Treasury defends policy on corporation tax

She insisted, during debates on details of the Finance Bill in the Commons yesterday (Monday), that it would be up to small traders whether to incorporate and comply with the responsibilities of small companies in order to qualify for the new lower rate.

She was responding to a Tory bid, led by shadow paymaster general Howard Flight, to allow individuals or partnerships to qualify for the lower corporation tax rate without having to incorporate.

Shadow paymaster general Howard Flight warned of a potential rush to incorporate among 3.5 million self-employed people would see national insurance contributions go up by 14% and that this and the lower corporation tax rate would result in savings of £3,000 a year on turnover up to £30,000.

Despite the Tory amendment being defeated by 14 votes to nine, Primarolo said she would consider the overall position following the rate cut, but said she was opposed to a reform which would allow unincorporated businesses to imagine what their tax burden would be if they were incorporated and pay that instead.

She said: ‘It would ask small businesses, their advisers and the Revenue to indulge in a fantasy to construct an alternative, hypothetical version of reality, which would make it a bit difficult to write tax legislation.’

Primarolo told Tory MP and accountant Mark Hoban she was aware of the strength of feeling in the unincorporated sector, adding: ‘All I can say is that the government have looked carefully at that. We seek to strike a balance as best we can in not driving business into a particular structure.’

Hoban, MP for Fareham, pointed to the ‘depth of feeling’ among sole traders about the growing fiscal advantages of incorporation. He put the tax advantage for a business with profits of £42,000 in 1996/7 at £1,400 and warned that by 2003/4 it would be about £4,000.

He said: ‘They do not wish to incur the additional; costs of incorporation, but the tax regime is such they feel almost obliged to do so because if they did not they would be significantly worse off.’

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