 House of Commons |
Session 2006 - 07 Publications on the internet General Committee Debates Finance |
Finance Bill |
The Committee consisted of the following Members:David
Doig, Hannah Weston, Committee
Clerks
†
attended the Committee
Public Bill CommitteeTuesday 15 May 2007(Morning)[Mr. Roger Gale in the Chair]Finance Bill(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration)Clause 17Corporation
tax deduction for expenditure on energy-saving
items
10.30
am
Question
proposed, That the clause stand part of the
Bill.
Mr.
Paul Goodman (Wycombe) (Con): Welcome to the Chair,
Mr. Gale. The clause marks the beginning of the part of the
Bill that deals with the environment. It is progress to have such a
part, given that there was no similar part in last year’s
Finance Bill.
By
way of introduction, I shall point out that my hon. Friends and I have
done some research and discovered that in last year’s Budget
alone, the Chancellor mentioned climate change no fewer than 15 times,
whereas in the Budget and pre-Budget statements between 1997 and the
autumn of 2005, he mentioned it on average only once. I shall leave it
to the Committee to work out what stimulated his interest in the
environment, and what might have happened in the autumn of 2005 to
awaken that
interest.
The
Chief Secretary to the Treasury (Mr. Stephen
Timms):
Will the hon. Gentleman confirm that, under the
Governments of the party that he represents, the Budget documentation
never included an environment chapter? Our documentation has
consistently done so since
1999.
Mr.
Goodman:
I can confirm that carbon emissions have risen
since 1997. I am afraid that I have to disappoint the Chief Secretary
by saying that my research has been less rigorous than his; I have not
sat back and looked at every Bill that was issued in every year since
1979. I should want to check his claim closely, as we always want to
examine with great care claims that are made by the
Treasury.
Mr.
David Gauke (South-West Hertfordshire) (Con): Will my hon.
Friend confirm that, during the Chancellor of the Exchequer’s
period in office, not only
has climate not featured heavily in Bills and Red Books, but green
taxes, as a proportion of taxation as a whole, have
fallen?
Mr.
Goodman:
I can confirm that. Green taxes represented 9.4
per cent. of receipts in 1997; that figure has slid to 7.7 per
cent.
Mr.
Brooks Newmark (Braintree) (Con): The Chief Secretary gave
1999 as the critical year in which green issues suddenly became
important for his Department. I note that since 1999, 15 Departments
have increased their carbon emissions. What does that say about the
Government’s green
strategy?
Mr.
Goodman:
I am grateful to my hon. Friend. I assume that he
refers to the Sustainable Development Commission’s finding that
said exactly that.
Mr.
Gauke:
Will my hon. Friend also accept that although 15
Departments have increased their carbon emissions since 1999, of all
Departments the Treasury has the third highest carbon dioxide emissions
per person from air
travel?
The
Chairman:
Order. It has taken me 24 years to work out that
Parliament is a reasonably party political place. I would be awfully
grateful if we could discuss the clause under
debate.
Mr.
Goodman:
I shall not respond to my hon. Friend’s
question, Mr. Gale, although I was prepared to do so. I
shall instead turn to clause 17, which, by amending the Income and
Corporation Taxes Act 1988, seeks to extend to corporate landlords the
availability of the landlord energy savings allowance. Proposed new
section 31ZC sets out regulatory powers associated with the earlier
provisions of the clause. How many corporate landlords does the Chief
Secretary expect to install energy-saving devices as a result of the
clause? What does he expect total carbon saving to
be?
Julia
Goldsworthy (Falmouth and Camborne) (LD): I shall be brief
in dealing with clauses 17 and 18. The hon. Gentleman was right: this
is the first time that we have seen part of a Finance Bill deal
specifically with the environment. That is slightly confusing, as we
have just discussed some environmental clauses under the previous
part.
Clauses 17(5)
and (6) specify the definition of an energy-saving item and stipulate
that such items will be defined by regulation. I am not sure that I
have seen the regulations; will the Chief Secretary provide some detail
of exactly what kind of items those will be? Will they refer just to
electricity, or will they include items like ground source heat pumps,
the development of which is making great strides in my constituency? I
also note at the bottom of page 11 in the proposed new section 31ZB(3)
that expenditure relating to holiday lets has been excluded. Can he
explain why that is the case? Surely, we want to encourage greater
energy efficiency in all properties, and not limit that process.
Finally, I would like to know what the projected cost to the Exchequer
of these measures will be, and what the
Chief Secretary expects take-up to be in terms of the number of
properties that will respond to these incentives to improve energy
efficiency.
Mr.
Newmark:
I welcome clause 17, because it begins to deliver
on the Treasury’s promise of fiscal incentives for energy
efficiency. Although I am sad to see that the hon. Member for
Wolverhampton, South-West is not here, I saw in the explanatory notes
that the measure is an attempt to standardise corporation tax reliefs
with an existing income tax relief. The explanatory notes
state:
“A
similar deduction...is currently available for landlords who pay
income tax.”
I also
welcome that principle, if only because the clash between the two
regimes has caused so many problems elsewhere in our Finance Bills over
the past few years.
I
have a few questions about the details, which I hope that the Chief
Secretary can answer. My first question is whether there is any need
for new section 31ZA(5), regarding the definition of an
“energy-saving item”. If the aim here is to achieve
harmony between the income tax and corporation tax regimes, why is it
not possible to use the existing regulations that were made for the
purpose of income tax deduction? I do not want to stray into the
territory of the next clause, but we have had some recent regulations,
a copy of which I have here, that define what an energy-saving item is
for the purposes of income tax deductions under section 312 of the
Income Tax (Trading and Other Income) Act 2005. The Energy-Saving Items
Regulations 2007 were laid before the House on 14 March and came into
force on 6 April. They define energy-saving items
as
“(a) hot
water system
insulation;
(b)
draught proofing;
(c)
solid wall insulation;
and
(d) floor
insulation.”
They also
prescribe limits on expenditure.
If the idea
is to achieve harmony between the deductions possible under the Income
and Corporation TaxesAct 1988 and the Income Tax (Trading and
Other Income) Act 2005, I must ask the Chief Secretary whether it is
not possible to use a common definition of an energy-saving item, and
if possible the same regulations.
Proposed new section 31ZA(7)
seems to imply a wide range of possible conditions, which may be
imposed upon the definition of an energy-saving item. I hope that the
Treasury does not intend to develop a definition of an energy-saving
item that is so specific that no one can make use of the relief. The
list given in the Energy-Saving Items Regulations 2007 is hardly
exhaustive, and I hope that the Treasury is not signalling that it is
going to become any shorter. If this relief is to be useful and not
another of the Chancellor’s gimmicks, it will be helpful if the
Chief Secretary could offer the Committee some idea of what will be
covered by the proposed definition, and whether that definition will be
based on the existing
regulations.
My second
question concerns restrictions on the use of the relief, particularly
that it is not applicable if a house is in the course of construction.
I would have thought that the best time to make the relief available is
during the acquisition and construction phase; I see the Chief
Secretary nod there. It is at that point that the
availability of a deduction is best able to influence commercial
decisions about whether to proceed with energy-saving
measures.
The
Government seem to be establishing a false dichotomy between businesses
that improve the energy efficiency of an existing building and those
that elect to improve the specification of a prospective building. I am
sure that there is some logic in that distinction and I would
be grateful for the Chief Secretary’s explanation.
My third point concerns the
restriction in proposed new section 31ZB(5), which restricts any
deduction in respect of expenditure which
“is not for the benefit of a
dwelling house.”
That
seems very nebulous and the Chief Secretary may be able to put my mind
at ease by providing the appropriate legal definition. As it stands, I
can think of a number of possible disputes arising over whether an
energy-saving item has been installed to the benefit of a dwelling
house or for another commercial purpose. The scenario I am thinking of
is tied accommodation in which there is very little differentiation
between residential and commercial premises, such as a pub.
If a pub landlord were to
install some energy-saving technology, even choosing from the very
modest list in the current regulations, would he be benefiting his
dwelling or his commercial premises? Presumably both to some extent,
but does that mean that no deduction is allowed at all or that the
benefit should be apportioned out in some way or another? My concern
with the whole of the clause is that its intentions are positive, but
its details risk producing a deduction that is so specific or so
complex that nobody bothers to use it. I should like to see the clause
put to good effect by business, rather than providing another two pages
of primary legislation and yet another set of
regulations.
Kitty
Ussher (Burnley) (Lab): I rise briefly to express my
support for the clause. Obviously its purpose is to address the market
failure that exists because landlords have a disincentive to invest in
energy efficiency in their properties because the benefits of the
investment flow to the tenant so they cannot get a return on it. The
clause would correct that by giving a direct financial return to the
landlord. I should like to explore the parallels between this clause
and the clauses relating to microgeneration that we discussed late one
evening on the Floor of the House. Those clauses give individuals
exemption from income tax on income from any surplus electricity
generated from installing solar panels and wind turbines, perhaps we
should consider a similar provision for landlords. For a landlord there
is also, presumably, a market failure to invest in microgeneration,
solar panels, wind turbines and so on because he would not be the one
to benefit from selling the surplus energy back. Surely, the
microgeneration clauses should also be extended to landlords. Perhaps
the Chief Secretary can clarify that
point.
Mr.
Timms:
Good morning, Mr. Gale. I welcome you
back to the Chair. Let me briefly repeat the point that I made in an
intervention. The Chancellor introduced in the Budget documentation for
the first time an environmental chapter and it has been in each
pre-Budget report and Budget Red Book since 1999.
Before that we published a statement of intent on environmental taxation
in July 1997. I will not go further down that road, Mr.
Gale, given your wholly proper strictures to Opposition Members earlier
on.
I
want to comment on clauses 17 and 18 as they are grouped together on
the selection list. About one third of the UK’s carbon emissions
come from residential properties. We have therefore introduced, not as
the hon. Member for Wycombe suggested this first measure, but a series
of measures to encourage household energy efficiency. For example,
energy efficiency measures professionally installed in residential
properties now qualify for a reduced rate of VAT. The energy efficiency
commitment provides incentives under which energy suppliers are
installing a range of energy efficiency measures in residential
properties. By 2010, in combination with initiatives introduced as part
of the warm front scheme, that will reduce carbon dioxide emissions by
more than 2 million tonnes per year.
10.45
am
The Government
have also set out our ambition that, by 2016, all new homes will be
zero carbon. We will shortly come to a clause that introduces a stamp
duty exemption for zero-carbon homes. However, action targeted
specifically at the rented residential sector is needed, since such
properties typically produce about 500 kg more carbon dioxide a year
than other homes. There is an obvious incentive for home owners to
improve the energy efficiency of their homes, but, as my hon. Friend
the Member for Burnley said, that does not apply in the case of rented
properties, hence the need for this
measure.
In the 2004 Budget, we
introduced the landlords energy saving
allowance—LESA—which allows private landlords to deduct
the cost of installing loft and cavity wall insulation from their
taxable profits. Since then it has been extended to include solid wall
and hot water system insulation, and draught-proofing.
We have explored the options
for a green landlord scheme in some depth. An option that we discussed
in the past was to reform the wear-and-tear allowance, linking it to
the energy efficiency of a property but, having fully investigated the
practicalities, we concluded that LESA provided a more cost-effective
and better targeted way to encourage improvements in the energy
efficiency of privately rented properties.
LESA has been successful in
encouraging investment: landlords spent more than £1.3 million
on energy efficiency improvements to rented properties in its first
year. The Energy Saving Trust and the Energy Efficiency Partnership for
Homes are also doing good work in encouraging landlords to improve
energy efficiency in their properties. Building on that progress, we
announced several extensions to LESA in the pre-Budget report last year
to ensure that its scope and coverage are as comprehensive as possible.
Those extensions are expected to reduce carbon emissions by up to two
thirds of a million tonnes a year by
2011.
LESA is at
present available only to private landlords subject to income tax, and
clause 17 extends it to landlords in the corporate sector. Corporate
landlords own about a quarter of all properties in the
residential rental sector, so that is a very significant widening of
access to the allowance. As a Government support to businesses, the
extension requires state aid approval from the European Commission
before it can be implemented and we will be shortly be submitting
notification of this aspect of the LESA and seeking approval.
The clause also gives powers to
the Treasury to change the level of allowance available to ensure that
the allowance operates fairly in all situations and to specify the
types of energy-saving items covered. I will return to that matter in a
moment.
We will lay
regulations introducing the same conditions for corporation tax that
are already in place under the existing allowance for income tax, and
the regulations will set the maximum deduction available at
£1,500 per property per year and provide for that deduction to
be apportioned in cases of joint ownership. A draft of the regulations
has been provided for the Committee and I hope that all members will
have seen
it.
Mr.
Goodman:
Will the Chief Secretary say when the regulations
were sent to the Committee, as I have no recollection of receiving
them? If he cannot answer my question now, perhaps he will do so in due
course.
Mr.
Timms:
I do not have the date in front of me but I will
check it. I hope to be able to respond to the hon. Gentleman in a
moment.
Corporate
landlords will be able to deduct the cost of acquiring and installing
solid wall, cavity wall and loft, floor and hot water system
insulation, and draught-proofing.
Extensions to LESA for
non-corporate landlords, who already benefit from the original LESA,
aremade for income tax in clause 18 to match those in clause
17 for corporation tax, and represent a further incentive for landlords
to increase the energy efficiency of their properties. Clause 18
extends LESA by making the allowance that is currently set to end in
2009 available until 2015.
From 2008,
energy performance certificates will be introduced in the private
rented sector for every home bought, sold and let in the UK. Those
certificates will highlight to landlords and tenants the existing
energy efficiency of properties, as well as suggesting affordable ways
to improve them. Setting 2015 as the date strikes a good balance
between giving landlords enough time to take advantage of the allowance
and encouraging them to take steps to improve the energy efficiency of
their properties as soon as possible. The extension of the allowance by
six years gives them time to take full advantage of the extended
allowance and to benefit from the information provided by energy
performance certificates.
Secondly, the clause ensures
that the LESA is available for expenditure on increasing the energy
efficiency of communal areas within properties, providing an incentive
to improve the energy efficiency of the whole building. We have
already, through secondary legislation, made the allowance available
for expenditure on floor insulation, changing the maximum annual
deduction available from £1,500 per building to £1,500
per property. That means that for a
landlord who owns and lets a block of 10 flats, the maximum deduction
available per flat is increased from £150 to £1,500. I
hope that the Committee has seen the draft of the regulations that we
intend to lay afterthe Bill receives Royal Assent. They ensure
that the maximum annual deduction of £1,500 will continue to
operate correctly for expenditure on communal areas.
Let me respond to some of the
points that have been raised in our brief debate. The hon. Member for
Falmouth and Camborne asked a fair question about furnished holiday
accommodation. We have thought carefully about that, and the evidence
is that there is not the same market failure in the case of furnished
holiday lettings that there is in the private rented sector more
generally. For example, it is common for owners of furnished holiday
accommodation to live in their properties for part of the year, so they
will benefit directly from energy efficiency improvements.
In any case, the commercial
letting of furnished holiday accommodation is treated more favourably
for tax purposes from other rental businesses. That suggests that it
would not be right to provide the LESA for furnished holiday
accommodation. However, it is a fair point that we ought to keep under
review arrangements to encourage the right level of energy efficiency
in furnished holiday accommodation. If it is appropriate at some point
to introduce fiscal incentives for that purpose, we will be open to
doing so.
We expect
the cost of the extensions to be up to£10 million per
year. That is set out in table 1.2 of last week’s pre-Budget
report documentation. The things that will count as energy-saving items
in the regulations will be those that I have listed: floor insulation,
loft insulation, cavity wall insulation, solid wall insulation,
draught-proofing and hot water system insulation.
The hon. Member for Braintree
asked why we did not make the incentive available for a dwelling under
construction. The answer is that, as a result of recent changes,
building regulations require new properties to be built to a high
standard of energy efficiency. As a regulatory requirement already
exists, making the LESA available would cost the taxpayer money but
would not have a beneficial effect. The aim of the LESA is to target a
market failure where there is no requirement, as in the case of
existing privately rented properties, for energy efficiency measures to
be taken.
Finally,
the hon. Member for Braintree also asked why we needed separate
regulations for income tax and corporation tax. It is because they are
covered by two different Acts, so it is necessary for there to be two
separate sets of regulations. Indeed, they will take effect on
different dates. However, I can reassure him that the definition of
energy saving items will be the same for both income tax and
corporation tax. I hope that that will be of some comfort to
him.
Question put
and agreed
to.
Clause 17
ordered to stand part of the Bill.
Clause 18 ordered to stand
part of the Bill.
|
| |
| ©Parliamentary copyright 2007 | Prepared 16 May 2007 |