The Bill introduces measures on small business investment that will simplify the tax system and ensure that allowances are fair and not open to abuse.
Clause 41 charges corporation tax for the financial year beginning 1 April 2017. Corporation tax is an annual tax approved by Parliament each year. This is an essential provision that enables us to collect tax. The key reform announced in the Budget to support business investment and back Britain’s economy is set out in clause 42, which cuts the rate of corporation tax to 17% with effect from 1 April 2020. I expect that our debate will focus on this provision, so I will start here, before commenting more briefly on the other clauses.
I will begin by setting out our broader strategy on corporation tax. The Government have been clear that taxes should be low but must be paid, and since 2010, we have made progress towards those goals. The main rate of corporation tax was 28% in 2010. By 2020, we will have cut the UK main rate by more than a third to make the UK more competitive and to support growth and investment. It will be one of the biggest boosts British business has ever seen. Further corporation tax cuts will increase the returns companies receive on their investments, and by 2020, corporation tax cuts delivered since 2010 will be saving businesses almost £15 billion a year. This will ensure that the UK has by far the lowest rate of corporation tax in the G20 and make Britain even more attractive to inward investors.
At the same time, we have taken significant measures to clamp down on tax avoidance and aggressive tax planning. The Government successfully helped initiate the G20-OECD base erosion and profits shifting project and worked internationally, including with G20 and OECD partners, to bring this to a successful conclusion in October 2015. We spent the earlier part of today’s debate considering some of the measures introduced in the Bill to address avoidance and evasion, but the Bill also takes further steps elsewhere. Key measures include tackling hybrid mismatch arrangements, introducing a restriction on the tax deductibility of corporate interest and expense, extending the UK’s withholding tax rights over royalties and ensuring non-resident property developers pay tax in the UK on profits they make in this country.
Low corporation rates enable businesses to increase investment, take on new staff, increase wages or reduce prices. This is borne out in receipts data: onshore corporation tax receipts have risen by almost 20% since 2010, despite lowering corporation tax rates. The Treasury and HMRC have modelled the economic impact of the corporation tax cuts delivered since 2010 and those announced at Budget 2016. This modelling suggests that the cuts could increase long-run GDP by more than 1%—almost £24 billion in today’s prices. The corporation tax cuts and other reforms we introduced have completely changed perceptions of the UK tax regime. The UK is now regularly cited in surveys as one of the most competitive regimes in the world.
As the Chancellor has said, in the last six years, the Government and the British people have worked hard to rebuild the British economy. We have worked systematically through a plan that means that today Britain has the strongest major advanced economy in the world. Cutting corporation tax rates has been a central part of the Government’s economic strategy, and that strategy is working.
The UK has been one of the fastest-growing economies in the G7, and the OECD forecasts the UK to be the fastest-growing G7 economy in 2016. There are 2.3 million more people in employment since 2010, and business investment is now 30% higher than it was in 2010. Tax competition is dynamic. In the last few decades, we have seen countries across the world cut their corporation tax rates. We cannot afford to stand still while others rush ahead. The UK needs to be as competitive as possible. A new 17% rate of corporation tax sends out the message loud and clear around the world that the British economy is fundamentally strong and highly competitive and that Britain is open for business. For those reasons, I urge the Committee to support those clause, and to speak in anticipation of what we are about to hear, I hope the Committee will reject amendment 21, tabled by the hon. Member for Wolverhampton South West (Rob Marris), which would cancel the corporation tax cuts.
Let me move on to the other measures in this group. Clause 43 abolishes vaccine research relief from 1 April 2017. This relief is available only to large companies and is claimed fewer than 10 times a year, with a value below £5 million. The Government believe that direct spending programmes such as the recently announced £1 billion Ross fund offer a more effective and flexible approach to supporting the development of medicines and vaccines, and will have a far greater impact.
Clause 44 makes a small change to ensure that the introduction of the research and development expenditure credit does not have the unwanted effect of reducing the amount of relief available to certain small businesses. The expenditure credit replaced the old large company R and D tax credit scheme in 2016, following a period of three years in which both were available simultaneously. We recognise that R and D tax relief plays a vital role in supporting productive investment in the UK. These two changes will ensure that R and D tax support remains effective in meeting this objective.
Clause 65 extends the current time limit for claiming enhanced capital allowances in enterprise zones to eight years from the date on which the enterprise zones are announced. Businesses operating in the 46 enterprise zones across the UK can opt either for a rebate on business rates or enhanced capital allowance covering 100% of investment. Extending the time limit for claiming enhanced capital allowances to eight years will allow all zones to enjoy it for the same duration. I am sure that hon. Members of all parties will welcome this.
Clause 66 will strengthen the existing capital allowance anti-avoidance revisions to ensure that artificial and contrived arrangements cannot be used to gain excessive capital allowances. Capital allowances allow businesses to write off amounts that they spend on plant and machinery against their taxable profits. This reflects the depreciation in the value of the assets over time. When the business disposes of the asset, the legislation is designed to subtract this disposal value so that the allowances are reduced to reflect the net cost of the asset to the business. HMRC has received several disclosures of tax-avoidance schemes where the disposal value has been manipulated to an artificially low level. This leads to excessive capital allowances being received; the tax result does not reflect commercial reality and so constitutes an avoidance of tax. Clause 66 prevents this and ensures that business pays the correct amount of tax.
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Clause 67 will ensure that trading income received in non-monetary form is fully brought into account in calculating taxable profits, income tax and for corporation tax purposes. HMRC consider that existing law and practice already requires that trading and property income received in non-monetary form is brought into account in calculating taxable profits. This is an equitable position arising from a long-held principle established in case law. However, this legal principle has been challenged in some instances. Clause 67 will insert a rule to provide that the value of the moneys’ worth is to be brought into account for the purposes of calculating the profits of the trade. This will have no effect on the vast majority of trades and will put beyond doubt that such income is taxable in full.
Clause 68 repeals the renewals allowance legislation. This allowance provided a tax relief for spending by a business on the replacement and alteration of trade tools. The relief is no longer available to businesses, and relief was repealed from the effective date on 1 April 2016 for companies and on 5 April 2016 for sole traders. The clause removes a relief that predated capital allowances. The number of traders using the relief was small, and there has been some evidence of abuse. Alternative means of tax relief for spending by businesses is available
through the capital allowances regime and there is new relief for residential landlords for costs incurred in replacing domestic items such as furniture and appliances.
Clauses 69 and 70 make changes to the wear-and-tear allowance that currently allows landlords fully furnishing properties to claim a 10% tax deduction of their net rental income when calculating the taxable profits each year. The allowance can be claimed regardless of the actual costs incurred on replacements and can be claimed even when a landlord has not actually made any replacements. The changes made by clauses 69 and 70 will replace this with a new allowance, permitting all landlords to deduct the actual costs they incur on replacing domestic items such as furniture and appliances. In conclusion, this change will create a fairer system for landlords and for tenants where the genuine costs of replacement can be reclaimed against income tax.
Clause 71 makes changes to incorporate the revisions to the OECD transfer pricing guidelines secured as part of the joint OECD /G20 base erosion and profit-shifting project into UK domestic law. The beneficial revisions to the OECD guidelines ensure that they are refocused on appropriately rewarding real economic activity within a multinational enterprise. This is in line with the key principle that profits should be recognised where economic activity takes place. In addition, the revisions provide tax authorities with a new tool better to investigate the pricing of unique intangibles where there is no independent information with which to ascertain their value, ensuring that tax bases cannot be eroded through the mispriced transfer of the significant assets. Clause 71 will also widen the scope of materially updating the OECD guidelines, which can be incorporated within UK law by way of a Treasury order. Together, these changes will further support the work undertaken by HMRC to tackle aggressive transfer pricing positions taken by some multinational enterprise groups and ensure that these are swiftly incorporated into UK legislation.
As I have outlined, these clauses take a number of important steps to make our business tax environment one that better supports enterprise and growth, and targets reliefs where they are effective in advance of this Government’s plans for a successful economy. They implement OECD guidelines that the UK has championed on transfer pricing, and take other steps to clamp down on avoidance. They withdraw outdated and little-used allowances in favour of broader reliefs and spending programmes on vaccines. They support Britain’s enterprise zones, set up by the Government to boost growth and employment in key areas of opportunity. By bringing down the headline rate of corporation tax to 17%—the lowest in the G20—we are making it clearer than ever that Britain is open for business. These clauses should therefore stand part of the Bill.