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Finance Bill

Volume 492: debated on Tuesday 12 May 2009

(Clauses 7, 8, 9, 11, 14, 16, 20 and 92)

Considered in Committee

[Sir Alan Haselhurst in the Chair]

I call Mr. Stephen Timms to move the order of consideration motion.

Ordered,

That the Order in which proceedings in the Committee of the whole House on the Finance Bill are taken shall be: Clauses 7, 8, 9, 11, 92, 14, 16 and 20.—(Mr. Timms.)

I am very grateful to the right hon. Gentleman; otherwise we might never have started at all.

Clause 7

Charge and main rates for financial year 2010

I beg to move amendment 1, page 3, line 16, leave out ‘28%’ and insert ‘25%’.

After that rather shaky start, Sir Alan, I am sure that the rest of our Committee proceedings will move more smoothly.

Clause 7 sets the main rate of corporation tax at 28 per cent., but the amendment—which I also tabled in Committee to last year’s Finance Bill—would reduce that to 25 per cent. We have tabled amendment 1 for the same reasons that applied last year. We believe that the headline rate of corporation tax is uncompetitive, and that it impacts on the UK’s attractiveness as a place to do business. If we are to look forward to how the economy will develop once the recession is over, we need to think about making sure that we are as competitive as possible when compared with other nations.

Some may argue that now is not the time to think about reducing the headline rate of corporation tax and that we should focus first on the current economic and fiscal crisis, but I do not believe that we can afford to ignore the UK’s competitive position at this time. I shall set out in more detail why I think the amendment is important and necessary and why I believe the Committee should support it.

Five years ago, Britain had the fourth lowest corporation tax rate in the EU. Now, even after the reduction in the headline rate from 30p to 28p in the 2007 Budget, we have the 19th lowest rate. The average in the OECD is 22.5 per cent., so Britain’s rate is some 5.5 per cent. higher than that. We need to address that. Without a change, we are likely to find ourselves slipping further down the OECD table and putting ourselves at a competitive disadvantage to other members of the OECD, the G20 and the EU.

We can take it for granted that everyone wants to reduce taxes when they can, and no doubt we will come on to how much the proposal would cost and how the Opposition intend to pay for it. On the point of comparison, however, does the hon. Gentleman agree that our present 28 per cent. rate is distinctly lower than the various forms of corporation tax in France or Germany, taken together? They are our principal competitors, so there is not a great deal to be gained from the comparisons that the hon. Gentleman makes.

The hon. Gentleman has long experience of business, both in the UK and overseas. He will understand the importance of remaining competitive and of always being vigilant about what other nations are doing. Tax has become an increasingly important issue when it comes to the location of businesses and, given that both capital and labour are very mobile now, we need to pay attention to it. It is not good enough to say, “Okay, France and Germany have higher rates than we do.” We need to look at the broad perspective, because there are other countries that are happy to compete for inward investment and people to join their work forces.

Will the hon. Gentleman confirm the fact that we have a more competitive corporation tax rate than France or Germany?

But we have also slipped down the table: our rate used to be the fourth lowest, and now it is the 19th lowest. We can pick and choose our comparisons, but the reality is that we have moved down the league table. That is what we need to reflect on. I would not want always to benchmark myself against the performance of the French and German economies. The Prime Minister has always boasted about how we have performed better than other countries, but I do not think that that is a very fruitful route to go down.

Is it not potentially misleading to concentrate solely on the rate of corporation tax? We have to include comparators such as incentives, concessions, allowances and the regulatory frameworks in other nations. The headline rate of corporation tax may or may not be a significant factor in decisions to invest or relocate.

The hon. Gentleman makes an important point. I do not argue that my proposal is a magic bullet—that all our problems would be dealt with overnight by reducing the headline rate from 28 to 25 per cent. Within the confines of the debate, I hope to touch on that briefly later in my speech. He is right: there are other factors that businesses bear in mind when thinking about the location of their business. They include the predictability and certainty of the tax system, which again are perceived to be weaknesses in the UK tax regime. Our tax system is not seen to be as predictable and as certain is it could be. In attracting businesses to the UK and keeping in the UK those that are already here, I am the first to accept that the amendment is not a magic bullet.

Is my hon. Friend, like me, concerned to see Shell, for example, deciding to locate its headquarters and taxable operations in Holland rather than here, because the Dutch have a lower tax rate? Does he think that the Irish rate is extremely attractive to many businesses thinking about an English-speaking location? Is he worried by the flight of much of our insurance industry out of this country for tax reasons?

My right hon. Friend makes some important points. I shall discuss later some of the companies that have relocated from the UK to overseas jurisdictions because of tax regimes and rates. A number of Lloyd’s-based insurers have moved to Bermuda, in part for regulatory reasons, but in part because of the rate of corporation tax in Bermuda. Canada is setting a clear policy goal of having the most competitive rate within the G7, because the Canadians recognise how easy it is to move from one jurisdiction to another, particularly among English-speaking countries, and how important tax is—perhaps following the Irish example, where a very low corporation tax rate was set to attract businesses into the country.

People regard such tax policies as a way to gain competitive advantage and we need to bear that in mind. When I first spoke on a Budget from the Dispatch Box, in 2006, when the right hon. Member for Normanton (Ed Balls) was Economic Secretary, the Government dismissed this issue as though it did not matter. I thought that that was a disappointing, short-sighted view of the importance of tax to attracting businesses to the UK. The present Financial Secretary is much more aware of these matters and I expect us to discuss some of the reforms to the taxation of foreign profits later. The Government have been slow on the uptake, however, which has damaged our competitiveness.

I thought that the right hon. Gentleman wished to intervene earlier. Does he wish to do so now?

I am grateful for the invitation. The hon. Gentleman was getting on to firmer ground when he talked about comparisons with other G7 countries. I think that he will acknowledge that, since 1997, the UK has had the lowest corporation tax rate in the G7.

But Canada has stated a clear ambition in that respect, and our competitors are to be found outside the G7 as well. The very fact that we have had to expand to the G20 demonstrates the importance of other nations as competitors to the UK.

Let me give a few examples of countries with lower tax rates than ours. My right hon. Friend the Member for Wokingham (Mr. Redwood) referred to the Netherlands, where the corporate income tax rate is 25.5 per cent. Norway and Sweden are in line with us, but Canada—a member of the G7—has a rate of 19.5 per cent.; our position in the G7 is therefore under threat from Canada. Within the EU, the Czech Republic, one of the new accession states, has a rate of 21 per cent., and Portugal, Greece, Denmark and Austria all have a rate of 25 per cent. Although the rate in Germany is a central Government rate, clearly there are federal rates, too. The headline rate in Germany is 15.83 per cent. There are a range of views. We can pick and choose, but the general picture is that we have moved backwards, not ahead, in the league tables; that is the point that we want to make.

Surely the point is that when we make a judgment we have to take the most meaningful comparators. We could include whatever country we liked from across the world, if we took what the hon. Gentleman says literally and took it to its logical yet absurd conclusion. Surely it is therefore right to consider the members of the G7, which are our real competitors in such areas. Perhaps focusing on that at this point of time, when we are at a crossroads, is not the most relevant thing to do. He has to see the matter in that context.

I think that this argument about the G7 is a bit sterile and a bit stale. It says that the G7 economies are the only ones that we should care about, yet we held the G20 summit in London just last month because we recognised that the global economy is changing. Countries that were previously of relatively little economic importance to the world are becoming increasingly important to the shape of the global economy. We cannot rest on our laurels by assuming that the G7 will always remain in pole position; we cannot take that view. If that was the view that the hon. Gentleman took when he was in government, I am disappointed and surprised at him.

I agree that the G7 argument is spurious. Workers in my constituency have recently lost their jobs to Hungary and China. We will never compete with those countries on wage costs, but does the hon. Gentleman not agree that a reduction in corporation tax simply helps to create a competitive package? It would at least make it a tough decision, and not an easy choice, for boards of directors to move their businesses elsewhere.

The hon. Gentleman makes an important point about his experience of jobs in his constituency moving to China and Hungary. There may be situations in which we cannot compete with such economies, but we should make sure that we have the best possible competitive environment—an environment that will encourage businesses to invest in the UK, and ensure that businesses based in the UK see our tax system as a reason for being here.

The right hon. Member for Wokingham (Mr. Redwood) drew a comparison with Ireland. During my time on the Treasury Committee, its Conservative members frequently made comparisons with Ireland; they said that its tax rates and deregulation were important pull factors for companies that chose to locate there, or that it was always a threat that they would locate there. Given the economic situation in Ireland—businesses are closing down and leaving that country—is it really a valid comparison? Is that really the model that we should look to? Does that point not shore up what my colleagues on the Labour Benches have been saying—that we should be making a comparison with members of the G7 and our real competitors, such as France and Germany, instead?

Labour Members say, “The Irish economy has collapsed, so we should throw out the idea that low tax rates and a proportionate regulatory environment are means by which to achieve economic growth.” I know that that is a seductive argument, but part of the problem for the Irish economy, as I understand it, is that because of the euro there were low interest rates when the economy was booming. There was an asset price bubble in Ireland, which has burst, as it burst in the UK. Some of Ireland’s problems flow from that, rather than from the fact that it has a low corporation tax rate or a particular regulatory environment.

We have to be careful to understand correctly the causes of success in Ireland, and the cause of its current economic problems. I would argue that its problems have to do with the macro economy, and the way in which the euro does not necessarily meet the needs of every economy in the eurozone—a point that my right hon. and hon. Friends would very much recognise. I suspect that even the Government recognise that point from time to time; that is probably why we are not in the euro. The convergence criteria have yet to be met, even if they are still being measured over in the Treasury.

Is the hon. Gentleman saying that the regulatory environment in Ireland is not a factor in its economic problems?

I am not sure that it is the main cause, which is the asset price bubble that built up because credit was cheap, thus enabling people to borrow, pushing up prices in the housing market. That is exactly what has happened in the UK. We have a solution in macro-prudential regulation and in giving the Bank of England greater control over the amount of debt in the economy, which will tackle issues relevant to the asset price bubble at a time when inflation rates are lower. The hon. Lady may be right to identify the lack of macro-prudential regulation as a weakness in the Irish economy, but it is a weakness, too, in our economy, which is why reform is needed.

I am grateful to the hon. Gentleman for his usual generosity in giving way.

These are difficult issues, but from looking at the figures in the Red Book, I would imagine that the Treasury has taken corporate relocation into account, so if the amendment were accepted, tax revenues in the United Kingdom would drop by £3.7 billion, as a rough estimate. Why is the hon. Gentleman not pursuing the logic of his position in going for the OECD average of 22.5 per cent. corporation tax which, again on those figures, would cut corporation tax revenues in the UK by £6.8 billion? Where is the money coming from?

I am grateful to the hon. Gentleman for raising the issue of costs, and I shall tackle it within the narrow confines of our debate. I think that that was his first contribution to the Committee of the whole House, but he has featured in previous Finance Bill Committees, bringing his detailed knowledge of explanatory notes to the fore. I hope that he will be tempted by the usual channels to serve on the Public Bill Committee again, because we missed him last year. It would be nice to see him again this year, taking part in debate on probably the last substantive Finance Bill before the general election.

It is important that we have a competitive rate of corporation tax. One of the great strengths of the UK is that we have an open economy, which is the basis on which the City of London, the global financial centre, has grown. There has been a free flow of capital and people into London, which has made it a successful centre. The fact that businesses are prepared to move to this country means that—

I share the hon. Gentleman’s enthusiasm for the notion that the hon. Member for Wolverhampton, South-West (Rob Marris) should serve on the Public Bill Committee, but I would be interested to hear him develop his response to the intervention. Even if we were minded to support the amendment, there would be cost implications, so given that we have a budget deficit of £175 billion, is the hon. Gentleman confident that that cost gap can be bridged, and does he anticipate that the extra industry of the type that the right hon. Member for Wokingham (Mr. Redwood) often describes in these debates will be sufficient to generate the extra revenue to make up the shortfall identified by the hon. Member for Wolverhampton, South-West?

I had forgotten that we had the voice of fiscal conservatism to the left of our Benches.

I will, as I said earlier, return to the issue of costs. However, I have not yet addressed the issue of whether we are dependent on an increase in tax revenue flowing from a reduction in corporation tax to fill the gap. We have not factored that into our costings—that would be a windfall to accounts. My right hon. Friend the Member for Wokingham is a great proponent of the Laffer curve, but I am a bit more cautious than him about its impact and banking those gains, as it were, at this point. I would rather have a cost-neutral package of reform—and I will explain how we will fill the gap in a minute—than presume that we would get an instant flow of tax revenues. As the fiscal environment improves, I hope that that means that more companies will want to come to the UK, which will strengthen the flow of tax revenues to the Exchequer. Goodness knows, we need it at the moment.

I thank my hon. Friend for his generosity in giving way. Clearly, our financial problems are spread over more than one year, so a lower rate sends a signal. One would hope to keep companies in the UK, or encourage them to relocate to the UK, so that they would pay tax over three or four years. One year, if the figures are out, will not make much difference, but it will make a difference if a company is here for three or four years.

Indeed. A big part of the issue is sending a clear signal about what a tax regime’s direction of travel should be. One of the criticisms that people could make of the Government is that, at times, there has been a lack of clarity about that direction of travel. I shall touch on that in my remarks on clause 8.

I am grateful to the hon. Gentleman for giving way once more, and I am sorry for interrupting his flow. He said that the additional location or additional output of businesses were not factored into his financial calculations, so he has still not answered the hon. Member for Wolverhampton, South-West (Rob Marris), who made two points. The first was that, in his estimate, the cost would be £6 billion and he asked where the Conservative party would find that money; the second was to ask why the hon. Member for Fareham (Mr. Hoban) did not follow the logic of his own argument and reduce the rate to 22.5 per cent. I am thinking particularly of the first point: if there is not going to be extra industry and growth to bridge the gap, how does the hon. Gentleman propose to finance it?

I am just getting going on the amendment. I have said to both the hon. Member for Wolverhampton, South-West (Rob Marris) and the hon. Member for Taunton (Mr. Browne) that I will come to that point. I am not using a debating or rhetorical device to avoid answering the questions, but I want to deal with the issue in sequence. I ask them both to be patient; the day is still young.

Indeed—we literally have all night. Let me continue to make the case for why it is important for us to deal with the issue.

As I was saying, our economy is an open one. Businesses choose to locate here; we have few barriers to prevent them from doing that, and few that prevent them from moving offshore. Because we are so open, we cannot tax businesses on the basis that they have no choice but to stay here. The evidence has shown that businesses move. During the period covering the last Finance Bill, when we debated the same issue, companies such as United Business Media, Shire, Kraft, Experian and Google had moved outside the UK. To pick up on the point made by my right hon. Friend the Member for Wokingham, since then, Beazley, a Lloyd’s of London insurer; WPP, the advertising giant; Regus, which provides office services; Henderson, a major fund manager; and Charter, an engineering company have all done the same. The fact that they constitute a broad spectrum of businesses from a wide range of industries is telling.

We have had warnings. Richard Lambert, the director general of the CBI, said:

“In today’s world of global markets, companies have many more choices to make about where to invest their capital and their talent than they did in the past. Business tax is one of the most important considerations that firms have to take into account, and it is easily measured…business leaders believe the UK’s corporate tax regime is more burdensome than it was five years ago, and that this is making the UK less attractive as an international business location.

The worry is that on current trends our position relative to other developed economies will deteriorate further over the next two or three years.”

Mr. Lambert made that statement in 2006. Time moved on, but the CBI returned to the same point last year in its publication “UK business tax: a compelling case for change”, which concluded:

“Comparatively high tax rates, increasing complexity and a lack of certainty are all contributing to declining tax competitiveness.”

The report called for a more strategic approach to corporation tax. So the voices making the point are not only those of Conservative Members; people in industry are also making it. Richard Lambert touched on the point raised by the hon. Member for North-West Leicestershire (David Taylor): the issue is not only the rate but other aspects of the tax regime. I remind Members of what Mr. Lambert said:

“increasing complexity and a lack of certainty are all contributing to declining tax competitiveness.”

This theme has emerged elsewhere—it does not just come from the CBI. Last year, the City of London corporation published a report, “The Impact of Taxation on Financial Services Business Location Decisions”, which discussed how “sticky” London is with regard to business staying put in spite of the tax regime, not because of it. It compared the UK’s corporate tax regime with those of other financial jurisdictions, and found that the UK had among the worst scores in two categories: “Certainty of Interpretation” and “Attitude and Approach”.

There is a growing consensus that says, yes, rates are important, but it is not just about rates. In a report commissioned by the Mayor of London—

It is very clear who the Mayor of London is. [Interruption.] If I meant the lord mayor, I would refer to the lord mayor of the City of London. [Interruption.] I am not sure that the previous Mayor would have been that interested in the tax regime, whereas I think that Boris Johnson is a bit more interested in the competitive position of London compared with other jurisdictions.

The executives interviewed for that report concluded that the UK’s reputation for predictable, competitive and constructively applied taxation is in decline, and the call was for a strategic policy on corporation tax.

I happily give way before moving on to the favourite topic of the hon. Member for Wolverhampton, South-West—Canada.

When a detailed analysis was done in 2006, it was found that the de facto corporation tax rate for larger companies in the UK was not 30 per cent., the official rate at the time, but 22.5 per cent. because of the activities of avoidance vehicles and companies. Is the hon. Gentleman reassured by their ingenuity? If this is such a crushing burden on British industry, why do the majority of FTSE 100 companies pay no tax, or nugatory amounts, and did so even before the recession reduced their profit base?

The hon. Gentleman had an Adjournment debate on this issue last week when we were debating the Second Reading of the Finance Bill; I am sorry that I could not listen to his remarks. There is an issue about the tax take and what a tax gap is. One comment made about research by the TUC is that it does not take into account some of structural reliefs that are in place in the UK tax system. It is important that companies pay the tax they are due to pay and do so promptly and fairly. However, we live in a complex global economy. Several of the companies listed in the FTSE 100 are not necessarily UK trading companies, so they will be subject to a different tax regime. It is a difficult comparison to make. Just as the hon. Member for Coventry, North-West (Mr. Robinson) picked holes in my analysis of where we are in relation to the OECD, some would pick holes in an analysis of the tax gap. It is not as clear-cut as people would suggest.

I am interested in what the hon. Gentleman is saying about complexity and differences in the tax system. Before he moves on to Canada, will he expand on why he chose not to extend his proposed cut to ring-fenced profits and to apply it only to non-ring-fenced profits? I declare an interest as a shareholder in Shell, and an interest in North sea investments through my constituency and my membership of the offshore oil and gas industry all-party group.

The hon. Gentleman makes an important point. When I thought about the amendment’s impact, I considered whether it should deal with changing the ring-fenced profits rate as well, but I was conscious that that might take me into a new field of argument about oil taxation, which my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands) will deal with in Committee. There is a complex set of interactions for us to discuss carefully, but I wanted a narrowly framed amendment to avoid detaining the Committee for too long.

I turn to Canada, which the hon. Member for Wolverhampton, South-West mentions quite often. He prayed it in aid in relation to VAT in last week’s debate on the Bill. I do not know whether he has seen Canada’s aspiration for corporation tax rates, which was highlighted in the report produced by Bob Wigley for Boris Johnson. It stated that Canada’s mission statement on tax was that:

“To improve productivity, employment and prosperity in an uncertain world, a bold, new tax reduction initiative will reduce the general federal corporate income tax rate to 15 per cent. by 2012 from its current rate of 22.1 per cent. The general corporate income tax rate will decline by 7.12 percentage points between 2007 and 2012—giving Canada the lowest overall tax rate on new business investment in the Group of Seven (G7) by 2011 and the lowest statutory tax rate in the G7 by 2012.”

That is a very clear statement of intent from the Canadian Government about the direction of travel, and I am sure that people thinking about the relocation of businesses will take it into account.

For completeness, will the hon. Gentleman confirm that the separate provinces of Canada charge additional tax?

Indeed, and that is why I carefully quoted the report, pointing out that the quotation related to the general federal rate. The report flags up the scale of the reduction—7 percentage points—in the federal rate of tax. The Canadian Government believe that that will provide the lowest overall rate of tax on new business investment in the G7, which is a clear statement of direction. In thinking about how economies move out of recession and plan for the future, countries that can afford such tax changes will think very carefully about making them.

The hon. Gentleman is extolling, I think, the advantages of a country having the lowest corporation tax rate in the G7. Is he now confirming that he believes, contrary to what he said earlier, that that is a good thing?

I am not taking a position on where we should be in the league tables. I am saying that other countries are looking at how they can use their headline rate of corporation tax as a tool, to use the words from Canada, to

“improve productivity, employment and prosperity in an uncertain world”.

I am not suggesting that a target should be set for the UK’s headline rate of corporation tax; I am just pointing out to the Committee that it is an important tool that countries use to attract and retain businesses. We must be mindful of that when thinking about overall tax policy in the UK.

I believe that there is a consensus on this issue. The Prime Minister said last year at the Institute of Directors conference:

“Our aim is to reduce corporation tax even further when we can afford to do so...and we’re looking at how we’re going to do it.”

I shall come to how we can pay for that in a second, but I shall wait until the hon. Member for Taunton returns to his place so that he can hear that bit of fiscal prudence.

The Financial Secretary might remark that the Government have taken some measures to reform the taxation of foreign profits. I acknowledge that, although it has not been an entirely straightforward process and the Government have had a couple of consultations to attempt to get the right structure in place. The sense from industry is that that is now broadly in place, but no one should say, “The job is done, we have dealt with this issue, let’s move on to something else.” The listed publishing group Informa moved its tax domicile from London to Switzerland not long after the Budget, once it knew broadly what the shape of the taxation of foreign profits would be. We therefore cannot afford to rest on our laurels in any way, and that is why I tabled the amendment.

Given the Government’s dire fiscal position, I appreciate that the room for manoeuvre is limited. When borrowing this year is £175 billion and next year’s forecast is for £173 billion, there is not much money left in the kitty to cut the burden of taxes. That is why the package we propose today is cost-neutral. We have long made it clear that our reforms to the headline rate of corporation tax, reducing it from 28 per cent. to 25 per cent., will be funded by simplifying reliefs and allowances. [Interruption.] Right on time, the hon. Member for Taunton returns. We will bring the rate of capital allowances more closely into line with the accounting measure for depreciation, which is meant to reflect the deterioration in value of assets over their life. That is how we will fund the package of reforms. We set out that position clearly when we announced the policy, and we will continue to use that approach of funding changes in the headline rate of corporation tax by simplifying the tax system and trying to align the accounting and tax definitions of profit more closely.

I am rather bemused by the hon. Gentleman’s explanation of the cost-neutrality, which makes it sound as though the amendment were mere window-dressing. It will not remove any tax burden on UK-based businesses if, taken as a whole, the package is cost-neutral, with counter-balancing increases from the business sector. It sounds like grandstanding and window-dressing.

The hon. Gentleman cannot have it both ways. He must either accept that our proposal is a funded tax package, or believe that it is grandstanding, which will do nothing for business. He can criticise us for one or the other, but just one at a time.

I thank the hon. Gentleman for his generosity in giving way. On the projections for corporation tax this year—I do not say he accepts those figures—the amendment would cost the Exchequer £3.7 billion. If he proposes a cost-neutral package, the £3.7 billion will be raised from businesses through other mechanisms—for example, changes in allowances. How would the amendment, as part of such an overall package, have any effect on whether a company decided to relocate to Switzerland? A company would examine the total tax burden, including allowances, not simply the headline rate of corporation tax.

I do not agree and I shall explain why. The hon. Gentleman argues that there is a clear relationship between businesses that pay corporation tax and those that benefit from capital allowances. He claims that they are alike in their profile, but I do not think that that is the case. The headline rate sends a powerful signal to business about the advantages of locating in the UK. Perhaps some businesses are not interested in capital allowances; that depends on the nature of the business—on whether it is service-oriented or invests more in capital equipment. There is a mixture of incentives, and there will be some winners and losers. However, it is important to send a signal about the direction of travel. There is no money available for tax cuts, so a funded package is the sensible way to send the right signal to business about the importance to us of the UK tax system’s remaining competitive.

The debate is interesting. As the hon. Gentleman said, we often had it in the Treasury, and the headline rate seems attractive. However, as my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) said, the tax burden remains the same. Will the hon. Gentleman bear in mind the massive impact of £3.7 billion a year on capital allowances? It cannot simply be dismissed as a compensating factor. The problem with much of British industry, particularly the manufacturing sector, is the UK’s persistent tendency to under-invest in capital. Increasingly, we say that we will have cheaper and more flexible labour and we chase that market down, but it does not get us anywhere. Let us consider what the Germans have done. Germany is the biggest exporter in the world. Its manufacturing sector is strong because of its continuing capital investment in its industry. By how much would the £3.7 billion a year reduce capital allowances? Has the hon. Gentleman taken that into account? Can he give us that figure?

According to some examples, the general plant and machinery capital allowance will be about 12.5 per cent., and the long-life plant and machinery capital allowance will be about 6 per cent., bringing them more closely into line with the accounting rates of depreciation.

Bringing those allowances into line with depreciation is no good at all. That means we will barely be investing at the replacement level, which was one of the big problems with the old General Electric Company. Tight though Lord Weinstock’s controls were, investment often ran at less than the depreciation rate. Manufacturing is a bit more in the spotlight now—rightly so, I think, and not just because I represent a manufacturing constituency in Coventry, in the west midlands—and it is regaining importance, given the imbalance that the collapse in the financial sector has caused, which we need to remove. However, having a target to drive capital investment down to the level of depreciation is a suicidal policy.

Order. We are beginning to lose track of who is making the speech and who is making an intervention. Let us try to keep interventions in proportion.

I am grateful to the hon. Gentleman for his rather lengthy intervention, because it enabled me to find a quotation. I will not hold a competition with hon. Members afterwards to see whether they know who the author was; rather, I will tell them. The quotation says:

“Promote investment and growth—by…reducing tax-driven distortions on commercial activity, ensuring that business decisions are based on commercial rather than tax considerations; stimulating higher levels of foreign and domestic investment through a lower CT rate on a broader tax base”.

That is a good summary of our policy. What particularly pleases me about that quotation is that it is from the Treasury, from a document entitled “Business tax reform: capital allowance changes”, a technical note from December 2007. Clearly, the debate has moved on since the hon. Gentleman was sat around the table watching TV with the former Chancellor—wherever he watched TV.

That is why I said what I said earlier, when I teased Government Members about there being a consensus on the issue. The Treasury recognises the power of the argument. Indeed, the hon. Member for North-West Leicestershire (David Taylor), who is a great campaigner against the tax gap, will be very concerned about distortions in the tax system that led to particular types of behaviour. I just think that the hon. Member for Coventry, North-West should be a little more careful not to state the Government’s case too boldly.

Is there not a slight paradox, given the argument being made? Only last year, there were significant changes to plant and machinery allowances and a massive reduction in industrial buildings allowances, which was commented on at the time. I am pretty sure that the arguments made by the Government on that occasion were rather different from those that we have heard this afternoon.

Indeed. I am pleased that the hon. Gentleman, who is a fellow veteran of previous Finance Bill Committee proceedings, has reminded me of that. We have had debates in Committee about reformed capital allowances before. The Financial Secretary and I had a debate about the abolition of the industrial buildings and agricultural buildings allowances. [Interruption.] The Minister says from a sedentary position, “You were against it.” We argued that the issue should be explored in more detail—so that the competitive impact could be considered—and that the Government had rushed into things without proper thought.

There are issues on both sides of the argument, although I take on board the important comment that the hon. Member for Coventry, North-West made about manufacturing. I know from my experience of visiting manufacturing companies in my constituency that compete at the top end, producing high value-added items that compete with the best—that is, if they are not the best in the world themselves—that there is a mixture of plant in those operations. There are some very old, faithful bits of kit in those factories, as well as some very new, modern equipment. It has been pointed out that the life of some of the more modern pieces is quite short, in relation to their contribution to the top end of manufacturing, and that they might therefore require a shorter depreciation period and a steeper write-off. We need to think about that.

I do not wish to stray too far from the subject, Sir Alan, but one issue that has emerged from the economic crisis is the need to broaden the base of British business, and manufacturing is important in that regard. We must be mindful of that. We are not blind to the concerns expressed by the hon. Member for Coventry, North-West, but we do not want to see distortion in the tax system.

Distortion in the tax system is one thing, and we have had the arguments about neutrality. I am sorry that I was not at the previous meetings of the Committee. May I just plead that we do not build into Conservative thinking the idea that the Treasury or the Department for Business, Enterprise and Regulatory Reform have ever had the policy—which the hon. Gentleman is now adopting—of reducing capital allowances down to the bare minimum of depreciation? That cannot be a proper theoretical or practical position to take up.

This is about trying to reduce distortions in the tax system to ensure that decisions are not being driven by tax considerations. The rate of the capital allowance is a cash flow issue. Over the life of an asset, a business will get full relief on that asset, assuming that it uses it until it is scrapped. It is a question of timing as to when that relief arises. I am sure that, at a later stage in Committee, we shall have a debate about the 40 per cent. first-year allowance being introduced in the Bill. Perhaps such a measure is right in a crisis, but for the purposes of the long-term reform and simplification of corporation tax, we need to look at reducing the distortions in the system.

In so doing, we should consider reducing the headline rate of corporation tax. That would send a clear message to businesses, which are fed up with the complexity and distortions in the tax system. A lot of the tax planning that takes place is a consequence of the distortions that are built in to encourage particular types of behaviour. A less complex, more straightforward system would yield benefits to the economy as a whole and make it more attractive to inward investment. Companies’ compliance costs would also be reduced, and my old employer, PricewaterhouseCoopers, might not get quite the same revenue flow from tax planning as it had in the past. That might be a price worth paying, however.

I have spoken for rather longer than I hoped to, but the Committee will be pleased to know that I have almost completed my remarks on this subject. It is important for Britain’s competitive position in the global economy that we have a corporation tax regime that is fit for purpose. Part of that can be achieved through tackling complexity, improving predictability and certainty, and having a proper consultation process in place. A fundamental part of the package, however, is to reduce the headline rate of corporation tax.

The amendment is part of a package that would ensure that the measure was cost-neutral. Regrettably, I cannot table amendments that would increase the tax take, so I cannot propose the flipside to this package, which would change capital allowances. However, we have set out a clear package of measures to reform corporation tax, in order to improve the competitiveness of the UK economy. As we look beyond the recession, we need to ensure that we are competitive not only with the G7 but with other global economies, so as to make the best of the advantages that we have, to broaden the base of the economy and to bring wealth and prosperity back to the UK.

Having been lucky enough to catch your eye, Sir Alan, I wish briefly to revert to the question of effectively reducing the capital allowances, which would come into effect in year one. Given the recession and its likely progression, immediate cash-benefit to companies is the very thing we need at the moment. Despite the seeming good news today, I think we all know that we are still in a precarious position and should not take anything for granted. The real need is for cash flows to companies now, so reducing capital allowances at this point in time would hit the very thing we need for the future, which is investment. The timing is particularly perverse.

Apart from the wrong timing, we would be hitting the very area where we are already weakest, and the hon. Member for Fareham (Mr. Hoban), who led for the Opposition, should realise that. We already have a relatively low depreciation charge, which arises directly from the fact that our manufacturing sector is weak compared to our main competitors in exports and world markets—India and China, for example, are taking the lead on many consumer goods. Where we have to compete, we already have a low depreciation charge arising from our relative under-investment over the years, so driving it down still further would hit the very sector that most of our policies should be directed at improving.

Is the hon. Gentleman aware that the parlous plight of British manufacturing today means that a very large number of otherwise very good companies are loss-making, so his case in the short term falls?

If they are loss-making, they are not going to benefit from a reduction in corporation tax. That is the whole point. They are losing money in part because of under-investment but mainly because of the world situation. The right hon. Gentleman has, surprisingly, made precisely my point for me. In the short term, those companies will not benefit from any reduction in corporation tax, so we should be trying to get them what they need by securing money for them from the various schemes that have been announced. Of course, I am the first to acknowledge, in front of the Secretary of State for Business, Enterprise and Regulatory Reform, that we have been slow to get those schemes off the ground. The Conservative party offers no help, however, by suggesting that we have £50 billion in our pockets and that it be should doled out to anybody who wants it. That is not serious.

I put it to the hon. Member for Fareham that what he proposes is wrong. I accept that getting the headline rate down is important, and the first thing we did in government, if the hon. Gentleman remembers, was to introduce a whole range of tax changes, including moving to a new system of corporation tax and other measures. Of course, we reduced the headline rate of corporation tax—it was the first thing we did in our first Budget. I do not underestimate the importance of that, but it is important that we send the right signal and timing is so important. It is no good sending a signal at the wrong time. No one is coming here to invest at the moment. However well we are doing in other respects, the important thing is to get money to the worst-hit sector at the moment, which is manufacturing.

I highlight the manufacturing sector, because, despite the dire forecasts of the City of London—the right hon. Member for Wokingham (Mr. Redwood) knows far more about that than I will ever know; indeed, he has probably forgotten far more than I will ever know, and probably to his own benefit—comparatively speaking, the City has not been so badly hit. Not yet, at any rate, so the losses are occurring where they always occur—in my own area, that of my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) and that of my right hon. Friend the Secretary of State for Business, Enterprise and Regulatory Reform—[Interruption.] Yes, in the area of my hon. Friend the Member for Walsall, North (Mr. Winnick), too.

In sum, now is the wrong time and this is the wrong target. The Conservatives should reconsider and put off their proposal. In fact, I know that their proposal to reduce capital gains is not remotely serious—it is a talking-point, and quite a good one in a way. However, I believe, Sir Alan, that now is not the time and what is offered is directed at the wrong target. The amendment should not be pressed and we should not accept it.

I am a director of two companies, as declared in the Register of Members’ Interests, but I wish to make some general remarks about the tax system.

My hon. Friend the Member for Fareham (Mr. Hoban) has been quite right to say that a lower headline rate of tax could be very important in attracting more business to this country. I think he could have added that it will also affect the judgments of quite a lot of multinational businesses that already have some representation in Britain but have options over where they could carry out their various activities.

Quite rightly, it is not legal for a company to fiddle its transfer prices by suppressing profit in a high-tax regime in order to allow the transfer of that profit to a low-tax regime by artificial means. Under this and previous Governments, the Treasury has rightly adopted methods of preventing or stopping that practice. It is, however, an entirely legitimate business strategy for a multinational with factories, service areas and operational centres around the world to decide where, at any given time, it is best to allocate particular types of business. Obviously, if a multinational has footloose business of a high-technology, high-value-added, high-growth kind which will produce a high margin and plenty of profit, it will look very carefully at the effective and, especially, the headline tax rates around the world. All other things being equal, it may then decide to put more of its high-value, high-profit business into the parts of the world that offer the most competitive headline rates.

I am sure that, in their saner moments, Treasury Ministers agree that that is the case. They know that it happens and that it is a real possibility now, which is one of the additional reasons why I think my hon. Friend the Member for Fareham is right to press them again on whether they are certain that 28 per cent. is a sufficiently competitive rate at a time when the whole world is hungry for jobs and for higher-technology and high-value-added business, and when there is not enough business to go round and there are not enough jobs to go round.

It is true that our debate takes place against the background of a sharp devaluation of the pound. Such a devaluation has many drawbacks. It makes us all poorer, and it pushes up inflation—although it has one important advantage in that it makes our industrial and service activity much more competitive in the short term from a British base, which I trust will limit the damage in Britain compared with that in some of our competitor economies. However, we need to think beyond the one-off impact of the devaluation. We need to think beyond the present trough of the recession. We cannot be sure how long it will take, but there will be recovery, and we need to ask ourselves that fundamental question: is 28 per cent. a sufficiently competitive rate at the present time?

The hon. Member for Coventry, North-West (Mr. Robinson) rightly pointed out that the present Government had continued the previous Government’s policy of cutting the headline rate. That was very sensible, but I think that they got stuck. I do not think that they realised how rapidly the rest of the world had moved on. In the opening exchanges today, my hon. Friend the Member for Fareham was asked if he recognised that all that we needed was one of the more competitive rates in the G7, and that if we had it we would be all right. Of course we will not be all right. The world has been completely transformed. The Prime Minister accepted that in hosting and chairing the G20. The serious competitive threat to keeping manufacturing in Britain or attracting it to Britain today comes primarily from China and India. It is a serious option for most multinational companies to switch production from the United Kingdom or Germany to China or India. Most multinational companies already have several factories in those countries, as well as having manufacturing capability in Britain, Germany, the United States or some combination of all three.

The proposal that we are discussing goes to the heart of that issue. Why are we talking about the headline rate? We are doing so because it is the headline rate that people usually use in their simulations, models and forecasts when considering where to put their future investment. They also look at the underlying trend of policy. If, as in Canada, it is clearly a commitment to make the current rate the maximum and to say that in future it will be reduced, that will be a fairly influential factor when it comes to the judgment on the back of the numbers. If people see a Government who face a monumental deficit and who seem to think that it is only possible to secure more tax revenue by raising tax rates—itself a very dubious argument, in my view—they may well say to themselves that the Government could not be bothered to cut the rate below 28 per cent. although they knew that 28 per cent. was no longer particularly competitive, and that in a year’s time they, or some other Government, might be forced to put the rate up. That is not a good background against which to make an investment judgment.

I urge Treasury Ministers to think again. I urge them to understand that our prime competitors have much lower tax rates than we have, as well as having lower remuneration and other competitive advantages. I urge them to understand that the big investment players in manufacturing in this world already have capacity around the world, and the ability to switch. I also urge them to understand that we are talking about not just where the new factory goes, but where the work is allocated around the different factories of the world, and that if we allow our country to be perceived as more hostile to business—less competitive in tax and regulatory terms—we will start to be on the wrong end of business judgments. The people in the American, Japanese or Chinese multinational will start to say, “Well, we’ll leave the old, low value-added, less profitable business in Britain because of the tax rate,” and that means that Britain will lose jobs rather than create them, and that, in the end, the British plant will be the one most likely to face the closure notice because—surprise, surprise—it has the worst business and then it has the worst figures. The people in the multinationals will forget that that particular country has less good factory results because, for tax reasons, they chose to locate a less profitable business in it. Therefore, if countries are not careful, they can find that they are on a very slippery slope indeed.

In today’s exchanges, we have already heard Labour Members voicing scepticism about whether the setting of a 10 per cent. rate in Ireland was the reason so much business was attracted there. I can assure Labour Members that, from conversations I have had on account of my work on the policy review and for other purposes, it is clear that the low headline rate of corporation tax has probably been the number one attraction to footloose international businesses in choosing to go to the Republic of Ireland. They did not go there for the European Union grants; most of those were paid to agriculture, which was not a particularly successful sector. They did not go there to join the euro either, because they have to deal in a multi-currency world and what matters to them is the rate into the dollar, the renminbi and the rupee, so the euro is not that important. What mattered to them was that they assumed that they would run profitable businesses—and for quite a lot of years, many of them did—and it makes a huge difference to their forecast cash flows on an investment if they are keeping 90 per cent. of them rather than only 70 or 72 per cent. of them with the rest going to the Government. The Financial Secretary is a clever man, and he knows the power of compound arithmetic. The compound effects of taxing at 10 per cent. are so much more benign than the compound effects of taxing at 28 per cent.

I do have one, friendly, disagreement with my Conservative Front-Bench colleagues in that I believe that the Laffer curve works—they are sitting up and taking notice, Sir Alan. I am trying to make our lives easier, because I believe that this is one of those rare cases where we can have our cake and eat it. I believe that if a country is brave enough to set a lower tax rate, as the Irish were in spades, it can attract a huge extra amount of business, because world business is very footloose and very sensitive to the individual tax rates on offer. The Irish moved from being a lot poorer than the United Kingdom to being a lot richer. At the same time, they moved from spending less per head to being able to spend a lot more on public services because the low rates brought in so much more revenue. Such low rates can therefore have an extremely benign effect, but there is also the reverse effect: if a country allows itself to become too uncompetitive on the headline rate, it discovers that even putting it up does not solve its revenue problem, but can actually make the revenue problem worse.

Fortunately, so far, although we have had a run of companies leaving the country, such departures have been paced out and the Government have managed to suppress a lot of bad commentary on that, but I suggest to them that they should not push their luck any further. My hon. Friend the Member for Fareham produced a partial list of those companies that have gone. There are others as well, and in certain sectors, such as insurance, it is becoming a rush to get to the exit on time. The situation could be the same for some of the higher charging investment management companies, one of which my hon. Friend mentioned. This is a serious problem for the United Kingdom. To those on the Labour Benches who say, “Well, we don’t want to keep those sorts of businesses if they’re that sensitive to the tax rate and do not want to pay their fair due”, I say that that is a very short-sighted view. Businesses are, on the whole, motivated by profit and money as well as by wishing to serve the public, but they know they have to serve the public well to generate the revenues—that is the deal—and if we are too cavalier in our approach to taxing them, we do not just lose the tax revenue they were paying in terms of corporation tax, but we lose the tax revenue they were paying in terms of the tax on their employees, the national insurance and the VAT on the money their employees would have spent in the shops. We lose a great deal of tax revenue if we become too cavalier about where businesses are to be located.

The case is very straightforward: cutting the rate from 28 per cent. to 25 per cent. would send a very strong signal to our international competitors and, more importantly, to international manufacturing investors that this country is serious about remaining tax competitive. I hope that my Front-Bench colleagues agree that a change to 25 per cent. is the minimum that we need to do and that it is not the final resting place. I would be much happier with a rate of 20 per cent., because that would make a huge statement, would catapult us back to being a place that people talked about as a desirable location for investment and would definitely illustrate the Laffer curve—one might say that one would be “Laffing” all the way to the bank if one was to do that, because so much more business would be attracted and so much more revenue would be coming in.

As a result of these straitened times, my hon. Friend the Member for Fareham says that we should be absolutely sure and pay for this proposal out of removing allowances. That is my second-best option—I would rather just cut the rate—but it makes more sense than doing nothing, because it does take the trick on the headline rate and I do not believe it does the damage that the hon. Member for Coventry, North-West, who is no longer in his place, seemed to suggest. Past corporation tax reforms have cut allowances and cut rates, and they have been helpful and benign; they have usually resulted in more flows of business as long as they establish a competitive international rate that we can work with and of which we can be proud.

I do not think that those on the Treasury Bench are communicating a strong enough sense of the danger to our economy that the current situation represents. Perhaps they are resting on the laurels of the devaluation and perhaps they do not understand how tough the situation is, particularly in the manufacturing heartlands. They are not energetic enough in making the case within government that if we are serious about rebuilding our manufacturing, we need to put in place a package of measures, and this considerably lower corporation tax headline rate would be an important first step.

I would like this country to export more and make more, as that is part of the necessary process for recovery. A lower corporation tax rate would help to do that. I do not despise financial services. I would like us to grow and improve our financial services offering in Britain and keep London as a very important financial centre. That, too, is very dependent on a very competitive corporation tax regime. The Financial Secretary knows that I am not happy with the huge sums tipped into banks, which have grossly distorted the economy’s adjustment process and have delayed the necessary adjustment in those banks. I wanted to keep them going at a much lower cost.

Of course I did not want the banks to go bankrupt, but it is a disgrace that so much money has been absorbed in them. If we had not wasted all that money in the banks, even the Financial Secretary could have afforded my 20p in the pound proposal for corporation tax, given his view that it does not generate the extra revenue that I believe it does. That option would have been a much better competitive package for Britain than losing billions in RBS and delaying the time when RBS sorts itself out and actually generates some money for British taxpayers and for the Treasury, instead of taking away all the money that we need in order to offer a more competitive package. I hope that the Treasury will also go away and think about squeezing some money out of the banks to make the rest of British business profitable, rather than squeezing the rest of British business to try to buttress the banks.

If one looks at table C6 on page 231 of the Red Book, one sees that the projected receipts from corporation tax for the financial year 2009-10 are £34.7 billion. The amendment would cut corporation tax by three 28ths—from 28 to 25 per cent. In round terms, three 28ths of the projected revenues of £34.7 billion is £3.7 billion. If one were to cut our corporation tax rate to the OECD average, which the hon. Member for Fareham helpfully informed us is 22.5 per cent., that would be a five and a half 28ths cut in £34.7 billion, which would be a £6.8 billion cut.

That is not before us tonight. I suspect, from what the hon. Member for Fareham (Mr. Hoban) said—although he did not say so directly—that he would not pursue the logic of his position and seek to put the UK at the average rate of the OECD, but cut only from 28 to 25 per cent. That was because he wanted a revenue-neutral package, and that the counter-balancing measures that he outlined to make up for that loss—which I calculated at £3.7 billion, although I appreciate that he does not accept that figure—would come to £3.7 billion. His countervailing measures did not come to £6.8 billion and therefore he could not go the whole hog to cut corporation tax to 22. 5 per cent. When I hear the phrase “revenue neutral”, it has the same effect as the words “efficiency savings” and my scepticism meter starts twitching markedly—

Does the hon. Gentleman recall that under a Conservative Government corporation tax rates were cut and income tax higher rates were cut, and in both cases there was a revenue surge?

I am not saying that it cannot happen: I simply said that my scepticism meter starts twitching. Following the probing and then the speech by my hon. Friend the Member for Coventry, North-West (Mr. Robinson), and the measures that the hon. Member for Fareham said that he was not allowed to table tonight, it appears that the countervailing measures to achieve the other half of this package—to make up for the lost revenues in corporation tax, were that cut to be enacted—are precisely the sort of measures that would hit manufacturing.

Parenthetically, I would say to the hon. Member for Fareham that my understanding of the procedure of the House is that he could have tabled his amendments, so that we could have seen them, but the Chairman of Ways and Means would not have selected them—[Interruption.] Well, there is chuckling from Conservative Members, but it would have been useful to see the countervailing measures proposed. Instead, they were outlined by the hon. Gentleman, and from what I understand, they would hit manufacturing. The right hon. Member for Wokingham (Mr. Redwood) talks about footloose manufacturing companies, but his Front-Bench colleagues favour a tax regime for business that would hit manufacturing. It would be the loser under the countervailing measures and other parts of British business would gain. As a Member of Parliament in the west midlands—my hon. Friend the Economic Secretary is in his place, and my hon. Friends the Members for Walsall, North (Mr. Winnick) and for Coventry, North-West were here earlier—the current plight of manufacturing is a considerable concern, without changing the tax regime in a way that would make things worse.

I understand the aspiration towards lower corporation tax, but the hon. Gentleman has to be careful about pushing the Canadian model too far. There are many jurisdictions in Canada, and those subject to federal taxation are federally incorporated and make up a tiny minority of companies, engaged in activities such as telecommunications and transport that, under the Canadian constitution from 1982 and the British North America Act 1867, are the federal preserve. Almost all business in Canada is the provincial preserve, and the huge trade barriers between provinces are an issue that bedevils that country. I understand that the hon. Gentleman aspires to that model, and it does raise some money at the federal level, but he should not push it too far.

I do not accept the concept of distortion—although I am not sure that that is the argument that has been made—because people change their behaviour. There is no natural way for people to behave that is somehow then distorted, because to say that is to buy in to the whole nonsense about perfect competition, which never exists, even on eBay. We have taxation measures to encourage certain forms of behaviour, and some of those behaviours are related to commercial matters, including for example, the lack of VAT on newspapers and books, and the company car taxation regime. So, corporation tax as part of a package of taxation measures will have an effect on behaviour and one must be very careful about that so as not to drive business out. I reject any suggestion that we have perfect competition and that we should not intervene at all.

We should have a capital allowance regime that encourages manufacturing and capital investment, as my hon. Friend the Member for Coventry, North-West said. I remember that a few years ago, when we had a 100 per cent. first year writing down allowance for investment in computers, that measure found favour on both sides of the House, although some might have said that it was a distortion. I favour capital allowances that help manufacturing and I urge Labour Members to reject the amendment tonight.

The hon. Gentleman referred to the 100 per cent. first year writing down allowance for computers. Did he object to its withdrawal?

Yes. It was cut by this Government and I do not think that it should have been. It should have been kept for longer—that is the simple answer—because computers are used across British industry, including in manufacturing.

The hon. Gentleman is characteristically honest, but does he not recognise that decisions are taken to reduce allowances because they have perhaps distorted behaviour or outlived themselves and changes need to be made? We need to get people to act in a way that is consistent with their economic and commercial drivers rather than simply distorting behaviour for a short-term objective.

I will not be tempted too far down that line, Sir Alan. However, I think that there is a role for writing down allowances and tax and capital allowances to encourage certain behaviour in the economy, even though it might be seen by some—and perhaps by the hon. Gentleman—as a distortion. That is why I think that the computer writing down allowance should have continued for a bit longer, until we had even more computers in the economy. That allowance was very helpful. I urge my hon. Friends to reject the amendment, because it is part of an overall package that would hit manufacturing and would be bad for British industry and bad for jobs in the west midlands.

The measure proposed by those on the Conservative Front Bench is actually rather simple and modest. One would think from the attempt to draw dividing lines, as is fashionable in politics at the moment, and from the length of the speech made by the hon. Member for Fareham (Mr. Hoban) that a huge point of principle was being proposed that distinguished the Conservative party from the Government. If the sentiments expressed by the right hon. Member for Wokingham (Mr. Redwood) had been the substance of the amendment, that would have been true. He made a serious ideological point that distinguished between what he thought was the best way forward for the British economy and the Government’s proposed way forward for the British economy. The distinction made by the amendment is not nearly as substantial and as impressive.

The right hon. Member for Wokingham said that there was great value in cutting headline rates. I think there is some truth in that, although it is not always as straightforward as he might think, as shown by the Prime Minister’s experience in his last Budget as Chancellor of the Exchequer. He cut the headline basic rate of income tax to 20p, thinking that that would be extremely popular and would incentivise a lot of people on low to middle incomes to do more work. It appeared not to have that effect when people realised that it was revenue-neutral and that some would be disadvantaged as they would have to pay additional taxes to make up the shortfall arising from the money that was lost by cutting the headline rate. Cutting headline rates is not always as popular as politicians and legislators might think.

I was also interested in the point made by the right hon. Member for Wokingham about the Laffer curve, although he appeared to suggest that the Laffer curve’s principal benefit is attracting investment from other countries into the jurisdiction where that applies. I would have been more interested if he had gone on to advance the view that it would generate more money from companies within the existing area of jurisdiction. He appeared to dwell less on that point, although I suspect that that is also his view.

By way of contrast, the amendment attempts to create an impression that, at this time of recession, the Conservative party would like to give British companies preferable tax treatment. However, having heard the explanation from the hon. Member for Fareham, one understands that that is not the case and that the proposal is revenue-neutral with regard to the total tax take. For that reason, his speech could have lasted two minutes rather 50—he could simply have said, “This amendment seeks to redistribute but not reduce the tax burden on British businesses.” Given that our budget deficit will be £175 billion this year and £173 billion next year, and that we do not have huge amounts of surplus revenue sloshing around to use to reduce taxes, I and my party are minded to support the amendment precisely because of its modesty.

Three principles are worth observing—[Interruption.] I hear mutterings from off stage, but my point is that, although the ideas of the right hon. Member for Wokingham are more interesting and ideologically adventurous, they would create a real distinction—something that the Conservative party wants only to give an impression of doing. In a way, there is nothing very interesting about the amendment.

I will in a moment. We are considering not how much business is taxed, but whether the burden on different aspects of business should be redistributed in a way that renders the total tax take more reasonable. By and large, I think there is scope for collecting the same amount of tax revenue in a more simple way, and I shall set out my three principles for doing so. Before I do, however, I shall give way to the right hon. Gentleman.

Do I understand the hon. Gentleman correctly? Does he think—unfairly—that, because the proposal from my hon. Friend the Member for Fareham (Mr. Hoban) is potty, it is now good Liberal Democrat policy?

That would have been funnier if the timing had been better. As it was, it was a typical Back-Bench attempt to be conservatively amusing.

The Conservative party believes it is here to argue the case for British business. That is reasonable, but it is trying to create the impression that it wants to cut the tax burden on British business. In reality, though, it does not want to do anything of the sort, and that is why I said that the amendment could have been dealt with rather more quickly. Had the Opposition proposed from the Front Bench the measures articulated by the right hon. Member for Wokingham, that would have been worth debating all of today and tomorrow because it would have represented a massive change in economic and tax policy. However, that is not what the Conservatives are trying to do: they are trying to give that impression, but they are not really trying to achieve that.

Even so, for the reasons that I am about to outline, I think the amendment is probably a step in the right direction. The first principle that I think ought to govern these matters is stability. Stability is beneficial: the Government have kept the rate unchanged, and that is a reasonable step in the right direction. It would help if they gave an indication of how long the rate will be kept at that level. I realise that future Finance Bills and general elections make it harder for them to give a firm commitment, but it would be helpful if business could have a feel for where corporation tax rates are going.

The second principle is simplicity, and it is in that regard that I think the amendment is most worthy of support. Removing lots of rates and reliefs and concentrating on a lower headline rate makes the system easier to understand for companies. It is harder for people to dodge tax, and complying with tax obligations is less of an administrative burden.

The third principle is transparency. I caution Conservative Members against creating the impression that they wish to cut business taxes when the reality is that they want nothing of the sort. They are in harmony with the Labour Government in thinking that the overall tax burden on business is exactly right, but this modest amendment at least advances the cause of simplicity and, on that basis, I see no reason to oppose it.

I declare an interest as the chairman of an SME that employs about 140 people and that pays well below the corporate tax rate affected by the present discussion, although we hope that, one day, we will get there. We do, however, service a number of companies that are in the relevant tax bracket, and therein lies my interest, because supply chains are a vital component of the whole structure.

I shall talk about how people think about tax as much as about how accountants evaluate tax. Business men tend in the main to be more creative than accountants and they tend to dwell less on detail. It is that degree of creativity that makes the amendment interesting and it is why I commend it so strongly. What the amendment proposes would create a feeling of the worth of being involved and of using money to gain more money and to grow on behalf of the nation, as well as on behalf of the people we employ. It reflects an attitude of mind —one that is often not understood by Government Members.

Many in business get the impression that Labour Members think that business men are there to make profit and that that undertaking is in some way dubious—or even, some of the worst sort of that thinking suggests, crooked. In fact, many business men are there to create, to build and to grow, and that very objective is the driving force that creates jobs in this country. Therein lies the importance of the amendment: it would encourage creativity, which in turn encourages jobs. That is a vital part of the process in which we need to be engaged right now if we are take advantage of the green shoots that will appear, as my right hon. Friend the Member for Wokingham (Mr. Redwood) and my hon. Friend the Member for Fareham (Mr. Hoban) have said. When those green shoots appear, we need to be in a position to exploit them to the advantage of our nation. High taxation in any form does not help us to do that.

Another point touched on by my right hon. Friend is the need to attract to this country businesses and big companies from other nations. I am amazed by the arguments advanced by some Government Members, who seem to think that our real opponents are Germany and France—that those countries should be our comparators and that, as long as we are lined up relatively sensibly with them, the world is okay. Let me tell Ministers that the world is changing dramatically and the G7 may not always be in pole position. In fact, I believe that the present elements of the G7 will not be in pole position for very much longer, because I perceive a massive, dynamic change in the world, which the present recession will only enhance. The Government need to understand that, but I see no understanding among them of that trend.

Let me explain part of the reason I think that. I have just returned from a Department for Business, Enterprise and Regulatory Reform trip to the United Arab Emirates and Saudi Arabia, and I went to Dubai. Some might say that Dubai is having a pretty bad time, and indeed it is, because it is not a major oil-producing part of the world, but it is a hub for a massive region. People there said to me time and again, “We used to look to the west; we now look to the east.” Business man after business man in Saudi Arabia and the Emirates told me that. Of course, many of them were not nationals of those countries. They were European business men who decided to settle their businesses in that part of the world because of the potential that it provided. That is what we are competing against. It is against that background that this debate is so important. It is about ensuring the recharging of Britain’s natural entrepreneurial spirit. That creativity is vital, and lower tax rates inspire that creativity. I beg the Government to recognise the connection in the amendment, even at this late stage.

I was rather surprised at the hon. Member for Coventry, North-West (Mr. Robinson), whom I admire enormously. He is one of the few members of the Labour party with real business experience. I was particularly surprised that, although he recognised that we created the lowest corporate rates of taxation in the G7, he did not seem to think that that was too important. That was a very confusing argument. I recognise the points made about the overall tax basis, but he did not see the creative, imaginative elements of the proposal, as I would expect a business man to do. That surprised me in a business man of his stature.

Drawing on his business experience, does my hon. Friend find, as I do, that business people in big companies will go to enormous lengths—within the law, we trust—to try to avoid paying higher taxes? That is important when they do business across the world.

Of course my right hon. Friend is correct. Many of the greatest business supporters of the current Government were the proponents of such exercises. The hon. Member for Coventry, North-West—I repeat that I hold him in great esteem—said that the argument was about timing. That was the essence of why he did not want to support a cut to 25 per cent. at this moment. I would argue that it is precisely because of the timing that we need to make the change. I was one of those people who saw, from ’79 onwards, a great rebirth of entrepreneurial spirit in this nation. I saw what that did for people like me, who wanted to go out and be their own boss, to build and create, and to drive forward the jobs that were so successfully created in the next years.

At the time, one of the major motivations for me, and for many other people like me, was the fact that the Government wanted to get off the back of business, free business up, and encourage business to build. Therein lies the import of the cut to 25 per cent. Like my right hon. Friend the Member for Wokingham, I want further cuts as time progresses, but timing is vital if we are to grab the green shoots that will surely appear. That is why it is important that we make the change now, and that we tell people we want to support business and entrepreneurism. We want to grow jobs and businesses and we want to attract businesses so that my children and grandchildren do not see that movement to the east as the end of their hopes and aspirations.

I do not have a problem with lower business taxes, and I am very supportive of lower corporation tax. I have said so many times that, as part of an overall competitive framework for business, that is a prerequisite for solid economic growth. When we look back over the medium term, we can see that many countries that, when they reduced their business tax burden, in fact experienced a business tax increase year on year as the rates came down.

None of those comments will come as a surprise to those on the Conservative Front Bench, as I have made them on many occasions. It is the case, however, as we have discussed before, that concerns arose when business taxes were kept high. Even when allowances and reliefs for investment were extended, there were concerns that that regime failed to support the good businesses that were simply getting on and running their companies, and supported only the companies or firms that invested in particular areas. I shall return to that in a moment.

The hon. Member for Fareham (Mr. Hoban) suggested that the proposed tax cuts would fundamentally be paid for by reducing or removing allowances or reliefs, by simplifying the allowance or relief system. Although I agree with the need for a simpler tax allowance and relief system in general, I have a couple of questions about his amendment. What assessment has he made of the value of lost investments—investments that might be cancelled or delayed as a result of the proposals—if those allowances or reliefs have already been budgeted into the costs? Why has he proceeded at this point with the cut, rather than proposing a longer time scale for changes to the tax and allowance regime, which would allow the economy to benefit from the announcement effect, as we have seen elsewhere, whereby businesses come and set up in preparation for lower taxes, while mitigating the risk of investment projects being cancelled or postponed?

I am very supportive of a lower corporation tax rate—our aspiration is to reduce it to 20 per cent.—and I am in favour of a simpler tax system, which is a good thing, as it reduces costs and burdens, and is easier for business people, their offices and their staff, to understand. However, I question the timing of the proposal. Why not say that it would take place in future, to benefit from the announcement effect, and why not tie that into a longer lead time for the abolition or simplification of allowances? Importantly, what assessment has the hon. Gentleman made of the risk of investment projects being cancelled? I want to support the proposal, but it would be useful to hear his thinking.

From the point of view of the hon. Gentleman’s party, what would be a competitive corporation tax rate for the United Kingdom?

We suggested a reduction to 20 per cent. That was our favoured route, and we thought it would be the optimal position. We must not have a race to the bottom, but we cannot compete with the lowest-cost economies: there must be a competitive package—that is the key. At the same time, we made it clear that that would not be done on day one. There must be a lead time, and where that has happened—and there is empirical evidence of this—the announcement effect on businesses coming here in preparation increased the tax yield even before the rates went down. If the hon. Member for Fareham responded to those points, I would be extremely grateful.

First, I should like to draw hon. Members’ attention to my interest in the Register of Members’ Interests as a director of a family building business.

We have had an interesting debate, and when we talk about first principles—tax, tax rates and competition—we often have such a debate. At the beginning of debate on the Finance Bill, we had almost a Cook’s tour of Canada, Bahrain, Dubai, China and Dundee, East. That shows that we live in a competitive world environment that is not getting any easier year by year, but is becoming far more competitive. One of the examples that I used was Ireland, and a key message that has come across is that low taxes generate more revenue and jobs, attracting people to locate there. Ireland is one of our competitors and, notwithstanding its short-term difficulties, which are similar to ours as a result of asset price deflation and everything else, we must accept that this is a competitive world.

We should not look at the question on a year-by-year basis; we need to look at the medium term. Our economic problems relate not to one year alone, but to half a dozen years. We have to keep business in the UK and attract it to the UK. Setting a rate, a direction of travel, of 25 per cent. will make things a little easier than if we set a rate of 28 per cent.

One of the messages to come from our financial problems has been how big some of the banks and international companies are in relation to our economy. We know that people sitting in various capitals around the world look at the various competitive differences of language, productivity and tax; all those things feed in. Although we do not necessarily need the lowest tax, we do not want to tax too much more than our competitors. That is a black mark when people are considering where they are going to invest and to locate their businesses.

Paying for the measure by restricting the capital allowances reliefs is probably right. Most businesses that have to invest in equipment and machinery do so for reasons to do with the business and not because of the tax advantages. The hon. Member for Coventry, North-West (Mr. Robinson) has already told us that there may be an impact on manufacturing. Of course: the pound has devalued against the euro and interest rates have massively reduced. All those things should—fingers crossed—help west midlands manufacturing. So what I have been discussing is a rather good way to go about things.

My hon. Friend the Member for Fareham (Mr. Hoban) mentioned companies such as Google and insurance companies, some of which are moving for regulatory reasons as well as the reason of rate. Such companies are more mobile. Manufacturing can move, but it is a hassle to move a plant; it is easier for an insurance company, bank, investment fund or software company such as Google to move. It is perfectly possible for my hon. Friend to come up with a calculation for amendment 1 whereby the burden on UK business would be the same but the pot might be bigger, because we might retain businesses that would otherwise consider moving—whether to Bermuda, southern Ireland or the Netherlands—and we might well attract businesses in. We have tremendous advantages as a nation. We are creative and hard-working, and the English language is a tremendous asset. That also means that we have to be competitive because a lot of other people speak English and can compete with us. Reducing the rate from 28 to 25 per cent. by restricting capital allowances and reliefs is sensible.

My hon. Friend made some compelling arguments. At the beginning of this debate he said that five years ago we had the fourth lowest headline rate in the EU and that today we had the 19th lowest. However, as we have heard, our competition comes not only from the EU—let us face it; many EU countries are rich and successful and will get through the problems—but from the whole world. Setting a lower rate is therefore important.

The hon. Member for Taunton (Mr. Browne) made some good points. A simple proposal that is more certain and not as avoidable is far better than having a higher rate and lots of reliefs and allowances. We see the direction of travel, but countries in the rest of the world are trying to get our business. They want to attract our companies, and they are doing so by setting more competitive rates. Unless we respond to that, we will not be defending the wealth, jobs and investment in the UK. We have to look beyond our current economic difficulties. Let us face it—we know that the corporation tax take is going to take a hit and that, even when recovery comes, there will be a lag. However, we also know that international businesses plan on a three, five, seven or 10-year basis. We should therefore plan our economic renaissance on the basis of setting rates to encourage people to look towards the medium term.

Is my hon. Friend worried for firms in his constituency that are part of multinationals given that, at a time when a lot of capacity worldwide will be removed and plants will be closed, too high a headline rate might be what tips the balance against a British plant?

There is over-capacity within the car industry, and there will be cutbacks there; and we have already seen bad news from Teesside as regards steel. Many international businesses will be looking to see where they want to expand in future. We face great competition, and the tax rate is one of the things that might encourage people at least to consider staying here at a difficult time. Many of our major manufacturing plants are hanging in there by their fingernails. We hope that we will get through the current problems. However, it is important to send a message in terms of public policy, setting rates and stating a direction of travel if we are to retain people and stop them moving abroad. I was surprised when my hon. Friend the Member for Fareham listed some of the companies that have moved. I was aware of some, but perhaps I am not as glued to the financial pages as somebody who does the Treasury job full time and is a chartered accountant.

The amendment deals with lost revenue to UK plc that could be spent on important alternatives. It is therefore an excellent proposal, and I commend it to the House.

I apologise for not having realised that in order to participate in this debate one had to be an expert on Canada, but having returned from Canada only on Saturday morning let me give the Committee the benefit of an update on the situation there. The economic situation was encouraging, as were the conversations that I had with Ministers, including those in the finance team. They had a realistic view of Canada’s position and direction and were keen to go out around the world and “sell” the country. Canada started with a good situation in terms of its approach to the current crisis. The stock market was doing rather well last week—not that I had time to undertake any speculation—and unemployment was under control.

There is one great difference between Canada and the UK: Canada has a Conservative Government. One of the Committees that I have served on over the past few months considered the Corporation Tax Bill. Nothing new was introduced into that Bill—it was part of a tidying-up exercise; “simplification” was the euphemism used—but the fact that it had some 1,300 clauses shows that we have some problems in our corporation tax system. It was evident that what was required was not just telling the press about closing loopholes but genuine simplification of a regime of allowances and reliefs that interact with each other, are extremely complex and set a very confusing picture for foreign investors who come to this country. It is a shame that the opportunity was not taken to make more of simplifying the corporation tax system as part of the way out of the current crisis.

There is huge scope for simplifying the system even further. For several years, I was an inspector of taxes—[Interruption.] I hear cries of “Shame!” from my hon. Friends. I remember that when I first started, all the income and corporation tax Acts could be put into a reasonably small box that could be put into one’s briefcase and taken home. That is no longer so, which is a great shame. Even then, one had to deal with huge areas of enormous complexity, such as transfer pricing.

Order. May I ask the hon. Gentleman to speak a bit more about the amendment as opposed to the generality of corporation tax?

Thank you, Mr. Hood. I shall try to do that. That complexity, though, is very much part of the balance that needs to be struck in deciding what reduction in corporation tax is required and how it can be adjusted.

A lot of hon. Members have spoken about competitiveness in reducing the rate, and I endorse the many comments that have been made about the role of a lower rate of corporation tax in encouraging foreign investment into this country. For a number of years, it was very much the UK that set the agenda in encouraging newly developing countries in how they should approach their financial systems and set their own rates. I remember being involved in discussions how the countries of central and eastern Europe, as they emerged, could get the right balance between the rate of corporation tax and the need to bring in foreign investment through other means. That was always a difficult discussion, because countries always want to encourage companies to come in initially through means other than reducing corporation tax. It takes quite a lot of maturity for a country to get to the point of reducing it, as the amendment proposes.

When my hon. Friend was in Canada, did he find people taking great delight in the fact that the UK rate was so much higher than the Canadian rate? Did they believe that that gave them a great competitive advantage?

My right hon. Friend is right—there was a certain pleasure in that, although perhaps I should not use the word “pleasure”, as they are, after all, our cousins and still part of the Commonwealth.

I may have misheard, but I believe that the intervention was factually incorrect. The corporation tax rate in Canada is higher than that in the UK.

I think that my right hon. Friend the Member for Wokingham (Mr. Redwood) was talking about the overall direction in which it was going—at least, that was what I understood.

To return to the example of countries needing to reach maturity to consider reductions in corporation tax, the country that sticks in my mind is Poland, which has reduced its corporation tax rate to 19 per cent. Of course, the UK was very much behind the reforms there in the whole tax and financial system. It is a great irony, particularly given the advice that Poland gave the Prime Minister recently, that Poland was ready to take advice from the Conservatives but the Prime Minister was not. There we have something that will continue in future.

In the businesses that I have advised and examined, there is great attraction to the headline rate of corporation tax.

May I caution the hon. Gentleman about praying in aid Canada and Poland? He will find that both countries have a rather higher unemployment rate than we do. I appreciate that ours is getting worse and is worrying, but I think that both those countries have higher rates. Canada certainly does.

I thank the hon. Gentleman for his intervention. There is always a limit to the use that we can make of examples, but those of Canada and Poland still have merit to the extent that I have indicated.

The hon. Gentleman has rapidly developed a reputation in the House for being a rather more subdued and rational person than his predecessor, which does not take a lot. He says that the direction in which things are going is all that matters. Does he believe that if investors and industrialists were looking at a country with a highish corporation tax rate that was heading down slightly, and at another country with a lowish corporation tax rate that was heading up slightly, a rational organisation or individual would choose the former because the direction was downward? I do not think so.

I am not sure whether to thank the hon. Gentleman or whether his remarks comparing me with my predecessor were even a half-hearted attempt at a compliment, but I will take them at face value and hope that I continue to make the gap bigger in his appreciation.

In my experience of advising companies and Governments about how to set up foreign investment regimes, companies consider the headline rate. They do not look at it on its own, and the comments about not considering it in isolation are correct. However, companies consider the direction in which it is going and are prepared to take a punt on that, and to examine other circumstances, such as the simplicity of the tax system. An incredibly complex system will offset some of the advantages of reducing the tax rate. It is therefore right to proceed with simplification.

Companies examine the whole complex pattern, but I cannot emphasise enough that the starting point is the one thing that one can always grab hold of—the amount and direction of corporation tax. Earlier remarks about considering the whole package are important, but there must be one guiding figure: the rate of corporation tax.

I have done enough of a world tour to my two favourite spots, Canada and Poland. I hope that other hon. Members will consider other countries. As my hon. Friend the Member for Northampton, South (Mr. Binley) said, the middle east is an important area. His comments about attitude, direction, perception and the changes people make are vital because we can be sure that, when the crisis is over, people will not look at the world, or countries’ approach to their tax systems, in the same way. They will look for simple tax systems that focus on the nation’s priorities and reflect the changes in people’s experience when, for example, they examine the amount of debt on the books.

I fully endorse the amendment and look forward to the vote on it.

The debate has been interesting. I want to underline the Government’s determination to maintain the best possible environment for business in the UK, help the economy recover from the current downturn and provide the right conditions for long-term growth.

Since 1997, the UK has led the way among its peers in reducing corporate tax rates. We reduced the main rate from 33 per cent. in 1997 to 31 per cent. in 1998, to 30 per cent. in 1999 and to 28 per cent. last year. The UK corporation tax rate has been the lowest in the G7 since the Government were elected in 1997. The rate has consistently come down.

From listening to some comments, one could be forgiven for concluding that the rate had gone up, was going up or was set to go up. It has not—the main rate has consistently decreased. Indeed, we have set a target to maintain the most competitive main rate of corporation tax of the major economies. The hon. Member for Fareham (Mr. Hoban) said that he did not have a target. We do. Our target is to maintain that most competitive rate, and we will continue to assess the case for further reductions in the corporation tax rate, consistent with our wider objectives.

This debate, like many in the past, has been enlivened and enlightened—

May I take my right hon. Friend back a few sentences? I think that he said that the Government’s aim was to keep the UK’s corporation tax the lowest in the G7. Does that mean that, if Jim Flaherty in Canada achieved his aspiration of dropping corporation tax to 15 per cent., the UK Labour Government would follow that figure on a beggar-my-neighbour downwards approach?

I was coming to precisely the point about Canada, which, thanks to my hon. Friend’s contribution and those of others, has been an interesting aspect of this debate. As I understand the current position in Canada, the rate is 33.5 per cent.—at least for most companies—compared with 28 per cent. in the UK. However, as we have heard, the Canadian Government have announced an aspiration to reduce that rate and, in due course, for Canada to have the lowest rate in the G7. Clearly, there cannot be two countries—[Interruption.] It is possible, I suppose, to have two, if both countries set the same rate. It is worth pointing out, however, that that aspiration was set before the problems in the world economy that we have seen over the past 18 months. There have been big changes in the world economy and Canada may wish to reconsider how best to address the fiscal consequences of the past 18 months. However, our intention—which was set some time ago and which Canada said a little while ago it wanted to emulate or even better—remains, but of course we will need to see what happens.

It is worth bearing it in mind that tax competitiveness is about more than just the headline rate of corporation tax, as has been pointed out. The UK tax system certainly has significant advantages, including a generous and well-developed system of research and development tax credits, relatively low administrative burdens for business, a large tax treaty network and no withholding tax on dividends paid. We are introducing a package of measures in the Finance Bill to reform the taxation of foreign profits, which the hon. Member for Fareham mentioned, enhancing the UK’s competitive position as a location for multinational business. We will debate that in due course.

We in the UK also perform well on other measures, according to the hon. Gentleman’s former employer. In “Paying Taxes”, a publication by PricewaterhouseCoopers and the World Bank, we rank first in the G7 for ease of paying taxes. We were ranked by KPMG last year as the most friendly country in the world for VAT arrangements.

I refer the right hon. Gentleman to the authoritative KPMG survey of more than 500 multinational companies that reached that conclusion. The World Bank’s “Doing Business 2009” study ranks the UK sixth in the world. The evidence is clear: we are in a strongly competitive position, and it is important that we should retain that.

If everything is so wonderful, why have so many companies left for tax reasons and why have there been such strong representations in recent months about how hostile the climate now is on tax?

The climate is certainly not hostile on tax. Of course it is true that, from time to time, some companies choose to locate elsewhere. It is also true, however, that over a long period we have consistently attracted more foreign direct investment into the UK than any other country in the world, with the exception of the US, and in one year—I forget exactly when; it was three or four years ago—we got more in than the US as well. We have an absolutely stunning record on attracting foreign direct investment, which is a reflection of the strongly competitive character of the UK business environment.

I am pleased to hear the views of international businesses about the user-friendliness of HMRC. The prompt payment code, which the Government have signed up to, requires the payment of invoices by the public sector and the Government within 10 days where there is the equivalent of an invoice, such as an acknowledged refund of corporation tax that is due. Is it the case that those payments, which are vital to the continuity of the businesses concerned, sometimes take weeks and weeks, because of peaks of work in the relevant tax offices, which is partly because of cuts in the headcount of staff? That is not good, is it?

No, it certainly is not, although I do not agree that our announcements about changing the way in which Revenue and Customs is organised, for instance, would lead to that kind of difficulty. If my hon. Friend is aware of a particular problem, I would be happy to hear about it from him and will gladly investigate. However, he is certainly right that such repayments should be made promptly.

In opening the debate, the hon. Member for Fareham seemed to say at one point that the change could be funded by simplifying taxation. Indeed, it would be a wonderful idea if one could simplify everything and thereby fund the reduction of corporation tax from 28 to 25 per cent. However, as we explored what he is proposing further, the position became clearer. Cutting the rate of capital allowances further could produce an effective rate of tax depreciation significantly below the average depreciation rate used by businesses.

Businesses with good commercial reason to invest would then find the tax system discouraging them from doing so, which would be a very undesirable state of affairs, discouraging investment by sectors such as manufacturing, transport, communications, retail and utilities, and certainly damaging our international competitiveness by reducing investment in those sectors. My hon. Friend the Member for Coventry, North-West (Mr. Robinson) was absolutely right to underline that point with his experience of working in manufacturing. Indeed, my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) made that point as well. The hon. Member for Poole (Mr. Syms) did not think that that mattered, because of other benefits that the manufacturing sector was experiencing. It is certainly true that, for example, the change in the exchange rate over recent months has been helpful for manufacturing. However, he would be very ill advised indeed to rob manufacturing in particular of the significant benefits of the current arrangements for allowances. We simplified capital allowances in the Finance Act 2008 to pay for the reduction in the headline rate. Going further could create serious problems. Indeed, the hon. Member for Dundee, East (Stewart Hosie) was right to query the timing of the hon. Gentleman’s proposition.

I hope that the House will reject the amendment. Nevertheless, I underline the Government’s commitment to maintaining the attractive tax environment for business that we have in the UK, not least through having the lowest headline main rate of corporation tax in the G7.

We have had a wide-ranging and thorough debate on the amendment about reducing the headline rate of corporation tax. It was interesting that the Minister acknowledged the fact that, in the Finance Act 2008, the Government were able to fund a reduction in the headline rate of corporation tax by simplifying the allowances. We discussed the reforms to the industrial buildings allowance and the agricultural buildings allowances in Committee. There is therefore a track record of using the proceeds of simplifying capital allowances—that is, reducing the rates—to fund reductions in the headline rate of corporation tax. Our view is that we could go further and reduce the rate to 25 per cent.

My right hon. Friend the Member for Wokingham (Mr. Redwood) was acting in his customary role as a critical friend, supportive of where we had moved so far, but perhaps keen for us to move further in the direction of reducing the headline rate of corporation tax. My other hon. Friends cited their business experience in talking about competitiveness and about what businesses bear in mind when locating activity.

Mention has been made of the way in which Governments focus on tax as a means of competing, and I think that more reference was made to Canada in today’s debate than perhaps at any time since it was a dominion and part of the empire. It was good that my hon. Friend the Member for Henley (John Howell), a former tax inspector, joined the hon. Member for Wolverhampton, South-West (Rob Marris) as an aficionado of Canada and a spokesman on its behalf.

We discussed the fact that Canada has a federal rate and provincial rates of tax. I note that the OECD figures suggest that it has a combined rate of 33.5 per cent. If Canada were to achieve its aspiration of reducing the federal rate by 7 per cent., that would bring its combined rate down to 26.5 per cent., which is below the present UK tax rate. If the Minister is keen to match the Canadian rates, some progress clearly needs to be made.

We discussed the impact of the proposal on capital investment and the possible reaction of businesses to it. Part of the problem that we need to address is the fact that the structure of capital allowances has been so unpredictable in this country. That has made it difficult for businesses to factor into their plans an understanding of what the capital allowance rate might be. For example, businesses planning on the basis of a 25 per cent. writing-down allowance might be surprised to find that there will be a 40 per cent. first-year allowance for this year only. The extent to which that provision will create an incentive for businesses to invest this year is unclear. Many businesses with a longer planning horizon might not be able to respond to such a short-term incentive.

It is important to have predictability so that businesses can make their plans. That is one reason why we are so keen to flag up our intention to reduce the headline rate of corporation tax, and to fund that reduction through a reduction in the rate of capital allowances. The broader economy would gain huge benefits from moving to a lower headline rate. Such a move would send a clear signal to inward investment that this is the place to come for lower corporation tax rates.

Such a move would also tackle the issue of businesses moving out of the United Kingdom. I think that my hon. Friend the Member for Poole (Mr. Syms) was impressed by my lengthy list of businesses leaving the UK. Part of the problem is that, when the first few businesses moved, it was newsworthy and people paid attention, but subsequently, a stream of businesses leaving have left. It has become more commonplace and less noteworthy, and people now accept that it is happening. But the fact that it is less newsworthy does not mean that it is less important for us to take action.

The Financial Secretary to the Treasury talked of several firsts. He said that the UK was the best place for tax compliance and the best place for VAT, but let us not forget our other first. We also have the longest tax code in the world. We beat India by a country mile in that regard. International comparisons do not always work in our favour.

It is important for Britain to have a competitive tax rate. It is important for inward investment, and for strengthening the economy to make Britain a place where people want to do business. This proposal is only one part of a series of reforms of the corporation tax system that would lead to a better system for business in this country, but it is important that we send a signal that this is something that we are committed to. That is why I shall press the amendment to a vote this evening.

Question put, That the amendment be made.

The Committee proceeded to a Division.

Clause 7 ordered to stand part of the Bill.

Clause 8

Small companies’ rates and fractions for financial year 2009

With this it will be convenient to discuss the following:

Amendment 6, page 3, line 23, at end insert—

‘(1A) The Treasury may by regulations provide for the introduction of a very small companies relief from the small companies’ rate under subsection (1) for businesses with a rateable value of less than £25,000.

(1B) Regulations under subsection (1A) shall be made by statutory instrument and shall be subject to amendment in pursuance of a resolution of the House of Commons.’.

Amendment 3, page 3, line 25, leave out ‘7/400ths’ and insert ‘1/50th’.

Having engaged in a helpful and thorough debate on amendment 1, relating to the main rate of corporation tax, we must now deal with the small companies rate. Amendment 2, tabled by me and by two of my hon. Friends, seeks to reduce the headline rate from 21 per cent. to 20 per cent., while amendment 3 seeks to change the fraction from 7/400 to 1/50. I shall say more about amendment 3 a little later. Many of the points made during our debate on amendment 1 about the unpredictability, complexity and uncertainty of the corporation tax system apply to small companies as well, but in the case of small companies there is a more pressing issue.

There is a little bit of history attached to amendment 2. There has been a long-running debate in Government about the taxation of small companies, and about what tax rate has been appropriate. When I first served on a Finance Bill Committee as a Back Bencher in 2002, the then Chancellor—now Prime Minister—had proposed a zero per cent. corporation tax rate on profits of less than £10,000. What the Government said at the time suggested that they saw the proposed rate as a spur to enterprise which would reinvigorate British business, but that rested on a key assumption which was misplaced then and which, in a sense, has led to some of our present problems: the assumption that only companies were entrepreneurial. That assumption ignored the contribution that can be made by partnerships and other unincorporated businesses to the dynamism of the British economy.

The flaw in the Government’s proposal was that it did not merely overlook the fact that other types of business organisation could be equally dynamic, but triggered a behavioural change. A raft of unincorporated businesses became limited companies, because a gap had opened up between the rates of tax that would be paid by, say, a plumber, depending on whether he was employed, self-employed or a limited company. I believe that it was adequately flagged up at the time that that would happen.

I recall the decision and its implementation, and I recall the massive wave of incorporation that took place. It was not one of the best decisions that we have made in government. Does the hon. Gentleman agree with me—and, indeed with most management consultants—that, in the context of the framework for business, the decision whether to incorporate should never, or at best very rarely, be made for fiscal reasons?

That is an important question. It returns us to what was said earlier about distortions in the tax system, and about attempts to persuade people to make decisions that reflect commercial realities rather than being driven by tax considerations. A difficult position arose. Very small businesses—one-man bands—became incorporated in order to take advantage of the fiscal position, which I believed was a flawed decision. I argued at the time that it would lead to a wave of incorporations.

The problem is that small companies are not measured in terms of numbers: in terms of whether they have one employee or two, three, four or five. They are measured in terms of the amount of profit that they make. On the one hand, there is the wish to create a level playing field for the plumber, the carpenter, the engineer and the IT software support worker, while on the other hand there is a range of businesses that are also incorporated and that are much bigger. In the latter case, the decision to incorporate was probably made on grounds of logic or to admit liabilities.

What is happening now, however, is that larger companies that nevertheless fall within the profit threshold for small companies are paying the price of the Government’s early mistakes. Following the introduction of the zero per cent. rate in 2002, the Government saw what was happening and responded by introducing such measures as a higher tax charge on distributions. Gradually, a point was reached at which, rather than piling complexity on complexity, the Government decided to increase the small companies rate of corporation tax in an attempt to narrow the gap between the rate paid by people working by themselves as small companies and the rate that they would pay if they were employees or self-employed.

In 2007, the Government finally decided that enough was enough. They scrapped the system, and introduced a 19 per cent. rate. They then set out to increase corporation tax for small companies by 1 per cent. per annum until it reached a top rate of 22 per cent. This was meant to be the year in which it would reach that rate, but, in the light of the current economic circumstances, the Government decided to put the increase on hold. Let me ask the Minister a question that I asked on Second Reading last week. Can the Government give any indication of whether they intend next year to raise the rate to 22 per cent., and to continue on that upward path?

It was not just the change in rate that the Government considered as a means of tackling the issue of incorporation. They introduced a raft of rules on managed service companies in the 2007 Finance Act, and conducted a long consultation on the shifting of income between husband and wife, which, as far as I can see, has been kicked into the long grass. However, I think that we need to learn the lessons of the original rate change policy. I think that it was misconceived. It triggered certain types of behaviour that the Government have sought to crack down on, and introduced a new complexity into the tax system. It is a sign of the uncertainty and unpredictability in the tax regime for small businesses.

I accept that the hon. Gentleman’s amendments seek to achieve specific ends, but does he more generally feel that, notwithstanding the current debate, we need to have a root-and-branch review of the complexity? That complexity does not help either tax gathering or small businesses. Businesses are burdened by an unbearable cost in time and effort because of the opacity of the system, but a more streamlined version would help both them and the taxman.

The hon. Gentleman makes an important point: we must have a less complex system. The Chancellor of the Exchequer made a commitment to simplify it when he was appointed to the post. I do not know whether the hon. Gentleman is auditioning to take part in the Public Bill Committee, but if he were he would notice that in the Bill’s index there is the sub-heading of “Simplification”, listed under which there are only three clauses out of a total of 126. Therefore, although everyone aspires to achieve simplification, it is clearly hard to deliver. I know that complexity is an issue for the people who run small businesses; that was raised with me on Friday, when I was talking to small businesses locally.

I am grateful to the hon. Gentleman for his concurrence with my view, but for the avoidance of doubt let me make it clear to my party Whips that I am absolutely not auditioning for the honour of serving on the Public Bill Committee.

I am grateful to the hon. Gentleman for his comments too, but I hope that that is the end of them, as his party colleague, the hon. Member for Taunton (Mr. Browne), was very critical about the length of an earlier speech of mine, which was the result of my being overly generous in taking interventions.

I have talked about the need to look at the direction of travel of the small companies rate, and about whether holding the figure this year at 21 per cent. is a permanent feature or whether it is the Government’s intention to move to 22 per cent. next year. Many small businesses are finding the current economic crisis very difficult. In October of last year, John Wright, chairman of the Federation of Small Businesses, wrote an open letter to the Prime Minister under the heading,

“Help or the UK will crumble”.

In the body of the text, he implores the Government to implement Conservative proposals to reduce the rate of corporation tax for small businesses; amendment 2 would reduce the rate from 21 per cent. to 20 per cent. Not only is that a Conservative policy, but Mr. Wright clearly hoped that the Government would introduce it in the Budget. This is what Mr. Wright said after the Budget:

“In what has been the most crucial budget in decades, the FSB is disappointed that small businesses have been largely ignored”.

In an FSB survey, when its members were asked if this was a Budget for small businesses, 68 per cent. said no. When asked if it would have a positive effect on their business, only 7 per cent. of respondents said yes. A survey conducted by the Forum of Private Business came to a similar conclusion: 97 per cent. of respondents said nothing had been done to ease the burden of costs that they face, and 94 per cent. felt that the Budget did not address the issues threatening the survival of their businesses.

It was not only business organisations that were critical of the Budget and its impact on small businesses. Theo Paphitis, one of the stars of the “Dragons’ Den” television programme, said:

“The Chancellor forgot that small businesses exist. He also forgot that one in five households in the UK derives its income from small businesses. He also forgot that nearly half of all employees in the private sector are employed by small businesses. In fact, the Chancellor forgot a lot of things.”

One way in which we can help small businesses is by reducing the headline rate of corporation tax for small companies from 21 per cent. to 20 per cent. As with the measure proposed in amendment 1, this is a funded tax cut. I know that the modesty of it will upset the hon. Member for Taunton, but it is the prudent thing to do at present. Again, we will fund the reduction in the small companies rate through simplifying the capital allowances system.

Earlier on, we engaged in debate about the competitiveness situation for small businesses and how the UK tax regime compares with those of other countries. According to the OECD, our small companies tax rate is significantly higher than that of the US and France, whose rates are 15 per cent. Earlier in the debate, the Government were very keen to highlight that the UK mainstream corporation tax rate was one of the lowest in the G7. Clearly, however, as the US and France—and, indeed, Canada—have lower rates of corporation tax for small companies, we are out of kilter with other countries. My hon. Friend the Member for Henley (John Howell) will be interested in the Canada comparison, and I am sorry that the hon. Member for Wolverhampton, South-West (Rob Marris) is not present to hear about it, although I am sure he will pick it up later. We need to ensure that both the main rate of corporation tax and that for small companies are competitive.

The measure proposed in amendment 3 is very straightforward—or at least I thought it was when I tabled an amendment last year reducing the fraction concerned to one fortieth, only for the Financial Secretary’s predecessor to point out that that fraction was based on the corporation tax mainstream rate being 30 per cent. I have therefore gone back to my calculator, and it is my belief that the fraction should be one fiftieth, under which there would be a very smooth transition for businesses whose profits exceed £300,000, which is the upper threshold for small companies until they reach the full rate for large companies of £1.5 million. I hope the maths of that work. If the House were to agree to amendment 2, then amendment 3 flows logically from that. In our amendments, we both reduce the rate concerned from 21 per cent. to 20 per cent. for small companies and we have got the right fraction.

May I pre-empt the hon. Member for Taunton in his comments on his amendment 6? I was intrigued by it, and I wish to flag up my understanding of it. The intention appears to be to give further tax relief to small companies based on the rateable value of their premises. Does that not create a risk of giving highly profitable businesses relief simply because they might work from small offices? I am not sure whether that is the hon. Gentleman’s intention, but I am sure he will explain the situation at greater length.

The thrust of taxation for small companies has been disjointed over the past few years. The Government saw it as a spur to enterprise when they introduced the zero per cent. rate back in the 2002 Budget. They then decided that that led to all sorts of inappropriate behaviour and, sadly, by increasing the rate of tax from 19 to 22 per cent., have started to penalise businesses that fall under the definition of small companies but that are not an alternative to being self-employed or employed. I see the emerging danger that we are penalising those small companies that have not sought to incorporate to take advantage of the tax rules, but that incorporated for the right commercial and legal reasons. They are being penalised because of a flaw in the Government’s thinking back in 2002. I do not believe it is appropriate for that to continue. That is why I propose this cut in the small companies rate from 21 per cent. to 20 per cent. That, again, will be funded through a reduction and simplification in capital allowances. I hope that the House will support amendment 2.

I am grateful for the opportunity to contribute to this part of our deliberations. I say at the outset that I was not criticising the hon. Member for Fareham (Mr. Hoban) when I said his proposals were modest: I was praising him, and it is precisely because of their modesty that I feel able to support them. If they had been unfunded—the right hon. Member for Wokingham (Mr. Redwood) suggested that we consider such a situation—that may have given us greater difficulty, given the overall state of the public finances.

That leads me neatly to this proposal, which, after all, is largely an extension of our discussion on the previous clause. However, as it is slightly different, I shall speak at slighter greater length to it. According to the Federation of Small Businesses, there are 4.7 million small businesses in the UK, a remarkable 97 per cent. of firms employ fewer than 20 people, and 95 per cent.—19 out of 20 companies in the United Kingdom; I am not talking about 19 out of 20 employees—employ fewer than five people, so the overwhelming majority of businesses and enterprises in this country are extremely small employers. More than 500,000 people start up their own businesses every year, small firms employ 58 per cent. of the private sector work force, 13.5 million people work in small firms, small firms contribute more than 50 per cent. of UK turnover, and 64 per cent. of commercial innovations come from small firms.

I rehearse those statistics because it is clear—this point is made so often that it is a truism—that small enterprises are extremely important to wealth creation and employment opportunities. Thus, it is important that we regard them as being a distinct entity for corporation tax purposes. That point is widely accepted, which is why the Government have a different rate for them. For the same reasons that I cited in our previous discussion, we think that stability is important. If the Government are not going to cut rates, it is good that they at least indicate that there will be stability and that the rates will be frozen, and seek to convey to businesses the understanding that the situation will endure, even though it is not necessarily in the gift of the Government to guarantee that, as clearly it is not for a longer time scale.

That statement of intent is helpful because it allows businesses to plan. However, it remains our view, as it was when we discussed the previous clause, that simplicity has a virtue and that our trying to reduce headline rates helps companies—as my hon. Friend the Member for Montgomeryshire (Lembit Öpik) said, it helps in terms of their administrative burden—and creates the right message for those looking to start businesses or invest in this country. For those reasons, and because I have the assurance of the hon. Member for Fareham that the Conservative proposal is costed and responsible, as I like proposals to be, it is reasonable to support it.

Amendment 6, which stands in my name and that of my colleagues, was an attempt to provide additional assistance. In an effort to be open-minded and generous-spirited, may I say that I take the hon. Gentleman’s point that there are potential difficulties with the system I am proposing? It is difficult to frame amendments that cover every eventuality, because the nature of the process is that amendments have to be reasonably brief. We seek to give further assistance to particularly small businesses, which may benefit from that help, given that, as I was saying, 95 per cent. of businesses in the United Kingdom have five or fewer employees.

I am a big admirer of the FSB and I use its website and services from time to time. Has it said whether there is any correlation between rateable value and profit? Why would it be sensible to use as a proxy for a definition of small businesses something related to rateable value? Far better measures could be used, particularly for organisations and small businesses that are devolved in an electronic sense through good numbers of people working from home. How would that be handled?

One might seek to give the greatest encouragement to precisely those businesses. I take the hon. Gentleman’s point, and my doing so relates to the concession I was making only a moment ago; I only regret that he did not take the opportunity to table an amendment that he felt would be more effective in assisting the businesses I am trying to help. I think there is broad agreement on the overall point that small businesses contribute substantially to the UK economy, and it is very much in our interests that that be recognised in the tax structure.

The hon. Gentleman makes an important point about recognising the importance of small companies in the tax structure, but could he elaborate a little more as to the nature of his amendment and the relief that would be granted to businesses that fell into this category? Is he talking about a 10 or a 15 per cent. rate of corporation tax for those businesses? It is not clear where his thinking is heading on the additional relief that would be offered to them.

There would be an additional saving to such businesses, and it would depend on the rateable value of the premises. An assessment would have to be made of that rate, and the saving would accrue at that point. Even if you propose to let me press my amendment to a Division, Mr. Hood, I do not intend to do so; I was seeking to make the point that there is merit in the Conservatives’ proposal. I did not think it necessary to table an identical amendment, because I am more than happy to give my party’s support to their suggestion. I was seeking to explore ways in which we could help particularly small companies that may benefit from additional assistance. If people feel there are multiple ways in which that can be achieved, I am open-minded on the matter and I hope that those will emerge during this debate and our deliberations in Committee.

I am not sure how my hon. Friend defines seniority, but could the hon. Gentleman make his point a little clearer? He talked about the relief in relation to rateable value, which gave me the impression that he was talking about a reduction in the business rates a small business would pay, as opposed to a reduction in its corporation tax bill. He left hanging in the air the question of what sort of relief he means in practice.

If his intervention is directly related, I shall give way to the hon. Member for Northampton, South (Mr. Binley).

It is. We should recognise that the seniority to which I referred was with regard to pecking order, rather than anything else. I welcome the general thrust of the hon. Gentleman’s proposal; there is a need for a more graded relationship to corporate taxation, particularly for micro-companies. He has the good will of the Committee in this respect, and I hope that the Government will take that on board. The proposal does need defining further; introducing rateable value creates a more clumsy arrangement when matters need to be simplified.

I am grateful for the hon. Gentleman’s intervention, because it perhaps gave the response that I may have sought to give to his Front-Bench colleague. I hope that the Equality Bill, which we debated yesterday, will address any issues he may have about seniority and discrimination in terms of pecking order. The intention behind amendment 6 was not only to say that the proposal to cut the headline rate had merit and that additional simplicity had virtue; it was also to consider whether, through this method, we could grade matters further and target specific assistance on particularly small companies such as start-up and IT companies, which have been mentioned. There is probably a feeling that this may not necessarily be the best method, but that there is some merit in trying to think along those lines. This has afforded me the opportunity to make that point.

On the lead amendment, while I welcome the Government’s intention not to increase the rate, we think there is scope for decreasing the headline rate, based on tax-neutral assumptions and simplification of the system as a whole.

Of all the things the Government have done in recent months, one of the worst was to increase corporate taxes for the small business sector. The timing of this proposal has been disastrous, and the Government—and many of their supporters—recognise the problems. The increase has had a depressing effect on small businesses. It has prevented entrepreneurs from starting businesses, and it has certainly stopped small businesses growing. We need to change that situation, and amendment 2 would help to do that. That is why I am so keen that it should be accepted.

My main point concerns the importance of retained profit to small businesses. Retained profit is the very essence of their growth and survival. Small businesses tend not to have loans or be involved in over-complicated financial support—they simply have an overdraft. Therefore, the amount of money left at the end of the year is a vital consideration for their future growth, and to their protection against bad debt. That is particularly relevant at this time. For small businesses, cash is king and the more that the Government take in corporation tax, the less small businesses have to survive. The objective of most small businesses is simply to be here next year, and the Government could help enormously by accepting the amendment.

The amendment would also help businesses looking to grasp the opportunities that will be provided by the green shoots when they come. I hope that the Chancellor’s projections are right. I want to see the green shoots sooner, rather than later, and a cut in corporation tax would better prepare small businesses to exploit those opportunities. I do not need to tell the Government about the growth opportunities in small business, as they have been well proved. The creativity of small businesses is very valuable for this country, and we need to have them in situ to support the supply chains for our bigger plc companies. However, they will not be in situ if they do not survive, and we will lose that infrastructure. The amendment would be a small measure to encourage small businesses, because it would give them more cash at the end of the year, which would help their survival and their growth when the recession ends.

My hon. Friend will know from his experience running small businesses about the impact that the Government’s change in their approach to small business taxation has had. From his viewpoint, have the frequent changes over the last few years damaged the willingness of those businesses to invest and plan for the long term?

My hon. Friend makes a vital point. Many small businesses that were thinking in the longer term have ceased to do so. Many of them are simply looking to the next six to nine months in the hope that they will still be around. As I said, cash is king, and the amendment would provide a little more cash for such businesses at the end of the financial year to enable survival, after which they can think about growth. They have to survive first, and that is the point that I wish to make to the Government. The amendment would give small businesses sizeable encouragement, which would be most welcome.

I wonder whether my hon. Friend’s experience is similar to mine in that, because of the vulnerability of small and medium-sized companies, even the smallest amount of tax reduction has a huge effect on them.

I am grateful to my hon. Friend for making that point, because it allows me to point out that just a £2,000 bad debt can be the end of a very small company. That sort of saving might ensure its survival, which is why I seek the Government’s support for the amendment. If that is not forthcoming, I hope they will think about this matter more constructively than they have to date. I am told that the road to Damascus is a most attractive route.

Clause 8 is important and amendment 2 would be very helpful. We have already heard how important small businesses are—probably more for the employment they provide and the taxes thus generated, rather than for their profits and corporation tax purposes. Many companies in the small business sector are under-capitalised. It is therefore important that when they make money, it be retained within the business. Many of the capitalist entrepreneurs who run such companies pay the tax and leave the money in the company instead of taking a dividend, so that the company can grow.

If we are to get through these economic problems, we will need people who are determined, who are good managers and who have a vision for running a business. Many small businesses do not make a profit, but giving a signal to the small business sector by reducing, rather than increasing, the rate is potentially very important. Many people are in business out of sheer awkwardness—they have run the business for years and are determined to keep faith with their employees. Those people are looking for better times ahead. Many of them have risked their homes, put off holidays and even ruined marriages over their businesses, so it is important that we give them a signal that they will be able to retain more of what they do make in profit.

Today’s small business is the potential medium or large company of tomorrow. We have seen several examples over the past 10 to 15 years of small businesses growing and providing many jobs and innovation. It is important to tend, encourage and provide direction for small businesses so that they provide jobs, make profits and produce a return for those who take the risks.

The Government are already set on a course of raising national insurance on employees. That is not the right approach, but the amendment would enable us to reinvigorate and encourage small businesses, which will, we hope, be the great successes of tomorrow.

I wish to draw Members’ attention to my entry in the register, as I am the director of a family company—my own family company, for the sake of clarification.

I thank the hon. Member for Taunton (Mr. Browne) for giving the statistics on the small business sector. It was a helpful tour d’horizon and has set the scene for this debate. However, it does not emphasise enough that the problem faced by small and medium-sized businesses comes down, essentially, to the credit squeeze and their inability to access credit to develop their businesses.

I am grateful to the hon. Gentleman for giving way, because he has only just started to speak. I am also grateful for his kind words. The one other point that I omitted to make during my speech is that most of the big multinational companies started as small businesses. The benefit of this sector is measurable in terms of not only current small businesses but many companies, employing thousands of people, that had to get off the ground initially.

The hon. Gentleman makes a good point. We all need to bear in mind and to stress the support provided by the interrelationship between small and medium-sized companies and larger companies. Many of the points that I made during our debate on amendment 1 are just as relevant to amendment 2. Other hon. Members have mentioned the effect on small businesses of uncertainty within the tax system and the need to get rid of that, as well as of the system’s inherent complexity. Indeed, I would argue that those two elements are especially important considerations for the small business sector.

Getting rid of uncertainty is vital and there is no benefit to anyone in maintaining a complex tax system for small businesses driven by entrepreneurs. It is totally unnecessary to make things complicated or more expensive. Entrepreneurs can be a funny bunch. They are very focused on their idea. I am sure that there are some very good examples of such people on the Conservative Benches and that they will take these comments in good spirit. That focus is why their business ideas work and why they are successful. However, as well as doing all the things that a business needs, they have to undertake a range of other activities, from being the head cook and bottle washer to being the bookkeeper. I know that—I have been there and have experienced the pressures of going out and getting business while ensuring that the cash flow is working and that there is back-up. The Budget presented a handful of measures for the small business sector, but it did not address the important issue of cash flow. The amendment seeks to address that problem.

Earlier, reference was made to comments from the Federation of Small Businesses and its chairman, John Wright. The quotation was:

“In what has been the most crucial budget in decades, the FSB is disappointed that small businesses have been largely ignored”.

The most important word in that quotation is “crucial”. His point is borne out in the quotation from the chief executive of the Forum of Private Business, who said:

“The Chancellor has missed a vital opportunity to produce a Budget for business survival”.

That point has already been made eloquently by my hon. Friend the Member for Northampton, South (Mr. Binley). It is crucial, because this is about survival. Many of our small businesses are just surviving, and the rate reduction could be of extreme benefit to them.

We like to think in terms of protecting vulnerable institutions but we rarely think of small businesses as vulnerable. Last night, I was privileged to have in the House members of the Henley-on-Thames partnership, many of whom represent small and medium-sized businesses in and around the town. They individually employ relatively small numbers of people, but collectively they make a major contribution to the life of the town and to its business life in particular.

In small towns such as Henley, lay-offs are personal. People know each other and there is a family atmosphere, even when the companies are not necessarily owned by the same families, among the companies that work and do business in the town. It is crucial to reduce the threat that any possible downturn could pose to those companies. Anything that can improve the cash flow, as amendment 2 does, is to be welcomed.

As I said at the beginning, the vulnerability of such companies results principally from a lack of credit. However, many are vulnerable because they have already had to make cuts in order to save costs. In some cases they have laid people off, and in others they have found different means to make savings. Also, as a result of the recession, many of the service sectors are already witnessing a decline in the number of people seeking their business. When businesses have made all those efforts and cuts in order to stay afloat, it does not go down well at all when they see the money that they have saved going on higher taxes. That is nonsense for them. They do not understand it and it does not encourage entrepreneurs into the system, particularly to begin start-ups.

I am listening intently to my hon. Friend’s speech, and I congratulate him. I meet many small business people who are beginning to despair and feel that the burdens are getting too heavy for them to continue the journey. This is about spirit as well as money; it is about giving a sign of encouragement as well as taxation. Does my hon. Friend agree?

I completely agree. An important point that emerged in our debate on the headline corporation tax rate concerned its importance as a signal of the country’s competitiveness. In this case, we are giving out a signal about the importance of a very vulnerable sector, which lives on the margins, as my hon. Friend has described so well. I, too, meet representatives from many businesses in a similar situation in my constituency and as I go around the country.

I have never been in despair about the business, but I know that one has to deal with many things as part of running a business while yet more tasks are piled on top. The lack of recognition and appreciation of the role played by small businesses in the economy bites into one’s enthusiasm and energy. The amendment sends a powerful signal to a business sector on which we all rely.

Opposition Members are right to underline the crucial importance of small businesses to the UK economy and I agree with those points, as well as with their points about the large proportion of UK employment provided by small businesses. However, I disagree with their overstatement of the significance of the small companies rate. They have also underestimated the important measures that the Government have put in place to support small businesses specifically—in fact, they have rather ignored them.

The UK has about 4.7 million small businesses, three quarters of which are made up of self-employed people who would therefore not benefit from a reduction in the small companies rate of corporation tax. About 400,000 companies pay no corporation tax, so they would not benefit either. The small companies rate is, in reality, a small profits rate. Any company with profits up to £300,000 benefits from that lower rate, regardless of its size.

We are introducing a wide range of measures to support businesses in the downturn, including additional targeted support for new investment through the temporary increase in the main capital allowance rate to 40 per cent., which is a significant boon for many businesses.

May I give the example of a small company in my constituency that sells wood-burning fires for companies? They cost £200,000 whereas the very big ones cost £500,000. A sizeable grant is available, but what I hear is, “People cannot afford the stuff even though they get a very good grant.” That is what I mean about survival. People are not spending, even though the grant incentive is sizeable. Would he accept that?

I do not accept the hon. Gentleman’s conclusion, and I was about to make an extremely important point about the effectiveness of HMRC’s business payment support service, which we introduced in November. It has addressed exactly his concerns about the survival of businesses, as it means that those businesses that for cash-flow reasons need to or would like to defer a tax payment can do so by ringing up HMRC. Very often, they can make an agreement on the spot in that call. More than 100,000 companies have benefited from the scheme, and between them they have deferred about £2.3 billion in tax. It is undoubtedly the case that a significant number of companies that would have “given up”, to quote the hon. Member for Northampton, South (Mr. Binley), in the downturn have been able to survive, go on to do well and keep up with their repayments as well.

The Minister is most generous in giving way again, and I am most grateful. I accept the value of the benefits that the Minister has outlined—it would be churlish not to—but my point is that the customers of the business to which I referred say that, even though they get a lot of grant, they simply do not have the money that they need to put in themselves. They get a 40 per cent. grant, but they cannot afford the remainder, however they might want to pay it.

We are undoubtedly in a very serious world economic downturn, and the measures that the Government have taken are helping to support the economy through it. I was speaking to an accountant yesterday, and he told me that his colleagues who work in liquidation are less busy this year than they were last year. He thought that that was because of the success of the business payment support service and the large number of companies that have gained a significant cash-flow benefit from it. The service has been very valuable for business survival, and its scope was widened further in the Budget.

The hon. Member for Fareham (Mr. Hoban) spoke about the fairness of the UK’s corporation tax arrangements for small companies. At £300,000, the UK threshold for the small company rate is the highest in the G7. It is perfectly true that rates in some other countries are lower, though not many are. For example, the small companies rate in the US is 15 per cent., but that applies to only about £30,000 of profit, compared with £300,000 in the UK. The fact that the threshold in Britain is the highest in any of the G7 countries means that companies making a profit of, say, £250,000, or up to the threshold pay the lowest marginal rate on that profit in the G7. Finally, as we discussed earlier, we performed very well in an international analysis of competitiveness.

The amendments proposed by the hon. Member for Fareham would raise a serious problem of fairness. He acknowledged, I think, the problems that arose when the small companies rate was reduced significantly, as the result was a large incidence of businesses being incorporated, which was motivated purely by tax. The problem with his amendment 2 is that it would return us to precisely that problem.

It would not be fair to encourage people to incorporate purely to gain an advantage in terms of tax and national insurance payments. We have set out a range of measures to make the tax system fairer across all small businesses, and to reduce the competitive disadvantage faced by unincorporated businesses. The amendment would make that disadvantage greater.

The number of incorporations per year increased from 230,000 to 320,000 with the introduction of the zero per cent. starting rate. They reached a record high of 450,000 in 2006-07, but they have declined since, following the increase in the small company rate. The amendments tabled by the hon. Member for Fareham would reignite the problem, which would be unfair and a mistake.

The amendments also pose a substantial fiscal risk—by the way, I accept that the hon. Member for Fareham has got his arithmetic correct this year—because a permanent reduction in the rate would cost about £500 million per year. He suggested that more changes to capital allowances would pay for that, but he did not give us any information about what they would be. I simply point him to the concerns that I expressed when we debated similar changes to the previous clause.

I agree with the hon. Member for Taunton (Mr. Browne) about the crucial importance of very small companies to the UK economy, although he accepted that his amendment 6 might not be the best way to identify them. I was not quite clear about what relief he had in mind, but he made some important points.

The Minister professed the crucial importance of small and growing businesses, but is he not concerned that one of the biggest impacts of the income tax changes proposed by the Treasury for the years to come will be that the owners of such businesses will have even less incentive and available collateral to grow them? Businesses like that are very often run by a single individual using his own pocket and energies, so being taxed at a much higher level post £150,000 of earnings will cause them to suffer most. Does he agree that, as a result, the growth of small businesses that is so crucial to the economy will be undermined?

No, I do not agree with that. The entrepreneurs whom I know and admire earn a long way short of £150,000 a year. Moreover, the owners of businesses occupying premises with quite low rateable values will not, on the whole, have earnings of over £150,000 a year. For those reasons, I do not agree with the hon. Gentleman.

I hope that I have demonstrated to the House’s satisfaction that the amendments would not help the majority of small businesses. They do not recognise the importance of fairness, which is a very important consideration in tax matters. In addition, the debate did not properly reflect the impact of the substantial measures that the Government have put in place to support small businesses. I hope that the House will decline to agree the amendments.

This has been a useful debate, as it drew on the experience of my hon. Friends the Members for Poole (Mr. Syms), for Henley (John Howell) and for Northampton, South (Mr. Binley), in small businesses. My experience before entering Parliament was largely confined to large businesses; in my professional practice, I had little contact with small businesses, but I have got to know the sector well in my role as a constituency Member of Parliament.

I have a great deal of respect for small business men, because they really do put themselves on the line in growing their businesses and taking day-to-day responsibility, not only for their own future, but for that of their staff. My conversations with them over the past few months have brought home to me how tough they are finding it to survive in the present economic climate. They are worried about their cash flow, for example. The Financial Secretary talked the tax payment deferral scheme, which I welcome, but before the Government announced their scheme, the Conservatives proposed a six-month deferral of payment of VAT, recognising the importance of cash flows. The hon. Member for Taunton (Mr. Browne) talked about smaller businesses. We also proposed measures on national insurance that particularly affected micro-businesses employing four or fewer members of staff.

There is a judgment call to be made on the small companies tax rate. The Minister is right to point out that not all small companies are small businesses. He says that there are 4.7 million small businesses in this country, three quarters of which are unincorporated, leaving about 1.2 million small companies, of which 400,000 pay no corporation tax. We are therefore talking about 800,000 businesses across the country that fall into the small companies’ rate of taxation. This debate is important to them.

We have to decide the extent to which we should be focusing on how people used incorporation for tax planning and crack down on that, or incentivising those small companies that incorporated for legitimate economic and legal reasons. That is where the division is between the Conservative party and the Government. The Government see incorporation of small companies as a way of managing down tax bills and not paying what is fair. In my view, and that of my hon. Friends who have had experience of running small companies, the increase in the small companies’ rate is not a matter of fairness. We believe that the increase is having an impact on their ability to retain profits which, as my hon. Friend the Member for Northampton, South said, is important to their ability to build up reserves for the future and to fund investment.

In our judgment, the small companies rate of taxation should fall, to incentivise genuine small companies and encourage their growth and future development. The rate should not be increased, as the Government would use it, as a means of cracking down on tax avoidance. That is the dividing line between the Conservative party, which wants to support entrepreneurs, and the Government, who have seen fit to crack down on them by increasing the small companies rate of corporation tax. The Government’s argument on tax-motivated incorporation is, I think, an excuse for a revenue-raising measure, increasing the tax take from small businesses. They have sought to compensate for the increase through the annual investment allowance, but that is available to all businesses, not just small companies, so on average small companies will be worse off as a consequence of the changes that the Government have announced.

Because we want to support entrepreneurs and because we recognise that people have set up limited companies for genuine purposes, and not only for the purpose that the Minister says, we want the small companies rate of corporation tax to be reduced. We have set out clearly how we would fund the reduction through reforming the system of capital allowances—our proposals are costed. I shall press the amendment to a Division, because it is important to send a clear signal to this country’s small companies that we have their interests at heart—we do not regard them as tax dodgers or tax avoiders and we want them to flourish and continue to grow. That is my party’s policy; it is not the Government’s policy. I therefore ask my hon. Friends to vote for amendment 2.

Question put, That the amendment be made.

The Committee proceeded to a Division.

Clause 8 ordered to stand part of the Bill.

Clause 9

extension of reduced standard rate and anti-avoidance provision

I beg to move amendment 8, page 4, line 2, at end insert—

‘(1A) The Chancellor of the Exchequer must, not later than 1 April 2010, compile and lay before the House of Commons a report containing an assessment of the impact of the temporary VAT rate reduction on—

(a) UK economic growth,

(b) the competitiveness of small and medium-sized businesses, and

(c) the disposable income of low-income households,

for the period during which the rate reduction had effect.

(1B) A Minister of the Crown must, not later than 1 May 2010, make a motion in the House of Commons in relation to the report.’.

I am grateful for the opportunity to speak on a subject that most people would regard as a central feature of our debate on the Finance Bill—the Government’s decision to use a reduction in VAT as a way of injecting extra money into the economy and trying to deal with the recession. Members will be familiar with many of the arguments, but before I make some slightly more general comments, I shall just explain the amendments that I tabled.

Amendment 7, which has not been selected, but which appears on the amendment paper—I hope I am not out of order, Mrs. Heal, if I briefly mention it, because it illustrates the direction in which I am seeking to move Government policy—seeks to bring forward the day on which the VAT reduction from 17.5 to 15 per cent. ceased to apply to the date on which the Bill receives Royal Assent, which we believe is the earliest conceivable date on which that temporary reduction could be ended. The amendment was not accepted, for entirely understandable reasons to do with revenue implications, but it nevertheless remains our intention to try to encourage or force the Government to bring forward that measure to the earliest possible date.

Amendment 8 is much more wide-ranging and benign, and provides an opportunity to review the success or otherwise of the Government’s policy. Inevitably, such a review could take place only after the effects of the policy had been experienced, so it is not as immediate as the change proposed in amendment 7 or, indeed, a proposal to reject the clause as a whole. However, it provides a useful opportunity to discuss the Government’s strategy as a whole. Many right hon. and hon. Members will be familiar with that strategy.

The Government are running a massive deficit—£175 billion this financial year, and £173 billion in the next financial year, if their assumptions are correct—so there is a legitimate debate to be had about the extent to which the Government can afford to borrow more to stimulate the economy. My party’s view is that there is merit in fiscal stimulus—trying to inject an extra boost into the economy will help us to get through the recession quicker, and the best way we can address our public finance deficit is to get the economy growing again. After that, we will have to ask questions about additional tax revenue, and about savings in the public sector. The immediate task, however, is to get through the recession and out the other end, growing strongly again. Some sort of fiscal stimulus, in my party’s view, is the right way forward, if it is affordable.

Without wanting to make a point about it, I agree about the need for fiscal stimulus. Before every Budget, I survey almost every business in my constituency and this year, for the first time, that survey received an extremely high response rate. Everyone who responded on the VAT cut was extremely critical of it. Does the hon. Gentleman acknowledge that that change is not one that commands universal support across the country and that it was not the right thing to do?

I not only acknowledge but completely agree with that.

The starting point for us, for the Government and for others was whether it was possible to afford some sort of fiscal stimulus. The answer, in our view, was yes, although it would be limited in scope because of the state of the public finances. The question that then arose was what form that fiscal stimulus should take. The Government’s view, as I understand it, was that a VAT cut would be a good way to go, partly because it could be introduced speedily—no doubt the Minister will put the Government’s case; I do not with to misrepresent it, but I will explain my view. They thought a VAT cut would incentivise people to spend money, which would provide the sort of stimulus they believed would be advantageous in the short term. They also believed it would be beneficial for individual consumers. I remember their making the case when it was introduced that it would save money for typical households, and we were given examples of those savings. However, when some retailers did not pass on the VAT reduction, the Government then made the case that it helped the margins of those retailers. I accept that there was a degree of truth in the Government’s position, even though to some extent they were having their cake and eating it: when the VAT cut was passed on, it would help consumers, and when it was not, it would help retailers and businesses.

That, as I understand it, was the Government’s case for the VAT cut. It is not a case that my party finds compelling, and that view is shared by many hon. Members, including Government Members. There are numerous reasons for that but, first, the Government unfortunately cut VAT in the run-up to Christmas, when retailers were heavily discounting their products. Many companies were introducing cuts of 20, 25, 30 or 35 per cent. and, in that context, the 2.5 per cent. reduction was rather modest. It may have led to a small extra saving for consumers, but it was unlikely to provoke them to make a purchase that they would not otherwise have made. The cuts introduced by the retailers themselves were substantially greater than the VAT cut.

There was the serious issue, too, of the administrative burdens placed on businesses as a result of the VAT cut. A number of businesses sought to reprice their goods, and if they were priced in a catalogue that had already been printed or if a similar approach had been taken, that presented even greater problems. I went into a shop in my constituency where the company introduced the discount, but did not mark it on the price that appeared on the product, as that would have resulted in extra burdens. I remember buying a birthday card for someone for £2, and I paid with two £1 coins. I was given 4p change because the shop had kept the marked price as £2, but I was given a discount, to reflect the temporary VAT reduction, which I had not anticipated. Up to a point, I appreciated it, but I did not necessarily feel incentivised to buy another card once I knew that another 4p was there for the taking. I suppose I had 4p more to spend on other goods and services, but I am not sure that the effect on the economy as a whole, even if everyone received that benefit, was as great as the Government hoped.

I very much agree with my hon. Friend’s point, but is there not another marketing consideration? Something that had cost £11.99 should cost about £11.73 after the VAT cut but, as we all know, the price points are heavily determined by marketing considerations—the prices tend to end with “99” and so on. Does my hon. Friend agree that the benefit of the VAT cut will almost inevitably gravitate back to the companies and businesses as they revert to the standard pricing points? No one can pretend that £11.73 is a natural pricing point or that it has any marketing advantage.

I take my hon. Friend’s point. Many retailers round their prices to a sensible point and then discount a penny to make them look more attractive. A lot of the margins might be greater than the VAT reduction, so the reduction might not have been felt in the way envisaged by the Government. With small items—I just gave the example of a birthday card—the saving to the consumer is small. With big items such as a new car, the saving would be greater. However, it is worth mentioning that car retailers were so desperate to turn over more of their products that the discounts by and large were bigger than the VAT reduction that was meant to incentivise consumers.

The hon. Gentleman has talked about costs to small businesses, but there are also the costs to local authorities, which charge for a range of services such as car parking spaces. Some such charges have VAT implications. That created costs for local government, which had to reduce lots of charges to be able to comply quickly with what the Government wanted.

That is an entirely fair point. Parking charges are a good example, which leads on from the point made by my hon. Friend the Member for Montgomeryshire (Lembit Öpik). By and large, parking charges are rounded to a sensible hourly rate. A reduction of 2 per cent. would mean that instead of paying £1.50 an hour, a person would pay—somebody else should do the maths—£1.47 or whatever. People might prefer to pay £1.50 rather than £1.47 or have difficulty in paying the precise amount. Many local authorities would think it easier to stick at £1.50, so in such cases the benefit was not passed on to the consumer.

No doubt opposition parties of all colours in the authority would then criticise the administrating party for not passing on the VAT cut to consumers, even though it would have been administratively burdensome for the authority to do so. The money would be absorbed by the local authority, so I suppose that the Government would argue that the local authority would have more money to spend on other services. However, I am not sure that the money flowed through the system as neatly as the Government would have wished.

The hon. Gentleman and I both have constituencies in the south-west, where the biggest industry is tourism. He mentioned small and medium-sized businesses. There are 200,000 such businesses involved in tourism and I have not found one that has embraced the change that we are discussing. It has actually cost them more—they have had to change their online basket systems and the pricings and so forth. They would relish the opportunity to have the measure thrown out as soon as possible.

The hon. Gentleman makes a good point. To follow on from that made by the hon. Member for Mid-Sussex (Mr. Soames), I should say that my experience—other Members’ experiences may be different—is that there are two reactions to the reduction. One is hostility, which the hon. Member for Bournemouth, East (Mr. Ellwood) described; the other is indifference. I have not met anyone who feels zealous enthusiasm for the Government’s policy. Some regard it as making no difference whatever to their business or the assumptions that they make; others regard it as burdensome and troublesome and, if they went to great lengths to accommodate the reduction, are not looking forward to having to put the rate back up again.

Local authorities, of course, could reduce the council tax as a result of having collected more money from parking charges and so on. Does the hon. Gentleman have any idea which tax his party would reduce to balance out the 2.5 per cent. VAT increase that it wants? Alternatively, would it use the additional money to cut borrowing?

I do not want to incur Mrs. Heal’s wrath, so I will not extend the debate to local government finance. However, in due course I shall discuss possible alternatives to the VAT cut, because that is very much within the scope of amendment 8.

Another aspect of the issue, to which the hon. Gentleman may come, is the date itself. The VAT change is unpopular, but most people are enjoying a drink on new year’s eve, and no small or medium-sized business, particularly in the tourism industry—pubs and so forth—wants to start changing tills when Big Ben is striking midnight.

The hon. Gentleman makes an entirely legitimate point, which I have heard him make in other debates. The Minister needs to engage with it. New year’s eve may well be the worst possible date of the year to pick—365 options, and the Government pick the worst one of the lot. Clearly, there are cost implications in pushing the date backwards—[Interruption.] I accept that the hon. Gentleman was not making a point about cost, but a practical one about businesses that trade beyond midnight into the new year and how they would manage to adjust.

The broader point is that businesses as a whole—and, in some cases, even individuals—have either found the change burdensome or have not noticed it at all. I doubt whether many people have changed their behaviour as a result of the measure. I take the point made repeatedly by the Government—people might have a little more money to spend and not consciously realise that they are changing their behaviour. They may buy one thing at the end of the week that they might not otherwise have bought because the accrual of all the 4ps saved when buying cards and other bits and pieces might make them think, “I might buy one more birthday card because I am suddenly feeling a bit more affluent.” My suspicion, however, is that even at a subconscious level, very few people have acted as the Government would have wished.

Given my hon. Friend’s sage and insightful observations, he may be amazed that at today’s sitting of the Business and Enterprise Committee, it was claimed that the VAT reduction had increased economic activity by £8,000 million to £9,000 million. What is my hon. Friend’s view of that heady claim?

It would probably be better to hear the Minister’s view of that claim; it does not accord with my experiences—or, apparently, those of other Members taking part in our deliberations.

Others may wish to dwell at greater length on the impact on business, but I have sought to make that point. My central point about the public finances—the Government’s finances—is the cost of the measure and whether the opportunity cost represents a good decision by the Government. In all our deliberations on the Finance Bill, we have to return to the big elephant in the room: this year, we are running a public sector deficit of £175 billion. That is £480 million every single day, and £20 million every hour; since we started our deliberations this afternoon, close to £100 million has been added to the public debt. The figures are enormous.

There may be some scope for a fiscal stimulus, although, as I have said, it is fairly small. We have to make sure that we get the maximum value from the money being spent. I argue that that money should achieve two objectives. First, it should try to ensure as quickly as possible that the economy starts to grow again; that, after all, is the whole purpose of a fiscal stimulus. Secondly, it would be beneficial if we had something to show for the money afterwards.

It is worth reminding everybody that the cost of the temporary VAT cut—I do not know whether the Government realised that it would be this neat—is almost exactly £1 billion a month. Amendment 7 is not within the prescribed boundaries of our deliberations, but I was keen for it to take effect because that would have saved the taxpayer about £4 billion or £5 billion, depending on the precise date of Royal Assent. The clock is ticking. If we are to try to come up with a more effective way to spend the fiscal stimulus, then every day that passes we have roughly £30 million less to play with than we would have done had we made that decision a day earlier.

Would the hon. Gentleman like his proposed assessment to include the Treasury’s own forecasts, run through the input-output model, of various options set against the VAT cut, showing how many more jobs might have been saved through direct capital expenditure, and what difference an income tax cut might have made in terms of GDP growth or jobs saved?

Yes; the hon. Gentleman is very helpful. Although it is tempting—and, I hope legitimate, Mrs. Heal—to have a wide-ranging debate on VAT, it is also useful to dwell on the amendment. That is precisely the sort of consideration that the review should examine.

What strikes me as extraordinary is that a civil servant asked to come up with a £12 billion or £13 billion tax cut could not have come up with one that had less impact on the public consciousness. If the Government were seeking, albeit with borrowed money, to give away that amount of extra money to the taxpayer, they could have taken roughly 3p off the basic rate of tax for a year. They might not have thought that that was the right way to go, or they might have felt that it did not stimulate the economy in the way that they had intended, but every time people got their payslip at the end of the week or month, they would have noticed the sizeable reduction in tax.

The most problematic aspect of the VAT cut, which it would be interesting to examine in a review, is that it did not have the effect of giving people additional confidence: the mental sense that they had additional money in their pockets. Part of the reason for the Government’s changes was to try to give people a sense that things were not so bad, that there was a bit more money to spend, that they could go out there and spend it, and that that would be a self-fulfilling prophecy in its impact on the economy. I do not think that that has proved to be the case, although others may disagree. If there were a cut in the basic rate of income tax, people might choose to save the money. The Government would say that cutting VAT means that people get the benefits only if they spend money—they were keen to encourage people to spend, and continue to be so. However, psychologically, it did not have the impact that it could have had as regards people feeling that they had more money to spend, even if they did in practice because the 4p’s were accruing here, there and everywhere as they made different purchases.

The basis of the hon. Gentleman’s argument, which he is making very powerfully, is whether the VAT cut was or was not a good thing to do. Does he know whether the Government consulted retailers and those who represent them on what the burdens would be, and whether retailers, who know much more than the Government about selling things, believed that the VAT cut would make a substantial difference to the Government’s prospects and to theirs?

I am not aware of what consultation took place among retailers. I hope that the Minister is more aware of that than me, but from what I have seen there was little or no consultation. The Government felt a need to act swiftly, and perhaps they were right in that analysis. They grasped at the temporary VAT cut from 17.5 to 15 per cent. as being the best way to go—there seemed to be very little evidence for it, and amendment 8 would be a good way of starting to examine whether they made the right decision—and introduced it swiftly as part of an attempt by the Prime Minister, principally, to show that he had a grip on the economic situation. He wanted to show that the situation was bad, but that he was taking the decisive action necessary to get us through the recession as speedily as possible. I do not get the sense that alternatives were considered in as much detail as they could have been, nor that the adverse impacts of the Government’s policy were considered in sufficient detail. No doubt the Minister will enlighten us about that.

I am not sure that the behavioural impact was fully assessed. Some people may behave in a way that the Government had not intended. I suspect that if the date on which the VAT reduction ceased had been brought nearer to today, some people who were motivated to spend differently because of the VAT reduction—for example, to buy a big-ticket item such as a car—would have tried to make such purchases just before the rate went back up to 17.5 per cent. again. Interestingly, the effect of the stimulus might have been brought forward if the reduction had been for a shorter period. Had it not stretched for the full 13-month period, the monthly cost of the reduction might have been a bit higher, but the overall cost might have been lower. That is a theory, but it is the sort of area that such a report could usefully examine.

The hon. Gentleman says that the assessment should be done before 1 April 2010. Does he agree that it could be done very quickly, and that if it included an assessment that showed that direct capital expenditure would protect or preserve tens of thousands more jobs in the remaining period than the VAT cut, that might be something that those of us who believe in fiscal stimulus could yet coalesce around in the teeth of recession and in light of tomorrow’s unemployment figures?

The hon. Gentleman makes a good point. I accept that the date in the amendment is arbitrary; I was trying to take account of the typical time scale of such reviews. There is a degree of urgency—very much so—in terms of the economy, and he mentioned unemployment. Of course, the review would be retrospective were it to take place on the date that the amendment envisages, but there would still be some benefit, because we do not know whether the Government may in time seek to use such a device again. It would inform future decisions instead of dealing with the here and now. I take his point that the here and now is an important priority, and we will no doubt focus on that in discussing the clause as a whole.

The hon. Gentleman takes me neatly on to what the money could alternatively be spent on, which is an entirely relevant consideration. There are, essentially, two schools of thought: that which says that there is no scope for a fiscal stimulus and that which says that there is. My party is of the second school, and while I do not wish to caricature anybody’s arguments, I understand that we are in the same school as the Labour party and the Scottish National party. By and large, Conservative Front Benchers—although we heard a dissenting view a few moments ago—do not believe that there is scope for a fiscal stimulus beyond the automatic stabilisers that one would get at a time when the economy was shrinking. Having said, “The Government’s policy is to have a fiscal stimulus, and after all they are the Government: they are in power and enacting this policy”, we can move beyond that and ask how the money would better be spent. The sum involved is generally estimated to be £12 billion to £13 billion, although the more popular the Government’s policy is, the more effective it is, and the greater the cost.

We should ask whether this is the best way to spend £12 billion or £13 billion, and whether it is doing two things. First, is it increasing demand and getting us through the recession more quickly than if the stimulus had not been put in place and the extra borrowing had not accrued? Secondly, will we have something to show for that large amount of public spending once it is finished? My party drew up a list, a package, when we were envisaging better ways to spend the entire £12 billion or £13 billion. As I said, with every day that passes that money ebbs away, but nevertheless I shall run briefly through some of the matters that we were talking about.

Order. I hope that the hon. Gentleman will contain his comments to the amendment that is tabled in his name, rather than the wider package of reforms that he was about to discuss.

Thank you, Mrs. Heal, for that very helpful guidance. The point that I was trying to make—I certainly do not wish to make it at excessive length—was that amendment 8 asks the Government to consider the impact of the VAT reduction on

“UK economic growth…the competitiveness of small and medium-sized businesses, and…the disposable income of low-income households”.

My contention is that the benefits in those three areas and more widely would have been greater had the Government gone down the path of spending the money on a range of programmes. I shall not list those programmes, but they would have been designed to encourage our country towards greater environmental sustainability.

We argued, and continue to argue even though the amount of money that we are arguing about gets smaller every day, that the money could have been spent on, for example, home insulation programmes, buying new rolling stock for trains or electrifying some train lines. That would have provided an opportunity for greater employment. It would have been a stimulus, but once we reached the end of the package, as the Government now envisage doing with the VAT reduction at the end of this calendar year, we would have had a lot of insulated houses, electrified train lines and new rolling stock.

Instead, I am afraid that we are going to spend £12 billion or £13 billion and have precisely nothing to show for it except, arguably, some small, incremental, hard-to-measure benefits to some organisations. I fear that the review envisaged in amendment 8 would still not get us to the bottom of precisely what those benefits are. That is not £13 billion of public money spent wisely, especially as that money was not available. Borrowing was increased, by this year’s figures, from £162 billion to £175 billion, but we do not have longer-term assets such as I have described to show for it. The Government talk about investment when they really mean spending, but under our plans there genuinely would have been investment as well as spending. They would have stimulated the economy in the short term while providing a longer-term legacy.

For all those reasons, amendment 8 requests a comprehensive review, and the debate gives us an opportunity to consider when the temporary VAT reduction should cease. The Government need to answer the question of the hon. Member for Bournemouth, East (Mr. Ellwood)—it was on a practicality, but an important one—about whether it is wise to finish it at the end of December. The Government also need to address the wider points about whether the end could be brought forward and the revenue savings realised earlier.

I hope that many hon. Members will contribute to the debate and that the Financial Secretary will accept the concerns that have been expressed in all quarters. I hope that he will take on board also the complete lack of enthusiasm of anybody in his party for debating this issue and defending Government policy. Perhaps, in the intelligent way for which he is well known, he will seek to arrive at a solution that is beneficial to the taxpayer and the economy as a whole.

This is an important debate, and I share the view of the hon. Member for Taunton (Mr. Browne) that it is a pity that there are not more Labour Members here to debate what was, after all, the flagship policy of the pre-Budget report of 2008. Perhaps this subject cannot drag them away from the various plotting enclaves in which they are currently gathered.

Can the hon. Gentleman tell us why there is no Conservative amendment on this subject? Given the strength of feeling on the Conservative Benches, I would have thought that there would be some proposals, but there is nothing.

If the right hon. Gentleman will be a little patient, he will receive the full reason why there is no Conservative amendment, but he will find that there is still a dividing line between us.

Does my hon. Friend agree that we tried very hard in the debate on the Bill last week to get the Financial Secretary to recognise that this was an unpopular move, and that the best thing that could happen would be for the date of the VAT change to be moved? Does he agree that the response, body language and message that we got back suggested that in absolutely no way were the Government willing to listen? What would be the point of tabling an amendment if that is how we are treated in the Chamber?

I am grateful to my hon. Friend. I was going to address that point later, and I will come back to it, but given the enthusiasm in all parts of the Committee for me to address it now, I shall do so.

Clause 9 will move the date at which we revert to 17.5 per cent. VAT back from 1 December to 1 January. If the clause does not stand part of the Bill, that date will remain 1 December. I shall elaborate on what that means, and I hope that the concerns that my hon. Friend raises, and the Minister’s concern that there is no Conservative amendment on this point, will be addressed. The Liberal Democrats tabled an amendment to bring the date forward, but it was not selectable, as is customary in these circumstances. However, we have an opportunity to do what we can to deal with the matter as quickly as possible.

I return to my points in a more methodical way. The hon. Member for Taunton was absolutely right to ask his two questions—first, whether in November 2008 we could afford the fiscal stimulus that consisted of the VAT cut; and, secondly, if we could afford a discretionary fiscal stimulus, whether that was the right way to go about it.

It is worth my being precise about where there is a difference between the Government and the Opposition, because there is a tendency to point to dividing lines and caricature our positions, and the differences between us can be exaggerated. First, we recognise that there is a place for automatic stabilisers. We recognise that tax revenues will reduce in the course of a recession and that expenditure will increase on certain things, particularly benefits. We have not argued that our fiscal policy should be such that we do not allow the automatic stabilisers to apply. The difference between the Opposition and the Government is about the discretionary fiscal stimulus, not the automatic stabilisers.

Secondly, let us not exaggerate the significance of fiscal policy in addressing a recession. It is not the sole, nor even the principal, means of addressing a downturn. If I may, I shall quote what the hon. Member for Twickenham (Dr. Cable), who is highly regarded in these matters, said in the debate on 31 March. I did not say that he is rightly highly regarded, but he is highly regarded.

He stated that,

“what is actually happening is that the Government are very carefully following the doctrines of Milton Friedman and we have, in essence, a monetary response to the crisis, which is absolutely right, provided it is effective and gets money into the economy.”—[Official Report, 31 March 2009; Vol. 490, c. 815.]

We supported the reductions in interest rates and recognised that addressing a downturn is essentially about monetary policy.

My hon. Friend is developing his argument well. Clearly, the VAT cut pales into insignificance compared with quantitative easing, devaluation, interest rate cuts and all the other things that are happening. There must be better ways of spending the money.

My hon. Friend is right. The Government can and should do many things to address a recession. We differ from the Government in that we believe that, in the current circumstances, the benefits from a discretionary fiscal stimulus such as a VAT cut are outweighed by the dangers that it poses to the public finances and the burden that it places on future taxpayers.

I am following the hon. Gentleman’s argument closely and with interest. I appreciate that there are separate discussions about whether we can afford a fiscal stimulus and which stimulus we should choose. Does he agree with the shadow Secretary of State for Business, Enterprise and Regulatory Reform that, if we are to have a fiscal stimulus, a VAT cut is the best and most effective measure?

My principal argument is that we cannot afford it. On what constitutes the best fiscal stimulus when one can afford it, there are various arguments for and against, which I shall tackle in my speech. However, the fundamental argument is that we cannot afford it.

I want to reach out in a bipartisan spirit to find another matter about which we and the Government agree. It is that one must recognise the state of the public finances when deciding what stimulus one can have, and that there are limits to Government borrowing, which must guide the policy that one pursues when drawing up pre-Budget report and Budget measures. We clearly agree about that because, despite all the rhetoric in the run-up to the Budget in April from the Prime Minister on his world tour, when he made the case for a bold fiscal stimulus for every country, the UK did not pursue such a policy in the 2009 Budget because the assessment was that we did not have the money. As the Governor of the Bank of England put it to the Treasury Committee—

Order. I have allowed some latitude, but the hon. Member is now straying rather wide of the amendment and its intention.

Thank you, Mrs. Heal. I want to argue that we could not afford the VAT cut, which was announced in the pre-Budget report. The public finances are precarious and the Government recognised that they could not afford an additional fiscal stimulus in April. As the Governor of the Bank of England said:

“The fiscal position in the UK is not one that would say, ‘Well, why don’t we engage in another significant round of fiscal expansion?’”

May I press the hon. Gentleman a little more? He is now setting out a view that is consistent with the comments of the shadow Business Secretary, but does he agree with his right hon. and learned Friend that, if one has a fiscal stimulus, the VAT cut is the most effective sort of stimulus to introduce?

Again, a little patience from the Financial Secretary would be appreciated. I know that he is keen to move me on from whether a fiscal stimulus was affordable, but I think that the subject should be tackled thoroughly. Given what we know now, who was right about the pre-Budget report 2008? Could we afford that discretionary fiscal stimulus? Hon. Members should remember that, at the time of the pre-Budget report, the Government projected that they would borrow £77.6 billion in 2008-09, and the projected figure for 2009-10 was £118 billion. By the time we reached the Budget—which contains the most up-to-date figures that we have from the Government; some consider them optimistic—the figures for 2008-09 were £90 billion and those for 2009-10 were £175 billion. That is an increase in borrowing over the two years of almost £70 billion.

Even in November, we were concerned about the risks of the VAT cut to the public finances. We were not alone—in a debate in the House on 17 December, the right hon. Member for Birkenhead (Mr. Field) expressed his concerns about the Government’s ability to raise debt. Were we right to be worried about public finances? Absolutely. Given the decline in them and the difficulties in selling Government gilts since then, our case has become stronger. Our opposition to the VAT cut sent a much clearer signal to the markets than the Government could convey of determination to take the state of the public finances seriously.

Let us consider whether a VAT cut is the best way in which to use the £12.5 billion that the Government said in November that it would cost. I have said that I do not believe that we could afford it, but there is a range of views about whether a VAT cut was the best method of using that money. I am not persuaded by Liberal Democrat proposals that the money should have been spent on a public works programme. The hon. Member for Taunton rightly did not have an opportunity to discuss the Liberal Democrat proposal in detail. However, I remember examining it, and it seemed to consist principally of improvements to rail services relevant to Liberal Democrat seats—strikingly so.

Let me cite that great Liberal—I do not know whether the hon. Member for Taunton is from the same tradition—John Maynard Keynes. In 1942, he wrote:

“Organised public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date) to be the most serviceable instrument for the prevention of the trade cycle.”

I appreciate the hon. Gentleman’s joke, but I fear that it may not be accurate. I beg your brief indulgence, Mrs. Heal, to say that our proposal was to electrify the great western and midland main lines and begin the Liverpool light rail network. Although my party is winning more and more seats in all parts of the country, it is probably unfair to say that those measures would specifically benefit Liberal Democrat constituencies.

Order. I have been generous to hon. Members. Perhaps we can now adhere a little more closely to the amendment.

I anticipate that you would not want me to dwell on a response to that, Mrs. Heal, but I have seen a document that had a number of proposals for the west country, including one for a line from Eastleigh to Romsey, which was particularly egregious.

The reaction to the VAT cut internationally has not exactly been enthusiastic. Nicolas Sarkozy has said:

“Cutting VAT by two points doesn’t incite people to buy if they are scared about their future.”

Christine Lagarde, the French Finance Minister, said:

“as far as we’re concerned…we’re not certain that when prices go down a VAT reduction is that effective.”

Peer Steinbrueck, the German Finance Minister, said:

“We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain’s debt to a level that will take a whole generation to work off.”

Carsten Schneider, the German Social Democratic budget spokesman, said:

“I think the sales tax cut is counter-productive.”

Oliver Blanchard, the chief economist of the International Monetary Fund, said:

“Temporarily cutting VAT, a measure that was adopted in Great Britain, does not seem to me to be a good idea…2 per cent. less is not perceived by consumers as a real incentive to spend.”

Not to be too cynical, does my hon. Friend feel that perhaps the Germans, the French and the Dutch were all terrified that the 2.5 per cent. cut in VAT would suddenly draw business away from France, Germany and Holland? Does he think that that was their motive in making those comments?

No, I do not. My hon. Friend puts forward an interesting theory—it is one that I am sure the Government would like to endorse—but I do not think that that was the reason that those whom I have quoted thought that the cut was a daft idea.

Does the hon. Gentleman think that the Government could take the approach of announcing—or letting it be known—that they intend to increase VAT to 20 per cent. in order to address the Budget shortfall and that that may have enough of an impact to create a stimulus in demand, when people realise that the differential will be 5 per cent., not just 2.5 per cent.?

That is an interesting idea. Although it would be unfair, I am tempted to say that the Minister—or at least what went out in his name—rather contributed to that perception when there was a suggestion that VAT may rise yet further. However, the Government have not stated that that is their intention. There may well be a stimulation in demand when people get in before the reversion to 17.5 per cent.

Indeed, although I take it that the hon. Gentleman will not be claiming credit for any stimulation in demand in December from the subsequent increase in VAT.

To follow up with a more serious point, I would be interested to know from the Minister, given that the Government track our borders assiduously, whether he noticed a flow of individuals coming from France, Germany or Holland into this country as a result of the 2.5 per cent. cut in VAT, which would thereby have increased retail sales to German, French and Dutch customers, or does he not have that information?

Again, I am grateful to my hon. Friend. I am sure that the Minister will have taken that question on board and will be able to provide us with some answers. The same question goes for the Republic of Ireland, although the devaluation of the pound over that period may have also played a part.

A number of countries engaged in a fiscal stimulus, because they were in a stronger position and could afford to do so, but they did not go down the route of the VAT cut. There are also some practical points to be made about VAT, some of which were raised in the quotations that I have cited. First, at a time of sharp discounting of goods—that was certainly the circumstance last November and last December—the 2.5 per cent. reduction in VAT could have been lost. That point was made by a number of commentators. In particular, when Justin King, the chief executive officer of Sainsbury’s, appeared on “Question Time” on 27 November, he said:

“If we walk down the high street today you’ll see 20 per cent. off, 30 per cent. off, 50 per cent. off, so really in that context it’s a drop in the ocean.”

That is one of the problems with the VAT cut.

The second problem is one of practical difficulties. There were practical difficulties with the sudden decrease in VAT at a time when shops were certainly hoping to be busy. There had to be re-pricing with very little notice and we know that that caused difficulties. In some cases the VAT cut was not necessarily passed on. In other cases, people were sitting in shops with calculators deducting the necessary amount, which also created difficulties. There were real costs involved in changing the system so quickly. Retailers were not exactly overjoyed at being faced with what was, after all, a tax cut. There are other technical difficulties involved. For example, those businesses operating under the flat-rate arrangements will not have felt the benefits of the change. There were significant practical difficulties.

At the big picture level, what was the test that the Government set themselves by reducing VAT? At the end of November, their argument was, “Thanks to the measures that we are introducing in the pre-Budget report, the recession is going to end earlier than it would otherwise do. It is now going to end in the second half of 2009.” Sadly, that is not going to be the case, although there are clearly some encouraging signs, and we hope that they will continue.

The Government now accept that recovery will not happen until the end of the year. The test that they set themselves was to use the VAT measure to bring the recovery forward. They have had to downgrade their growth forecast for 2009 from the contraction of 1 per cent. of GDP predicted in the pre-Budget report to a contraction of 3.5 per cent. as set out in the Budget. Even that figure is optimistic compared with the projections of the likes of the International Monetary Fund.

I am sure that the Minister will refer to the Centre for Economics and Business Research and to Doug McWilliams’ comments; he does so every time I debate this matter with him. Doug McWilliams has supported the VAT cut; indeed, he recommended that policy proposal in November. Having recommended it, he has subsequently looked at it again and concluded that he was right all along. His assessment states that retail sales over the December to February period were £2.1 billion higher than they would otherwise have been. We do not necessarily accept that, however. We need to disentangle the impact of the VAT cut from the effect of the very substantial cuts in interest rates over the same period, alongside the policy of discounting that shops were adopting, as we heard from Justin King. Even then, the Government’s figures show that, in the period from December to February, the policy was costing the taxpayer something in the region of £3 billion.

I am delighted that the hon. Gentleman has now looked at the CEBR report. I wonder whether he has read the sentence in it that states:

“The data also shows that the acceleration in retail sales volume was not achieved through fire sales and fierce discounting on the high street.”

That exactly addresses one of the concerns that he and others have raised.