(Clauses Nos. 3, 5, 6, 15, 21, 49, 90 and 117 and new Clauses amending section 74 of the Finance Act 2003.)
Considered in Committee.
[Sir Alan Haselhurst in the Chair]
That the order in which proceedings in the Committee of the whole House on the Finance Bill are taken shall be: Clauses 5, 6, 21, 3, 49 and 90, new Clauses amending section 74 of the Finance Act 2003 and Clauses 117 and 15.—[Jane Kennedy.]
Small companies’ rates and fractions for financial year 2008 etc
With this it will be convenient to discuss the following amendments: No. 7, line 37, at end insert—
‘(1A) Subsection (1)(a) shall come into force on a day which the Treasury may by order appoint.
(1B) No order may be made under subsection (1A) until—
(a) the Treasury has compiled and laid before the House of Commons a report containing an assessment of the impact on the competitiveness of small companies as a result of changes to the small companies rate of corporation tax, and
(b) the report has been approved by a resolution of the House of Commons.’.
No. 2, in page 3, line 1, leave out ‘7/400ths’ and insert ‘1/40th’.
Amendments Nos. 1 and 2 would reduce the small companies rate of corporation tax to 20 per cent. and make the appropriate change to the fraction. At a time when small companies are under pressure, facing higher costs and a more uncertain economy, it is beyond belief that the Government feel that the answer to their problems is to increase the small companies rate of corporation tax.
As in the case of the 10p rate, which we will debate later, the author of the tax increase is not the current Chancellor of the Exchequer, but his predecessor—the Prime Minister. As Chancellor during last year’s Budget, he announced that he would increase the small companies rate from 19 per cent. to 22 per cent. in three successive Finance Bills. That has sent out a confused and confusing message to the small business community, which has had a decade of instability in respect of the small companies rate of tax.
The Committee should remember that the rate is now on an upward curve, having fallen from 24 per cent. in 1996-97 to 19 per cent. in 2002-03. There will have been six changes to the small companies rate of corporation tax between 1996-97 and 2009-10; that is before we take into account the starting rate of 10 per cent., which was introduced in 2000-01 and which the Prime Minister, when Chancellor, reduced to zero in 2002-03. In 2004-05, he overlaid it with a 19 per cent. tax rate on distributions to shareholders. He scrapped it completely in 2006-07. For small businesses seeking to navigate their way around the rate of corporation tax, there has been a significant amount of change. At this time, businesses want stability, predictability and certainty, rather than the only certainty that they have had in the past decade—that the rate will continually change.
It is not surprising that the verdict of business organisations and small businesses has been hostile. In its Budget submission for this year, the Federation of Small Businesses pulled no punches. It said that
“The Government’s approach to the taxation of small businesses remains alarmingly disjointed and inconsistent. What has been received is a never-ending raft of badly thought through last minute measures, designed to tackle problems in one part of the tax regime, but ending up creating several more elsewhere.”
It goes on to say that
“Small businesses continue to be let down by the Government with regards to taxation and were understandably extremely disappointed by the announcement in Budget 2007 to increase the small firms rate of corporation tax from 19 to 22 per cent. This was a draconian measure to tackle a problem of tax avoidance that did not exist and will have a highly detrimental effect on many small businesses.”
The Forum of Private Business said that politicians should give the same attention to the increase in the lower rate of corporation tax as they gave to the abolition of the 10p rate, and 76 per cent. of respondents to its survey said that
“reversing the decision to increase the small firms rate of corporation tax would encourage them to reinvest in their business, with 49 per cent. indicating that they would have extra funds to invest in skills and training”.
The response from individual companies has been equally hostile. Tim Rhodes of Skypark Freight Ltd in Liverpool said of the Government:
“They don’t seem to be thinking of tomorrow. Small businesses are quite resilient and tend to bounce back, but all of these additional taxes are very trying. Often, it comes to the point where you ask if it’s worth carrying on—we can hold on only for so long, after that, unfortunately, job losses will be the result.”
Matt Hardman, who runs a bacon slicing business in Bury, called the decision to increase the small companies rate a “kick in the teeth”. There is widespread concern among business communities about the increase in the small companies rate by 1 per cent. to 21 per cent. this year and then 22 per cent. next year. Businesses will be asking themselves why the Government are attacking small companies in this way. What have they done to get to a stage where the small companies rate of tax had fallen to 19 per cent. but is now back on that upper curve?
The genesis of the increase stems from the decision in the 2002 Budget to introduce the 0 per cent. rate of corporation tax for profits of less than £10,000. That triggered a wave of incorporations of companies, which some predicted at the time. I believe that the Government’s analysis of the situation is this: that a tax change that was meant to stimulate entrepreneurial activity led to that mass incorporation by people seeking to take advantage of the lower 0 per cent. rate of tax, which gave them an advantage comparable to self-employed and employed people earning the same income. The analysis produced by the Institute for Fiscal Studies bears out that analysis, which was then, however, used to justify the abolition of the 0 per cent. rate and is now being used to justify the increase in rate from 19 to 22 per cent.—2p higher than the basic rate of tax that people who earn a comparable amount of income would be paying through the income tax system. The Government’s introduction of the 0 per cent. rate created a significant incentive for businesses to incorporate. The abolition of the 0 per cent. rate has narrowed the gap between the effective tax rate that small companies enjoy and the effective tax rate that individuals enjoy when they are employed, but there is now a sense that the Government are seeking to go further and further in narrowing that gap.
Part of the Government’s action is that which is before us today—the increase in the small companies corporation tax rate—but they have also taken other steps to deal with the issue. Last year’s Finance Act introduced changes on managed service companies, and the pre-Budget report included proposals on income shifting—again, targeted at incorporated small businesses. Those proposals have been deferred for a year, and business organisations welcome that, but they are concerned that they might return in next year’s Finance Bill and are looking to have a proper dialogue with Her Majesty’s Revenue and Customs and the Treasury to tackle those issues. A series of measures is being taken to tackle the gap in the effective rate of tax, but it is not clear to small business organisations just how far the Government intend to go in dealing with the issue. It would be helpful in the context of this debate if the Financial Secretary could clearly set out the basis of Government policy on the taxation of small companies and businesses, because significant concern is building up that the Government are turning their backs on small companies, that they do not show any understanding of how small companies operate, and that that is creating a culture in which entrepreneurial activity is penalised.
A significant cost arises from the Government’s approach because companies that are already finding it difficult to trade profitably will see their taxable profits decline. The tax bill of any company with profits of less than £300,000 will increase regardless of whether it employs one person, 10 people, 100 people or 1,000 people. That illustrates the crude nature of the Government’s step. If this tax increase is motivated by a concern about incorporation, the Government need to recognise that it catches out many businesses, not only one-man bands. That is part of the unfairness that people perceive in the system. They see the tax rate and the tax bill for small companies increase in the Budget, as it did in the last Budget and as it will in the next Budget. The Government argue that the annual investment allowance will compensate for that. However there are two flaws to that approach.
First, the allowance is available to all small businesses—that is a much wider pool than all small companies. While the pain is concentrated on one group, the gain is spread more thinly. Last year, I estimated that small companies’ average loss would be approximately £1,000, whereas the gain to small businesses would be less than £100. Proper compensation is therefore not being paid to the small companies that will lose out through the increase in the small companies corporation tax rate.
Secondly, the compensation rewards a specific type of business activity—investing in physical assets—and does not recognise the other sorts of investment that companies can make, such as in training, human development and so on. The Government are trying to incentivise only one form of behaviour when firms could operate in other ways to improve their businesses, for example, through investing in people by developing skills and so on. They are introducing the annual investment allowance when the Red Book forecasts a fall in growth in business investment from 3.75 per cent. in 2007 to between 1.75 and 2.25 per cent. this year.
Does the hon. Gentleman perceive a contradiction in Government policy in relation to the annual investment allowance? At a time when the Government, rightly and understandably, seek to capture the cost of intangible investment in research and development, one of their tools for genuine investment—the annual investment allowance—is directed only at physical assets, not process?
The hon. Gentleman makes, as he often does, a perceptive comment. There is a problem with that sort of behavioural device because it supports one specific activity, rather than recognising different ways in which people might invest in their business. That is especially relevant given our economy’s increasing dependence on the service sector. That is why Conservative Members believe that the best solution is to reduce the small companies rate of taxation, as the amendment proposes, and give companies and businesses the ability to determine where they will invest and spend their profits. That is a much better—non-distortionary—way of proceeding. It tells businesses that they know the best way in which to grow and allows them to decide how to act rather than relying on central Government and the Treasury to recognise their improvement in performance only so long as they invest in physical assets. That is the difference between the Conservative party and the Government.
We believe that restructuring reliefs and allowances will provide us with the tax revenue to enable us to reduce, in this case, the small companies rate of corporation tax—a change that is tax neutral overall, but gives businesses the freedom that they need to decide where to invest and avoid going through a fairly lengthy, potentially complex process about annual investment allowances. It will also give companies the responsibility for and opportunity of deciding for themselves how best to spend their money. Reducing the small companies rate would benefit companies, whether they employ one person or 1,000 people.
My hon. Friend is making a powerful case. Does he believe that it is even more interesting that the Government are limiting investment to such a narrow definition, yet when they speak about their spending patterns, almost all their revenue spending—much of it wasteful—is called “investment”?
My right hon. Friend makes a good point. I, too, have been frustrated at how anything that the Government spend their money on counts as investment, when sometimes, as I know from the parliamentary questions that I have tabled, it does not necessarily equate to spending that helps taxpayers.
To return to amendment No. 1, because of the nature of our proceedings, we have not tabled amendments in the Committee of the whole House that deal with the annual investment allowance, which we want to scrutinise in some detail in Committee. However, we believe that we should scrap the annual investment allowance and use the proceeds to fund a cut in the small companies rate of tax to 20 per cent. That would be in the best interests of business and is entirely consistent with our approach of having simpler, flatter and fairer taxes, by broadening the tax base through reducing distortionary relief and using the revenue gain to reduce the rate of corporation tax.
Amendment No. 7, which the hon. Member for Dundee, East (Stewart Hosie) has tabled, has much to commend it and gets to the nub of the problem, which is the impact that the rate has on competition. It is important to consider the competitive impact of the rates of corporation tax paid in this country. The week before last we heard about the pharmaceuticals company Shire, relocating out of the UK because of tax, while United Business Media, which was formerly chaired by the Labour peer, Lord Hollick, made a similar announcement today about its domicile for tax purposes. Clearly there is a significant issue with the competitiveness of the UK tax system and how it compares with those of other major economies. That competitive position is not just about rates, but about a range of issues, including predictability, stability and certainty.
My only concern about amendment No. 7 is that, as I understand from its drafting, there will be some uncertainty for small companies, because the rate change will be made only once the report has been laid before the House and voted on. If the House were minded to reject the Government’s report, that would delay the implementation of the small companies rate. That would cause some uncertainty—although I gather that Parliament now has a much greater say on tax, thanks to the right hon. Member for Birkenhead (Mr. Field), who seems to have extended parliamentary control—and I am not sure whether, under the circumstances, we can allow that for the small companies rate. I would much rather the Government listened to our proposal and reduced the rate of tax now, rather than waiting until the report is published later in the year. I would therefore urge the hon. Gentleman to support us, should we push amendment No. 1 to a vote.
My argument is that one of the problems that the Government have created in tackling the issue is that they have said that the pain should be borne by small companies, but that the gain should be spread widely and thinly on small businesses. My proposal would ensure that the small companies tax rate for the financial year 2007-08 was kept stable. That is in the best interests of small companies. Part of the issue is the complexity of the treatment of sole traders, the self-employed and so on, but in principle small companies should have a lower tax rate and should not be forced to pay a higher tax bill as a consequence of the Government changing their mind about how they deal with their tax affairs.
The Government have got themselves into that position. The weapon that they have chosen to tackle the issue is crude, will hit small companies regardless of the number of people whom they employ and will be damaging to small companies as a group. That is why the Government should think again about the proposal and why amendment No. 1 seeks to keep the small companies rate at the level that existed for the previous tax year.
This is my first Finance Bill Committee, and I admit to a degree of trepidation as I embark on this adventure, which will occupy a large part of my time for the next few months. I was reading an obituary of Humphrey Lyttelton on the train from Taunton this morning, and I thought that his comments about his period as a restaurant critic were relevant to my feelings. He said:
“In a moment of self-doubt, I said to George Melly…who had been doing the film reviews for The Observer, ‘I’m sure they’re going to find out one day that I know nothing about it’. His answer was convoluted but true: ‘Yes, but in my experience, by the time they find out you know nothing about it, you will know something about it’.”
I hope that is my experience during the remainder of our sittings.
I am sure that my unease about the Bill is nothing compared with that felt by the Government in recent days and weeks. Our deliberations have focused primarily on the 10p rate being doubled. Although the public as a whole, and people who watch politics carefully, inevitably tend to have a great preoccupation with taxation on personal income, taxes on small businesses are just as relevant—sometimes more so—to the prosperity of the individuals whom we represent as the taxes that are levied directly on their income. The Chancellor is championing the 2p cut in the main rate of corporation tax, but if we look at the small companies rate, we see that it was 19 per cent. in 2006, 20 per cent. in 2007, 21 per cent. in 2008 and that it will be 22 per cent. next year. There is no clearer direction of travel than that. People in my constituency and elsewhere who work for, or who are related to, people who work in the small business sector are understandably concerned about the impact of that increase on its profitability and competitiveness. The chief executive of the Forum of Private Business, Phil Orford, has said of the Budget:
“While there are some welcome initiatives, they do little, if anything, to offset the tax burden due to be implemented in April. The Chancellor has missed a golden opportunity to convince the small business community that he is on their side.”
When I speak to those who work in small businesses, they frequently say that it is becoming increasingly difficult for them to remain competitive. The burden of tax and regulation, not all of which is tax based—some of it relates to health and safety provisions—compromises those businesses’ competitiveness. There are not many large corporations in my constituency. Inevitably, when a large business goes bust or makes several hundred employees redundant, people tend to focus on that, but the cumulative effect of lots of small businesses laying off a person here and a person there, which is much less readily observed by the media and by the general population, is none the less a problem for us if we wish to have a successful economy in the UK.
I agree with many of the points that have been made by the hon. Member for Fareham (Mr. Hoban), and I shall not repeat them simply because we are able to carry on for as long as we want to in today’s debate. I agree particularly with him about the unease in many quarters regarding the small business provisions in the Budget. If he chooses to press the amendment to a vote, we will support the Conservative party.
The hon. Member for Fareham (Mr. Hoban) asked whether I would be likely to support him on amendment No. 1. Given that my name is attached to the amendment, I should say that it is highly likely that I shall. He may take that for granted.
Before I speak to amendments Nos. 1 and 7, both of which I support, let me say that I was struck by the fact that the Liberal Democrats have not tabled any amendments on important matters such as business tax, capital gains tax, gaming or the abolition of the 10p rate. There are none until we get to the next group of clauses. Perhaps I am going wide of the mark, but I was surprised by that.
I rise, however, to speak to amendments Nos. 1 and 7. I offer the simple argument that imposing new and extra taxation on small businesses is fundamentally wrong. Amendment No. 1 would leave the small companies rate at 20 per cent. and amendment No. 7 would give the Government the opportunity to make an assessment and justify to the House why they believe that increasing the rate to 21 per cent. now and 22 per cent. in the future would be beneficial to business and make it more competitive. It would then be for the Government to explain why other measures in the Budget, or that they announced in the pre-Budget report and previous Budgets, would compensate and ensure that business competitiveness remained as it is or would get better. I have to say that I am sceptical of whether the Government could come up with an assessment to prove that, and I am very suspicious that they could come up with an assessment that would say anything other than that business competitiveness would be weakened by an increase in the small companies rate at this time.
Let me explain further. Businesses are operating at a time of high and rising fuel costs, which are unlikely significantly to be moderated at any time soon, and within a framework of high transportation costs—and every haulier I speak to tells me that that is unlikely to change in the near future. Businesses are seeing prices for raw materials skyrocket and I can evidence that with an example from my own constituency, where the Patak’s food company factory recently closed down. Swingeing rises in the prices of its raw materials—mainly chicken, rice and dairy products—forced the factory to close as it became utterly uneconomic and completely unprofitable. That resulted in many very loyal workers losing their jobs. Nor is that an isolated or anecdotal story, as we are hearing and seeing similar examples from around the country. Indeed, the hon. Member for Fareham referred earlier to the pharmaceutical company, Shire, and to United Business Media in respect of corporation tax being too high.
Given that businesses are operating in the midst of a credit squeeze, as a result of which any investment they might wish to make and their ability to absorb price increases will have to come from their own resources, now is the wrong time to be putting up tax on the money they make. That is the key point. As prices for fuel, energy, transportation and raw materials go up, and as the external funding that companies used to rely on either dries up because of the credit squeeze or becomes much more expensive, we should not be taxing the money that small companies make in the way that we are with the rise in the small companies rate.
It is heart warming to hear that the hon. Gentleman is such an advocate of lower taxes on business—a cause that he knows I support. Will he tell us what his party recommends for Scotland by way of a company tax rate either for larger or smaller companies?
We have focused our attention historically on the main companies rate, which we want to see reduced to 20 per cent. in order to create a real competitive advantage in Scotland. With regard to smaller businesses generally, the right hon. Gentleman will know that we have already taken steps to reduce or remove completely the business rates burden from 150,000 Scottish businesses. However they slice and dice us and from wherever we get that competitive advantage, we need to take such action through budgets. We think that we have done the right thing with business rates in Scotland and we now want to go much further on the main rate of tax. That is the approach that we would take.
We want the increase in the small companies rate to be reversed, as we believe that would allow companies to make the investment to create the jobs that we all want as we move, I hope at some point, towards full employment. In the current economic circumstances, a tax rise will simply denude businesses of the money that they need to make that investment.
We know that that investment would be made. The Forum of Private Business survey last autumn—at the time of the pre-Budget report—was interesting in showing that 67 per cent. of members who responded said that, should the rate increase be reversed, it would encourage them to reinvest in their businesses. Almost half said that a reversal would give them the extra funds to invest in skills and training and almost half said that it would make them more likely to seek to grow their businesses. It is highly likely, I suggest, that should the increase go ahead, a much smaller number of businesses would have the cash to make the investment that they were talking about last autumn.
That is a particular concern in Scotland. At the last count, there were 279,495 businesses in Scotland, of which 273,745 employed fewer than 50 people. Another 3,500 employed between 50 and 249, and only 2,265 are large businesses employing more than 250 people. We believe that the impact of the £1.2 billion—estimated by the CBI—taken as a result of the increase in the small companies rate is likely to be disproportionate in Scotland.
The words at the time of the Budget from the Scottish Chambers of Commerce, on this matter in particular, were especially telling. Liz Cameron, its chief executive, said:
“Alistair Darling’s first Budget was a missed opportunity for the UK… to boost Scottish businesses. He could have cancelled his plans to increase the Small Companies’ rate of Corporation Tax…but he didn’t.”
She went on:
“Promises of future tax simplification and a consultation on limiting the volume of regulation are welcome, but when set against the cold, hard tax rises being experienced by many businesses, they are of little comfort.”
I wholeheartedly concur.
Over three years, a few thousand pounds extra in revenue yield might add up to a great deal of money for the Government, but if businesses do not have that kind of money, it will stop them buying a new computer, bringing someone in on a Saturday to fulfil an order, undertaking a small marketing campaign or perhaps paying the air fares to a first ever trade show. The Government do not seem to recognise that such small amounts of money are vital for growing businesses and incredibly difficult to earn, particularly in the current economic climate.
Obviously, I will back amendment No. 1 to reduce the rate. I will reserve my position on amendment No. 7 and wait to hear what the Financial Secretary has to say. I hope that she at least tries to give some justification for why she believes that increasing tax at this time—in view of all the other burdens that businesses face—is somehow a good idea, rather than the bad idea that businesses, business leaders and many in the House believe it to be.
I am a company director and a shareholder in companies, as I have declared in the register, but not, I think, of a company that will be paying this particular tax in the current year.
I rise to support the idea that the tax should be 20 and not 21 per cent. and that it should not go up to 22 per cent. subsequently, and I ask the Government to think again about their extraordinary U-turn in their policy towards lower tax rates for people on lower income and for smaller and start-up companies that earn less profit than more mature companies that have gone on to grow for longer and perhaps more successfully.
The Government produced an attractive package when they decided to encourage incorporation by having a zero tax rate on small profits for companies that had recently incorporated, and when they decided to have a 10p capital gains tax charge on people who set up companies, who took founder shareholdings in companies or who decided to buy into companies that were small and growing and could take advantage of that privileged capital gains tax regime.
We saw a response to that favourable tax regime in the improvement in the rate of new company formation. A lot of people in the small business groups around the country were saying to Opposition representatives, as well as to Government representatives, that the Government had got something right and that that part of the tax regime was favourable. It was an encouragement that those people very much welcomed, so it is strange and extremely disappointing that the Government should have backtracked on both elements of that attractive regime and that they have not learned the lesson from a country such as Ireland, which has persevered with a much more favourable tax regime for business across the board—businesses large and small—and has had the phenomenal success that we see in the Irish growth rate, the development of Irish business within the Republic and the collection of so much more tax revenue in general by the Irish Treasury.
As more people have got better jobs and taken more income out of smaller and larger companies, and as more smaller and larger companies have grown, been successful and produced capital gains, dividends, income and good jobs for people, so the economy as a whole has benefited from that process, and so the Irish Treasury has benefited, having more money to spend per head on public services as a result of that growth than has been available from the British Treasury’s attempts to find ever more stealth taxes to sustain more rapid growth in spending per head on public services here.
I appreciate my right hon. Friend’s comments about the Laffer curve, which I have gone on and on about in the three years that I have been a Member of Parliament. However, what bothers many small businesses—with which, like me, my right hon. Friend has been involved—is the timing of the tax increase. At a time when we should be supporting small businesses, it appears that we are attempting to undermine what they are trying to achieve in extremely difficult times by increasing taxes while, across the pond, the United States is doing everything it can to lower them.
My hon. Friend is right. Ministers must know from their conversations, as he and I know from our conversations with the British Chambers of Commerce and the bodies representing small businesses in Britain, that it is becoming much more difficult to be a successful competitor from a British base. Smaller companies are feeling the increase in taxation and the growing weight of regulatory cost even more than the larger ones, but that population of small businesses must be allowed to grow more rapidly so that we can experience success in the future.
All the studies show that if there is to be sustained rapid growth in employment in private-sector activities, a lively and growing small business sector is essential. New jobs are much more likely to come from that sector than from the larger companies that have the money to automate, to mechanise and to take their labour-intensive activities offshore. They do not generate the same pace of business growth and job growth as small companies.
As the hon. Member for Taunton (Mr. Browne) observed, although we unfortunately often hear of very large casualties in the corporate world—factories closing, or large numbers of people being made redundant by the larger companies—we never hear of redundancies of the same scale in the smaller companies. They do not employ as many people to start with and, when conditions are reasonably benign, they do not sack people. As a whole, they are a growing sector, adding jobs as they find better ways of doing things and creating new activities that the public wish to buy into. The danger is that the Government will take small businesses to tipping point with too much tax and regulation, so that, largely unseen, many jobs will be removed or new jobs will not be created and we will have a worse problem with unemployment.
It should also be borne in mind that nearly every large business that employs vast numbers of people started off as a small business. We are not only compromising the small business sector of the economy, but running the risk that tomorrow’s big businesses will never be able to get off the ground.
The hon. Gentleman is right, and it can be deduced from his argument that we need to lower tax and regulation on all populations of business if we want a really successful economy like the Irish economy. That is especially important in the incubator world of small business. Among the mighty population of small businesses in a vibrant economy will be a limited number that will go on to become the mega-corporations of the future. As Silicon valley demonstrates, businesses can grow from very small to very big in the space of a decade, with stunning implications for the success of the economy and the success of tax-raising on those populations of businesses, and job generation.
We might quip that the way in which to create a small business under new Labour is to start with a big business. However, on a more serious note, let me say that my right hon. Friend has not touched on another important issue. One of the hallmarks of new Labour has been chopping and changing, but what businesses like is consistency. Only through consistency of policy, particularly tax policy, can they thrive.
I am grateful to my hon. Friend, although the number of interruptions makes developing the argument as quickly as he would like a little more difficult. He is giving me friendly help and assistance to make sure that I do not forget the important arguments. I am genuinely grateful to him and he is absolutely right that consistency is important. Being able to forecast the tax rate to be paid not just this year but next year and the year after is extremely important when it comes to drawing up a business plan. Any small business that wishes to grow relatively quickly will need access to outside finance: a bank loan, other investors, business angels or another way of raising capital. Any of those would immediately want a business plan, not just for one year but for, say, three.
An important element of that business plan would be to know what the net profitability would be after three years, after the start-up costs and losses. The net profitability obviously requires an assumption about the Government’s tax rate. If the tax rate is changing every year—or goes up every year—it makes forecasting accurately more difficult. It also means that net profits will be less at the three-year stage, or at the five-year stage in a five-year business plan. That makes it more difficult to raise external capital; the banks and others living through the credit squeeze may say that they are unable to help because the net returns are not sufficiently good. Altruistic as many financiers are, they are not normally interested in how much money a business generates to pay the tax man; they are interested in how much money a business generates to pay the shareholders and other private stakeholders, which is why the tax rate is so important.
I am delighted that my Conservative Front-Bench colleagues are strongly in favour of simplicity and lower taxes and they are right to want a 20p tax ceiling on small businesses. I hope that they will also want—I am sure they will—to bring down the rate of corporation tax on larger companies closer to the 20p band. That is very important to the enhanced competitiveness of Britain that we will wish to see after the damage being done to it by higher taxes and more regulation.
I trust also that Governments will start to look at the idea, revolutionary for current political times, that we can perhaps save some of the waste and unnecessary expenditure in Governments so that we do not always have to pay for these tax reductions by finding other ways of increasing taxes. It was exactly that route of tax reform that got the Government into such difficulty on the 10p band.
I am grateful to the right hon. Gentleman for giving way to me a second time. Does he share my unease that the Conservative party is committed to taxing at exactly the same overall rate as the Labour party at the next general election? The total amount of Government spending as a percentage of GDP will be identical, if the Conservative party wins the election, to the level it would be were Labour to win. That sounds like mimicking the Government, rather than providing an alternative to them. Does he think that that is a wise approach for his party?
The hon. Gentleman must have forgotten that I am a Conservative MP, so I do not share his unease at all, nor do I accept his premise. I am quite sure that the shadow Chancellor and his senior colleagues are serious when they say that they wish to have a lower-tax Britain than we would have under Labour. I am quite sure that we would have a lower-tax Britain than we would have under a Lib-Lab pact, because we know that Liberals are very liberal with other people’s money. Normally in the House they do not make the wonderful case for lower taxes as the hon. Gentleman seemed to be doing this afternoon. Normally they make the case for spending all sorts of sums of public money on things that may not even be desirable and are very often quite wasteful
There is only one party that seriously believes in lower taxation for the whole of the UK and has a chance of winning a national general election in this country and that is the Conservative party. The Scottish National party now seems to believe in lower business taxation, but it is not in a position to do very much about it because most of the powers on these matters rest in the UK Parliament.
I say to my hon. Friends on the Front Bench that it is a privilege to be able to support this very sensible proposal for a 20p tax on business. It would be to the benefit of the small business community, and the Government’s relations with it, if the Government listened, in the way that we hear the Prime Minister is now listening on the 10p tax band. It is another example of how dangerous the Government’s tax reform can be, particularly now they are destroying the only good tax ideas that they ever had. I was with them on the 10p income tax band and on zero tax on smaller businesses and they are throwing it all away.
Before I begin my speech, I wish to draw Members’ attention to my entry in the Register of Members’ Interests. I also wish to make an observation: there is not a single Labour Back Bencher present to contribute to this debate on this extremely important clause. [Interruption.] I agree that the hon. Member for Stoke-on-Trent, North (Joan Walley) is present, and she may well contribute to our debates later on, but I have not yet heard any contribution on this clause.
I am delighted to contribute to our deliberations on the vital issue of the taxation of small businesses. Small businesses are often lauded as the real wealth creators and the dynamo of the economy, as, indeed, they are, but it often appears that the Government have taken this image too literally in creating a tax policy for them that resembles a dynamo only in so far as it spins in circles.
If there was ever any doubt about the Prime Minister’s new-found fondness of Blairite political theatre, it was dispelled during this year’s Budget, which began the escalation of the small companies rate. After years of debate in Parliament and elsewhere about taxation acting as an incentive to incorporation and encouraging distortion, the Prime Minister’s final act of political theatre was to propose a Budget that cut the main rate of corporation tax to 28 per cent. while the small companies rate was simultaneously to be raised to 22 per cent. over three years.
More than that, years of debate about the disparity between personal taxation and business taxation rates influencing behaviour in undesirable ways by encouraging avoidance were further muddled by the fact that the small companies rate is set to rise above the basic rate of income tax. Having encouraged thousands of sole traders to incorporate, the Prime Minister aims to leave the small companies rate at just 1p below the level where he found it when he became Chancellor. The result of his small business taxation odyssey is that he has boxed thousands of taxpayers into a structure that may no longer be appropriate for them.
I know that the Treasury’s response will be that such people can simply elect to pay themselves a salary rather than dividends, but that neglects the fact that many small businesses face significant increases in administration and compliance costs as a result of incorporation. A former Financial Secretary has quantified that the incentive for a self-employed person earning £30,000 to incorporate and take income from dividends will reduce by £1,000 by 2009-10. For some, that could be just the start of the additional costs. That would, perhaps, be more acceptable if disincorporation were a simple proposition, but it is not. Tax advisers were already warning last year that there was no method for businesses to disincorporate tax-free without Her Majesty’s Revenue and Customs making a case that there is a deemed transfer of goodwill out of the business and back to the sole trader.
If the Treasury’s aim really is the encouragement of disincorporation, the Minister will no doubt be able to tell us what steps the Treasury is taking to remove barriers to disincorporation and to assist small businesses to unwind their tax affairs. However, if the Treasury is actively pursuing disincorporation, the Minister must also admit that it has led the small business community on a wild goose chase for the past few years. Indeed, a tax policy that simply brings the Prime Minister back to where he began is certainly a novel interpretation of the role of the business cycle. Unfortunately, his changes have been counter-cyclical, if not counter-productive, and he has committed his successor to increasing the tax burden on small businesses at a time when they can least afford such a move—I made that point to my right hon. Friend the Member for Wokingham (Mr. Redwood).
The small companies rate has been discussed in whole libraries of paperwork over a number of years. Formerly, criticism focused on the sporadic nature of the Prime Minister’s changes. The Institute of Chartered Accountants was typical in its condemnation, stating:
“This type of ‘stop-start’ tax tinkering is creating a climate of uncertainty for businesses.”
Before he moved on to greater things at the Treasury, Edward Troup also regularly called for not only certainty but simplicity. He is notable for having expressed his hope to the Treasury Committee that the Government would “do a graceful U-turn” on the subject of the 0 per cent. small companies rate in favour of incentives that were both better targeted and workable. It seems that this time at least the Treasury has been fruitful in the U-turn department, even if none of the U-turns has been particularly graceful.
I hope to return to Mr. Troup’s influence on policy later in the Committee’s deliberations; suffice it to say that if anyone’s hand is on the tiller of the ship of state as it tacks and gybes towards the rocks, it may well be his. In the meantime, I want to dwell briefly on the reason underpinning the change of direction by examining the supposedly better targeted and more workable incentives.
The Prime Minister presented small businesses with a regime of research and development and investment allowances, and that is all well and good for businesses able to make use of them, as my hon. Friend the Member for Fareham (Mr. Hoban) outlined. Unfortunately, the system entrenches an unwelcome distinction between businesses operating in the manufacturing and service sectors—between those that are capital intensive and those that are not. The Government argue that they support targeted reliefs, but perhaps Ministers can explain the justification for favouring one sector over another in that way?
Will my hon. Friend be extending the argument that the Government’s concern seems odd, because someone who decides to draw more money out in salary or in dividend has to pay tax, so the Government are clearly targeting money that would otherwise stay in, and be profitably used in, the business?
My right hon. Friend makes an excellent point; the Government’s lack of consistency bedevils many businesses, both small and large.
The Government argue that they support targeted reliefs, and I look forward to the Minister’s explanation of the justification. We addressed the issue last year, while I still had the pleasure of serving on the Treasury Committee. Our sceptical conclusion bears repeating now:
“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.”
Instead of committing to an escalation of the small companies rate, the Government should take a step back and take stock of their continuing to pull in different directions.
Commercial decisions in small businesses are still being influenced by legitimate concerns about the benefits or disincentives of incorporation, and the dust has not yet settled. The Government occasionally manage to evoke a sense of continuity in their fiscal policies. For example, let us consider the following quotation from Malcolm Dunn, writing in the journal Taxation:
“It is a bizarre form of socialism which leaves the rich virtually unaffected but hits the poorest the hardest”.
I do not want to presage too much of tonight’s debate, so I should make it clear that he was writing in 2004 about the introduction of the minimum 19 per cent. rate for non-corporate distributions. The comparison between that and other poorly timed simplifications with disproportionate effects bears noting, and we should not forget that the increase in the small companies rate came in very handy when the Prime Minister was trying to balance the books after he cut the main rate from 30 to 28 per cent. as part of his pre-election stunt.
The proposals in clause 5 are at least part of a three-year escalation and businesses can be grateful that they have been given a time line for increases in their further tax burdens, but we are still talking about tax increases. I speak in favour of amendments Nos. 1 and 2 in the hope that the Government will think again about committing to escalating the small companies rate to 22 per cent. by next year. The original decision was made both in more benign economic conditions than those today and by a different Chancellor.
What is more, the Government have shown in the past few months that they have a firm track record in only one respect: the rapid reversal of fiscal policy. I hope that I can encourage the Minister to think again, if only because the third time is the charm, and to come back to the House on Report with a small companies rate that does not increase the burdens falling on small businesses that are ill equipped to deal with them. If the Government are looking to do something that might restore the trust of the small business community, they need look no further than a freeze on the current rate and a moratorium on fresh uncertainties.
It has been an interesting debate to warm us up for later proceedings. The right hon. Member for Wokingham (Mr. Redwood) lumped this proposal with others and described it as a stealth tax. It is not so stealthy that hon. Members are not protesting against it, as witnessed by this debate. I have noted the fact that the Opposition voted against this measure in the Budget.
The hon. Member for Fareham (Mr. Hoban), in his opening comments, moved quickly to the differences between us. It is interesting that his right hon. Friend the Member for Witney (Mr. Cameron) was quoted as saying that people should
“never believe a politician about tax or borrowing, unless they are prepared to take tough decisions about public spending.”
I see the hon. Gentleman nodding in agreement, and I shall return to that comment in my closing remarks. In the mean time, I invite the Committee to consider it.
The Government announced changes in last year’s Budget to encourage investment and innovation. The small companies rate of corporation tax remains highly competitive internationally and has by far the highest threshold in the G7 at £300,000—a fact that one would hope would be welcomed. The average threshold for other G7 members with a small companies rate is just over £23,000.
If I may, Sir Alan, I will stray slightly wide—although not, of course, wide of the amendments—in responding to some of the criticisms that have been levelled at the Government and in explaining our proposals and why we seek to resist the amendments. The World Economic Forum ranks the UK as one of the top 10 most competitive countries, ahead of France, Canada and Australia, and the World Bank ranks the UK sixth in the world in doing business, ahead of Germany, France and Japan. We are also first in the G7 for ease of paying taxes, which is an important factor for small businesses. The Government are committed to tax simplification and have announced a package of more than 20 measures, including simplification of the associated companies rules and a new review of CT calculations for small businesses, all of which have been welcomed by small and medium enterprises.
I welcome the hon. Member for Taunton (Mr. Browne) and his L-plates—I have great sympathy for some of the comments that he made on that score. He stated that the UK tax system imposes significant burdens on small businesses compared with other countries. I do not accept that statement. At the Budget 2008, Her Majesty’s Revenue and Customs published details of how it is improving services for small businesses, including progress against its administrative burden reduction targets. According to the PricewaterhouseCoopers World Bank publication “Paying taxes 2008: The global picture”, a standard UK company spends less time complying with the tax system than a similar company in any other G7 country. The Government have outlined in their enterprise strategy, published at Budget 2008, how they will build on their targeted net reduction in the administrative burden of regulation by 25 per cent. by 2010. It is therefore wrong to claim that the changes to the small companies rate of corporation tax affect all businesses.
The UK has around 4.4 million small businesses. Of those, 75 per cent. are the self-employed, and they are not affected by the changes to the small companies rate of corporation tax. Additionally, about 400,000 companies pay no corporation tax, so they will not be affected by changes to corporation tax rates. Of those companies that pay corporation tax, a quarter of large companies and more than half of medium-sized companies pay tax at the small companies rate. It is important to realise that the rate is in fact a small profits rate. Any company with profits up to £300,000 benefits from that low corporation tax rate, regardless of its size.
Both groups can benefit from one of the other changes in the Bill: the annual investment allowance for expenditure up to £50,000, which has been maligned by Opposition Members. Both the hon. Member for Hoban—[Interruption.] I apologise to the hon. Member for Fareham; that is why I increasingly need my reading glasses. The hon. Members for Fareham and for Dundee, East (Stewart Hosie) said that the AIA did not go far enough. The hon. Member for Dundee, East in particular, speaking for the Scottish National party, criticised the AIA’s ability to help with the costs of training staff, improving staff capability and other intangible investments. I am sure that he knows this, but it is worth bearing in mind the fact that the cost of employees can already be offset against tax. The AIA will allow businesses to offset £50,000 of capital expenditure in a similar way.
The Government are expanding and improving Train to Gain, with funding rising to £1 billion by 2010-11. The other forms of investment mentioned by the hon. Gentleman are directly deductible for tax purposes. Indeed, the Government have introduced a generous research and development tax credit, which was picked up on by other speakers, that provides more than 100 per cent. relief—it provides 150 per cent. relief against tax for small companies.
In debating the amendments, it is necessary to understand the changes to small business taxation in a wider context. The Government have lowered corporation tax rates for small companies over the years in order to encourage investment. We have reduced the small companies rate from 23 to 19 per cent. and introduced a starting rate of corporation tax for those with profits below £10,000.
Those lower rates of tax resulted in a significant number of people incorporating, not to invest and reinvest in their businesses but simply to extract the profits in a way that reduces their personal tax and national insurance contribution liabilities. I shall not quarrel with the point made by the hon. Member for Fareham that we were warned of that at the time, but those who take such action carry out the same economic activity as they did before they incorporated but pay lower rates of tax than those who remain unincorporated and than employees.
Such people are not using incorporation as a launch pad for growth. Instead of concentrating on their core business and being advised on how to expand and become more profitable, they and their advisers are treating incorporation as a tax break, which is being subsidised by ordinary taxpayers and the self-employed businesses that suffer a competitive disadvantage. The increase in the small companies rate will reduce the differential in tax paid between the incorporated and the self-employed.
The Financial Secretary’s arguments are reminiscent of those used by her predecessor in the debate last year. It is almost a Yogi Berra moment; it is déjà vu all over again. What research has the Treasury done to prove what proportion of companies incorporate to take advantage of the 0 per cent. corporation tax rate? Are companies continuing to use that despite the fact that the 0 per cent. rate was scrapped?
It is too early to say what the total impact of last year’s proposals will be. I shall commission work to answer the hon. Gentleman’s point, and when I have that sort of detail, I shall communicate it to him. I am sure that we will have the opportunity to return to the subject in the Public Bill Committee in a few days’ time.
The difference in the tax burden for those who are incorporated and those who are unincorporated is clear and accepted, and our proposals have been phased in, to allow companies to take those changes into account, and to recreate, as it were, a fair and level playing field between small businesses competing in the same sector that may not be incorporated for tax purposes. The increase in the small companies rate reduces the differential between the incorporated and the self-employed. That means that the 3.3 million unincorporated businesses will be relatively more competitive—thus, as I said, levelling the playing field.
Last year, we announced a package of business tax reforms to improve competitiveness and encourage investment and growth. The changes to the small companies rate are part of that package, which refocuses the incentives for small businesses on the activity of investment, and is designed to promote fairness across all 4.4 million small businesses. The hon. Member for Fareham asked why a targeted solution to the tax-motivated incorporation problem was not adopted instead of increasing the small companies rate. We have done extensive work on the issue of small business taxation, balancing incentives for small business growth with fairness in the tax system for all, and the changes to the taxation of small businesses announced in the Budget last year provide a good balance between those objectives.
It would be wrong, however, to consider the small companies rate in isolation, and the change in that rate was only one component of the small businesses package announced in the 2007 Budget. That package refocuses the manner in which the Government provide incentives for small businesses on the activity of investment, and it would be wrong, as I have said, to take it in isolation.
We face difficult economic times, and I am trying to understand the logic of increasing taxation in a period that is particularly difficult for small businesses. How does that provide them with an incentive to continue to grow their business, and what have we done to encourage businesses to come and set up in this country, as they can actually see that business has increased year in, year out? [Interruption.]
My hon. Friend the Exchequer Secretary reminds me that a figure of 700,000 new businesses is not a discouraging one. The hon. Member for Braintree (Mr. Newmark) asked me a general question about the economic climate in which we have made these changes. As I have just explained, they are intended to re-establish fair competition for those who have been incorporated for tax purposes, and thus enable them to take advantage of arrangements that ought to have been made for investment in business for growth purposes. By levelling the playing field, we will restore the motivation for companies to focus less on how to use incorporation to avoid tax liabilities, and encourage them instead to focus on growing their business.
The annual investment allowance, as I have mentioned, will target assistance directly on those businesses that invest their profits, regardless of their legal form. It will be available to all 4.4 million businesses, and will allow them to offset up to £50,000 of capital expenditure in the same way as they offset other costs such as employment costs. To increase the sense of déjà vu experienced by the hon. Member for Fareham, I repeat that the package is important: it was introduced last year, and it is part of the ongoing debate. Simon Sweetman, chair of the Federation of Small Businesses tax committee, said:
“The Annual Investment Allowance will be significant for small business, both incorporated and unincorporated…and has the added benefit of being a simplification.”
The allowance should be welcomed, rather than dismissed as some speakers have done.
The Government also announced an increase in the small and medium enterprise R and D tax credit rate from 150 per cent. to 175 per cent.—we will come on to debate that later in other clauses—and that will also help small companies investing in new technology. All these measures taken together refocus tax support on investment rather than on low profits.
Thank you for bearing with me, Sir Alan. I will now deal with the proposed amendments in detail and in turn. I fear that the amendments would pose a serious risk to fairness. The Government have set out how they will make the tax system fairer across all small businesses, reducing the competitive disadvantage, as I have said, faced by unincorporated businesses. However, the Opposition believe that all 3.3 million of them should continue to be disadvantaged in this way.
Amendment No. 1 would encourage further tax-motivated incorporation, counteracting the moves towards fairness that the Government support. Furthermore, the small companies rate will still be lower than it was in 1997 when it was 23 per cent., even as we take the proposals forward.
Amendment No. 2 proposes to maintain the current fraction of marginal relief as 1/40th. In proposing the amendment however, the Opposition have not done their sums properly, setting out a perverse incentive to have profits within the marginal relief band. The fraction for marginal relief ensures that there is a smooth rise in the rate of tax applied to companies with profits between the thresholds for the small companies and main rates of corporation tax. In proposing that the small companies rate and marginal fraction both be maintained at last year’s level, the Opposition fail to take account of the reduction in the main rate of corporation tax from 30 to 28 per cent.
Will the Minister explain how it came to pass that the previous Chancellor created such an unfair system in her view that the Government now have to amend it in this direction of creating greater fairness? Is it not rather the case that the previous Chancellor gave a poisoned pill to his successor in the form of higher taxes across the piece?
As I have said, and as the right hon. Gentleman will remember, the intention of the changes that have led to advice given by tax advisers to incorporate to avoid tax was to encourage investment and growth, particularly in small businesses. We are now correcting an imbalance that has developed as a result of the behaviour in response to those changes.
As I have said, the amendment would negate the purpose of marginal small companies relief. By way of illustration, if the Committee were to accept the amendment, a company making profits of £301,000 would pay more than £5,500 less in tax than a company making profits of only £299,000. It would do nothing to benefit the vast majority of small businesses in the UK.
Amendment No. 7 proposes that an assessment of the impact of the changes to the small companies rate should be undertaken before any change is made. Again, it shows that Opposition Members misunderstand the changes put forward by the Government, which are about improving competitiveness across all small businesses. Reducing the differential in tax between the unincorporated and incorporated will allow better direct competition. Delaying implementation of this change will allow the differential to remain. Furthermore, the changes to the small companies rate are part of a wider package that encourages all businesses to invest and innovate to assist future growth. The introduction of the annual investment allowance benefits all businesses, allowing them to compete more fairly.
It is appropriate that I should make clear the substantial fiscal risk that the amendments pose. Together, they would cost the Exchequer more than £300 million next year. That brings me back to the statement by the right hon. Member for Witney that I quoted earlier. The Committee should consider the amendments in the context of the fact that the main Opposition party voted against all the revenue-raising measures proposed in the 2008 Budget. Given that the country is looking for a Government who are wedded to economic responsibility, I do not believe that such amendments should be accepted. They would do nothing for the majority of small businesses and fail to recognise the importance of fairness across the board in the tax system.
I would ask the hon. Member for Fareham to withdraw the amendment; however, having heard his opening speech, I am clear that he is unlikely to do so. In that case, I ask the Committee to resist the amendments.
First, I want to say something to the hon. Member for Taunton (Mr. Browne), who, to use the words of the Minister, has his L-plates on. Thinking back to the hon. Gentleman’s reference to an obituary of Humphrey Lyttelton, I should say that tax is rather like the game Mornington Crescent: the rules are there if we look carefully, and they will become discernible apparently.
I take issue with the introduction and conclusion of the Minister’s speech; they were written without the arguments for the amendments having been heard. It was clear from what I said that our proposed cut in the small companies rate of corporation tax would be funded through the scrapping of the annual investment allowance. We have made that clear, not only today but in debates earlier this year and around the time of the Budget. We believe fundamentally that by restructuring the current allowances and reliefs we can make savings that would pay for reductions in the main and small companies rate of corporation tax. We are proposing a funded tax cut.
On several occasions, the Minister came back to the point that the Government’s measure was to tackle what she claimed was an unfairness in the tax system which encouraged incorporation. Yet at the same time, as the Minister said in response to an intervention of mine, the Government have not done the work to understand whether last year’s scrapping of the 0 per cent. rate was sufficient to discourage tax motivated incorporation. She further undermined her arguments by highlighting that larger businesses would also be affected by the tax increase. She referred to the proportions of larger and medium-sized companies that also paid the small companies rate of corporation tax.
If we look at the rate of incorporation for companies in the past six years, yes, we see that there has been a 50 per cent. increase in the number of companies incorporating with only one employee. Companies with between one and nine employees are running at about 37 or 38 per cent. in that regard, and for those with more than 10 employees, the figure is just under 20 per cent. We are seeing significant increases in the incorporation of companies of all sizes. Given the long tail of owner-managed businesses, with no employees, that I see in my constituency, perhaps it is not surprising that a large number of them incorporate.
The Government’s measure is meant to deal with the issue of fairness, but it imposes an additional tax burden on small companies at a time when they do not need it—they are struggling with higher costs and economic uncertainty. I will press amendment No. 1 to a Division because of the problems that face small companies. They want a Government who are on their side and are not working against them. By increasing the small companies rate of tax from 19 to 23 per cent., the Government are damaging those businesses when they need help and support. Conservative Members and, I believe, other Opposition Members recognise the importance of supporting small companies. I hope that those Opposition Members will back us in the Division Lobby.
Question put, That the amendment be made:—
The Committee proceeded to a Division.
Clause 5 ordered to stand part of the Bill.
I beg to move amendment No. 8, page 3, line 20, leave out from ‘(1)’ to end of line 21 and add
‘will have effect from a day which the Treasury may by order appoint.
(4) No order may be made under subsection (3) until—
(a) the Treasury has compiled and laid before the House of Commons a report containing an assessment of the impact of changes to the rate of capital gains tax on—
(i) businesses seeking investment,
(ii) investors who normally pay tax via capital gains tax, and
(iii) the availability and cost of houses to buy and rent; and
(b) the report has been approved by a resolution of the House of Commons.’.
The amendment seeks to have the Treasury justify the changes it intends to make to the capital gains tax system and to have them approved by the House of Commons before any implementation. There are a number of reasons for that, which I will explain later, but the assessment that we seek from the Treasury will consist of three parts.
First and most important, what would the impact be on businesses seeking investment? For us, that is the most crucial area. As they stand, the Government’s proposals will only damage business investment. For example, if someone who invests in a business and pays capital gains tax seeks the same cash return after tax under the changes, that will leave less profit in the pot for, say, a proprietor investor or a manager investor, who may no longer take the risk and seek that capital. If, on the other hand, the investor receives the gross amount and pays the additional tax under the new system, they may consider the risk not to be worth taking and decide to take their money elsewhere, perhaps out of the country.
Secondly, the Treasury should report on investors who normally pay tax via capital gains tax, not least because it would appear from all the reports that I have read and all the people to whom I have spoken that the changes to the rules have had the consequence, unintended or otherwise, of encouraging real investors to sell up and take their money out of businesses to avoid falling into the new tax regime. That has been evidenced by a flurry of recent newspaper reports, of which I shall give one or two examples.
In article entitled “How Darling’s ill-thought CGT fix has only made things worse”—not exactly a snappy title, but one that sums it up—the Sunday Herald said:
“The unseemly dash by owners of companies and other assets to beat the April 5 deadline for the capital gains tax changes introduced by Alistair Darling reached a crescendo last week. This extraordinary flurry of mergers, acquisitions and other corporate finance activity, which started gathering momentum last autumn, was sparked by many business owners’ decision that, rather than plough on with running their own businesses merely to hand over more money to the Exchequer, they would rather sell out now.”
The article continued:
“It has also inspired entrepreneurs and company owners right across the Scottish and UK business and industrial spectrum to sell up—often to private equity and vulture funds.”
The Fair Investment website put the matter similarly:
“Many UK business owners decided to sell up before the changes to capital gains tax took effect on April 6, while others transferred ownership to avoid the higher rate of tax.”
The article, of 8 April, went on to quote KPMG tax partner David Kilshaw saying to The Times that this has been
“the busiest end of financial year in living memory”
as investors rushed to sell up before the new laws came into effect.
It is not only newspaper commentators and financial advice websites that have been discussing the issue—practitioners have also been talking about it. I am grateful to the Institute of Chartered Accountants in England and Wales for its comments on this matter. It says that these highly controversial changes were announced
“without proper prior consultation, with inadequate transitional provisions and with a lack of appreciation of the likely behavioural impacts and compliance costs that they would impose.”
It also said that the announcements showed a lack of appreciation of the potential damage that they could
“inflict on the international reputation of the UK as a place to live, work and invest.”
I agree entirely with its assessment of capital gains tax reform in the 2008 Budget that
“taxpayers should have been given more time to understand”
the impact before implementation. That is fundamentally what I seek to do with amendment No. 8: have the Treasury provide all the detailed assessments that will be required for people to understand the consequences.
Is there not a problem with that, in principle at least? If more time is given, that will allow the distortions that the hon. Gentleman mentioned earlier to happen, such as small business people wanting to sell when a radical change is proposed. How would his amendment get around that problem?
I was just about to make that point. The hon. Gentleman is probably right, on balance, in relation to the previous debate on corporation tax, to say that changing things now might create distortion and uncertainty. However, this measure was proposed in the pre-Budget report and there was a flurry of panic, mainly in the Government ranks. The Government then changed things to introduce the £1 million lifetime entrepreneurs’ allowance, but there was still a lack of clarity—I know that from speaking to accountants close to the end of the financial year—so I am not convinced at all, in this case, that a small additional delay until we get clarity from the Government would deliver the instability that the hon. Gentleman describes.
The third area that the Treasury should report on is the housing market, particularly in areas of Wales, Scotland and elsewhere where there is pressure on house prices, a lack of affordable first-time accommodation, particularly for those on modest wages, and a shortage of affordable private lets. The paradox of the CGT changes is that not only are they damaging investment in business and possibly driving investors to take their money elsewhere, but they have made speculation in the private housing market more attractive. That is bizarre at a time when there was already huge pressure—particularly in high-pressure areas and remote, rural areas—and a shortage of housing combined with low wages. That is a catastrophic thing for the Government to do.
Again on the impact on business, tax is going up, as are costs such as fuel, energy and the transport of raw materials. Traditional funding routes have either dried up because of the credit squeeze or are very expensive, and the stock exchange and the alternative investment market are either inappropriate or too expensive for the kinds of businesses that seek private investment at the lower level. This is the wrong time to make changes to CGT that risk, even potentially, driving out investors from business. Let me give an example.
Historically, to get a stock market listing a company needed to be a £100 million-plus company, but the truth is that the figure was much bigger than that. Entry-level costs were £750,000, and so were fundraising costs; advisory costs were £250,000; and commission was 2 to 5 per cent. of the money to be raised. Even on AIM, entry level was about £300,000 and so was fundraising, commission was 2.5 per cent. and advisory costs were about £50,000. That was for companies looking to raise £2 million to £20 million. With traditional bank funding drying up and with other routes being beyond the means of most small companies, private investors were filling an important gap. If there is a risk—I believe the risk is real and serious—that the capital gains tax changes will force private investors with capital to take their money elsewhere, the change needs to be reviewed and revised. I was happy not to press my earlier amendment No. 7 on corporation tax, but although I will wait to hear what the Minister has to say and see whether she provides me with any comfort, if she fails to do so I am likely to press amendment No. 8 to the vote.
Most of the debate on the Bill so far has focused, quite understandably, on clause 3, which doubles the 10p rate of income tax. The Prime Minister is, of course, personally responsible for the changes in clause 3—and, indeed, clause 5, which we have just debated, as both were announced in the 2007 Budget.
Clause 6 is, by contrast, something of a home-grown own goal for the Chancellor, at least if we believe that he is the author of the 2007 pre-Budget report. Although the doubling of the 10p rate has delivered the short-term political damage, the fiasco of the pre-Budget report and the capital gains tax changes will have a lasting and negative effect on business sentiment. The manner of the introduction of such far-reaching changes to business asset capital taxation in the pre-Budget report—with no consultation, no forewarning and little thought—was damaging enough in itself, but the signal that Labour was willing to sacrifice the interests of business to short-term political advantage was more damaging still. The substance of the proposal, at a time when the economy is slowing and public concern about jobs and prosperity is growing, sends a hugely negative message to British business and to Britain’s entrepreneurs.
Does my hon. Friend agree that, given the City of London’s position as an international financial centre, the sense of indecision and dithering and the impression created that the Government are, as my hon. Friend rightly points out, seeking to make political capital out of the situation rather than having regard to the long or even medium-term economic welfare of the country is likely to be extremely damaging, not just for our domestic businesses but internationally?
My hon. Friend is right. It is not just a matter of those who are directly affected by the capital gains tax changes; it is part of a bigger picture of indecision, unsignalled change and lack of proper consultation on the business tax regime. If the Minister got out at all and talked to people in City boardrooms, she would know that that has become a real theme that we should all be seriously concerned about. There are two aspects to the problem. First, there is the substance of the changes that clause 3 introduces, which amendment No. 8 is designed to address; secondly, there is the manner in which they were introduced, particularly the lack of consultation, the lack of clear signposting and the reversal of what had been seen as a long-term commitment by the Government to a lower CGT rate for long-term gains. That, I suspect, as much as the substance of the measure itself, is extremely damaging to the climate for Britain’s entrepreneurs.
By raising business taxes at a time when our competitors are cutting them to support investment and underpin their economies, the Government have undermined business confidence. The abandonment of what was an iconic long-term Labour policy of a 10p capital gains tax rate for long-term gains—announced with great fanfare by our present Prime Minister even before the Labour Government came to office—has dealt a blow to British enterprise and entrepreneurs at a time when we should be promoting it and them.
I have to say that we have a great deal of sympathy with the sentiment behind amendment No. 8, and I agree with almost everything the hon. Member for Dundee, East (Stewart Hosie) said in introducing it. Regrettably, however, it would not quite do what its sponsors wish it to do. It would indeed postpone the change in the main rate from 40 to 18 per cent., but because the implementation provision that the amendment would introduce covers only subsection (1), schedule 2 would be effective anyway, ending taper relief and indexation. It would, I think, have the opposite effect to that which the hon. Gentleman seeks, in that it would push the effective CGT rate on business assets up to 40 per cent., rather than leaving it at 10 per cent., as he intends.
For reasons that I shall outline, we believe that the Government need to go back to the drawing board on CGT reform, consult properly and come forward with a comprehensive set of CGT proposals that recognises the need to promote long-term investment and encourage entrepreneurship.
The amendment calls on the Government to measure and report on the impact of the proposed changes on business investment, the tax burden on investors and the housing market—in particular, the buy-to-let market. As my concerns relate to precisely those areas that the hon. Gentleman outlined—even though my solution is to vote against clause stand part, rather than to support the amendment, for reasons I have explained—I hope that it is convenient for me to set them out now, as time is limited, so that we might not need a separate clause stand part debate.
It all started with the pre-Budget report; hon. Members will remember that saga. The pre-Budget report was brought forward to early October so that it could act as a pre-election Budget—a showcase for whatever bribes the Prime Minister would offer the nation in the election that never was. That plan was torn up when the Prime Minister bottled it and canned the election for reasons that, we are assured, had nothing whatever to do with the opinion polls. The pre-Budget report—[Interruption.] I hear sceptical comments from those on Benches behind me, but I could not possibly comment.
The pre-Budget report still had to go ahead on 9 October, to save face. So the tax strategy for Britain—the world’s fifth largest economy—as we faced the first signs of economic slowdown in the aftermath of the Northern Rock fiasco—had to be drawn up on the back of a fag packet over the weekend. Even one of the Prime Minister’s closest allies, the hon. Member for Coventry, North-West (Mr. Robinson), described that as
“policy making on the hoof.”
And it showed—in the lack of consultation on proposals for major changes to business taxation and the complete absence of a coherent narrative as key parts of Labour’s long-term business tax strategy were discarded overnight without explanation or warning.
The words of that pre-Budget report speech were scarcely out of the Chancellor’s mouth before they were drowned out by the crashing of gears being thrown into reverse. It was hours before Downing street was briefing against the Chancellor, and just days before the climbdowns began, but the damage to Britain’s reputation as a business-friendly economy will take longer to reverse. I say to the Minister that the damage to Labour’s reputation as a business-friendly party may be irreversible.
A common theme is beginning to emerge from the PBR: the systematic subordination of the long-term interests of the country—even as identified and clearly set out by the Labour party—and of our economic future to the short-term political agenda of our Prime Minister.
The Chancellor’s claim that his CGT reforms were made in the name of simplification was as bogus as the same claim made for the abolition of the 10p income tax rate. The proof is in schedule 3, where the complex and still extremely unclear entrepreneurs’ relief adds a tier of complication to the system that was supposed to be simplified. This is a missed opportunity for comprehensive modernisation of business capital taxes based on a full, extensive and genuine consultation. In fact, the capital gains tax change was a straight tax grab, originally designed to raise £900 million a year for the Treasury, and a wildly misplaced attempt to address the issue of taxation of private equity-carried interest—something that had been exercising the Government and the trade unions before the pre-Budget report and, ironically, a problem that now looks likely to have gone away all by itself, as the bank credit on which private equity deals depend has all but dried up.
Will the hon. Gentleman explain how his party would pay for the consequences of rejecting the proposed change, bearing in mind the comments of his right hon. Friend the Member of Witney (Mr. Cameron), who has said that people should
“never believe a politician about tax or about borrowing unless they are prepared to take tough decisions about public spending”?
I think that that question deserves an answer.
As I have said, what we are trying to do is persuade the Government to go back to the drawing board with their business capital tax proposal and look at it again. If we are successful in the vote on clause stand part, we shall not expect the Government to roll over and play dead, and to accept that as the end of the game. We shall expect them to do some work on these proposals, and then bring back to the House a properly thought out package of capital gains tax reforms on which they have consulted properly with the business sector—unlike the proposals announced in the pre-Budget report—so that we can proceed in a way that does not deliver a blow to British business, British entrepreneurs and British enterprise at a time when our competitors are supporting their companies and their entrepreneurs, and our economy is slowing.
I am always interested to hear the hon. Gentleman’s comments at the Dispatch Box, but I want to press him once more. The costs of the capital gains tax reform, including entrepreneurs’ relief, are £250 million this year, £300 million next year and £500 million in 2010-11. Those are real costs. Can the hon. Gentleman say more than simply that he would seek a postponement, and that the Government would fix the mess that he would get us into if we accepted the amendment?
Actually, the Government got themselves into this mess by meddling with a vital part of the business tax system without any advance signalling and without any consultation.
Let me now put a question to the Minister. Given that she is so worried about the danger of creating little holes here and there in her Budget, where did she find the £400 million that is the difference between the £500 million yield that she has just announced for 2010-11 and the £900 million yield that appeared in the pre-Budget report before the Chancellor executed his U-turn and introduced the entrepreneurs’ relief? I shall be happy to give way to her again if she would like to tell the Committee where she found that £400 million, given her concern about identifying all these parcels of money. However, she appears not to wish to tell us where she found it.
The Minister seems to have no compassion for entrepreneurs who have run their businesses for a long time on the basis that the receipts at the end of their working lives will provide for their pensions. Does the Minister recognise, and does my hon. Friend agree, that the harm being done to those pensioners is unacceptable and has not been thought about at all?
My hon. Friend is entirely right. Many small business people regard the businesses that they are building up as their pension pot, but it is not just individuals who are suffering harm from these measures. This is not just about some business people or entrepreneurs who will be less well off, less motivated and less incentivised than they might have been The real issue is that as enterprise goes elsewhere and investors take their money and expertise elsewhere, the big loser will be UK plc, and it is our prosperity and our jobs that will suffer as a consequence.
We can add to the list of 5.3 million low-earning families and the owners of small companies at least 270,000 of the 1.7 million employee shareholders, as well as the farmers and other business people whose assets will not be eligible for entrepreneurs’ relief and those who will lose out from the scrapping of accrued indexation as losers from the Finance Bill. As we also must add the serial entrepreneurs and the business angels providing finance to them—people who have been so important in maintaining the level of innovation and business formation in our economy—it is UK plc that becomes the clear long-term real loser from the measure.
Only new Labour could devise a business capital tax system that incentivises modest success in lifestyle businesses with entrepreneurs’ relief but penalises the growth of the scalable enterprises that will deliver the prosperity of tomorrow; one that halves the rate of tax on buy-to-let landlords and second homeowners while increasing it by 80 per cent. on serial entrepreneurs and up to 260 per cent. on some employee shareholders; one that rewards short-term, quick-turn investors with CGT rates well below income tax while increasing the effective rate most on the very longest of long-term investors who stand to lose most from the loss of indexation relief on all assets held before 1998. The Prime Minister’s moral compass appears to be pointing in increasingly bizarre directions.
If the clause survives a stand part vote this afternoon, schedule 2, containing the detailed measures to scrap taper relief and indexation, and schedule 3, containing the details of entrepreneurs’ relief, will be considered in Committee. We will need to look in great detail at the mechanics of entrepreneurs’ relief—who will get it and who will not—and at the consequences of the taxation of inflationary gains at 18 per cent. in a world without indexation or taper relief.
I appreciate that my hon. Friend is coming to the end of his comments and he is making a very good case in respect of the confused nature of the Government’s dealing with the matter in the run-up to October and, more particularly, in the panic since. To try to pre-empt the Financial Secretary’s comments, I should say that one positive side of what was perhaps intended at the outset—although my hon. Friend has raised some doubts about its real nature—is the idea of simplification. Will he make it clear that we in the Conservative party very much favour the idea of simplification but that, obviously, during the past six months we have seen some object lessons in how simplification should not be carried out?
Of course simplification of the tax system is a good thing in itself, but not at any cost. We have ended up with the worst of all worlds, a system that disincentivises entrepreneurship and yet has created a regime more complex than the one it replaced.
Entrepreneurs’ relief is a fudge. It was a hastily cobbled together minimum concession to buy off the most numerous, although not necessarily the most economically important, group of losers from the pre-Budget report changes. We will need to review how it works for employee shareholders; for investors in the highest risk companies that might historically have listed on a junior stock market; for members of limited liability partnerships, who seem to have been forgotten in the drafting of these provisions; and for the market in insurance bonds, which, on the face of it, will disappear under these proposals.
This is an ill thought out measure, introduced without consultation or early warning. It has imposed a huge retrospective cost on thousands of businesses. At a stroke it has withdrawn the single tax measure, taper relief, that had been held aloft as the symbol of new Labour’s commitment to business. It was hailed as a simplification but it was a simple stealth tax. Because it was made up on the hoof without a consensus behind it, the Chancellor had to back down at a cost of some hundreds of millions of pounds, and the Financial Secretary cannot tell us where that money is coming from. The Chancellor introduced the entrepreneurs’ relief and thus created a system more complicated and more unfair than the one it has replaced.
At the end of this little charade, as we face a global economic slowdown, we have a capital gains tax system that not only increases taxes on business entrepreneurs, but will be less fair in operation, will encourage short-termism and will be more complicated than the regime it replaces. This cannot be the way forward.
I would have liked to support the amendment but, for the reasons I set out earlier, we believe that it will be more effective to send a signal to the Government by voting against clause 6 stand part and by asking the Government to go back to the drawing board, to look again at the package of proposals, to consult properly with business and to come back to the House on Report with something a little better thought out.
This feature of the Bill is a classic example of what a Government do when they are driven by political considerations rather than the overall requirements of the economy. At the Conservative party’s autumn conference in September of last year it put forward a series of proposals on taxation in anticipation of a possible general election—of course, none of them went any way to helping people who had been adversely affected by the doubling of the 10p rate, but we will come to that later. The Government felt they needed to respond to the Conservatives’ apparent seizure of the initiative and as a result the Treasury was thrown into an exercise. That process may have lasted only a couple of days but, in that time, the Treasury went from having a blank sheet of paper to drawing up a series of taxation proposals that would have a deep and significant effect on business and on our economy.
My party has a different view from that of the other parties in this House on how much money capital gains tax should raise and what its role should be in relation to other forms of taxation. The parallel that my party draws is between the taxation rate paid by people who are taxed on their capital and the rate paid by those who are taxed on their income. I am extremely supportive of wealth creation; we need an economy that generates prosperity so that people can prosper in their private lives and so that we can afford to fund key public services. However, it offends the sensibilities of the Liberal Democrats and many millions of people throughout the country that there are people in Britain, who work in private equity and the like, who pay a much lower marginal tax rate than the people who clean their offices. In our view, that cannot be right.
Our starting point is that capital gains should be taxed at the same rate as income, as was the case under Nigel Lawson when he was the leader of the Thatcherite vanguard in the 1980s. This is hardly a particularly left-wing policy; it is entirely in tune with what other Governments have proposed in the past. The danger otherwise is that people with good accountants who are able to convert their income into capital will pay considerably less as a share of tax, and we will effectively create a two-tier system: one for those who are taxed on the money they take home at the rates we will now have to get used to—20p and 40p, with national insurance contributions in line with that—and another for those who enjoy much more favourable rates of taxation, despite having considerably higher earnings.
Does the hon. Gentleman accept that in the world in which we actually live, where both capital and many of the most innovative entrepreneurs are mobile, the benchmark must be not what Governments did in the past, but what other Governments are doing now in creating regimes that our entrepreneurs and businesses have to compete against?
I understand the hon. Gentleman’s point, but I return him to the point that there is a large amount of mobile labour comprising people earning considerably smaller sums who are being expected to pay a higher proportion of their income in tax than people who are able to convert their income into capital; there are people who are able to move freely across the European Union for whom that is the case. The Liberal Democrats do not wish the overall share of taxation to rise as a proportion of gross domestic product. We would, however, ask something of high earners—who currently pay lower marginal rates than those who clean their offices— so that people on lower incomes could pay a lower marginal rate. Both the Conservatives and Labour are unable to match that commitment.
Is not the problem with what the hon. Gentleman is suggesting the fact that that mobile wealth creation will leave these shores and go elsewhere? Although I fear that it does not fall within the context of the clause, a discussion of the benefits of globalisation is legitimate because far too many people in both the first world and developing countries are perhaps being left behind. Is not the reality of his policy that it would simply impoverish this country while we bought into the notion, to which most political people in this country and on other shores would subscribe, of globalisation as being a good?
I am grateful for that point, although we are slightly going round in circles.
There are many benefits of globalisation for which the case is not made sufficiently frequently. Not only is globalisation beneficial for many millions of people in this country—I believe in free trade, and in goods and services flowing around the world, because that generates prosperity—but it offers the best prospect for billions of people in China, India and other Asian countries to have levels of prosperity that they have not enjoyed previously. There is no other way in which they are likely to achieve those standards of living.
Let me answer the question by flipping it on its head; the onus is on both Labour and the Conservatives to make the moral case for a cleaner who earns £10,000 a year paying a higher marginal rate of taxation than the boss of the company whose offices he or she cleans, who takes home £1 million in the form of capital. There is a genuine debate to be had about that. The hon. Member for Cities of London and Westminster (Mr. Field), who represents large numbers of people—more than any of the rest of us—who fall into both categories just put forward the argument, as do the Government, that it is morally right that cleaning staff should pay a higher marginal rate. I merely inject a note of controversy into the debate by saying that I do not agree.
The changes made by the Government have resulted in a perverse set of consequences. The Budget proposals reward property speculators while penalising people who have run small family businesses, and many small investors—perhaps employee share scheme holders—lose as a result. In addition, because the changes were introduced in a haphazard, short-term fashion with inadequate consultation, many people have been unable to prepare for them in a way that most people would consider reasonable.
The effect has been, as the hon. Member for Northampton, South (Mr. Binley) described, that people who have worked and planned on the basis of a tax regime that they thought would affect them when selling their small business at the end of their working life, and who had a legitimate expectation that if the tax regime was to change they would have long enough to change their behaviour to take account of the alterations, have suddenly had the changes sprung on them without adequate time to make the necessary adjustments to their circumstances.
That introduces what feels like a retrospective degree of taxation. Although it is not strictly speaking retrospective, that would be the outcome for people in terms of the practicalities of selling a business in a short time scale. Even the Government’s U-turn—
The hon. Gentleman asks which U-turn; I shall come to many of the others later in our deliberations. The specific one is the £1 million of relief for entrepreneurs. Even that carries problems for people who are serial entrepreneurs, whose business is to rapidly grow and sell companies. That is a legitimate and healthy business model that contributes to the overall growth of the economy, but those involved are penalised by the proposals in a way that people who stick with one business over a longer period of time are not.
For all those reasons, we disagree with the approach that the Government have taken to these matters. We do not think that they are fair, and the system of implementation has not been effective. We will vote accordingly.
Clause 6 sets the stage for the first of this year’s U-turns from the Chancellor and I hope that we will have a little clarity from the Financial Secretary about the Government’s motivations. “Start as you mean to go on” is probably not a maxim on which the Chancellor should rely, as he and the Prime Minister continue to lurch seamlessly from credit crunch to credibility crunch. The Chancellor’s last few months in the Treasury would have done the three stooges proud, although I do have some sympathy for the fact that he seems to have become the Prime Minister’s one and only stooge when it comes to taking the consequences of unpopular taxation.
Nevertheless, by 24 January, the Chancellor had already confirmed his first U-turn of the year in an attempt to water down the impact of an 80 per cent. tax rise on small business at a time of increasing economic uncertainty. We are still in the dark about why the Government should have set about, apparently deliberately, undermining their own much vaunted objective for increasing long-term investment in business. The only explanation is a bad one: that it is a knee-jerk reaction against a very small number of individuals in the private equity industry who were making use of taper relief to reduce the capital gains tax charge on their carried interest.
To give credit where it is due—and notwithstanding the comments made by the hon. Member for Taunton (Mr. Browne)—Ministers were always adamant in their public statements that there was no special loophole in the taxation of the private equity industry, and that was indeed the case. But faced with pressure to close a loophole that did not exist, the Chancellor did the next best thing and threw the baby out with the bathwater by abolishing taper relief altogether.
We are entitled to ask about the principles underlying the change as much as about the impact of the change itself. Was it simply designed to target a small number of individuals—with the damage to businesses and angel investors viewed as the necessary price to be paid—or was there a genuine principle and strategy involved? What, indeed, is the Government’s current direction of travel on the taxation of business, the stability and predictability of that taxation and the encouragement of long-term investment? Those are legitimate questions that still need to be answered.
What we do know is that clause 6 represents a tax hike of some £700 million, even with the last-minute concessions subsequently offered by the Government. But the potential cost to the economy of the proposed changes dwarfs the money that the Treasury hopes to raise through them. Capital gains tax has never been a big revenue raiser and the tax base has never been very wide, raising just £3.8 billion from 266,000 individuals in 2006-07, rising to £4.8 billion on the original forecast of the pre-Budget report. Nevertheless, it has significant potential as a disincentive to long-term investment—the point made by my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond).
The only benefit to the economy presented by the Chancellor’s erratic driving on capital gains tax reform has been the thousands upon thousands of hours of overtime worked by lawyers, accountants and financial advisers up and down the land as they struggled amidst a dearth of information in order to give their clients reliable advice in advance of 6 April. That is quite some contribution, although it is presumably not the outcome for which the Treasury planned.
Weighed in the balance against these detriments are two attempted defences from the Chancellor—consultation and simplification. Announcing the entrepreneurs’ relief on 24 January the Chancellor was the model of calm reassurance:
“Of course we will listen to what businesses—small and large alike—have to say. It is important that we introduce the right tax regime.”
That is what he said as he frantically back-pedalled away from the tax regime that he had announced just months before. But he only cocked his ear to listen to the business community after he had announced his proposed change in the pre-Budget report and discovered that those in the business community felt that he was cocking his leg at them instead.
I am intrigued by some of the rationale that was deployed to explain away the lack of consultation. The Treasury claimed, for instance, that there had been no consultation because the change to CGT was a simple rate change and not a reform. In an amusing contrast, the explanatory notes for the draft legislation were subsequently headed “Capital Gains Tax Reform”. Leaving aside the fact that the rate change was some 80 per cent., does the Treasury still believe that clause 6 is a simple rate change and not a reform?
I do not wish to stray wide of what we are discussing today, particularly as much of the detail that appears in schedule 2 and the proposed entrepreneurs’ relief in clause 7 will be discussed in more detail upstairs, but it is nonsense to suggest that it was proper that such a radical increase in the burden of taxation should have been proposed entirely without consultation with the business community.
The Chancellor used the pre-Budget report to launch his bombshell, when the whole point of the pre-Budget report is to lay out proposals for consultation. The whole idea was that the Budget process should become more transparent and more of a two-way process for those affected, so that we would not have all these U-turns and problems halfway through the financial year.
The hon. Gentleman makes an excellent point that supports my argument.
The second canard in play here is that clause 6 represents the best intentions of good government in implementing a desirable tax simplification. This figment also crept bashfully on to the record on 24 January when the Chancellor announced:
“I am trying to simplify the tax system, which is something that people in the House and outside have asked successive Chancellors to do.”—[Official Report, 24 January 2008; Vol. 470, c. 1635-6.]
The Chancellor has apparently convinced himself that he was merely being responsible and responsive to the House, or perhaps the new clutch of special advisers from next door in No. 10 have convinced him. Indeed, the Chancellor is setting new records in responsiveness to the House, given the sheer number of times that he has had to come to the Dispatch Box to apologise, explain and dilute.
What the Chancellor is not doing, and what the Government have so signally failed to do while in office, is simplify our tax law. I need point no further than the 1,148 pages of explanatory notes, in four volumes, that accompany this year’s two volume Finance Bill. Perhaps the Government should look at offsetting the carbon cost of printing it. But only a Labour tax simplification could introduce new complexity, as we saw last week with the other major “simplification” in the Bill that has gone a little awry.
In the spirit of both those supposed simplifications, it might be worth dwelling a little on the question of winners and losers. Richard Mannion, writing in the journal of the Chartered Institute of Taxation, put the point quite simply:
“While any significant regime change like this would be likely to result in both winners and losers, the main losers on this occasion were business owners and entrepreneurs, the very people that the previous chancellor had set out to encourage with the effective CGT rate of 10 per cent. on business assets.”
Once again, it is not so much a question of whether there are losers but of who the losers are.
The Government’s erosion of competence has been matched by the erosion of confidence in their handling of business taxation. As John Wright, chairman of the Federation of Small Businesses, has said, the botched CGT changes have
“seriously eroded small businesses’ trust in the government.”
So, if, “Start as you mean to go on” is not exactly a guiding light for the Chancellor, perhaps he should stick with, “If it ain’t broke, don’t fix it.”
The UK is in the throes of a liquidity crisis in the wholesale markets, which is severe enough to warrant billions of pounds of taxpayer-backed intervention from the Bank of England. One of the side effects of the liquidity crisis is the potential impact on retail investor confidence as investors fall back on safer, more liquid investments. In the middle of that turmoil, the Government are doing away with a tax relief that was designed to encourage people to invest over the long term in relatively illiquid asset classes, such as unquoted shares, family businesses or venture capital enterprises.
We should not forget that the Prime Minister’s introduction of taper relief was couched in uncompromising terms. He said:
“We must do more to increase the quantity and quality of long-term investment. The capital gains tax regime that we inherited rewards the short-term speculator as much as the committed long-term investor.”—[Official Report, 17 March 1998; Vol. 308, c. 1101.]
Yet at the very time that the Government ought to be looking at whether it would be appropriate to offer additional inducements to long-term investors, they are moving in the opposite direction.
The Chancellor’s January statement also put a great deal of store in the capital gains personal allowance. He mentioned it several times, as if to suggest that its continued existence compensated in some way for the 80 per cent. tax hike. However, a personal allowance does nothing to encourage an investor to hold illiquid assets when gains cannot easily be crystallised and netted annually. It was soon clear that the personal allowances alone were totally inadequate when it came to the expectations of the business community, so another fudge was cooked up.
How are we to greet the compromise? Richard Lambert, the CBI’s director general, is quite clear about the merits of a change that is
“superficially quite clever and on the surface might seem like a relief”
but that results in even the smallest business owner being worse off than before. However, I prefer to look directly at one of the architects of the scheme. Edward Troup, who is now director of business and indirect tax at the Treasury, wrote witheringly in the Financial Times in January 2002 complaining that the Prime Minister’s original introduction of taper relief had pandered to political lobbying and had
“created further distortions and directionless complexity.”
“Pragmatism has been replaced by opportunism masquerading as principle. The clock should be rolled back. A single rate of, say, 20 per cent applied across the board would stop the worst excesses of avoidance without creating undue distortion.”
Mr. Troup might have got his single rate but he also got more than he bargained for in the way of “directionless complexity” from his political masters.
It has become easy in recent weeks to poke fun at a Government who are at war with themselves. It is perhaps more worrying that Treasury officials do not seem to be on the same page as Treasury Ministers. Officials seem to like the idea of brutal simplicity, even when the burdens fall disproportionately. Ministers, on the other hand, do a good line in opportunism masquerading as principle. Members of the Committee will know of my background in the venture capital industry and I want to conclude my remarks by focusing on the support available to serial angel investors.
The Chancellor has proposed a complex package that includes a lifetime capital gains tax allowance for capital gains arising from the sale of business assets. I have no doubt that after months of confusion the scheme is of some comfort to small business men who have a lifetime of work invested in their family businesses. It does absolutely nothing for the committed business angel who shoulders the burden of risk, time and again, to help with the process of genuine wealth creation in this country.
There is little sense of continuity in the Government’s thinking on that point. It is only necessary to look back to the Standing Committee debates on the Finance Act 2002, when the qualifying period for taper relief was shortened. My hon. Friend the Member for Fareham (Mr. Hoban) hit the nail on the head when he asked the then Economic Secretary a simple question:
“If long-term investment is good and short-term bad, why are the Government shortening the taper?”
The answer he got was very clear, if a little short-tempered. The then Economic Secretary said
“venture capitalists and other early-stage investors frequently invest with a view to realising their capital in less than two years, so we have designed the taper specifically to take into account the natural mode of operation and interests of venture capitalists, and their investments in start-up businesses.”—[Official Report, Standing Committee F, 21 May 2002; c. 170.]
In other words, the relief had been retooled to benefit the very group that seems to have sparked off the latest ill-considered reform of CGT, which is the group that will now see little benefit from a lifetime capital gains tax allowance.
When Mark Neale, managing director of budget, tax and welfare at the Treasury, gave evidence to the Treasury Committee following the pre-Budget Report, he took pains to emphasise how “carefully” the Treasury had considered the Chancellor’s original announcement. His reasoning—that taper relief was a successful short-term incentive that had outlived its usefulness because it attracted tax avoidance—was a new departure for the Treasury and broke with years of momentum.
Does my hon. Friend agree that even if taper relief had outlived its usefulness—I do not believe that for a moment—it is imperative that the Government signal an intended change of direction well in advance and consult widely on it, otherwise, the impression is created that policy is being made on the hoof? Frankly, that invites investors in this country to apply the same kind of risk premiums for lack of certainty in policy that they might more typically apply in less developed economies.
As always, my hon. Friend makes an excellent point. We made that point in the debate on the previous clause. It shows the lack of predictability, consistency, planning and consultation in the Government. We need planning. We need to consult thoroughly with businesses so that they can plan in the long term, not the short term.
Mr. Neale’s justification for the change of direction was that the Treasury was
“taking this step both to simplify the tax and to put it on a long-term basis.”
That statement was made on 17 October. On 24 January, the Chancellor changed his mind again. Not only do the proposals fail to provide simplification, but the Treasury’s view of long-term tax planning appears to have shrunk to a window of a little over three months.
In January, the Chancellor also seemed keen to emphasise that there were many alternatives for helping small businesses such as venture capital trusts and the enterprise investment scheme. However, venture capital trusts have been endlessly tinkered with by the Government. I remember the Committee’s discussions on the second Finance Act of 2006, when the gross asset value for VCT investments was lowered to focus investment on small companies and, at the same time, the incentive for investors was cut by an increase in the tax they had to pay.
The VCT regime has been a story of fluctuation and indecision, year in, year out. It sits badly with a capital gains tax regime that fluctuates not only year by year but month by month, yet the VCT regime is one of the crutches that the Chancellor is using to prop up his latest ill-fated reform. The Chancellor must decide which road he wants to follow: targeted incentives to encourage specific policy objectives, or a simpler, flatter tax.
Does my hon. Friend agree that what we are discussing is a vital part of making, and keeping, Britain competitive as we move into much more uncertain times. Does he share my astonishment that there is not a single Government Member on the Government Benches apart from the Whip, the Minister and the Parliamentary Private Secretary? Does that not tell us something about the level of Labour’s commitment to the businesses and the entrepreneurs of this country?
I must agree with my hon. Friend—it shows almost the contempt in which the Government hold small businesses, which are the engine of the economy. I made the same point in our debate on the previous clause—there was not a single contribution from Labour Members to that debate.
Order. I should be grateful if the hon. Member for Braintree (Mr. Newmark) confined his remarks to the amendment that we are discussing.
A well-timed intervention.
As I was saying, the Chancellor must decide which road he wants to follow: targeted incentives to encourage specific policy objectives, or a simpler, flatter tax. He cannot have his cake and eat it, but that is what he is attempting to do in this year’s Finance Bill.
The hon. Member for Runnymede and Weybridge (Mr. Hammond) was rather skating on thin ice, as he drew attention to the fact that there was one Conservative Back Bencher in the Chamber, although it is true that the Labour Benches are even more thinly populated.
Clause 6 and schedule 2 introduce the central reform elements announced in the 2007 pre-Budget report. The changes replace layers of complex rules built up over many decades with a significantly simpler framework. In particular, a number of old reliefs are abolished, leaving an easy-to-understand tax-free allowance and a single headline rate of tax. I make those opening comments to set the scene, but I want to return rapidly to the brief exchange between the hon. Gentleman and myself.
The hon. Member for Dundee, East (Stewart Hosie), whom I compliment on tabling the amendment and encouraging us to hold this important debate, raised a number of serious points and questions, and I was interested in the examples that he drew from Scottish experience. He spoke on behalf of the Scottish National party, who are in government in Scotland, so he bears a similar responsibility to the Opposition Members whose party would be in government. That is why the comments of the right hon. Member for Witney (Mr. Cameron) are important, and why the House requires a clear explanation of what those parties would do if their amendment was not carried, and how they would cost the consequences.
The hon. Member for Runnymede and Weybridge asked me to explain the difference between the figures published in the PBR and those published in the Budget. We can argue about the figures, and it is right that we should do so, but there will be significantly more than a little hole if he does not accept that the clause should stand part. The figure in the 2007 pre-Budget report for 2010-11 was £900 million. The figures published in the Budget do not separate out the final estimated cost of entrepreneurs’ relief. The decision was made in the light of the whole score card, and the costs of the 2008 Budget are therefore somewhat less—£250 million per year; £350 million next year; and £500 million in 2010-11. We have costed the measures, and the hon. Gentleman needs to explain how he would cost such an action, and the decision that he is encouraging Conservative Members to make.
The Minister has costed the measures, but she has not told us where the Government found the money. That is important, because we have had a similar debate on the 10p tax rate. If the Government can spirit up money when they need it for things that they choose to do, why can they not spirit it up to solve other problems?
Entrepreneurs’ relief was fully costed, and it forms part of the Budget figures. It is the hon. Gentleman’s party that needs to find an answer to the question when he goes to the public in an election period with a programme that is £10 billion adrift, and adds a number of decisions made as a result of voting on the Budget.
Well, I am sure we will return to it in future debates. Perhaps, Sir Michael, I should speak more narrowly.
The reformed regime is complemented by a focused capital gains tax relief for entrepreneurs, introduced in clause 7 and schedule 3, which we shall debate in detail in Committee. In progressing the capital gains tax reform programme, the Government have been guided by three key principles. First, we are determined to deliver a significantly simpler tax regime. There is no doubt that capital gains tax legislation had become one of the most complex parts of the tax code, and there are genuine benefits in sweeping much of that complexity away.
Secondly, the Government have maintained a fair and competitive capital gains tax regime. A generous tax-free annual exempt amount will continue to keep the vast majority of individuals out of the capital gains tax net. For those with larger capital gains, it is right and fair that they should make a contribution to the public finances, and for that minority, the new 18 per cent. rate remains internationally competitive. Finally, the Government remain particularly committed to supporting businesses and promoting enterprise. We recognise the contribution to the economy and to society that our entrepreneurs make, and have introduced a new capital gains tax relief focused closely on that group. We have also retained a number of targeted tax incentives, including the enterprise investment scheme and venture capital trusts.
On the general point that has emerged from the debate about the process and the way in which business was engaged and consulted, will the Financial Secretary address the uncertainty in investors’ minds? They do not know whether the Government are going to spring something else on them in the next pre-Budget report which, in fact, is a decision that is to be implemented. Will she reassure us that the Government are going to return to the notion that the Budget system should be about opening consultation wherever possible, not springing surprises on business? If we are to encourage investment, we need certainty and understanding of where the Government are going.
The hon. Gentleman makes a fair point, and I know that those concerns have been expressed. I hope to be able to respond to them in a few moments, if he will allow me, but first I should like to develop my response to the overall debate in a more structured way.
The hon. Member for Runnymede and Weybridge said that simplification was a good and valuable thing, but that it should not be undertaken at all costs. May I tell the House that the reforms will replace—and this bears repeating—a significant amount of structural complexity built up over many years with a simple system based on a single headline rate and focused relief for entrepreneurs? That is a change well worth having. Entrepreneurs’ relief has been targeted to deliver a special 10 per cent. rate for business and enterprise, which is essentially what businesses have asked for. Indeed, when the pre-Budget report was published, stockbrokers Killik and Co. was quoted in the Daily Mail of 10 October as saying:
“This has to be a positive move for investors. It will lead to many choosing to sell investments when it’s right to do so rather than holding on to investments in order to avoid a penal 40 per cent. tax.”
Will the hon. Gentleman allow me to quote one or two comments that are entirely independent of the Government? The Financial Times editorial on 25 January this year said that there was a “strong case” that 80 per cent.—let me put my teeth back in; it is 18 per cent.—is “fair”. Lisa Macpherson, the national tax director with accountants PKF said on 28 February that the new capital gains tax legislation is “simple and sensible.” On 24 January, John Wright of the Federation of Small Businesses said:
“The Chancellor said specifically today that he wanted to help small businesses facing big tax rises from April and that is very good news indeed.”
Of course Killik and Co. is in favour of reducing the tax paid by passive investors in the shares of large companies quoted on the London stock exchange. What the Chancellor has created is a regime where those who invest passively in the relatively safe shares of large companies will be treated in the same way as those who get up early in the morning, who work and take risk over a lifetime to build up a substantial business. The Government have ended the differentiation in favour of risk taking and enterprise in this economy.
The hon. Gentleman and I will have to agree to disagree on that point. I clearly do not accept his description.
The hon. Member for Taunton (Mr. Browne) suggested that capital gains tax should be taxed at income tax rates, but there is a clear view that 18 per cent. strikes the right balance. The Government’s strong view is that that 18 per cent. rate rewards investment and enterprise, which is important for the economy. It ensures that people with gains above the tax-free allowance of around £9,600 contribute to the public purse and it remains internationally competitive.
The proposals for capital gains tax reform have been controversial. We do not generally consult on changes to tax rates, but wide-ranging discussions with interested parties took place after the pre-Budget report, and the entrepreneurs’ relief announced in January was our direct response to the concerns that were raised. Her Majesty’s Revenue and Customs have engaged in discussions with tax experts on the technical detail and issued draft legislation for comment ahead of Finance Bill publication. The entrepreneurs’ relief directly responds to the concerns raised by business groups and it should receive a warm welcome in the House.
The hon. Member for Runnymede and Weybridge said that this was the wrong time to be increasing business tax, and that case was advanced in the previous debate. However, the new entrepreneurs’ relief continues to deliver targeted support for business. The change will deliver a massively simpler system that will benefit everyone. The hon. Member for Taunton said that the entrepreneurs’ relief makes matters more complex, but again, I do not agree. The reform will replace a significant amount of structural complexity, which is a change well worth having. It will provide a simple system, based on a single headline rate and a focused relief for entrepreneurs. The relief has been carefully targeted to deliver a special 10 per cent. rate for business and enterprise, which, as I said, is essentially what business has been asking for.
Overall, the changes introduced by the Bill represent a major and welcome simplification of the capital gains tax regime. The hon. Members for Dundee, East and for Runnymede and Weybridge pressed the matter of entrepreneurs’ relief, saying that it was not good enough and it was a small concession, and they referred to the loss of confidence in the UK as a business environment, but entrepreneurs’ relief will deliver a 10 per cent. CGT rate for the vast majority of small business owners and material investors. That is a tax saving of up to £80,000 each.
Overall, the UK continues to be an excellent place in which to do business, as was said earlier. For example, the relative cost of starting a new business is now equal to that in the US and lower than in France and Germany, and that is why, as my hon. Friend the Exchequer Secretary reminded me earlier, 700,000 new businesses have started up in recent times. The overall changes that we are making are not only good, but welcome to businesses.
Does the Financial Secretary recognise that the problem faced by the UK is not the number of start-up businesses—that is holding up pretty well—but the number of businesses that reach the critical level of a £1 million turnover within three years? That number has fallen, so more lifestyle-type businesses are starting up, but fewer of them are growing to become scalable businesses that will create the jobs, wealth and prosperity that the economy needs.
Again, that is precisely what the investment allowance is about. These are all matters that we must keep under review. I am grateful to the hon. Gentleman for his acknowledgment that the start-up figure is holding up and is good news.
Amendment No. 8 seeks to delay the implementation of clause 6 pending a Treasury report on how capital gains tax reform will affect businesses seeking investment, investors who normally pay tax via capital gains tax, and the availability and cost of houses to buy and rent. It is unnecessary, and worse still, by abandoning the 6 April 2008 commencement provision, it would mean significant disruption for taxpayers who would no longer know where they stand. The Government have been clear from the outset that the reformed regime will be much more straightforward for people who pay capital gains tax. We announced the changes in advance to give people time to arrange their affairs accordingly, and we listened to the concerns that were raised by business groups following the announcement introducing a new tax relief targeted on entrepreneurs to meet these concerns.
The Financial Secretary says that advance notice was given in order for people to put their affairs in order, but it was given only because of the hue and cry after the initial announcement last autumn. We then had the situation through February and March where accountants and other financial advisers were pulling their hair out because there was a lack of clarity as to what was meant, and people were pushed into selling businesses or disposing of shares, or were not sure whether to hold them. I will not buy the “This will throw the whole system into chaos” argument, because it will not. If the amendment were passed, it would allow the Treasury to do precisely what it says, which is to prepare a detailed assessment of the real impact of the real changes, so that people could take informed decisions in the future.
I did not think for one moment that the hon. Gentleman would buy the argument, but I am confident that Government Members will accept the case and support the changes that we propose. We have listened to the concerns that were raised by business groups following the announcement. On the issues around property investments, it is important to remember that capital gains tax is just one of many factors that influence people’s decisions about when to buy and sell. More importantly, the Government have taken a number of steps, both through the tax system and more broadly, to promote housing supply and improve affordability for first-time buyers.
The hon. Members for Runnymede and Weybridge and for Taunton asked about the save-as-you-earn plan, and suggested that it might be unfair. Our figures show that the average amount of gain that a typical employee makes from save-as-you-earn options is well under the annual exempt amount of £9,600 a year, but I have no doubt that we will return to that point in Committee.
The hon. Member for Braintree (Mr. Newmark) made an entertaining and interesting contribution. I have been trying to read his lapel badges from a distance, and I now know what they say. In 1992—hon. Members will remember that that was the year when the Labour party failed to get into government—I remember wearing a badge saying “Don’t blame me, I voted Labour”, but the wearing of lapel badges is a practice that I am happy to have grown out of.
The hon. Gentleman brought several serious points to the debate, particularly with regard to how capital gains tax reform might hit small business. Entrepreneurs’ relief will deliver a 10 per cent. capital gains tax rate for the vast majority of small business owners and material investors, and overall the UK continues to be an excellent place in which to do business. He asked how another 28 pages of CGT legislation could possibly constitute simplification, but it is what they do that will provide the simplification. They will sweep away layers of complex rules built up over many decades, and the legislation as drafted is necessary to ensure that the various changes are made and followed through correctly. The end result will be a substantially simpler regime.
The hon. Member for Taunton asked whether the 18 per cent. CGT would lead to all sorts of avoidance. As he will be aware, there are already numerous rules in the tax code to prevent individuals from disguising income as capital gains for tax purposes. The Government have a clear track record of blocking tax avoidance if it arises, and they are consulting on options to strengthen the anti-avoidance machinery in respect of that issue.
I have been interested to read the criticism that the tax code is getting ever longer. In truth, a lot of that has resulted from the tax law rewrite work, which has introduced simplification and clarity. It has also resulted in greater explanation within the code, which is therefore longer. The language is simpler, but reading it takes longer. The hon. Gentleman’s criticisms are not worth taking seriously.
We will probably return to the issue several times in Committee. I do not accept what the hon. Gentleman is saying; we are introducing serious and welcome simplifications.
I do not accept the hon. Gentleman’s suggestion that the changes discourage long-term investment. When concerns are raised, it is always sensible to listen to them, but I say to him that the Government’s success in delivering macro-economic stability has created the conditions in which individuals can plan for the long term. The reformed CGT regime removes distortions and will be more sustainable and straightforward for taxpayers and help everyone to plan for the future. The new entrepreneurs relief is targeted to reward business owners and material investors, who have worked hard to grow their businesses.
I reiterate the importance of certainty for businesses and investors. I am well aware that there are differing points of view on the merits of capital gains tax reform, but I hope that all parties will recognise that the uncertainty that would result from the abandoning of the 6 April 2008 start date would be highly disruptive and must be avoided. I hope that the hon. Member for Dundee, East will withdraw the amendment, although I do not believe that he will. If he presses it to a Division, I urge hon. Members to reject it.
I thank the Financial Secretary for her consideration of our amendment. Early in her reply, she said that our party, which is governing in Scotland, and Plaid Cymru, which is jointly governing in Wales, needed to take responsible decisions. I thank her for pre-empting the day when we take decisions on these very matters in Scotland and Wales.
The amendment is not irresponsible. It does not offer up a cost and it does not add confusion or uncertainty. We have had the uncertainty since the decision announced last autumn. The amendment seeks clarity.
I turn to some of the points made by the hon. Member for Runnymede and Weybridge (Mr. Hammond), who was sensible on this issue. He said that the Government’s measure was a home-grown own goal, which it is; he said that the Government had sacrificed business to short-term political advantage, and they have; and he said that we needed a properly thought out package of capital gains tax, and we do. He criticised the Financial Secretary for the Government’s bringing forward of their CGT changes with no advance warning or discussion, and I agree entirely. He went on to say that schedules 2 and 3 will need detailed scrutiny upstairs in Committee, and I can hardly contain myself in anticipation of the glorious hours when we will do just that.
The hon. Gentleman said that the amendment might still allow elements of schedule 2 to be proceeded with. I am sure that he will agree—in fact, I am also sure that the Financial Secretary would—that schedules 2 and 3 are opaque, long and impenetrable. Without the assistance of the civil servants or advisers that other parties have, I am unable to go into as much detail as I would have wanted to on schedule 2. However, I have presented a principled amendment that seeks the clarity that the Government have failed to provide so far. I wish to press amendment No. 8 to a Division.
Question put, That the amendment be made:—
Motion made, and Question put, That the clause stand part of the Bill—
Clause 6 ordered to stand part of the Bill.
Amusement Machine licence duty
I beg to move amendment No. 16, page 11, line 17, at end add—
‘(3) The amendment made by subsection (1) ceases to have effect on 1st April 2009 unless the Secretary of State has made regulations under the Gambling Act 2005 which permit up to one-fifth of the gaming machines in bingo halls and arcades to be Category B3 machines (as defined in regulations made under section 236 of that Act).’.
Amusement machine licence duty is important not only to the many small businesses that are involved in gaming arcades up and down the country, but, further up the supply chain, to the various manufacturers and companies that service gaming machines. It is also important to the Treasury. It raised around £208 million in tax revenue for the Treasury in the financial year 2006-07, according to the British Amusement Catering Trade Association. Indeed, the association estimates that the industry’s overall contribution through gaming arcades and the gaming machines that are also in bingo halls, for example, is even greater. The industry employs 26,000 people directly, so when employment taxes—for example, national insurance and PAYE—are included, the estimated total tax revenue from amusement arcades is a substantial £600 million.
Against that backdrop, the industry described the further increase in this year’s Budget in amusement machine licence duty as a “missed opportunity”, given the pressures that it faces as a result of the Gambling Act 2005, which was effected last September. The amendment is intended directly to assist an industry that is under pressure, and to strengthen the Treasury’s ability to ensure that we retain a successful gaming and arcade industry, which can continue to contribute to the Exchequer.
The amendment would enable gaming arcades to have up to one fifth of their gaming machines as B3 machines, and unless the provision was in place by April next year, this year’s Budget increases in amusement machine licence duty would lapse. The amendment would force the Government to revisit allowing more B3 machines per establishment than the current rules in the Gambling Act permit. The new rules restrict establishments to a maximum of four machines, irrespective of the venue’s size. The Act also introduced a further change, reducing the maximum stake on B3 machines from £2 to £1, which has meant a dramatic fall in the turnover of gaming arcades.
Although the debate is about amusement machine licence duty, to explain my amendment properly and so that hon. Members at least understand my rationale for tabling it I need briefly to outline the dramatic effects of the Gambling Act. I could have tabled a further amendment on increasing the current limited stake from £1 to £2 for a £500 maximum prize on B3 machines, which the Gambling Act reduced. However, I believe that the amendment will give me the chance to make plain my concerns about the viability of the gaming arcade industry and the impact on the economies that it supports.
Many people who are involved in the gaming arcade industry have serious concerns about even its short and medium-term viability, if my amendment is not accepted. Those anxieties are especially prevalent in seaside communities, where a much larger base of the local economy is linked to tourism and the entertainment industry generally.
I assure my hon. Friend that I have received numerous representations from people in my constituency who run establishments such as those that she describes. They are all suffering greatly. Many have experienced catastrophic falls in revenue and many wonder for how long they can continue. My hon. Friend is right and I cannot emphasise enough the seriousness of the position of that sector of the industry.
My hon. Friend makes a helpful contribution, which illustrates the two key points that I want to make today. First, now is not the time to increase tax further on the industry through raising the amusement machine licence duty. Secondly, it is ironic that a fair amount of the Exchequer’s tax revenue, which it already, and no doubt willingly, takes from the industry is under threat because the businesses are threatened. The concerns that my hon. Friend expressed are reflected in early-day motion 840, which 155 Members from all parties have signed.
The British Amusement Catering Trade Association has assessed that, since the introduction of the Gambling Act, revenues have collapsed by an average of 21 per cent. year on year. The amendment aims to ensure that the trend in collapsing revenues has a chance of being reversed by the Government well before the planned review of the impact of the Gambling Act, which is likely to be long drawn out. That review is currently planned to start in 2009. It could take many months— perhaps longer—so we will probably not see any action until 2010. As the hon. Member for South Thanet (Dr. Ladyman) said in a recent Adjournment debate:
“We cannot afford to wait for a six-month review, or even a three-month review. My constituents’ businesses are going under now. We need to send a signal now.”—[Official Report, 22 February 2008; Vol. 472, c. 744.]
If the Committee supports the amendment, we would send that signal, which businesses need to give them hope that they can keep going until their problems are properly tackled.
Without the changes that the amendment proposes, the risk to Treasury revenues is significant. However, let me be clear: for Conservative Members, it is more important that those tax revenues are based on economic success and jobs. I am worried that, by the time we who raise our concerns tonight are proved right, it will be too late to protect those gaming arcade businesses and bingo halls, which are also affected by the changes that the Gambling Act introduced, and they will be lost.
Unfortunately, the reality is that many of those businesses, which are the lifeblood of many of our most loved seaside and coastal towns, are under pressure and are going to the wall. I am talking not only about gaming arcades that form the very identity of places such as Margate, Blackpool, Portsmouth, Hastings, Great Yarmouth and Ramsgate—I could continue—but about family businesses that have been passed down from generation to generation.
Such businesses are the lifeblood of their local economies and are often committed to those economies, alongside providing employment, too. They deserve to be supported by the Government. Instead, they are being undermined. The Government will not take note of their cries for help, even though the Under-Secretary of State for Culture, Media and Sport, who has responsibility for gambling, admitted only in February that there was a “serious problem”. Ministers seem more concerned with saving face than with saving jobs and supporting local communities. My amendment challenges that most damaging attitude.
Gaming arcade businesses are being asked to compete with betting shops and casinos with one hand tied behind their back. The stakes and prizes of their machines cannot compete, and such businesses cannot have the number of machines that they need to stay profitable. My amendment aims to challenge that by removing the excessive control over the number of B3 machines to which an establishment is limited, and allowing up to 20 per cent. of any establishment’s machines to be B3 machines.
Without my amendment, there is a danger that the Treasury’s tax revenues will fall, not just because of lost amusement machine licence duty but from lost employment taxes from long-standing, often family-run, businesses. My concern is that such businesses are under so much pressure that many are in danger of going to the wall, as we have heard. My amendment seeks to prevent a lose-lose situation—in which everybody loses, not just, most importantly, the businesses concerned, but the Exchequer.
I am grateful for the hon. Gentleman’s intervention. That suggestion was supported by the British Amusement Catering Trade Association. Our party supports the proposal, along with the association’s other suggestion, which is to reverse the reduction in the maximum stake from £2 to £1. Our amendment is fully supported by the industry that we seek to help.
Gaming arcades and the economies that they support are fundamental parts of their local communities. Indeed, the adult gaming centres in which B3 machines are often found support family entertainment centres, which support the wider communities and economies of which they form part. Nick Harding of BACTA says that there is already evidence to suggest that
“at this rate, half the industry will be gone in six months.”
He also said that seaside operators are
“dying on their feet as a result of the Gambling Act.”
My amendment seeks to challenge that.
Although the trigger for the problem was created by another Department—the Department for Culture, Media and Sport—the consequences are Treasury-related. They include small family-run businesses potentially going out of business and local jobs being lost.
I for one will be supporting the hon. Lady in the Lobby on this issue. I am delighted that she has quoted BACTA’s comment about half of all amusement arcades going out of business in six months. However, arcades have lost more in the past six months than they have lost in the past 10 years. The damage done by the Gambling Act is already apparent not only in the amusement arcades but in the manufacturing industries that support them.
Again, we are hearing from hon. Members with direct experience of the communities affected and the stresses that the 2005 Act is putting on them. Based on the contributions that we have heard tonight, it would appear to be only a matter of time before the economic damage being done to the industry is transferred to Treasury revenue.
My amendment aims to challenge the Government’s drive to continue raising the amusement machine licence duty against a backdrop of economic problems that put so much more underlying tax revenue from the broader gaming industry at risk. I am sure that many hon. Members in the Chamber will be aware of the Select Committee on Communities and Local Government report published back in February 2007 called “Coastal Towns”. Even then, before the devastating impact of the 2005 Act, that Committee said:
“A number of coastal towns suffer from deprivation and their economic regeneration is of critical importance.”
As I have said, the Minister with responsibility for licensing accepted in an Adjournment debate earlier this year that there was a “serious problem”. My amendment is an attempt to address that problem. It would mean that those underlying causes, which are so badly holding gaming arcades back, preventing them from competing with other gambling businesses, would have to be addressed. Even if those causes were not addressed, however, there would at least be no raising of amusement machine licence duty, as the Budget proposes. Instead, the rates would be frozen. Without addressing the more fundamental issues—not just the number of B3 gaming machines allowed, but the need to increase the B3 machine stake from £1 to £2—this is no time for the Government to put further pressure on an industry that is already on its knees.
Even if the Department for Culture, Media and Sport is unwilling, the Treasury must listen to the pleas of the thousands of small gaming arcade businesses facing ruin. The 2005 Act is sucking the economic lifeblood out of seaside communities, bingo halls and gaming arcades throughout our country. Treasury Ministers must take the necessary steps to make their colleagues in the Department for Culture, Media and Sport listen and take action before it is too late for those economies and communities.
It is time that the Government started supporting local economies, especially in the seaside towns that form so much of our valued national heritage. Today the House has the chance to join the Conservative Opposition in voting to stand up for those seaside communities. I hope, too, that we will have the support of all those hon. Members who signed early-day motion 840. For the sake of the communities affected, I hope that we can all take that opportunity.
On the face of it, clause 21 is fairly innocuous in terms of raising revenue, but it has obviously raised huge concerns in many parts of the gambling industry. I represent a constituency with coastal resorts, and although the adult gaming centres and amusement arcades in those resorts are small they form part of the entertainment that many such resorts provide.
Acceptance of those facilities is slightly mixed. Not all my constituents have gone to the planners saying that they would like more of them. Indeed, demonstrations and campaigns have been mounted to stop certain businesses starting up. We need to strike a balance. Tourists like to use such facilities when they visit, but they are not necessarily the flavour of the month with local residents.
Nevertheless, such facilities have been around a long time and are, in the main, small family businesses. In the ordinary run of things, merely raising the duty by the rate of inflation would not be particularly onerous. However, as the hon. Member for Putney (Justine Greening) pointed out, a combination of the Gambling Acts, in some cases the smoking ban and the increase in alcohol duties has begun to put a lot of pressure on such businesses.
It is not only arcades that are affected; small pubs and bingo halls are also affected. I was interested to learn about the restriction to four B3 machines in bingo halls, because some such halls are rather large establishments that hold quite a few people. During breaks, people rush to use the machines, but if there are only four machines, there will be queues of people waiting to use them. Four machines might be an acceptable number in a small establishment, but it is not reasonable in a large bingo hall.
The Government should consider the whole situation and the effects of different aspects of their legislation and policy. Together, those measures have put particular pressure on such businesses, and it is time to pause and consider the situation in the round. They must consider the effects on businesses and coastal towns, which have many such businesses, and particularly the effects on revenue and jobs. A significant number of jobs are affected; I was surprised to learn how many people are directly or indirectly involved in this large industry. There are great concerns that our efforts to modernise the industry and squeeze a bit more revenue out of it are going to kill the goose that lays the golden egg.
One of the original ideas that led to the changes was the trade-off whereby super-casinos were to come in and ambient gambling was to be reduced. Does the hon. Gentleman agree that that plan has evaporated because super-casinos are not going to happen, but that ambient gambling is still being hit? The Treasury therefore risks losing revenue from ambient gambling because those business are all going under, but without getting the extra uplift in revenue from super-casinos.
I could not agree more. That is exactly what has happened. Some of the smaller businesses involved in the gambling industry might have breathed a sigh of relief that the super-casinos were not going ahead, but they have suddenly realised that the panoply of Government policy on this issue is having almost the same effect of potentially putting many of them out of business.
There is time to address this issue. We support the amendment in the sense that it gives us the chance to pause, consider the matter in the round and see whether there is a better way of dealing with it. The duration of licences could be considered, as could the opportunities for rebates that the industry has proposed. The industry has put forward some very constructive ideas and does not seek to have things all its own way. It seeks a fairer way of dealing with these matters so that businesses can carry on and continue to provide employment, and so that attractions at resorts, including small family businesses, can continue. That would also mean that revenue would continue to come to the Treasury.
Unless we consider those issues, there will be a rapid demise in many of those areas. Some people who do not support the concept of gambling might think that is a good thing, but many people would be substantially affected by the demise of such businesses. It is time that the Government paused to consider the whole issue, including the effects of the Gambling Act 2005 and other measures that will be devastating for a significant number of businesses.
I find the hon. Gentleman’s position somewhat contradictory, unless he was making a speech on the clause stand part debate. The amendment does not ask for a pause, to use his word. It sets out a way forward, as perceived by the hon. Member for Putney (Justine Greening). It does not ask the Government to pause and consider the evidence to see whether anything needs to be done and whether there is a problem, which seems to be what the hon. Gentleman suggests. That is not what the amendment asks for and I urge him to reconsider his support for it. As a result of that reconsideration, he might decide to vote against clause stand part, which would be a more logical position and would be commensurate with his earlier remarks.
I was trying to suggest that accepting the amendment, which relates specifically to B3 machines, would, with the reviews that are taking place, provide an opportunity to reconsider the particular aspect that the amendment covers. It would necessarily have to cover other areas as well.
I suggest that the reviews are taking place and that that is not what the amendment would do. It states what the outcome should be, and does not say that we will look at the results of the review.
My difficulty with the way in which the hon. Member for Putney spoke to the amendment is that most of her speech was a series of assertions. I am not an expert on the gambling industry, although of course it exists in my constituency in Wolverhampton—we have bingo halls, casinos and a new venue coming on stream shortly—but given that we are making technical legislation in the Finance Bill, I would prefer to hear a little more evidence rather than simply being told that this is what the industry wants. The industry might be right, but we have been given that assertion without any evidence. I understand the concept of potential damage to the industry, but I should like to have a little bit of evidence.
I suggest that the hon. Gentleman should come here armed with the necessary information. He says that he does not have it, but the Government do. BACTA has made it clear that it has had many meetings with the Minister with responsibility for gambling and that it has tried to speak to members of the Treasury. The evidence is clear that the industry is suffering. It needs support, but is not getting it from the Government.
It is not for me to produce evidence, as I have not moved the amendment. I seek to find out the reasoning behind it, and it is quite in order for a Member to ask for the reasoning behind an amendment. It is also in order to ask the Member who moves an amendment for evidence to support it, and to be put out if such evidence is not produced—[Interruption.] It was not produced by the hon. Lady in her speech, except tangentially. Neither did she explain the mechanics of what the amendment would do, apart from the £1 stake going up to £2. That may be all that would happen, but it behoves a Member who moves an amendment on a technical issue such as this—it is also very sensitive because it affects seaside communities—to produce a little more evidence.
I do not know because I have not been given the evidence. Perhaps the Minister will explain it if she catches your eye, Mr. Cook.
Finally, I find it sad that the hon. Members for Putney and for South-East Cornwall have said nothing—unless I missed it, and I stand to be corrected—about the potential problems of gambling, which is not a risk-free activity. There is a beneficial side to gambling in that many people enjoy it, but there is also a downside. A minority of people get into trouble with it, and hon. Members should always bear that in mind when considering the regime, and should mention it rather than being silent on the problems that gambling can cause.
It is a pleasure to follow the hon. Member for Wolverhampton, South-West (Rob Marris). He has raised several important questions, but many of them have already been answered. We have been here before and the relevant information is in the public domain. I suggest that following his comments today, he will be deluged with information from BACTA and its secretary, Lesley MacLeod-Miller, to convince him and to show him the state that the gambling industry is in.
I should like to make a little progress, but I will give way shortly.
I commend my hon. Friend the Member for Putney (Justine Greening) for introducing the amendment—an important amendment for the industry—and it is good to see that the shadow Treasury team is willing to listen and talk to other Departments. There is a dilemma in that the Treasury team is not willing to see the consequences of tax rises for the industries involved, so I am pleased that we are putting forward a proposal to remove the limit on B3 machines not only in adult gaming centres but in bingo halls. I underline my support for the removal of the £1 stake limit and its return to £2. To place that in its historical context, we had the same situation before the Gambling Act 2005, but there was no problem. They were called section 16 machines—that was old money—but they are now called section B3 machines.
The hon. Member for Wolverhampton, South-West wanted evidence, so let us look at the Gambling Commission’s prevalence study on areas of problem gambling. If we do so, we find that when it comes to machines under the banner of soft gambling, the figure is about 2.5 per cent. If we compare that with FOBTs—fixed-odds betting terminals—found in bookies up and down the country, the prevalence study report shows an addiction to gambling of 11.4 per cent. That is a huge difference, and that is perhaps where we should focus our attention, rather than the soft form of gambling.
Speaking as the shadow Gambling Minister, let me state the Conservative view that we need the right level of regulation for every type of gambling, whether it be penny arcades, the Crockfords casino or, indeed, internet gambling—another area that we have not even touched on, but I know that you, Mr. Cook, would correct me if I wandered down that road. Let us be clear: where is the evidence from this Government to justify hitting the soft forms of gambling such as bingo and the penny arcades? I do not like the term “adult gaming centres”, which has a seedy ring to it. I see the Minister smiling and I hope she agrees that perhaps another term could be used.
These soft forms of gambling are part of our community, whether in seaside towns such as those in my Bournemouth constituency or some of the other places mentioned in our debate. May I place on record my sadness that so few Members are in their places, suggesting that they are not supporting their local tourism industries? That applies particularly to those who signed early-day motion 840, which calls for exactly the changes that we are debating today.
Another consequence of the Gambling Act 2005 is that we have seen a 21 per cent. downturn in the trade of adult gaming centres. That is what has happened. People are migrating out of the arcade centres and, indeed, the bingo centres and going across the road to the bookies, where there is a different and harder form of gambling, which now meets their desires. I have already mentioned the FOBTs, where £100 a bet can be put down every 20 seconds and scant regard is paid to what is actually being done. That is the consequence—the unintended consequence—of the Gambling Act 2005, which we have an opportunity to amend today. That is why we are proposing the amendment.
My hon. Friend is making a very powerful case on behalf of, for example, businesses in Hornsea and Withernsea in my constituency. They are coastal towns facing many economic challenges, and getting taxation correctly positioned on arcades and other such businesses is essential to maintaining their economic well-being.
I just want to correct the hon. Gentleman. He referred to the move towards fixed-odds betting terminals as one of the unforeseen consequences of the Gambling Act 2005. They were well foreseen, particularly by those who now operate that sort of gambling; they saw it as an absolute cash cow in the making. The Government were told that that would be the consequence, but they did not listen.
The hon. Gentleman makes a valid point. I was being generous to the Government in using that term. We have called for a review of the use of FOBTs. They are here to stay, but if people can walk into these bookies up and down the country and place a £100 bet without anyone even taking a look at what is being done and if about 11.5 per cent. of people are addicted, the Government should clearly be looking into that problem, rather than making changes that affect bingo halls and penny arcades.
May I caution the hon. Gentleman? I did not say that I was against the amendment, which he seems to assume I was. I was merely questioning whether there was evidence for it. I am grateful to him for supplying some of that evidence, which his Front Benchers singularly failed to do. The import of the earlier part of his speech was that we have been here before, but I can assure him that I have sat on six Finance Bill Committees in a row, so I have some idea of what has and has not been discussed in this regard.
I do not wish to challenge the hon. Gentleman’s claim to being an intellectual tower when it comes to financial matters. What was clear from his intervention was that he was here either to delay proceedings—though I am sure that that was not his intention—or perhaps simply to learn, but it seemed that he was unaware of the impact of this legislation and its important consequences if passed. Now that the hon. Gentleman has heard the arguments, I certainly hope that he will join us in supporting the amendment, which is crucial to helping our communities, particularly our seaside towns. If you visit any of these places, Mr. Cook, whether they be bingo halls or arcades, you will see them boarded up; they are closing down at a colossal rate of knots. The last six months has seen more of these establishments closed than ever before, as the hon. Member for South-East Cornwall (Mr. Breed) mentioned. That is what is happening to this important industry and it needs Government support.
We cannot wait for the standard review to take place. A review of stakes and prizes takes place about every two years, and the next one is due in 2009. We are delighted with the Conservative policy that we have heard today, but we cannot wait for a general election. We need action now, so the Minister has a fantastic opportunity to stand up and show some support for seaside towns, for the bingo halls that are closing all over the country and for the communities that rally round the soft form of gambling. That would be preferable to the continuing trend towards the harder forms of gambling.
I ask the Minister to consider and look further into the evidence that she has received. I know that the Under-Secretary of State for Culture, Media and Sport is keen to support this measure but feels that his hands are tied, so I hope that the Exchequer Secretary will be able to stand up today and say, “Watch this space.”
May I first congratulate the hon. Member for Putney (Justine Greening) on what I thought was an excellent speech, putting the case on behalf of an industry that has been badly let down? Throughout the negotiations on the Gambling Act 2005, including the pre-consultation, the Government promised to listen to the case that BACTA and others were putting forward not just to safeguard themselves but in an attempt to work with the Government. When the Gambling Bill came out, it was clear that the Government had totally ignored all that advice and guidance. Labour Members voted gladly to support that, without realising the damaging consequences to the industry. I am grateful to the hon. Member for Wolverhampton, South-West (Rob Marris) for his advice not only to vote for the amendment but, if it fails, to vote against the clause stand part. I think that we should take that good advice.
If I look around my part of the south coast and south Hampshire I see that Portsmouth, Hayling island, Fareham, Gosport and the Isle of Wight have seen a decline in the arcade industry. Many establishments have already closed or been converted and some are in the process of conversion now. I do not share the concerns of my hon. Friend the Member for South-East Cornwall (Mr. Breed) about people demonstrating or campaigning—it is more about campaigning against new practices, as I do not believe there is a campaign in the country to try to close these operations. The Government are doing an effective job on their own bat by doing that.
The amendment offers an opportunity for the Government to say that they realise that the industry is important in employing tens of thousands of people—not just in the front line in the arcades, fairgrounds and on piers, but in the manufacturing industry in respect of servicing the machines. Countless thousands of people will lose their jobs. If they were all concentrated in one or two constituencies, there would be a national outcry and the Government would be forced to take action. Because those people are mainly dispersed around the coastline and in the city centres, the Government can choose to ignore the problem—there may only be a few dozen here or there, perhaps 50 in a city such as Portsmouth, so they can ignore it. I would say, however, that the Government ignore it at their peril. They not only disadvantage the industry when those arcades are closed down, as many people who enjoy the facilities offered there will be equally disappointed when the bingo halls are forced to close, like the arcades that are already closing.
The different parts of this industry all have families and voters, so I urge the Government to listen carefully to tonight’s debate. They have an opportunity to go some way to start to listen to the industry. They promised that they would, but ignored it in the Gambling Act. If we see what the hon. Member for Bournemouth, East (Mr. Ellwood) talked about—people migrating from arcades to the real danger of heavy gambling, which the hon. Member for Wolverhampton, South-West mentioned; lots of people share his concerns—there will be an even bigger increase in the problem.
The hon. Member for Bournemouth, East mentioned a figure of 11.2 or 11.4 per cent., but the report says that the figure is 11.4 per cent. and rising. That is the dilemma that the industry has to combat.
The hon. Gentleman is making a powerful speech and I am pleased that he supports the amendment, but is he aware that bookies are opening in the north of England and elsewhere with a licence to be a bookmaker even though people cannot bet on a horse on those premises? They are opening so that the four FOBTs can be based there. Those are the money-making machines.
I agree entirely, and I think that that pattern will quickly be followed around the country, because word will spread that that is a way to make money. The Government are truly cutting off their nose to spite their face. If the Treasury could calculate how much revenue it has lost in tax take from the closures over the past 12 months, it would be surprised and would see that it has already lost more than it will ever gain over the next two or three years.
Does the hon. Gentleman agree that the problem is as bad if not worse in smaller towns such as Aldeburgh and Felixstowe in my constituency? These arcades have been hugely important because, on wet days, families have been able to spend a short time together at little cost; they have been able to have family enjoyment. Such activity is wholly different from that which goes on in places of the sort being talked about.
The right hon. Gentleman comes late to the debate, but he comes with a pertinent point. That is the added quality that such amusement arcades—in city centres and small towns, as well as in the coastal cities of our country—offer to the family. In many areas, those arcades are one of the last places where the family can go on a wet day, having planned to do something else, and not have to spend a lot of money to have some fun as a family. That is what the Government have not recognised.
I will be delighted if the Minister says that she welcomes the amendment and will accept it. Perhaps she can persuade her colleagues to support it, because that would start the process of honouring their commitment to the industry, recognising its importance and giving those who see such arcades as one of the small pleasures in their life the opportunity to see that continue.
It is a pleasure to make my first contribution to what will be a long process. I am sure that we will all get more than used to listening to contributions from all parts of the Committee as we consider the Bill upstairs following two days of debate in the House. I for one am looking forward to it.
The hon. Member for Putney (Justine Greening) moved amendment No. 16 on gaming machines. I want to spend a little time taking the Committee through the current situation to set it in context. Gaming machines are subject to amusement machine licence duty, which is payable in respect of a licence that entitles a person to make a machine available for play.
AMLD taxes dutiable gaming machines and is charged at different rates based on machine type and the duration of the licence, which is what the B3 category mentioned by the hon. Lady refers to.
It may help the Committee if I briefly outline the background to AMLD. In 2006, we aligned the categories of AMLD with the Gambling Act categories. Aligning machine categories with the Gambling Act was a simplification measure because it gave operators more consistency between the tax and regulatory regimes.
The hon. Lady’s amendment would make tax changes contingent on changes to the social law. Traditionally, the social law is a matter for the Department for Culture, Media and Sport and the Gambling Commission. The taxation of all gambling is clearly a matter for the Treasury. I would have some worries about mixing up the two.
During the alignment with the Gambling Act, which does not regulate non-gaming machines, we removed AMLD from non-gaming machines—for example, pinball and video machines, which are more than likely to be in amusement arcades of the kind that hon. Members have been talking about in today’s short debate. Quite a lot of those machines have been exempt since 2006. We also exempted from AMLD many of the small-stake and small-prize machines. Those are the ones that are found in family oriented seaside arcades.
For the purpose of this tax, there are six categories of gaming machine—A, B1, B2, B3, B4 and C—which are determined by reference to the stake limit of the machine and the maximum prize available from the gaming machine. The cost of an annual licence ranges from £760 to £5,160, depending on the category. The cost depends on the category of machine and the duration of the licence applied for. Licences can be taken out for any period of between one and 12 months. Rebates are available in monthly chunks for licences that cease to be useful for gaming machines that are no longer in use.
AMLD is a fixed cost, so, because of inflation, the value of revenue raised for any given number of machines will diminish over time. Clause 21 makes a routine revalorisation for all rates of AMLD. That is not an increase; it merely maintains the real value of the licence.
Amendment No. 16 would lead to a reduction in the cost of all amusement machine licences on 1 April next year—not just for B3s, but for all of them, including those at the higher end, which people were objecting to so much earlier in the debate—unless the Secretary of State for Culture, Media and Sport made regulations that allowed a fifth of the gaming machines in bingo halls and arcades to be category B3 machines. It would return AMLD in April 2009 to the level of August 2006, which would cost £15 million.
Will the Minister expand on why it would cost £15 million to make that change? We probably all agree that this is perhaps not the right domain for her to make it, but she has heard—I hope—a convincing argument as to why it should be introduced. We have taken the opportunity to put the case. Will she now have words with her counterpart in the DCMS and say that, unless there are changes, she will receive less revenue from bingo halls and amusement arcades?
Clearly, we keep those issues, as well as those of the effect of taxation, under close review, but the hon. Gentleman is right to point out that the DCMS is the Department that deals with the social law. The changes that he wants to be made in relation to the number of category B3 machines allowed in bingo halls and amusement arcades are a matter for my DCMS colleagues.
The Minister has heard from Members on both sides of the Committee various descriptions of the trends that have long been in place regarding the run-down in the number of bingo halls and amusement arcades. How relaxed is she about that run-down in fiscal and social terms? Not everybody who was once a user of amusement arcades will migrate to the heavy end of the spectrum. For a lot of middle aged and elderly people, amusement arcades represent a social outing and a small piece of enjoyment while they are out shopping. By no means are they problem gamblers.
I agree with my hon. Friend that people who use amusement arcades or go to bingo halls are not necessarily problem gamblers; I suspect that few of them are. As hon. Members have said, a series of changes has taken place under the Gambling Act, which, after all, has been working only since October 2007. Hon. Members are calling for a review. Clearly, there will be a review, but we must remember that the major changes to social law have been working for only a short time and it may be slightly early to have a full review of the Act.
The Government have just conducted a very panicky emergency review of their ill-judged proposals on the taxation of low-paid people. Why can they not attribute the same urgency to a review of the destruction of a seaside industry, about which the Minister has been warned in the past and which has now taken place? A very serious situation faces hundreds, or even thousands, of businesses employing very many people. Will the Minister show the same urgency over that as she showed over the 10p tax rate?
If the right hon. Gentleman had been listening to what I was saying, he would know that it is not for the Treasury but for the Department for Culture, Media and Sport to conduct such a review. I will not say from the Dispatch Box that I will do things that are properly a matter for colleagues in another Department.
I find it a little difficult to understand what the Minister is saying about the distinction between community action and taxation. When the Chancellor of the Exchequer announces that the cost of cigarettes is to rise considerably, he always says “I am doing this to safeguard the health of the nation.” It is not possible to distinguish between the two issues. All we are asking is for the Minister to promise that she will tell her colleagues that the review must take place, otherwise she will lose money.
My colleagues in the Department for Culture, Media and Sport are keeping these matters under review, as they keep the social law relating to gambling under review. Even as we speak, they are examining issues relating to specific gaming machines and stakes. It is not for me to announce what my colleagues in the Department for Culture, Media and Sport are going to do. The fact is that gambling law and the social law relating to it are a matter for them and for the Gambling Commission, while taxation is a matter for Her Majesty’s Treasury.
If taxation is indeed the responsibility of Treasury Ministers, accepting the amendment would demonstrate that they recognised the damage that this change would do to the industry, and that they would be denying themselves revenue rather than increasing it. That in itself would put down a marker for the Minister’s colleagues elsewhere in Government, indicating that she for one is prepared to listen, to recognise the size of the problem, and to act.
The hon. Gentleman has raised two issues. Of course we are sensitive—I am sensitive—to the health of particular industries and how their activities are affected, but he seems to be suggesting that this industry is in difficulty because of the revalorisation of amusement machine licence duty. Although he may well have a point, the issues affecting the industry range more widely than whether we revalorise amusement machine licence duty as a tax. They also involve some of the changes resulting from the gambling legislation, and the changes in the social law. However, that is a matter for my colleagues in the Department for Culture, Media and Sport.
Category B3 machines are high-price gaming machines with a maximum stake of £1 and a maximum prize of £500. As we were told by the hon. Member for Putney, adult gaming centres and licensed bingo halls are permitted a maximum of four such machines. My colleagues in the Department for Culture, Media and Sport are considering the case for assisting bingo halls and arcades, but the Government’s underlying approach to gambling regulation is rightly a precautionary one. We must weigh the industry’s demands that we help it through economic difficulties against any danger that higher-stake, high-prize machines may pose to the public.
As I have said, amusement machine licence duty is a fixed cost, so because of inflation the real value of revenue raised by it will diminish over time. Reducing AMLD rates in 2009 to their August 2006 levels would cost £15 million. The Department for Culture, Media and Sport has said that it is considering the industry’s case for assistance, and it would be wrong to pre-empt the process by making an explicit link between the social regulation of gaming duties and levels of amusement machine licence duty.
I hope that, given that explanation, the hon. Member for Putney will withdraw her amendment.
If we were ever in doubt over whether this is a joined-up Government, we have just discovered the truth: they definitely are not. The Minister can hardly be bothered to talk to her colleagues in the Department for Culture, Media and Sport. She says that we should not mix up social law and Treasury law, but I am afraid that this is a social law which is having an economic impact. To say that it has nothing to do with the Treasury is an entirely inadequate response to the fact that companies are going out of business at this moment. The Minister ought to be willing to act. This is no way in which to treat the businesses that are so vital to seaside communities, and I therefore wish to press the amendment to a vote.
Question put, That the amendment be made:—
Clause 21 ordered to stand part of the Bill.
Abolition of starting and savings rates and creation of starting rate for savings
With this it will be convenient to discuss the following: Amendment No. 19, line 22, at end insert—
‘(6A) The amendments made by this section shall cease to have effect at midnight on 5th January 2009 unless the condition set out in subsection (6B) has been satisfied.
(6B) The condition referred to in subsection (6A) is that the Chancellor of the Exchequer shall have laid before the House of Commons a statement setting out the measures taken to mitigate the effect of the amendments made by this section and by section 1 (when taken together) on those for whom such effect is a net increase in income tax payable and the House of Commons shall, by resolution, have approved such statement.’.
Clause 3 stand part.
Clause 3 has dominated debate on the Finance Bill. The policy changes that it contains have unravelled, and they have unravelled for the same reason that the Government are unravelling; they are incoherent, inconsistent and driven by short-term political expediency rather than a long-term strategy. The problems that the clause has created are the Prime Minister’s problems. He announced these measures in his last Budget, measures that he knew—even when taken together with all the other measures that he announced—would have the effect of making 5.3 million low-earning households worse off. So why did he do it? Various theories have been advanced, the most generous—and, I have to say, the least probable—of which is that he did not appreciate the effect the measure would have on the poorest.
I bow to no one in my enthusiasm for identifying flaws in the Prime Minister but stupidity and innumeracy are not two that even I would suggest. Was it, as I have previously suggested, a move designed to establish his credentials ahead of a Labour leadership election and a honeymoon general election as the successor to Blair, able to reach out to middle England? Or, as my right hon. and learned Friend the Member for Folkestone and Hythe (Mr. Howard) suggested in the debate last Monday, was this entire elaborate strategy—announced in the way it was, with the abolition of the 10p rate concealed in the Budget small print and the reduction in the basic rate trumpeted in the final paragraph—nothing more than a tactical manoeuvre to try to wrong-foot the Leader of the Opposition in his reply? Whatever the motive, it was a cynical and short-term one, abandoning a long-term Labour party objective and a 1997 manifesto commitment.
Regardless of what the Government’s motives were in changing the policy, the absolute wage rates in my constituency have decreased by 4 per cent. in the last 12 months—and they started off at 25 per cent. below the national average—so this change is having a practical negative effect in my constituency. It is reducing the average standard of living in Montgomeryshire and in many other constituencies, too.
The hon. Gentleman makes a good point. This tax change, which has had a negative impact on 5.3 million of the poorest households, comes at a time when earnings are stagnant and prices are soaring, leaving the average family squeezed in a vice-like grip. This measure is all the Government can offer them; at a time when those households need a hand up, all the Government offer them is a tax increase.
My hon. Friend is being too generous to the Prime Minister. The clear reason for this measure is that the only category of the poor that count in the eyes of the current Administration are those who are part of the client state. The point is that this measure is heavily hitting people who are not in receipt of benefits.
I rise to ask a question in a spirit of genuine openness. This time last year, my right hon. Friend the Member for Birkenhead (Mr. Field) moved an amendment, which eight of my colleagues and many Liberal Democrat Members—and, I think, one Conservative—voted for. Why did the hon. Gentleman not vote for this last year, when we had the opportunity that was led by eight of my colleagues—and myself, I have to say?
I will answer that question genuinely—as, in fact, I answered the same question last Monday. We flagged this tax on the poorest within an hour of the then Chancellor sitting down at the end of his 2007 Budget speech. The amendment in question sought to impose an ongoing restriction on Governments, Chancellors and the Treasury in dealing with income tax changes. We felt that that was not the best way to deal with the problem. This specific issue is in this year’s Finance Bill, and we are addressing it by tabling amendments that will deal with the problem before the House today.
We have not said that we would introduce the 10p rate, and it is clear that the Labour Members whose position was critical in forcing the Government’s climbdown were not necessarily seeking to reinstate the 10p rate. [Interruption.] The hon. Gentleman says, “Ah”, but perhaps he would care to ask the right hon. Member for Birkenhead (Mr. Field), who is sitting not 3 m along the Bench from him. Those Labour Members were seeking to get the Government to go away and look at this package again, and make sure that those on the lowest incomes who lose out from the proposals were compensated. That is also our objective tonight.
No, I shall make a little progress now, if I may. [Interruption.] Well, let me tell the hon. Lady what the Labour party manifesto of 1997 said. It said:
“Our long-term objective is a lower starting rate of income tax of ten pence in the pound.”
When the then Chancellor introduced it in 1999, he described it as a measure
“that will make work pay and help people, especially those who are low-paid, to keep more of the money that they earn”
and he went on to say:
“When we make promises, we keep them”.
I was therefore surprised to see in what can only be described as the “slippery letter” of the Chancellor to the Select Committee Chairman issued last Wednesday, that the 10p rate championed by Labour in 1997 as a long-term objective is now described as having been
“introduced in 1999 as a transitional measure.”
My hon. Friend the Member for Worthing, West (Peter Bottomley) also noticed that change of tone, and asked the House of Commons Library to check whether there had ever been any reference to the 10p rate being transitional prior to the 2007 Budget. The Library’s answer was clear:
“No. It does not appear to have been described that way.”
Therefore, it is not any longer a “long-term objective”, and not any more a step
“that will make work pay and help people…to keep more of the money that they earn”,
but now, after the Government have abolished it, it was apparently a mere transitional measure. This is not so much a question of,
“When we make promises, we keep them”,
but more a question of, “When we make promises, we’ll spin and we’ll twist and we’ll duck and we’ll weave to cover our tracks as we break them.”
In fact, the statement that the rate was introduced in 1999 as a transitional measure is, to put it bluntly, a terminological inexactitude. If it had been uttered in this Chamber, rather than in a letter, the Chancellor would have been forced to withdraw it. It is a rewriting of history that would make Stalin blush; a long-term policy objective has been airbrushed out to become a mere footnote—a transitional measure of no lasting importance.
My hon. Friend is giving a forensic analysis of the machinations that the then Chancellor, now the Prime Minister, has had to go through to get this proposal through the House. Is my hon. Friend aware that earlier this afternoon, in response to some penetrating questions from a Labour Member, the permanent secretary was forced to admit that the Treasury was, as long ago as the Budget of last year, completely clear about and aware of who would be losers under the abolition of the 10p rate?
I was not aware that that admission had occurred this afternoon, but I am not surprised by what my hon. Friend says and I can tell him this: 5.3 million low-income households know to their cost that the Prime Minister does not keep his promises, and that he was prepared to betray them for his own short-term political interests.
I am very grateful to the hon. Gentleman for giving way. About 40 per cent. of my constituents earn less than £19,000 a year. That means they will lose out from the 10p rate. However, the vast majority of them will gain substantially because of the way in which the moneys have been redistributed through working family tax credits, child care tax credits and housing benefit. [Interruption.] No, not clients of the state; people who work hard for the state, and who receive only the minimum wage in return for their labour.
From what the hon. Lady says, it appears that she represents a constituency where earnings are below the national average. The figures, from the independent Institute for Fiscal Studies, are clear: 5.3 million households will, after taking into account all the other factors in the Budget package, be worse off. That is the group of people we are addressing today. Also, in addition to those 5.3 million people, there are millions more people—including some of her constituents —who have benefited from this package and who are equally disgusted that a Prime Minister, especially one who poses as the protector of the poor, could so cynically betray those who have placed their trust in him.
What is the Prime Minister’s response? As recently as a week last Friday, he was insisting that there was no problem and that no one would be worse off, despite the independent evidence mounting all around him, the threats of resignation from some within his own Government, the comments of his own senior Ministers, the figures produced by the Institute for Fiscal Studies and the rising tide of public anger reflected in the views and mood of his Back Benchers.
Instead of listening and responding as the furore mounted, the Prime Minister and the Chancellor dug in with their few remaining loyalists in the bunker. The Prime Minister said that there was no problem and that no one would be worse off, the Chancellor said that he could not reopen the Budget and the Secretary of State for Children, Schools and Families told The Daily Telegraph that the tax rise on the poor was part of the process of
“taking forward the fairness agenda.”
The Minister for the Cabinet Office dismissed the fate of the 5 million or so losers as a “matter of regret”.
Senior Downing street sources were briefing like mad to The Guardian on Saturday 19 April, saying:
“The idea that someone is going to stand up…and pull a rabbit out a hat is just not possible”.
On 20 April, The Sunday Telegraph reported having been told:
“We are not doing anything. We are not going to change our policy”.
The Exchequer Secretary was slapped down when she dared to suggest—with some prescience, as it now seems—that there might be some movement, and the Chief Secretary’s Parliamentary Private Secretary, the hon. Member for Sheffield, Hillsborough (Ms Smith), got a blast of transatlantic vitriol when she sought to express her constituents’ concerns.
The position was clear: the Prime Minister out of touch—and, indeed, out of the country at the critical time—was on top of it. He said:
“I am satisfied that once people understand the scale of the good things that we’ve been able to do in reforming the tax system ...then whatever questions people have about these changes can be answered”.
Everybody else—Members who were reading their e-mails, opening their postbags, doing their surgeries and talking to their constituents during the recess—were all, apparently, hopelessly out of touch. Alternatively, in the view of those in the bunker, the others were perhaps just too stupid to understand what the great genius in Downing street had achieved.
Is not the real sin of this the Government’s failure to admit that people were worse off? How does my hon. Friend think the Prime Minister would explain things to a pensioner involved in the Royal National Lifeboat Institution who, at the opening of a new lifeboat in my constituency, pointed out that she would be £2.50 a week worse off because of the proposals? The thing that really made her angry was that the Government in general, and Ministers on the Treasury Bench in particular, pretended that that was untrue. She objected to being told that she was a liar.
Once again, this is a case of the Prime Minister treating people as if they were fools. He knew exactly what he was doing, as did we, and, in the end, as did Labour Members. The Government only last Wednesday came kicking and screaming, dragged to admit the truth.
Every parent explains to their children that the only way to deal with a bully is to stand up to him. This Prime Minister is a bully, make no mistake—one need only ask the hon. Members for Sheffield, Hillsborough or for Hyndburn (Mr. Pope) about that. To their credit, a significant number of Labour Back Benchers rallied behind the initiative of the right hon. Member for Birkenhead in demanding compensatory measures for those who were to lose out, before the measures were implemented. I am not talking about a scrapping of the plan to double the l0p rate, but a revisiting of the wider package to restore the £700 million or so that was going to be taken from the pockets of those on the lowest incomes. They stood up to the Prime Minister and, true to form, he bottled it.
The Prime Minister offered no apology, no explanation and no recognition of the enormity of the policy that he had pursued, defended and sought to justify. The protestation that everything was cast in stone, that nothing could be revisited and that it was all in the long-term best interest of the country was forgotten in an instant. Faced with defeat, he ran up the white flag. He did so not because he had been persuaded of the argument or because he acknowledged that he was wrong, but simply to avoid a humiliation on the Floor of the House tonight. His was a tactical manoeuvre, and the right hon. Member for Birkenhead promptly claimed a victory—a victory it certainly was. The Prime Minister was humiliated. He was forced to climb down on a key proposal in the Budget that he had introduced a year earlier and in respect of which he had refused to countenance any form of compromise.
However, the top-level message that the demands of the rebels would be met, is not supported by the wording of that “slippery letter” from the Chancellor to the Chairman of the Select Committee, which is full of prevarication and procrastination. It talks about
“taking forward work to look at how we can help families without children”
“actively looking at ways to help these groups”.
It also mentions putting
“in hard work to see if those households who have lost out.. .can be helped through the mechanism that already exists”
“on potential changes to the tax credits system to allow the average losses from the removal of the 10p starting rate ... to be off-set” .
It also spoke of reporting
“on what changes could be made to the minimum wage regime .”
The right hon. Member for Birkenhead sent an e-mail to those Back Benchers who had supported his amendment, telling them that the Prime Minister had committed to compensation in full for all those who lost out and that compensation would be backdated to the beginning of this tax year. We know what it said because Jeremy Paxman helpfully read it out on “Newsnight” to the Chief Secretary, who then pointedly refused to confirm that all those affected would be compensated, that they would be compensated in full or that compensation would be backdated.
The following morning on the “Today” programme, the right hon. Member for Birkenhead, in magnanimous mood, put the Chief Secretary’s prevarication down to a lack of briefing on the deal. I find that unlikely, given her usual diligence and attention to detail and given the fact that this was the life-critical issue for her Government at that point in time. We note with interest that she has decided this evening that discretion is a more attractive option than valour.
We have already dealt with that one; the hon. Lady was obviously thinking about something else at the time.
The hon. Members for Norwich, North (Dr. Gibson) and for Merthyr Tydfil and Rhymney (Mr. Havard) both popped up on our television screens expressing the slightly heretical thought that perhaps the right hon. Member for Birkenhead had been a little too hasty in accepting the Prime Minister’s vague assurances. They have clearly both noticed, as have Conservative Members, that when shaking on a deal with the Prime Minister, it is a sensible precaution to make sure one has got all one’s fingers back in one’s possession before counting the deal as done.
There is no doubt that the combined determination of the Opposition and a core of courageous Labour Back Benchers scored a great victory last week and exposed the Prime Minister, once again, as weak and indecisive. Nothing will detract from that achievement, but now it is our job, as the Opposition, to ensure that what has been promised is delivered. Today, the Prime Minister has not exactly reassured those of a nervous disposition, saying at lunchtime:
“We have sorted out the problems that existed which were the under-65s and we are sorting out the low-paid by looking at what we can do to help them”.
I must have blinked, because I missed the announcement on how precisely the under-65s are to be helped. For the Prime Minister’s information, “looking at” how to help someone is not the same as “sorting out the problem”.
No, I am going to make some progress. The hon. Gentleman has already had one go.
Let us remember that this is the Prime Minister who was going to restore trust in politics. Well, promising anything to buy off a rebellion four days before an election and then failing to deliver on those promises is not the way to restore trust in politics in this country. Nor is it the way for the Prime Minister to dig himself out of the hole he has dug himself into.
So the amendment that we have tabled is designed to underpin the deal that was done last week, not to undermine it. It should be as acceptable to those who are convinced of the Prime Minister’s sincerity as to those who doubt it, and as acceptable to those who wish to live in hope as to those who prefer to learn from experience.
The amendment would introduce a sunset provision for the changes made by clause 3—principally, the abolition of the 10p rate. It would give the Government the rest of this year to take action and come back to Parliament and report on the measures that they have taken to mitigate the effects of this clause on those who will pay more income tax as a result of the combined effects of clauses 3 and 1—the clause reducing the basic rate of tax. When they had done so, it would require a simple resolution of the House that it is satisfied with the statement made to lift the threat of the sunset provision.
The amendment is deliberately not prescriptive. It does not seek to tell the Government how they must address this problem; whom they must compensate and to what extent, or by what means. The requirement for approval of the statement by a resolution of the House is intended to ensure that the package the Government deliver addresses the reasonable concerns that have been expressed in the House.
The logic of the hon. Gentleman’s position is that it would be satisfactory to get rid of the 10p rate, provided that the House was satisfied with a complex compensation package. Surely it is a crazy idea to get rid of the 10p rate and try to compensate various groups through ever more complex means, only to end up spending public money on other groups who did not lose but cannot be separated from those who did. The whole idea is nonsense, and it would be far better simply to retain the 10p rate—[Interruption.]
As I have just been reminded, the Liberal Democrats’ policy was to get rid of the 10p rate, so the hon. Gentleman might be a little off message.
In practice, because of the arithmetic in the current Parliament, the only way the Government could fail to secure such a resolution would be to fail to secure the support of the 46 Labour Members who signed the amendment tabled by the right hon. Member for Birkenhead and those other Labour Members of like mind who had not quite summoned up the courage of their convictions by last Wednesday. If the Government deliver those Members what they promised them, or at least a package that they accept as being a fair and reasonable solution in all the circumstances, they will get their motion, whatever the Opposition parties do. But the provisions of the amendment would be the House’s insurance policy against the Government who, with the rebellion off and the elections behind them, could renege on the commitment they have made.
Such an insurance policy is necessary, because the Government’s body language, within hours of the deal apparently being done, signalled evasiveness. There was no clarity as to whether everyone would be compensated. There was no confirmation that they would be fully compensated. There was no commitment on backdating— except for 60 to 64-year-olds who will receive a winter fuel payment, where backdating is irrelevant in any case, as the qualifying date is in September. There was a shabby attempt to shuffle part of the burden on to employers by a political interference with the rate of the minimum wage. Perhaps the Financial Secretary will provide some specific and concrete assurances in the course of this debate. If so, that will be yet another change of direction, albeit a welcome one. In the absence of such details and concrete assurances, the House must have its insurance policy.
This is a problem of the Prime Minister’s own making, quite literally. It was his Budget; his betrayal of 5 million households on low earnings; his refusal to listen to the advice and counsel of his own party supporters; his arrogance and intransigence in rejecting the possibility that he could be wrong; and his weakness and indecision in first squaring up to the rebels, and then climbing down. He has a track record now. Over the last decade or so, we have seen many offerings from the Prime Minister that do not quite match the fine rhetoric with which they were presented. We have all learned—and it takes a conscious effort now to remember that this was not the case before 1997—not to take what we hear in the Budget speech at face value, but to wait until we have trawled through the mountains of small print and press releases before passing judgement. Now the Prime Minister has to live with the consequences of that track record and recognise that many in the House will have been alarmed by the gap between the right hon. Member for Birkenhead’s version of the deal and the Chief Secretary’s comments on “Newsnight” last Wednesday. They will have been alarmed that they might have sold the pass too quickly, without a clear Government commitment on the extent of the compensation, the amount and how it will be backdated. I hope that they will support amendments Nos. 18 and 19 in the spirit in which they have been tabled—as an insurance policy to guarantee that the Government act in good faith.
Without such a guarantee, my hon. Friends and I cannot support clause 3. The Labour Members who displayed such courage last week, and who have now retreated from that position, will carry a tremendous weight on their shoulders if the end result is a package that delivers less than the right hon. Member for Birkenhead has led us to believe that it will.
Let’s get this show on the road.
We all remember 21 March 2007, the final Budget delivered by the longest serving Chancellor of the Exchequer in the past 100 years. Labour Members behind him waved their Order Papers and celebrated the fact that they would finally be rescued from the torment of Tony Blair’s leadership, to go instead into a sunlit upland of socialism with a leader who both connected with their base and understood, uniquely, and even better than his predecessor, the instincts of middle England—a leader who would return them for a fourth term in this Parliament. They all went off excitedly to the Tea Room to discuss the triumph that was inevitably theirs.
The leader of the largest Opposition party in the House got to his feet and said, “At last, we have been given a tax cut.” He completely failed to notice that the trade-off was that millions of the poorest people in this country, far from getting a tax cut, would see their taxes rise substantially.
The one eminent figure in that debate—the one party leader—who spoke most clearly on the subject was the then Liberal Democrat leader, my right hon. and learned Friend the Member for North-East Fife (Sir Menzies Campbell), who pointed out precisely the point that has concerned so many Labour MPs in the past few weeks. It just goes to show that there is nothing like an opinion poll or two to concentrate the minds of Labour Members of Parliament. The warning was there and had they stayed to listen to the speeches made by the Liberal Democrats, they would have known that their constituents would be the main losers from that Budget.
Does the hon. Gentleman not accept that the number of people who will lose through the cutting of the 10 per cent. band has been over-hyped? Does he accept that some of the poorest people in this country are those who are on low wages but fall outside the benefit banding? The cut from 22p to 20p helps that most vulnerable group.
I do not accept that argument. If the hon. Lady had been present for our extended debate this time last week—she was not, and I appreciate that she has been brought in as the one person on the Labour Benches who is willing to defend this policy, apart from the Parliamentary Private Secretary, the hon. Member for Sheffield, Hillsborough (Ms Smith), who does so under duress—she would know that the Labour Chairman of the Treasury Committee made the point that more than 5 million taxpayers would be net losers as a result of measures in the Budget and that the 2p cut in the basic rate would not be sufficient to offset the doubling of the 10p rate. We must not make the mistake of ever talking about the abolition of the 10p rate as, for our constituents, the rate has doubled.
Indeed; the Institute for Fiscal Studies and the Treasury’s own answers have both confirmed figures in the region of 5.3 million losers. I do not think that that is a matter of debate; what we are discussing is how those people can be assisted and how the Government got into this mess in the first place.
Does my hon. Friend agree that it was entirely unjustified of the Government and, indeed, of the vast majority of Labour Back Benchers completely to ignore and deny the impact of the doubling of the 10p tax rate on the incomes of the low-paid, when the hardship that the measure would cause was crystal clear a year ago?
I very much agree. It does not seem difficult to work out that for people who pay 10p in the pound as a marginal tax rate, a doubling to 20p would end up costing them more in tax than if the measure had been left in place, but it obviously took 13 months for that finally to become clear to Labour Back Benchers, which is highly regrettable.
The Prime Minister is a man of massively diminished authority. Last week, he was pacing around the White House pleading with the hon. Member for Sheffield, Hillsborough, who is appropriately dressed in black for this occasion, urging her not to resign from her post as PPS and further humiliate him. Last week, one can only imagine the atmosphere in his private meeting with the right hon. Member for Birkenhead (Mr. Field), who has a long track record of making keen observations about his qualities or otherwise. Who can forget the observation:
“Allowing Gordon Brown into No 10 would be like letting Mrs. Rochester out of the attic”?
The right hon. Gentleman went on to say:
“He has no empathy with people.”
[Hon. Members: “More.”] There are many choice observations by the right hon. Gentleman on the subject. He told ePolitix website a year or so ago:
“One of the reasons I favour a leadership contest is that once you’re in a contest a person’s full qualities can be judged in a way that they never are in normal circumstances…A contest would enable us to judge people’s competence not just as Chancellor of the Exchequer but as Prime Minister, which is a totally different position.”
That has been shown to be very much the truth, so I can only imagine how the Prime Minister responded to that intimate and cosy chat when a gun was held to his head by the right hon. Gentleman, who threatened to humiliate him.
I imagine that the atmosphere was less than perfect, but that does not justify the euphoria in the Labour ranks. Perhaps something happened in that conversation, and the right hon. Gentleman may tell us what it was when he gets to his feet. I read the letter from the Chancellor of the Exchequer to the Chairman of the Treasury Committee, and I could not understand why Labour MPs were in such a buoyant and euphoric mood last Wednesday afternoon. There are many questions—and many of them have been touched on by the hon. Member for Runnymede and Weybridge (Mr. Hammond)—that remain unanswered, and I shall go through some of them.
First, what is going to be backdated in this package of proposals? As I understand it, the specific measures aimed at trying to assist pensioners between the ages of 60 and 64 will be backdated, but there is dispute—and it remains unresolved—as to whether other people will receive backdated compensation. Indeed, the right hon. Member for Birkenhead said that the Chief Secretary was “badly briefed” on the backdating of the compensation package. I wonder whether the right hon. Lady, even though she is not speaking for the Government in this debate, has had time to swot up. It is extraordinary that she should have to be briefed at all on these matters, as one would think that she was at the centre of trying to decide the Government’s taxation policy.
Secondly, even if those measures are backdated for everybody, there is the issue of cash flow. There are many people on low and low-to-middle incomes, and if they receive money in November that is backdated six months, it will not pay today’s supermarket, gas or council tax bill, and those are the problems that the Government have not identified or addressed.
My hon. Friend makes an excellent point, which no Treasury Minister has so far adequately addressed, but we await with interest to see whether a rabbit will be pulled out of a hat. We were told to watch this space. We are still watching, but the picture is yet to become fully clear.
Has my hon. Friend seen in any of the Government responses a solution for my constituent, a young, single, working mother, who has vowed never again to claim tax credits because of the cycle of overpayment and clawback, who now sees that there is no way out from paying a higher tax rate on her very meagre income, and who may not work again?
My hon. Friend makes a valid and related point about the fiasco and complication that is the tax credit system. One of the issues that the Government will have to address is that they are replacing a simple mechanism to reduce the tax burden on people on low incomes with a series of far more complex and complicated alternatives. Many of those people may not be adequately compensated, but some will be theoretically compensated, because I will bet the House that the Treasury will budget so that the take-up is not 100 per cent. for those who are eligible to be compensated as a result of the 10p rate being doubled.
It is our intention to reduce the tax burden on people who earn the lowest salaries, and we will do that in a number of ways. We propose to reduce the basic rate of income tax, and I would like to see us bring forward measures for the next general election that will also raise thresholds in a progressive way. Tax-cutting can be extremely progressive if the taxes cut are for those on the lowest incomes, who at the moment pay tax to the Government even if they are on the minimum wage and then become eligible to try to claim large parts of it back in the form of various credits and other rewards from the Treasury, which is extremely bureaucratic and inefficient, and many people fall through the net. Our objective is to try to make it both simpler and fairer.
The hon. Gentleman is making a good speech, but there was a simple question to answer so that the country would know where the Liberal Democrats stand. It is clear that, while the Liberal Democrats might want to introduce all sorts of things to make our tax system fairer, there is no commitment to reintroduce the 10p rate. The message goes out from the debate that none of the major parties is proposing its reintroduction, so we are looking at compensation packages.
Let me make this clearer. The Liberal Democrats’ objective is to ease the tax burden on people with very low incomes who cannot afford it at present. The Government propose to double the 10p rate to 20p for those people, going completely in the wrong direction. We could choose to use the 10p mechanism to assist those people, or it could be done some other way. A millionaire pays less as a result of the 10p rate decision, so I appreciate that it is not a very focused tax reduction for people on low and low-to-middle incomes, but it is a hell of a lot better than what the Government are proposing, which is that that tax burden should be doubled for those people.
I have explained so many times. We will vote against the clause this evening, and I hope that, if the right hon. Gentleman shares our instincts to help some of the lowest income households, he will join us. I see that many, many Labour Members have come here, I hope for the same purpose.
I have been enjoying my hon. Friend’s vivisection of those on the Treasury Bench. I brought up this matter in the Treasury Committee, particularly with regard to pensioners in my constituency, because they have the double whammy of not only losing out on tax but facing increased costs against which they can do nothing. Is not the fairest way to deal with those pensioners and others who lose out in that way to raise tax allowances, so a policy that we may well contemplate might be the raising of tax allowances, combined with a lowering of the basic rate, which would achieve as good, if not better an objective than simply putting back the 10p rate?