Finance Bill

Barry Gardiner Excerpts

Monday 12th July 2010 Commons Chamber

[Mr Gauke]

As I have already explained, the Chancellor or the Exchequer set out a business tax package in the Budget that included rate cuts and reductions in allowances that are good for business and growth overall. Amendment 49 proposes that clause 1 be amended to reduce the main rate of corporation tax to 26% for those companies whose tax bill will increase by more than 1% as a result of the reduction in investment allowances. That is a somewhat complex mechanism, but it provides an opportunity to raise the matter of capital allowances.

As part of a package to improve the UK’s competitiveness, it was announced that from April 2012 there would be reductions in the rates of writing-down allowances for plant and machinery and a reduction in the annual investment allowance. The Government will reduce the main rate of corporation tax to 26% that year—2012—and by that reduction, alongside changes to allowances, we will achieve the results that the amendment seeks. Furthermore, by not implementing the changes to allowances for two years, but reducing corporation tax rates next year, we are giving companies a full year to benefit from the reductions in rates, alongside current levels of allowances. Further reductions in the main rate of corporation tax follow in later years and capital allowances remain broadly in line with average rates of economic depreciation. To answer the shadow Minister’s questions, no changes are made to the so-called investment allowances in this Finance Bill and none is planned for the next financial year.

[Barry Gardiner (Brent North) (Lab)]

Why does the Minister believe that, if the Budget begins to work and we see businesses begin to pull the country out of recession, that is the right time for the Government to take away the incentive for further investment in business growth? That seems paradoxical to us all and to damage the very prospects of the recovery that he claims he wants to aid.

[Mr Gauke]

As I said a moment ago, the changes to capital allowances will take effect from 2012, and we believe that there is a substantial benefit for the UK economy in reducing the corporation tax rate. Indeed, it is a direction of travel that our predecessors followed when they reduced the rate from 30% to 28%, but we do not think that that went far enough. The point was raised in earlier debates that the UK has lost its competitive advantage in having a relatively low rate of corporation tax, as a number of other countries have cut their corporation tax rates much further than we have over the last 13 years. We believe that the lower rate sends a very clear signal that Britain is open for business and it is a demonstration of the direction of travel in which we are going. Assessment of the impact of Budget measures on investment over the next few years suggests an increase in investment of £13 billion.

The Budget thus provides a set of proposals and a set of reforms to corporation tax that will encourage further investment. As I say, it is a sign that Britain is open for business and a sign to investors and businesses throughout the world that the UK is a good place in which to do business. We believe that the package as a whole is well balanced and that it will aid a private sector recovery, partly funded through reforms to capital allowances and partly through the bank levy, as we debated earlier. Legislation is not required for the changes in capital allowances in this Finance Bill or indeed in next year’s, but we have set out a clear sense of direction that has been welcomed by business groups as a whole. We therefore urge the shadow Minister not to press the rather complicated amendment 49. It will not make any difference, because we will legislate to this effect in any event—without the complicated mechanism in the amendment. I urge him to withdraw it.

--- Later in debate ---

[Chris Leslie]

I am grateful, Mr Benton, that you have seen fit to allow a stand part debate on this important clause, especially at a time when every measure in the Finance Bill and the Budget as enacted needs sufficient scrutiny to ensure that the general public can have confidence in the fact that any revenue forgone is forgone for a good purpose. At a time when our public services are threatened and look set to be cut so significantly, it is very important that, if this country is to give away potential yield through changes such as the corporation tax, this is done for the right reasons.

It is important to note that we want a healthy economy and for our companies, by and large, to be profitable and doing well. I do not, of course, want to revisit in too much detail our debate on the banking sector, but I point out that it is necessary to have an environment in which our companies can be competitive on a global scale, and to ensure that they can succeed. While we want companies to be profitable, we also want them to reinvest a lot of those profits, so that they can improve the capital stock, improve the ingenuity and enterprising innovation that goes on within such companies, and have a longer-term profitability trajectory. It is for those reasons that I am perplexed by the drastic reduction in capital allowances, to just £25,000. Manufacturing companies—the institutions that produce the actual goods we can sell and export abroad—may well be disadvantaged relative to other sectors of the economy.

[Barry Gardiner]

Is my hon. Friend aware of the predicated growth, contained in the Government’s figures, of the private sector generation of income into the Treasury over the next five years, and does he believe that that is compatible with the reduction in capital allowances that has been announced? In particular, would he care to comment on the timing of that reduction at precisely the moment when—if the Chancellor’s figures were to work out—the economy would be about to see the largest part of its expansion?

--- Later in debate ---

[Chris Leslie]

Indeed that is the case. I know that my hon. Friend has done a great deal of work on some of the analysis of these points. There are arguments to be made for reducing corporation tax to boost competitiveness, but clearly that is a way of encouraging profit-taking and, in turn, the removal of money from companies in the form of dividends. That, of course, benefits us all in some ways, because we are all members of pension funds and so on. However, if it is indeed the Government’s particular choice at this point in time, as we are coming out of a recession, to try to encourage companies to focus on their long-term profitability, might it not be a better strategy, in some respects, to retain some of those capital allowances to ensure that we can fix our banks such that they are able to supply much-needed credit to small companies, in particular, and to the wider industries across the board?

[Barry Gardiner]

My hon. Friend rightly talks about the need for companies to pay dividends and the benefits of that for all of us in society, in particular pension fund holders. Does he appreciate that the portfolio of shares that our pension funds all hold can also increase in value by incentivising companies to reinvest in themselves? That happens by the increase in value of the company through the increased investment that it has made in itself. Is that not a more efficient way of doing things than paying out dividends, which may simply go into private pockets for consumption?

[Chris Leslie]

That is a moot point and I would not go to the wall to argue against reducing corporation tax in this way. All I am suggesting is that there are other strategies that I do not feel that the Government have properly explored. We ought to be focused on growth and on how business can contribute to it. Let us not forget that we have such a deficit situation in this country not because of so-called excessive public service consumption but because tax receipts have been so depressed. That has partly been caused by the credit crunch and the lack of credit available, which provoked the private sector investment strike that has been mentioned by my hon. Friend the Member for Hemsworth (Jon Trickett).