Taxes on Small Businesses

Nadine Dorries Excerpts

Wednesday 18th October 2017 Westminster Hall

[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)]

I call Jim Shannon.

[Jim Shannon]

Ms Dorries, I withdrew my name this morning.

[Ms Nadine Dorries (in the Chair)]

Well, it is still on my list. We will go to Robert Jenrick.

--- Later in debate ---

[Glyn Davies (Montgomeryshire) (Con)]

rose—

[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)]

rose—

[Ms Nadine Dorries (in the Chair)]

I call Mr Courts.

--- 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?