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The intention behind the amendment is to raise concerns about the impact of changes to the industrial and agricultural buildings allowances on particular businesses. I want to highlight the comments of the Institute of Chartered Accountants in England and Wales, which said at the outset:
We recognise that the changes to the capital allowances rules are part of a balanced package that has also seen the headline rate of corporation tax reduced from 30 per cent. to 28 per cent.
Nevertheless, we have many concerns about the proposed changes and the underlying policy, particularly given that smaller businesses will not benefit from the 2 per cent. cut in the main rate of corporation tax.
The key concern is that there does not appear to have been sufficient consultation on the impact of the changes. Although there is a consensus that there is a need for reform to the tax system, questions have been raised about the motivation for the proposal we ended up with in this years Finance Bill. Was it a considered attempt to reform the tax system or was it something included at the last minute to try to make the corporation tax proposals as a whole add up?
The allowance or charge for businesses on disposing of agricultural and industrial buildings is being withdrawn for disposals taking place after 20 March 2007. I understand that in next years Finance Bill the annual writing-down allowance will be phased out. If the move was a considered one, it is certainly not regarded in that light by businesses directly affected by the changes. Like other members of the Public Bill Committee, I have been contacted by an organisation called Towngate Estates Ltd, which will be greatly affected by the changes.
Over the past few years the Inland Revenue has produced a number of consultation documents on the reform of corporation tax. I am aware of documents in August 2002, August 2003 and December 2004.
it is envisaged that the new relief would replace and extend the current Industrial Buildings Allowances and Agricultural Buildings Allowances.
As he goes on to say, there was no reference to the fact that IBAs would be stopped altogether. In fact, the language is about extending and reforming the existing allowance, rather than about getting rid of it. The same goes for the December 2004 paper. Again, the paper suggests that the allowance could be extended. The person writing the letter concludes by saying that, in 2011, the proposals
will cost the company an extra £53,000.
My other concern is how the change will impact on different sectors. One of the concerns raised by the Institute of Chartered Accountants is that it is more likely to impact on a number of UK business sectors, including manufacturing, farming and capital intensive sectors such as the hotel trade, which is currently anticipating the need for capital investment prior to the forthcoming Olympics. My concern is that people involved in those businesses will be affected by the changes on the basis of decisions that they may have made up to 24 years previously. In that respect, the change has a retrospective impact. That relates to the comments we made yesterday about how the small business rate increases would impact on different sectors and regions of the economy, depending on how they were weighted in terms of how capital intensive they were, the size of the business and what it was focusing on.
That concerns me, because I have businesses in my constituency that will be affected. There is a farm in my constituencylike most farms in Cornwall, it is very smallthat made one of the first commercial objective 1 grant applications for European funds that were available to try to help develop the economy in some of the poorest parts of Europe. The farm made use of that allowance to diversify into cheese production and it qualified for agricultural buildings allowance. The farm has an ABA residue of only about £15,000; the dairy, which is newer and has been more heavily invested in, has a residue of more than £300,000. The point is that decisions to invest were made in good faith and jobs have been created as a result, but now that is being placed under threat because of a decision taken at a much later date. I am sure that there are similar examples all over the country.
I am reminded of the merits of the new clause tabled by the right hon. Member for Birkenhead (Mr. Field), which we discussed yesterday. He talked about the need for real clarity in terms of the impact of personal taxation changes on particular groups. This is another classic example of where we need to understand the interrelated impact of lots of taxation decisions in the
Finance Bill on different business sectors in different regions. Businesses also need to understand how all the proposals interact.
As I bring my remarks to a close, I want to highlight again the concerns of the Institute of Chartered Accountants. There are concerns that there has not been sufficient time for detailed consultation and consideration and there is a feeling that the Government should withdraw the clause at this point in order to undertake more consultation and consideration. If they will not do that, will they grandfather existing assets so that companies such as the farm in my constituency do not face a much more uncertain tax future?
Mr. Drew: I rise to support what the hon. Lady has said. I have a farmer in my constituency, Rob Warren of Moreton Valence, who has undertaken a major capital project that involves building a new milking parlour. The cost of the whole project comes to something over £1 million. Part of the proposal to undertake that work was predicated on getting the agricultural buildings allowance, which, as far as I understand, is tapered down over a period of time. To lose that allowance at this time is, at the very least, problematic to his farm and his business. Without the allowance, it would have been much more difficult for him to develop his proposalcertainly at this time.
I have sat down with Mr. Warren at his table in his kitchenas most of us do when we meet farmersand I am the first to accept that we are talking about something that is hideously complicated. My simple economists brain went no way towards grasping the fine mesh by which the measure has been working over the years. Nevertheless, it seems to have worked in the sense that Mr. Warren and various other people in the agricultural industry have been encouraged to undertake major improvements to increase the efficiency of their businessesas the hon. Lady said and, in the case of Mr. Warrens business, to achieve a greater milk yield. I have seen Mr. Warrens impressive operation.
Will my right hon. Friend the Chief Secretary explain why the proposed change was brought forward? While there has been a reduction in corporation tax, the measure will not help business planning in this particular industry. Indeed, it will create a disincentive because farmers who were thinking about making major capital investment have probably reconsidered that. I hope that my right hon. Friend will be able to persuade me and Mr. Warren that the Government have alternative plans so that such important projects can be brought forward. I hope that the measure has not been rushed through, given that it could damage the agricultural trade, which has taken advantage of the allowance. The industry might be peculiar in that it has had a special arrangement with the Treasury. However, it would not be helpful if that arrangement was lost at a time when the agriculture sector is in difficulty and the milk business, especially, is in a somewhat parlous position. I hope that my right hon. Friend will give me some good news and that he can reassure Mr. Warren that his investment was worth while and that the Government are helping him.
Mr. James Paice (South-East Cambridgeshire) (Con): I want to address the way in which the agricultural buildings allowance affects tenant farmers. I am sure that my hon. Friend the Member for Fareham (Mr. Hoban) will cover the wider aspects of the amendment. However, I doubt that the Treasury talked to the Department for Environment, Food and Rural Affairs about the matter and examined the agricultural holdings legislation.
Some 40 per cent. of farmers in this country are tenants who do not own the land on which they farm. Agricultural holdings legislationtenancy legislationallows them, with the permission of the landowner, to construct buildings on the land, but they never own the buildings. The ownership reverts to the landowner either at the end of the tenancy, or at the end of any fixed period agreed between the landowner and the tenant.
In the past, the agricultural buildings allowance has been the only form of return for tenant farmers constructing such buildings, apart from the benefit of the buildings. They have no capital asset to sell or let because they are not the owners of the land. The retrospective nature of clause 35 means that they will lose the ABA and have nothing. As the hon. Members for Stroud (Mr. Drew) and for Falmouth and Camborne (Julia Goldsworthy) said, the measure will hit all farmers, but it will hit especially hard those tenant farmers who do not own the land on which a building is constructed.
I appreciate the Chief Secretarys interest in my speech. I suspect that what I am saying is news to him and that he did not know about the agricultural holdings legislation. It would be a tremendous gesture if he were to agree that the approach in the Bill is not sensible, at least until he has talked to DEFRA officials about the impact that the measure will have on the 40 per cent. of farmers in this country who do not own their farms and rely on the ABA as the only way of getting back the capital that they have invested in a farm building that will never be theirs to dispose of, or to benefit from in any other way.
Mr. Peter Atkinson (Hexham) (Con): I agree entirely with my hon. Friend the Member for South-East Cambridgeshire (Mr. Paice). The change could not have happened at a worse time for the farming industry, which has gone through a funding revolution following the introduction of the single payment scheme. All sorts of new things are spinning out as a result of that. Farmers are advised to put their houses in order by farming for profit, not for subsidy. That requires structural changes to agricultural holdings, especially buildings.
As we heard from the hon. Member for Stroud (Mr. Drew), farmers have recently been investing considerably in reorganising their buildings and structures. Such investment leads not to appreciating assets, but depreciating ones. It results in metal buildings that are designed for a particular purpose, and their time will expire over the next 20 or 30 years. That is why farmers who invested large sums of capital took into consideration the fact that they would benefit from the agricultural buildings allowance. In effect, the change will bring about retrospective taxation that will cause farmers considerable problems.
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