Comparison of Divisions: Finance (No. 2) Bill 2006 — Abolition of corporation tax starting rate and non-corporate distribution rate — 2 May 2006 at 21:45 with Division No. 104 on 29 Apr 2009 at 15:49

The majority Aye voters agreed to abolish the corporation tax starting rate^[1] in the Finance Bill (No. 2) 2006. They also abolished a number of other measures relating to corporation tax.

Corporation Tax starting rate

Corporation tax is, very simply, a tax on profits made by companies resident in the UK. The starting rate for corporation tax was a measure introduced by Gordon Brown in his 1999 budget^[2]. This meant companies who made a profit between £0 and £10,000 per year were taxed at 10% on those profits.

However, in the 2002 budget Gordon Brown reduced this starting rate to 0%^[3] meaning, of course, companies with profits of no more than £10,000 paid no corporation tax.

Nevertheless, in the 2006 budget Brown decided to get rid of the starting rate entirely^[4]. This meant companies with profits of between £0 and £10,000 would now be charged at the small companies' corporation tax rate which in 2006 was 19%^[5]. Small companies corporation tax rate applies to companies whose profits do not exceed £300,000 per year.

Why scrap the starting rate?

This particular vote was on whether the corporation tax starting rate should be abolished. Labour wanted to scrap the starting rate because when it was set to 0% in 2002 this resulted in a large number of small businesses turning themselves into companies^[6]. Consequently, many of these businesses were avoiding paying corporation tax.

In 2004 the Chancellor introduced a 'non-corporate distribution rate (NCDR)'^[7] to try to recover more tax from businesses who were becoming companies (NCDR was also abolished in this vote). However, in the 2006 budget the government thought this was still a major issue and removed the starting rate entirely. As John Healey MP explains^[8]:

• 'In the Budget in March we therefore stated that we continue to believe that all individuals and businesses must pay their fair share of national insurance contributions and tax, irrespective of legal form.'

The Conservatives and Liberal Democrats both opposed these changes in corporation tax. Mark Hoban MP of the Tories explains as follows^[9]:

• 'In 2002, we supported the introduction of the zero rate, and we oppose its being scrapped in the Finance Bill. We welcomed the relief that it provided for small businesses and object to the burdens that it places on them today. We want to support our small businesses, not attack them when they feel vulnerable because of increased regulation and red tape.'

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• [1] Motion to abolish measures relating to corporation tax, House of Commons, 28 March 2006
• [2] Finance Act 1999, Section 28
• [3] Finance Act 2002, Section 32
• [4] Finance Act 2006, Section 26
• [5] Finance Act 2006, Section 25
• [6] BBC News, 16 March 2004
• [7] Wikipedia entry, retrieved on 2010-02-27
• [8] John Healey MP, House of Commons, 2 May 2006
• [9] Mark Hoban MP, House of Commons, 2 May 2006

The majority of MPs voted in favour of the motion:^[1]

• This House
• regrets the Government's recent statement^[2] outlining the eligibility criteria for Gurkhas to reside in the United Kingdom;
• recognises the contribution the Gurkhas have made to the safety and freedom of the United Kingdom for the past 200 years;
• notes that more Gurkhas have laid down their lives for the United Kingdom than are estimated to want to live here;
• believes that Gurkhas who retired before 1997 should be treated fairly and in the same way as those who have retired since;
• is concerned that the Government's new guidelines will permit only a small minority of Gurkhas and their families to settle whilst preventing the vast majority;
• further believes that people who are prepared to fight and die for the United Kingdom should be entitled to live in the country; and
• calls upon the Government to withdraw its new guidelines immediately and bring forward revised proposals that extend an equal right of residence to all Gurkhas.

As a consequence, the alternative Government motion, which read:^[3]

• This House
• recognises that this Government is the only one since the Second World War to allow Gurkhas and their families settlement rights to the United Kingdom;
• notes that in 2004 the Government permitted settlement rights to Gurkhas discharged since 1997, following the transfer of the Brigade HQ from Hong Kong to the United Kingdom;
• further notes that under these rules around 6,000 Gurkhas and family members have been welcomed to the UK;
• acknowledges that the court judgement of September 2008 determined that the 1997 cut-off date was fair and rational, while seeking clarification of the criteria for settlement rights for those who retired before 1997;
• further notes that on 24 April the Government published new and more generous guidelines for the settlement applications of Gurkhas who retired before 1997;
• supports this revised guidance, which will make around 10,000 Gurkhas and family members eligible to settle in the UK;
• further notes that the Government undertakes actively to inform those who may be eligible in Nepal of these changes and to review the impact of the new guidance within 12 months;
• further notes that the contribution Gurkhas have made is already recognised by pensions paid to around 25,000 Gurkhas or their widows in Nepal that allow for a good standard of living there; and
• further notes that in the year 2000 Gurkha pensions were doubled and that, earlier in April 2009, in addition to an inflationary uplift of 14 per cent., those over 80 years old received a 20 per cent. increase in their pension.

... was never voted upon.

Although this extremely rare Government defeat in an opposition day motion is not binding (has no legal force)^[4] a Government minister made a statement later in the day to bring "forward the date for the determination of the outstanding applications to the end of May."^[5]

• [1] Christopher Huhne MP, House of Commons, 29 April 2009
• [2] Phil Woollas MP, Written Ministerial Statement, 29 April 2009
• [3] Phil Woolas MP, House of Commons, 29 April 2009
• [4] Home Secretary Jacqui Smith blamed for humiliating Gurkhas defeat in the Commons, Daily Mail, 30 April 2009
• [5] Phil Woolas MP, House of Commons, 29 April 2009