Finance Bill

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Dawn Primarolo: I am happy to put it on the record that the Government will continue to review how the tax rates are operating on an annual basis. We may take decisions that require no change for other reasons, but we do not intend to set up something that will wither on the vine.

Mr. Flight: I thank the Paymaster General for her reply. The issue is that tax rates must not wither on the vine. Without further consuming the Committee's attention, I am comfortable that the underlying point has been taken. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

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Mr. Flight: There is one aspect of the operation of corporation tax that I should like briefly to raise now and come back to in more detail when we address new clause 6, which has not been included with clause 30 for technical reasons. The issue concerns companies paying their corporation tax.

Companies have presently to estimate the annual tax payable five and a half months before the end of the accounting period, and a failure to perform a reasonable estimate can lead to penalties being levied. That results in companies having to calculate their tax liabilities at least three times: once each for the payments in months seven and 10 of the accounting period and at least once for all payments after the end of the accounting period. That can be a costly administrative burden. Would it not be possible to consider arrangements that monitor a company's payments on account based on the prior year, unless there is reasonable evidence to show that the figure from the prior year is too high? As I said earlier, new clause 6 proposes a particular formula to deal with that. The regulations are in a statutory instrument, and a cost-saving approach that would not cost revenue would require some statutory changes. I am interested in the Government's view on achieving what I would view as common sense in that area, particularly when that has already been achieved for individuals.

Mr. Michael Jack (Fylde): In advance of my remarks on corporation tax, I remind the Committee of my business interest as a non-executive director of a plc that pays corporation tax.

I should be grateful if the Paymaster General were to comment either now or in writing on some interesting data on the impact of corporate taxation, and therefore the effect of the main rate as confirmed by clause 30, from the Inland Revenue statistics for 1997 and 2001. In 1996-97, the main rate of corporation tax was 33 per cent. At that time, the overall impact of corporation tax was 18 per cent. of net trading profits of UK enterprises and 13 per cent. of gross trading profits. If we move to 1999-2000 when the main rate was 30 per cent., which is the current situation that the clause seeks to confirm, the percentage of corporate taxation had risen to 22 per cent. of net trading profits and 16 per cent. of gross trading profits.

The Paymaster General made a very interesting comment in reply to an earlier amendment moved by my hon. Friend the Member for Arundel and South Downs in which she talked about fairness in the context of corporation tax. I wonder whether the Treasury was, in setting the main rate at 30 per cent., mindful of the impact on each sector of the economy, which has been confirmed by Inland Revenue statistics.

In 1996-97—a comparative period—agriculture, forestry and fishing paid 22 per cent. as a percentage of their net trading profits, and at that time the main rate was 33 per cent. Under the same main rate as we are being asked to confirm today, that figure rose to 24 per cent. During the same time, banking, finance and insurance rose from 20 to 28 per cent.; chemical

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manufacturing, which is a sector that has been under particular pressure, rose from 15 to 18 per cent.; and distribution and repairs rose from 20 to 22 per cent.

Those figures tell us that having a main rate of 30 per cent. has created a situation in which tax take, as a percentage of net trading profits, has been increasing, although against the background of a decrease in the main rate of corporate tax in 1996-97. If we are to apply the criteria of fairness to such a hard-pressed sector as agriculture, which has been under particular pressure, we should consider that for it to find that the percentage take for net trading profits had risen would be worrying. The same message applies to manufacturing chemicals. I should be grateful for some commentary on and explanation of that phenomenon. With a decline in the main rate of corporation tax, and the confirmation of 30 per cent., those results are not what I would have expected.

Dawn Primarolo: First, I shall deal with the point made by the hon. Member for Arundel and South Downs on new clause 6 and instalment payments, which he mentioned in the margins of the Committee this morning. We will closely consider the principle behind the new clause when we come to it. As he knows, the Government have already closely considered the issues of payment of instalments and penalties for late payments. I do not remember the figures exactly, but we have considered reducing substantially the interest on late payments. The substantive debate will happen under new clause 6, and I am prepared closely to consider the hon. Gentleman's point and give him a response.

In answer to the right hon. Member for Fylde (Mr. Jack), I do not have, after having leafed through my endless bits of paper, figures on a sectoral basis. He raised an interesting question however. A 10-year time sequence may also prove interesting. I cannot promise that I shall be able to get that information to him, but I shall do my best to provide an answer, which I shall ensure every member of the Committee receives.

I have the names and numbers of companies that fall into each category, and I am happy to put them on the record or send those details in writing to the hon. Gentleman. Some 340,000 companies pay no tax and make no profit; some 150,000 companies have a starting rate of zero, so their profits would be—[Interruption.]

The Chairman: Order. I reassure members of the Committee that the Officers of the House will inform us if it is necessary to take any further action in response to the alarm.

Dawn Primarolo: I am reassured by that, Mr. Gale, because I did not know whether to carry on speaking or run for the door.

The Chairman: Order. This Committee takes a Francis Drake approach to most things.

Dawn Primarolo: You mean the men will be first at the door, Mr. Gale?

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I shall start again, because I do not wish to give the information in a way that is not helpful to the right hon. Gentleman. About 340,000 companies are not recorded as making profits and they are rate zero. About 150,000 have profits up to £10,000 and their starting rate, once the Bill has been agreed, will be zero. About 160,000 will be in a marginal band of between one and 18 per cent., with profits ranging from £10,001 to £50,000. There will be 155,000 companies at the smaller company rate of 19 per cent., with profits ranging from £50,001 to £300,000. About 20,000 companies will be in the marginal band of 20 to 29 per cent., and 35,000 with profits of more than £1.5 million will be subject to the main rate of 30 per cent. That is the distribution of the 860,000-odd companies.

As I said, I do not have the figures the other way round. The corporation tax rates that have existed since 1979 have varied from a main rate of 52 per cent. down to the current 30 per cent. and from a small companies rate of 40 per cent. down to the current 19-plus per cent. For the past two years we have had the 10 per cent. rate as well, and this year a zero rate. Therefore, the spread is different.

If I can give the right hon. Gentleman a sensible breakdown, given the new corporation tax structure, I shall certainly try to do so and, with his agreement, ensure that every member of the Committee has that information at the same time.

Mr. Flight: In accordance with my declaration on the Order Paper, I should declare an interest as a director of a company that pays tax. I apologise for not having done so in my opening remarks.

On the issue of making advance payments, will the Minister focus particularly on the concept that there should be no penalties where instalment payments are wrong as a result of waiting on clarification of the tax treatment of an issue from the Inland Revenue? However, we can discuss that when we come to the new clause.

Question put and agreed to.

Clause 30 ordered to stand part of the Bill.

Clause 31

Small companies' rate and fraction for financial year 2002

Mr. Flight: I beg to move amendment No. 35, in page 22, line 5, at the beginning insert—

'(1) An individual subject to income tax on profits or gains under Schedule D Case I or II shall be entitled to claim relief in respect of tax on those profits or gains which corresponds to the difference between the income tax otherwise payable and the corporation tax which would have been payable and the corporation tax which would have been payable by a company on such profits or gains taking into account sections 13 and 13AA of the Taxes Act 1988 (small companies relief and corporation tax starting rate), provided that:

(a) profits or gains in excess of the lower relevant maximum amount (as defined in section 13 of the Income and Corporation Taxes Act 1988) shall be disregarded for the purposes of calculating any relief under this subsection; and

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(b) individuals in partnership shall be treated as if they were associated companies for the purposes of the said section 13; and

(c) such relief shall only relate to profits which have been retained within the relevant trade, profession or vocation. The Treasury shall have power under regulations to specify the situations in which profits shall be regarded as having been retained within a trade, profession or vocation.

(2)'.

As hon. Members may be aware, some 3.5 million self-employed people will see their national insurance charges go up about 14 per cent. following the Budget. As I understand it, if they were to incorporate—the amendment deals with quite low levels of turnover of about £30,000 per annum—there would be net national insurance and tax savings of about £3,000 per annum. I cannot believe that the Government want every small, sole trader business to incorporate itself. If nothing else, there would be the potential loss of revenue. I am also mindful of the fact that, ultimately, from a consumer point of view, the Government's legal position is stronger against a sole trader than against an incorporated business.

Amendment No. 35 has been designed to produce fairness in this area and to address the issue presented by the new improved small company taxation rating in conjunction with the changes to national insurance. It would give unincorporated businesses the option to retain profits and take advantage of the lower rates of corporate tax offered, instead of going through the hassle of incorporation. For partnerships, the bands at which lower tax would be paid are split evenly between the partners. That is designed to avoid the criticism that we are trying to help largely wealthy partnerships such as accountants.

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The clear practical point is that for incorporated businesses, money comes through in wages and pay, on which income tax is paid. Similarly, the self-employed pay income tax, but if a self-employed business is able to retain profits to grow the business, it is fair and reasonable to provide for a parallel tax treatment to allow it to function on an incorporated basis.

 

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Prepared 16 May 2002