House of Commons
Monday 28 April 2008
The House met at half-past Two o’clock
[Mr. Speaker in the Chair]
Oral Answers to Questions
The Secretary of State was asked—
The security situation in Afghanistan is stable, if fragile in places. In 2007, the Afghan national army and troops from the 40-nation international security assistance force achieved significant tactical success against the Taliban. This success has geographically restricted the insurgents’ ability to conduct sustained activity. During 2008, NATO figures show that 91 per cent. of insurgent activity has been reported from only 8 per cent. of the districts of Afghanistan. Yesterday, the Taliban carried out a cowardly attack on the mujaheddin victory parade. This attack illustrates perfectly their irrelevance to the future of Afghanistan. While the country celebrated liberation, the Taliban were firing indiscriminately at unarmed civilians. In tactical terms, that will prove to be a disaster for them.
When I was in Helmand province in February, I was surprised to learn that many of the farmers would prefer to grow wheat, which is now highly priced on world markets, rather than poppies. However, they had to grow poppies because of Taliban intimidation. When does the Secretary of State think that we will have the security situation sufficiently under control for Afghan farmers to feed their own people and not feed the habits of people in the west?
That is exactly the case in an increasing number of provinces in Afghanistan—indeed, more are poppy-free than ever before. The greatest concentration of poppy growing happens to be in those provinces where there are the greatest security challenges. I am sure that the hon. Gentleman will understand from his visit why that is the case. Because of the work of our troops in Afghanistan, particularly over the past 18 months, the number of areas under the control of the Afghan Government that are secure enough for farmers to make that transition is increasing. We will find in the outturn of the figures for this year that the Afghan poppy crop has reduced, but there is still a long way to go.
Given that a large proportion of the injuries suffered by members of our armed forces in Afghanistan are from roadside bombs and similar improvised explosive devices, why are we still deploying troops in some of the most dangerous parts of Afghanistan in so-called snatch Land Rovers, when we know that such vehicles offer little or no protection against such devices?
The hon. Gentleman and the House will know, because I have gone to some lengths to keep the House up to date, that we have been increasingly providing our troops with vehicles that offer the highest level of protection. Indeed, through Mastiff and Ridgback, on which we hope to make significant progress over the coming months, we will be providing a total of 400 new vehicles that will offer that level of protection. The hon. Gentleman will know also, because it is reported back here regularly, that Mastiff has proved enormously popular with the troops in saving lives.
My obligation as the Secretary of State is to provide commanders on the ground with a range of vehicles. Our experience in Afghanistan shows us that the issue is not just a need for protected vehicles, in the sense of protected against such explosions; rather, we also need vehicles that give our troops both the necessary flexibility and movement, and a presence on the ground that is specific to the communities in which they are working. I fulfil that obligation. We provide a range of vehicles to the commanders. I do not intend to dictate to our commanders, with a long screwdriver from London, which of those vehicles they should use, but I am conscious of the need continually to develop and to deploy more protected vehicles, subject to that requirement.
Has President Karzai not become a liability? He has demonstrated an inability or an unwillingness to tackle corruption in high-level officialdom and is failing to crack down on drug trafficking. Is there not a lesson to be learned from Pakistan? The President there said that he was the only person to lead the country, but a new civilian Administration now are getting on reasonably well. Is that not the future for Afghanistan? Should Karzai not go?
I am slightly at a loss to understand my hon. Friend’s underlying point, because President Karzai is a civilian. He was freely elected and is the democratic choice of the people of Afghanistan, and has proved to be a very good leader in very difficult circumstances. My hon. Friend addresses an important issue, which is the need to deal with corruption, drug trafficking and the relationship between them in Afghanistan, which permeates a large part of society there, up to the highest levels. President Karzai recognises that; indeed, when he addressed the NATO summit in Bucharest recently, he recommitted himself to dealing with those issues. However, we should not underestimate how difficult that is to do in Afghanistan.
One contribution to security that could be made would be to have more helicopters. Her Majesty’s armed services have 1,451 helicopters, but how many of them are in Afghanistan? At the forthcoming NATO Parliamentary Assembly, some of us would like to make the case for our European partners, including the Turks, to make a greater contribution with the 3,900 helicopters that they have. Will the Secretary of State place in the Library the facts about helicopters in Afghanistan so that hon. Members on both sides of the House can make the case for greater European involvement at that important NATO gathering?
To the extent that placing that information in the public domain is consistent with force security, I will do that. However, as I have said to other hon. Members, if I am not able to put that information in the public domain, I am content that individual Members, or groups of Members, should be given detailed briefings, as long as they respect the briefings. I am sure that they will, as they have in the past.
My right hon. Friend makes an extremely important point about the need for more helicopter support. That has been an issue for our troops for some time, and I am pleased to say that in southern Afghanistan in the past year we have increased available helicopter hours by more than a third. The significant point that my right hon. Friend makes, which is known to the House, is that there is a significant number of helicopters in the world that are not deployable. That is exactly why the Prime Minister announced at Bucharest an initiative in the form of a helicopter trust fund, which is attracting significant support. Between seven and 10 countries have indicated their willingness to contribute to the fund and allow those helicopters to be deployed either by training pilots to fly them in Afghanistan or by fitting them with necessary equipment. I look forward to seeing countries carry out the promises that they have made.
The Secretary of State is well aware of the role played by Nimrod aircraft and their crews over Afghanistan. He also knows that QinetiQ has produced a report with 30 safety recommendations about those aircraft. How many of those recommendations have been complied with?
I am not in a position to give the hon. Gentleman specific figures, but I shall check them and ensure that he receives the figures and that all hon. Members are able to access the information in the usual fashion. So far as his consistent and welcome concern about the safety of the Nimrod crews and aircraft is concerned, I assure him that I constantly obtain reassurance from those with the necessary technical ability that the aircraft are safe to fly.
Were the events in Kabul over the weekend evidence that the Taliban are changing their tactics? Are we beginning to see an increase in asymmetric warfare? If so, is the Secretary of State going to reassess our whole approach in Afghanistan?
The fact that the Taliban have been forced to change their tactics in that way shows the success of ISAF, particularly the exceptional work that our troops have done in Helmand province in repeatedly facing down the Taliban and over-matching them. The Taliban have been driven to use that asymmetric approach, which is entirely uncharacteristic of the Afghan approach to conflict. That is why the latest assessment shows that the Taliban enjoy support from only about 4 per cent. of the population of Afghanistan. Contrary to the hon. Gentleman’s encouragement that we should change our tactics, we will continue with the tactics and the comprehensive approach that we have been so successful in developing in southern Afghanistan with our allies. We will also continue to support the Afghans in building the capacity to deal with the increasing asymmetric attacks.
Has the Secretary of State noted the recent warning by the Foreign Minister of Turkey—the only Islamic member state of NATO—that unless there are major changes of policy in Afghanistan, public opinion there will increasingly turn against the foreign military forces that are currently fighting the Taliban?
I am acutely aware of the need for ISAF and for the whole international community, including the United Nations, to continue to enjoy the support of the Afghan people. The main focus of everything that we do in Afghanistan is to maintain the support of the Afghan people in achieving the objectives that they share with us. It is welcome that other allies maintain a focus on that, but our measurement of the support that we enjoy from the Afghan people suggests that it is being sustained. However, I am aware of that risk. The only answer is to build on the ability of the Afghans to deliver security and government to their own people. That is the focus of everything that we do.
Does the Secretary of State accept that, despite the picture of stability that he is painting, the burden on our 7,000 service personnel in Afghanistan is very great? Given that the Prime Minister is no longer able to achieve his ambition of scaling down our 4,000 troops in Iraq, does he have any other ideas about how our 7,000 troops in Afghanistan might be reinforced and the burden on them lessened?
The hon. Gentleman will have noticed that when NATO gathered in Riga a year ago, there were 32,000 ISAF troops in Afghanistan; when it gathered in Bucharest recently, there were 47,000 such troops there and, in addition, a number of countries—including France and, indeed, the United States of America—made further commitments. Currently, 2,200 American troops are deploying to southern Afghanistan, which will significantly increase our ability to deliver what we are doing in that part of the country. Increasingly, other countries are either taking on a greater share of the burden or increasing their already great share of the burden that they take on.
Our forces in Iraq still have a wide-ranging and extremely important job to do. They continue to play a positive role in helping to bring security and stability to Iraq. In Baghdad, we have over 200 senior officers and supporting staff working in the coalition headquarters. In the south, the primary focus of our forces is now on training and mentoring the 14th division of the Iraqi army and enhancing command and control capabilities in Basra, including at the Basra operations command. The 14th division remains some months from becoming fully operational.
We also support more directly the Iraqi security forces in their efforts to ensure the rule of law in Basra. In recent weeks, this has included providing fast jet and helicopter support and surveillance, as well as logistic and medical support. In addition to the focus on the Iraqi army, British forces are heavily involved in mentoring and training the Iraqi navy, supporting the Department of Border Enforcement and helping to protect the oil platforms. Finally, we facilitate economic reconstruction efforts—notably, setting Basra’s international airport on the path to international accreditation.
During a press conference last Friday, Admiral Mike Mullen, chairman of the US joint chiefs of staff blamed Iran for
“its increasingly lethal and malign influence”
in Iraq. He went on to say how recent operations in Basra had revealed
“just how much and how far Iran is reaching into Iraq to foment instability”.
Does the Defence Secretary agree with that assessment, and what is being done by British forces to counter the threat Iran poses to Iraqi stability?
The hon. Gentleman is quite right—and, of course, the Admiral is quite right, as he is in possession of a significant amount of the available information. Evidence suggests that a significant proportion of the equipment and armaments being used by insurgents in Iraq is of Iranian origin or has been transited through Iran. Any Iranian links to armed groups in Iraq outside the political process—either through the supply of weapons or through training and funding—is unacceptable. With our allies, we are seeking to challenge that in a number of ways. Through our support for the Department of Border Enforcement, we seek to interdict the transfer of any such weaponry from Iran into southern Iraq; and through supporting the searches conducted by Iraqi security forces, we have discovered, seized and destroyed a large amount of weaponry that appears to have been sourced from Iran. By seeking to influence the Iranian Government diplomatically in a number of ways, including involving other influential countries in the region, we are trying to get it across to Iran that it is not in its long-term interests to have instability in southern Iraq or any part of Iraq at all. We are also endeavouring to deal with the insurgent and other groups that the Iranians seek to support in Iraq—and we have done so very successfully recently.
Whatever our overall view of the presence of British forces in Iraq, clearly their safety and well-being should be a paramount consideration of the House of Commons. Following on from my right hon. Friend’s written statement to the House on Thursday, should we assume that the Government are planning on force levels of about 4,000 at least until the autumn?
My written statement was not intended to encourage the House to draw that inference. I have always made it clear that we keep our troop numbers under review. As I made clear when I made my oral statement, and it was reinforced in my written statement, we have decided to maintain our troop numbers in southern Iraq at about 4,000 while the Iraqi-led operations to enforce the rule of law in Basra continue. We are working with our coalition partners to define the support that the Iraqis will need over the coming months. It remains our clear intention to reduce troop numbers in Iraq as and when conditions allow, but while the situation on the ground continues to evolve rapidly, as it does, and while military commanders continue to assess that the changing environment in Iraq requires the prudent decision to take time to consider any further reductions, I will stick with that decision.
But does the Secretary of State agree that his Minister of State was absolutely correct, as he often is, when last summer he told the Select Committee on Defence that the minimum viable military force in Basra was about 5,000? Can the Secretary of State explain how it was that he ever came to be persuaded that the figure of 2,500 was anything other than completely meaningless?
We have about 4,000 troops in Iraq. I do not know whether the right hon. Gentleman has had the opportunity to read the letter from the Chief of the General Staff, which was circulated down through the chain of command and put on the MOD website following his recent visit to Iraq. I think that I shall arrange for a copy of that letter to be placed in the Library of the House so that everyone can have access to it if they are not IT literate and cannot get it off the MOD website.
The letter goes into some detail to set out why our current troop levels can and continue to make a significant contribution to a substantial operation that is taking place in Iraq. The point that I am making to the right hon. Gentleman—I cannot make it any simpler than this—is that this is classic overwatch. The figure that we have is, in the assessment of this country’s leading soldier, whose reputation is worldwide, the right one.
I attach a great deal of importance to it. On a recent trip to Iraq, I visited the Navy. It is training marines and the Iraqi navy, which is comparatively small but developing towards the objective of it being able to take over responsibility for security, or at least to make a significant contribution to it, in the northern Arabian gulf.
With other allies, we provide security for those important oil platforms on which the whole Iraqi economy and its income depend. It is the ambition of the Iraqi navy that it will be able progressively to develop to be able to take over or add significantly to that security. It has made enormous strides and is shortly to take delivery of new ships in order to do that. At Umm Qasr, we have been continuing that training for some time—quite quietly, without much comment publicly, but very successfully.
When the Secretary of State made his statement to the House on 1 April, he said that it was too early to assess the effectiveness of last month’s Basra Operation Charge of the Knights, against the Sadr militia, of which we were given just 48 hours’ notice. Can the Secretary of State now provide the House with such an assessment, and also tell us what arrangements he has put in place to ensure that British military commanders have a full and timely say in any future operations in which our armed forces may be required to assist?
In view of what the Secretary of State has just said about troop numbers, will he also tell us whether the call at the weekend by Moqtada al-Sadr to his militia to limit their attacks on British and US forces will have any implication for the number of British troops deployed in southern Iraq?
I shall deal with the hon. Gentleman’s questions in reverse order.
The latest outpourings from Moqtada al-Sadr merely add to the confusion that has emanated from his leadership of the Jaish al-Mahdi militia and his own political organisation. We do not rely on such statements, and I have always taken the view that our troops are at risk of attack from that source, so my answer to the hon. Gentleman is that that statement will have no significant effect on our assessment of the risk to our troops.
In answering the hon. Gentleman’s principal question, let me direct him to the Chief of the General Staff’s assessment—which is very fresh, as he returned from Basra only days ago. While there was some criticism of the planning of the first phase of the operation, we have been involved in the planning and support of the later phases, and they have been extremely successful. The information that I have suggests that there are clear and encouraging signs that Basra is springing back to life, and that the firm action taken by the Iraqi security forces has extended their control to most of the city. I have many pieces of information from citizens of Basra that show how relaxed they are in the new Basra, as they see it.
All those developments are very positive, but the situation is fragile. We must ensure that we see the operation through, and that we can enable the 14th division of the Iraqi army in particular to sustain the security that it has created.
Injured Service Personnel (Compensation)
The armed forces compensation scheme was introduced in 2005 for personnel who are injured as a result of service in the armed forces. For the first time, our personnel can claim compensation while they are still serving, by way of a tax-free lump sum for illness or injury, up to a maximum of £285,000. Those more seriously injured will, in addition to a lump-sum payment, receive a tax-free, inflation-proof guaranteed income payment which is paid on discharge and monthly thereafter for the rest of their lives. The payment is not capped and may, over a lifetime, be worth many hundreds of thousands of pounds.
I can also inform the House that in January this year I ordered a further review of the armed forces compensation scheme, and that Ministers expect to receive a report in May.
I thank the Minister for his response and, in particular, for the information about the review that he is conducting. However, my hon. Friend the Member for Woodspring (Dr. Fox), the shadow Secretary of State for Defence, asked:
“What on earth are we to make of a system where the secretary who gets a wrist injury typing the orders receives more compensation than the soldier who loses his legs following the orders?”
Can the Minister justify that appalling imbalance, regardless of the fact that the serviceman receives a continuing pension and the civilian does not? I hope that it will be taken into account for the purposes of his review.
The hon. Gentleman is not comparing like with like. This is a no-fault scheme, and the claim to which he refers was a negligence claim. Armed forces personnel can claim against the Department for negligence, but the key point is that, for the first time ever, armed forces personnel can be paid, while they are still serving, a sizeable lump sum in addition to any lump sum that they could claim under the war pension scheme after leaving the service. Moreover, the lifelong guaranteed income payment for those most seriously injured is worth many hundreds of thousands of pounds. This is a significant improvement on the previous scheme.
There is support enabling the families of injured personnel returning from Afghanistan and Iraq to stay at Selly Oak and to receive expenses. We have also been working with the Soldiers, Sailors, Airmen and Families Association to provide improved accommodation at both Selly Oak and Headley Court.
Financial compensation is, of course, extremely important, but so are the recovery and rehabilitation of injured servicemen and women before they receive that compensation. Is the Minister not rather ashamed that, apparently, the swimming pool, physiotherapy centre and relatives’ accommodation at Headley Court must wait for a charity pop concert rather than being provided by the Ministry of Defence now?
I am certainly not ashamed. Headley Court is a world-class establishment, and has been recognised as such by the Select Committee on Defence. We pay for treatment and facilities at Headley Court, which already has a number of gyms and a rehabilitation pool. We welcome the idea of people being able to raise additional resources to complement what we provide. We do so for a number of reasons, not least because it gives the British public a chance to show their support for the armed forces.
We will continue to invest in Headley Court and in medical facilities. Only last year, I opened a new ward at Headley Court.
Before the Armed Forces (Pensions and Compensation) Act 2004, there were no lump sum payments in the 18 years in which the Conservative party was in power. When the Act came before the House—I was on the Bill Committee— not once were the objections now being raised by the Conservative party brought up. The only thing that was raised in the Select Committee was the objection by the hon. Member for Aldershot (Mr. Howarth) to my amendment to extend these benefits to unmarried partners.
My hon. Friend makes an important point. When the statutory instrument was laid to set out the new compensation scheme, the Opposition parties did not object and did not pray against it. It is a bit rich for them, this far down the road, suddenly to start to criticise a scheme that they did not object to at the time.
Are the comments attributed to General Sir David Richards—that payments to injured soldiers will rise threefold—in yesterday’s The Sunday Telegraph correct? When does he expect this to happen and when does he expect our serving personnel to receive similar compensation to that of civilian personnel?
In the light of the welcome comments by Commander in Chief, Land, over the weekend, the Minister might like to express his regrets for the inadequacies of the 2005 armed forces compensation scheme that General Richards has found so wanting, and as the current review implies. Meanwhile, the Adjutant General continues to push private insurance schemes such as Pax that cost the private soldier a month’s pay to cover risks run on our behalf in Iraq, Afghanistan and the Balkans. Why does this month’s gimmick—the armed forces benefits calculator, designed to convince service men that they have never had it so good—completely ignore the disbenefit of having to take out personal insurance to cover occupational risk?
As I said, that is a bit rich from the Conservative party, which, let us be clear, supported the armed forces compensation scheme. This is the first time that compensation of this scale—up to £285,000—is payable while serving. That is a significant step forward. The guaranteed income payment is index-linked, tax-free and paid for life. Unlike the previous war pension scheme, it is not capped, changed or withdrawn if the injured serviceman or woman improves at some point. The Conservative party did not introduce any such scheme during its 18 years in power. The scheme should be kept under continual review, which is why we made the changes last year in terms of motor injuries and why we are reviewing it now in the light of experience.
Ministers visit Iraq on a regular basis. My right hon. Friend the Secretary of State visited most recently and was encouraged by the good spirits and professionalism of our troops. Equally, two of the Chiefs of Staff have been in theatre recently and similarly report that morale among our forces is good and that we are working effectively alongside our coalition partners and the Iraqi security forces in Basra.
I welcome the Government’s policy of holding an inquiry after troops are withdrawn from theatre. An inquiry while they are still in action would put them in more danger and damage their morale. Will he always put the safety of our troops uppermost and resist opportunistic attempts to turn our troops into a political football?
I agree with the hon. Gentleman. When we discussed the matter a few weeks ago it was clear that people wanted an inquiry for purely party political purposes and that there was no precedent for holding such an inquiry while our troops were still in theatre and in danger. That is why we rejected the call for an inquiry at this time.
There is no prouder body of men and women than the British Army. What is it supposed to do for their morale when they read the unfair and uncomplimentary remarks about allowing the Americans to do our dirty work for us in the recent operation in Basra in Iraq? Would it not be better for their morale either to let them get stuck in or to get them out of that country, rather than chain them up in the airport against all the traditions of the fighting British Army?
From the discussions I have had with our armed forces in both Iraq and Afghanistan, I know that broadly speaking they ignore what they read in the media and know what the facts are. The fact with regard to Basra is that our forces are involved in a very similar way to the American forces. The American forces came down to Basra with the additional Iraqi forces. Our own forces are in Basra assisting the Iraqi 14th division, which they helped to give the capability that it is now showing in its success in Basra town. Although we should not overstate our own role, the Iraqis would not be capable of doing what they are now doing in Basra if it had not, in part, been for the contribution that the British forces have made and continue to make. We should not run them down just because the press do.
Service Personnel (Active Service)
As at 23 April 2008, the endorsed force levels for southern Iraq and Afghanistan are 4,000 and 7,800 respectively. The precise number of personnel in theatre at any one time fluctuates on a daily basis for a variety of reasons, including mid-tour rest and recuperation, temporary absence for training, evacuation for medical reasons and the roulement of forces.
I am grateful to the Minister for that reply. Will he join me in paying tribute to those from RAF Leeming who are currently serving, and those from RAF Linton-on-Ouse, Dishforth airfield and Alanbrooke barracks, Topcliffe? Will he also have regard to the fact that the numbers serving and the length of tours is having a tremendous impact on overstretch and morale? How can we ensure that morale is not affected by the long tours and the short time those serving have at home with their families in between?
I am very happy to do as the hon. Lady asks by paying tribute to those forces, and to all our forces in both Iraq and Afghanistan. However, I must say to her that despite the fact that our armed forces are stretched—we recognise that that is the case—and working hard, the morale of our forces in theatre is good. When I go out to theatre, I find that not only is it good, but that those forces at the sharp end on the front line who are in the most austere of circumstances have the best morale. They are soldiering—they are achieving and doing what they wanted and trained to do. Their morale is good, and they are doing an excellent job and they deserve the support of the House.
The Government argue that our troops are stretched but not overstretched, yet the drawdown from Iraq has been postponed and serious recruitment difficulties cannot be entirely masked by a massive increase in recruitment from the Commonwealth. For how much longer can we operate beyond defence planning assumptions without doing damage to our future capabilities? Do we really have the spare capacity to undertake further commitments—in Kosovo, for example—and if we do, what lessons have we learned from Iraq and Afghanistan about making it clear that we are going in for a time-limited shift and not taking on another open-ended commitment?
There is no untime-limited commitment open to us in Kosovo. There is a commitment we will have to deal with and respond to, but it is a time-limited commitment to provide forces to Kosovo. Of course we must be mindful of the hard work we are asking of our armed forces. We must keep that under assessment at all times, and we do so. We take advice from the military chain of command on what is feasible and what is acceptable, and we must ensure that we stay on top of that and do not ask too much of our armed forces, because they are working hard. We are asking an awful lot of them and they deserve our support. They are doing an excellent job, and I am satisfied that they are capable of continuing to do so.
My right hon. Friend the Defence Secretary and I have held frequent meetings on this subject with Ministry of Justice Ministers. We make regular statements to the House about progress on reducing the number of outstanding inquests. We are strongly committed to minimising delays, and we will consult regularly about management of, and support to, inquests relating to deaths on operations.
I thank my right hon. Friend for that answer. I have received a number of letters from constituents who are concerned that the Scottish National party Administration in Scotland are dragging their heels on this matter. Does he think they are doing everything they can to expedite a solution?
My hon. Friend knows that the situation in Scotland is different from that in England and Wales. We have been trying to deal with the matter for some time. My predecessor, my right hon. Friend the Member for East Kilbride, Strathaven and Lesmahagow (Mr. Ingram), wrote to Kenny MacAskill MSP in June last year raising this issue, I have tried to meet Scottish Executive Members and the Secretary of State wrote again to Mr. MacAskill in March setting out what needs to be done, so the ball is now firmly in the hands of the Scottish Executive.
I am sure the Minister will join me in paying particular tribute to David Masters, the Wiltshire coroner, who is doing an outstanding job wrestling with the complexities of the inquest into the deaths of the 10 people killed when a Hercules came down in Iraq. Can the Minister confirm that in no circumstances will he or anybody else in the Ministry of Defence attempt to interfere with the investigations or with the outcome of any such inquests, even if those inquests were to be critical of Ministers or of the MOD?
Not only would we not attempt to interfere with such an inquest, but we welcome the input that we get from the independent coronial system. It throws up issues and findings of immense importance, which we must examine and know about, so of course I can give the hon. Gentleman the commitment that no attempt will be—or has been—made to interfere with coroners’ decisions.
May I encourage the Minister to keep trying with the Scottish Government as far as the holding of fatal accident inquiries for Scottish-domiciled soldiers is concerned? Such inquiries would not only take some pressure off the English inquests system, but would mean a great deal to the families of serving soldiers who were domiciled in Scotland at the time of their death.
We believe that it is important not to oblige families to travel the distances that they are required to travel to attend inquests in the south of England when they are based in Scotland and their loved ones who have died came from parts of Scotland. That is why we have been pursuing the matter with the Scottish Executive and will continue to do so. As I have said, we have made representations over time, and we hope that a solution to the problem will be found because that would be in the interests of Scottish families.
The primary focus of the international security assistance force mission is to assist the Government of Afghanistan in the maintenance and extension of security. Practical support for reconstruction and development efforts is one of ISAF’s key supporting tasks.
I thank the Secretary of State for that answer. Given the situation in southern Afghanistan and the Taliban’s cowardly attacks on the international aid agencies working in that area, when does he think the situation might sufficiently improve to allow aid agencies to return and re-establish their vital work?
My hon. Friend makes an important point. It is important that the work that the Afghan Government do is supported by non-governmental organisations. More important is the presence of the United Nations Assistance Mission in Afghanistan in southern Afghanistan. I am confident that under the leadership of Kai Eide, who has recently been appointed to the co-ordination role, we will see an early presence for the mission in Helmand province. That will be a sign to many organisations that they can come and work with us, but we should not ignore those organisations that are doing good work there now, many of which are Afghan-based NGOs.
The security situation in southern Iraq is stable, but has a fragility. Recent operations by the Iraqi security forces, supported by UK forces and coalition partners, who are deployed with those forces in Basra city, have been successful in helping the Iraqi Government consolidate control over Basra and all key routes into and out of the city. There are encouraging signs that conditions in the city are improving and we will continue to work with our coalition partners and the Iraqi authorities to help sustain this positive trend.
When Ministers have a strategically weak argument, they have a disagreeable habit of hiding behind the arguments of generals who have a responsibility down the chain of command to support the morale of the troops of whom they are in charge. The Secretary of State has done that this afternoon. The fact is that the strategic situation in Basra with the British forces is an example of dither, and it is damaging the reputation of the United Kingdom and the morale and capacity of our armed forces. When will the Government resolve that?
The current situation in Basra and southern Iraq is nothing of the sort. The plan was clear: we would progressively hand over the provinces of southern Iraq to provincial Iraqi control. When we came out of central Basra and handed over to provincial Iraqi control in December, it was clear that the criminal and militia elements in the city could be dealt with only by Iraqi security forces. We went into overwatch and I made it clear that that was the plan. The Iraqi security forces are now doing that task, and our troops are deployed with them, mentoring them in the city as they do so, as are US troops who have come with the divisions that they mentor. There are some 14,000 plus Iraqi troops in Basra and about 800 American troops in the south. Those numbers are a proportion of the numbers of troops that we have. All those troops are engaged in doing exactly what we described they would do, and they are doing it very successfully. It ill behoves the hon. Gentleman to describe what they are doing in such a way.
As Secretary of State for Defence, my departmental responsibilities are to make and execute defence policy, to provide the armed forces with the capabilities they need to achieve success in the military tasks on which they are engaged at home and abroad, and to ensure that they are ready to respond to the tasks that might arise in future.
I have made it clear to the House that we are committed to the building of these carriers—
In that case, I do not need to tell him. When we have achieved the necessary alignment of the work schedule, the commercial arrangements and other related matters, we will set the date for signing the manufacturer contract.
I am grateful to my hon. Friend for notice of that specific question. I am grateful for the opportunity to answer it and to displace some misinformation in the public domain about the AWE at Burghfield. The AWE is able to carry out live nuclear work at Burghfield. The nuclear installations inspectorate has provided constructive criticism about areas where safety can be improved or where there are shortfalls in the processes or systems. That is a normal part of its regulatory role and does not mean that there are serious concerns about the safety of the AWE at Burghfield. If the inspectorate had serious concerns, it could use its enforcement powers to stop work there and it has never done so.
It has been reported that by mid-May British forces might be deployed to Kosovo in support of NATO’s KFOR. The House would like to know whether the reports are true. Clearly, if we have a commitment we should fulfil it, but the last time the UK deployed its spearhead land element, as part of NATO’s operational reserve force in 2004, it required more than 30 C-130 Hercules sorties and five C-17 sorties. That was before we had nearly 8,000 troops in Afghanistan as well as the air bridge that they need for logistical support. Where on earth will we find the extra lift capability for Kosovo without undermining our efforts in Afghanistan?
We have had a request, as the hon. Gentleman knows, to supply the strategic reserve for Kosovo. When he talks about equipment and where we will find it, he needs to be aware that we made contingency plans some time ago, as we were aware of that commitment. Equipment was moved into theatre some months ago so that it would be there, ready and waiting, if we were called on to supply the reserve. We will respond to the request imminently and we will, of course, inform the House of our response.
Given that the equipment that is supposed to be available in Afghanistan is often not available, many in this House and the armed forces will find that answer a touch complacent. It is a bit pathetic that we are even considering the difficulties of deploying a small force to another part of Europe. This all arises because of the mismatch between funding and commitments for the armed forces under the Government. The Treasury is failing properly to fund Iraq and Afghanistan. The urgent operational requirements system means that equipment might be procured, but through-life costs are falling on the core MOD budget. The tempo of activity means that equipment is worn out prematurely and no extra funds are being made available to compensate. Again, the core budget is under pressure, which creates a serious crisis for the military and industry. Is that why MOD individuals are describing the Department in this morning’s papers as “unfit for purpose”, or are there other reasons, too?
The hon. Gentleman knows that there has been a year-on-year increase in the defence budget and that the additional resources provided by the Treasury for operational requirements are over and above the defence budget. He says that it is quite disgraceful that we are trying to conduct these commitments with the moneys that we have, but he needs to reconcile that with the fact that his leader, not a few months ago, refused not only to give any commitment to an uplift in the defence budget but refused—[Interruption.] The hon. Gentleman knows this. I know that it upset him, but he knows that his leader refused to give a commitment to spend at the current level of defence spending. If the hon. Gentleman is going to criticise the level of defence spending in the country, he needs to say that his party would—
I shall just repeat the answer that I have given my hon. Friend on the many occasions on which he has asked for a date on which British troops will leave Iraq. We will draw down our troops in relation to developing conditions in Iraq, and if the operation in Basra continues to be as successful as its first four phases, and if it continues to be welcomed by the Basrawis, and if there is the sort of change in Basrawis’ lifestyle that has been reported, for example, in The Times by an independent reporter after a visit last week, those are all indications that conditions are moving in a direction that allows us to reduce troop numbers. May I reassure my hon. Friend that senior officers, our ambassador, and senior representatives in Iraq continue to meet Prime Minister al-Maliki regularly and work with him to take forward that operation?
We have said that we will spend about £8.4 billion over the next 10 years on housing in this country and abroad. There have been decades of neglect by your party, and we accept our responsibility—[Interruption.]—and others.
Let me make it perfectly clear that we have spent sizeable amounts of money on refurbishing, modernising and upgrading properties around the country. Last week, I not only saw housing upgrades required to meet standard 1 but improvements such as new boilers, kitchens and bathrooms. Of course, we have a lot more to do, but the hon. Gentleman should reflect on the fact that part of the problem is the deal that the Conservative party made with Annington Homes, which we have to live with today.
My hon. Friend is right to highlight Veterans day, and it is right that we get as many people as possible to support it. We have not finalised the programme, but I can tell her that more than 40 towns and cities across the country are hosting major Veterans day events, and hundreds of small towns and villages are developing their own events. The national event will take place in Blackpool, and its proposals are excellent and outstanding. Given the high focus on the armed forces, the work that has taken place on the Command Paper that the Secretary of State has ordered and the recognition study, there will be a great deal more focus this year on Veterans day and celebrating what our veterans have done.
The way in which the British Army works in theatre depends heavily on the Lynx helicopter, and if it does not have Lynxes in future, there will be implications not just for the Army but for the Navy and the Air Force. When will the decision be made on the contract for the future Lynx programme, and is the Secretary of State aware of the damage that will be caused by the delay both to the nation’s strategic ability to produce such a helicopter and, above all, to the way in which the armed forces operate?
I am well aware of the value of the Lynx helicopter and, indeed, helicopters to modern warfare. As in previous years, capability is under review, and when we undertake such a process there is a lot of speculation. I shall not be drawn into commenting on speculation: when there is anything to announce to the House, we will make it very clear.
No item of protective clothing or equipment can guarantee protection against every kind of attack or accident, but I can tell my hon. Friend that the helmet offers the highest level of protection compared with the combat helmets of many other nations. It is very well thought of by our troops, and it is fitted with shock-absorbing pads—the substance of the campaign that she raised, which, of course, we are well aware of.
Is the Secretary of State aware of the recent statement by Robert Gates, the United States Defence Secretary, referring to our recent involvement in various theatres, when he said:
“For those missions that still require manned missions, we have to think hard about whether we have the right platforms, whether for example, low cost, low tech alternatives exist to do basic reconnaissance and close air support…where we have total control of the skies.”?
The US Defence Secretary is to set up a taskforce. Does the Secretary of State agree with his sentiments, and will he do the same?
I know that the hon. Lady keeps abreast of all the issues concerning the changes in the operational environment and the challenges that those generate for equipment, particularly the platforms that we use. I also know that she is well aware that we have, particularly during the last two years, made some great progress in investment in such platforms, which provide the maximum protection to our troops. The point that the US Defence Secretary has been making repeatedly to his own armed forces concerns whether there is a need for manned aerial vehicles in particular to sustain the operational awareness that is necessary above modern battle spaces. We in the Ministry of Defence are acutely aware of that, and work is going on in that regard, as it is in the United States, and we are in close contact with the United States in relation to that. In particular, the hon. Lady will know that the Defence Secretary challenged the US air force about allegedly living in the past in that regard. I do not make the same criticism of the RAF.
Will the Secretary of State tell the House of Commons what procedures exist whereby complaints of serious misconduct by British nationals or British military/security firms operating in Iraq and Afghanistan are investigated, and whether there is a deficiency in our law that does not give extraterritorial extent to our police and investigatory authorities about the wrongdoing of individuals who are employed by the Ministry of Defence, the Foreign Office or the Department for International Development?
With respect, I do not understand my hon. Friend’s concern in relation to this. For those whom we deploy into operational theatre, we retain the right to investigate any allegations that are made against them. We do that through the military police force.
Point of Order
Orders of the Day
(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.