Taxes on Small Businesses

Mel Stride Excerpts

Wednesday 18th October 2017 Westminster Hall

[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.

[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]

Of course we have.

--- Later in debate ---

[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?