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Mr. Beith : I beg to move amendment No. 1, in page 12, line 47, at end add

and shall have effect as if there had been added to section 25(1)(b) of the Capital Allowances Act 1990 after "thereto" the words

"The balance so arrived at shall be up-rated by the rate of inflation for the chargeable period, as given by the gross domestic product deflator, in respect of any chargeable period beginning on or after 1st April 1992".'.

I shall be brief, because I do not share the ambition of the hon. Member for Brent, South (Mr. Boateng) to fight the Bill line by line, tooth and nail. It does not justify that, and the hon. Gentleman will have some difficulty identifying more than half-a-dozen clauses to which anyone could take strong exception. It is just not that kind of Bill. Other legislation might justify that sort of treatment, but not this.

The amendment suggests a sensible way of changing corporation tax arrangements to protect companies from inflation adding to their corporation tax burden. Providing a long-term, stable corporation tax framework is more likely to provide the climate for investment than one-off incentives designed to promote manufacturing investment in a particular year. I hope that the Government share our objective, even if they feel unable to agree to the amendment.

The present tax system--certainly corporation tax--is distorted by inflation. When the Government's inflation policy goes wrong, business is hit not only by higher prices and higher interest rates but by a higher real corporation tax burden. That distortion can itself lead to lower investment.

The most pernicious aspect relates to investment allowances. Companies can only write down a machine's historic cost, not its current cost, which creates a disincentive to invest. Removing that distortion would be a simple and sound long-term reform of greater value than one-year investment of the kind that the Committee has rightly just voted against, by a substantial majority.

With the Chancellor of the Exchequer in his place, the Financial Secretary might feel obliged to argue that there will not be any inflation, because the Government will remove that scourge from the economy. Even the Chancellor has taken to talking about not the zero inflation rate which the Prime Minister repeatedly mentioned, but a target of 2 per cent. Some have even criticised him for setting so ambitious a target, with the downside that it has in terms of some of the more uncomfortable disciplines associated with it. I share his desire to set a firm target, and would be inclined to go for the zero target rather than for 2 per cent.

Industry has been down this road before when it was told that it could make reforms because there would be no inflation. Nigel Lawson thought and said that in 1984, but inflation took off after reforms led to the removal of the stock allowances. Business was penalised twice as a consequence of inflation.

It would be more sensible to introduce this reform when inflation is low because that would reduce its cost. Its introduction now would also show that the Government are determined to keep inflation low. If inflation rose, the cost of that reform would increase. It therefore makes a great deal of sense to make the change now. The corporation tax system is vulnerable to distortion in other ways because there is no stock relief, and because nominal rather than real interest rates are deductible. We

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simply propose one change in the way in which inflation is accounted for in that system. It is a modest change, which would provide more stability for business and encourage more investment decisions to be made on the right grounds rather than because they would incur one-year tax relief. Those decisions would be made because they represented good economic, business sense. I commend the amendment to the Committee.

Mr. Dorrell : The hon. Member for Berwick-upon-Tweed (Mr. Beith) described the amendment as a modest measure and that is a fair description. I shall make a brief reply, and I am afraid that I shall not suggest to the House that we accept the amendment.

The amendment would adjust capital allowances to allow for inflation, presumably on the ground that the current write-down allowance for tax understates the true cost of using the asset. That is not true because, as I quoted earlier, my right hon. Friend the Chancellor said in the Budget statement :

"on average, the current tax rules allow capital investment to be written off more quickly than economic depreciation would imply".--[ Official Report, 10 March 1992 ; Vol. 205, c. 750.]

The 25 per cent. write-off allowance already allows for inflation, plus a bit more. The hon. Gentleman's assumption is wrong. There is another reason why this would not be a desirable amendment. I refer to the hon. Gentleman's confidence, or lack of it, that inflation will be brought under control. I am not sensitive about it and I simply remind him that our monetary policy is now set in the context for which the Liberal party argued for many years on the ground that it would be a more successful counter-inflation policy. The pound is in the exchange rate mechanism and we share the hon. Gentleman's confidence that his policy will deliver low inflation. The amendment will, therefore, be unnecessary.

Mr. Beith : I am unconvinced and I believe that if the Government anticipate a successful anti-inflation policy, they should recognise the reasonable cost of the amendment. Business is dissatisfied with the extent of the write-down allowances and it does not feel that the present system adequately allows for inflation. I therefore invite the Committee to make a sensible change to the corporation tax system.

Question put, That the amendment be made :--

The Committee divided : Ayes 125, Noes 291.

Division No. 29] [7.23 pm

AYES

Ainger, Nicholas

Ainsworth, Robert (Cov'try NE)

Allen, Graham

Anderson, Donald (Swansea E)

Ashton, Joe

Banks, Tony (Newham NW)

Barnes, Harry

Battle, John

Beckett, Margaret

Beggs, Roy

Benn, Rt Hon Tony

Bennett, Andrew F.

Benton, Joe

Betts, Clive

Boyce, Jimmy

Boyes, Roland

Bradley, Keith

Brown, N. (N'c'tle upon Tyne E)

Bruce, Malcolm (Gordon)

Callaghan, Jim

Campbell, Ms Anne (C'bridge)

Campbell, Menzies (Fife NE)

Campbell-Savours, D. N.

Chisholm, Malcolm

Cohen, Harry

Corbyn, Jeremy

Cousins, Jim

Cox, Tom

Cryer, Bob

Cummings, John

Cunliffe, Lawrence

Cunningham, Jim (Covy SE)

Dafis, Cynog

Darling, Alistair

Davies, Bryan (Oldham C'tral)

Davis, Terry (B'ham, H'dge H'l)

Dixon, Don

Dunwoody, Mrs Gwyneth

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Column 366

Enright, Derek

Ewing, Mrs Margaret

Fatchett, Derek

Flynn, Paul

Foster, Donald (Bath)

Gilbert, Rt Hon Dr John

Godman, Dr Norman A.

Godsiff, Roger

Golding, Mrs Llin

Graham, Thomas

Griffiths, Nigel (Edinburgh S)

Griffiths, Win (Bridgend)

Gunnell, John

Hall, Mike

Harvey, Nick

Hendron, Dr Joe

Heppell, John

Hinchliffe, David

Hogg, Norman (Cumbernauld)

Howarth, George (Knowsley N)

Hoyle, Doug

Hughes, Roy (Newport E)

Hughes, Simon (Southwark)

Hutton, John

Illsley, Eric

Jackson, Ms Helen (Shef'ld, H)

Janner, Greville

Johnston, Sir Russell

Jones, Barry (Alyn and D'side)

Jones, Ieuan (Ynys Mo n)

Jones, Ms Lynne (B'ham S O)

Jones, Martyn (Clwyd, SW)

Jones, Nigel (Cheltenham)

Kennedy, Charles (Ross, C & S)

Kennedy, Ms Jane (L'p'l Br'g'n)

Khabra, Piara

Kirkwood, Archy

Loyden, Eddie

Lynne, Ms Liz

McKelvey, William

McLeish, Henry

McMaster, Gordon

Madden, Max

Maginnis, Ken

Mahon, Alice

Mallon, Seamus

Mandelson, Peter

Marek, Dr John

Marshall, David (Shettleston)

Marshall, Jim (Leicester, S)

Martlew, Eric

Meale, Alan

Michie, Mrs Ray (Argyll Bute)

Milburn, Alan

Miller, Andrew

Molyneaux, Rt Hon James

Morley, Elliot

Morris, Rt Hon A. (Wy'nshawe)

Morris, Estelle (B'ham Yardley)

Mudie, George

O'Brien, William (Normanton)

Paisley, Rev Ian

Pickthall, Colin

Prentice, Ms Bridget (Lew'm E)

Radice, Giles

Robinson, Geoffrey (Co'try NW)

Roche, Ms Barbara

Rooker, Jeff

Ross, William (E Londonderry)

Salmond, Alex

Simpson, Alan

Skinner, Dennis

Spearing, Nigel

Steel, Rt Hon Sir David

Steinberg, Gerry

Strang, Gavin

Taylor, Rt Hon D. (Strangford)

Taylor, Matthew (Truro)

Trimble, David

Walker, A. Cecil (Belfast N)

Wallace, James

Wardell, Gareth (Gower)

Wareing, Robert N

Wicks, Malcolm

Winnick, David

Wise, Audrey

Wright, Tony

Tellers for the Ayes :

Mr. A. J. Beith and

Mr. Paul Tyler.

NOES

Adley, Robert

Ainsworth, Peter (East Surrey)

Aitken, Jonathan

Alexander, Richard

Alison, Rt Hon Michael (Selby)

Allason, Rupert (Torbay)

Amess, David

Ancram, Michael

Arbuthnot, James

Arnold, Jacques (Gravesham)

Arnold, Sir Thomas (Hazel Grv)

Ashby, David

Aspinwall, Jack

Atkinson, Peter (Hexham)

Baker, Rt Hon K. (Mole Valley)

Baker, Nicholas (Dorset North)

Baldry, Tony

Banks, Matthew (Southport)

Banks, Robert (Harrogate)

Bates, Michael

Batiste, Spencer

Bellingham, Henry

Bendall, Vivian

Beresford, Sir Paul

Biffen, Rt Hon John

Blackburn, Dr John G.

Body, Sir Richard

Bonsor, Sir Nicholas

Booth, Hartley

Boswell, Tim

Bowden, Andrew

Bowis, John

Boyson, Rt Hon Sir Rhodes

Brandreth, Gyles

Brazier, Julian

Bright, Graham

Brooke, Rt Hon Peter

Brown, M. (Brigg & Cl'thorpes)

Browning, Mrs. Angela

Bruce, Ian (S Dorset)

Burns, Simon

Burt, Alistair

Butcher, John

Butler, Peter

Butterfill, John

Carrington, Matthew

Carttiss, Michael

Cash, William

Channon, Rt Hon Paul

Chaplin, Mrs Judith

Clappison, James

Clark, Dr Michael (Rochford)

Clifton-Brown, Geoffrey

Coe, Sebastian

Colvin, Michael

Congdon, David

Conway, Derek

Coombs, Anthony (Wyre For'st)

Coombs, Simon (Swindon)

Cope, Rt Hon Sir John

Cormack, Patrick

Couchman, James

Cran, James

Currie, Mrs Edwina (S D'by'ire)

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