duty on annual gross gaming yields of more than £10 million from 40 per cent. to 50 per cent. As the Financial Secretary said, it will raise the starting rate of the duty from 2.5 per cent. to 15 per cent. Those changes, together with the measures in clause 8, will raise £30 million for the Treasury this year, £35 million next year and £35 million in the year after that. That £100 million represents quite a nice little earner for the Treasury. It will make a modest contribution to restraining the Chancellor’s borrowing, which, on his figures, is due to reach £153 billion by 2011.

The £100 million rise over three years was reported to have left the industry “gobsmacked”. Lady Cobham, the chairman of the British Casino Association, said that the move would

“hit the smallest casinos, often situated in seaside resorts, hardest with a knock on effect for jobs and industry suppliers.”

She said that it

“exposes the contradictions that have characterised the Government’s handling of the entire process … On the one hand, they are talking about developing new casinos, which enables money to go into regeneration, and at the same time they’ve brought in hugely increased tax rates”.

Ian Burke, Rank’s chief executive, said that the changes would make some casinos, especially those in the regions, unviable and asked:

“How can you make sensible long-term investment decisions if rules change at a whim?”

I will certainly give way to the hon. Gentleman. I look forward to hearing from him many times during the passage of this year’s Finance Bill.

The hon. Gentleman says that he is a simple seeker after truth, but the way in which he is setting out his case does not appear to be consistent with that. If he and his colleagues are concerned about the rates that have been suggested, why have they not tabled amendments to change them?

I will address the hon. Gentleman’s question in a moment. It is important at the outset to set out the concerns.

Ian Burke said that the change had been imposed without consultation and that it was not signalled ahead of the Budget in any meeting with either the Treasury or the DCMS. Mr. Hawskwood concluded that the Chancellor

“had closed the door on remote gambling”.

While independent analysts were more measured, it was clear that they shared much of the industry’s analysis. Deloitte said that the changes

“may make it less attractive for operators to bid for casino licences and we could well see a reduction in the number of companies bidding for small, large and regional casino licences”.

Warwick Bartlett said that Britain would miss out on a substantial influx of high-tech jobs. BDO Stoy Hayward went further in relation to clause 8 and said that the 15 per cent. rate sounded the “death knell” for Britain’s aspiration to be a regulated online gambling world leader.

I will now come on to the point raised by the hon. Member for Wirral, West (Stephen Hesford). I say at the outset that we do not automatically endorse the comments of the industry or analysts about the likely effect of the proposals. However, we genuinely want to hear from the Financial Secretary the full rationale for the proposals and what their effects will be. One of the reasons we felt we could not table amendments at this stage was that we did not know those effects in full, so I will be putting questions to the Financial Secretary towards the end of my speech.

If the hon. Gentleman can tell me in full what those effects will be, I will be grateful to hear from him.

Let us not be silly about this; it is not my place to do that. Is the hon. Gentleman saying—I think that this is what he is suggesting—that he might table amendments on Report?

The hon. Gentleman cannot answer my question, which proves the difficulty of tabling amendments at this stage. However, to answer his question directly, we might table amendments on Report. A great deal will depend on what the Financial Secretary says and what we conclude when we mull over his remarks.

The hon. Gentleman is generous in giving way. Can we just cut through this? Surely this simple seeker after truth stuff is just humbug—the hon. Gentleman is fishing.

The hon. Member for Wirral, West is getting himself into difficulty. I certainly cannot reach any conclusions without hearing from the Financial Secretary. We also want a reassurance from the Minister that the measures will not have the consequences for the industry that have been suggested.

As the hon. Member for Wirral, West makes his way towards the Chair, may I say that although we have not heard an explanation of the measures from the Financial Secretary, others have not been shy to offer their explanations? According to The Times, the Chancellor’s announcement was interpreted as having signalled

“his personal distaste for gambling”.

The Guardian reported that MPs believe that the Chancellor

“is not keen to see an expansion of the gambling industry”.

The Financial Times reported that the Chancellor’s scepticism for liberalising gambling,

“evidenced by his decision to impose a 50 per cent. tax on big casinos in the Budget, means a Brown premiership would be unlikely to impose a new super-casino”.

Now that the hon. Member for Wirral, West is back in his place, I can tell him that the Daily Mail reported:

“Tessa Jowell’s efforts to boost betting with the controversial Gambling Act were in tatters last night”.

It reminded readers that the Chancellor and the Culture Secretary had not exactly formed a mutual admiration society and that she had not yet been reported to have signed up to his leadership campaign.

Such speculation is a reminder that these proposed changes in taxation are meant to be marching in step with the implementation of the Gambling Act 2005, to which the Financial Secretary referred, and, especially, the setting up of the new regional casino. However, while we have such proposed tax rises, we do not yet have the casino. Given that the casino and the implementation of the Act are directly related to the rates, let me remind the Committee of the story so far.

The Gambling Act, which will bring the regional casino into being, was preceded by a draft Bill that was examined by a Joint Committee of the Lords and Commons. In a submission to that Committee, the Treasury said that the proposed programme of deregulation

“raises a number of challenges and issues on tax”.

The Financial Secretary told the Committee:

“There is a very important potential supplementary role for tax reform to reinforce and reflect the sort of regulatory changes that the Bill is looking at”.

He also said:

“On the tax side we are inevitably at a relatively early stage”.

He told the Committee that a steering group of officials from the Treasury and DCMS had been set up in part to

“form the modelling that is obviously essential to considering any tax options for the future”.

Brigid Simmonds of Business in Sport and Leisure told the Committee:

“Investment will be dependent on taxation”.

The economic impact study carried out by Pion Economics for the cross-industry group on gaming deregulation estimated that inward investment could amount to as much as £5 billion. Mr. Byrne of Sun International told the Committee:

“We have been planning to invest upwards of £500 million if the regulatory conditions are absolutely right … and so on”.

The Government’s response to the Joint Committee stated:

“The Treasury will use this work”

—the work of the steering group of officials with which the Financial Secretary will be familiar—

“when it considers the options for the future gambling tax regime.”

A Bill was then introduced.

It was reported that the Department for Culture, Media and Sport took the view that tax rates on gaming should be cut to ensure that the impact of the Bill was “revenue neutral”. On Second Reading, the Culture Secretary said that this was “an error.” She also said:

“The point being made was that revenue is not a motivator for this legislation.”—[Official Report, 1 November 2004; Vol. 426, c. 30.]

During consideration of the Bill, the number of proposed regional casinos was whittled down to one. After the Bill was enacted, the Casino Advisory Panel recommended that one regional casino should be sited in Manchester. The House of Lords Select Committee on Merits of Statutory Instruments expressed concerns about the potential effect of the decision on problem gambling, and 83 Labour Back Benchers signed an early-day motion urging the reconstitution of the Joint Committee to examine the Casino Advisory Panel decision. The Government then introduced a single order to put into effect the decision in relation to all 17 new casinos. As the Committee knows, in the other place the Government lost the vote on the draft order that would have established the casino in Manchester.

Before I put some questions to the Financial Secretary, it is worth reminding the Committee of what he said about remote gaming during the passage of last year’s Finance Bill:

“It is not an easy issue. There are many factors influencing the decision by remote gaming operators about where to locate. It is not clear that the rate of remote gaming duty will be the decisive factor.” —[Official Report, Standing Committee A, 11 May 2006; c. 88.]

Setting aside, just for a moment, the views expressed by the industry, by independent analysts and so on, I shall put a few simple questions to the Financial Secretary. First, what specific estimate has the Treasury made of the impact of clause 7 on old and new casinos, on the profitability of the industry, on investment from overseas, and on jobs? Will that estimate be published? Secondly, what modelling, if any, did the Treasury do on the impact that any new duty on online gambling would have on applications for licences by companies based overseas? Thirdly, how many licence applications do the Government expect to receive? Fourthly, does the Chancellor indeed have a personal distaste for gambling, and, if so, to what degree, if any, has it shaped his Budget decisions in these clauses?

The hon. Gentleman says “Come on”, but this was widely reported in the media from sources that included Labour MPs, so I simply want to know the answer.

I would be delighted to give way, for the first time in the consideration of this year’s Finance Bill, to the hon. Gentleman.

I am delighted that the hon. Gentleman, with whom I had great fun serving on the Select Committee on Work and Pensions during the previous Parliament, has generously given way. The reason I said from a sedentary position, “Oh, come on”, in response to his question to the Financial Secretary about the Chancellor’s views, was precisely because the Financial Secretary is not the Chancellor, so I doubt that he is in a position to give the Committee the Chancellor’s personal views on gambling.

I suspect that the Financial Secretary is in a position to say more to the Committee than he might consider wise, but I am grateful to the hon. Gentleman, who signed an early-day motion questioning the decision to place the regional casino in Manchester, for raising that point.

Finally, what would be the effect of the changes when combined with what the industry describes as double taxation on Mecca bingo? When will a Minister make an announcement about what action the Government will take on their regional casino proposal following the defeat of their draft order in another place?

I echo the hon. Gentleman’s penultimate question about double taxation on Mecca bingo, which is being raised in my constituency, where such a facility exists. My constituency contains two casinos and the excellent Dunstall Park race course, where quite a lot of gambling takes place. The city of Wolverhampton was one of the 17 locations for a casino that were put forward by the commission. Given the configuration of the city, it is likely that were such a casino to come to Wolverhampton, it too would be within my constituency—at third casino, to complement the two that we already have.

I want to ask the Financial Secretary some perhaps disparate questions about schedule 1. It inserts a series of amendments to part 2 of the Betting and Gaming Duties Act 1981—new section 26A, and so on. For ease of reference for hon. Members, I shall refer to the proposed section numbers to be inserted by schedule 1. Proposed section 26A(1)(a) includes “the internet” in the definition of remote gaming and what would be liable for remote gaming duty. Subsections (5) and (6) of proposed section 26J refer to the fact that the commissioners would be able to register a “foreign person” for the purposes of a remote operating licence. Everyone involved would have to have such a licence.

Schedule 1 clearly contains extraterritoriality. The hon. Member for Wycombe (Mr. Goodman) referred to companies in different countries. I believe that this sort of gambling activity has been banned in the United States and that several such companies have moved to central America as a result. The tax rate would be 15 per cent, as provided for in proposed section 26C(1), in contrast to the rates of up to 50 per cent. that would apply for gaming duty generally, as provided for in clause 7(1). That is quite a discrepancy, which presumably has something to do with encouraging foreign operators to come to the UK, because I imagine that an intensely competitive environment exists around the world in this regard.

I suggest to my hon. Friend the Financial Secretary that the extraterritoriality will be rather difficult to police. As far as I can see, the definition of a person who provides facilities for remote gambling is not in the Bill. Proposed section 26A(3) states:

“In relation to remote gaming duty ‘P’ means a person who provides facilities for remote gaming.”

One interpretation of that, and in particular the noun “facilities”, could mean that credit card companies are included. I have never indulged in this myself, but I would venture that most remote gaming involves the use of a credit card. Indeed, I believe that the way in which the Government of the United States of America have been able to clamp down considerably on such activity is not so much directly on the remote gaming companies as on the credit card companies who facilitate the transactions.

Will the Financial Secretary tell me whether the intention of that provision is to cover credit card companies? My understanding of the way in which such transactions work suggests that they would facilitate the provision of remote gaming. If that is the case, does he intend that credit card companies, as such facilitators, should be charged 15 per cent. on the profits that they make—the gross profits—from such transactions?

My final point relates to my intervention on the Financial Secretary during his opening remarks. It concerned clause 7(2), which increases the rate of duty that applies to unregistered gaming from 40 to 50 per cent. In the light of the extraterritoriality contained in schedule 1, is it the Government’s intention that organisations abroad that provide remote gaming for UK residents and make profits thereon, and fail to register under the provisions of schedule 1, should be charged not the 15 per cent. rate set out in the schedule for those who are registered, but a 50 per cent. rate for providing unregistered gaming? If it is the Government’s intention to charge that punitive rate for those abroad who fail to register, how will it be enforced?

First, I congratulate the hon. Member for Wycombe (Mr. Goodman) on his research. He employed a wide set of references, with the result that we heard just about everybody’s views but his own during the course of his speech. I am sure that the Committee would be interested to know whether he agrees that a new gaming duty rate of 50 per cent. is appropriate in the present circumstances, bearing in mind that it will apply only to profits in excess of £10 million gained in a period of six months, rather than one year, as he mentioned. For the purposes of the debate, it would be interesting to hear the views of the hon. Gentleman and his Front-Bench colleagues, rather than those of a wide sample of commentators.

The hon. Gentleman posed several questions, but mixed up his questions about the new provisions for the new remote gaming duty and questions about the changes to the rates and bands in clause 7. I shall deal first with clause 7 and the effect on the existing UK industry of the rate and band changes. As I explained to him, we carried out an assessment. Partly because the casino industry in the UK is a growing industry and partly because, from this year, we face a new situation in which the Gambling Commission oversees many aspects of social regulation, and restrictions on casinos have been relaxed by the Gambling Act, there is a good basis on which to make the sort of reforms of the gaming duty rates that we propose in clause 7.

The hon. Gentleman quoted a number of commentators speculating before the Budget about what decision we would reach on remote gaming duty—the new duty introduced by clause 8. That only served to demonstrate that it is better to reserve judgment until after the Budget is announced. Clearly, the principal newspaper article that he quoted, and Mr. John O’Reilly of Ladbrokes, were wrong in their speculation about what the Budget would bring.

The question to be asked in relation to remote gaming duty is whether offshore online gambling companies will choose to come onshore into the UK, to be regulated in the UK by the Gambling Commission and therefore also to pay tax in the UK. We considered the question of a new remote gaming duty and what the appropriate level would be. The hon. Gentleman quoted some of the exchanges that he and I have had in the past year or two. I have been looking into the matter for a couple of years. I met the Remote Gambling Association in the run-up to this Budget and the previous one, and officials have been in close contact with the association and some of its leading members. We have consulted on the draft legislation to introduce the new gaming duty. I do not think that we could have done more to get the structure right, but in the end the decision on the rate is for my right hon. Friend the Chancellor and me to take.

We discussed and analysed very closely with remote gaming operators and their association the sort of commercial decisions that might be affected by tax rates and the rates of the new gaming duty. As the hon. Gentleman and other members of the Committee will understand, remote gaming operators are located in tax havens. Even operators that have parent companies in the UK, are interested in the UK and have been following the development of the social regulation that my hon. and right hon. Friends at the DCMS have been establishing, or are well disposed toward the UK—what might be called UK-facing operators, which would be most likely to consider coming onshore with their online offshore operations if the structure and incentives were right—have told us that the value of being regulated in the UK is only about 2 per cent. of gross profits from remote gaming. Set that alongside even the total amount of irrecoverable VAT that would be present in any operation that came onshore, which would be about 4 per cent. of gross profits from remote gaming, and members of the Committee will see that even a zero rate of remote gaming duty would not, in itself, attract the industry to this country. We concluded that there was no tax rate solution to the question of how to encourage such operators to consider making the UK their base for future operations, in line with the new social regulation.

At different points in his speech, the hon. Gentleman advanced different arguments regarding the yield from the package of tax changes. Those changes will raise only about £30 million extra; that is set out in the Red Book. They are designed to complement the Government’s social policy on gambling and, as I have consistently and clearly said over the past couple of years, to adapt the tax regime to enable it to adjust for developments in the casino market and the regulatory regime. We calculate that clauses 7 and 8 combined will yield an extra £30 million in a full year. That is hardly either a tax bonanza, when set alongside the £143 million raised from casinos in 2005-06, or a tax bone, given to operators to secure a massive expansion of casinos in this country or to tempt offshore operators into the UK.

Both the hon. Gentleman and my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) raised what they described as the “Mecca bingo” question. That is a little beyond the scope of the clauses and the schedule under discussion, but if you will allow me, Mr. Gale, I shall comment on it. As the Committee would expect, I regularly meet representatives of the Bingo Association and bingo operators, including Mecca. I am acutely aware of the situation that bingo operators face in Scotland after the smoking ban. They must make commercial decisions on whether to continue or to close the clubs. At root, this is not principally a tax problem with a tax solution; it is the product of a complex combination of changing demographics and changing tastes in leisure activities. In addition, the policy of applying VAT and duty to bingo participation fees is entirely consistent with our treatment of other player-to-player games in licensed premises, such as poker played in casinos.

My hon. Friend asked some specific questions about the provisions in the Bill. The reference in the schedule to those who provide “facilities for remote gaming” is intended to identify and define companies that provide that type of gaming. After all, the new tax regime is designed to apply to those very companies. He had concerns about ensuring that the taxation regime would apply to companies that provide online services to players in the UK but are based abroad, particularly outside the European Union, in the tax havens that the hon. Member for Wycombe mentioned. The reality is that those companies are beyond the reach of UK regulation and our taxation regime. I agree with my hon. Friend the Member for Wolverhampton, South-West, that it would be an advantage to be able to regulate and tax such operators and operations, but part of the reason why they operate from those tax havens is that it places them beyond the reach of our taxation system. I hope that those points of explanation have been useful to the Committee, and I hope that it accepts that clauses 7 and 8 should stand part of the Bill, and schedule 1 should be agreed to.

It is a pleasure to see you in the Chair, Mr. Gale. The Financial Secretary’s response on clause 8 was, in essence, “We’ve consulted a lot and we’re really trying to get this right.” His response on clause 7 was, “We’re trying to arrange things in such a way that we can’t be accused of stifling the industry with a colossal tax burden, or of giving it inducements in the form of a tax bonanza that is unreasonable and unfair to other parties.” I did not hear him give specific answers to the questions that I asked about the effect on jobs, investment, profitability and, in particular, the future of the super-casino issue. The Government’s proposals on super-casinos have now been rejected by the House of Lords.

The hon. Gentleman is right to say that I did not touch on the points that he mentions, and I apologise to the Committee for that, but Ministers at the Department for Culture, Media and Sport have made it clear that they are considering the nature of the debate, and the views being expressed, in the House, and they will make their announcement on the subject in due course.

I am grateful to the Financial Secretary for making that clear, and he brings me neatly to my concluding point, which is that more information on clauses 7 and 8 is yet to come to light. I am sure that the record of this debate will be read with interest by many people who have an interest, commercial or otherwise, in the issues. We will not oppose the clause, but I tell the Financial Secretary and the hon. Member for Wirral, West (Stephen Hesford) that we may wish to revisit the issues on Report.

This might be referred to as the debate of the four Ws, as it involves the Member for Wolverhampton, South-West, my hon. Friend the Member for Wentworth (John Healey)—the Financial Secretary—my hon. Friend the Member for Wirral, West (Stephen Hesford), and the hon. Member for Wycombe (Mr. Goodman). I urge the Financial Secretary to look again at schedule 1, particularly proposed new section 26A(3) of the Betting and Gaming Duties Act 1981, regarding facilities. It should be considered together with proposed new section 26B(b), which refers to the provision of equipment and so on, because I think that the wording would cover credit card companies that had a piece of equipment, such as a computer, that was used in transactions in the United Kingdom; he should consider that issue before Report.

Of course I will reflect on my hon. Friend’s contribution to the debate, as I always do. He refers to proposed new section 26B(b), which mentions

“at least one piece of remote gambling equipment used in the provision of the facilities”,

but that will be defined by the Gambling Commission, as part of its role is to set out the terms of the regulation of such activities.

I do not wish to prolong the debate, but I have to say to my hon. Friend that it is news to me that the Gambling Commission has the power to interpret primary legislation, and that is what the provision will be. However, I think that I understand the spirit of the Government’s approach to schedule 1, which is that credit card companies and other such companies should not be covered. One way forward might be to consider a definition of “facilities” in proposed new section 26A(3).

Question put and agreed to.

Clause 7 ordered to stand part of the Bill.

Clause 8 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clause 25

Managed service companies

I beg to move amendment No. 1, in page 17, line 15, leave out from ‘Schedule’ to end and insert

‘shall come into force on a date which the Treasury shall by Order made by statutory instrument appoint.

(3) No Order shall be made under subsection (2) unless the Treasury has compiled and laid before the House of Commons a report on the likely consequences of bringing into force the provisions contained in Schedule 3.

(4) A report under subsection (3) shall in particular include the Treasury’s assessment of the implications for—

(a) the overall level of tax revenues accruing to the Exchequer;

(b) the cost impact and regulatory burden of the measure;

(c) the United Kingdom labour market;

(d) the competitiveness of the United Kingdom economy and the encouragement of enterprise.’.

With this it will be convenient to discuss amendment No. 14, in page 17, line 15, leave out from ‘Schedule’ to end and insert

‘shall come into force on 31st October 2007’.

Amendment No. 1, which is in my name and the name of my hon. Friends, would postpone the application of schedule 3 and the measures in it until there has been time for a thorough consideration of the effects of the legislation, and time for the Government to report formally to Parliament on the impact of the provisions proposed on tax revenues, the labour market, the competitiveness of the UK economy, and the cost burdens that the provisions will impose. In particular, I would like the report to dwell on the impact on freelance workers, contractors and small companies.

According to the Professional Contractors Group, there are just under 1 million freelance workers and contractors in the UK, and they make a significant contribution to gross domestic product, particularly in the information technology industry, where they play a pivotal role in keeping the country competitive. Paragraph 2.1 of the Government’s consultation document on the proposals acknowledges the importance of varied working patterns in giving

“businesses the flexibility to respond swiftly to new opportunities as they arise.”

The Opposition’s view is that imposing unreasonable new administrative burdens on the freelance and contractor community, as the Bill threatens to do, could significantly damage the ability of British business to compete in the globalised world economy. The Opposition believe that the proposals implemented in schedule 3 by clause 25 are flawed, and that they need to be significantly revised if they are to achieve the Government’s stated goal of cracking down on abusive schemes without penalising legitimate freelance and self-employed workers.

It goes without saying that the Opposition support moves to crack down on illegal tax evasion with respect to freelance and self-employed workers, and as I acknowledged on Second Reading, we also support attempts to stop abusive tax schemes. Indeed, we, like a number of people who have commented on schedule 3, have a degree of sympathy with some of the Government’s goals in the schedule. If, in reality, a worker is an employee, and a service company is being used simply to reduce the amount of tax payable, there is a case for measures to tax the substance of the relationship, rather than the label that the parties choose to give it for tax-motivated reasons. We would certainly be happy to work with the Government on reforming IR35 and on amending schedule 3 to try to target such situations and ensure that the workers in question pay their fair share of tax. However, as I shall explain, schedule 3 as currently drafted has a much wider impact.

The schedule will place significant limits on the administrative functions that a genuine freelancer, in business on his or her own account, can outsource to advisers. It will force them to deal directly themselves with much more of the red tape that comes with incorporation, rather than delegating it to others.

Does the shadow Chief Secretary to the Treasury not accept that her amendment is inconsistent with protecting revenue, despite what she says?

As I shall come on to say, I think that a pause for reflection, thought and analysis of how we can get the legislation right could have a positive impact on tax revenue. The first thing to note about schedule 3 is that the proposals are a clear acknowledgement that IR35 has failed. If the Government had got IR35 right, they would not need to bring further complex legislation before the House to attempt to police the borderline between the employed and the self-employed.

Many hon. Members will remember that in 1999 the Government caused significant controversy in the freelance and contracted-out community with their proposals on IR35—so-called because they were not announced in the Chancellor’s Budget speech, but in Inland Revenue press notice 35. The Government said at the time that that would raise £300 million for the Exchequer, and cost it just £55,000 a year ongoing to implement. However, of the IR35 investigations known to the Professional Contractors Group, 1,405 concluded that the taxpayer in question was outside IR35, and only three concluded that the taxpayer was within its provisions.

The Government have repeatedly refused to publish any figures on the amount of revenue collected under IR35 or on its ongoing cost impact for contracts. The truth is that IR35 has been a hugely expensive failure. It has left thousands of freelancers in an uncertain tax position and created serious difficulty in planning ahead. It has cost untold millions in compliance checking, and whole galaxies of the blog universe have been devoted to the intricacies of IR35 compliance. We appeal to the Government to postpone the implementation of schedule 3 to assess the reasons why its predecessor—IR35—failed; to consider the steps needed to ensure that schedule 3 is not a costly failure in the same way as its predecessor; and to establish whether the Treasury will undertake to measure the revenue raised by schedule 3, despite its refusal to do so in relation to IR35.

That investigation would provide an opportunity, too, to see whether IR35 is still necessary. If schedule 3 is adopted, there will be an even more complex tax framework for the taxation of freelance workers who have incorporated than there was before. Companies outside IR35 will be on one regime; companies inside IR35 will be on a second regime; and there will be a third regime for companies covered by schedule 3. Yet again, the Government have introduced highly complex and controversial legislation that is not properly thought through. They have found that it does not work properly, and to try to fix some of the problems that they created in their first round of tax law they are introducing more complex legislation that is not properly thought through either.

I should like to take the opportunity to explode a myth peddled in relation to both IR35 and schedule 3. The proposals are not about employment protection. The impact of schedule 3 will be to change the tax status of individuals working through companies that fall within the definition of a managed service company. It will not change their employment status. Of course, it is wrong for people to be forced to give up their employment rights by being pushed unwillingly into managed service companies, but the proposals will not have any impact whatever on that problem. If the Government wish to deal with it, that is not the way to do it.

A fundamental problem with schedule 3 is the collateral damage that it will cause. As drafted, the provision could hit many genuine freelancers who operate entirely legitimately and are genuinely self-employed—they are not employees. The consultation document asserts that the “underlying nature” of the relationships established by workers in MSCs is “almost invariably” one of employment. No evidence is given to support that assertion in the consultation document, and the Professional Contractors Group has challenged it:

“This ignores the possibilities that MSCs can be used for commercial relationships, and often are.

PCG has relatively few members who work via MSCs but those that do are generally conscious of IR35, have no wish to be employees and make a point of using IR35-compliant MSCs.

Several have contacted us following the announcement of the proposed changes to make it clear that they operate commercial relationships and are in no sense employees.”

The Chartered Institute of Taxation has looked at the problem, too, and it says:

“Our main concern is distinguishing between Managed Service Companies and Personal Service Companies…There are workers that operate through a PSC without failing IR35, but who do not have time to manage a company and will therefore outsource its functions to a professional…It is important that the legislation clearly distinguishes between these PSCs and MSCs.”

Freelancers who outsource part of the financial and administrative functions relating to their company to advisers are in danger of being caught by the provisions of schedule 3—that is a key point. Outsourcing routine administrative work to allow the worker in question to concentrate on what he or she does best, whether it is IT, engineering and so on, could walk them straight into the clutches of schedule 3. The nature of their working practices and their relationship with their end client is wholly irrelevant to their tax status under schedule 3.

The key question is posed by proposed new section 61B (1) (d) of the Income Tax (Earnings and Pensions) Act 2003—ITEPA—which is part of schedule 3. We must ask whether

“a person who carries on a business of promoting or facilitating the use of companies to provide the services of individuals…is involved with the company.”

That is the issue that determines tax status, and it is the relationship with specialist advisers that is critical to the whole framework. Any company involved with an MSC provider is caught by schedule 3, whether someone is genuinely self-employed and in business on their own account or not. Their factual relationship with their end client is wholly irrelevant under schedule 3.

The Law Society expressed concern that the test of involvement is “enormously wide”. The question that every freelancer up and down the country must ask is whether her professional advisers could fall within the category of an MSC provider under the meaning of paragraph (d), and it is not an easy question to answer. It is highly likely that, under the provision as drafted, it would take at least a couple of cases going through the courts to determine the answer, and the uncertainty surrounding the meaning of paragraph (d) is a critical reason for supporting amendment No. 1 and postponing the implementation of those proposals until they have been fully thought through.

Without qualification, paragraph (d) would hit any freelancer who uses an accountant to draw up her company tax returns, so its scope is narrowed by proposed new section 61B(3), which states:

“A person does not fall within subsection (1)(d) merely by virtue of providing legal or accountancy services in a professional capacity.”

The meaning attributed to that carve-out will be critical in determining the reach of the legislation. There are at least three possible approaches to the carve-out and the type of services that are relevant in the context. First, under a narrow approach, the carve-out would provide safe harbour only for basic, traditional accounting services such as book-keeping. Secondly, the widest definition could cover any services ordinarily provided by accountants. The third approach would apply to accounting services ordinarily provided in the course of an accountancy business.

We need much greater clarification—that is why we need a delay and a report—about the range of services that are currently outsourced and whether they would trigger the operation of schedule 3. Those are services such as setting up and registering companies; invoicing; company secretarial services; IR35 compliance checking; routine tax advice such as guidance on the different rules governing companies and sole traders; and other assistance on regulatory compliance. Almost all those services are frequently performed by accountants, so it would not cause a problem if the second, wide interpretation is the correct one. However, if the third, middle way—the more restrictive option—is correct, the setting-up of companies and company secretarial services may fall outside the carve-out for an accountant. They are services provided by accountants, but they are more closely associated with lawyers than accountants, so they could be treated as MSC-type services if provided by an accountant, but not if provided by a lawyer.

The Institute of Chartered Accountants has expressed concern about the issue, and it says:

“The legislation is ambiguous about whether firms of chartered accountants and tax and business advisers who as part of their other services advise clients about the best structure through which to trade and provide the necessary company secretarial services to enable them to do so, are within the definition of ‘an MSC provider’.”

Her Majesty’s Revenue and Customs has indicated informally that such activities should not turn accountants into MSC providers. However, as the Institute of Chartered Accountants points out, there is no substitute for a legal definition, and we propose to table amendments in the Public Bill Committee to clarify the operation of the safe harbour in proposed new section 61B(3).

The Opposition believe it is unfair and unwise to impose the new regime on freelancers while such uncertainty attaches to the scope of proposed new section 61B. The Chartered Institute of Taxation points out that there is a real danger that

“uncertainty could render the legislation unworkable or difficult to enforce”.

The IR35 precedent is not a happy one. Susie Hughes, founder and editor of the specialist contractor website Shout99, said:

“It is clear that contacting is a very complex business, and the new legislation has caused a headache for many contractors, who are still unsure about how to comply with the new rules.

The majority of freelancers who visit Shout99 are very knowledgeable, but the last-minute changes in the Budget knocked many sideways.”

Members should be aware that the Government maintain that these rules are in force as we speak. Despite the fact that they are unclear, they were due to come into force on 6 April.

There is another twist in the tail. A freelancer might have an entirely compliant relationship with her professional adviser that does not go beyond the provision of accountancy services within the meaning of proposed new subsection (3). However, she could still end up with MSC status if her accountant was providing non-compliant services to other companies. Her accountant’s work for other companies would taint all their clients, and in assessing whether she is at any risk of falling within the scope of schedule 3, a freelancer therefore has to look not only to her own relationship with her professional advisers, but at the services that they might be offering to other people.

This uncertainty is made even more problematic when one turns to the new section 688A of ITEPA, which is also introduced by schedule 3. That gives the Treasury the power to introduce secondary legislation to impose liability for the tax debts of an MSC and levy them on third parties. The Law Society described this section as “extremely wide” and stated that it

“could cover a wide number of people who do not actually benefit from the provision of the MSC services.”

The Chartered Institute of Taxation has also expressed the concern that the proposals are “unnecessarily wide”.

The third parties potentially caught by the provisions are set out in proposed new section 688A(2). They include any person

“who (directly or indirectly) has encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the services of an individual”.

The phrase

“encouraged, facilitated or otherwise been actively involved”

indicates the potential for a much wider application of the provisions than the consultation document suggests is the Government’s intention. The provisions pierce the corporate veil, leaving directors, employees and payroll clerks in the firing line. The Chartered Institute of Taxation expressed the concern that although the HMRC says it wants to target the controlling minds of a scheme provider, ordinary employees of those providers might well be hit with tax debts, as they could be seen as encouraging and facilitating the provision of services through an MSC.

There is also no firm guarantee that I can see in proposed new section 688A that someone who works as a contractor through a managed service company will not end up becoming liable under this section. Furthermore, there is every chance that the end-client might be viewed as having encouraged the provision of services of the worker via an MSC. According to the Law Society,

“It is quite possible that a client might be caught if it encourages involvement . . . the word ‘encouragement’ introduces an extremely wide concept . . . We think this goes too far and could cover something that was entirely informal where the party encouraging received no benefit and no involvement . . . it leaves too much discretion with HMRC.”

The Law Society goes on to point out that leaving end-clients on risk for the tax debts of the freelancers and contractors that they take on could have a highly disruptive effect on outsourcing in Britain.

I strongly agree with all my hon. Friend’s comments. Is it not the case, as with other legislation with which the Government try to tackle specific problems, that they end up using a sledgehammer to crack a nut? It would be much better if the legislation were far more focused than schedule 3.

My hon. Friend hits the nail on the head. Far too many people who are legitimately in business on their own account as genuine freelancers will be hit by the legislation, which is designed to target abusive schemes.

It is critical that we do not produce legislation that makes it difficult for companies to take on freelancers and contractors. That could significantly damage our competitiveness as an economy and the flexibility of the UK labour market. As on the third-party debt provisions that I outlined, and in the same way as for section 61B, there is a carve-out aimed at removing professional advisers and recruitment firms from the scope of the provisions. However, the carve-out suffers from a number of the same uncertainties that I outlined earlier in relation to the definition of a managed service company provider. There is a real risk that recruitment firms and professional advisers might still fall foul of the encouragement or active involvement tests set out.

Ann Swain, chief executive of the Association of Technology Staffing Companies, stated:

“It seems completely contrary to all common principles of justice to make companies that have no legal control over individuals liable for their tax. The Government tried to make the recruitment industry liable for contractors’ tax affairs when it introduced IR35, but eventually backed down. Here we are six years later facing the same tax grab on the recruitment industry. The attitude seems to be that if Revenue and Customs cannot ensure contractors comply with tax law, because it is too difficult to apply, other parties need to be made to pay”.

The Opposition believe that the recruitment industry is a vital part of ensuring a flexible and efficient labour market, and that much more time, reflection and thought are needed to ensure that the industry is not damaged by the proposals in schedule 3. We hope to table amendments in Committee to bring that about. I have received representations pointing out that the potential liabilities under the third party debt provisions are uninsurable, and that public companies involved in working with freelancers and small service companies are being advised that they would have to set so much aside as a contingency as to have a significant impact on their share price. The debt transfer provisions could also involve considerable litigation risk, as companies might end up blaming one another for being dragged within the scope of schedule 3.

I declare an interest as a member of the Chartered Institute of Public Finance and Accountancy. The hon. Lady complains about the possible impact on recruitment companies of a liability to ensure that taxation falls where it should, but surely that is a prosperous, profitable and reputable section of industry on quite a grand scale. What on earth is wrong with expecting those companies to live up to the professional responsibilities that they should have in the role that they are performing? People watching the debate will be astonished by those comments.

I agree that one should expect recruitment companies to exercise high standards in the way that they conduct their business, but that does not mean that they should necessarily be liable for the significant tax debts of the people with whom they do business. I do not see how the hon. Gentleman can make that connection. It is one thing to require companies to behave well and in a reputable manner, but why should they be liable for other people’s tax bills?

The third party debt provisions are draconian. They seem substantially harsher than the rules that govern the limited context where directors are held personally liable for the debts of their companies. Those connected with or giving advice to contractors operating through service companies will be on risk for potentially huge liabilities, and liable to the last penny