Taxes on Small Businesses
(7 years, 1 month ago)
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Derek Thomas (St Ives) (Con)
I beg to move,
That this House has considered the effect of taxes on small businesses.
It is a pleasure to serve under your chairmanship, Ms Dorries. I am grateful for the opportunity to raise this issue, which affects small businesses in west Cornwall and the Isles of Scilly, in the constituency of St Ives.
Some 87% of business enterprises in my west Cornwall constituency are classed as microbusinesses, meaning that they employ fewer than 10 people. In fact, 99% of all businesses in my constituency are small and medium-sized enterprises, employing fewer than 250 workers. Those small, locally run businesses provide the lion’s share of jobs and are the drivers of our local economy. If that is true in St Ives, it will be true elsewhere in the country, which is why understanding how the tax system helps or hinders small business is so important and why I am pleased to raise the issue today. It is also why I have dedicated a considerable amount of time since being elected in 2015 to meeting small businesses and understanding the issues facing them. In fact, I had a small business of my own until my election in 2015.
I know that this Conservative Government recognise the considerable contribution of small businesses, and I acknowledge and appreciate the work that has been done to address the tax burden and support small employers. Many of the 3 million jobs created since 2010 are within small businesses, which is, in part, a credit to Government policy. I recognise that there is no shortage of priorities for the Government and that navigating our way out of the EU will be time-consuming, to say the least. Despite that and—dare I say it—because of it, if there was ever a time to radically address the way businesses are taxed, it is now. While reform will be a challenge, it will undoubtedly yield benefits for our economy by improving productivity, driving wage growth, boosting full-time employment and spreading wealth across all corners of Great Britain, which is a particular concern and interest of people in the far west of Cornwall.
Time does not permit us to consider every aspect of business taxation, and I am not gifted with the brain that is needed fully to understand the complexities of the issue. However, I wish to cover three tax-related issues that stand out to me as clear opportunities for the Government to remove barriers for small business and demonstrate an understanding and recognition of the life of a small business owner.
The first issue is the VAT threshold. Small business owners in coastal communities such as Cornwall and the Isles of Scilly choose to curtail their business to duck under the VAT threshold of £85,000. That is not necessarily about tax avoidance, but more a desire to avoid another level of administration. One business owner on Scilly contacted me because the gallery she runs is set to cross the VAT threshold. She will then have to raise prices by 20% to break even. Since only one of the gallery’s 30 artists is VAT-registered, being able to claim back VAT would not compensate for that change. The gallery must either take the leap and accept that burden or close for the rest of the season.
The effect of the stifling VAT threshold in my constituency is reduced activity during shoulder and winter months, reduced employment opportunities, reduced Government tax income, depressed town centre activity and greater pressure on the hospitality sector during peak season. A guest house owner wanting to avoid registering for VAT may also choose to close early, reducing the availability of beds for visitors and removing altogether the potential spend of the visitor within the wider community.
I raise that issue now because leaving the EU presents an opportunity for the Treasury to consider raising the threshold to, for the sake of argument, £120,000. The Isles of Scilly would be a great place to look at if the Treasury wanted to assess the possible impacts and implications of such a change. The Government may find that it is a cost-neutral proposal.
Another benefit of that proposal is the potential to create greater job opportunities and encourage fresh blood into the tourism sector. That is particularly relevant in Cornwall, Scilly and other rural areas across the UK that struggle to retain young people. I am not suggesting that the proposal would address the skills gap entirely in remote and rural areas, but it would be a step in the right direction.
I assure the Minister and everyone here today that the need to address the VAT threshold in coastal communities is regularly brought to my attention by business owners. I am interested to hear if the Minister is minded to consider such a proposal and possibly a pilot in the constituency of St Ives.
Jim Shannon (Strangford) (DUP)
This is a very complex matter. I was doing some research on it and found that 59% of homes now own a tablet, 71% of UK adults have a smartphone and 97% of small and medium-sized businesses have access to online services. I make a plea to the Minister on behalf of craftspeople—people who know nothing about computers but everything about their hands. The person who has a computer in their house is probably a 13-year-old—
Ms Nadine Dorries (in the Chair)
Order. Mr Shannon, please keep it to an intervention, not a speech.
Jim Shannon
Does the hon. Gentleman agree that that point is not fully taken into consideration when it comes to the digitalisation of everything?
Derek Thomas
If the hon. Gentleman is happy to wait, I will be pleased to address that issue later.
I will move on to business rates, which have been quite a contentious and well-documented issue in recent months. There is no doubt in my mind that if the Treasury were inventing a taxation system from scratch today, the current business rate system would not feature in its proposals. The Government should scrap the current system of business rates and develop a fresh solution, injecting fairness into the tax system for small businesses and taking into account the growth of online shopping and supermarket home delivery services.
Structurally, there are many things wrong with business rates. The tax bears little or no relation to the success or activity of a business. The method used to calculate it is arbitrary. Colleagues will be aware that rates are calculated by multiplying the rateable value, based on the assumed rental value of the property, by a multiplier set by Government. Almost in recognition of that, and in an attempt to spare small businesses the business rate burden, the 2010 Conservative-led coalition and the two successive Conservative Governments have sought to address the problems associated with business rates. As a result, some businesses are eligible for rate relief, with many paying no rates at all. Others, for reasons that are beyond the understanding of most lay people, find they are charged 100% business rates, with many in my constituency experiencing considerable increases following the revaluations earlier this year.
The owner of a small independent delicatessen in Helston, where rents are relatively lower, approached me for help in March. Her current rateable value stands at an extortionate £17,750 per year. To rub salt into the wound, her rates are calculated as £149 per square metre, which is the second highest on the street. A chain bakery operating next door pays just £101 per square metre—32% less—and a national clothing chain on the other side of the street pays just £66 per square metre, which is over 56% less. If she enjoyed the same rate per square metre, she would be liable for no rates whatsoever. Because of her business rate charge, she is not sure that she can afford to stay in business.
The current business rate calculations unfairly discriminate even between businesses in the same part of the high street and do not enable businesses to operate on a level playing field. The great tragedy is that that example is not unique. There are similar cases of an independent photography shop in Penzance and a car paint-spraying business that is run by two youngsters who find that their business rate charge bears no comparison to similar units on the same industrial estate. In both instances, there is little hope for the businesses unless the Government act quickly.
Furthermore, in this age of online shopping and supermarket home delivery services, there are businesses essential to the health of the high street that find competing in today’s world nigh on impossible, despite their so-called privileged position on the high street. Historically, a place on the high street gave an advantage to the shop owner, and consequently the business rate levy reflected that. The ability of supermarkets to provide a delivery service direct to the door has undermined that advantage, and in many cases, despite the modern reach of supermarkets as a result of home delivery services, the supermarket pays relatively less in business rates than the high street shopkeeper. In fact, in St Ives, business rates for some supermarkets reduced this April.
To add insult to injury, rents in St Ives town are being pushed up by the perceived popularity of this iconic place. This year, because rate charges relate to rental values, independent business owners have seen their business rate charge rocket. Traditional retailers, such as bakers, butchers and grocers, face the risk of closing after decades of trading. High street chains move in, and ironically the very thing that drives visitors to St Ives is being lost, partly because of what I believe is a flawed business rate system.
Could it be that the cost of running a high street business, including a business rate charge, means that a greengrocer can no longer compete with a supermarket 20 miles away, now that it can deliver groceries to the family living in the flat above? Surely a modern-day business tax should recognise such changes in consumer behaviour. Furthermore, business rate charges take no account of external factors such as high parking charges, poor upkeep of the local area, closure of local public toilets, or a downturn in the economy, most of which have been experienced in Cornwall in recent years.
I have worked hard with a number of business owners who have found the business rate system profoundly challenging. That group includes a local pub owner, who came to the trade recently, full of enthusiasm. The pub employs 14 locals and is a focal point for the community. A rate review means that the pub now faces a 280% increase in business rates, which equates to an extra £13,000 a year. I recognise that the Government have done some work, and Cornwall Council is also doing some work, to help with that, but the fact remains that that rural pub owner’s rates have increased by 280%. As rural pubs close around us and communities are losing their rural services, issues such as this are hardly encouraging to new entrants.
Another major drawback is that business rates hinder aspiration. Should a small business benefiting from full rate relief wish to take on a second property, expanding both the business and the workforce, it will lose its rate relief and pay rates on both the new and the existing outlet. That step change discourages growth and innovation, and stifles all the benefits that growth brings, including job opportunities, staff training and career progression. That is hardly the intention of what I believe is a small business-friendly Conservative Government.
Before moving on, I want to stress the potentially unique role that traditional independent retailers such as bakers, butchers and grocers have in looking out for vulnerable people in the community—for example, the elderly. That is reason indeed to consider the potentially devastating impact of an outdated business rate system.
Finally, I would like to address the Government’s Making Tax Digital plan. I am in favour of moving across to digital tax reporting and I recognise the Government’s ambition to move to a fully digital tax system during the next few years. Will the Minister ensure that SMEs, including sole traders, have easy access to reliable software and training? Have the Government considered that for some businesses, a transition to digital-only tax will present a further serious administrative and financial burden? Strange as it may seem, there are still significant numbers of traders who are not naturally acquainted with online activity. I am reluctant to single out individuals, but I have met a number of sole traders who are not tech savvy, and the idea of making tax digital fills them with dread.
At present, I can see that there may be a benefit to Her Majesty’s Revenue and Customs in making tax digital, and I know that the Government are making allowances for areas of poor digital connectivity and plan to exempt some on very low self-employed incomes. Can the Minister please ensure that those exceptions are properly supported by accurate data, so that those who are not yet in a position to take part in the brave new world of digital tax reporting will not be unfairly penalised or discriminated against?
In conclusion, I believe that the Government could send a clear message that Brexit does not mean that important domestic priorities are being left on the back burner. The Government can do that by ensuring that small business growth is not stifled by out-of-date and grossly unfair tax systems. Taxation must promote growth so that, as a nation and within our communities, we can maximise all the benefits that a vibrant economy brings. As changes in consumer behaviour and better digital services lead consumers to gravitate towards online shopping and supermarket home delivery, we must ensure that the Government have a fair system of taxation and make changes to unlock the potential of our country’s entrepreneurial small businesses.
The Government must recognise that the negative impact of business rates and the profit hit from VAT registration often go hand in hand. Both taxes kick in at the crucial point when an enterprise is on the cusp of growing to a size at which it can be of useful benefit to the local economy and community. Will the Government please consider scrapping business rates once and for all, in favour of a tax that reflects the economic activity of all businesses concerned? Will the Government explore opportunities to raise the VAT threshold in coastal and rural tourist areas, and will the Government continue to listen carefully to those who recognise the move towards digital tax reporting but ask that we approach it with caution and understanding?
Ms Nadine Dorries (in the Chair)
Well, it is still on my list. We will go to Robert Jenrick.
Robert Jenrick (Newark) (Con)
It is a pleasure to serve under your chairmanship, Ms Dorries. I am grateful to my hon. Friend the Member for St Ives (Derek Thomas) for bringing this matter to the House’s attention. It is an incredibly important subject.
Like a number of hon. Members in the Chamber today, I came to the House having run a business. Not only was I involved in running businesses, but more importantly, I grew up—indeed, spent most of my life from the age of four—involved to a greater or lesser extent in a family business. Having seen a business founded and run from a kitchen table and known that the roof above your head was on the line when the cash flow was short or times were difficult gives you a respect for small business people and entrepreneurs that never leaves you. That helped to forge my politics and make me a Conservative, because it is the Conservative party that has always respected small business and sought to use what levers we have, including the tax system, to incentivise small business people and entrepreneurs, to reward enterprise and to focus enterprise on the things that really matter, not just for them but for the benefit of everyone—the whole of society. I am talking about innovation, research, development and building a vibrant economy that works for everyone.
I want to talk about a few of the tax changes that have been made since the Government first came to power in 2010, which I know, from the small businesses that I speak to in my constituency, and from talking to the businesses that I have been involved in and even my own family business, have made a huge difference. There are the obvious ones to the headline taxes that we have made such a big issue of over the years. I am thinking of the reduction in corporation tax, which has fallen to 19% and will fall again to 17%. That is an incredibly important, landmark reduction in taxes that affects, of course, big businesses and corporations, but also small businesses that prosper—the directors, founders and shareholders want to see a reward for their hard work. That tax would go up under Labour. The Labour party’s manifesto, or the small print of it at least, said that the small profits tax—for those below £300,000—would rise to 21% in 2020-21.
Capital gains tax is another tax that we have reduced. We increased it initially, at the beginning of the coalition Government, and then accepted that we had made a mistake and brought it down again. We have not brought it to as low a level as applied under the last Labour Government, but we have brought it down, which benefits businesses of all kinds. I would be very concerned if a change in Government led to its rising again.
However, taxes that get far less publicity in the main political debate are perhaps my priority. I am talking about those that, in the long term, benefit innovation, investment and research and development. The most obvious one that I have seen succeed is the research and development tax credit. That tax credit enables businesses large and small to claim back against profits, following the latest development, an extra 130% of their qualifying costs. That was on top of the 100% that we had had in the past, meaning a 230% tax credit for research and development by a business. In fact, there is a tax credit even if there is a loss by that business. That is incredibly generously defined and implemented by the Treasury, particularly for small businesses. Businesses involved in manufacturing—like the business that I have been involved in, through my family, for many years—with a high research and development capability, can usually see tax bills as low as 10%. In fact, it is unusual for a business like that—an SME manufacturing business—to have a tax bill above 10%. That is incredibly important because those are the businesses that, across the House, we care about and want to succeed in this country.
The patent box regime introduced by the last Chancellor of the Exchequer for corporation tax relief is incredibly important. It has led to tax reductions for all businesses that develop new products in manufacturing, software and other areas, and has been generously defined so that SMEs can access it and benefit from it without needing the finest lawyers or tax accountants. The innovative businesses that we want to prosper in our constituencies would struggle to pay more than 10% tax as a result of corporation tax, R and D tax credits and the patent box regime. I am concerned that a future Labour Government would abolish those incredibly important reliefs. Will the shadow Minister, the hon. Member for Bootle (Peter Dowd), comment on the Labour party’s position on the reliefs that businesses the length and breadth of the country rely on?
Entrepreneurs’ relief has increased the lifetime limit on gains for entrepreneurs, which I think was £1 million when we came into government, to £10 million—a lot of money to almost anyone, and certainly to people in my Nottinghamshire constituency. Entrepreneurs of any scale can use that relief to ensure that their lifetime’s hard work—the business that they have built up—can be used for their pension or passed on to the next generation. Someone who owns a business, whether it is a highly successful tech business worth tens of millions or a florist’s in Newark that they have devoted their entire life to, can be sure that when they sell it, they will gain the benefit. Enterprise and hard work have their reward. Above all, the entrepreneurs we care about most in society—the ones who do not take out the profits but reinvest them in their business—can have the confidence that they will be able to use that business in retirement as their pension or nest egg. I ask the shadow Minister what the Labour party intends to do about that relief.
For seven years, we have worked hard to close loopholes that were exploited by private equity and others to direct those funds to people that none of us in this House would want them to go to. We want to ensure that genuine entrepreneurs have the confidence not to take out money from their business, which they could easily do when it becomes successful, but to continue to reinvest it and to ensure that that business succeeds. Reinvestment involves employing more people, expanding, creating new opportunities and driving the economy forward. We should be proud of entrepreneurs’ relief and promote it to entrepreneurs, whatever the size of their business, in our constituency.
Although we have cut corporation tax to the lowest level imposed in any major developed economy, the level of business property taxes is still among the highest in the OECD, as we heard from my hon. Friend the Member for St Ives. I agree with him about the effect of business property taxes, not just on the obvious business owners, such as shopkeepers in the small market towns of Newark and Southwell, but on start-ups; on businesses that need a workshop or retail outlet before they build a presence online; on offices; on manufacturers who want factory space; and on businesses making their first expansion by purchasing new sites and renting new premises. Those businesses suffer most from this, and the Treasury should do further work to understand how we can move into the 21st century. Business is going online and we need a level playing field.
All these lower taxes for businesses are in the debit column, but there are some items in the credit column. The introduction of the national living wage means that small businesses must pay their staff more and make pension contributions. There are enhanced benefits; most recently, the Government announced extra bereavement leave. All these policies have almost universal support in this House. I support them all. Most small business owners want their workers to be treated well, paid the living wage, and so on. However, the policies have put pressure on small businesses, particularly in constituencies such as Newark that have high numbers of catering businesses and small retailers.
There is a fine balance between the pressures that important social changes have brought to our small businesses, and the policies that this Government have introduced, and that we support. If we want to ensure that the living wage continues to rise and working people are better supported, we need low taxes on the other side—corporation tax, capital gains tax, entrepreneurs’ relief, the patent box regime. We need the balance to work in favour of entrepreneurs and risk-takers—the businessmen and businesswomen of this country. That is why we should be deeply concerned about a Labour Government, who would not only follow our lead on social reform and treating workers as they should be treated, but risk diminishing and undermining the tax reforms and reductions that small businesses have come to rely on. That would put the enterprising people of all our constituencies at great risk. Enterprise should have its reward. I believe the Conservative party will always provide that reward for the hard-working constituents we represent.
Ms Nadine Dorries (in the Chair)
Order. It is appropriate etiquette for any Member who wishes to speak to rise and catch my eye. Is Mr Davies the only remaining Member who wishes to speak?
Robert Courts (Witney) (Con)
It is a pleasure to serve under your chairmanship, Ms Dorries. I welcome the chance to speak in this important debate, which I congratulate my hon. Friend the Member for St Ives (Derek Thomas) on securing. I declare at the outset my chairmanship of the all-party group on small and micro business, and my practice at the Bar, both of which have a clear bearing on the debate. I also refer hon. Members to my entry on the Register of Members’ Financial Interests.
There is no doubt that small businesses are the drivers of our economy—the agile, risk-taking job creators. It is no exaggeration to say that they are the very fabric of our society. That is never clearer than when I walk around my constituency of Witney and west Oxfordshire and see many hundreds of brilliant examples of small businesses that have started from scratch in small premises. As my hon. Friend the Member for Newark (Robert Jenrick) says, many of them start around a kitchen table. I recently launched the West Oxfordshire Business Awards, at which I saw some fantastic examples of such businesses. They make the importance of small business crystal clear.
It is essential that we continue to work towards a low-tax economy. I entirely concur with my hon. Friend about this Conservative Government’s attitude to support for small businesses and the low-tax economy they have fostered. I thank them for it. There is no doubt that the burdens of taxation on small businesses are significant: it is estimated that they spend about £3,600 per year and three hours per month on administering the tax burden and complying with its obligations. It is incumbent on us to reduce those obligations to as limited a level as realistically possible. The chief culprits are VAT, corporation tax, income tax and PAYE.
Making Tax Digital is a key plank of the Government’s agenda. I freely confess that when I practised at the Bar before being elected to Parliament, I did not hugely look forward to filling in my annual tax return or my quarterly VAT return, so I was not wildly enthusiastic about the prospect of doing either more frequently. Setting aside that immediate reaction, once the system has bedded in and people have got used to it, it will clearly make it easier in the long run for small businesses and microbusinesses—as well as sole traders like me—to do tax returns online and more frequently, rather than in a massive chunk at the end of the year.
I welcome Making Tax Digital, and I think its benefits need to be explained to all businesses, but I ask the Government to ensure that complying with it is not an onerous burden for small businesses. Chief among my concerns are training and software. I make a plea that the software be fully tested before digital taxation is rolled out, so that it works smoothly and unintentional difficulties are not introduced. I also applaud the amended timetable that was laid out in July; I think it was the Minister who is here today who did that. Clearly the Government have listened to some of the concerns that have been expressed by small businesses and that amendment will assist them greatly.
I welcome the national living wage and the start of auto-enrolment for pensions. Those measures have done so much under this Conservative Government to help the lowest paid in our society and to ensure that people have planned for a successful, safe and financially secure retirement; they are much to the Government’s credit. However, there is an impact upon small businesses, especially those with lower margins and those for whom the staff costs—childcare, social care and so on—are particularly high.
I ask the Government and the Minister just to consider whether they might be able to support employers further by looking at increasing the employment allowance, simply because that is something that companies tend to use to put into investment in technology, hiring more staff or raising wages. The small business community would welcome such an increase.
It would not be right for me to make a speech in this debate without mentioning business rates, which of course are a major concern to many small businesses. Again, when I walk around my constituency—including the streets of Witney, Burford and Chipping Norton—and see the wonderful small businesses that are so unique, I am reminded how important it is that we never reach a situation in which we have identikit high streets and essentially the same chains populating towns.
I thank the Government for having listened to the concerns expressed earlier this year with regard to the discretionary relief fund—the £300 million that was produced and given to local authorities. I pay tribute to my council, West Oxfordshire District Council, which is well on its way to distributing the help that has been given by central Government to local Government. I would like to make it quite clear at this stage that there is good evidence in Witney that that help has made a real difference and saved some businesses that might otherwise have been unable to cope. So, as I say, I thank the Government for that.
However, I have some concerns about the administration that is involved in any business rates system, particularly with regard to the valuation office. A constituent has been locked for four years in an unresolved dispute over the valuation of their property. The layers of bureaucracy, which are confusing enough for those of us who regularly deal with these matters on a casework basis, are particularly challenging for small businesses. I would like to see a quicker and more efficient appeal process for the purposes of business rates valuation.
I will just say a few words about the online environment, which I know the Government are working on. An incredible world exists for us now. When we are sitting here having made our speeches, we can order things online—all sorts of products from all over the world. Gone are the days of needing to visit another country to get their products; we can get their products brought here to us. That is extraordinary but there is a real issue when small businesses, such as those I have referred to, that are trading from brick and mortar premises are up against large companies that are not paying the same business rates because of their obvious lack of such a physical presence. It is very difficult to compete against those companies, and likewise against the larger multinationals or nationals who can more easily absorb the costs, the bureaucracy and of course the taxation that is involved. I know that the Government are aware of that and that they are doing something about it; I simply flag it as something that is very important for small businesses.
We must also remember that there is an element of choice for consumers, and that it is incumbent upon all of us to spread the word among our constituents about the brilliant small businesses that we have in our local area. In my constituency there is a great local bookshop in Woodstock. Well, if we want to have that shop, or the florist in Witney, we need to go in there and buy things, and not buy everything from Amazon. Those shops need to be there and we need to support them and actively make that choice. And let us not forget what such shops can give, because there is the real customer service—the care and dedication—that one gets from businesses that their owners really feel about, when they have set them up from their own kitchen table and grown and sustained them through their own blood, sweat and labour.
I will conclude by saying that as we leave the European Union we have an extraordinary opportunity to make Britain the most business-friendly environment in the world—the best place to start the small businesses that really are the lifeblood of our local economies. I am entirely confident that that British entrepreneurial spirit will ensure that we continue to thrive outside the European Union and make the most of those global opportunities that are there for the taking.
However, we all need to continue to ensure that we have the business-friendly environment that encourages and unlocks the talent that we have, which means a low-tax and low-regulation environment, to make sure that our local businesses not only continue to survive but continue to thrive. I know that is the case under this Conservative Government, and I applaud all activities in that regard and in that direction.
Glyn Davies (Montgomeryshire) (Con)
Thank you, Ms Dorries, for calling me to speak in this debate and, indeed, for your generosity in doing so after I was a couple of minutes late in arriving.
I congratulate my hon. Friend the Member for St Ives (Derek Thomas) on bringing this matter forward for debate. I took great interest in his comments about business rates. I cannot say a great deal about business rates, because they are a devolved matter in Wales and it would not be appropriate for me to speak about their effect in Wales here in Westminster. However, I must say that the dramatic changes in terms of revaluation really have put the most horrendous pressure on some of the most important businesses in my constituency.
The one issue that I will raise today is VAT on tourism. It is not a new issue; it has been discussed many times before. However, I want to make sure that it stays on the Treasury’s to-do list, so I have come along to this debate to talk about the impact of that tax on small business.
In Montgomeryshire, and I am sure in most rural areas of Britain, tourism is a massively important industry and a hugely important part of the local economy. Very often, the competition to an area such as my constituency is from overseas. In a lot of overseas countries, which people can choose to go to for their holidays or to visit for a day or a week, the level of VAT is much lower than it is here. The differences might be measured in relatively small amounts of money, but the point is that it is competition and other countries can advertise by saying that they have a lower level of VAT than Britain. The impact of our level of VAT is negative and it is particularly damaging to rural areas that depend on tourism.
As for my constituency, a lot of people know about Powis castle, Lake Vyrnwy and the Lake Vyrnwy hotel, which is a huge attraction, as well as the Montgomeryshire canal and the Welshpool to Llanfair light railway. Those things are why people come and very often they are the reason people come to Montgomeryshire to set up all sorts of businesses. The point that I am making is that tourism is massively important to my constituency, and I am sure that the same is true of every other rural part of Britain.
As I have said, the issue of VAT on tourism, which is at 20% in Britain, has been under discussion for many years and addressing it has been very much part of the work of the all-party group on the tourism and hospitality industry in Wales. Lowering it is one of our major campaigns and has been for a long time. The ambition is to make certain that VAT on tourism is not forgotten. Addressing this issue needs to be part of the Treasury’s considerations.
It would be very enjoyable for me if the Minister stood up today and said that in the Budget in November, the Chancellor will say that he is contemplating a cut in VAT on tourism, but I am not absolutely sure that that will happen. However, it is important that we keep this issue as a consideration for the future. I know it is not a straightforward issue, and that there may well be administrative costs and that we could be accused of having different levels of VAT. We need to know what the benefit to businesses would be of lowering VAT on tourism. Instinctively, we believe there will be a benefit when the competition is lower, but we need to know what that benefit might be.
What I am asking for more than anything else is that the Treasury keeps this issue under consideration, and that we have a proper understanding of and a continuing inquiry into what the benefits of any VAT cut would be, because as we leave the European Union, the freedom to take decisions relating to VAT will change things; it will give us a lot more freedom. Something that I would like to do as a celebration of our leaving the European Union and the ensuing freedom that we will have to vary our VAT is to announce that we are either removing or greatly reducing VAT on tourism in Britain. The economic benefits of doing so would be huge and I hope that it is something the Treasury will keep under consideration.
Carol Monaghan (Glasgow North West) (SNP)
It is a pleasure to be called so early in the debate this afternoon, Ms Dorries. I thank the hon. Member for St Ives (Derek Thomas) for securing such an important debate. He spoke passionately about constituency interests and local businesses that are affected.
The hon. Member for Newark (Robert Jenrick) presented his personal experience of tax on SMEs and talked about the importance of supporting innovation and enterprise, which I will talk about a little. The hon. Member for Witney (Robert Courts) talked about what he saw as the opportunities presented by Brexit. I do not necessarily share his optimism for the next couple of years, but we will see what happens. Time will tell on that one. As far as I am concerned, it is important to reinforce that Brexit is a real threat to small business, and we should do everything we can to avoid a hard Brexit. I know from speaking to trade organisations across the UK that their members are genuinely worried about what Brexit—or, even worse, a no-deal Brexit—will mean for their small businesses.
The Scottish Government recognise the importance of SMEs and are taking action to support them with initiatives such as the £500-million Scottish growth scheme to target high-growth, innovative and export-focused SMEs, which will clearly need as much support as they can get after March 2019. In June the Scottish Government announced the first tranche of the Scottish growth scheme, aiming to stimulate more than £200 million of investment to help small businesses grow, and they will make a further investment this year. Alongside additional private sector investment, we expect that to provide more than £100 million to innovative, high-growth companies. Scottish Government funding for new business research and development projects is also increasing, with an additional £45 million being invested over the next three years.
Various Members have mentioned VAT on tourism. The hon. Members for St Ives, for Montgomeryshire (Glyn Davies) and for Strangford (Jim Shannon), who has left the Chamber, mentioned the tourist tax. I have just come from the Royal National Mòd, which is being held this year in Lochaber around the Fort William area. The area is the outdoor capital of the UK, and definitely of Scotland. The area is poised and ready for expansion. The opportunities for tourism are unique. Ben Nevis is on its doorstep and there are all sorts of activities available from white-water rafting to low and high-level walking. One issue that crops up time and again is VAT on tourism. If that could be brought into line with other EU countries, we could see much greater investment and real expansion in the area.
Business rates were mentioned by most Members. The Scottish Government’s small business scheme has removed the rates burden entirely from 100,000 premises across Scotland and we will urgently take forward the Barclay review recommendations on non-domestic rates. More than half of our rateable properties are paying nothing this year, and more than 70% of Scottish properties are paying the same or less in 2017-18 than they did last year. That is making a difference to small businesses across Scotland. Additionally, all rate payers in Scotland have the right of appeal against the independent assessor’s determination of rateable value, which is free to do in Scotland, unlike in the rest of the UK.
We believe a simplified tax code would pave the way for a significant boost in tax yield. The UK has one of the most complex tax codes, which is often guilty of creating an uneven playing field for our businesses and workers, as well as creating loopholes that disproportionately aid and assist the wealthy and powerful. The hon. Member for Witney talked about the amount of time that had to be spent on completing tax returns, which is a big issue for small businesses.
We broadly support the transition to digital taxation, but we have a series of concerns regarding its implementation, particularly for small businesses and specifically around the impact of digital taxation on low technologically advanced businesses, businesses in rural areas with restricted access to the internet, and small businesses generally that perhaps do not have the skills required to deal with it.
As we face Brexit and the challenges that that will pose for our small business community, the UK Government must do more to support small businesses, which are the backbone of our economy, and I urge the Minister to look seriously at the issue of VAT on tourism that has been raised by several Members this afternoon.
Peter Dowd (Bootle) (Lab)
It is a pleasure to serve under your stewardship today, Ms Dorries. I thank the hon. Member for St Ives (Derek Thomas) for initiating this important debate. We all recognise that small businesses are the backbone of our economy. Most of us have a family member involved in a small business. They might work for or own a small business, or they might be a partner in a small business, so I would not like people to get the idea that the Labour party is distanced from small business. We are not; we are right in the heart of the small business community. The question is whether the Government have neglected the needs of small business in favour, for example, of tax breaks to big business that has failed to stimulate investment and create the high-skilled, well-paid jobs that the country needs. We have record employment but, as I have said in the past, the issue is not just about the quantity of jobs but the quality. I do not demean the number of jobs that have been created, but there has to be a balance.
Under the Conservatives, productivity trails behind our international rivals and British businesses are struggling to recruit the skilled workers they need. The Government have failed to invest in the infrastructure that businesses depend on and have presided over what amounts to a skills crisis. The approach we have seen from Ministers on business rates revaluation is only one example of the chaos at the heart of the Government. Their approach to business rates revaluation has created a huge and destabilising burden for many businesses, with many facing a substantial and unfair increase, which other Members have alluded to. Discretionary funds are helpful, but they do not solve the underlying problem. All that is in advance of the issue that the continued uncertainty around the Government’s approach to Brexit negotiations is creating in the UK business community, whether small or large.
Such uncertainty has led many businesses to delay investing in their people or capital, which is having the unintended effect of undermining the economy’s long-term prospects. No wonder optimism among small firms and businesses has tumbled to its lowest level in the wake of the referendum and the unprecedented political and economic uncertainty that we face. What we do about it is a different matter, but that is what we face, and that is the environment that people and small businesses operate in.
According to the Federation of Small Businesses’ small business index, a majority of small and medium-sized businesses report that operating costs have risen compared with the same period last year. Labour costs are up, taxation is up and rent is up, and all are frequently mentioned as problems. On top of that, the Government are out of kilter—I will go no further than that—in relation to Making Tax Digital. Stakeholders, including tax experts and accountants—we have discussed this previously—have queried the Government’s implementation date as well as the added cost that will be passed on to small and medium-sized businesses. I take the point made by the hon. Member who said, “You get used to it,” but to be fair, at what point do you have to get used to it?
What we might call the U-turn, or about-face, that the Government made during the summer, under the Minister’s auspices, scaling back plans for Making Tax Digital, was welcome. It pushed back the implementation date to 2019, ensuring an exemption for small businesses below the VAT threshold, and ensuring that businesses do not have to submit quarterly tax returns just yet. I do not criticise that; it is welcome. However, despite that volte-face there is still, in our opinion and that of many others, an impact on small businesses; an example is the unrealistic 2019 implementation date for Making Tax Digital for VAT. That date would mean that SMEs were expected to deal with the added costs and complications of digitalising their tax returns at the same time as having to deal with the added costs of Britain’s leaving the European Union. The hon. Member for Montgomeryshire (Glyn Davies) thinks that is a good thing and he is entitled to his opinion, but that is not necessarily everyone’s view.
There is also huge uncertainty over whether businesses and HMRC will be ready to implement Making Tax Digital by 2019, and we must take that into account. Perhaps the Government’s implementation timetable has more to do with the lacuna in the public finances. I do not know; I pose the question. According to HMRC, Making Tax Digital will raise £2.1 billion for the Treasury, although the Minister may tell me that that is not the correct figure. That money has probably already been spent; whether it is raised is a different kettle of fish. That is another factor for small businesses to take into account.
The truth is that the Conservatives are not the only party for small businesses. In fact, one could argue that in the past few years they have rewarded larger companies with tax cuts at the expense of SMEs. As to tax avoidance, over the past month we have seen the same story play out, first with eBay and then Amazon. We have heard about small stores in villages having to compete in the face of non-collection of huge amounts of tax from the likes of Amazon, which avoid their fair share of tax or run rings around HMRC. That affects small businesses because they pick up the tab.
The Financial Secretary to the Treasury (Mel Stride)
I have been listening with growing disbelief to the hon. Gentleman’s running commentary of doom on our approach to business. He mentioned tax avoidance, but does he recognise that since 2010 we have, through our measures against avoidance, evasion and non-compliance, brought in £160 billion? We have reduced the tax gap—the amount of tax that should have been collected but has not—to 6.5% of tax. That exceeds any year when his party were in government.
Peter Dowd
I am pleased that the Minister has brought that to my attention. I bring to his attention Labour’s tax enforcement programme, as well as our manifesto, “Funding Britain’s Future”, and our industrial strategy. I am sure that the Minister has read those avidly and will no doubt revisit them.
SMEs find it increasingly difficult to operate around the tricky and ever-changing tax law while HMRC has been directed to crack down hard on them. The likes of Martin McTague, policy director at the Federation of Small Businesses, recently accused HMRC of going for the soft underbelly by tackling SMEs over tax avoidance and evasion rather than showing the same energy in confronting larger companies, and arguably, by underfunding and not resourcing appropriately.
Robert Jenrick
Will the hon. Gentleman answer the point that I made in my remarks about why the Labour manifesto included an increase in corporation tax for small businesses? If it cares about small businesses rather than large ones, why increase business profits tax for them?
Peter Dowd
I suggest that the hon. Gentleman reads the totality of the document, about the whole environment in which small businesses would operate. It is not a question of one element, but the total environment. That is the point I am trying to get across. It is not one specific thing, such as tax for small or large businesses, but the complete environment in which businesses must operate that we must consider. The current environment is not the most conducive to business for SMEs, in my humble opinion. That is my view; Members may agree with it or not.
We are committed to putting small and medium-sized businesses at the heart of our economic policy. We value them.
Mel Stride
To pursue the point a little further, I understand that the Labour party’s policies are to put up the corporation tax rate to 26%, whereas we are going down to 17%. The difference is a huge gulf—a huge additional tax burden on British businesses. Has the hon. Gentleman’s party conducted any analysis of the impact that that huge hike in taxation is likely to have on jobs, wealth creation, taxes and our ability to fund our public services?
Peter Dowd
The hon. Gentleman, from a sedentary position, asks for the answer. We are here for the Government to defend their record, not for a defence of what Labour’s record will be. [Interruption.] It is okay for Members to laugh, but the bottom line is that the economy is in chaos. Only yesterday the OECD effectively said that the Government should rethink their position on corporation tax. That is not coming from me; it comes from our partners elsewhere.
We want to support small and medium-sized enterprises. I have made the point that it is ridiculous to suggest that they are somehow a foreign land to the Labour party. The country needs, and we have set out, proper investment in the economy and skills and increased productivity. We believe that small businesses can play a part in investment, in a rise in productivity and in helping with skills shortages; but in turn it is our responsibility to help them. I am not sure that they are getting the support they need.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve under your chairmanship, Ms Dorries. I thank my hon. Friend the Member for St Ives (Derek Thomas) for securing this excellent debate. I recognise the extraordinary passion with which he has always prosecuted the argument for the importance of small business, not least in St Ives. As a fellow west country Member of Parliament, I am grateful for all that he has done to fly that flag over the years.
I have sat with growing incredulity as the shadow Minister, the hon. Member for Bootle (Peter Dowd), for whom I have a lot of personal respect, has set out Labour’s stall as the party for business. Apparently it is not the Conservatives, a number of whose Members are here for this important debate, who are the party for business, but the Labour party, represented just by the shadow Minister, who of course needs to be here, unlike his absent colleagues who chose not to be. I think that says a great deal. The hon. Gentleman referred to the chaos presided over by the Government. I am afraid I simply do not recognise that suggestion. The economy has been growing for the past four years. We have more people in employment than at any time in our history, we have the lowest level of unemployment since 1975 and we have slashed the deficit by three quarters. That is not the hallmark of a Government who are in economic chaos.
To move on to the question in hand—the importance of small businesses, and particularly taxation of small businesses—I want first to recognise the huge contribution that they make to the economy. I thought my hon. Friend the Member for Newark (Robert Jenrick) quite movingly described his early years when, sitting at the family table, he realised that every pound mattered. I think the expression he used was that the roof of the house was at risk, in some sense. I recognise, having had a similar background and watched my parents and family go through a similar experience, and having created a business myself and done the same, that we owe a huge debt to the 5 million small business people who do what they do day in, day out, and who often worry about it greatly.
Small businesses are delivering. Small businesses are generating 48% of private sector employment. About a third of private sector turnover comes by way of small businesses. The benefits are not just there for those involved in small businesses; they are there for us all and for society. Small businesses pay the taxes that in turn pay for public services, for the doctors, nurses and paramedics and for the army, police, fire services and so on—all the things that are the hallmark of a civilised society. We owe them a very large debt.
When we talk about job creation, wealth creation and taxation, it is important to recognise that it is not government that does those things, but it is government that sets the environment. The Government can pull the levers that make it easier, or sometimes get in the way and make it more difficult to achieve particular outcomes. I would like to focus on some of the things we are doing.
First, outside the tax sphere, we have the British Business Bank, which has facilitated £9.2 billion in finance. Lending through the bank was up 24% on the previous year. We are channelling money into commerce. We have the StartUp loans programme, from which 50,000 entrepreneurs have benefited, and those are individuals who typically cannot go to family for the funding required. It is small amounts of money, but they have the get-up-and-go and the desire to make something happen in the business environment. We have the enterprise finance guarantee scheme, which has driven £2.9 billion of investment in business to date. Most of those guaranteed loans—I think they average a little over £100,000 each—are going into the small business community.
We have done a huge amount on the tax front. Many Members have raised some of the issues in the debate this afternoon. Corporation tax was 28% when we came into office in 2010. It is now down at 19%, and we made a manifesto commitment for it to head down to 17% by 2020-21. That is a huge drop in taxation. For those who are self-employed and unincorporated, the personal allowance has risen dramatically since 2010 to £11,500. It is heading further up to £12,500, taking 3 million to 4 million people out of tax altogether. Once again, that is us assisting those in business not operating through a corporate or company structure.
The employment allowance was mentioned. It is an allowance of £3,000 for anyone employing somebody. If someone has four workers on the national living wage, which my hon. Friend the Member for Witney (Robert Courts) rightly lauded, they would be paying just £30 in national insurance. That is huge assistance for the smallest companies and for generating jobs.
Entrepreneurs’ relief has been much spoken about. It increases the lifetime allowance to £10 million so that the capital gains tax for entrepreneurs when they sell shares in their businesses is just 10%, rather than 20% or potentially 28%. The new state pension has not been mentioned. It started in 2016 and benefits the self-employed to the tune of £1,900 a year.
We are making a number of important changes that support business, but I want to turn specifically to a few of the contributions to this afternoon’s debate. My hon. Friend the Member for Newark shared his personal experiences with us, for which we are grateful. He talked about the high importance of low taxation, tax support for research and development, the patent box and entrepreneurs’ relief.
My hon. Friend the Member for Witney is passionate about business. I was interested to hear about his West Oxfordshire Business Awards, which he has done a great deal to promote and encourage. He welcomed the new timetable for Making Tax Digital, which is an example of our listening to the business community. He welcomed the employment allowance and suggested we increase it. I will take that as a Budget representation from him. I noted his comments about appeals and the valuation office. If he would like to meet me or write to me—not so much about the specific case he raises, because it would not be appropriate for me to get involved in that—about the principles that that case throws light on, I would be interested to take that up on his behalf.
My hon. Friend the Member for Montgomeryshire (Glyn Davies) raised the importance of VAT and its interconnection with tourism. He is right, and once we have left the European Union we will have greater latitude to make changes there. It is probably a big debate for another time, but I understand the points he made so strongly.
The hon. Member for Glasgow North West (Carol Monaghan) highlighted the uncertainties of Brexit and the difficulties it might cause. We were in a metaphorical sense around the same side of the table on that debate, because I campaigned to remain, but I say to her that the British people have taken their decision. It is beholden on us all to be positive and upbeat and to seize the opportunities. We need to look for the bright sky and not dwell on any lingering doubts that we might have. I say to her that ironically, one of the great opportunities will be for us to take control of some of those tax areas, such as VAT, as we go forward after leaving the European Union.
The hon. Lady raised the issue of Making Tax Digital and its accessibility in rural areas where broadband might not be as available as in other areas. There are provisions in the Finance Bill that I am taking through the House to ensure that those who are genuinely digitally excluded will be able to provide their information in a non-digital form.
I turn now to the specific points that my hon. Friend the Member for St Ives raised. The Government recognise that accounting for VAT can be a burden on small businesses. That is why we maintain the highest VAT registration threshold in Europe, which increased to £85,000 in April 2017. That keeps more than 3 million of the smallest businesses out of VAT and costs the Exchequer around £2 billion a year. The case for change has been regularly reviewed over the years, and views on the threshold are divided. While some businesses have argued that a higher threshold would reduce administrative burdens, others contend that a lower threshold would provide a fairer competitive environment, and that the current threshold incentivises some businesses just below the threshold to limit their recorded turnover and creates unfair competition between businesses operating above and below the threshold. The Government have therefore asked the Office of Tax Simplification to consider the registration threshold as part of its current review of VAT. The final report is due to be published in early November and we look forward to hearing its recommendations.
I recognise my hon. Friend’s concerns about the fairness of business rates, but the Government do not believe there is a case to scrap the system entirely. The objective of business rates is to raise revenue to pay for key local services. The Government concluded a fundamental review of business rates at Budget 2016 and the consensus was to maintain them as a property tax. Respondents agreed that property-based taxes were easy to collect, difficult to avoid and had a clear link with local authority spending.
Some evidence was provided that suggested that changes were taking place in the use of property. A number of hon. Members highlighted the shift away from bricks-and-mortar retailing towards greater online retailing. However, the overall picture was of changing patterns of use within different sectors, rather than a decline in property use overall. Although increased internet shopping might lead some larger retailers to rationalise their portfolio of physical property, some Members pointed out that that has led to increased demand for retail warehouses, and that new, more leisure-orientated businesses are now occupying traditional retail space on many high streets.
None the less, the Government recognise that business rates represent a high fixed cost for small businesses. That is why, in the 2016 Budget, the then Chancellor introduced an £8.9 billion package of measures providing support for all rate payers. That package included making the 100% small business rate relief permanent and raising the thresholds from April 2017. As a result, 600,000 of the smallest businesses will not pay business rates again. It also included raising the rateable value threshold for the standard multiplier to £51,000 from April 2017, taking a quarter of a million properties, including some high-street shops, out of the higher rate of business rates. All rate payers will also benefit from the switch in indexation from the retail prices index to the main measure of inflation. That represents a cut every year worth £1.1 billion by 2022.
Some small businesses are also eligible for rural rate relief, as has been mentioned. We are looking to revalue properties more frequently, and plan to look more broadly at the way in which we address the perceived unfairness of companies that operate in bricks and mortar being effectively treated differently from those that do not.
Finally, I turn briefly to Making Tax Digital, which represents a major step towards the Government’s objective of helping businesses to get their tax right first time. It is, however, a big change, and although it has received broad support, some stakeholders have voiced concern about the scale and pace of change. The Government have listened carefully to those concerns. In July, I announced significant changes to the scope and timetable for Making Tax Digital.
Businesses will not now be mandated to join Making Tax Digital until April 2019, and then only to meet their VAT obligations. Businesses with turnover below the VAT threshold will be able to choose whether to take part. The scope of MTD will not be widened before the changes are shown to work, and not before 2020 at the earliest. No business will have to file VAT returns more frequently than it does currently. Approximately 3 million small businesses that would have been mandated will have the flexibility of joining MTD at their own pace. I am confident that many businesses will recognise the benefits of a streamlined digital experience and will choose to do so.
Once again, I thank everyone for taking part in this important debate, particularly my hon. Friend the Member for St Ives. It has given us the opportunity to demonstrate the Government’s commitment to backing business wholeheartedly, as we will do going forward.
Ms Nadine Dorries (in the Chair)
Mr Thomas, is there anything you want to say to wind up?
Derek Thomas
Unquestionably, since 2010 the Government have taken action to support small businesses and stimulate local economic growth. I am glad that the debate has provided an opportunity to remind the House of those measures. I am also glad that we have been able to discuss the introduction of positive employee support, such as the national living wage and auto-enrolment.
We are united in our desire to ensure that Great Britain remains open for business. Our desire is to make Great Britain a great place to run businesses, which is why my plea, on behalf of rural areas that are largely populated by small businesses, is to reform how we tax them. I thank everyone who took part in the debate. I apologise to the shadow Minister for what seemed to be quite an uncomfortable experience for him.
As we have heard, the business rate charge is hurting many independent small businesses. It is time to install some fairness into business taxation. I maintain that a tax system that reflects the activity of the business, rather than the building from which it operates, has to be fairer.
Question put and agreed to.
Resolved,
That this House has considered the effect of taxes on small businesses.