Clause 6 - Main rate for financial year 2015

Finance Bill – in a Public Bill Committee am 11:30 am ar 16 Mai 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Good morning, Mr Amess. It is a pleasure to serve under your chairmanship. I cannot think of anywhere I would rather be than here on the Finance Public Bill Committee.

All hon. Members are ready and raring to go, although I am not sure we should remove all items of clothing for comfort. I am sure we gentlemen should continue to wear our neck ties. You would not want the Committee to go all Conservative modernist, Mr Amess. I wonder whether you remember the good old days, when the Conservatives were in the centre ground. The hon. Member for Grantham and Stamford (Nick Boles) was the main exponent of the open-neck look. How long ago those days seem now that the Conservatives have firmly moved back to the right of the political spectrum. Anyway, I digress. [Interruption.] Well, one has to have a go at such things.

The clause takes us back a little to before the Committee adjourned, when we were debating the clauses relating to corporation tax changes. The Exchequer Secretary is not with us today, but he led that debate opposite my hon. Friend the Member for Kilmarnock and Loudoun last time the Committee sat. I will ask the Economic Secretary a few questions to test his knowledge of the Treasury’s corporation tax strategy. I am not sure who is in charge of such things, but I am sure he has a strong grasp of the matter.

We hope that reducing corporation tax will have an economic benefit. After all, the previous Labour Administration reduced corporation tax and there is  clearly a good case to be made for some of that strategy. However, we now feel very strongly that we require evidence for the Government’s continuing changes, particularly relating to 2015, which is the subject of the clause. The clause will put corporation tax at 20% of company profits, other than ring-fenced profits, which are, of course, addressed elsewhere in the Bill.

Obviously, there is some sort of relationship with levels of personal taxation and income tax. After all, it is sometimes said that corporation tax could almost be regarded as deferred income tax, because corporations are ultimately owned by individual shareholders, who, at some level, pay tax on any income that comes downstream from corporate profits. The Economic Secretary may wish to elaborate on the argument that there is a point of alignment here with the 20% rate. Has a strategic choice been made on rates of income tax? Last time we sat, the Committee debated alignments with the small profits rates of smaller firms, but did income tax go through the Treasury’s mind when it was thinking about these points?

I do not think that the Treasury has ever produced a firm analysis of how further cuts to corporation tax would definitely feed through into economic growth. There has been all sorts of conjecture, speculation and anecdotal examples from various hon. Members, but we need to see hard evidence to be certain that such instincts are correct. I want to press the Minister on whether further falls in corporation tax will undoubtedly feed through into positive economic activity or whether, as some suspect, corporate surpluses will be stockpiled if the tax strategy is not correct?

I want to ask the Minister about his understanding of inward investment and outflows of investment from the UK relative to other jurisdictions. The corporation tax rates set for 2015 will not exist in isolation; other national jurisdictions set their own. Labour tax practitioners are anxious that if we are not careful, the UK will get into a vicious circle of a constant chase for lower rates, in which countries engage in an arbitrage process of always outbidding one other, with the result that public services and public investment lose out.

It may well be that the United Kingdom finds itself in a more tax competitive position than other jurisdictions, but that is not necessarily guaranteed because they are perfectly able to reciprocate by following suit or even outbidding the United Kingdom, as we have seen in some jurisdictions over the past decade or two. Any observer of international tax rates would say that those rates have tended to flow downwards across the main developed jurisdictions. Has the Minister taken stock of where that flow will end? Will the main developed nations settle on an equilibrium as a natural level of corporation tax, or will that circle be pursued in perpetuity, which would obviously affect the Treasury’s strategy?

Famously, the Republic of Ireland has a corporation tax level that is relatively low compared with those of other countries. It has been under pressure, particularly from Germany and other member states of the European Union, under the rescue programme for countries in the eurozone that require financial assistance. There was speculation about Germany or other nations putting pressure on Ireland to move its corporation tax strategy in an alternative direction. It is obviously unusual for a  nation state that has a particular tax strategy to come under external pressure from its partners and other nations.

Thankfully, we stayed out of the euro, as a result of decisions taken by Labour—[Laughter.] We will see where the Chief Secretary to the Treasury—the Minister’s good colleague—takes the Treasury, because he spent 10 years of his life campaigning for membership of the euro, but I do not want to digress again. We need to know what evidence the Treasury has that the strategy for a cut in corporation tax in 2015 will yield positive economic benefits, rather than essentially being lost by our fuelling an international race to lower levels.

I have seen the recent statistics on inward foreign direct investment, but there is a lag in relation to when they are collected. While this Government have been in power and perhaps pursuing this particular strategy, our inward foreign investment levels have fallen back somewhat compared with previous levels. Indeed, as far as I can see, the amount of British money that has been invested in foreign jurisdictions has increased. The figures show that in 2011 foreign companies invested £31.9 billion in the UK, which was a fall compared with the 2010 figures and the lowest investment level since 2004.

Perhaps the Minister can give us the most recent statistics that the Treasury has about FDI. He could make a case for his corporation tax strategy if he said that inward investment into the UK had been somehow connected with the levels of corporation tax that the Government had been pursuing. However, as far as I can see from this set of statistics that the House of Commons Library has produced, in 2011 outward FDI by UK companies was £68 billion, an increase of £42 billion from 2010, which is a phenomenal increase in the amount of money leaving the UK and going elsewhere. One could make an assumption—there might be a simple correlation rather than a causal effect—that British companies were choosing to invest net higher levels outside our own jurisdiction, for whatever reason. Perhaps corporation tax is part of that equation, but we need to get a view from the Minister about what is happening with those particular choices.

Our preference would be that British money and British companies choose to invest in the future prosperity of British firms and British endeavours, supporting UK enterprise and increasing job creation in this country. I know that Government Members have a terrible blind spot when it comes to jobs, economic growth and these particular questions.

Kwasi Kwarteng (Spelthorne) (Con) British jobs for British workers.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

That is an interesting intervention from the hon. Gentleman. Perhaps he wants to tell us if that is now his policy. If it is his policy, I am not sure that the strategy is borne out by the evidence before us.

Nevertheless, the Minister should tell us a little more about this issue. If he does not have the figures on inward flows of investment and outflows from the UK, I would be more than happy for him to write to the Committee to give us any more information. That would be extremely helpful.

I also want to take the opportunity to ask the Minister to clarify what will happen on corporation tax in 2015 in relation to the banking sector. We touched on some  of these issues a little in the debate on clause 4, but we did not get to the bottom of the issue of the other tax that interplays with corporation tax. As part of the Government’s strategy, they have introduced a levy on the banks, at a puny, knock-down rate. They said that it was supposed to yield £2.5 billion annually, but it has totally failed to bring in the sums that the Prime Minister promised that it would. In fact, last year it brought in only £1.6 billion, which represents a pretty big shortfall. Think what that extra £900 million could have done for public services and investment if they had hit that £2.5 billion target. The year before, I think that only £1.8 billion was brought in.

The Government said that they were going to offset the corporation tax cuts for the banks with an adjustment in the bank levy. It does not appear, at first glance, that that is what has happened in the last couple of financial years. I want to press the Minister to give us a bit more detail about how exactly this particular change for 2015, as set out in clause 6, will work. What is the formula that feeds back through into the bank levy in terms of the way that that has been calculated? Obviously, if there is going to be a 20% rate in 2015, adjustments to the bank levy will need to be made, but I do not see directly in the Bill where that offset is being made. I want to see a straight line—maybe even a dotted line—from one bit of clause 6 to those other provisions, so we can be certain that that nice, juicy corporation tax cut, which I am sure the banks are all rubbing their hands at and looking forward to, will be clawed back through the bank levy increases planned elsewhere.

If our constituents knew that the Minister and the Chancellor of the Exchequer were giving a corporation tax cut not just to many large multinational corporations but particularly to the banking sector, I think they would be very concerned. They are not getting a tax cut this year. Our constituents are being clobbered by the reductions in tax credits and the increase in VAT. [Interruption.] We should be thinking about the VAT increase as a petrol tax, as my hon. Friend the Member for Cardiff South and Penarth suggests.

What is the formula? How does it feed into the bank levy? I am assuming that if the economy improves by 2015—although heaven knows—we might have some bank profitability by that time. Perhaps the Minister can give us a sense of what it would be. If we have bank profitability by 2015, presumably there will be corporation tax on those profits. Ultimately, the problem with corporation tax is that if businesses are not doing very well or are making losses, that yields no corporation tax. Again, it would be helpful for the Committee if the Minister could give us a projection of what he anticipates the corporation tax yield will be in 2015. Perhaps that will give us a sense of the Government’s confidence in business profitability by the time of the next general election; the rate will kick in about four weeks before that, during the campaign. What is the Treasury’s projection of yield from corporation tax as a result of the change?

I know that Government Members often like to refer to what is sometimes known as the Laffer curve, their slightly antediluvian theory, used with the 50p rate in tax, that tax can be reduced to low levels and somehow miraculously yield massive revenues as a result. They do  not call it Laffer for nothing; there is a reason why it has that particular nomenclature. Speaking of Laffer, I give way to the hon. Member for Braintree.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree 11:45, 16 Mai 2013

I am a protégé and acolyte of Professor Laffer. Does the hon. Gentleman not agree that one must look at the evidence? The evidence indicates that when the Thatcher Government reduced the punicious—sorry, punitive, and pernicious—tax rates of the Labour Government of the late 1970s, taxation on unearned income was cut from 98% and other taxation was cut from 60% to 40%. As the tax rates were reduced, the Exchequer’s tax take increased. As an economist and somebody involved with the Treasury, he should recognise that what is important is not political point-scoring but ensuring that we raise the maximum amount of revenues possible from taxation.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

My hon. Friend the Member for Kilmarnock and Loudoun made this point in previous debates. Obviously, if the tax rate is set at 100%, it will have a pretty devastating effect on the revenue yield, but if the rate is 0%, obviously, there will be no revenue, hence the issue of what happens in the mid-ranges in between.

What Professor Laffer did not factor into his analysis was forestalling people’s behavioural change when it comes to particular rates of tax. We have seen clear evidence that behaviour has been distorted by the knowledge that the 50p rate would be reduced to 45p. Many wealthy individuals, or high net worth individuals as they are sometimes called, held back until that 50p rate fell to 45p and decided to give themselves a big bonanza pay packet on the flipside of that tax year. If only the Government had given the 50p rate a proper run, we would have seen a significant benefit for taxpayers, but they were far too generous to the millionaires of this country.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I sense the hon. Gentleman’s strong feeling for wanting the 50p rate and ensuring that it is raised back up from 45p to 50p. Does he regret that during their 13 years in office the last Government did not raise the higher level of taxation to 50p until their last six weeks?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am glad that the last Government put the rate at 50p, which was fair and popular. Our constituents, including those of the hon. Gentleman, agreed with that move. I take it from his representation that he wanted a 50p rate far earlier and that he thought it should have been introduced the previous year, or the year before that. I am fascinated that Conservative Members were itching for that 50p rate so much sooner than when it was introduced.

Photo of Sheila Gilmore Sheila Gilmore Llafur, Edinburgh East

Enthusiasm for the 50p rate is sometimes overwhelming in this debate. Regardless of that, the context in which the decision was made on the 50p tax rate was very much part of a deficit reduction programme, and many of my constituents believe that if we are to have deficit reduction, everyone must play their part in that. The context was substantial cuts in various forms of social security benefits, tax credits and so on, and it was reasonable in that context to raise the tax to 50p.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Coming back to clause 6 and the corporation tax rates, our constituents want to know that the Treasury is being fair in its approach to taxation across a whole set of different classes of taxpayer in different circumstances. Many of our constituents may think that we should support business and ensure that that we get the tax rate right, but they are paying far more than in 2010—the extra cost of tax increases and cuts in various benefits is £891 for a typical family compared with 2010—and when they see the Government’s strategy of cutting taxes for millionaires and making generous provision for banks and so on, they want to know sort of priorities the Government have. That is why, with corporation strategies such as this, we need to see evidence that they are yielding results. So far, the economic performance of the last three years has not in any way verified that the Government’s tax strategy is yielding economic benefits.

That is the point I want to put to the Minister today. I want him to answer questions about the bank levy and to know how he is calculating that formula to make that offset. I want to see the evidence of foreign direct investment, and above all I need to hear from the Minister what evidence he has that this corporation tax strategy will be beneficial for the economy. Is it ideology or a theory? What evidence does he have? Those are the points I wanted to make about the clause.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

May I say, Mr Amess, that it is a pleasure, as always, to serve under your chairmanship? I look forward to taking part in the Committee. I will come to some of the specific questions asked by the hon. Member for Nottingham East in a moment. First, I will introduce clause 6, which sets out the main corporation tax rate and the charge for the financial year beginning on 1 April 2015. The rate will be reduced to 20%, as announced in Budget 2013. It will be the joint lowest rate in the G20—lower than almost all our key competitors, including the Netherlands, France, Germany, the United States and Japan. Among those last two countries, key competitors of Britain in the global race, the US has a corporation tax rate of 40% while Japan has a rate of 38%.

We have just heard the hon. Gentleman’s views regarding the cut, and there has been an interesting discussion on why the Government are reducing corporation tax rates and the impact on businesses and investment across the country. A stable tax system is vital for business. Legislating now for the rate reduction in 2015 will provide the certainty that is needed for effective business planning. Next year’s Finance Bill will legislate to unify the small profits rate, which is already 20%, with the main rate from April 2015, so that there is a single headline rate of corporation tax—a significant simplification of the tax system.

I was asked what evidence there is of the benefits of this Government’s strategy of making Britain more competitive and more open for business. The announcements made by global multinationals including some of the largest companies in the world, and their reactions to the Government’s policy, including the policy to reduce corporation tax rates and make Britain’s tax rates more competitive, show how confidence in Britain is being boosted and how our policy is generating jobs and investment. WPP, the world’s largest advertising  agency, has announced that it will move its headquarters back to Britain. Other companies, such as Aon, Seadrill, Ensco, Lancashire and Rowan, have announced that they will move their global headquarters to Britain, generating jobs and investment. That is firm evidence that the Government’s changes are already making a difference.

The hon. Gentleman asked about foreign direct investment. The most recent annual report on FDI published by Ernst and Young states that the UK is the highest recipient of FDI in Europe. One reason it cited was the changes that the Government are making in cutting tax rates and making Britain more competitive.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The Minister is good on statistics, which his Department provides him with a great number of. However, I was looking not for a snapshot volume of foreign direct investment but for the direction of flow, which we have seen reducing. Of course, the UK, being a large economy, will have a large amount of FDI, but what is happening with it? The 2011 figures were disappointing. What has been happening more recently? I genuinely do not know the answer to that.

The Minister says, anecdotally, that there is this company coming and that company over here. It is not methodologically rigorous of him to pick one or two companies as an example of the success of a whole policy. We need to get the whole picture. Companies will come, but other companies will leave. What is the flow? I want a better statistic from the Minister.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

The latest numbers on FDI published by the Office for National Statistics—for the quarter ending 2012—showed that direct investment abroad by UK companies, which the hon. Gentleman also talked about, had fallen by £12 billion to £3.2 billion. I think he suggested that the figure was going up, but the ONS figures show something to the contrary. Direct investment into the UK increased by £0.3 billion to £7.2 billion. Clearly the number is heading in the right direction, which I am sure is a direct result of this Government’s policy to promote Britain and create more jobs and investment.

Photo of Stephen Doughty Stephen Doughty Llafur, De Caerdydd a Phenarth

What direction does the Minister think those figures would go in if we were to leave the European Union?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

That is not the subject of the debate.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

It is not the subject of this debate, and I do not think my tweets are the subject of this debate. It is important that we have a debate on Europe, but this is not the time or place for it.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree 12:00, 16 Mai 2013

My hon. Friend was correct to point out the extremely high corporate tax rates of the United States and of Japan. While we are in Europe—as we still are—the competitive landscape within the European Union has to look attractive for the UK. It is worth  noting that the corporate tax rate in Belgium is 34%, in France, it is 33%, in Italy, it is 32% and in Germany it is almost 30%. In that competitive landscape, is it not best to attract businesses within Europe to come to, settle in and have their headquarters in the UK, so that UK plc benefits from those tax revenues?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

As always, my hon. Friend is absolutely right. He understands business, as Government Members do; that is why we are taking these measures. It is no surprise to me that Opposition Members find it hard to understand how to attract business and investment to Britain.

It might help to quote other people who have direct experience of the business world. The director-general of the CBI said:

“An extra one penny cut in corporation tax will...make the UK one of the most internationally competitive locations in which to do business.”

The director-general of the British Chambers of Commerce said:

“All companies will cheer the news that Corporation Tax will fall to 20% by 2015. This is an important fillip to business confidence, particularly among global investors.”

Those people know a lot more than the hon. Member for Nottingham East about how to attract business into Britain.

The hon. Gentleman also raised the issue of the bank levy. As he points out, the Government have rightly increased the bank levy alongside each cut in corporation tax to ensure that banks do not benefit from the decrease in the corporation tax rate. In the last autumn statement, we increased the bank levy to 0.13%, effective from January 2013. In Budget 2013 we announced that the rate would increase further, to 0.142%, from 1 January 2014. It is right to take those measures and ensure that banks are making their contribution to the fiscal consolidation process.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

What will be the commensurate increase in 2015-16? As I understand it, the clause relates to corporation tax rates from the financial year 2015-16. The Minister said that he would offset that for the banks with a change in the bank levy, but he has not said what the bank levy rate will be in 2015-16.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

The hon. Gentleman raises a good point. We will set that out in due course. We have said quite clearly that any reductions in the corporation tax rate will not be passed on to banks, and that will be achieved by increasing the bank levy rate.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Let me get this absolutely clear. The Minister and the Government are telling the banks that they will get a corporation tax cut from April 2015, to 20p, but the Minister is not prepared to say at this stage what the increase in the bank levy will be in 2015-16. Have I got that factually correct?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

The Government have made clear how we intend to cut the corporation tax rate, and in Budget 2013 we set out our plans to increase the bank levy rate. We will announce any further changes in due course. The purpose of this debate is not for me to announce tax changes that will be made clear in future Budgets.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am surprised at that, because there was a clear commitment by the Chancellor of the Exchequer—for it was no less than that right hon. Gentleman—that the banks would have their corporation tax cut recouped by a commensurate increase in the bank levy. The Minister is clearly not prepared to tell us what the bank levy will be for 2015-16. Will he at the very least guarantee to the Committee, with a cast-iron guarantee, to quote the Prime Minister

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Copper-bottomed, as well as cast-iron. Will the Minister guarantee to the Committee that the bank levy will increase in 2015-16?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

We have always made it clear that any cuts in corporation tax will not be passed on as a benefit to banks, which we ensure by increasing the bank levy. That is absolutely the case for the cut in corporation tax that will take effect in 2015-16, as there will be a further increase in the bank levy. To set the levy, we look at the most up-to-date forecast of corporation tax to ensure that it is set based on the best information available.

I would like to point out that the hon. Gentleman and his colleagues have, on a number of occasions, made the case for replacing the bank levy with a repeat of the bankers’ bonus tax, which, incidentally, would have raised less money than the levy in each year that the levy has been in effect. It is intriguing that he set out that the revenue that he thinks a bankers’ bonus tax will raise £1.6 billion when last year’s bonus pool was £1.8 billion—[Interruption.]. I will give way to him if he wants to confirm that his intention would be to have a 90% tax rate, or thereabouts, on bankers’ bonuses.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I dispute the Minister’s statistics, which are dodgy in the extreme. He needs to take a look at that. What statistic is he using for bankers’ bonus payments for 2012-13? Is he really certain that those bonuses were £1.8 billion? I understood that Her Majesty’s Revenue and Customs’ figures were quite different? Will he put that on the record?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

A moment ago, the hon. Gentleman was commending my use of statistics, but now, when it does not suit him, he does not like it. The latest numbers from the banks are that approximately £1.8 billion was paid in bonuses in the latest year. If he believes that he can raise £1.6 billion from £1.8 billion, he must be suggesting a tax rate similar to that imposed by Labour in the late 1970s.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

What is the Minister’s source for that figure for 2012-13?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

I will be more than happy to provide the hon. Gentleman with my source.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

I will write to the hon. Gentleman and provide him with that source. If he is not comfortable with the source, he is at liberty to raise that with me.  I notice he has not answered my question about how, on a £1.8 billion base of income, he thinks that we can raise £1.6 billion. His bankers’ bonus policy has just fallen apart.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

When my hon. Friend writes to the hon. Member for Nottingham East with the details on how much the bankers’ bonuses were worth, will he include how much tax was paid on those bonuses in personal income tax, national insurance and employer’s national insurance?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

My hon. Friend raises a good point; it would be useful to include that information and I will seek to do so.

The hon. Member for Nottingham East raised questions on what I think he loosely described as tax fairness and he talked about the impact of tax changes. I know, Mr Amess, that this debate is about corporation tax, but I hope that you will allow me briefly to point out the tax cuts that the Government are making.

Through the personal allowance, there is a cut for 24 million people. When that allowance hits £10,000, more than 3 million people will be taken out of taxation altogether. All the individuals who enjoyed Labour’s 10p tax rate, which they then abolished, will now be paying a zero rate of income tax.

As for taxation on the highest earners, we made changes designed to ensure that the wealthiest make the biggest contribution to fiscal consolidation. The increase in the capital gains tax rate from 18% to 28% is fair not only because it makes the richer in society contribute more. It also ensures, as my right hon. Friend the Chancellor of the Exchequer said in yesterday’s debate, that we have got rid of a situation in which the cleaners in hedge fund offices were paying higher tax rates than the hedge fund managers themselves.

In conclusion, reducing the main corporation tax rate to 20% in 2015-16 will further reduce the cost of new investment, incentivise activity across the economy and provide further support for the Government’s ambition to achieve the most competitive tax system in the G20.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.