Tax loophole
The debate began when David Heath, LibDem MP for Somerton and Frome asked What assessment the DTI had made of the impact on small businesses of changes in tax treatment set out in IR591.

Minister for Small Business, Nigel Griffiths, replied: "The growth in the UK economy, at a time when all other leading economies contracted, is the result of the Chancellor's prudent policies in helping businesses to invest. This measure was designed to encourage businesses to retain profits, to reinvest in their businesses and grow.

"Sadly, it was abused as a tax loophole simply to avoid paying tax and national insurance by reclassifying income as dividends. The Budget's impact on small businesses will ensure steady business growth and prosperity that is the envy of our neighbours."

The general approach during Departmental oral questions is to ask a general opening question and then follow up with a more targeted supplementary question, after which other MPs can contribute.

Mr. Heath then pushed the issue with the following supplementary question: "Is this not a problem entirely of the Chancellor's making, by ignoring advice at the time and providing a fiscal incentive for incorporation that resulted in a massive 43 per cent increase in the number of incorporations? Now, the tinker man in the Treasury is reversing the flow and causing a mini boom and bust for small businesses. Do not our small businesses deserve a more stable environment to grow their businesses?"

Minister, Nigel Griffiths, replied: "The hon. Gentleman might want to consult on this matter on his website. He could perhaps take a leaf out of the book of the hon. Member for Kingston and Surbiton (Mr. Davey), who speaks on local income tax for the Liberal Democrats and who, in a survey of his constituents, managed to secure the support of only 12 people for their policy, with 2,400 against. If the hon. Gentleman consults small businesses, he will find that it is widely accepted that the abuse had to be stopped.

"Indeed, had he attended the all-party parliamentary group, he would have heard the director general of the CBI denounce this measure and the abuse that followed from it and say that the Chancellor had no choice but to close the loophole - a view that is widely held by business."

Perverse incentives
Next, the DTI received an attack from their own side. David Taylor (Labour/Co-op MP for North-West Leicestershire, asked: "When does an incentive become an abuse? When the take-up is higher than Treasury officials predict? Having been an accountant and a financial adviser to small businesses in a life before 1997, I think it deeply unfortunate that this measure was needed.

"The Chancellor has flagged up the fact that a review of small business taxation will report in the autumn. Will the Minister feed into that process the fact that small businesses - those acorns that will become the oaks of our future economy - need clarity and certainty? Those are the watchwords, not perverse incentives of the sort that were introduced in April 2002."

Nigel Griffiths replied: "I will certainly feed into that process, and I will feed in the latest Barclays survey, published on 31 March, which shows that 485,000 new businesses started up last year - an increase of 19 per cent. I am grateful to my hon. Friend for all the help and advice that he has given to businesses to ensure that they are now thriving. "

Annoyed
Then the Conservatives had an opportunity to make their point on the issue. Andrew Mitchell Conservative MP for Sutton Coldfield said: "Is the Minister now beginning to get, from the reaction of the House today, the hang of just how annoyed the business community is about this? Having followed the Government's advice on incorporation, are not businesses now faced with extra costs, regulation and taxes, as the Government try to remedy the effects of this blunder? Surely a little contrition, even humility, from Ministers would now be welcome.

Last word on the subject to the Minister. Mr Griffiths replied: "I treat the joint advice from the Conservatives and the Liberal Democrats with the respect that it deserves.

Moving the goal posts
After the Parliamentary exchange, LibDems Small Business spokesman, Brian Cotter MP condemned the Minister’s refusal to take the concerns of small firms seriously. He said: "The Chancellor pulled the rug from beneath thousands of small incorporated companies when he chose to reverse their special tax status in the budget, just two years after he himself tempted them with a 0 per cent rate of corporation tax.

"The smallest companies have now found that the cost of incorporation far outweighs the tax benefits they were promised.

"Many are now struggling to decide whether they should now go through the cost and hassle of disincorporating.

"Despite continually moving the goal posts, Ministers are continuing to sweep the fears of small businesses under the carpet.

"When even the Small Business Minister rejects their calls for stability and simplified taxation, it is clear the Government has no understanding of small businesses in this country."

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Susie Hughes © Shout99.com 2004