Clause
35
Industrial
and agricultural buildings
allowances
The
Chairman:
I have taken a look at the scope of the
amendments to this clause and I am reasonably satisfied that, given
some flexibility from the Chair, it will be possible to cover the stand
part issues within the debate on the amendments. I therefore advise the
Committee that I probably will not allow a stand part debate on the
clause.
Mr.
Mark Hoban (Fareham) (Con): I beg to move amendment No.
15, page 26, line 30, after
‘No’, insert
‘qualifying expenditure shall
form any part of the residue of qualifying expenditure when
a’.
The
Chairman:
With this it will be convenientto
discuss the following amendments: No. 16,
page 26, line 33, after
‘Part,’,
insert—
‘(ab) the qualifying
expenditure in question is incurred after 21st March 2007 otherwise
than pursuantto a relevant pre-commencement contract
(seesubsection
(7));’.
No.
17, page 26, line 38, leave out
‘before 1st April
2011’.
No. 18,
page 26, line 40, leave out subsections (2)
and (3).
No. 19,
page 27, line 9, after ‘No’,
insert
‘qualifying
expenditure shall form any part of the residue of qualifying
expenditure when
a’.
No. 20,
page 27, line 10, after ‘if’,
insert—
‘(a) the qualifying
expenditure in question is incurred after 21st March 2007 otherwise
than pursuant to a relevant pre-commencement contract;
and
(b)
’.
No.
21, page 27, line 12, leave out subsection
(5).
No. 22,
page 27, line 16, leave out
‘subsections (4) and (5)’ and insert ‘subsection
(4)’.
No. 23,
page 27, line 19, leave out ‘before
1st April
2011’.
No. 24,
page 27, line 27, at end
add—
‘(8) This section shall
not come into force unless the Treasury have laid before Parliament a
report setting out the impact of the abolition of balancing adjustments
and of the agricultural and industrial buildings
allowances.’.
No.
183, page 27, line 27, at end
add—
‘(8) This section shall
not come into force until the Treasury has laid before the House of
Commons a report on consultations which it shall undertake with the
agriculture and tourism industry within the period of six months from
the date of the passing of this Act about the effects on those
industries of the provisions of this
section.’.
Mr.
Hoban:
Welcome to the Chair, Mr. Gale. I am
grateful for your guidance on the breadth of the clause, which is just
as well, given that my remarks are broad.
The clause marks the start of
a long process of reform of the capital allowances system that the
Chancellor highlighted in the Budget speech in March. Those reforms are
designed to help offset the costs of the reduction—the 2p
cut—in corporation tax, which we debated earlier. The clause
sets the ball rolling on two particular groups of allowances—for
agricultural buildings and for industrial buildings—by
withdrawing balancing adjustments in connection with the disposal of
qualifying industrial and agricultural buildings, unless that
adjustment has taken place within a qualifying enterprise zone or
pursuant to the relevant pre-commencement
contract.
It
is worth highlighting the fact that buildings allowances have been in
place since the end of the second world war, when they were introduced
to encourage post-war reconstruction and to give businesses an
incentive to invest in buildings by enabling, as the law still states,
the cost of investment in those buildings to be written off over 25
years, at a rate of 4 per cent. per annum. Those are quite valuable
reliefs, and the HMRC website says that the value of claims for both
allowances in 2004 was just over £3 billion. Therefore, the
Chancellor is embarking on quite a significant reform, at significant
cost to taxpayers.
As
I said earlier, the clause withdraws balancing adjustments that arise
when the proceeds from the sale of an industrial or agricultural
building differ from its tax written-down value. Where the proceeds
exceed the tax written-down value, there is a recovery of the
allowances claimed to date. Where the proceeds are less than the tax
written-down
value—[Interruption.]
The
Chairman:
Order. I have no objection whatever to hon.
Members holding private conversations, but would they go outside if
they want to do
so?
Mr.
Hoban:
Thank you, Mr.
Gale.
Stephen
Hesford (Wirral, West) (Lab): The hon. Gentleman mentioned
the second world war. Does he agree that the economy has changed
slightly since that time, as commercial buildings are at least as
important to the economy these days, if not more so, than agricultural
and industrial buildings, and it is about time that we modernised our
economy? Is not that proposal part of such a
measure?
Mr.
Hoban:
No one can escape the fact that the economy has
changed somewhat since the end of the second world war. As I drive
around the country, I see new industrial buildings springing up to
house distribution centres and meet the needs of the growing retail
sector. The leisure sector is becoming increasingly important as a
source of employment in the economy, and I will come on to the way in
which those changes affect that sector in particular. I agree in part
that modernisation is needed to allow for the changing economy, but
that does not mean that industrial buildings are redundant. They are
still an important part of the productive and service sectors of the
economy.
Notwithstanding
that, the Chancellor announced a reduction in the rate of the
industrial buildings allowance, so that it will be zero by 2011-12 and
there will be no allowance for businesses to claim on industrial or
agricultural buildings. As you might anticipate, Mr. Gale,
that has caused concerns among various industry groups, which fall
under four headings. The first is the lack of proper consultation on
the change. It is a significant change because the value of the
allowances is just over £3
billion.
I spoke to a
senior tax adviser before the Budget and asked whether he thought that
it would make any significant reforms to capital allowances. He
replied, “No, it would not be possible, because the Government
would have to consult first.” The reality is that the Government
have not consulted on the scale and depth of the changes. It is worth
looking at the remarks of the British Property
Federation:
“The
proposed changes are inconsistent with previous government policy
statements. In December 2004, the government issued a consultation
document on capital allowances and the conclusions from the
consultation were announced in the December 2005 Pre Budget Report. The
conclusions were that there were no current plans to take forward
proposed reforms on a partial schedular system or the taxation of
capital assets, but continue to consider the scope for the modemisation
of capital
allowances.”
The summary
of the responses in paragraph 14 said:
“There was general
support for a commercial buildings allowance, incorporating the current
Industrial, Hotel and Agricultural Buildings
Allowances.”
Paragraph
15 said of the consultation:
“Respondents indicated
their dissatisfaction with the current IBA regime pointing towards the
compliance costs involved and the shortcomings of a system which did
not recognise the actual cost incurred when determining the level of
allowances
available.”
It appears
from the consultation on which the Government embarked that there was
widespread support for the continuation of IBAs and agricultural
business allowances, which were seen as an important part of setting
the costs of capital investment in
property.
The
second concern about the reforms goes back to the Chancellor’s
announcement about the broader reforms of capital allowances and the
fact that there should be a move to align more closely the writing-down
allowances with the economic rate of depreciation on capital assets.
Changes in subsequent years will reduce the writing-down allowance on
plans from 25 per cent. to 20 per cent. per annum to reflect the change
in the accounting charge that most businesses incur in relation to the
depreciation of
assets.
We are
discussing something slightly different. Under FRS 15, most businesses
make a depreciation charge against property. That is a change from the
previous accounting regime, SAP 12, under which it was common practice
not to charge depreciation. The overall package aligns accounting rates
and the tax rates for plant and machinery, but there is a divergence
from that policy in respect of property: the Government are abolishing
the writing-down allowances, but businesses charge depreciation on
property in their
accounts.
The third
worry that has been expressed most widely concerns the retrospective
nature of the measure. Investment decisions taken
24 years ago when people expected to be able to claim industrial
buildings
allowance and ABAs are now called into doubt. Such
decisions about investment were made on the assumption that they would
receive capital allowances, yet capital allowances will be withdrawn
over the next three or four years. That causes great concern to people
whose investment plans were predicated on the basis that capital
allowances would be available on their property. The fourth point
concerns the impact on the profitability of a number of UK business
sectors.
Mr.
Brooks Newmark (Braintree) (Con): My hon. Friend might
wish to consider the point made by the National Farmers Union. Farmers
in my constituency consider that the phasing out of the agricultural
business allowance will be a clear disincentive to upgrade and improve
their
facilities.
Mr.
Hoban:
My hon. Friend has just beaten me by a few
paragraphs to the impact that such a measure will have on the farming
community. He has highlighted the fourth worry, which is how the
changes will have an impact on different sectors of the economy, of
which agriculture is one. Another is the leisure sector, to which the
hon. Member for Wirral, West referred. The small companies sector, too,
will be particularly affected, as I shall explain
later.
It is worth
reflecting on some of the more general comments that have been made
about the changes. The Tax Journal states:
“The removal of IBAs
will affect not merely owners of traditional industrial buildings but
many utilities and transport
companies.”
It refers to
the hotel sector and says that it is capital intensive. It argues that
the economic case for the change would undoubtedly be more convincing
if some measure of depreciation were allowed for buildings
themselves.
11
am
John Whiting
of PricewaterhouseCoopers, a well known commentator on tax matters, has
said:
“Whilst
there have been calls for years to rationalise the allowances on
buildings, to deny any allowance seems perverse—property does
depreciate. The transition is far too short: financing arrangements
just set up on the basis of 25 years of hotel, industrial or
agricultural allowances will now receive as little as 10 per cent. of
the expected
allowances.”
In
addition, Property Taxation said:
“Property is generally
the second highest area of business expenditure besides salaries and so
all UK businesses will feel the brunt of these changes. Many will no
doubt choose, in due course, to pass on to their customers the ultimate
costs incurred through loss or reduction of allowances as proposed in
the
Budget.”
Clearly,
there is widespread concern from business and tax commentators about
the impact that removal of the allowances will have on the economy as a
whole. However, let me address some of the specific sectors that will
have an issue with the change. The tourism industry is the UK’s
seventh largest industry, generating £17 billion per annum in
export earnings and employing more than 2 million people. Bob Cotton,
chief executive of the British Hospitality Association, has said that
the association
“believes that the
Chancellor’s decision will discourage investment at a time when
there is more pressure than ever to
build new quality hotels and restaurants, to add extra rooms and to
upgrade facilities
generally.” He added
that the association has
“one member who, with a £3
million extension to his hotel, would have been allowed to claim tax
relief over the next three years alone on nearly £1.2m of the
costs. Under the new proposals, his tax relief will be reduced by as
much as £600,000 or possibly even
more.”
It is not just
hotels that are affected; every hospitality company that wants to
expand will be affected
too.
Rob
Marris (Wolverhampton, South-West) (Lab): If the hon.
Gentleman accepts—although he might not—that a regime
that is 60 years old is somewhat outdated, surely the time to change it
is when the sector is buoyant and not when it is
depressed.
Mr.
Hoban:
The very same argument was deployed by the
Chancellor back in 1997 when he made his tax grab on pension funds. He
said that it was fine, because the sector was buoyant, but we know what
happened—the pension sector declined as a consequence of the tax
grab. So the argument does not constitute a particularly robust support
for the Government’s proposed changes. I know that you would not
wish me to be tempted down the tax dividend route, Mr. Gale,
so I shall return to the impact of the proposed changes on particular
sectors.
Graham
Gross is the chairman of the British Hospitality Association. He is
from the west country and he owns two hotels there. In a letter, he has
said:
“As a
result of the Budget, the extension to the Thurlestone will not go
ahead as we were planning and we will have to severely curtail our
plans to develop the Mullion Cove.
At a time when the hotel
industry is being urged to refurbish its facilities and build new units
to meet international competition and growing customer sophistication
the consequences of the Chancellor’s Budget will be felt for
many years into the
future.”
That shows that
the tourist sector is already having to adjust to the
Chancellor’s changes. When we deal with amendment No. 24 I shall
address some of the things that the Chancellor should perhaps be
thinking about before proceeding to implement the regime.
My hon. Friend the Member for
Braintree mentioned the plight of farmers. The NFU has been very vocal
in its comments on the proposals and has pointed out that most of the
assets that qualify for the agricultural buildings
allowance—steel barns, structural parts of dairy sheds, and
poultry and pig houses—have limited useful economic lives and
are depreciating assets. Notwithstanding that, they will not benefit
from the
allowance.
Julia
Goldsworthy (Falmouth and Camborne) (LD): Does the hon.
Gentleman share my concern that there might be a disproportionately
negative effect on smaller farmers, who are exactly the farmers who
might look to diversify into other industries and who might also be hit
by the increases in the corporation tax rate for small
businesses?
Mr.
Hoban:
Indeed. The hon. Lady makes an important point
about the interaction of the reforms with other Finance Bill proposals
that we have already debated. I shall address that later, because it is
important to understand the impact that will be felt by different sized
businesses that are subject to different tax
regimes.
The NFU said
that
“it is unjust
simply to withdraw relief completely on expenditure already incurred.
It is clear that the phasing out of ABAs will result in a significant
loss of relief over what would have been the remaining tax lives of
qualifying assets.”
One
accountant in the south-east told the NFU that his firm’s larger
clients currently have unrelieved balances totalling £12.5
million. That is a significant amount of tax relief that farmers felt
would be due to them in the future that they will now no longer
receive. If they seek to sell one of their agricultural assets when
clause 35 comes into effect, they will not even receive the balance of
the adjustment on that sale.
Therefore, there are concerns
in the farming sector. In Oxfordshire, one accountant produced examples
of a range of clients who currently have ABA balances ranging from
£814,000 to £4.2 million. Those are significant sums for
individuals working in the agricultural sector.
I come now to the argument of
the hon. Member for Falmouth and Camborne. The Government have argued
that the reform of capital balances, the abolition of balance
adjustments and the phased withdrawals of IBAs and ABAs will fund the
corporation tax cut that they announced at the time of the Budget; the
2p reduction in the headline rate. One can accept the loose argument
that the reductions in one area will be funded by increases in tax in
another, and that there will be winners and losers. There is a logic to
that. However, as the hon. Lady points out, a problem arises for small
companies; they will lose the historic tax balances that they would
have received relief on and, in addition, will have to pay a higher
corporation tax rate themselves. Therefore, there is a double whammy
there. They will not be able to receive the benefit of tax relief on
investment already incurred and they will have to pay the higher
corporation tax rate as the Chancellor proposed in the
Budget.
Mr. Gale, if you
owned industrial property—and I do not know whether you
do—you would see the loss of IBAs and ABAs but would not receive
compensatory reduction in your tax rate as a consequence. The only
people who seem to be potentially net in balance will be those
companies paying the main rate of corporation tax. The small company
sector will want from the Chief Secretary some acknowledgment of the
impact that that will have on the sector when taken in conjunction with
other changes to the tax system.
Amendments Nos. 15 to 23 are
designed to achieve a degree of grandfathering for expenditure already
incurred, or contracted to be incurred prior to the Budget. That means
that, where there is a disposal, they will still be eligible for a
balancing adjustment. That reflects the concern over the retrospective
nature of the changes. It is worth remembering that there is a
precedent for grandfathering in this area. When the industrial
buildings allowances were increased from 2 per cent. to 4 per cent.,
only new investment qualified for the 4 per cent. rate. Therefore, when
Governments have made changes on IBAs and ABAs in the past,
they have thought about the issue and taken it into account. They
differentiated between past and future investment. In Amendment No. 24, and I
think in Amendment No. 183 tabled by the hon. Member for Falmouth and
Camborne, we ask the Treasury to lay before Parliament a report setting
out the impact of the abolition of balancing charges, in particular in
the abolition of IBAs and ABAs more generally. As Committee members on
both sides will acknowledge, there are legitimate concerns about the
impact that the abolition of IBAs and ABAs will have on those sectors
that are heavily dependent on capital investment for their business. It
is important that that analysis is made available by the Treasury and
that it is able to work through that process more speedily. These
issues would have emerged more properly through a process of
consultation. Although the Government have often been congratulated on
carrying out proper consultation in other areas—I will
congratulate them myself later for that—it is a pity that we
have a major change here that has really been introduced without proper
consultation.
In
conclusion, these amendments would provide protection for past
investment and would also provide the Government with some time to
think about the impact of the changes on property-intensive businesses
such as tourism, leisure and agriculture. They would also give the
Government the opportunity to think carefully about the impact of the
changes on different types of business, whether they are small
companies or larger businesses. I think that it is perhaps small
companies that will have a great deal to lose from the abolition of
these allowances, as they do not have the compensatory reduction in the
corporation tax rate.
The Government have embarked
on a major reform without carefully thinking through the consequences
for different groups. By accepting amendment No. 24, the Government
would create some room for manoeuvre and give them the opportunity to
think again about the clause and how it might affect different
businesses.
Julia
Goldsworthy:
It is a pleasure to welcome you to the Chair
this morning, Mr. Gale.
As we have heard in the
remarks made by the hon. Member for Fareham, the clause is the first
part of proposals announced in the Budget to abolish the IBAs and ABAs
as part of the wider package of reform of the capital allowance system.
If one examines the timetable, the clause eliminates balancing
adjustments but allows the existing writing-down allowance to continue.
Then, in subsequent years—presumably we can expect legislation
in next year’s Finance Bill—we will see the rate of
allowance cut down from 75 per cent. ultimately to zero.
This package of reform has
been portrayed as a balanced package and ultimately it may well be a
balanced package. However, the difficulty for many businesses is
working out how all these changes that they have heard about will
interact with one another, and determining at what point they may
benefit and at what point there may be significant difficulties or
disbenefits for them.
We see a
headline reduction in the rate of corporation tax, which will not
benefit small businesses; instead, they will see an increase. Although
such businesses may benefit from an annual investment allowance next
year, in the meantime, they must work out what the impact will be. They
are left with this huge package of change, which, as we have heard,
there has not been much consultation about, and the wash of all these
different decisions will affect different businesses in different ways.
I have received representations from businesses that feel that they
will be negatively affected, but I am sure that there are many other
businesses that simply will not have any idea about how all these
measures will interact with one another.
Of course, these changes will
have an impact on future decisions, but they will also have an effect
on areas where decisions have already been taken and investment has
already been made. There will be significant changes to things that
businesses have already set down in their budgets.
We have already heard about
the concern over the lack of consultation. The Institute of Chartered
Accountants in England and Wales recognised that this was a balanced
package, but it said:
“Such a major change to
the capital allowances rules should have been exposed beforehand for
detailed consultation. We appreciate that reform of the capital
allowances rules was mooted as part of the wider package of corporation
tax reforms but no firm proposals were discussed and we think that most
respondents thought it was a bad
idea.”
The Chartered
Institute of Taxation
said:
“We
welcome the extent of prior notice of future changes, although
consultation would have been
preferable.”
That
brings us to an issue that has been raised by the Liberal Democrats on
previous occasions. In some aspects of this Bill, we see that there has
been detailed consultation that has resulted in widely welcomed
proposals that are largely uncontroversial; in other areas of the Bill,
we see that changes are being put forward unannounced and there is no
opportunity for some kind of consultation before we have to debate
those changes, either on the Floor of the House or in Committee. It is
another example of how a limited, formal consultation procedure would
assist our ability to go through the Bill and give it detailed
scrutiny.
11.15
am
My
concern is whether the Government have fully thought through the
changes’ impact not only on businesses but on Her
Majesty’s Revenue and Customs. Has a regulatory impact
assessment been undertaken? Presumably, it must have formed the basis
for the Red Book predictions of how much revenue the changes would
generate for the Exchequer. There may be a regulatory impact
assessment, but I have not seen one, so I should appreciate the
Minister’s comments on whether one exists. Have the Government
considered the differential impact of the changes on various
sectors?
In
amendments Nos. 24 and 183, we are trying to tease out what sizes of
business and which sectors will be most disadvantaged by the changes.
We have heard that tourism, agriculture and industrial building are
among them. Has a regulatory impact assessment been
undertaken, and will it be made available for Parliament to see on what
basis the decisions were
made? The Chartered
Institute of Taxation has raised concerns about whether businesses will
end up re-categorising integral fixtures and plants. Before, it did not
matter how such things were categorised, but now it will make a
difference. The CIT said in its
representation:
“Until
now, the split of costs between buildings, plant and fixtures did not
affect the sum of the long-term allowances given. However, the change,
because it is to apply to existing buildings, might result in many
companies that own industrial or agricultural buildings deciding to
review open tax returns with a view to re-categorising integral
fixtures or plants previously included as part of the building costs,
as fixtures and fittings. If this were to occur, it would result in
additional administration for those businesses and for HMRC. There is
also the possibility of error or mistake in claims being made for
earlier
years.”
Stewart
Hosie (Dundee, East) (SNP): The hon. Lady will know that
the guidelines on fixtures and fittings, plants and machinery are very
well defined. If people try to redefine them, does she see the
possibility of a new avoidance industry which we will have to tackle in
two or three years’
time?
Julia
Goldsworthy:
That may well be a problem. We shall revisit
the issue in future Finance Bills to tackle the potential for
avoidance. Again, I should like the Minister’s comments on
whether the Government anticipate any such changes in behaviour, and
what additional burden it might represent for Revenue and
Customs.
I shall
give some examples of the businesses that have contacted my colleagues
and me, to demonstrate how they feel they will be adversely affected.
The hon. Member for Fareham commented on examples from the tourism
industry of how decisions to invest will be affected by the changes
proposed in the clause, but I shall give an example relating to my
earlier
intervention.
A farm
in my constituency has diversified into cheese production. It is a
small farm struggling to get by. It was one of the first farms to
benefit from a European objective 1 grant application, which resulted
in the extension of the dairy. The farm already benefits from the
agricultural buildings allowance, but has recently made a decision to
make a significant investment in a dairy for cheese production, which
has an IBA residue of more than
£300,000.
The
decision was made in good faith. It has resulted in the creation of
jobs, is supporting the agricultural industry and is helping to develop
one of the most underperforming economies in the country, but money
that the farm could have reinvested will now be paid to the taxman.
Unfortunately, the farm is a small enough business that it will not
benefit from the higher rate of corporation tax—its corporation
tax will increase. The farmers will be all-out losers.
Cornwall is one county among
many that consists largely of smaller businesses. It has a lot of
industrial buildings and small-scale businesses, whether agricultural
or industrial. Its people will mostly lose out. I am interested to know
whether any assessment has been made of the differential impact in
terms of
geography on places where there might be large numbers of smaller
businesses. At the
other end of the country, my hon. Friend the Member for Orkney and
Shetland (Mr. Carmichael) has written to me about
Lerwick’s port authority, the deputy chief executive of which
wrote to him to raise huge concerns about the changes to the industrial
buildings allowance. She
said:
“For
2006, Lerwick Port Authority has IBA’s of £680,000
resulting in a corporation tax saving of £204,000 (30 per
cent.). The abolition of this is very detrimental—even on
current projects the additional corporation tax due over 25 years is
immense. More worryingly, the capital investment programme we have for
developing the port will be
affected”.
That, too,
chimes with the hon. Gentleman’s comments. We are concerned
about the impact on investment decisions that have already been made,
and how the change will affect future investment decisions in the
tourism industry and other sectors all over the country.
Many companies either fear
that they will lose out or have not yet been able to get a handle on
how this package of reform will ultimately affect them. Some are part
of the way through the change process; others do not know what will
happen at the end of it. I hope that the Minister will respond to my
questions by reassuring those companies that the Treasury fully
understands the cross-cutting effects of the range of
changes.
Adam
Afriyie (Windsor) (Con): The clause concerns the
short-term phased removal of agricultural and industrial buildings tax
incentives, which were designed to encourage the building of such
buildings. It amends parts 3 and 4 of the Capital Allowances Act 2001.
I would welcome the simplification of capital tax allowances if that
were the sole purpose of the measure. Certainly, an alignment of all
sorts of allowances throughout the economy and business taxation to
coincide with a simple, straight-line depreciation method would be an
understandable manoeuvre; it would be a simplification.
Given that we all accept that
it is clear that the economy has changed since the second world war, it
would be understandable if we were to review the incentivising of the
building of agricultural and industrial buildings. However, it seems
that the Government have, to a degree, misled investors. It is a bit
like offering somebody a chair and then, as they position themselves to
sit down, pulling it away. The agricultural sector, hoteliers and the
industrial sector—manufacturing companies—have been
working on the basis that the allowances would continue for 25 years,
and have made decisions intended to last for that period. All of a
sudden, the Government have changed direction and said,
“Actually, we are removing those allowances,” but have
not compensated them in some other way. Indeed, as the hon. Lady
pointed out, not only are the allowances being removed, but the changes
disproportionately affect smaller businesses. They face the corporation
tax increase over the next two or three years and they are also having
their allowances taken away. A pincer movement is being made on smaller
businesses, smaller agricultural businesses, hoteliers and, in
particular, manufacturers.
Rob
Marris:
May I gently remind the hon. Gentleman that the
Government that I suspect he supported did exactly the same thing in
1984 when I was taking out a mortgage? They got rid of life assurance
premium relief and subsequently ran down mortgage interest relief at
source over the 25 years of my mortgage.
Adam
Afriyie:
There is the old adage that two wrongs do not
make a right. I am not arguing that past bad decisions should persist
into the future, but I would argue that businesses have had a clear
framework—they have had the certainty that if they make
investments for 25 years, the writing-down allowances will be available
for that period. Then, all of a sudden, the rug has been pulled and
people who purchased buildings only two or three years ago find that
their reliefs have disappeared.
Julia
Goldsworthy:
Very small businesses might in future benefit
from the annual investment allowance. However, their concern is that
that still has no effect on past decisions to
invest.
Adam
Afriyie:
That is precisely my point. All hon.
Members, not just those on the Conservative and Liberal Democrat
Benches, must become very nervous whenever there is retroactive
legislation, particularly on taxation, unless it is to close tax
loopholes.
The
Economic Secretary to the Treasury (Ed Balls):
Just to
clarify the matter, we are anxious to point out the extent of the
Opposition’s expenditure commitments. The hon. Gentleman said
that the abolition of MIRAS—mortgage interest relief at
source—and tax relief on life assurance was wrong. He said that
two wrongs do not make a right; it was the wrong thing to do to abolish
those tax
reliefs.
Adam
Afriyie:
That was a lovely schoolboy trick, but it is well
outside the scope of our discussions. I was making a general
observation that any retroactive tax legislation needs to be considered
very carefully. I will not rise to the Economic Secretary’s
schoolboy
remark.
Mr.
Newmark:
There is a more serious point that follows
from my hon. Friend’s remark—that the retroactive
legislation is saving the Government £3 billion, which
will plug a £3 billion black hole in their
finances.
Adam
Afriyie:
My hon. Friend pre-empts me wonderfully, as he
made exactly the point that I was coming to—that the Government
are clearly in some difficulty because of their tax-and-spend attitude.
They gave a reduction in corporation tax to large businesses, but they
are now having to scrabble around to pull back the tax take from
smaller businesses and businesses that felt there was a certainty in
their investment framework. I am not comfortable with that
behaviour.
My
observation, to which the Chief Secretary may wish to respond, is that
if the proposal was not designed as a tax-raising measure—a
retrospective tax-raising measure to a large degree—why not
allow
the balances to be paid up front? Why not give businesses an option? If
there are 10 years to run at 4 per cent., for example, on an
agricultural or industrial building, the business can claim a 40 per
cent. allowance. Why not just say, “It is your choice. You can
either have 20 per cent. now or let it run.” If this is not
purely a tax-raising measure, largely on smaller businesses, why not
give them the option to take a larger amount or to have more of the
allowances reclaimable? In that way, businesses which, without a shadow
of a doubt, will be struggling, will have an option to do something
different in the short or longer term. They may decide that they would
rather continue taking the allowances for the next 10 years, but they
may decide to take a lower amount of tax rebate now. It appears that the Government
have duped farmers, hoteliers and manufacturers, and then pulled away
from the behaviour they were encouraging. I do not disagree with the
argument that the investment environment probably needs to change; it
is a fair point that we may not require more agricultural buildings,
but if that is the case, why not announce that two or three years from
now the allowances will disappear completely and enable those who are
already claiming them to continue to do so until the end of the
period?
I have two
key questions for the Chief Secretary. First, why was there no
consultation on this scheme when there was plenty on tax-avoidance
schemes? Secondly, on tax allowances for the music industry, there are
new, first-year capital allowances for new investment over a
single-year period. What certainty is there that the Chancellor will
not withdraw those allowances? If the Government are prepared to
withdraw what I argue is a stabilising allowance for investment in the
agricultural and industrial building sectors, what confidence can
businesses have that the new allowances, which as yet are not clearly
defined, will remain? Or are they going to offer single-year allowances
and then withdraw those to rake in even more money for the Exchequer,
in order to fill that black hole of several billion pounds that has
been created over recent
years?
11.30
am
Mr.
Newmark:
I had assumed that we had finished the section of
the Bill on anti-avoidance, and I would like to hear the Chief
Secretary’s justification for the surprise with which this move
has been greeted by those sectors that it affects. My hon. Friend the
Member for Fareham alluded to two of them—the British
Hospitality Association and the NFU. Given that the capital allowances
referred to in clause 35 influence long-term investment decisions, it
would not have been difficult for the Chancellor to consult—the
point that my hon. Friend the Member for Windsor was
pressing—and to give fair warning of these changes. After all,
the Chancellor has had 11 Budgets in which to do so.
If I were cynical, I might be
tempted to think that clause 35 has less to do with beginning to
correct an anachronism within the capital allowance regime than it has
to do with propping up the Government’s balance sheet to the
tune of £3.042 billion in forgone revenue. The Government have
justified the clause as
the first step in the process of withdrawing the industrial buildings
allowance and agriculture buildings allowance in order to prevent some
businesses from obtaining an unfair or arbitrary tax advantage.
However, the Chartered Institute of Taxation had to perform gymnastics
to determine if any advantage might be possible. Try as it might, it
could not find one that could be considered as unfair. Perhaps the
Chief Secretary could give us some examples of the unfair or arbitrary
situations that are intended to be caught by the
clause. On the wider
issues raised by the Government’s interference with the capital
allowances regime, there seems to be a number of flawed assumptions at
play here, the worst of which is the fiction that industrial and
agricultural buildings do not depreciate and should not therefore
qualify for a writing-down allowance. Budget note 7 referred to the
industrial buildings allowance and agricultural buildings allowance as
“outdated and unjustified distortions.” As alternatives,
the Red Book has “longstanding and unjustified”, as well
as “distortive”, which I cannot help thinking is
something of a distortion in itself. Nevertheless, that is fairly
scathing language to describe what are admittedly well established and
even venerable capital allowances. Whatever their provenance, the IBA
and ABA reflect the fact that industrial and agricultural buildings
depreciate. I say that that is a fact, but if I am wrong, I hope that
the Chief Secretary will correct me for the
record.
I represent a
constituency that is largely rural, in which many people will be hard
hit by the withdrawal of these allowances. If I were to suggest to a
farmer in my constituency that his working buildings did not
depreciate, as he thought they had for so many years on the basis of
good empirical evidence of seeing them rusting or collapsing in front
of him, I suspect that he would not be impressed by my argument. If I
were to say that his buildings were appreciating in the manner of
houses in Connaught square or the eco-homes in Gallions Park, he would
laugh at me.
Agricultural buildings are
worked hard and they have a useful life, after which they are replaced.
That is the reason for the straight-line basis of the write-down over
25 years. Farmers are not going to be able to sell, say, an 18-year-old
cowshed at a profit, on the basis of the appreciation of either the
structure itself, or in the vast majority of cases, the land on which
it stands. Those buildings depreciate from the day that they go up to
the day that they are pulled down or
replaced.
Adam
Afriyie:
If I understand my hon. Friend correctly, is he
saying not only that the Government were wrong about the IBA and the
ABA but that they have cut off any route for taking into account
appreciation in writing down these
assets?
Mr.
Newmark:
The Government have done that by removing that
opportunity that my hon. Friend referred to in his speech. The image he
used was of pulling the rug from under them. The clause is explained
away in terms of removing an unjustified distortion, but the distortion
accounts for a difference between a certain kind of working building
and other commercial property. I want to explore that distinction a
little further.
The Red Book claims in
paragraph 2.38 that the IBA, and presumably by extension the ABA, is
poorly focused and a historical anomaly. This lack of focus seems to
derive from the Government’s inability to engage with the
difference between commercial property, which might in the ordinary
course of events be expected to appreciate, and agricultural property
for which the opposite is usually true.
I can imagine the thinking in
the Treasury when this idea cropped up. Sitting in the impressive new
office building at 1 Horse Guards road it would have been easy to
envisage the steady and inevitable appreciation of commercial property
and to question why any special allowance for depreciation should be
made for agricultural or industrial property. Likewise if this
Committee had been sitting over the road in Portcullis House, we would
have another example of a building that ought not to depreciate
throughout its designed lifespan of in excess of 125 years. But
commercial real estate in central London is worlds away from the
cowsheds and pigpens in Essex and worlds away from the businesses that
rely on the capital allowances hit by clause 35.
The Government have rolled
these things together on the spurious grounds that they all involve, as
the Red Book would have it, “land and buildings”. That is
not robust reasoning. Rather than trying to tighten the focus to
correct any potential inequity, the Government have simply charged in.
I would say that they have gone like a bull at the gate but I do not
think that anything as rural as that occurred to Ministers when they
looked at this issue. If the distinction between the buildings that are
likely to depreciate and those that are not needs to be tightened up,
so be it. I would not disagree with that, but it should be tightened up
after proper consultation and reporting has taken place.
I have two further brief
comments to make. The first concerns the constant injunction that we
should look at all of the Chancellor’s measures in the round or
as part of a balanced package. What that really means is the process by
which a tax-cutting budget is revealed as a tax-conning budget, but we
should not stray too far from what we are talking about.
I share the concerns of my
hon. Friend the Member for Fareham that small businesses and
unincorporated businesses will not benefit from the 2 per cent. cut in
the headline rate of corporation tax that sits in the balance against
the withdrawal of IBA and ABA. What concerns me more than that is that
the detailed shape of the whole package on capital allowance has
yet to appear.
The Chancellor is withdrawing
balancing adjustments and the recalculation of writing-down allowances
now, but is also dithering over bits and pieces of the package that
will appear in future Finance Bills. I suppose that once the Secretary
of State for Trade and Industry is installed in No. 11, the case for
industrial buildings allowance might conceivably be looked at again,
but I doubt very much that the Secretary of State for Environment, Food
and Rural Affairs will be able to effect a positive outcome for the
farmers.
Rob
Marris:
Could the hon. Gentleman explain what the effect
of withdrawing balancing adjustments would
be?
Mr.
Newmark:
The effect of withdrawing the balancing
adjustments will have the knock-on effect that we are talking about
here. That is the removal of capital allowances and, to use my hon.
Friend’s analogy again, pulling the rug from those businesses
that have made certain assumptions about their cash flows in respect of
commercial or agricultural buildings. It would be preferable to defer
the beginning of this process until after the detailed study called for
in amendment No. 24 has been
undertaken.
My final
point concerns one piece of the future package: the rate of writing
down allowances for certain fixtures that are integral to a building.
That raises the spectre of a raft of artificial manipulations in
respect of what constitutes an integral fixture for accounting
purposes. Paul Howard, a senior tax consultant with Chiltern plc, has
said:
“You
could always claim capital allowances on fixtures, but I suspect they
will ring fence the definitions to restrict what you can claim as
integral...This could make buildings and capital allowances more
complicated than they already
are.”
In other words,
the prospective changes open the door to error, complexity and
artificial manipulations. Rather than shutting the stable door after
the horse has bolted, or indeed after the stable door has been
reclassified as a plant, will the Chief Secretary give some indication
of the Treasury’s thinking on this issue and the scheme set out
in Budget note 2? Better still, will he agree to amendment No. 24, so
he can set out his thoughts and listen to others at greater
length?
James
Duddridge (Rochford and Southend, East) (Con): The bigger
the tax grab, the less innocuous its title. If one were sat in the
Treasury wanting subtly to plug a black hole with a large amount of
money, one would choose something that sounded quite verbose and not
very exact and would probably make it an acronym. In fact, that has
been done with ABA and IBA. One would also try to disguise what was
actually going on. In respect of the ABA—the agricultural
buildings allowance—one would say, “Agricultural
buildings allowance? The farming sector’s only 1 per cent. of
GDP, so this must be about a small section of the economy.”
However, the measure involves industry as well, in respect of
industrial estates and property, and so forth, which is a significant,
but not massive, part of our economy. The definition of industrial
property covers not just farming, but all industry. We have received
submissions from various sectors, including hotels, transport,
distribution and tourism. It is effectively a tax grab from everyone,
and a huge one at that. I had to re-read briefs several times to
confirm that the figure of £3 billion was correct. That is an
enormous sum.
A
number of colleagues mentioned certain items: my hon. Friend the Member
for Windsor talked about a chair and my hon. Friend the Member for
Braintree spoke of a rug. Retrospective legislation is truly
appalling—in the sense of carpets, that is, as mentioned by the
hon. Member for Braintree, who is looking at me—and the issue of
retrospection is critical in my assessment of the relevant clauses and
the
Bill.
Adam
Afriyie:
The Chief Secretary may argue that the
writing-down allowances are contained in clause 36. However, if a small
or medium-sized
business has invested in a building for the long term, that is its
biggest capital expenditure, and their allowances will be cut off. It
is incredibly unlikely that the first-year allowances will apply to any
great
degree.
James
Duddridge:
My hon. Friend is right. It is not only that
business about which I am concerned, but the broader message that this
measure is sending to entrepreneurs, which is that they cannot look at
the present tax system with any certainty and know it will not be
changed overnight, retrospectively in the Budget by the Government,
effectively reducing capital investment in the United Kingdom, taking
away business and jobs from the UK and removing in the longer term the
absolute level of tax brought in to be spent on public
services.
11.45
am
My hon. Friend
the Member for Ludlow, whose constituency is rural in parts,
unfortunately cannot be with us today. However, he was passed some
information from a chartered accountant who specialises in the farming
sector in Herefordshire. Mr. James Hutchinson of the
Hutchinson partnership wrote to him and estimated that based on his
client base, changes to the agricultural buildings allowance would lead
to an effective tax increase of 8.5 per cent. for farmers. I
specifically want to understand what the Chief Secretary’s
assessment is of that and what advice he has received on
it.
My constituency
has one or two farms, but it is not largely a farming area. However,
having visited those farms I realise that far from farmers being
rich—the impression one might occasionally get from television
programmes—they are instead suffering. It is ironic—I
hope that I shall not be ruled out of order if I present the broader
picture of what is happening in farming—that Europe and the
Government are giving with one hand, by way of the common agricultural
policy, while increasing taxation with the other. That seems completely
inconsistent.
The
chartered accountants’ letter points out, with no sense of
irony, that
“the detail
is not always apparent
immediately”
from the
Budget. That is a consistent theme of our debates, particularly in
terms of these amendments and the substance of the legislation. The
letter mentions the retrospective effect of the legislation and
considers its likely impact on the client base of Mr.
Hutchinson’s firm. I admit that that is only one example, but
given that the Government have not done a systematic impact assessment,
because they have not gone through a proper consultation, we are
reliant on anecdotal examples. However, the firm does specialise in
agriculture. Over the next four years, the firm’s client base
will be left with £6.4 million of unused allowances that they
would otherwise have had. That seems totally and utterly
unfair.
Stewart
Hosie:
The hon. Gentleman mentions the impact of the
provisions. Does he think that it is perverse they will have an impact
on low-margin sectors, such as agriculture and tourism? Does he
believe that the law of unintended consequences will apply? When people
consider the cost, there will be fewer new entrants to the agricultural
sector. Tourism businesses that have been pressurised to invest and up
their quality will no longer be able to do so. At a time when
manufacturing industry in particular is being encouraged to invest to
compete, it will be unable to do so because the forecasted financial
plans will be thrown into
turmoil.
James
Duddridge:
The hon. Gentleman is absolutely right. My
constituency might be a long way from his patch, but there are further
contradictions within the Thames Gateway area, where the Government are
encouraging investment—this type of expenditure—prior to
the 2012 Olympics. The Bill does not fit within the thrust of what they
are trying to achieve.
The Government’s
changes are bad. They are not transparent, and they represent an
enormous £3 billion tax increase.
Mr.
Gauke:
I add my voice to those who have expressed concern
about the lack of consultation. A number of hon. Members raised that
point and questioned why something that has been described as the
biggest reform of business taxes since the mid-1980s has been
undertaken with little or no consultation. I venture to suggest that
the answer is that the Government have been slow to realise that the
corporation tax rate was becoming increasingly uncompetitive. Other
jurisdictions have been reducing their rates and the Government have
been under pressure—not least from the Opposition. In an attempt
to respond, they have hurriedly sought to reduce corporation tax and to
pay for the reduction by reducing allowances.
I am not sure that I would
disagree with that as a general policy direction. As the Chief
Secretary said, the corporation tax rate is, in itself, an important
point, as well as the overall burden of taxation. However, that
suggests that the Treasury perhaps took its eye off the ball on
corporation tax and business taxes as a whole. Hence, we have this
rather hurried proposal, with all the disadvantages that hon. Members
set out.
I want to
return to two points that I raised on Second Reading. The first relates
to the impact on major infrastructure projects, including the Olympics.
The reason why I raised that was because of the evidence that the
Select Committee on the Treasury received from, among others, John
Whiting of PricewaterhouseCoopers, to whom my hon. Friend the Member
for Fareham referred. In John Whiting’s oral evidence to the
Select Committee, he identified those who will lose as a consequence of
the proposals set out in the Budget. That will
include:
“somebody in
long-term property infrastructure including some very prominent
projects that are around at the moment where commitments have been made
on the assumption that allowances are going to come in over 20-25 years
and suddenly they are
not.”
When
Mr. Whiting was referring to
“some very prominent projects
that are around at the
moment”,
I think that he
was referring to the Olympics.
The Financial Secretary was
good enough to respond to me on that particular point when he wound up
the Second Reading debate. He stated
that
“the changes to
capital allowances have a largely temporary timing effect. Those will
be more than outweighed by the dominant effect of the cut in the main
rate that the Bill and Budget introduce.”—[Official
Report, 23 April 2007; Vol. 459, c. 758.]
As a number of hon. Members
pointed out, the cut in the main rate obviously only applies to those
companies that pay mainstream corporation tax rate. It will not apply
to small businesses.
I am not an accountant, but I
would also question the claim that the changes to capital allowances
have a largely temporary timing effect. They are clearly substantial
raisers of revenue and if they are substantial raisers of revenue,
presumably somebody is paying that revenue, or at least not claiming
allowances of some description.
Mr.
Hoban:
Perhaps I can illuminate my hon. Friend on
his point about temporary timing differences, and I say that as an
accountant. If the Government varied the rate of capital allowances,
that would accelerate or decelerate the rate at which that expenditure
is recognised for tax purposes. Where an allowance is abolished and not
replaced, there is a permanent loss of tax relief. So the changes in
the subsequent clause accelerate capital allowances. The changes that
we have debated in this clause—in subsequent years, we are
talking about the abolition of IBAs—will lead to the permanent
elimination of that tax relief.
Mr.
Gauke:
I am extremely grateful to my hon. Friend for
clarifying that—or at least it will perhaps be clarified in my
own mind when I carefully read his contribution in the Official
Report subsequently. For those who understand these matters, I
suspect that that was a very useful contribution.
I would be grateful if the
Chief Secretary agrees with my hon. Friend’s comments and
further explains whether the changes announced in the Budget and
contained in the Finance Bill could have a detrimental effect with
regard to the Olympics and cause an additional cost as far as they are
concerned. I am obviously conscious that the Chief Secretary follows
these matters closely from a constituency point of view. If he is able
to shed any light on them and on the concerns raised by John Whiting
and others, I would be
grateful.
The second
point that I raised on Second Reading, which the Financial Secretary
did not pick up on his closing remarks, related to the impact on
certain private finance initiative projects. I raise this matter rather
tentatively because I have only heard it discussed anecdotally, but
there is a concern that some of the PFI projects that the Government
have entered into in recent years contain clauses whereby changes to
allowances that would be detrimental to the PFI provider might trigger
additional payments from the Exchequer to that PFI provider. In other
words, there might be a revenue cost as a consequence of the changes to
the
allowances.
Stewart
Hosie:
Will the hon. Gentleman give
way?
Mr.
Gauke:
I gave way to the hon. Gentleman on this section on
Second Reading, and I shall give way to him
again.
Stewart
Hosie:
I am glad the hon. Gentleman remembers
that.
The total
amount of capital in PFI projects at the moment is £53 billion.
The total published outstanding liability to 2030-31 is £162
billion. Does the hon. Gentleman have any idea what the impact might be
if he is correct and the changes trigger additional costs to the
Treasury?
Mr.
Gauke:
No. That is why I am raising that concern. For the
sake of completeness, I have also said that the concern does not arise
in many PFI contracts, but it appears to arise in some. I am grateful
to the hon. Gentleman for providing numbers on the potential scale of
the problem, but I should be grateful if the Chief Secretary clarified
that point. As I said, I make the point tentatively, because I have
heard it only anecdotally, but if there is something in it, as the hon.
Gentleman suggested, it could create a considerable cost to the
Exchequer, so we must consider
it.
Mr.
Timms:
I shall start by outlining the purpose of the
clause. The Committee is already familiar with the main features of the
package of business tax reforms in the Budget. The main rate of
corporation tax will be reduced from 30 to 28 per cent., giving the UK
the lowest rate of corporation tax in the G7—lower than the EU15
and Organisation for Economic Co-operation and Development averages. A
set of reforms will modernise and simplify the capital allowances
system.
Adam
Afriyie:
Will the Chief Secretary give
way?
Mr.
Timms:
I will, but I need to get a bit of a move
on.
Adam
Afriyie:
The Chief Secretary mentioned the
reduction in corporation tax. Will he also confirm, as I am not sure
whether he is going on to mention it, the increase in corporation tax
for small
business?
Mr.
Timms:
Indeed, that was my next sentence. The refocusing
of the small company taxation system will tackle the rising Exchequer
costs of tax-motivated incorporation and provide a better-targeted
incentive for investment in the shape of the new annual investment
allowance, which was conspicuously absent from the comments of
Opposition Members, although not from those of the hon. Member for
Falmouth and Camborne. I shall refer to that in a moment. In addition,
enhancements to both the large company and small and medium-sized
enterprises research and development tax credits will increase business
R and D and strengthen the UK’s competitive
position.
The
packages are designed to be fiscally neutral for both small and larger
businesses in each of the years listed on the Red Book score card,
maintaining and strengthening the UK’s international
competitiveness and encouraging further economic growth through high
levels of investment. To underline the point for the
hon. Member for Windsor, the package will be fiscally neutral for small
businesses in all the score card years, because the benefits of the
additional allowances will be set alongside the increase in the small
company rate of corporation
tax. Clause 35 paves
the way for gradual withdrawal of industrial and agricultural buildings
allowances over four years. The hon. Member for Fareham is right to
point out that the allowances were first introduced more than 60 years
ago. They replaced the old mills and factories allowance, which dated
back to the early years of the 20th century. Sixty years ago, it made a
lot of sense to assist in the post-war reconstruction of British
industry, but as my hon. Friend the Member for Wirral, West pointed out
in his intervention, the allowances no longer reflect the reality of
the modern economy.
12
noon
There is no
good economic case for continuing to provide a selective subsidy for
some kinds of business property but not others. It may come as a bit of
a surprise to some listening to this debate, in the light of the
slightly overblown rhetoric of Opposition Members, to hear that 13 per
cent. of the stock of business property is eligible for industrial or
agricultural buildings allowances—80 per cent. is not eligible.
There really is no justification for having subsidies for this small
proportion of business properties and no allowances at all for the
rest. It is perfectly true that a case has been made for a general
system of allowances for all commercial properties so that the other 87
per cent. would be eligible too, but given the performance in recent
years of the commercial property sector, it would be hard to argue that
a more generous tax arrangement for them would be the right thing to
do.
Stewart
Hosie:
The Chief Secretary says that there is no
justification for the allowances for small industry sectors, but he
makes a point about the commercial sector. The per footage rental for
commercial retail space is buoyant and has been for many years. There
is an expectation that it will stay buoyant. However, the small margins
on agricultural businesses, the tiny margins in the hospitality sector
and the huge pressures in the manufacturing sector surely show that
there is a justification to provide the assistance to invest where
investment is needed in those sectors that are most hard pressed by
competition and very small
margins.
Mr.
Timms:
The small businesses to which the hon. Gentleman
refers are exactly the ones that will benefit from the annual
investment allowance that we are introducing, which my right hon.
Friend the Chancellor set out in the Budget. That is a much
better-targeted form of support than this rather random and arbitrary
arrangement that goes back 60 years. I can give a little
example. A crèche attached to a factory is eligible for an
industrial buildings allowance but a crèche attached to an
office is not. There is no rationale for such anomalies, and it is high
time that we put them right.
Julia
Goldsworthy:
While the annual investment allowance will
bring benefits to many small businesses, it affects future decisions,
not those that have already been made based on the current industrial
and agricultural buildings
allowances.
Mr.
Timms:
But many of those businesses, particularly farms,
that will see an increase in what is due from them because of the
withdrawal of allowances will see a reduction in what is due to them
because of the availability of the annual investment allowance. Farm
businesses are investing year after year. They will benefit. Small
businesses will benefit very substantially from the annual investment
allowance.
Mr.
Hoban:
Will the Chief Secretary give
way?
Mr.
Timms:
I need to make a little more progress. I want to
clarify a point that was made repeatedly in some of the slightly
overblown comments from Opposition Members about the amount of money
that is at stake.
The hon. Member for Rochford
and Southend, East referred to a £3 billion tax increase. The
hon. Member for Braintree made a similar point. The hon. Member for
Fareham referred to the £3 billion figure, but I think he
understood that the figure is the value of the claims. The cost to the
Exchequer is £600 million, so we are talking about an order of
magnitude smaller than Conservative Members appeared to believe. That
may account for the slightly overblown character of some of their
points.
The amount
at stake is £600 million, and £540 million of that is in
industrial buildings allowances, which incidentally is equal to about 4
per cent. of total allowances available to business. It helps to put
this into perspective. The remaining £60 million is in
agricultural building allowances: 95 per cent. of the benefit of these
allowances goes to large businesses and 50 per cent. of the
total amount of industrial buildings allowance—the £540
million—goes to the 100 largest companies. Those companies will
gain substantially from the reduction in the main rate of corporation
tax.
Let me pick up
another point. Both the large business package and the small business
package in the Budget are fiscally neutral in each of the years set out
in the Red Book. Without these measures, those packages would not be
fiscally neutral. I shall be interested to see how Opposition Members
will vote. If they vote in favour of the amendments, they will be
forgoing substantial sums—hundreds of millions of pounds of
income for the Exchequer—to add to the £400 million that
they decided to forgo when they voted against schedule 4 last
week.
Let me pick up
some of the other points that have been made. A good deal has been said
about consultation. The rate of writing-down allowance remains
unchanged for this year. It will be gradually reduced between 2008 and
2011. As my hon. Friend the Member for Wolverhampton, South-West said,
it is not customary to consult on changes in rates of taxation or on
the reduction or removal of tax reliefs. That is not the practice of
this Government, nor was it the practice of previous Governments.
However, we will consult
later this year on the design of new measures such as the annual
investment allowance, on which the hon. Member for Falmouth and
Camborne commented, and the new credits for environmental technologies.
We will certainly welcome contributions to those
consultations. Rather than withdrawing the
allowances overnight, we have given businesses a year’s notice
of their eventual withdrawal. From April next year, the writing-down
allowance will be reduced by one percentage point per year until 2011.
That will give businesses ample time to plan and adjust. The clause is
designed in particular to prevent forestalling and other behaviours
that would otherwise have allowed some businesses to accelerate
allowances unfairly at the expense of others. It is not right to
describe this as a retrospective change. Corporation tax is an annually
set tax. We have pre-announced the withdrawal, and will withdraw the
allowances in a phased
manner.
Mr.
Newmark:
I understand the Chief Secretary’s point,
and he is absolutely right on corporation tax. However, when it comes
to making capital investment and building decisions, one bases those on
the amortisation or depreciation that one can get on a building over a
certain period, because cash flows cascade off that. Making an annual
decision on corporation tax is a different matter from having the
taxation that is suggested in this clause.
Mr.
Timms:
There are a couple of points to be made in response
to that. First, the value of a building plus the land on which it sits
has commonly, in recent years, appreciated rather than
depreciated.
Mr.
Newmark:
Will the Chief Secretary give
way?
Mr.
Timms:
Let me finish the point.
The hon. Gentleman is right in
respect of agricultural buildings, but the picture is different because
the tax system recognises depreciation in other ways. It is common to
all commercial buildings that deductions against corporation tax are
available for the costs of repair and insurance, and the depreciation
of business premises is recognised at the point of sale in the capital
gains tax system. The system properly takes account of that
point.
On hotels, it
is interesting that the industrial buildings allowance regime was
extended to qualify hotels in 1978—it is a much more recent
feature of the regime than most—to assist with the growth of UK
tourism. I suggest that the rationale for giving extra help to hotels
at that time does not apply today. There is not a good economic case
for preserving that selective subsidy. In general, the sector is
enjoying high levels of profitability and it will also derive
significant benefit from the 2 per cent. cut in the headline rate of
corporation tax from 2008. In the case of smaller hoteliers, the annual
investment allowance will act as a big incentive for investment as
well.
Stewart
Hosie:
The tourism market has changed beyond recognition
since 1978. The long weekend city break holiday, which generates huge
amounts of money, particularly in urban areas where it did not
previously exist, is now subject to competition from places such as
Prague and Dublin, where people did not go, even for short breaks, in
1978. There is a constant demand to increase quality and availability
in all those areas. Surely the demand to keep the quality of the
service high and to improve constantly makes the argument that the
world has changed and therefore we do not need to do it completely
wrong.
Mr.
Timms:
No, not at all. People do not benefit from an
industrial buildings allowance if they are upgrading a facility in the
way that the hon. Gentleman talks about, and that is exactly the kind
of investment that will benefit from the annual investments allowance.
The new arrangements that we are introducing are much more effective
for encouraging the kind of investment that he wants to see rather than
the anomalous and outdated system that we are replacing.
On the Olympic games, I can
give the hon. Member for South-West Hertfordshire the reassurance that
the London Organising Committee of the Olympic games has been exempt
from corporation tax since its incorporation in October 2004, and so
will not be
affected.
Mr.
Gauke:
It is not so much that; the concern is that other
property infrastructure providers may find themselves hit. That is the
concern that the likes of John Whiting have
raised.
Mr.
Timms:
I am not sure who will be hit. The only sector that
I can think of that might be affected would be the hotel sector. We
have just had an exchange about that, and it will benefit overall from
the cut in the main rate of corporation tax or the annual investment
allowance.
The main
effect of amendments Nos. 15 to 23 would be to undo the main
anti-forestalling purpose of the clause. That would give a big
incentive to businesses without taxable profits against which to set
allowances, having valuable, older industrial or agricultural
buildings, to enter into sale and lease-back arrangements so that a
taxpaying purchaser could access relief on a high market value over the
remainder of the 25-year term. There would be a number of opportunities
for forestalling if the amendments were agreed and if this clause were
not agreed. The potential Exchequer cost of that is very large
indeed—probably around £250 million in the first year. A
number of other opportunities of that kind would open up.
I should also point out that
there must be an error in the drafting, because as drafted the
amendments would create new or increased balancing charges and would be
a significant deterrent to businesses from selling qualifying
buildings. I hope that for that reason as well, Opposition Members will
not press the amendments to a vote.
Amendments Nos. 24 and 183
propose delays pending reports. We have set out in some detail the
rationale for reform and the fiscal impact in this year’s Budget
report. It is our intention to publish a regulatory impact assessment
on the withdrawal of the industrial and agricultural buildings
allowances, and on the package more widely, over the next year, in time
for the implementation of the reforms. Those who are
calling for a report may perhaps be reassured by that. That information
will be published before the withdrawal takes place and will also
address the regional impact, although I do not think that it will be
large.
Adam
Afriyie:
Will the Minister give
way?
Mr.
Timms:
I will, but for the last
time.
Adam
Afriyie:
A regulatory impact assessment is to assess the
impact of regulations. Surely it should be done before the regulation
is drafted into legislation. If the regulatory impact assessment shows
the complete opposite of what the Minister has said, will he then
withdraw the
regulation?
Mr.
Timms:
I can give the hon. Gentleman the reassurance that
the regulatory impact assessment will not say the complete opposite of
what I have said. The RIA will be published before the legislation puts
the changes into effect. I refer him to clause 35, which is simply
about balancing charges, and does not put into effect the wider changes
to the allowances.
The real impact of this pair
of amendments would be to introduce a delay. I do not imagine that
Opposition Members want a delay in reducing the main rate of
corporation tax. The clause is designed to stop forestalling, and any
delay would re-create opportunities for that, and would give some
businesses an opportunity to gain an unfair advantage over others. The
right way of withdrawing these outdated allowances is in a fair and
orderly way. I commend the clause, without the amendments, to the
Committee.
12.15
pm
Mr.
Hoban:
I want to make a few remarks about the
Minister’s response to our extensive debate on the clause and
the amendments.
From
my perspective, the Minister’s response betrayed a failure to
appreciate the interaction of a complex series of reforms on
enterprises of different sizes. He was wrong to argue that the package
of tax reductions for large businesses is ring-fenced from the
refocusing, as we must now call it, of tax increases for small
businesses. The two allowances—IBAs and ABAs—can be
claimed by enterprises of different sizes and different forms of
ownership. ABAs can be claimed by people who pay income tax or by small
and large companies. It is therefore difficult to try to disaggregate
them as the Minister sought to do in his
remarks.
Mr.
Timms:
I am grateful to the hon. Gentleman for giving way,
especially as I failed to give way to him, for which I apologise. The
point that I emphasised was that for large businesses, and separately
for small businesses, the packages are fiscally neutral in each of the
years set out in the scorecard in the Red Book. It is not as a whole a
business package, but it works separately for large and for small
businesses.
Mr.
Hoban:
Given that the abolition of ABAs and IBAs has been
justified in the context of the reduction of corporation tax for large
businesses, there is a knock-on effect on small businesses and that is
where the problem arises. I take on board the Minister’s
comments about consultation and the fact that a regulatory impact
assessment will be published before the next Finance Bill. Apparently,
we all know the answer to that, so there is no point in professional
bodies wasting their time responding to the consultation document
because it is almost written as we sit here today.
Those are complex issues and
there should be a clearer way of thinking through the impact on
different sectors and different types of enterprise. The Chief
Secretary said on several occasions, “Don’t worry about
the abolition of ABAs and IBAs because there will be an annual
investment allowance for small businesses”. However, in the
past, small businesses evaluated projects on the basis of the available
ABAs or IBAs, and their cash flow was based on that. Those businesses
assumed that tax relief would come on-stream, but they will no longer
receive it, which will make it more difficult for them to continue to
invest. It is difficult to rationalise the matter by saying,
“Don’t worry, there will be a new allowance for
investment in the future,” because we are talking about the
withdrawal of investment relief to which businesses expected to
continue to be entitled. They have made financial projections on that
basis, and taken that tax relief into account when determining whether
the investment will go forward. That is an important
issue.
The hon.
Member for Falmouth and Camborne talked about the matter in the context
of rural diversification, and many businesses have based those very
difficult decisions on the assumption that the allowances would be in
place, so they will now wonder how well they will stack up in the
future.
Kitty
Ussher (Burnley) (Lab): Can I take it from the hon.
Gentleman’s remarks and those of his hon. Friends that a future
Conservative Administration would reverse the abolition of IBAs and
ABAs?
Mr.
Hoban:
No, the hon. Lady cannot take it; she falls into
the same trap as the Economic Secretary has fallen into, with great
delight and desire, throughout proceedings on the Bill. It behoves
parties, whether they are in government or in opposition, to think
through fully the changes that they make, but in this case, the
Government have failed to do so. That is why there should be a report,
which could consider the impact of the changes on small businesses, the
agriculture sector and tourism and ensure that they have been properly
thought through. The principal issue is the lack of
thought.
Julia
Goldsworthy:
A lot of rural diversification is assisted by
European funding. There are very strict criteria about the business
planning that needs to take place before a decision is made to provide
such funding. Plans have been made on the basis of the current tax
system rather than a changed version. Businesses need certainty, not
the greater uncertainty posed by the threat of more
changes.
Mr.
Hoban:
That is helpful. I am sure that the hon. Lady and
others know from having talked to those in business that one of the
things that they want, particularly when considering long-term
projects, is a degree of certainty in the tax regime. That is an
important factor to bear in mind when proposing any set of
reforms —[
Interruption.
] The Economic
Secretary is itching to get in.
Ed
Balls:
When the shadow Chancellor made his proposals for
corporate tax cuts two days before the Budget, saying that they were to
be paid for by the abolition of allowances—after consultation, I
am sure—was the allowance part of the package of allowances that
he was going to abolish to pay for those tax
cuts?
Mr.
Hoban:
My hon. Friend the shadow Chancellor referred to
the reform of capital allowances generally. That is something that we
will consider— [Interruption.]
The Economic
Secretary is desperate to help us write our 2010 Budget. I suppose that
we should be grateful that he recognises that that is going to
happen.
Let me
repeat what I said to the hon. Member for Burnley. It is important that
there should be proper consultation; changes should be discussed so
that their impact can be understood. I do not think that the Government
have done that properly in relation to the abolition of the two
allowances. We are not going to stand here and write the 2010 Budget.
We need to ensure that the changes are thought through and that we
understand the consequences for different sectors—we object to
the fact that that has not happened in this
case.
Stephen
Hesford:
Will the hon. Gentleman give
way?
Mr.
Hoban:
I shall give way in a second to the hon. Gentleman,
who will give us a breathtaking analysis of change in this country
since the second world war. Such measures need to be thought through
properly, and I am not sure that this one has been. It would have been
better, given the package that the Chancellor announced in the Budget,
for the regulatory impact assessment to be produced then; not at some
time in the future. It would be much better to have a clear analysis
now rather than having to wait. Does the hon. Gentleman still want to
intervene?
Stephen
Hesford
indicated
dissent.
Mr.
Hoban:
I want to draw this discussion to a conclusion. We
have had a full debate on the topic at the same time as colleagues in
Westminster Hall have been discussing the fate of the dairy industry.
There is a curious irony—you see, Mr. Gale:
accountants can do irony occasionally—in the timing of our
debate and the debate in Westminster Hall. I beg to ask leave to
withdraw the amendment.
Amendment, by leave,
withdrawn.
Amendment proposed: No.
24, in clause 35, page 27, line 27, at end
add—
‘(8) This section shall not come into force
unless the Treasury have laid before Parliament a report setting out
the impact of the abolition of balancing adjustments and of the
agricultural and industrial buildings
allowances.’.—[Mr.
Hoban.]
Question
put, That the amendment be
made:—
The
Committee divided: Ayes 10, Noes
15.
Division
No.
7
]
Question
accordingly negatived.
Clause 35 ordered to stand
part of the
Bill.
Clause
36 ordered to stand part of the
Bill.
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