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Finance Bill

Before I begin my speech, I wish to draw Members' attention to my entry in the Register of Members' Interests. I also wish to make an observation: there is not a single Labour Back Bencher present to contribute to this debate on this extremely important clause. [Interruption.] I agree that the hon. Member for Stoke-on-Trent, North (Joan Walley) is present, and she may well contribute to our debates later on, but I have not yet heard any contribution on this clause. I am delighted to contribute to our deliberations on the vital issue of the taxation of small businesses. Small businesses are often lauded as the real wealth creators and the dynamo of the economy, as, indeed, they are, but it often appears that the Government have taken this image too literally in creating a tax policy for them that resembles a dynamo only in so far as it spins in circles. If there was ever any doubt about the Prime Minister's new-found fondness of Blairite political theatre, it was dispelled during this year's Budget, which began the escalation of the small companies rate. After years of debate in Parliament and elsewhere about taxation acting as an incentive to incorporation and encouraging distortion, the Prime Minister's final act of political theatre was to propose a Budget that cut the main rate of corporation tax to 28 per cent. while the small companies rate was simultaneously to be raised to 22 per cent. over three years. More than that, years of debate about the disparity between personal taxation and business taxation rates influencing behaviour in undesirable ways by encouraging avoidance were further muddled by the fact that the small companies rate is set to rise above the basic rate of income tax. Having encouraged thousands of sole traders to incorporate, the Prime Minister aims to leave the small companies rate at just 1p below the level where he found it when he became Chancellor. The result of his small business taxation odyssey is that he has boxed thousands of taxpayers into a structure that may no longer be appropriate for them. I know that the Treasury's response will be that such people can simply elect to pay themselves a salary rather than dividends, but that neglects the fact that many small businesses face significant increases in administration and compliance costs as a result of incorporation. A former Financial Secretary has quantified that the incentive for a self-employed person earning £30,000 to incorporate and take income from dividends will reduce by £1,000 by 2009-10. For some, that could be just the start of the additional costs. That would, perhaps, be more acceptable if disincorporation were a simple proposition, but it is not. Tax advisers were already warning last year that there was no method for businesses to disincorporate tax-free without Her Majesty's Revenue and Customs making a case that there is a deemed transfer of goodwill out of the business and back to the sole trader. If the Treasury's aim really is the encouragement of disincorporation, the Minister will no doubt be able to tell us what steps the Treasury is taking to remove barriers to disincorporation and to assist small businesses to unwind their tax affairs. However, if the Treasury is actively pursuing disincorporation, the Minister must also admit that it has led the small business community on a wild goose chase for the past few years. Indeed, a tax policy that simply brings the Prime Minister back to where he began is certainly a novel interpretation of the role of the business cycle. Unfortunately, his changes have been counter-cyclical, if not counter-productive, and he has committed his successor to increasing the tax burden on small businesses at a time when they can least afford such a move—I made that point to my right hon. Friend the Member for Wokingham (Mr. Redwood). The small companies rate has been discussed in whole libraries of paperwork over a number of years. Formerly, criticism has focused on the sporadic nature of the Prime Minister's changes. The Institute of Chartered Accountants was typical in its condemnation, stating:"““This type of 'stop-start' tax tinkering is creating a climate of uncertainty for businesses.””" Before he moved on to greater things at the Treasury, Edward Troup also regularly called for not only certainty but simplicity. He is notable for having expressed his hope to the Treasury Committee that the Government would ““do a graceful U-turn”” on the subject of the 0 per cent. small companies rate in favour of incentives that were both better targeted and workable. It seems that this time at least the Treasury has been fruitful in the U-turn department, even if none of the U-turns has been particularly graceful. I hope to return to Mr. Troup's influence on policy later in the Committee's deliberations, suffice it to say that if anyone's hand is on the tiller of the ship of state as it tacks and gybes towards the rocks, it may well be his. In the meantime, I want to dwell briefly on the reason underpinning the change of direction by examining the supposedly better targeted and more workable incentives. The Prime Minister presented small businesses with a regime of research and development and investment allowances, and that is all well and good for businesses able to make use of them, as my hon. Friend the Member for Fareham (Mr. Hoban) outlined. Unfortunately, the system entrenches an unwelcome distinction between businesses operating in the manufacturing and service sectors—between those that are capital intensive and those that are not. The Government argue that they support targeted reliefs, but perhaps Ministers can explain the justification for favouring one sector over another in that way?