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Mr. Jack: There are two parts to the definition. It is determined, first, by the life of the asset, and, secondly, by the value. The point of the de minimis exclusion was that many small investments need not be caught by the provision. Serious sums above £100,000 a year would be regarded as starting on the trail of heavy monetary investment. However, to be caught, the life of the asset must be considered. If, in terms of accounting practice, it has a life of 25 years, it will be deemed to be a long-life asset and will therefore be caught. To answer the hon. Gentleman's point, if companies do not invest, they will not be caught.
Sir James Molyneaux (Lagan Valley): I apologise for my absence from the start of the debate; I was chairing a Committee.
On the life of assets, is there not a strong case for differentiating between turboprop and jet aircraft, as the former tend to have a much longer life?
Mr. Jack:
I shall pre-empt some more detailed remarks that I was going to make on that. For light aircraft, matters such as the number of flying hours can be taken into consideration. It is for the company to decide all such matters when it starts in its accounting principles to deal with long-life assets. If there is a dispute about assets being long life or short life, the discussions with the inspector of taxes come into play. If no agreement is reached between the inspector and the taxable entity, the matter can be referred to the commissioners for further adjudication.
At the start of the debate, we discussed bringing tax allowances into line with accounting principles: accountants will identify the asset at company level and decide whether it is appropriate to write it down in the company's accounts as a long-life asset. It is at that point that the tax treatment is triggered. We have brought the principles together as detailed in schedule 13.
I want to pick up a point made by the hon. Members for Edinburgh, Central and for Clackmannan (Mr. O'Neill). Major components of aircraft such as engines can be treated separately. When such significant components are replaced, they can be treated as any other replacement part would be under a tax regime different from the long-life tax regime. An oil rig or exploration device may be made up of a series of separate modules, and the test would apply to each part. The principles are fair in their practical application.
Mr. Tim Smith:
Is my hon. Friend saying that it would be open to airlines to break down an aircraft into its
Mr. Jack:
Engines are generally treated as separate entities for tax purposes. That would not apply to the rest of the aeroplane. I hope that that is clear.
Mr. Darling:
The engines and fuselage are treated as different parts because they are made by different companies. My limited knowledge of aircraft manufacture is almost wholly gleaned from a recent visit to Rolls-Royce. I am no aircraft engineer, but I know that many other parts of the aeroplane can be separated. Is the Minister saying that many other parts of the aeroplane can be separated? For example, I understand that the most important part of an aeroplane is its wings. Those who make the wings tell me that the wings affect how the aeroplane flies and performs. The bit in the middle that we all sit in is of lesser interest.
How can the Minister take the separation of the component parts of an aeroplane or anything else so lightly? Surely lawyers will have a field day arguing that the components of an aeroplane, a power station or anything else are separate assets and that the value of not one of them exceeds £100,000. The Minister can see what arguments might be open to accountants and lawyers. Will he be a little more helpful on what line the Revenue will take? We need some certainty.
Mr. Jack:
Those of us who use aeroplanes--I think that the hon. Gentleman occasionally travels home in one--would regard the placing of the pilot as rather more important than he implied. My remarks were predicated on the Inland Revenue's current tax treatment of significant and separate components. If the hon. Gentleman knows anything about aircraft, he will know that engines are taken out and new ones are put in as part of maintenance operations. A wing is an integral part of the structure of the aircraft: people would not normally take one out and put another one in. He and I can debate that, but I have British Aerospace's military aircraft division headquarters in my constituency, so I perhaps have a shade more knowledge of aircraft maintenance procedures than he has. I do not want to get into such a debate, Dame Janet, or you will rightly call me to order.
The hon. Member for Edinburgh, Central spoke generally about the mobility of airline industry investment. My hon. Friend the Member for Beaconsfield (Mr. Smith) voiced a concern that has been expressed by the industry. The sum total of the effect of the proposal on the United Kingdom airline business on an annualised basis will be £25 million, against a total investment of some £2 billion. That represents an on-cost of £1 per passenger per year. Although the industry is bound to express concern, that figure puts it into perspective.
The financing of aircraft, which is also affected by the proposal, is an international activity. People go around the world with their various lease arrangements, almost collecting tax allowances as they go.
The hon. Member for Clackmannan drew the Committee's attention to the cable industry, and he expressed concern about how the proposal would affect it. It is important to put the matter into perspective.
The annual capital expenditure of the cable industry runs at some £2 billion, and £6 billion is to be spent over the next three to five years. Given the current annual turnover of about £1 billion--which is growing--the effect of this tax proposal on the cable industry will be containable. It is not a showstopper, given the size of the investment.
We return to the question of non-distortion. It is fair to say that we have not tried to make artificial distinctions between one type of industry and another, apart from those of which I gave the Committee details a few moments ago. Given the size of the commitment, there is not a problem.
The hon. Member for Clackmannan also drew the Committee's attention to the effect of the proposal on the oil industry and asked whether any calculation had been done to measure it. I hope that my comments will reassure him. The tax effect is the equivalent of less than one third of 1 per cent. of the industry's turnover. Any industry is bound to mount an argument for special pleading, but I genuinely do not believe that the oil industry can argue that the effect of the proposal is such a serious matter.
There is, however, an important point of principle. The hon. Member for Edinburgh, Central was right to draw the Committee's attention to the need for an allowance regime that does not distort. It is important that decisions on major investments are not made by virtue of the tax allowances; sometimes, far bigger costs have to be taken into account. One of the biggest single costs to the airline industry is the amount of fuel used on a journey. One of the most important factors affecting profitability is--to use the colloquial expression--the number of bums on seats, which has a far greater effect on determining investment decisions. Airlines seek aircraft of a more modern design to save fuel, or with more capacity so that more passengers can be carried. Such considerations are more important than the effect of the tax allowance. It is important that decisions on investment should not be distorted by the allowance.
Mr. O'Neill:
I am grateful to the Minister for trying at least to give some figures. The sums that he gave were somewhat vague. One does not know what would be the significance for investment in, for example, the North sea. We have to take account of the globalised character of that industry. At the margin, a project might be disadvantaged by even a fairly modest change in the tax regime. Such a project may be in competition with another in Alaska or the Gulf of Mexico, and it might be to the company's advantage to move there. Oil companies care not where they get their oil but about the money that they get from the projects in which they invest. That is the point that I was trying to make.
The Minister has not quite fiddled the statistics, but he has given a meaningless figure that needs either to be clarified or to be discarded as irrelevant.
Mr. Jack:
I am not prone to deliberately misleading the Committee, but I have been informed that the hon. Gentleman was right when he said that my figure was meaningless: it referred to the airline industry, not to the oil industry. I take this opportunity to apologise to right
Mr. Denis MacShane (Rotherham):
Resign.
Mr. Jack:
For a third of 1 per cent., that is going a bit far.
I am advised that the change mentioned by the hon. Member for Clackmannan is unlikely to cause any project, certainly in the North sea, to be dropped. I shall consider whether I can make any further points, with perhaps greater accuracy, to quantify the effect of the measure.
I have dealt with the points made by the hon. Member for Clackmannan about the cable industry. I was pleased to have the support of my hon. Friend the Member for Beaconsfield. He raised a number of issues on aircraft and I hope that I have dealt with them. I was also grateful for his assistance in answering the point made by the hon. Member for Edinburgh, Central about aircraft being sold on. He answered it with clarity and knowledge.
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