Taxes on Small Businesses

Glyn Davies Excerpts

Wednesday 18th October 2017 Westminster Hall

[Robert Jenrick (Newark) (Con)]

It is a pleasure to serve under your chairmanship, Ms Dorries. I am grateful to my hon. Friend the Member for St Ives (Derek Thomas) for bringing this matter to the House’s attention. It is an incredibly important subject.

Like a number of hon. Members in the Chamber today, I came to the House having run a business. Not only was I involved in running businesses, but more importantly, I grew up—indeed, spent most of my life from the age of four—involved to a greater or lesser extent in a family business. Having seen a business founded and run from a kitchen table and known that the roof above your head was on the line when the cash flow was short or times were difficult gives you a respect for small business people and entrepreneurs that never leaves you. That helped to forge my politics and make me a Conservative, because it is the Conservative party that has always respected small business and sought to use what levers we have, including the tax system, to incentivise small business people and entrepreneurs, to reward enterprise and to focus enterprise on the things that really matter, not just for them but for the benefit of everyone—the whole of society. I am talking about innovation, research, development and building a vibrant economy that works for everyone.

I want to talk about a few of the tax changes that have been made since the Government first came to power in 2010, which I know, from the small businesses that I speak to in my constituency, and from talking to the businesses that I have been involved in and even my own family business, have made a huge difference. There are the obvious ones to the headline taxes that we have made such a big issue of over the years. I am thinking of the reduction in corporation tax, which has fallen to 19% and will fall again to 17%. That is an incredibly important, landmark reduction in taxes that affects, of course, big businesses and corporations, but also small businesses that prosper—the directors, founders and shareholders want to see a reward for their hard work. That tax would go up under Labour. The Labour party’s manifesto, or the small print of it at least, said that the small profits tax—for those below £300,000—would rise to 21% in 2020-21.

Capital gains tax is another tax that we have reduced. We increased it initially, at the beginning of the coalition Government, and then accepted that we had made a mistake and brought it down again. We have not brought it to as low a level as applied under the last Labour Government, but we have brought it down, which benefits businesses of all kinds. I would be very concerned if a change in Government led to its rising again.

However, taxes that get far less publicity in the main political debate are perhaps my priority. I am talking about those that, in the long term, benefit innovation, investment and research and development. The most obvious one that I have seen succeed is the research and development tax credit. That tax credit enables businesses large and small to claim back against profits, following the latest development, an extra 130% of their qualifying costs. That was on top of the 100% that we had had in the past, meaning a 230% tax credit for research and development by a business. In fact, there is a tax credit even if there is a loss by that business. That is incredibly generously defined and implemented by the Treasury, particularly for small businesses. Businesses involved in manufacturing—like the business that I have been involved in, through my family, for many years—with a high research and development capability, can usually see tax bills as low as 10%. In fact, it is unusual for a business like that—an SME manufacturing business—to have a tax bill above 10%. That is incredibly important because those are the businesses that, across the House, we care about and want to succeed in this country.

The patent box regime introduced by the last Chancellor of the Exchequer for corporation tax relief is incredibly important. It has led to tax reductions for all businesses that develop new products in manufacturing, software and other areas, and has been generously defined so that SMEs can access it and benefit from it without needing the finest lawyers or tax accountants. The innovative businesses that we want to prosper in our constituencies would struggle to pay more than 10% tax as a result of corporation tax, R and D tax credits and the patent box regime. I am concerned that a future Labour Government would abolish those incredibly important reliefs. Will the shadow Minister, the hon. Member for Bootle (Peter Dowd), comment on the Labour party’s position on the reliefs that businesses the length and breadth of the country rely on?

Entrepreneurs’ relief has increased the lifetime limit on gains for entrepreneurs, which I think was £1 million when we came into government, to £10 million—a lot of money to almost anyone, and certainly to people in my Nottinghamshire constituency. Entrepreneurs of any scale can use that relief to ensure that their lifetime’s hard work—the business that they have built up—can be used for their pension or passed on to the next generation. Someone who owns a business, whether it is a highly successful tech business worth tens of millions or a florist’s in Newark that they have devoted their entire life to, can be sure that when they sell it, they will gain the benefit. Enterprise and hard work have their reward. Above all, the entrepreneurs we care about most in society—the ones who do not take out the profits but reinvest them in their business—can have the confidence that they will be able to use that business in retirement as their pension or nest egg. I ask the shadow Minister what the Labour party intends to do about that relief.

For seven years, we have worked hard to close loopholes that were exploited by private equity and others to direct those funds to people that none of us in this House would want them to go to. We want to ensure that genuine entrepreneurs have the confidence not to take out money from their business, which they could easily do when it becomes successful, but to continue to reinvest it and to ensure that that business succeeds. Reinvestment involves employing more people, expanding, creating new opportunities and driving the economy forward. We should be proud of entrepreneurs’ relief and promote it to entrepreneurs, whatever the size of their business, in our constituency.

Although we have cut corporation tax to the lowest level imposed in any major developed economy, the level of business property taxes is still among the highest in the OECD, as we heard from my hon. Friend the Member for St Ives. I agree with him about the effect of business property taxes, not just on the obvious business owners, such as shopkeepers in the small market towns of Newark and Southwell, but on start-ups; on businesses that need a workshop or retail outlet before they build a presence online; on offices; on manufacturers who want factory space; and on businesses making their first expansion by purchasing new sites and renting new premises. Those businesses suffer most from this, and the Treasury should do further work to understand how we can move into the 21st century. Business is going online and we need a level playing field.

All these lower taxes for businesses are in the debit column, but there are some items in the credit column. The introduction of the national living wage means that small businesses must pay their staff more and make pension contributions. There are enhanced benefits; most recently, the Government announced extra bereavement leave. All these policies have almost universal support in this House. I support them all. Most small business owners want their workers to be treated well, paid the living wage, and so on. However, the policies have put pressure on small businesses, particularly in constituencies such as Newark that have high numbers of catering businesses and small retailers.

There is a fine balance between the pressures that important social changes have brought to our small businesses, and the policies that this Government have introduced, and that we support. If we want to ensure that the living wage continues to rise and working people are better supported, we need low taxes on the other side—corporation tax, capital gains tax, entrepreneurs’ relief, the patent box regime. We need the balance to work in favour of entrepreneurs and risk-takers—the businessmen and businesswomen of this country. That is why we should be deeply concerned about a Labour Government, who would not only follow our lead on social reform and treating workers as they should be treated, but risk diminishing and undermining the tax reforms and reductions that small businesses have come to rely on. That would put the enterprising people of all our constituencies at great risk. Enterprise should have its reward. I believe the Conservative party will always provide that reward for the hard-working constituents we represent.

[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?

--- Later in debate ---

[Glyn Davies (Montgomeryshire) (Con)]

Thank you, Ms Dorries, for calling me to speak in this debate and, indeed, for your generosity in doing so after I was a couple of minutes late in arriving.

I congratulate my hon. Friend the Member for St Ives (Derek Thomas) on bringing this matter forward for debate. I took great interest in his comments about business rates. I cannot say a great deal about business rates, because they are a devolved matter in Wales and it would not be appropriate for me to speak about their effect in Wales here in Westminster. However, I must say that the dramatic changes in terms of revaluation really have put the most horrendous pressure on some of the most important businesses in my constituency.

The one issue that I will raise today is VAT on tourism. It is not a new issue; it has been discussed many times before. However, I want to make sure that it stays on the Treasury’s to-do list, so I have come along to this debate to talk about the impact of that tax on small business.

In Montgomeryshire, and I am sure in most rural areas of Britain, tourism is a massively important industry and a hugely important part of the local economy. Very often, the competition to an area such as my constituency is from overseas. In a lot of overseas countries, which people can choose to go to for their holidays or to visit for a day or a week, the level of VAT is much lower than it is here. The differences might be measured in relatively small amounts of money, but the point is that it is competition and other countries can advertise by saying that they have a lower level of VAT than Britain. The impact of our level of VAT is negative and it is particularly damaging to rural areas that depend on tourism.

As for my constituency, a lot of people know about Powis castle, Lake Vyrnwy and the Lake Vyrnwy hotel, which is a huge attraction, as well as the Montgomeryshire canal and the Welshpool to Llanfair light railway. Those things are why people come and very often they are the reason people come to Montgomeryshire to set up all sorts of businesses. The point that I am making is that tourism is massively important to my constituency, and I am sure that the same is true of every other rural part of Britain.

As I have said, the issue of VAT on tourism, which is at 20% in Britain, has been under discussion for many years and addressing it has been very much part of the work of the all-party group on the tourism and hospitality industry in Wales. Lowering it is one of our major campaigns and has been for a long time. The ambition is to make certain that VAT on tourism is not forgotten. Addressing this issue needs to be part of the Treasury’s considerations.

It would be very enjoyable for me if the Minister stood up today and said that in the Budget in November, the Chancellor will say that he is contemplating a cut in VAT on tourism, but I am not absolutely sure that that will happen. However, it is important that we keep this issue as a consideration for the future. I know it is not a straightforward issue, and that there may well be administrative costs and that we could be accused of having different levels of VAT. We need to know what the benefit to businesses would be of lowering VAT on tourism. Instinctively, we believe there will be a benefit when the competition is lower, but we need to know what that benefit might be.

What I am asking for more than anything else is that the Treasury keeps this issue under consideration, and that we have a proper understanding of and a continuing inquiry into what the benefits of any VAT cut would be, because as we leave the European Union, the freedom to take decisions relating to VAT will change things; it will give us a lot more freedom. Something that I would like to do as a celebration of our leaving the European Union and the ensuing freedom that we will have to vary our VAT is to announce that we are either removing or greatly reducing VAT on tourism in Britain. The economic benefits of doing so would be huge and I hope that it is something the Treasury will keep under consideration.