The Exchequer Secretary to the Treasury (Mr David Gauke)
I congratulate the hon. Member for Birmingham, Northfield (Richard Burden) on securing this debate and putting his case so eloquently. I am sure he will appreciate that it is difficult for me to comment on the tax affairs of any specific community interest company, but I will do my best to provide answers on some of the general points that he has made.
It seems likely that the dormant status of the particular farmers markets in which the hon. Gentleman has expressed an interest has simply been subject to the usual periodic review that HMRC undertakes for all dormant companies. There has been no recent change of Government policy in respect of the taxation of CICs. As hon. Members may be aware, CICs were specifically designed to provide a legal framework and a brand identity for social enterprises that operate for the benefit of their community. As such, they provide an alternative to setting up a charity. Indeed, the major attraction of such companies is that they can be set up and operated in a manner significantly less regulated and more commercially focused than charities. The use of a CIC also ensures that the assets of the company are locked away for a public benefit purpose. Indeed, he touched on the differences between the regulation of charities and of CICs.
It is important to note that, unlike charities, CICs are not not-for-profit organisations. They do aim to make a profit, which can be distributed to the company’s owners or shareholders, or may be used to benefit the community. For that reason CICs are liable to corporation tax in the normal way. That is entirely consistent with the Government’s long-standing level playing field policy, whereby profits that arise from trading activity are subject to corporation tax, regardless of the nature of the entity undertaking the activity.
Jim Shannon
The thrust of what has been put forward for consideration relates to the difference between the taxes paid by a company and those paid by organisations such as the one that has been mentioned, which plough money back into the local community. Does the Minister not feel, as the hon. Member for Birmingham, Northfield (Richard Burden) and I do, that their situation is different? If the community is being regenerated, with opportunity and confidence created, is that not sufficient reason for doing away with the corporation tax because of the benefits that come to the community, which may lead to more jobs and other people paying tax?
Mr Gauke
Let me just elaborate on the point I was making and the reason we have a level playing field approach in this area. For example, a farmers market could operate in competition with other local businesses, and should not be given a competitive advantage over those other businesses purely by reason of being a CIC. A different regime is in place for charities, although one must bear in mind what applies in terms of trading there. CICs are under a different regulatory regime. They are, and have always been, chargeable to corporation tax on any trading profits, investment income or capital gains, but they are also able to take advantage of any corporation tax reliefs that are available.
HMRC treats some entities as dormant for corporation tax purposes when they are in fact active, but they must meet specific criteria to do so—for example, where a particular type of organisation has a corporation tax liability of £100 or lower. Rather than that being an exemption from the tax, this is an administrative issue based on a consideration of the costs that would be incurred through processing returns and collecting payments for such small amounts of tax.
As a general rule, a community interest company is unlikely to meet the specific criteria to be deemed to be dormant, but if the criteria were met, as appears to have been the case in the example given by the hon. Member for Birmingham, Northfield, HMRC would then review the matter periodically and decide whether to continue to treat the company as dormant or whether the company should start submitting tax returns. It should also be noted that the company itself is obliged to tell HMRC if its situation changes such that it is no longer within the criteria to be treated as dormant.
HMRC’s administrative discretion to depart from the strict statutory position is extremely limited. What we are talking about here, as far as I can tell, is essentially that a periodic review having been undertaken, an assessment was made that the farmers markets in question were liable to corporation tax. Although I accept the point that the great bulk of the tax gap that HMRC seeks to address will not be found from dealing with dormant companies or CICs, none the less it is appropriate that HMRC properly enforces the law, which we in Parliament have made, and ensures that companies or CICs are not treated as dormant when in fact they are not.
Richard Burden
I am following what the Minister is saying. Clearly, the badge of “dormant” should not just be seen as a flag of convenience to be used at any time. If I am reading him right, is he saying that there could be some flexibility in the definition of what is dormant? The judgment about what is and is not dormant is an administrative matter rather than something that is laid down by regulation or statute. Therefore, HMRC would have the potential to exercise some discretion.
Mr Gauke
Where a company or a CIC is active, there are very limited circumstances in which HMRC would treat that entity as dormant. Specific criteria must apply, and as I say, it is unlikely that a CIC would meet those criteria. HMRC’s administrative discretion to depart from the strict statutory position is extremely limited. It is not within HMRC’s powers to treat all CICs as exempt from tax, as the law is quite clear that CICs are chargeable to corporation tax.
I should make a broader point. The hon. Gentleman asks whether this is a question of priorities, what the position would be with large companies and so on. We could have a much lengthier debate on that subject alone. However, during this Parliament, HMRC has collected £23 billion from larger businesses as a consequence of its compliance activity. That is significantly up on the record of previous years and demonstrates a determination by HMRC to address compliance by large companies. I do not want to be over-deflected to this, but many larger company issues relate to how international tax laws work. The UK continues to lead the way in encouraging the OECD and the G7, the G8 and the G20 to focus on that work internationally.
To return to CICs, I should like to take this opportunity to reaffirm that the Government are committed to encouraging social enterprise. A social investment road map was published at the beginning of the year and set out the Government’s plans to encourage people to invest in social enterprises, including CICs, particularly with the introduction of a social investment tax relief.
I assume that the farmers markets to which the hon. Gentleman refers will benefit from the employment allowance if they have employees. If they do not have employees but pay business rates, they will benefit from the policies announced in the autumn statement in that respect.
I am sorry if I have not provided the hon. Gentleman with the answers that he hoped for, but I hope that I have provided him with a little more clarity on the issue. Although it is difficult to talk about individual cases given taxpayer confidentiality, I hope that I have clearly set out the position in respect of CICs.
Question put and agreed to.