Foreign scams 'caused tax rise'

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The tax rate rise for small firms was needed to counter East European scams, Chancellor Gordon Brown has said.

Mr Brown said East European workers were being encouraged to register themselves as companies to avoid paying income tax when they arrived in the UK.

"It is a problem that every country faces but it is a problem that we are going to deal with," he told MPs.

Tory leader David Cameron accused the government on Wednesday of "punishing" small businesses with tax rises.

But Mr Brown insisted, in evidence to the Treasury Select Committee, the increases were necessary to prevent abuses.

Why did he not close that particular loophole, rather than increasing tax on small firms, the vast majority of whom don't incorporate as a tax dodge Federation of Small Business

"We have had a particular issue that we have had to deal with. We have had individuals artificially incorporating as companies for purely taxation purposes.

"One of the problems that we have faced - and had to act upon - is that people who are coming to work in this country are being encouraged to form and work through managed services companies even before they come into this country.

"We face the prospect of schemes that have been marketed right across Eastern Europe encouraging people to set up companies purely for the purposes of avoiding taxation."

He said it was a "problem that every country faces - but it is a problem that we are going to deal with and we are going to deal with in a way that does not penalise the good company that is investing in the future".

He urged the committee to study carefully schemes being marketed "in Eastern Europe and elsewhere sometimes in languages other than the English language" before opposing the changes.

'Disingenuous'

He said the vast majority of businesses in the UK were "completely unaffected" by the Budget proposals and would benefit from a lower rate of income tax.

But he said there was a small number of businesses who were incorporating "purely for tax purposes" and not "investing in the future".

But the Federation of Small Business accused Mr Brown of being "disingenuous".

"Why did he not close that particular loophole, rather than increasing tax on small firms, the vast majority of whom don't incorporate as a tax dodge," a spokesman told the BBC News website.

Mr Brown cut the headline rate of corporation tax from 30p to 28p, saying it was the lowest among Britain's competitors.

But he said the small companies' rate would increased from 19p to 20p from 1 April 2007, with further increases to 21p in 2008 and to 22p in 2009.