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Mr. O'Neill: I am interested in the hon. Gentleman's point. There is another aspect to that problem. A power station can be built with different generating sets added over time. To get the show running and to generate some income, as well as electricity, the first set is put in and
then funded out of the next one, which may come several years later. A continuing programme of expansion can be carried out under the umbrella of the original contract.
Mr. Smith: If it was clear that there was one contract and everything was carried out under that umbrella, there would not be a problem, as I understand the schedule. However, if there was something less than a contract--a commitment that was not contractually binding under which the project would not be viable if the whole undertaking was not proceeded with--there may be a problem. I do not know, but I hope that my hon. Friend will consider that.
Cable has been mentioned. I wrote to my hon. Friend the Financial Secretary in December about a problem that is of particular concern to Cable and Wireless, although it may be a problem for all cable companies. I shall not go into the detail, but I hope that my hon. Friend will be able to respond to that.
Having said all that, I think that the changes proposed in the schedule are sensible. They can be made only in a low inflation environment, but it is sensible to try to have the profit for the purposes of corporation tax as near as possible to the reported profit in a company's accounts. For that reason, I welcome the proposals.
Mr. Ian Pearson (Dudley, West):
The schedule adds a further eight and a half pages to the Capital Allowances Act 1990. No doubt it will also add substantially in due course to the voluminous case law on the issue.
It is clear from its size that the measure is not business-friendly. Capital allowances are complicated and present significant difficulties for small and medium-sized businesses in fathoming what allowances they can use for tax purposes.
The issue is of concern to many tax practitioners. In their book, "Practical Capital Allowances", Peter Newbold and Martin Wilson write about some of the practical difficulties. They say:
Mr. Tim Smith:
Does the hon. Gentleman agree that the exemption in the schedule for any business that spends less than £100,000 in one year on capital investment means that it is unlikely to apply to all small businesses and many medium-sized businesses?
Mr. Pearson:
No, I do not agree. The £100,000 limit will not exempt a significant number of medium-sized businesses--certainly companies that are still small but
I would accept the principle behind the clause and the schedule if it really brought the tax treatment of long-life assets more closely in line with normal accountancy practice. The hon. Member for Beaconsfield (Mr. Smith) welcomed it, and like him I want taxable profit more closely to approximate accounting profit. In the same speech, however, he rightly made the point when referring to the CBI's submission, that, at the end of a 25-year period, as a result of the reducing balance system proposed in the schedule, about 20 to 21 per cent. of the value of the assets will not be relieved from tax. That does not seem to be getting close to mirroring tax treatment with accounting profit. The Government must be honest and give the real reason for the schedule. If it is a clever tax wheeze to raise £1 billion in two financial years, they ought to come clean and say so.
Mr. Darling:
Following the point made by the hon. Member for Beaconsfield (Mr. Smith), I am prompted to ask my hon. Friend to look at section 38C of schedule 13, where he will see that there is a further problem concerning the £100,000 figure. Although it would catch a contract that spanned several accounting periods and treats them as being one accounting period, what would happen if concerns so arranged their affairs to have a series of separate contracts? In speaking in support of the amendment, my hon. Friend will know that we do not want to reach a point where we are creating a very healthy living for lawyers who argue such matters. Some certainty would be very helpful. Although I appreciate why the Government are trying to be helpful in exempting small firms, they could unwittingly be creating a gravy train for lawyers.
Mr. Pearson:
I thank my hon. Friend for his comments, which are not only valid but have independent support. Andrew Dilnot of the Institute of Fiscal Studies said when questioned by the Treasury Committee on the issue of capital allowances and long-life assets that the provision would indeed create a gravy train for tax lawyers and accountants. He was far from convinced that the projected yields of £325 million in 1998-99 and £675 million in 1999-2000 would be achieved. We should listen to what he says. Tax lawyers and accountants are already gearing up to offer companies advice on how they should organise their tax affairs. Some of the utilities with which I have discussed the issue certainly feel that there are ways around the system and that it will not affect their businesses to any substantial degree.
I turn to some of the detail of schedule 13, which raises fundamental issues that require scrutiny. It is unfortunate that, since this is the first clause and schedule to be discussed in Committee, it will not receive the level of detailed analysis that it deserves if we are to make good law in the area. I draw the Committee's attention to section 38A(2)(a) and (b), which revolve around who determines whether assets will have an economic life of at least 25 years and what we mean by a "useful economic life".
It seems clear that individuals and--probably--partnerships will decide themselves whether assets are caught by the legislation because, with the coming self-assessment regime, it will be up to them to determine such tax matters. Similarly, tax lawyers and accountants will advise companies, and undoubtedly some very interesting discussions will be held between companies and their firms of auditors as to how tax treatment of certain assets should be determined and accounted for.
The point is well made by the Institute of Directors in some of the concerns that it has been expressing about the Budget. It says that consultation with industry and tax advisers on how the rule can be implemented is desperately required. I very much endorse that. I will be interested to hear what plans the Financial Secretary to the Treasury has to consult those who will be affected by the legislation and whether further consideration should be given on Report to some of the problems that are likely to be associated with it.
Another key point to make about the section is that, although many major manufacturing companies will not keep assets for 25 years, they are nevertheless likely to be caught by the legislation because it may well be deemed that the asset has a "useful economic life" of 25 years. The most recent Government research that I have seen shows that the average age of plant and machinery in the United Kingdom is about 11 years.
Some of our leading manufacturers certainly have very clear investment programmes. I cite GKN plc as an example. It will clearly make significant capital investments in plant and machinery but will be upgrading and disposing of it well within a 25-year period. How will the section take account of obsolescence so that a machine that could last for 50 years can be replaced by a more advanced one within 15 or 20 years? What happens if everybody agrees in good faith that an asset will last for 30 years, but it lasts for only 20 years? Would the taxpayer be compensated for the loss of cash flow as a result of having only 6 per cent. allowances during this period?
Section 38A(4) and (5) deal with expenditure incurred on long-life assets in relation to composite assets, and state that apportionments should be "just and reasonable." This is peculiarly ill-defined, and it has some important knock-on consequences. Section 66 of the Capital Allowances Act refers to building alterations and states--in summary--that where a person carrying out trade incurs capital expenditure on alterations, it counts as plant and machinery. A company installing a major new manufacturing cell--which would be counted as plant and machinery, but may have a useful economic life of less than 25 years--may have to make substantial alterations to a building to install that cell. Those alterations would then be caught by the new regulations. At present, building alterations can qualify for the 25 per cent. writing-down allowances, but they will not in future. Companies that are likely to make alterations when investing in plant and machinery will be disadvantaged as a result of this part of the Bill.
Section 38B provides exemptions for dwelling houses, retail shops, showrooms, hotels and offices. I accept the point about dwelling houses, but it is not immediately obvious why it is right and fair to exempt retail shops, showrooms and hotels--or, indeed, offices. A number of large hotel groups and companies are making major investments in long-life assets, such as offices, and these
will not be caught by the legislation. But a manufacturing company investing in plant and machinery to create wealth in the United Kingdom will be hit by the legislation. That does not seem to be a fair basis in law.
Section 38B(3) is welcome, as it provides exemptions to the shipbuilding industry. However, it is not immediately obvious why shipbuilding should be exempted, but dry docks--where ships go to be refurbished--are to be classified as long-life assets and caught by the Bill. If we intend to do something to help the shipbuilding industry--we have had discussions during debates on previous Finance Bills on the need to support shipbuilding--it is slightly anomalous that dry docks will not be relieved in the way that the shipbuilding industry is. In case law, I cite Inland Revenue Commissioners v. Barclay Curle and Co. as holding that dry docks are plant and machinery. Grain silos are also classed as plant and machinery and they will be similarly affected by the new legislation--even though they are used for the purposes of loading and unloading ships. We need clarification.
We also need details on the subject of investment in sports grounds. Section 70 of the Capital Allowances Act 1990 provides that investment in safety in sports grounds can be treated as plant, but there is no exemption in the legislation for such investment. In future, such investment is likely to get relief at the 6 per cent. rate rather than at the current 25 per cent. rate. Is that what the Government intend? Are they aware of the problem? Will they do something about it?
I also wish to highlight the potential problems in relation to the private finance initiative, and I will be very interested to hear the Minister's response. A number of PFI contracts for the hospital sector--which are being signed rather belatedly--are from major companies that will invest in long-life assets, and certainly in assets with an expected useful life of more than 25 years. Before this Budget there was an understanding that they would get capital allowances at the 25 per cent. rate. It seems to me--there is nothing in the schedule to suggest otherwise--that PFI projects in the health service could be damaged by the change in tax treatment proposed by the legislation. We need urgent clarification on this.
Perhaps the Minister will talk to his civil servants and respond in writing to the next few points that I wish to raise. Section 38C(3)(b) and (4)(b) of schedule 13 talk about expenditure incurred by an individual being subject to the relevant limit, which is set at £100,000. Section 38C(3)(b) says that this is subject to the individual devoting
"It is common practice to speak of 'preparing' a capital allowances claim. This pre-supposes that particular types of assets qualify automatically for particular types of allowances, and that a claim consists of no more than assembling and presenting self-evident facts.
That is a very real concern for a number of United Kingdom businesses, especially small and medium-sized ones in the west midlands.
In the 1990s, the process is much more complicated. Both tax law and building design have moved on to a new plane of complexity, and the 'grey areas' have grown--the facts are often less evident than they once were. . . .
A claim for capital allowances must be 'developed' before it can be developed and it must be 'planned'. This clearly involves a good deal of work, and the question is often asked whether the cost (in both time and money) is justified."
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"substantially the whole of his time in that chargeable period to the carrying on of that trade and profession".
What happens if the individual--or partnership--does not devote
"substantially the whole of his time in that chargeable period to the carrying on of that trade and profession"?
Section 38C(5)(a) talks about excluding expenditure
"on the provision of a share in machinery or plant".
Why will expenditure on such shares be excluded? We could be talking about a 50 per cent. share of a £20 million capital investment. That does not seem to me to be obvious.
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