Finance (No.2) Bill

John Redwood Excerpts

Tuesday 8th April 2014 Commons Chamber

[Shabana Mahmood]

I assure the hon. Gentleman that Labour Members are passionate about business and our policy of a business rates cut for small and medium-sized businesses, which I will come to later.

The Government’s impact assessment says that the 1% cut in 2015 will lower the bills of 40,000 businesses that have profits of more than £1.5 million and pay the main rate of corporation tax. It will also benefit a further 41,000 businesses that have profits between £300,000 and £1.5 million and pay the main rate of corporation tax but receive marginal relief.

The Department for Business, Innovation and Skills estimates that the UK has 4.8 million private sector businesses, the majority of which, around 3.6 million, are sole proprietorships, and a further 1.02 million have fewer than 10 employees. That means that if 81,000 businesses benefit from cuts to the main rate of corporation tax, fewer than 2% of the total businesses in the UK are benefiting.

[Mr John Redwood (Wokingham) (Con)]

I would be grateful if the hon. Lady explained how the Treasury should go about making the calculations that she wants it to make. How would the Treasury know the consequence of that one particular tax change, and how would it know what it would be like without it?

[Shabana Mahmood]

I will come to the point about the different tax choices that we make and measuring their impact. Unlike the Minister, I do not have access to Treasury officials, so I am not versed in their methodology, but I do not deny that the Government’s corporation tax rate cuts in this Parliament, which we have supported, have benefited 2% of businesses. I will come later to the 98% of businesses that have not benefited from the cuts to the main rate of corporation tax, but which are struggling with the costs of running their business. The Opposition believe that the Government can and should go further in helping those businesses cope, in particular, with the business rates that they have seen increase.

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[Shabana Mahmood]

What I primarily regret is that, as a result of the choices they made, this Government choked off the economic recovery that was under way when they came to office. That is the most regrettable thing: it led to three damaging years of flatlining, and it is ordinary people who are paying the price.

Following a vocal campaign by a number of business groups, ahead of the autumn statement the Government decided not to go ahead with the planned 3.2% increase in business rates and decided instead to cap them at 2%. The Government also announced in the autumn statement that they would provide additional help to retailers. That was action—it was relatively late in the day but it was action—but it does not go far enough, and the Government’s policy does not compare favourably with ours ahead of the next general election.

Ultimately, business rates are still set to rise this month by an average of £270. The Government’s autumn statement offer of £1,000 business rate relief was welcome for retailers, but it excluded workshops and offices used by high-tech start-ups. I particularly have in mind small jewellery makers in my constituency, which is famous for the jewellery quarter at its heart. Such businesses will not benefit from the Government’s announcements in the autumn statement and, as I have said, a significant rise in business rates is still envisaged for small businesses.

Our proposal for a switch spend from corporation tax to business rates is a much more comprehensive measure that would offer genuine and more far-reaching support to small and medium-sized enterprises. Given the scale of the problem, our policy seeks to offer practical help that would truly make a difference on the Witton road, the Coventry road and the Soho road in my constituency. The Exchequer Secretary will be pleased to know that it would also make a difference in his constituency. The Office for National Statistics report “UK business: Activity, Size and Location 2013”—a great read—tells us that more than 80% of the 5,750 VAT or PAYE-based enterprises in South West Hertfordshire employ no more than four people, while almost 75% of them have a turnover of less than £250,000. They are therefore not affected by the changes to the main rate of corporation tax, which he himself oversees; they are more likely to be in properties with a rental value of £50,000, and are therefore more likely to benefit from Labour’s proposal to cut and then freeze business rates in 2015-16.

In conclusion, we believe that our policy is the right one for helping small businesses. It meets the scale of the challenge that they face on business rates, and it makes the right choice about how to pay for the policy. We will want to vote on our amendment later this afternoon to highlight the impact of this Government’s decisions and the imbalances in their approach.

[Mr Redwood]

I remind the House that I offer advice for an industrial company and an investment company, although not on these subjects.

I thought that the hon. Member for Birmingham, Ladywood (Shabana Mahmood) started her speech very promisingly. I admire her background, and I can think of a former great Member of Parliament who came from a very similar background and who deduced some very sound principles about how economies and shops work. I thought that the hon. Lady was going to develop in that style. I was delighted when she said that she is now a convert to tax reduction. She said that she and the Labour party now think that taking corporation tax down from 28% to 21% was right. It is wonderful news that we seem to have cross-party accord on the fact that lower tax rates can bring businesses to Britain, keep more profit in Britain and, if we let such policies fructify for long enough, even lead to more revenues and help to promote the economic growth that we all want.

The hon. Lady went even further and thought up another tax reduction that she wants. I am not normally one to let a tax reduction opportunity go by, and she said that a reduction in business rates would be a very good idea. She said that it would be good to find a way to make a further reduction in business rates, because that would be very welcome after years of increases.

I was then disappointed, however, because the hon. Lady said, “Oh, you can’t have too much of a good thing. It might start to work. You’ve got to have a tax rise, as well as a tax reduction.” She did set one part of the business community against another, although she claims that she did not do so. I find that rather curious, because we are meant to be debating the Opposition’s amendment 2, which does not propose a reduction in business rates or an increase in the corporation tax rate, although she says that that is their policy. The amendment allows us to talk about that because it is very wide ranging. We can talk about any kind of tax because it invites us to look at alternatives to corporation tax in ways that she spoke about.

We have a contradiction: the Opposition say that they have a settled policy to put up the corporation tax rate for larger companies and to cut and then freeze business rates. However, we are asked to vote on a much weaker amendment, which just says that the Chancellor of the Exchequer should conduct a review of the impact of cutting the corporation tax rate from 21% to 20%, as well as of other options, presumably including the one that the hon. Lady has already adopted.

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[Mr Andrew Love (Edmonton) (Lab/Co-op)]

Does the right hon. Gentleman accept that the primary cause of that increase in revenue is income shifting from one year to the next? Many individuals held back income in the year when the rate was 50%, and brought it forward when the rate was reduced to 45%.

[Mr Redwood]

I do not accept that at all, because the revenue in the previous year was very similar to the figure for the year before that, which was before people knew that there might be a cut in the tax rate. I suspect that next year will also see good levels of revenue. I do not expect a sudden reduction of £9 billion in revenue in the financial year we are just starting. As always, the hon. Gentleman is peddling misery for no good reason. Labour Members should rejoice and accept the fact that if we cut a rate, we sometimes get more money. They always want to spend other people’s money, so surely they should listen to how we can maximise the amount we get out of people.

[Sheila Gilmore (Edinburgh East) (Lab)]

Will the right hon. Gentleman explain where, following the rate change, this money has suddenly come from if it is not re-phased income? Is he suggesting that people have somehow avoided tax or that people have suddenly come into this country to pay it? He must have some reason for the increase, if he does not accept the one given by my hon. Friend the Member for Edmonton (Mr Love).

[Mr Redwood]

We are talking about people who are a serious amount richer than any of us on MPs’ salaries, and if the hon. Lady meets such people occasionally she will discover that they have many more freedoms than other people on when and where they earn income, what they invest in and where they organise their affairs. Some of them were not in this country before and came here when the rate was lowered. Some have some money in one country and some in another, and they can quite legally shift their money around and decide where they are going to earn more income. That is what companies do, as she has discovered and sometimes complained about. Rich people have a lot of flexibility, which means that a country that sets sensible tax rates attracts and keeps more of them and gets them to do more things.

There is also a disincentive effect, because someone who is legally here and keeps all their money here might not do extra work—why should they, when they are going to be taxed at too high a rate? Or they might not take an extra risk with their investments—why should they? If it works they will get taxed, and if it does not work they will take 100% of the loss. We can therefore change the climate by setting a competitive rate to encourage more confidence and action.

[Mr Love]

rose—

[Mr Redwood]

I will give way again, if the hon. Gentleman wants another go.

[Mr Love]

I do, because I want to explore the Arthur Laffer effect. The right hon. Gentleman seems to be saying that if we reduce income tax, we increase the amount of money we take. How far would he take that? Would he make income tax 40p in the pound, or 35p? Would he abolish income tax entirely and raise even more money?

[Mr Redwood]

The hon. Gentleman is now being completely stupid, is he not? There are two rates of tax that will raise no money—0% and 100%—and there is a curve between the two, which, as he rightly said, was first drawn by Mr Laffer, I believe on a napkin. Most people, including the Treasury, accept that there is a Laffer curve, and that it is a question of judgment where the rate is that maximises revenue. It is quite clear from the evidence in this year’s Revenue and Customs figures that 50% was too high a rate to maximise revenue, and that 45% gets us more revenue than 50%. I believe that 40% would get us more revenue than 45%. I am pleased to hear today that a Liberal Democrat, of all people, is writing a book on the subject. I welcome that and look forward to more progress in coalition talks about the maximising rate of income tax. If it were taken down to 20%, we would clearly lose a lot of money, so somewhere between there and where we are now is the maximising rate, and getting it right is partly science and partly trial and error. We can be sure that we are now moving in the right direction, having gone in the wrong one previously.

It is interesting that the previous Prime Minister, during all his time as Chancellor of the Exchequer, never took the top rate above 40%. I do not think that was because he liked rich people or wanted to be unkind to the left wing of the Labour party. I believe it was his judgment that anything over 40% would have cost him revenue. As a modest man, I therefore accept that there was something about which he was absolutely right—he was correct in not raising the top rate of tax above 40%.

[Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)]

The right hon. Gentleman has made a case about corporation tax and about the top rate of income tax being reduced from 50p to 45p. Would he apply the same logic of Laffer to indirect taxation? It would be interesting to hear his comments about the raising of VAT to 20%.

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[Mr Redwood]

It is clear from the figures that the raising of the rate to 20% increased revenue. Yes, there is a Laffer effect in VAT, and 20% is clearly below the optimising point if our only interest is in increasing revenue. Going from 17.5% to 20% has not got us to the point where it costs us revenue. If it had, I would have been the first to tell Ministers that it was a ridiculous idea. I understand their need for more revenue, because they inherited such a huge deficit.

[Tom Blenkinsop]

Of course, companies often pay VAT before they even make a profit.

[Mr Redwood]

Indeed, there are timing issues with VAT, as the hon. Gentleman says, but I do not really see how that affects the argument about whether putting the rate up brings in more money. That is in the figures.

I fear that we are drifting a bit far even from the wide subject of the amendment, but I suppose the alternative options to help business could include cutting VAT. However, it is clear that if we cut the rate of VAT again, there would be a substantial loss of revenue, whereas we have just cut the income tax rate and there has been a colossal revenue gain. We should learn from those points.

I think the shadow Minister suggested that there would be no loss of revenue to local government from cutting and then freezing business rates. I do not know whether she wants to intervene, but that was my understanding of what she said. I think the Labour party has been converted to the Laffer effect. It now asserts—I do not know on what evidence—that if we cut and then froze business rates, we would collect the same amount of revenue. I would need persuading about that, because I am not sure that business rates are at that point yet, but if they were, it would be a sensible proposal for the coalition Government to take up. It would make it an even bigger pity that Labour has not bothered to table a proposal along those lines for us to vote on today, which might even have drawn me into the Lobby against my own party’s Front Benchers if the case had been well made and I felt that the Laffer effect of lower business rates was well established. I have profoundly shocked my Front-Bench colleagues now, having earned myself a brownie point through my earlier remarks. As they are well aware, they are quite safe, because there is no proposal on the amendment paper to cut business rates. [Interruption.] The Whip has just found that out—she needs to do a little more homework before coming to these debates. [Interruption.] Now she is complaining that she did not say that. As she will be in the record as having said nothing, who am I to disagree?

Before I get into any more trouble, I will conclude my remarks by saying that I will not support the amendment. I do not believe that a review would help, and I do not understand how it would be judged. Nor does it seem that it would have any impact on Labour policy. I am perplexed by the fact that when Labour has a clear policy for once, it has not tabled a proposal so that we can debate it fully and vote on it. I strongly support lower corporation tax rates, which will be very helpful.

[Kelvin Hopkins (Luton North) (Lab)]

It is a great pleasure to speak briefly in this debate. There is everything to be said for reviewing the effects of changes in tax rates, but to do that one must eliminate all other factors. A great surge in demand over a certain period, with unemployment going down and output going up, and all sorts of other factors can affect tax revenues. It is not just tax rates. As my hon. Friend the Member for Edmonton (Mr Love) said, if there was a direct relationship between lower tax rates and increased revenues, a zero tax rate would mean big revenues and a higher tax rate would mean lower revenues. It is just not like that.

I also suggest that marginal changes to tax rates will not make much difference. Everybody in business likes lower taxes, and no doubt most citizens do. It is in the nature of things, because they have more money in their pocket. At the same time, in a civilised society—I like to think that we still have some remnants of a civilised society—taxation is vital to pay for the things that make it civilised. I would personally like higher revenues, so that we could spend more on the things that make our society worth living in. Over the past few decades, there have been some regrettable cuts in tax revenues. Perhaps we should not go back to the 98% top rate of the 1970s, but when Nigel Lawson got rid of the 60% rate and brought in the 40% rate, it led to substantial income for better-off people.

[Mr Redwood]

Would the hon. Gentleman not accept that cutting the top rate from 83% to 40%, or from 98% to 40% for so-called investment income, meant a huge surge in revenue? Rich people not only paid more in cash terms and real terms but paid a bigger proportion of total income tax. What’s not to like?

[Kelvin Hopkins]

We can argue about particular cases, but when we measure the impact of tax changes, we have to ensure that we are not measuring other factors. I met some people in the City just after Nigel Lawson cut the tax rate, and a lot of them were aghast at the Budget, saying, “Why has he cut the taxes? We don’t need the money.” They were clearly not of the same mind as the right hon. Gentleman, but they were civilised, decent people who thought that good tax revenues and higher taxes were a good thing.

[Mr Redwood]

As they were civilised people who did not need the money, all they had to do was give it away. They could have given the money to the state or to charity.

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[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to speak in the debate. If there is one attraction to the amendment, it is that it allows a broad-ranging debate on any tax measure one can think of. Perhaps I could talk about the impact that a carrier bag tax would have on small businesses, especially a tax on bags that would allow the biodegradable element to get into the recycling stream, which damages recycling businesses in the plastics industry. That would perhaps stretch the debate a little too far away from the main rate of corporation tax, even though hon. Members might agree on such a measure.

We are going in exactly the right direction in trying to get the main rate of corporation tax down to 20%. That has been the direction of travel for this Parliament and it is the right place to be. I suspect that, if we get it to 20%, that will be the end of the journey, for the very good reason that having a corporation tax rate lower than the basic rate of income tax creates lots of interesting tax planning opportunities, as the previous Government found out when they had a small companies rate of 10%. Lots of strange people incorporated themselves as businesses—they looked a lot like one-man bands who ought to have been self-employed and made interesting tax deferrals or savings when pretending to be companies.

If we get to 20%, that is the end. I suspect that that is why we can no longer have a small companies rate of corporation tax that is lower than the large companies rate. If we lower one rate, we encourage behaviour that we do not want to encourage. It is right that we get both rates down to 20% and to have one rate of corporation tax. We can then scrap the hugely complex marginal relief calculation and everyone will know what rate of tax they pay on their profits. That has to be the right situation. A small growing business, whose profit increases during the year and suddenly hits more than a quarter of a million pounds, will wonder what tax rate it will pay in that year, so losing that whole calculation completely is a huge advantage.

[Mr Redwood]

Does my hon. Friend agree that the review could very usefully come up with a 20% capital gains tax rate, too? I would settle for 20% capital gains tax, 20% corporation tax and 20% income tax. There would then be fewer tricks.

[Nigel Mills]

A symmetry of tax rates would make perfect sense. Whatever form of income one had, one would know what rate one was paying.

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[Sheila Gilmore]

We must review constantly what we do to get it right. The suggestion is that a review in itself causes uncertainty, but there are many uncertainties in business. The constant discussion about the EU, Britain’s place in it and whether there should or should not be a referendum is an uncertainty. I am sure that many people who feel strongly about that nevertheless feel it is so important that they are willing to risk that level of uncertainty.

[Mr Redwood]

The Labour Front-Bench team made a great deal of the need for banks to lend more money to small businesses being crucial to their future. How would an increase in the corporation tax rate and a special bank levy on payroll help? Would not that mean that the banks had less money to lend?

[Sheila Gilmore]

We still see high levels of remuneration and bonuses at banks while small businesses are told that there is no money to lend. Sometimes, of course, we are told the opposite is the case: banks allege that it is not a lack of money, but that businesses are not coming forward and do not want to expand. For a lot of small businesses who want to borrow, it is galling to find that banks are still seemingly able—despite all the difficulties they allege they have—to pay out so much in bonus payments.

To review these matters and to make a genuine attempt to provide additional help for the small businesses we all say we want to help would be useful. The terms of the amendment would enable us to get details of the impact of the cut in corporation tax to see exactly what the impact has been and what the impact of the suggested minor and very small increase might be before a decision is made.

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[Mr Gauke]

As a result of our corporation tax reforms, businesses are moving their headquarters here. The north-east of England, for instance, has benefited from Hitachi’s investment. However, if the hon. Lady’s point is that the job has not yet been done and that further steps are needed to make our economy more productive and competitive, I entirely agree with her. That is why we must stick to the long-term economic plan.

[Mr Redwood]

Does the Minister agree that increases in investment require consumption growth? Does he agree that the whole point of investment is to satisfy future consumption increases, and that we need both for a balanced recovery?

[Mr Gauke]

Indeed I do. As ever, my right hon. Friend brings great expertise to the debate.

Clauses 5 to 7 provide further evidence that we are continuing to make progress towards the delivery of a simpler and more competitive tax regime. They charge corporation tax for the financial year 2015. They set the small profits rate and the ring-fence small profits rate for 2014 at 20% and 19% respectively. They fix the ring-fence rates so that we need not reconfirm them every year in the Finance Bill. That is consistent with the way in which we handle the supplementary charge, the 32% tax levied on profits from oil and gas production. They set the fractions that will be used for businesses to calculate their marginal relief: the standard fraction is set at one four-hundredth, and the ring-fence fraction at eleven four-hundredths.