Ministerial Speech - Corporation Tax: Due and Payable Rate

- Monday, 27th April 1998

 

Rt Hon Peter Lilley MP

Mr. Peter Lilley (Hitchin and Harpenden) I beg to move amendment No. 2, in page 15, line 25, at end insert— 'Provided that a draft of the first set of regulations made under this section shall be laid before Parliament and the regulations shall not be made until the draft has been approved by resolution of the House of Commons.'. This is a tax-raising Bill: it adds to the taxes raised by the previous Finance Bill introduced last July, and the bulk of those taxes fall on business and on the savings available to businesses to finance their investment. Before the election, the Chancellor repeatedly promised that, apart from the windfall tax, the Labour party's programme would not require any extra taxation at all. The Labour party went out of its way to claim that it would be friendly to business in particular, to try to allay the fear business rightly had of a Labour Government. Labour gave us a test to judge its tax policies. Labour's manifesto stated: How and what governments tax sends clear signals about the economic activities they believe should be encouraged or discouraged, and the values they wish to entrench in society. That is the test that we can use to establish, on the basis of their tax record so far, what activities the Labour Government wish to discourage and what values they wish to oppose in society. What is clear is that business has been singled out for extra taxation; almost all the extra taxation introduced so far falls either directly on companies or on savings that will finance business and investment. We want confirmation from the Government today that it is their intention deliberately to send clear signals that the economic activities they believe should be discouraged are the activities of business and of saving for the purpose of financing investment, because it is on those activities that they have loaded all their taxes.

 

Mr. Barry Gardiner (Brent, North) If the Government are seeking to punish businesses, why do we now have the lowest ever rate of corporation tax for small businesses?

 

Mr. Lilley Because the Government have raised taxes massively with their right hand and given back a small amount with their left hand. Perhaps I should say it the other way round; it is, of course, the left hand that raises taxes, and a very small amount is being given back in the form of a lower corporation tax rate. 44 In total, nearly £20 billion is being raised from the business sector as a result of the extra taxes introduced in the Government's two Budgets—and that is after allowing for the reduction in corporation tax rates announced in both Budgets. That is why we say that there is an extra load on business. We should like the governing party to be more frank and honest about what it is doing. That £20 billion burden on business means that business has £20 billion less to invest, £20 billion less with which to generate jobs and £20 billion less with which to enhance the growth potential of the British economy. 5 pm Clause 30 introduces a quarterly payment system for corporation tax. It is an unplanned baby, conceived by accident in July 1997. Its progenitors were thinking of other things when they brought it about. They had not thought what, nine months later, would flow from their actions. They thought that they were simply abolishing tax credits—an enjoyable activity for socialists, because it was a stealthy way in which to raise a huge amount of tax from savers and companies—but one thing leads to another. Abolishing credits in July 1997 meant that foreign income dividends had to go in the Finance Act 1997. That meant that advance corporation tax ceased to be tenable, and, during the summer, the Government decided that that, too, had to go. Then they realised that they had to replace that with a quarterly payment system on corporation tax, which they announced in November 1997; and because they got that wrong, too, they had to revise it in March 1998. We welcome the mitigation of the measures announced by the Government in November 1997, and the improvements for small companies that were introduced when they finally brought this child to birth in March. However, like the Confederation of British Industry, we condemn the overall impact of the Government's changes on the cash flow of the company sector, and of major companies in particular. According to the Government's figures, clause 30 will raise £6.8 billion from companies this Parliament. The accompanying 1p rate cut in corporation tax will return to companies just £1.7 billion of that £6.8 billion. The net impact of the clause on corporate sector cash flow will be £5.1 billion. I should be grateful if the Paymaster General would confirm that figure now, or when he gets back to the Dispatch Box. He may not be listening, but can he confirm that the net effect of the clause is to lift £5 billion from the cash flow of the corporate sector and take it to the Treasury, as a result of bringing forward payments that companies would have to make, through the advance system of corporation tax payments, on all their profits? Let us have no more from the Labour party about the supposed reductions in corporation tax because of changes in the corporation tax rate, such as those that the hon. Member for Brent, North (Mr. Gardiner) just mentioned. Let us have a clear statement today that, when the Prime Minister denied that there was any increase in corporate taxation, he was misinformed and was, therefore, misinforming the House. Let us have a clear admission that the Government are adding further to the burden of business, on top of the previously announced taxes, on top of the high interest rates that have been introduced in this Parliament and on top of the crippling exchange rate, 45 all of which are already precipitating manufacturing into recession. These burdens of taxation will make it spread all the more rapidly to the rest of the business sector.

 

Mr. Ross Cranston (Dudley, North) Is it not the case that the quarterly system of corporation tax payment operates in the United States, Germany, France, Australia, Canada, Japan and a host of other countries, and that we are simply coming into line?

 

Mr. Lilley I was just about to say that we have no objection in principle to a quarterly payment system; it is the use of that system, by arranging the transition to bring forward into this Parliament payments that previously would have been made years ahead, that is so iniquitous and devious. If the hon. Gentleman had had the courage to admit that it was being done to raise extra taxation rather than to smooth spending over the year, I should have had more respect for him and the Labour party. We have no objection to a system of quarterly payments—something like that became inevitable once credits, foreign income dividends and the advance corporation taxation system on dividends went—but we object to it being used as a back-door method of increasing taxes on the business sector by stealth.

 

Mr. Dale Campbell-Savours (Workington) In the right hon. Gentleman's view, could we have had reduced revenue coming into the Exchequer while we had the reduced interest rates that the right hon. Gentleman has been calling for? Could we have had both together?

 

Mr. Lilley I believe that, if we had encouraged, not discouraged, saving, it would have made it easier for the Bank of England to achieve a given inflation target with less emphasis on high interest rates and high exchange rates. By not taking steps to encourage consumers to save, but allowing the burden of taxation to fall on business and savings, the Government have exacerbated the problems that they diagnosed when they came to power. Our amendment No. 1, which has not been selected for debate, would have required the Government, in introducing a quarterly payment system, to ensure that it did not result in any net take-out of companies' cash flow. It would have ensured that the effects of the system were fiscally neutral, and that the Government adjusted the timings and the transition period to ensure that. As amendment No. 1 has not been selected, we shall vote against clause 30, and I shall invite the Committee to join us. Apart from the fact that clause 30 raises taxes by stealth, the most objectionable feature of the Bill and the clause is that they rely on the wholesale use of regulation-making powers, so that the Government can introduce complex but important measures in a way that cannot be amended, and which, in many cases, will not even be debated. Hardly any of the key parameters of the new system of corporation tax payments are spelt out in the Bill. The Institute of Directors rightly protests: The dates on which tax is payable and any associated penalties are fundamental matters, which should be dealt with in primary legislation:' They are not. Why have not the Government spelt out in primary legislation the key parameters of the system that they are introducing, to allow hon. Members the 46 opportunity—preferably on the Floor today, but if not, later, in Standing Committee—to examine and consider the proposals. and to reflect in that debate representations from outside the House about the detailed proposals?

 

Mr. Cranston Will the right hon. Gentleman give way?

 

Mr. Lilley I shall continue with this point, if I may. It is essential that we find out the Government's intentions, or that we ascertain that, in this respect, too, they have not yet thought out their plans, just as, when they announced the abolition of tax credits, they had not thought that it would make necessary a new system. Is it further evidence of their botched, muddled failure to think through their taxes when they make their announcements? I shall happily give way to the hon. Member for Dudley, North (Mr. Cranston). If he is true to his duty as a Back Bencher, he will want to debate such measures in detail rather than pass them on the nod in the contemptuous way in which the Government sideline Parliament whenever they have the opportunity.

 

Mr. Cranston I thank the right hon. Gentleman for giving way again. Did he in his long experience, including at the Treasury, never propose legislation containing a regulation-making power?

 

Mr. Lilley I cannot remember proposing a clause containing 11 separate regulation-making powers. Not a single detail of the Bill has been spelt out or published previously so that the Committee would know what regulations would be made under the clause. The amendment would ensure that Parliament saw drafts of the regulations and voted on a resolution before the regulation-making process was completed. Labour Back Benchers are numerous and could use the time on their hands to good effect by considering legislation properly and in detail, which is what their constituents sent them to Parliament to do, rather than letting Ministers bypass them and Parliament by taking general regulation-making powers that suggest that they do not even know what they intend to do. We shall listen intently to the Paymaster General for evidence that he knows what he intends to do any more than he and his colleagues did when they started the process nine or 10 months ago.;

 

Mr. Lilley rose—

 

Mr. Quentin Davies rose—

 

Mr. Robinson I shall give way first to the right hon. Member for Hitchin and Harpenden, and then to the hon. Member for Grantham and Stamford.

 

Mr. Lilley If the Paymaster General is being open and transparent, will he confirm here and now, on the record, that the net cash raised for the Treasury over the next four 65 years—the lifetime of this Parliament—as a result of the clause will be just over £5 billion? Or he is trying, like his colleagues, to slip out of putting that on the record?

 

Mr. Robinson The right hon. Gentleman is being nothing short of ridiculous. We published higher figures for the cash flow impact in the transitional period. There is bound to be a cash flow impact when moving from the present system of advance corporation tax to an instalment system. We made that clear and did not try to dodge the issue. We discussed the matter with the CBI and industry, and with international as well as domestic companies. They could see that it was a principled reform with inevitable consequences in the transitional period. They understood that we had a long-term interest in stability and low taxation rates and that reducing the rate of corporation tax for large companies and small companies to 30 per cent. and 20 per cent. respectively—the lowest figures ever—would have a major net present value to the companies. That is why we have had considerable support for our proposals.

 

Mr. Davies My complaint was not that the figures were not published in the Treasury's document—I said in my speech that they were in the Red Book, which I quoted—but that although the figures were there for those who wanted to find them, the Government, and not only the Paymaster General, were disingenuously pretending that the effect of the Budget was to relieve the corporate sector of part of the existing burden of taxation when the reality was the exact reverse. My complaint was not about the figures in the Treasury's document, but about the deceptive spin put on them by the hon. Gentleman and his colleagues.

 

Mr. Robinson The hon. Gentleman misses the point. Not only did we try not to present the measure in that way, but we consulted on figures that clearly showed what the transitional impact would be. One could not be more straightforward or transparent than that.

 

Mr. Lilley The Paymaster General could be more straightforward and transparent and not dodge the question. Is it correct that the extra tax raised as a result of the clause will be £5.1 billion over the next four years? Is that true or false? Will he confirm that? Why is he dodging the question? Why is he refusing to put that answer on the record?

 

Mr. Robinson Even the right hon. Gentleman can read. He can read the Red Book, just as everyone else can—although he may not know the difference between cash flow and tax. To be precise, this is not a tax. The taxes are being reduced and the cash flow impact is negative. We made the effect clear back in November. That gives the lie also to Conservative Members' claim that the two parts of the major corporate tax reform were not seen as a whole.

 

Mr. Lilley rose—

 

Mr. Robinson I shall not give way again because the right hon. Gentleman will only repeat, ad nauseam, the silly little point that he is trying to make. He knows that it is a silly little point and he knows that the figures were published and consulted on. He hates the fact that we have 66 the CBI's agreement for the measure and that our relations with industry are very good, and much better than those of the Conservatives in opposition or in government, but he must accept that. The right hon. Gentleman should be aware that the director general of the CBI wrote praising us for the fact that we had consulted and that we had removed medium companies from the instalment systems and made other adjustments. The director general is clear that the principles of the reforms are accepted and supported by the large majority of companies in this country. That is what the right hon. Gentleman hates, but I regret to tell him that the Opposition have to learn that the Government—as we will discuss later when we come to individual savings accounts and other matters—are prepared to consult, to listen and to change policy, as we have done. That is nothing of which we should be afraid or ashamed. We recommend that the Opposition learn from that. Had they behaved more properly in that respect when they were in government, they would not have suffered such a disastrous defeat.

 

Mr. Quentin Davies Will the Paymaster General give way?

 

Mr. Robinson I have given way several times. I shall do so once more, but I hope that it will be a relevant point.

 

Mr. Davies It is a relevant point, and I hope that the Paymaster General will deal with it. There is no point in the Government consulting unless they are prepared to explain why they are introducing measures. Why have the Government decided that it is appropriate for income tax under schedule D to be charged on a previous year basis, but corporation tax on a current year basis? 6.30 pm

 

Mr. Robinson We took that decision because we felt that, on the whole, it would be much more reliable and more appropriate for companies to forecast quarterly on a revolving basis. I do not know on which boards the hon. Gentleman sits or used to sit, but the idea that a company does not make a clear annual forecast against which there is monthly and quarterly reporting is just unbelievable.

 

Mr. Davies rose—

 

Mr. Robinson I have given way an awful lot and we must move on. I always give way to the hon. Gentleman, as he knows—although, quite honestly, I found some of the things that he said today utterly amazing. I shall now deal with some other points that were made in the debate and need some attention. The hon. Member for Bexhill and Battle (Mr. Wardle) mentioned rapidly growing companies. There are precise provisions—I shall point them out—for rapidly growing companies that relate to whether they were smaller companies in the previous year or whether profits were as high as £10 million. That is a totally adequate provision. I hasten to add that the hon. Member for Bexhill and Battle should not be seen as encouraging overtrading by companies. It is wise to be prudent in such respects. The question is again only one of cash flow impact. If a company were in so much trouble that it had to borrow from the Inland Revenue at 2 per cent. over base— 67 I would not wish it on any company—it would not get a bad deal at that rate. It is worth pointing out that we have reduced the differential between the borrowing and lending rate of the Inland Revenue and companies from the 5 per cent. that prevailed under the Conservative Government for 18 years and was never touched, to a much more reasonable 2 per cent. At that rate, there is not a great deal for the Opposition to grumble about. The general mix that we have come up with reflects what we thought was the best judgment of the situation. I do not think that anyone in the House—at least, no hon. Member has declared himself in such a light so far—rejects the principle of what we have done. The Opposition are trying to accept it in principle, but, having willed the end, they will not will the means. That is why the amendment is confusing. We cannot make regulations under clause 30 without first laying them before the House of Commons. The regulations published on Friday are already in the Library and available to hon. Members. They have to be laid before the House so that we can scrutinise them before they come into effect. Not surprisingly, we do not need the amendment to require that. The second reason anybody who looks at the amendment is bound to be very puzzled is that it will require instalment regulations to be made under the affirmative resolution procedure. That is the point that the right hon. Member for Hitchin and Harpenden is trying to make in tabling the amendment. Indeed, he went on to say, when challenged, that he could not remember in his experience in the Treasury—I think that he served successively as Financial Secretary and Economic Secretary—the Conservative Government doing anything of the kind that we are proposing. Perish the thought. In the light of that damascene conversion, why, if the Conservatives did not like regulations being made under the negative resolution procedure, did they not change it during the 18 years that they were in office? I shall tell the right hon. Member for Hitchin and Harpenden what the Conservatives did in those years and give a few figures to substantiate my comments. The Conservatives were responsible for hundreds of sets of tax regulations that were introduced under the negative resolution procedure, including nearly 200 on direct taxes over the three years to March 1997. The right hon. Member for Hitchin and Harpenden said that the Conservative Government never did any such thing. Perhaps he did not know what they were doing. Perhaps he did not know what he was doing when he was in the Treasury. Above all, perhaps he did not know what the right hon. and learned Member for Rushcliffe (Mr. Clarke) was doing when he was Chancellor. I am sure that the right hon. and learned Gentleman very often did not know about such detail. In 1993, the Conservatives quite happily made new regulations covering the deduction from the pay-as-you-earn scheme—tax from employees' wages and salaries—under the negative resolution procedure. What does the right hon. Member for Hitchin and Harpenden have to say about that? Those regulations affected tens of millions of people and tens of billions of pounds of tax. The simple fact is that the right hon. Gentleman did not know what he was talking about then, 68 did not know what the right hon. and learned Member for Rushcliffe was doing, and neither of them knew what the Government were doing. The amendment is inappropriate and unnecessary and I of course urge the Committee to reject it.

 

Mr. Lilley I shall endeavour to be brief so that we can move on to the other two amendments to clause 30. The hon. Member for Gordon (Mr. Bruce) said that there had been relatively little detailed criticism of the clause. The reason is, of course, that there is rarely detailed criticism until regulations and details are published. They were not published until Friday, they are not yet in the Vote Office or available to hon. Members, and they have not been seen by the outside world ahead of this debate. Consequently, there was no possibility of people making informed submissions that could be considered by Conservative Members or, if they were remotely interested, by Labour Members. That is what is so wrong with the procedures and mechanisms that the Government are pursuing in this matter. There has been quite a lot of opposition to the fact that the Government are proceeding with the use of regulations on an unprecedented scale. Regulations have always had a place, but when everything is delegated to regulations and none of the detail is in the Bill or published in time for consideration in Committee, that is wrong. My hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb), in a powerful speech that will pay the Paymaster General dividends if he reads it, quoted a series of accountants to the effect that what is proposed is perilously close to a constitutional abuse—and so it is. My hon. Friend the Member for Grantham and Stamford (Mr. Davies) made a characteristically compelling speech in which he asked the Government why they had not simply drafted a one-clause Bill stipulating that the Treasury should have the power to introduce any tax by whatever measures it thought appropriate in the appropriate regulations. I fear that he is putting ideas into their heads. I saw many of them perk up at the thought. The process moves from paying tax in arrears to paying it in advance. Inevitably, that involves a period of double taxation. After beginning blusteringly by saying that he would be transparent and open, the Paymaster General dodged answering the question of how much extra tax will be raised by the clause. We are used to his dodging his taxes; now he is dodging telling us how much other people will have to pay in taxes as a result of his measures. That is not satisfactory. We will come back to this time and again. He pretends that industry is happy with the proposals. The CBI welcomed the mitigation of his original, more onerous proposals—

 

The Second Deputy Chairman of Ways and Means (Mr. Michael Lord) Order. The right hon. Gentleman has just mentioned tax dodging. I am not sure that that is the right phraseology to use, and I would be grateful if he withdrew it.

 

Mr. Lilley Of course I withdraw. The Paymaster General is well known for dodging answering questions about either his own taxes or the taxes that he is imposing on others. That is a well-established fact. 69 We believe that the Government should come clean on the amount of tax involved and recognise that industry does not welcome the extra tax that it is having to pay. What they propose will be welcomed even less when it accumulates with the other burdens they are imposing on business, which threaten a manufacturing recession that is likely to spread in due course to the whole economy.

 

Amendment negatived.

 

Mr. Lilley I beg to move amendment No. 3, in page 16, line 29, at end insert— '(c) for special payment arrangements for companies making seasonal profits, enabling such companies to pay instalments based on actual tax-adjusted results for the previous six month period.'. The quarterly process will inevitably increase taxes on business by requiring companies to forecast their future profits and pay taxes on them before they have been earned. If companies underestimate, they will have to pay interest on the underpayment at a rate designed to discourage understatement. That is a particularly tough requirement on the many firms with highly seasonal business; retailers, for example, who depend on the Christmas season to make any profit at all will have to pay taxes on quarters three and four before they have earned anything at all. The amendment would allow such companies to pay less in the first half of the year. International experience shows that corporation tax systems can be reformed to help seasonal businesses. In the United States, for example, businesses pay tax by quarterly instalments, but the system is modified to allow seasonal traders to pay each instalment of tax according to the proportion of annual profits earned at each payment date, using previous years' estimates. Seasonal businesses are not looking for any preferential treatment, but for a corporation tax system that acknowledges their distinctive trading patterns. It must be wrong to force seasonal businesses to pay tax in advance of earning enough revenues to have any profit at all over the year as a whole. Retailers have come to me with detailed suggestions about how to resolve the problem. The Paymaster General should listen to them and act on what they have to say. To be eligible to use the method we propose, retailers suggest that a company's profits earned in the first six months of the accounting period must be consistently less than their profits earned for the complete financial year. In the US, the proportion is set at 30 per cent. or less of total profit for the year. It would be easy to determine the estimates by looking at established trading patterns over the previous five years, as disclosed in published interim reports. I hope that the Paymaster General will seriously consider the amendment, which should not be costly for the Treasury to accept and introduce and would meet a valid concern of which he should take due note.

 

Mr. Malcolm Bruce I support the amendment. Some companies—in agriculture, farming and fruit, for example—have business that is exclusively summer or Christmas related, and it is reasonable to suggest that the Bill should take some account of that. Otherwise, the cash flow benefit to the Treasury may be significant, but the difficulties for individual companies may be real. If the Conservative party intends to divide the Committee on the amendment, we will support it. 70

 

Mr. Dafydd Wigley (Caernarfon) I, too, support the amendment. I represent a constituency where there is a considerable seasonal distortion to economic activity. Tourism is one of the major industries in my area; agriculture—when it is not going through a depression, as it is now—is the other. The fact that major companies in the tourism sector have large amounts of money coming in over a limited period and then have low levels of activity the rest of the year leads to knock-on effects on a host of service industries associated with the demand from the tourism sector. In Llandudno, for example, the population goes up from 20,000 to 200,000 in the summer. That gives an indication of the impact of seasonal business on the business fraternity in the area. The amendment would be helpful in terms of cash flow for such companies, and I hope that the Government will seriously consider it. 6.45 pm

 

Mr. Geoffrey Robinson The Committee is rightly considering the amendment in a reasoned tone. Like the right hon. Members for Hitchin and Harpenden (Mr. Lilley) and for Caernarfon (Mr. Wigley), the Government have received representations on it. We met the British Retail Consortium, which suggested something similar to the amendment; it would confine the measure to companies consistently making less than 30 per cent. of their profits in the first half of the year. The amendment might help a few large companies, but there cannot be too many firms that make upwards of 70 per cent. of their profits in the second half of the year. The Committee will realise that the amendment would add considerable complexity to the rules. The right hon. Member for Hitchin and Harpenden refers to the American situation, but I am sure that he is aware that, in other respects, the American system is less favourable. The whole of the tax, as opposed to half, is paid in the year in question. I do not think that the British Retail Consortium, or anybody else, would want that because it would be so disadvantageous. We would not have received the support that we have received for the changes over a four-year transitional period if we were to move to the American system as a whole. It is unwise to cherry pick—to have one bit from America and another bit from France—as we would end up with a mish-mash that would not achieve the principled reform we are looking for. I am not inclined to accept the amendment or the proposal from the British Retail Consortium, but we will consider the matter carefully and return to it.

 

Mr. Lilley I am grateful to the Paymaster General for that assurance; we will not press the amendment to a vote. I beg to ask leave to withdraw the amendment.

 

Amendment, by leave, withdrawn.

 

Mr. Lilley I beg to move amendment No. 4, in page 16, leave out lines 37 and 38. We have drawn attention to the fact that clause 30 in particular—like the Bill in general—makes excessive use 71 of regulation-making powers. I invite the House to consider particularly the proposed new section 59E(5), which states: Regulations under this section— (a) may make such modifications of any provisions of the Taxes Acts, or (b) may apply such provisions of the Taxes Acts, as the Treasury think necessary or expedient for or in connection with giving effect to the provisions of this section. It is, in short, a Henry VIII clause—a clause that enables the Government, by regulation, to change primary law elsewhere without proper consideration by the House. We know that the other place has found such legislative provisions particularly abhorrent, but it will not have the chance to vote on the Finance Bill. We should eliminate that subsection and ensure that if the Government want to change primary legislation, they must bring the change to the House in an open and democratic fashion by the normal procedures of the House and may not publish regulations that cannot be amended or debated.

 

Mr. Geoffrey Robinson This is, quite simply, a wrecking amendment, and the right hon. Gentleman is again suffering from a fairly severe bout of amnesia. It is quite normal for tax regulation-making powers to permit modifications of this sort. Given the authors of the amendment—people who have served in distinguished positions in the Treasury—the House may be interested to learn that the previous Government's last three Finance Bills provided more than a dozen sets of regulation-making powers covering direct taxes alone, three quarters of which included the power to modify existing provisions of the Taxes Acts. The only practical effect of the amendment would be to prevent regulations from being made to introduce quarterly instalment payments of corporation tax by large companies. If that is the Opposition's intention—clearly it is—I recommend that we proceed to a vote on the clause as a whole.

 

Mr. Lilley The Paymaster General said that the Conservative Government's last three Finance Bills contained 12 sets of regulation-making powers, but this clause alone has 11 and includes the obnoxious subsection that the amendment would delete. On any basis, that should make the Committee wary of allowing the clause to stand part of the Bill—we shall recommend that it votes against doing so.

 

Amendment negatived.

 

Question put, That the clause stand part of the Bill:—

 

Committee divided:Ayes 275, Noes 121.

 

 

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