---

Finance (No. 2) Bill

The unfairness at the heart of the system and the challenge that we face is that many companies are incorporating simply to reduce their tax liability, not because their business demands suggest that that is the proper legal form for them. Companies that do not incorporate are clearly tax-disadvantaged, compared with their competitors. I want to pursue the fairness point because it is important and at the heart of our argument. The hon. Member for South-East Cornwall (Mr. Breed) made some key broad points about the importance of small firms in a modern economy, and of Governments being able to implement measures to support their start-up and growth. He said that he was not sure what a fair tax system is. We should remember that as things stand—clause 26 is designed to change this—a self-employed person with profits of £20,000 a year pays some £1,800 more in tax and national insurance than they would pay if they were a company paying corporation tax and taking profits as dividends. That cannot be right, which is why we will continue to keep this issue under review, and why we have taken steps through clause 26. As I said, these provisions were announced in the pre-Budget report, and clause 26 implements them. They will encourage reinvestment by increasing first-year capital allowances to 50 per cent. for the year starting this April. Some 4.2 million small businesses—not just those that are incorporated—are eligible to benefit from this increase in first-year capital allowances.