House of Commons
Monday 30 April 2007
The House met at half-past Two o’clock
[Mr. Speaker in the Chair]
Oral Answers to Questions
The Secretary of State was asked—
Identity cards can be made compulsory for all United Kingdom residents only after further primary legislation. However, we will start issuing identity cards to British citizens from 2009, alongside compulsory biometric immigration documents to foreign nationals from 2008.
I thank the Under-Secretary for that response. We understand that the cost of the identity card scheme will be more than £5 billion and that, to date, the Chancellor of the Exchequer has not given his commitment to the resources necessary to make it compulsory throughout the country. What faith can people have in identity cards or in the Under-Secretary’s timetable when the Treasury could pull the plug on the scheme at the drop of a hat?
The identity card scheme will apply throughout the United Kingdom, including Northern Ireland. [Interruption.] It is intended to apply to people of any nationality who are legally resident and aged 16 or over. We were in regular contact with the Irish authorities, including the Irish embassy in London, during the passage of the Identity Cards Act 2006. The principle of the common travel area, which covers the UK, Ireland, the Channel Islands and the Isle of Man, will be unaffected.
The costs will be presented, as we are committed to doing, in the cost report, which will be published shortly, and in the Identity and Passport Service annual accounts for 2006-07. The hon. Gentleman can rest assured that the report will be before him soon.
May I revert to the question that the hon. Member for Thurrock (Andrew Mackinlay) asked? Will citizens of the Irish Republic be among the first tranche of people who have the documents— yes or no? Who else will be in the first tranche?
Immigration Points System
On 18 April, I announced the timetable for the points-based system. It will ensure that migrants can come to Britain to work or study only if they have something to give that Britain needs.
As my hon. Friend knows, the number of deportations has hit an all-time high—we now deport somebody, on average, every eight minutes. However, the points system will make it even easier to remove those who have no legal right to be here. Everybody who comes here under the points system to study or work in skilled jobs will need a sponsor. Those sponsors will be required to help us fulfil obligations. However, the commitment is backed by two important changes. First, there is £100 million extra for immigration policing, against which the Liberal Democrats shamefully voted when it came to the crunch in Committee. Secondly, there are the compulsory ID cards for foreign nationals. They derive from a system that I believe that Her Majesty’s loyal Opposition still plan to shut down.
The Government have spun the measure as designed to restrict the number of people coming into this country. Is it significant that the Minister failed to answer the question whether it would do that? In the light of the use of the existing points-based system for highly skilled immigrants in the opposite way to that intended—namely, when it was found that relatively few people who had the number of points applied, the Government simply reduced the number of points required until the numbers increased by a multiple of those under the previous system—what possible ground is there for believing that the Government will use the new system to restrict rather than to pretend to restrict numbers?
The points-based system has a simple objective: it is designed to ensure that those who come to this country from abroad, either to work or to study, have something to give that Britain needs. One of the virtues of the points-based system is that it is easier to move the bar up or down. I happen to think that that is not a decision that should be taken in a dark room in the Home Office. We need a much more open debate in this country about where our economy needs migration and where it does not. That is why we propose establishing a migration advisory committee, so that we can receive that independent advice. I also happen to think that we should take into account the wider impact of migration. That is why we propose establishing a transparent forum in which people can come together to advise us on where migration is having a wider impact on communities up and down the country. Those are measures that I would have thought the right hon. Gentleman would support.
I welcome the points-based system, which is an excellent idea that will improve the quality of immigrants. However, what impact will it have on the 600-odd people who are entering the Bradford district, including my constituency, on the grounds of marriage for permanent settlement?
Like the system in Australia, the points system is designed to apply to those people who seek to come to this country either to work or to study. There are provisions in the immigration rules to reunite British citizens with loved ones from abroad, which is an important objective that we continue to support. However, I say to my hon. Friend, with some gratitude, that we have further reforms to make to the immigration rules on marriage. There is a case for examining whether we should make English a pre-entry requirement, rather than one that is imposed once people are here. We must continue to bear down on forced marriage, an issue on which my hon. Friend has bravely championed her position in this House and beyond.
The Minister said that he wanted an open debate. He then mentioned the migration advisory committee, the creation of which is something that I have welcomed previously. Will he make a statement on the specific, narrow point of the number and type of people the Home Office has assessed are coming in, and where they might be going? The Minister will be aware that the risks and opportunities differ in the nations, the English regions and every local authority area. Will he make a statement to the House and allow questions on that specific, narrow point, so that people from all parts of the country and hon. Members from all parts of the House can have their say on the risks and opportunities that they believe their areas face?
When we finalise our plans for the forum designed to consider the wider impact of migration, we shall of course make a statement to the House and I shall of course be happy to answer questions, either inside or outside the House. Different regions in the country have different needs from migration. That is precisely why the First Minister was right to promote the fresh talent initiative in Scotland. I am not sure whether the scheme has the hon. Gentleman’s support, but it has been enormously successful in Scotland and shows that the immigration system needs to be flexible in order to take account of the different needs of different parts of our economy.
Much as I admire the Minister’s boyish charm, I am sorry to tell him, as I told his predecessor, that the points-based system will simply not work, because it will keep out the very people whom we need in this country. For example, there is a shortage of chefs, who wish to come to our restaurants. He cannot sell the policy unless he sorts out the mess that the Government have created over the highly skilled migrant workers programme. Does he have an answer to the questions put to him by the people he met at the meeting that I chaired in the Committee Room upstairs?
As ever, I am grateful to my right hon. Friend for his advice. I was grateful, too, to him for bringing together a group of those who had applied under the highly skilled migrant programme, in order to understand the impact of tightening the rules on their opportunities in this country. However, we have an obligation to ensure that only those who have something that Britain actually needs are able to come. The meeting that my right hon. Friend organised was helpful to me in getting the planning of the points-based system right. The system will be introduced in January, so there is still time for some fine-tuning to be made and for some of his observations to be taken on board.
The sheer scale of increased immigration in recent years has made it easier for traffickers and smugglers to bring in women for the purposes of sexual exploitation, to the extent that we are now perhaps Europe’s No. 1 destination for such women. Will anything in the new points system make it easier to identify the traffickers and smugglers, and thereby reduce the trade and prevent that monicker from being applied to this country any longer?
The hon. Gentleman is right to say that global migration has changed; it has doubled since the 1960s. Net migration into this country is pretty much in line with the Organisation for Economic Co-operation and Development average. Of course, as global movement becomes easier, people will seek to exploit it, and that is exactly why my right hon. Friend the Home Secretary and the Under-Secretary of State for the Home Department, my hon. Friend the Member for Gedling (Mr. Coaker), have brought forward the UK action plan on trafficking. That will have to be backed up by increased resources for immigration policing, which is why our measures are so important. It was a disappointment that the Liberal Democrats opposed them. Biometric identity technology will be important too, because it will help us to understand with confidence precisely who is coming into and leaving the country. That will make the business of enforcement much easier, and I urge the Conservatives to support our plans.
The Government fully recognise the importance of tackling knife crime. This is a complex issue and we are using a variety of measures, encompassing legislation, enforcement, education and prevention, to address it. Those measures form part of the Home Office action plan on guns, knives and gangs, which is being taken forward through the Home Secretary’s round table.
The recent spate of knife crimes, including those that claimed the lives of two young men in my constituency, might not be an indication of a worsening trend overall, but that is not how it feels on the street. A recent poll found that one in three Londoners thought that knife crime had reached an all-time high. Does my hon. Friend accept that perception is as important as actuality, particularly when it comes to discouraging young people from carrying knives for the purpose, as they see it, of defending themselves? What steps will he take to support the voluntary and community organisations, such as Working with Men, which deal with young people who carry weapons to defend themselves?
I thank my hon. Friend for that question. It is important to get the facts out about knife crime. Without being complacent or underestimating people’s very real fear of knife crime, and given that knives are generally available, the British crime survey reports that only 6 to 7 per cent. of violent crime is knife-related. That figure has remained relatively stable for several years; in 1997, the figure was 5 per cent. However, we need to address the problem of knife crime, and we shall do so using a variety of measures, including tough enforcement of the law, increased police powers and, as my hon. Friend says, working with community organisations to try to address the fear of crime. We have done that through organisations such as the Damilola Taylor Trust and the Boyhood to Manhood initiative, and we are working through the Connected Fund to support more community organisations in getting across the message that knives are dangerous. We are doing all that we can to reassure communities.
In the areas of London where knives are routinely carried, the police could use section 60 of the Criminal Justice and Public Order Act 1994 to carry out random stop-searches. Will the Minister tell us why that is not being done, and whether it is a priority for him that it should be done?
It is being done when appropriate and when the police consider it necessary. The hon. Gentleman will also know that we have recently increased the sentence available to the courts for simple possession from two to four years. Knife crime is a problem that we need to address through tough enforcement of the law, through giving the police more powers and through working with communities to try to prevent young people from carrying knives in the first place.
Does my hon. Friend agree that the violent gang culture that generates knife crime also generates the gun crime that we see on the streets of my constituency? As well as ensuring that we have effective policing and the right sentence tariff, the Government need to do more to deal with family breakdown and educational under-achievement, which are partly at the root of the issue.
Of course we need to address the problems that my hon. Friend has mentioned. The Government are considering whether to make membership of a gang an aggravating factor in relation to sentencing. It is clearly a worry for us all that some young people seem to give more credence to the values of their gang than to the values of society in general. We will tackle that problem through a variety of means including increasing police powers and supporting communities. A recent community initiative that I have looked at is the Boyhood to Manhood initiative, which tries to give young black people, in particular, positive role models.
Given the Minister’s earlier comments, he recognises that effective enforcement to stop knives getting into the hands of young people is an essential part of the fight against violent crime. Yet in 2005, the last year for which figures are available, just 19 people were convicted of selling knives or blades to youngsters under 16. What commitment can the Minister give to address the failure in enforcement and to make it clear that there is no knife amnesty for selling blades to those who are under age?
The clearest indication of the fact that the Government take knife crime extremely seriously is the increase in the sentence for possession from two to four years, which we expect to be enforced. The sentence given to anyone charged with that offence and brought before the courts is a matter for the courts. Let there be no doubt, however, that the Government consider possession to be a serious offence, and expect the courts to act accordingly.
Will the Minister support and welcome the “Knives Ruin Lives” campaign run by my local newspaper, The Shields Gazette? Does he agree that the only way to tackle this blight on our streets is to ensure that anyone convicted of carrying a knife serves a jail sentence?
I am happy to congratulate The Shields Gazette on its “Knives Ruin Lives” campaign in Jarrow and beyond. That is just the sort of community initiative that we need. Of course, it is up to the Government to pass tough laws and see that they are enforced, which is what we want. The community and local media must also take action, however, and we must all work together to show that the knife culture in certain parts of some of our communities is not acceptable, and that we will take steps to deal with it.
Not as many as I hope to receive once the migration advisory committee and the migration impact forum are up and running over the next few months.
We all recognise the contribution made by migrants and the undoubted benefits of some migration. As part of the debate, will the Minister accept that recent net migration—running at 400,000 in the past two years alone—has been historically unprecedented, and that the pressure on housing and public services is unsustainable? All of that is due, in no small measure, to Government policy changes. To put it in the Minister’s terms, should the bar be set higher or lower? Under his points-based system, will either he or the migration advisory committee have the power to set a limit?
The hon. Gentleman is right that net migration is up in the UK, as it is across the advanced west—the figure for Britain is the same as the OECD average. When we make migration decisions, we must consider which parts of our economy need migrants and which do not, on which we need independent advice. The hon. Gentleman is right that we must take into account the wider impact of migration on communities. We plan to bring together public services up and down the country so that, when we make migration decisions, we do so in full knowledge of the impacts on communities up and down Britain.
My hon. Friend has the sympathy of the House and the country in the tasks that he is undertaking. We must realise how difficult it is to stop the hundreds of thousands of people across Europe and the rest of the world who wish to make their way to this island paradise—especially after 10 years of Labour Government. But surely he realises that his points scheme deals only with legal immigration, and it is not the legal immigration that is causing problems. Illegal immigration, and bogus asylum seekers, are undermining the status of the legal immigrants, whom we welcome to Britain. Will he assure the House that his methods will reduce the number of illegal immigrants and bogus asylum seekers getting to this island?
I am happy to give my hon. Friend that assurance. If we are to tackle illegal immigration, we must stop illegal journeys and illegal jobs. That is exactly why we have published plans to set up a second offshore border control to keep our borders more secure, and why we have said that we will increase spending on immigration policing by £100 million next year—a measure that the Liberal Democrats voted against. Both measures, however, must be underpinned by a different way of identifying whether people are who they say they are, which is why biometric identity technology is so important. That underpins biometric visas and compulsory biometric ID cards for foreign nationals. That is why it is such an error for the Conservative party to pledge that it will close that system down.
Will the Minister put the Blairite spin to one side, and tell us by how much the annual number of immigrants to the United Kingdom will fall in the year following the introduction of his new points system? A ballpark figure will do.
I do not know whether I have given the hon. Gentleman a misleading impression, but I am not the general secretary of a Soviet-style central planning system—[Laughter.] I do not sit, together with my colleagues, in an office in the Home Office deciding what the needs of the British economy will be next year. We need to understand where in our economy migration is needed and where it is not, which is why the migration advisory committee is so important, but in setting the bar we must take into account the wider impact of migration, and that is precisely what we plan to do.
The increase in the number of doctors and dentists in my constituency would not have happened had it not been possible to recruit dentists from foreign countries. Will my hon. Friend reassure me that people filling essential posts in this country for which there was no local candidate will still be given fast-tracked immigration status and fast-tracked work permits?
My hon. Friend is right to say that migrants from abroad have performed vital roles not just in our economy but in our public services. In the last couple of years people coming to this country from the new accession countries have provided some 2,500 jobs in the NHS and NHS dentistry, and that is before we take into account the number of people from eastern Europe who are working in our social care sector. If there are roles that cannot be filled locally, both our public services and United Kingdom businesses should have the chance to fill them with the right people from abroad.
Will the Minister acknowledge that the net immigration figures were unacceptably inflated last week by the failure to deport two Libyan terrorist suspects, which even the judge described as a threat to our national security? Is it not time we accepted that the Human Rights Act 1998 is bad law, and that we need a new Human Rights Act that will balance matters involving people’s individual rights against—
Is the Minister aware of figures released last month by the Department for Communities and Local Government which showed that house building is now roughly keeping pace with household formation from indigenous sources, but also that household formation from immigration is due to reach about 73,000 a year? What prospect is there of ending house price inflation and giving people a chance to own their homes at a reasonable price while net immigration continues to run at those unacceptable and out-of-control levels?
The right hon. Gentleman has made an important point, which underlines the need for us to take account of the wider impacts of migration on society when making immigration decisions. The points-based system gives us a flexible way of either raising or lowering the bar that people must cross to come to this country, but I do not think our decision on precisely where the bar sits should be based on an economic rationale alone. We must take account of those wider impacts, which is why the migration advisory committee and the migration impact forum will be so important.
An assessment of the figures relating to people migrating to the United Kingdom for a year or more shows that about a quarter say that their reason for coming here is to undertake a course of formal study. How confident is he that appropriate assessments are conducted in relation to the institutions and courses that a substantial number of people coming to this country are about to attend and undertake?
My hon. Friend is right to underline the contribution that foreign students make to the economy. We estimate that last year foreign students brought in about £5 billion to the education system in Britain, but we have to ensure that the colleges to which people are going are legitimate and that people have the right qualifications in order to undertake those courses. That is why we will be investing up to £20 million next year in a compliance network of Border and Immigration Agency officers to check that colleges are not bending the rules.
The Minister’s widely acclaimed charms cannot disguise the fact that his actions are largely ineffectual, mostly because the Government have no idea how many people have come here. The Office for National Statistics says that only 56,000 Polish citizens entered Britain in 2005, yet mysteriously the Department for Work and Pensions tells us that 170,000 Polish citizens applied for new national insurance numbers in 2005-06. They cannot both be right. Will he admit that, as long as the Government fail to secure our borders and to know how many people are coming here and staying here, immigration policy will remain the single biggest failure in the long-term shambles that the Home Office has become?
That is an absolutely extraordinary claim from the hon. Gentleman, who I hold in the highest regard for the contribution that he has made to Opposition Front-Bench immigration policy—he has injected a degree of humanity into it that was not there a year or two ago. He will not have any credibility arguing that point when it was his party that began dismantling exit controls in 1994, and it is his party that has said that it will shut down the biometric identification system, which will support biometric visas and biometric identification in Britain and which is vital to our counting people in and out. As an alternative, he proposes to set a limit. That limit does not apply to the European Union; it does not apply to asylum seekers; and we have yet to find out whether it applies to family members. Even though I think it has—
Child Abuse (Internet)
The Government welcome the report of the Internet Watch Foundation, which was published this month, and congratulate the IWF and their partners on their work and achievements.
We continue to work very closely with the internet service providers industry in the UK to ensure that blocking mechanisms are in place to restrict access to the sites identified by the Internet Watch Foundation. We are aiming for every ISP to support the blocking mechanism by the end of 2007. Additionally, the Department is supporting work by the British Standards Institution to develop a kite-mark for software products that PC-owners can use to block access to the sites at software level. That will be available by the end of the year.
I congratulate the IWF, mobile phone companies, ISPs, the police, the charities and the Government's taskforce on making the UK a country that has virtually eradicated the hosting of those disgusting sites, but the IWF report showed that an increasing proportion—90 per cent.—are hosted in the US and Russia, and that the images are getting worse and more disgusting. What action can the Government take to encourage and to help those countries to improve their performance in blocking sites? Will my hon. Friend consider discussing with his Foreign Office colleagues organising an intergovernmental conference with Russia, the US, the European Union and the UK to stop children being abused and raped in front of the camera for profit?
I thank my hon. Friend for her question, the sentiments of which I know will be supported by all hon. Members. Just to reiterate the points that she made, 83 per cent. of all illegal child abuse websites that the IWF identified were hosted in the US and Russia, and 90 per cent. of those victims were under 12 years of age. What is increasingly worrying is the severity of the images that are posted on the sites. My hon. Friend makes an extremely important point. We are looking to work through the EU, the Council of Europe, the United Nations and other international bodies to see what we can do to encourage some of our international partners to take a more effective approach to blocking those sites. Hosting a conference is perhaps one of the ideas that we need to look at.
In his parliamentary answer in February, the Minister said that he would publish the research report on the exploitation and abuse of children in this country by a funded organisation, the Child Exploitation and Online Protection Centre—CEOPC—and that that would give us an idea of the nature and scale of child abuse and exploitation.He undertook to publish it by April. Will he produce the rabbit out of his hat this afternoon?
I am sorry to disappoint the hon. Gentleman, but I cannot produce the report that he mentions today. However, the report that CEOPC is in the process of producing is extremely important. I know that my right hon. Friend the Home Secretary will look at it in due course, and we will publish it as soon as possible. It deals with child abuse—as the hon. Gentleman knows, because of his work in that area—but also with child trafficking. The Government want to expand our knowledge and understanding of the extent of this problem and the numbers involved. We will publish the report as soon as possible.
Does my hon. Friend not agree that it is time that the servers themselves policed such sites as come into this country? People with computers use those servers, and it is time the servers did the policing. Can a hotline not be set up so that complaints can be made about such illegal sites coming through our computer systems? Should not ISPs be forced to put up such information on their sites so that it can be passed on to the necessary people?
We are trying to make progress through self-regulation and, as my hon. Friend knows, we have good relationships with internet service providers and mobile telephone operators. We have a target that by the end of 2007 all of our operators will have blocking mechanisms in place. Good progress is being made: almost 90 per cent. of those images are being blocked by our ISPs. They also provide that if people access such sites a message pops up informing them that they have accessed illegal material. We are considering what message ought to pop up on the computer screen, and examining the possibility of making it a tougher law enforcement message. However, to answer my hon. Friend’s question, what is important is the relationships that we have with our international partners. The key to tackling this problem lies in greater co-operation with other countries.
The management of the police estate and the allocation of resources are matters for each chief officer and the local police authority responsible for assessing needs in each locality.
West Yorkshire police has been closing police stations to the public, not because it wants to or it thinks that that is a good idea, but because it is underfunded to the tune of £15 million a year under the needs-based funding formula that the Home Office set. Shipley constituency now has no police station open to the public at any time of the day. Does the Minister not agree that if there is to be effective neighbourhood policing, there must be neighbourhood police stations that are accessible to the public?
The hon. Gentleman’s starting premise is entirely wrong. West Yorkshire police are closing some access to the public at some stations, as part of a reconfiguration based on their assessment of local needs, and of the most effective way to police the entire west Yorkshire area. I wish to make it clear that no police station in west Yorkshire will be closed as a result of such changes. Patrol and neighbourhood police officers will continue to be based at the same stations serving local communities. A local resident in west Yorkshire recently said that he felt that in his town the public would be better served if there were not a public helpdesk, that having a non-emergency contact point as suggested by West Yorkshire police would be a viable alternative, that in many cases pedestrians and elderly people believed that police stations were not in the appropriate locations, and that the posturing and overreaction to the proposals—
When I served on the police parliamentary scheme in Greater Manchester I visited some disgraceful police stations that were built during the Victorian period. I congratulate the Government on supplying many Greater Manchester police forces with brand-new police stations, including one in my Bolton constituency. I invite my hon. Friend to come to Bolton to see the new headquarters, which is superb.
I have previously tried to arrange such a visit, so of course I will come to Bolton to see how Greater Manchester police are responding to the policing needs of Greater Manchester’s communities. It is not for me to tell any local authority how it should configure its policing, and as I said, I agree with those who suggest—as the individual to whom I referred earlier did—that posturing and overreaction to proposals does not help at all: that individual was a Conservative candidate in west Yorkshire.
After 10 years, the Government must answer for their record. More than 500 police stations have closed, only one in eight stations is now open for 24 hours, one third of all forces have no 24-hour stations at all, the 101 national non-emergency number has been shelved and the promised 8,000 community support officers have been cut. That is at least two manifesto commitments broken. Is this what the Home Secretary meant yesterday when he said that he intended to build better relationships between the police and the communities that they serve?
I can only repeat what we have said many times at this Dispatch Box: there are record numbers of police officers, and in the past 10 years there have been record levels of resources. I repeat: it is not for the Home Office to tell each and every authority up and down the country how best to police their local areas by telling them what police stations should and should not be open. My hon. Friend the Member for Bolton, South-East (Dr. Iddon) made the entirely fair point that we are a good way through the refurbishment and renewal of the police station element of the police estate—after 19 years of sheer and utter neglect under the last Government.
Between January 2004 and 1 April 2006, the police used the power to disperse unruly groups in more than 1,000 designated areas. They have succeeded in tackling under-age drinking, joyriding, noise nuisance, the antisocial use of fireworks, the harassment and intimidation of residents, and many other such transgressions. That is yet another example of our commitment to empowering local communities to tackle the blight of antisocial behaviour.
I thank my hon. Friend for that answer. The police in Salford used a dispersal order and zone very successfully to get rid of disorderly behaviour at Ellenbrook shopping precinct, where large groups of youths were gathering and intimidating shop staff and local people trying to shop there. Given that success in Salford, does my hon. Friend agree that we need to continue with dispersal orders and zones, antisocial behaviour orders and parenting orders to tackle such disorder and antisocial behaviour, rather than expressing the somewhat pious hope that we have heard expressed recently that young people might start to behave?
I agree entirely with my hon. Friend. Sadly, I do not have intimate knowledge of the Ellenbrook shopping precinct, but I am sure that it is in a far better position than it was before the use of dispersal zones. We are very clear that the respect agenda, antisocial behaviour measures and broader such powers are liberating communities throughout the country from such behaviour, in ways that simply were not happening before the introduction of the legislation. Anyone who thinks that this is a consensual position, and that it would continue, should listen to the fluff and drivel that we heard last Monday from the Leader of the Opposition.
May I ask two practical policy questions that arose from a meeting with residents of the Sholing area of Southampton, where a dispersal zone has had a marked improving effect on antisocial behaviour since its introduction in October? First, the current rules appear to imply that if a dispersal zone works, the local authority and the police can no longer justify having one. Secondly, there is a need to be able to vary the boundaries of dispersal zones much more flexibly than the current rules allow. In the light of my hon. Friend’s commitment to dispersal zones, will he look at both those policy issues?
I thank my right hon. Friend for his comments; as usual, they are considered. Again, I do not know anything about Sholing in Southampton, but I am happy to increase that ignorance—[Interruption]—I meant to say increase my knowledge, of Southampton—[Interruption.] As the Opposition are saying, I do not need any help with the ignorance. However, I take the point that the import of the existing law is that once a problem has been solved, a dispersal zone is to be shut down, and reinvented only if the situation occurs again; we need to look into that. I also accept that the existing system may well be too bureaucratic to allow such zones’ boundaries to be varied; the practicalities of that issue need to be considered, too. Both my right hon. Friend’s points are well made.
We will consider the proposals when the Sentencing Guidelines Council comes forward with a draft guideline. The Government’s position on sentencing is absolutely clear: prison should be reserved for serious, dangerous and violent offenders, and we need better ways of dealing with less serious offenders. They should be punished, make reparation to the community and be helped to stop offending, which means that they are normally better punished in the community, with tough sentences that ask a lot of them.
Shoplifters already view their crimes as victim-free, so will the Minister do everything he can to ensure that the crime does not end up as punishment-free? Theft from shops threatens the viability of businesses and pushes up prices for genuine customers. In some of our big cities, children are being used, Fagin-style, in organised theft from shops. Will the Minister do everything he can to ensure that the punishment reflects the serious nature of the crime?
I wholeheartedly agree with the hon. Lady. She is right: we have to stop serious shop theft. In 1993 2.5 per cent. of people convicted of such theft were imprisoned, but by 2003 the number had gone up to 19.5 per cent., so the Government have been tough on shop theft. However, we need to work with the British Retail Consortium and the Union of Shop, Distributive and Allied Workers to support shop workers and retailers in making sure that shopping is safe.
Sixty-five per cent. of people arrested for theft, including shoplifting, test positive for drugs, so the proposal to issue penalty notices to shoplifters will mean that the underlying problems of substance abuse go undiagnosed, and therefore untreated. Does my hon. Friend agree that that will lead to an increase in shoplifting, thus putting shop workers at risk?
I am grateful to my hon. Friend, who does a tremendous amount of work in that area, supporting USDAW and retailers. She is right. Penalty notices are not given to people with drug problems, because it would be inappropriate, but they are important in low-level, high-volume shoplifting for first offenders. We need to make sure that we look at serious repetitive offenders, but it is sensible for the Sentencing Guidelines Council to look into what is going on and make recommendations. There will then be a period of full consultation.
Clearly, I do not read all the hon. Gentleman’s correspondence, but I am aware of the letter from Morrisons, whose headquarters are in Bradford—my patch. Morrisons and other retailers want us to get the balance right and that is what we intend to do, so it is important that when the advisory panel makes its recommendations to the Sentencing Guidelines Council we can all consider them, and I am sure that there will be an opportunity for full debate.
The refocusing of the Home Office will allow the Department to concentrate on personal, community and national security. Today the threat posed to the last of those has again been highlighted. The House will be well aware that this morning five dangerous terrorists were put behind bars, thanks to the hard work of the Security Service and the police. I want to place on record in the House our thanks to the men and women in the police and security services who have worked so hard to ensure that the perpetrators of that plot were brought to justice and that a major terrorist attack, which could have killed and injured many, many people, has been averted. The case reminds us all that the terrorist threat we face is real and severe, and that, given the changes in the world at both global and local level, the advantages—indeed, the necessity—of refocusing the priorities of the Home Office to concentrate on the challenges of today’s world and the priorities of today’s British people are clear.
Unfortunately, my friend did not answer my question. Why should we trust his judgment on splitting the Home Office when former Lord Chief Justice Woolf has called for consultation, as has former Cabinet Secretary Robin Butler? Why do we have to rely on ministerial fiat? Why do we have to rely on the royal prerogative to reconfigure Whitehall? Why does my friend not just ask people whether it is a good idea?
A great deal of consideration has been given to this decision, and the basic reason why we are refocusing the Home Office is quite clear. It is that the nature of the world and the threats that it contains are changing rapidly. The exponential growth in the threat from international terrorism, from international crime and from managing immigration—a subject constantly raised in this House—as well as the social changes in our communities that have led to the necessity to concentrate on tackling antisocial behaviour, have all given us major challenges in today’s world. They are all reflected in the priority placed upon them in opinion poll after opinion poll by the people of this country. We are therefore responding both to those realities and to the priorities of our public.
Ultimately, counter-terrorism will be the responsibility of the Home Office. If the hon. Gentleman is asking me to comment on the decision taken last Friday to release two suspected terrorists, I believe that my views on the matter are known. However, we are subject to judicial process, because I have authorised an appeal against that decision as soon as possible. As it is sub judice, I shall say no more on that subject.
Does my right hon. Friend agree that in the light of the convictions agreed today, the concentration of the reformed Home Office obviously needs to learn the lessons of what happened on 7 July 2005? However, the understandable hurt and distress of the families of the dead and the victims who were injured cannot be helped by an extensive investigation costing large sums of money, when the facts are known, including whatever failings existed. Today, we should thank the security and policing services for saving us, through what is now known as Operation Crevice, from the most horrendous terrorist attack in 2004. They saved us from another distressing and hurtful attack by terrorists seeking to damage our country.
I agree entirely with my right hon. Friend. He is probably among the few people who have had experience of the recent level of terrorist threat, and is aware of the capacity of terrorists to inflict terrible damage on the people of this country. May I express my condolences to the families of the injured and those who lost their lives on 7/7, as I realise the extent to which today’s events will bring back the hurt and anguish from which they have already suffered?
I am also aware of the demands to conduct a wider inquiry, but I do not believe that a public inquiry is the correct response at this time, because it would divert the energies and efforts of so many in the security and police services who are already greatly stretched in countering that present threat. Our responsibility as a Government is to try to minimise the chances of any other group of families ever having to suffer as the 7/7 families did. Nevertheless, I understand the anguish, which is why I have agreed with MI5 to publish on the web the answers to questions that have been posed before, during and after this trial. That is unprecedented, but I think it is fitting.
In addition, I can tell the House that today I have spoken to the Prime Minister, who has spoken in turn to the Chair of the independent cross-party Intelligence and Security Committee, which previously examined the evidence surrounding 7/7. The Chairman has confirmed today that it has revisited the issues and that the facts in the report still stand. However, the Committee has been asked again, through the Chair, to reappraise all these matters and questions, following the evidence arising from the trial, in order that members of the Committee and others can be satisfied that any questions raised have indeed been answered, and in order to identify any questions that have not been answered, to answer them and to report through this procedure to the Prime Minister. I think that that is a way of answering some of these questions without a massive diversion of resources from our security services, and I hope that it is welcomed by the House.
The Home Secretary has made his case for breaking up the Home Office by arguing that it will improve our ability to deal with terrorism. A former Home Secretary, the right hon. Member for Sheffield, Brightside (Mr. Blunkett), followed up on that. The terrorist trial that concluded today has shone a light not only on the terrible world of terrorism, but on the operations of our security services. Like the Home Secretary, we must express our gratitude to the men and women who prevented more atrocities, and I join him in paying tribute to them. But that gratitude must not deflect us from asking the necessary questions about the operation of the security services.
The former Home Secretary said that the facts are known. After the 7/7 bombings, the then Home Secretary told us that the attack came out of the blue. The security agencies briefed the press that the suicide bombers were all unknown to them. We now know that that was not true. Two of the 7 July bombers had been under surveillance for more than a year. MI5 dropped the surveillance. It said that that was unavoidable, based on the surveillance resources available to it. As the Home Secretary has said many times, there will never be a 100 per cent. guarantee against terrorism—and we do not expect that, but some mistakes are inevitable and some are not. His web-based response is not the answer. The ISC does not have the investigative capacity to give the answer. Will he please think again—
Order. I know how serious this matter is, but we have to be careful: the Home Secretary is not making a statement—[Interruption.] It was long, I agree. I allowed some latitude to the Home Secretary and to the right hon. Gentleman. But the right hon. Gentleman can still ask another question, and there are Back Benchers who also want to ask questions about this matter. There is nothing to stop him calling for a statement or asking an urgent question tomorrow, if he feels it necessary.
One of the reasons why we ought to be careful about perpetuating some of the myths in the press on these matters is that, with any amount of sincerity, it is possible to get these matters wrong. The right hon. Member for Haltemprice and Howden (David Davis) is wrong to say that the identities of the two people were known to the security services. They were not known to the security services until after 7/7; with the virtue of hindsight and retrospective checking, it was discovered that two people whose identities had not been known at the time turned out to be involved in the later bombing. Notwithstanding the fact that what the right hon. Gentleman said is incorrect, there are legitimate questions to be asked, and I am trying to get them answered in a way that does not divert the short and necessary resources and energies of our Security Service from the continuing fight. I think that I have identified a way of doing that.
I thank the Home Secretary for that answer, but I am afraid that I do not agree with him. What he said does not answer the question of why MI5 did not notify West Yorkshire police special branch of any concerns about Mohammad Sidique Khan after it had trailed him all the way to Yorkshire, even when it had a name, a photograph, a family address and his car registration. We are told—the Home Secretary repeated this—that there were no suspicions about Khan before 7 July. Yes, there were. Those suspicions related to criminal activity in support of terrorism, and they were not followed up by the police or the agencies. Evidence is now available that was not publicly available before the conclusion of the trial. An inquiry is an essential tool. It will not distract the agencies. It will provide the public with the confidence that they need to know that the agencies are doing their job as they should, to the maximum of their ability.
The right hon. Gentleman started with another factual error. I cannot confirm or deny any detail of this, because it is not convention, as he will well know—but on the question of West Yorkshire police, just let me say that the matter was investigated by the Intelligence and Security Committee. It could not be referred to at the time because of the sub judice rule, but I can tell him that, having investigated the allegations that he makes, the ISC was satisfied that there was no wrongful conduct on this occasion. [Interruption.] Well, no mistakes were made—put it that way.
I hope that the House will be satisfied with the way that I have tried to find through this matter. I have tried to balance the need to answer legitimate questions, in the first instance, with the need to address the recommendations that will come from the ISC and the need to retain all the resources towards the fight, to make sure that other families are protected as we all want our own families protected. I hope that the House is also satisfied that not only have five very dangerous people been jailed today, but the judge has now passed sentence and in two cases there is a life sentence with a minimum of 40 years, in two cases a life sentence with a minimum of 35 years, and in one case a sentence with a minimum of 20 years. That begins to reflect the seriousness of this crime.
To go back to the original question, a consultation paper would have been better than a simple assertion without evidence or detail. May I also pay tribute to the work of the intelligence services and the police? They have been extraordinarily diligent and have worked in very difficult circumstances. However, the fact remains that the trial has opened up several areas of questioning from which it is absolutely essential that we learn lessons if we are to protect people effectively in the future. This is within the core responsibilities of the right hon. Gentleman’s Department. I regret that he has rejected the concept of a full inquiry, because an independent inquiry is necessary to examine not only the reasons why the Home Office made it clear that these clean skins, as they were called, were unknown to the police and security services—he has asserted that that was the case—but whether there was proper co-ordination between MI5 and MI6 when it was learned that two of the bombers were—
First, the Intelligence and Security Committee is independent. I hope that the hon. Gentleman is not suggesting that his colleague the right hon. Member for Berwick-upon-Tweed (Mr. Beith), or the Conservative Committee members—the right hon. Member for East Hampshire (Mr. Mates), the hon. Member for Croydon, South (Richard Ottaway) and the right hon. and learned Member for Devizes (Mr. Ancram)—are anything other than independent minds. Secondly, I have not rejected the possibility of an independent inquiry. I have rejected the idea of a public inquiry at this stage, because of the energies and resources that that would divert.
Finally, I understand the legitimacy of concentrating on questions. I speak as someone who has met group after group of families affected by 7/7. I understand their anguish about such questions, because I have met them time and time again. To my knowledge, there are no new questions raised by the trial. Nevertheless, the questions that have already been raised ought to be answered. The Prime Minister has asked the Intelligence and Security Committee to identify whether it can find questions that have not yet been answered. If it does, it will report that to the Prime Minister. I hope that this approach respects the need of the nation to be protected and the need of all those who have lost family members or whose family members have been injured to get answers to their questions.
Points of Order
On a point of order, Mr. Speaker. I am sure that you are as anxious as everyone else that this Thursday’s elections should be well conducted. In the light of last year’s postal voting fraud and the detailed exposé in yesterday’s edition of The Sunday Times, have you received a request from a Minister to make a statement on the matter of the Labour leader of Leeds council allegedly committing electoral fraud?
Orders of the Day
[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—
Order. The Minister should be moving the order of consideration motion.
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.]
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.
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 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.
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.
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.
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 accountingweb.co.uk 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 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.
Charges and rates for 2007-08
With this it will be convenient to discuss amendment No. 11, in page 1, line 7, leave out ‘22%’ and insert ‘20%’.
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.
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.