Finance (No. 2) Bill

Andrew Gwynne Excerpts

Wednesday 25th March 2015 Commons Chamber

[Sheila Gilmore]

It is a pleasure to serve under your chairmanship, Mr Hood. I was also going to say that it was a pleasure to be in the company of so many Members who had participated in Finance Bill Committees during this Parliament, but one by one they have disappeared from the Chamber—even the hon. Member for Dover (Charlie Elphicke), who has been one of the most assiduous Committee members—which is a shame as I was looking forward to hearing the usually very robust views they express, when we are upstairs in Committee at least. Presumably they have something else on their mind today.

The period we are in, which spans one VAT increase to possibly another, is a very interesting one. One of the things that the Government are trying to say—interestingly, some of the other parties are trying to say the same—is that there is no difference between the policies of the Government and the Opposition and that we would all have to make the same decisions. However, the Institute for Fiscal Studies has clearly stated that there is a huge difference between the forward plans of the Government and those of the Opposition. Our policies involve a different attitude towards spending cuts and tax increases in order to reduce the deficit over a period. That is what we said back in 2010; we were clear that we would be following a different pathway. We were not deficit deniers, as was sometimes suggested, but we were clear that we had a different view on how this could best be handled and that there would therefore be fairness in our measures. That remains the case because, prior to the Budget, the IFS said that, given our forward plans and taxation proposals, in contrast to the £55 billion of spending cuts the Conservatives would have to find, the Labour Opposition would be looking to make only £4 billion of spending cuts. More recently the IFS has said that in order to carry out our plans we would not need to make any further spending cuts in the forthcoming Government. So that is a very big difference in our policies. From that point of view, we are in a position to say not just that we would not increase VAT, but that we have a different and much fairer road to go down.

It is right for us to ask what the Government—whether the coalition or the Conservative party; it is not always clear—would be doing. Not only have they said that they need to find those spending cuts to carry out their deficit reduction proposals, but they have also suggested further tax reductions through the continued raising of the tax threshold. At no time since that announcement was made by the Prime Minister at the Conservative party conference has there been any clarity as to where that money would be coming from. So not only are they clearly tied to making substantial departmental spending cuts, but they have not shown us how they are going to close this financial gap. That is why people are saying, “We think it’s going to be VAT.” It is hard to tell where else it might come from. Of course, if it is coming from somewhere else, we would expect that to be said. So the Prime Minister stands up and says, “Oh no, we won’t be increasing VAT,” but the other half of that statement has not been made. We do not know how he is going to square this circle.

[Andrew Gwynne (Denton and Reddish) (Lab)]

As we saw in 2010, what the Prime Minister says this side of an election is not necessarily the same as what then happens in future Conservative Budgets. Has my hon. Friend also pondered the quandary that they might stick to their pledge not to increase VAT this time, but they have not ruled out extending the scope of VAT to currently exempt items?

[Sheila Gilmore]

That is clearly another way the Conservatives might seek to close this gap they have opened up for themselves.



We need to know a lot more about this going forward, and so do the electorate. As hon. Members have said, VAT is a regressive tax. Even though those who have bigger spending power sometimes spend more and so may, in cash terms, spend more in VAT. It is a regressive tax, as are all these indirect taxes. Our position on this is clearly different: we do not believe it is right that people on low incomes should be taxed, in effect, to give other people tax cuts.

We have said a great deal about the 50p issue, which we will discuss later this afternoon, but one of my big concerns for some considerable time has been that low-paid workers already under the tax threshold were being offered nothing from the Government, who constantly talk about raising the tax threshold further. They have no plans to help those people any more. Those people face a real risk that if VAT is increased, they will end up paying the price of a reduction in income tax from which they will not benefit by one penny.

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[Shabana Mahmood]

I was not a Member at that time, so I was not a part of that Government at all, but I am proud of the previous Government’s record over 13 years. The hon. Gentleman will know that we raised the top rate of tax to 50p in response to the global financial crisis, and that was the right thing to do—[Interruption.] He asked about the minimum wage and mentions it yet again from a sedentary position, but we were the Government who introduced the minimum wage in legislation. That was one of our proudest achievements, and my hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) told me last week that the last all-night sitting of the House of Commons was when the Labour Government introduced the national minimum wage. Labour Members were in the House at eight in the morning to vote it through and they were absolutely right to do so.

[Andrew Gwynne]

My hon. Friend is absolutely right to recognise the importance of the national minimum wage to many people in this country. Of course, tax changes are one side of the equation, and the other has been the changes to tax credits, which benefited many people under the previous Government. Is it not the case that we have seen a £3 billion cut for the very richest with the cut in the 50p rate, at a time when average families are £1,100 worse off as a result of the tax and tax credit changes?

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[Shabana Mahmood]

That is exactly the point. If the Government have nothing to hide and nothing to fear from all the data being out there for us to interrogate, they should accept our amendment and get on with the review that we have called for. They should have got on with it when we first called for it, immediately after they made the change to the rate. Our amendment genuinely seeks to shine light on what has been happening to people’s incomes and the impact of changes to the top rate of tax. When the Government commissioned their report, the data were not extensive, and the report has been contentious from the minute it came off the printer. The reasons for that go to the thrust of what the Financial Secretary was asking me earlier, and I will come on to those points shortly.

As we have heard, the Labour Government introduced the 50p rate. It came into effect in 2010-11 and was a decision made after the financial crisis as we sought to get the deficit down. There was nothing in the coalition agreement about abolishing the 50p rate, but in 2011 HMRC was asked to look into it and the yields it produced. It did not take a genius to work out that the Chancellor was thinking about cutting the top rate of tax, and in 2012 with HMRC’s report, the Exchequer effected a 50% additional rate of income tax to back up the Chancellor cutting the rate to 45p.

[Andrew Gwynne]

My hon. Friend talks about the work done by HMRC. Is that almost the same piece of work that the Labour amendment would require the Government to do, in that it would show an analysis of how much money the 45p rate is bringing in and how much the 50p rate would bring in? It would also allow hon. Members to have a proper debate about the proportion of taxes that should go towards deficit reduction as opposed to spending cuts.

[Shabana Mahmood]

As ever, my hon. Friend is absolutely right, and it is precisely to get that additional data that we have tabled this and similar amendments ever since the change was made. Why would the Government go through the process of looking at yield and getting HMRC to produce a report in 2011? That is important, because everyone knew—both at the time and ever since—that there were not enough data to come to an accurate view about yield as the rate had not been in place long enough. To put it bluntly, the Chancellor probably felt that some people might not agree with his decision to give people earning more than £150,000 a massive tax cut, given the state of the rest of the economy and the crushing of people’s living standards on his watch. What he needed to back his decision was a report that said that the 50p rate hardly raised anything at all, which is precisely what the HMRC report said. After analysing a host of facts and figures, the report concluded that a cut that would, by the Government’s initial estimates, cost £3 billion— the so-called static cost, excluding all behavioural changes— would cost only £100 million.

The trouble with the report is that, as everyone acknowledges, there are too many uncertain variables to be anywhere near sure that the figure of £100 million is even close to reality. The report was based on only one year’s worth of data relating to 2010-11. That is a significant weakness, since we know that some incomes were taken earlier to avoid the extra tax. Further detail is now available, including for the tax years of 2011-12 and 2012-13 when the 50p rate was still in place. The writers of the 2011 report did not have those data available, so their report is therefore lacking. That could be remedied were the Government to accept our amendment.

The report attempts to quantify behavioural change. The scale of behavioural change is primarily based on an assessment of taxable income elasticity—basically the extent to which taxable income changes when the tax rate changes. The IFS says that there is a margin of error within calculations for the 2011 report, and that staying within that margin of error one could easily say, depending on taxable income elasticity, that cutting the rate of tax could cost the Exchequer £700 million or could raise £600 million. That gives an idea of the range of figures we are talking about and of how uncertain such projections are.

I return to my central point: more data are now available and could help to calculate a truer picture of the yield of a 50p tax rate as opposed to a rate of 45p. If Conservative Members are so certain that their position on the abolition of the 50p rate is true, why will they not agree to the scrutiny that the amendment suggests?

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[Mr Gauke]

We are making further progress. The hon. Lady has now explicitly said that the 50p rate will not raise £3 billion. [Interruption.] She has explicitly said that, because she has accepted that there will be a behavioural effect that will bring the amount down. I do not know why she is complaining and chuntering, because she has just made the unarguable point that the amount raised will be less than the static cost. That is not the point that the shadow Chief Secretary was trying to make.

Labour politicians are generally very good at saying, “It is a £3 billion giveaway”, in an attempt to give the impression that it will be a £3 billion increase in revenue. I accept that the shadow Chief Secretary probably misspoke, and that when he said that the 50p rate would raise £3 billion, he was getting a little carried away. Labour politicians usually avoid saying, “It will raise £3 billion”, for the very good reason that that is a completely unsupportable position. To be fair to the hon. Member for Birmingham, Ladywood, she is not making that case today. However, I wish to point out that even the Labour party does not believe that the 50p rate will raise £3 billion, which it clearly will not.

[Andrew Gwynne]

I appreciate that we are five and a half weeks from a general election, so we can exchange party-political knockabout. Having said that, I would politely say to the Minister that the point he is making—very eloquently, I must say, if I am being fair to him—is precisely the point made by my hon. Friend the Member for Birmingham, Ladywood (Shabana Mahmood). There is a degree of uncertainty. Is that not exactly why he should support the amendment?

[Mr Gauke]

I accept that I can be carried away with party-political knockabout. I look to the hon. Gentleman as a statesman who rises above such lowly behaviour, and I shall always seek to emulate his balanced and considered approach to the House of Commons.

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[Andrew Gwynne]

Is not a theme developing today: the extent to which tax cuts and spending cuts should contribute towards deficit reduction and, with regard to tax cuts, who should benefit? As with the debates on VAT and the 50p tax rate, we are arguing for greater consideration to be given to small businesses, because larger businesses have already benefited from corporation tax cuts.

[Shabana Mahmood]

My hon. Friend is right. This comes back to the impact of the choices being made—who is being prioritised and who is not, who is bearing the greater share of the burden and who is not. That is the material point.

We know that the Government’s impact assessment prepared for the 2014 Budget estimates that the cost to the Exchequer of the corporation tax cut would be some £400 million in 2015-16, £785 million in 2016-17 and £865 million the following year. In the 2015 Budget Red Book the estimates are revised upwards: for 2015-16 £550 million, for 2016-17 £1.045 billion, and for 2017-18 £1.1 billion. Those are not insignificant sums for a policy that affects a relatively small number of businesses. That is exactly my hon. Friend’s point.

The Government estimate that some 40,000 businesses pay the main rate of corporation tax and a further 41,000 businesses pay at the marginal relief rate. The Department for Business, Innovation and Skills estimates that the UK has some 5.2 million private sector businesses, the majority of which—3.9 million—are sole proprietorships, and 1 million have fewer than 10 employees. Clearly, if about 81,000 businesses benefit from the corporation tax cut, the opposite is also true—5.1 million businesses do not benefit in any way from that rate change.

The Government believe that a further cut in the corporation tax rate makes UK plc a more attractive place to invest and a more attractive destination for business to locate. The Minister and I have often debated the importance of the headline rate of corporation tax when that judgment call is made by businesses. It is important—a point that I have made on several occasions—but it is worth noting that on the former point it is far from clear that this is the case. We know that business investment fell from 8.2% of GDP in 2010 to 7.8% in 2013. That should not come as a big surprise.

Businesses tell us that they face a range of issues and that their decisions about where to locate and where to remain and invest are not based only on the headline rate of corporation tax. They take many other factors into account, such as infrastructure and the skills available in the labour market. Businesses often say that these factors are very important to their decision making, but they worry that under this Government those areas of policy have not gone in the right direction.

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[Andrew Gwynne]

It is always a pleasure to serve under your chairmanship, Mr Hood. It is also a pleasure to follow my hon. Friend the Member for East Lothian (Fiona O'Donnell), who I am almost certain will be back in the next Parliament to pursue these cases vigorously with the next Labour Government. I was tempted to speak by the Minister’s generosity in likening me to a future statesman. I appreciate that I have some way to go, although I have not handed him the Red Book across the Table, as I did to his Liberal Democrat counterpart on Thursday.

The debates we have had today really come down to one issue: balance and priorities. It is about the share we expect to take from tax or the share we expect to take from spending cuts to deal with deficit reduction in the next Parliament. As I said in an intervention on my hon. Friend the Member for Birmingham, Ladywood (Shabana Mahmood), the issues are the same whether it is the VAT debate, the 50p debate or the debate we are now having on business rates and corporation tax.

[John Robertson]

The best way to get the tax contribution is to give people real jobs with real pay; then we will get the money in.

[Andrew Gwynne]

My hon. Friend is absolutely right, and that goes to the nub of the issue today. As my hon. Friend the Member for Birmingham, Ladywood eloquently set out from the Opposition Front Bench, the numbers are clear. In respect of corporation tax, we are talking about a very small number of large businesses operating across the country. The benefits of that tax cut will not necessarily be felt throughout the wider economy. I would argue—I know my hon. Friend makes the same argument—that targeting the same amount of money on a business rate cut for the first year and a freeze for the second year is much smarter, because it would affect 5.1 million small and medium-sized businesses and others. That is the right thing to do for the struggling high street.

I therefore urge the Minister to consider very seriously what the Labour Front-Bench team is asking for. We are not asking him to implement Labour party policy, as much as I would like him to, and we are not asking him to freeze business rates or to cut them. We are asking him to conduct a review so that we can have a proper debate on whether his approach of cutting corporation tax is the right one, or whether, as we argue and believe, cutting and then freezing business rates is a much smarter way of using the same amount of money, as it would create a bigger boost for the economies of towns, villages and cities across the country.

I want to add one note of caution. I am very supportive of the devolution agenda in England. As a Greater Manchester MP, Members would expect me to say that I very much support the efforts by the Greater Manchester combined authority and the 10 local authorities—eight are Labour, one is Conservative and one is Liberal Democrat controlled—and recognise the benefits of the conurbation working together. The Government’s announcement included the retention of additional business rates from growth, but I urge caution. I support the proposal, but we have to approach it on a conurbation, city region and county region basis. Growth areas in cities and counties are often located in particular geographical areas, whereas needs are spread across whole areas. With that, I urge the Minister to accept Labour’s amendment, which requires nothing more than a report that I think would back our plans 100%.

[Mr Gauke]

First, I pay tribute to my hon. Friend the Member for Redcar (Ian Swales), who spoke in this debate as he has done in so many Finance Bill debates over the past five years. He has always provided a voice of calmness and sanity. I have not agreed with everything he has said, but he has mostly made helpful contributions, and thoughtfulness is a consistent characteristic of those contributions.

The corporation tax rate is set in legislation a year in advance on an annual basis. Clause 6 sets the corporation tax rate and charge for the financial year beginning on 1 April 2016. The House will be aware that in 2013 legislation was passed cutting the main rate of corporation tax from 21% to 20% for the 2015 financial year. The cut will take effect in seven days and give the UK by far the lowest rate in the G7 and the joint lowest rate in the G20. The clause confirms that the rate will remain at 20% in 2016.

The Government have made it clear that we want a business tax regime that is competitive and fair, and since 2010 we have made clear strides towards that goal. The main rate of corporation tax was 28%. We have cut it by almost a third to make the UK more competitive and to support growth and investment. At the same time, we have taken significant measures to clamp down on tax avoidance, and on Second Reading we debated the diverted profits tax introduced by the Bill.

Low corporation taxes enable businesses to increase investment, take on new staff, increase wages or reduce prices. Overall, the corporation tax cuts we have delivered since 2010 will save businesses £10 billion a year from 2016. To give Members a sense of scale, that is the equivalent of giving businesses enough money to hire 270,000 new employees. Oxford university’s centre for business taxation estimates that our reduction in the corporate tax burden will increase business investment by £11 billion; and as well as supporting businesses already operating in the UK, lower rates of corporation tax make the UK more attractive to international businesses. Last year, UK Trade & Investment reported a record number of inward investment projects that led to the creation of 66,000 new jobs and safeguarded 45,000 more.

The corporation tax cuts and other reforms, such as the introduction of the patent box, have completely changed perceptions of the UK tax regime. Five years ago, businesses were leaving the UK because of our tax regime. That regime has now become an asset that attracts firms to the UK. In surveys, the UK is now regularly cited as one of the most competitive regimes in the world. The clause embeds the message that the UK is open for business by affirming that the UK rate will remain at the record low of 20% in 2016.

The Opposition amendment proposes a review of the impact of a 1% cut to the main rate of corporation tax for the financial year 2016. A great deal is already known about the impact of corporation tax policy. We know that lower rates encourage growth and investment, and that stable and simple taxes give businesses confidence to invest and expand. The clause refers only to a single rate because we have already legislated to unify the main rate and small profits rate of corporation tax and to scrap the complex marginal relief system for all companies, except those with ring-fenced profits.

These changes will take effect next week and give the UK for the first time a single headline rate of corporation tax and provide administrative savings for a huge number of businesses, particularly the nearly 50,000 companies that pay the marginal rate of corporation tax each year. The move was recommended by the Office of Tax Simplification, and I would like to take the opportunity to pay tribute to Michael Jack, John Whiting and the team for all the work they have done since we introduced the OTS at the start of this Parliament. The Institute for Fiscal Studies has also been supportive of our reforms. In a recent report, it said:

“The simplification of moving to a single rate of corporation tax…is a real achievement of the coalition government’s tax policy, and it is one that should not be reversed.”

The evidence on corporation tax is clear: low rates and a simple system support business and support growth. In our view, the proposed review would provide little benefit, so we are not minded to accept the amendment.

As far as business rates are concerned, the Government recognise that they represent a fixed cost for businesses. That is why during this Parliament we have continued to double the small business rate relief schemes, supporting 575,000 businesses, of which 385,000 pay no rates at all. We have capped the inflation-linked increase in the business rates multiplier at 2% for two years, and we have provided a £1,000 retail discount this year, rising to £1,500 next year for small shops, pubs, cafés and restaurants, supporting the high street.

Labour said it would cut business rates by 1% for lower-value properties in 2015-16. Under its plan, the smallest single properties would pay more. A property with a rateable value of £5,000 saves £1,165 under this Government compared with the Opposition’s proposals. The high street would also lose out. A shop with a rateable value of £30,000 saves £1,080 under this Government when compared with the original proposals. We have published terms of reference for a wide-ranging ambitious review of Budget business rates to report back to the Government. That is, of course, on top of what we have done on fuel duty, which helps small businesses, and the employment allowance, which does the same.

In conclusion, cutting corporation tax has been a central part of our economic strategy—a strategy that is working. In 2014, growth in the UK outstripped that of every other G7 country. Employment is at record levels, business investment is growing rapidly, and this clause ensures that the rate of corporation tax for 2016-17 will remain at 20%—an extremely competitive rate and a foundation of tax system designed to support growth and investment. Reversing the progress we have made would be a big mistake and send a terrible signal to businesses around the world. That is why I believe the clause should stand part of the Bill.

Question put, That the amendment be made.