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Written Ministerial Statements

Monday 17 December 2007


Capital Allowances (Draft Legislation)

The Financial Secretary to the Treasury (Jane Kennedy): The Government announced a major package of reforms to the business tax system in Budget 2007. These reforms will enhance the international competitiveness of the UK, by encouraging investment, promoting innovation and ensuring fairness across the tax system.

The package announced a reduction in the main rate of corporation tax to 28 per cent. from 2008, making it the lowest in the G7 and below the OECD and EU15 average. It included reforms to deliver a simpler, two-rate system of capital allowances, to ensure the tax system better reflects the economic depreciation of capital assets. The package also included the introduction of a new annual investment allowance of £50,000 for all businesses, to promote investment particularly by smaller firms. This will allow 95 per cent. of businesses to write off all of their investment (excluding expenditure on cars) in the year in which it is made.

In July, the Government published “Business Tax Reform: Capital Allowances Changes”, a consultation on the Government’s proposals for the key design features of the new annual investment allowance, new rules on integral building features and the transitional rules for the move to the new rates of capital allowances.

The Government are today publishing a technical note including draft legislation on these changes, reflecting the support of the majority of respondents to this consultation for the Government’s proposals. As a result of the changes, the Government estimate that the administrative burden of the capital allowances system on business will be reduced by £15 million.

This technical note announces the Government’s intention to extend the provision that allows capital allowances to be claimed on thermal insulation added to existing industrial buildings to all commercial buildings, at a rate of 10 per cent., in line with the Government’s approach to environmentally beneficial features integral to buildings.

The Government also intend to withdraw the special industrial buildings allowances available in Enterprise Zones (EZAs) from April 2011, to coincide with the withdrawal of industrial buildings allowance. The Government consider that these allowances have now served their purpose, and that there is no case for retaining them. No business that has already claimed EZAs will be affected by this.

The publication of the draft legislation marks a significant milestone in the implementation of this major series of reforms, which will enable the UK’s tax system to encourage businesses to invest for the future.

Copies of the technical note and draft legislation have been deposited in the Libraries of both Houses.

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The Chancellor of the Exchequer (Mr. Alistair Darling): The Economic and Financial Affairs Council was held on 4 December in Brussels. The items on the agenda were as follows:

Implementation of the Stability and Growth Pact:

The Council agreed that Poland had met the 27 August 2007 deadline to correct its excessive deficit procedure, as its 2007 deficit is expected to be below 3 per cent. of GDP. The UK supports a prudent interpretation of the Stability and Growth Pact (SGP) which takes into account the level of debt, the influence of the cycle and the level of public investment.

Lisbon multilateral surveillance:

Ministers agreed draft conclusions on the multilateral surveillance element of the Lisbon strategy national reform programmes. The Council discussed progress on innovation and SMEs, better regulation, competition, and labour markets. Ministers agreed that it was important to maintain the momentum behind reform. The UK welcomes multilateral surveillance under the Lisbon strategy, which encourages member states to focus on the implementation of the Lisbon strategy.

Globalisation: capital and labour flows:

Ministers prepared a contribution to the December European Council of 14 December on the economic dimension of migration. This follows from an exchange of views at November ECOFIN on the basis of a report on the economic impact of migration prepared by the European Commission. Ministers agreed that the economic and fiscal policy dimension of migration is important in the broader analysis of the issue.

Financial services:

a) Lamfalussy review

Ministers agreed a set of Council conclusions on the review of the Lamfalussy arrangements, and a roadmap for taking these forward. The UK believes the Lamfalussy framework has made a major contribution to improving the efficiency of the EU legislative process and enhancing the convergence of supervisory practices. The UK argued against proposals that could lead to moves towards a single European regulator and welcomed the Council conclusions and the roadmap, which should further develop supervisory co-operation and convergence.

b) Directive on the solvency of insurance companies (Solvency II)

Ministers discussed the proposed Solvency II directive on the prudential requirements for insurance and reinsurance companies. Ministers agreed on the need for further work on provisions in the directive dealing with group supervision. The UK supports work that will ensure more effective supervision of pan-European insurance groups.

c) Risk capital

Ministers agreed Council conclusions on cross-border risk capital which invite the European Commission to carry out further work on identifying and removing obstacles to cross-border investments by venture capital funds. The UK supports work to break down the key remaining barriers to development of European venture capital markets.

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a) VAT package

Following on from its discussion at its November meeting, the Council reached political agreement on a set of measures that will modernise the EU VAT rules for the cross border supply of services, with particular focus on proposed changes to the rules for business to consumer supplies in the telecoms, broadcasting and e-services sectors. In particular, the Council’s political agreement was made possible by acceptance by all member states that such services should be taxed in the member state where the customer is located, rather than, as is presently the case, where the supplier is established. The UK has been a strong supporter of this package and welcomes the agreement.

b) Reduced VAT rates

i) Commission communication on VAT rates other than the standard rate

Ministers agreed Council conclusions regarding future work on reduced VAT rates and noted the Commission’s plans to present a legislative proposal on reduced VAT rates in 2008. The UK supports flexibility in applying reduced VAT rates where these will not materially affect the single market.

ii) Proposal for a Council directive amending Directive 2006/112/EEC with regard to certain temporary provisions concerning rates of VAT.

Ministers then discussed a Commission proposal to extend until 2010 some of the new member states’ derogations for reduced VAT rates. Council agreed a general approach, pending the opinion of the European Parliament, on a new directive to this effect. The UK supports the extension of most of the temporary derogations granted to those member states that acceded to the European Union after 1 January 1995. The directive will be adopted without discussion at a forthcoming Council meeting, once the Parliament has submitted its opinion.

c) Capital duty directive

Ministers agreed a general approach, pending the opinion of the European Parliament, of a Commission proposal for a directive concerning indirect taxes on the raising of capital. The UK abolished capital duty in 1988.

d) Combating tax fraud

Ministers agreed conclusions which provide guidance to the Commission on the direction of further work to improve the effectiveness of the existing VAT system in combating tax fraud. The Council has called on the Commission to produce legislative proposals for debate in the early part of 2008 on measures previously identified as priorities by ECOFIN and for progress reports during 2008 on other work. The UK is strongly supportive of work that will help in the fight against Missing Trader Intra-Community (MTIC) and other VAT fraud, while remaining committed to minimising the burdens on legitimate businesses.

e) Code of conduct group (business taxation)

Ministers discussed a forward workplan for the code of conduct group. The Council took note of a report from the group on its work under the Portuguese presidency and adopted conclusions on the future work of the group calling for all outstanding issues on its
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work programme to be resolved before the end of the Slovenian presidency. The code of conduct group is a ministerial group which looks to co-ordinate and share best practice on tax-related issues that are not directly covered by EU legislation. The UK is a strong supporter of the group.

Public Service Pensions

The Chief Secretary to the Treasury (Andy Burnham): Legislation governing public service pensions requires public service pensions to be increased annually by the same percentage as additional pensions (state earnings-related pension and state second pension). The Minister for Pensions Reform announced on 5 December 2007 (Official Report, column 841) that benefits such as additional pensions will be increased by 3.9 per cent., in line with the annual increase in the retail prices index up to September 2007. Public service pensions will therefore be increased by 3.9 per cent. from 7 April 2008, except those which have been in payment for less than a year, which will receive a pro-rata increase.

Varney Review (Tax Policy in Northern Ireland)

The Chief Secretary to the Treasury (Andy Burnham): Following representations by political parties in Northern Ireland, the Government commissioned Sir David Varney in March 2007 to carry out a review of tax policy in Northern Ireland. His terms of reference were to examine “how current and future tax policy, including the tax changes announced in the Budget 2007, can support the sustainable growth of businesses and long-term investment in Northern Ireland”. The review has been published today and has been deposited in the Library of the House. I am very grateful to Sir David Varney and his team, and to all those who submitted evidence to the review. Sir David’s report provides a valuable assessment not only of business tax issues for Northern Ireland but also of how the opportunities and challenges facing the devolved administration in developing an investment strategy might best be approached. The Government are fully committed to supporting the Northern Ireland Executive in implementing such a strategy.

The Government recognise that, in developing their economic investment strategy, the question of business tax levels in the UK is a particularly important issue for the executive. I am therefore particularly grateful to Sir David and his team for the considerable depth in which this issue is analysed and explored in the report.

He concludes that a policy of a preferential corporation tax rate for Northern Ireland, as compared to the rest of the UK, does not offer the best way forward for building a strong investment strategy for Northern Ireland. He is not convinced that a cut would represent good value for money. In particular, the role of supply side factors needed to be paid due attention, and caution taken on the responsiveness of investment to a cut in the rate.

The review examines the tax position in Northern Ireland, in both its international context and in comparison with the Republic of Ireland. It finds that the UK compares favourably with its G7 partners in
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terms of corporate tax levels. It also finds that the UK has a lower rate of tax than the Republic in areas such as VAT and the top rate of income tax, and offers more generous R and D tax credits and tax relief on dividends.

The review recommends a strategy to develop private sector investment in Northern Ireland based on maximising the benefits of the competitive advantages that already exist in Northern Ireland, including current financial investment incentives, and realising the potential further to improve this competitive advantage.

The report notes that for many years the Northern Ireland economy has been over reliant on public sector investment for its growth but that political progress over the last ten years to end conflict and to transform Northern Ireland to a peaceful, stable society has already helped attract inward private sector investment. The restoration of devolution on 8 May is a major turning point and incentive for such further inward investment.

The report identifies Northern Ireland’s key competitive advantages as including:

The report recommends that these advantages can be maximised by a strategy to:

In short, Sir David Varney’s report found that the conditions for economic success for Northern Ireland are more than a matter of tax incentives. There are lessons in terms of improving labour force participation, basic skills, and efficiency and organisation in the public sector; and Northern Ireland needs to move towards the execution of a strategy focused on business and economic development.

In the light of Sir David Varney’s report, the Government are working with the Executive to:

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This will build on the May 2007 settlement, elements of which specifically focus on issues highlighted in the review as key to a sound and forward looking investment strategy:

The Northern Ireland Executive has put growing the economy at the top of its priorities. This is reflected in the draft Programme for Government that was published on 25 October 2007, along with a draft Investment Strategy and draft Budget for 2008-11. I welcome the strategy that this programme sets for building economic success to benefit all communities in Northern Ireland, including the good progress that is being made towards the planned US inward investment conference next year.

I have discussed the report and next steps with the Executive and I am today announcing that Sir David Varney has agreed to carry out a further review building on his first review and focusing on identifying policies and incentives for strengthening and sustaining private sector growth, investment and employment in Northern Ireland.

Against that background and the desire of the UK Government and Northern Ireland Executive to work in partnership to create the conditions for sustained economic growth and increased employment opportunities for all, the terms of reference for the second review are:

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