Angela
Eagle: The clause introduces a new capital allowance
classification of integral features of a building or structure. It is
part of a wider package of reforms to business taxation that was
announced in the Budget 2007 and designed to promote investment and
growth through reduced administrative burdens and complexity. I am glad
that the hon. Lady has made a point of saying that simplicity is also
important in maintaining both reforms of that kind and the fairness of
the tax system. The
reforms include the 2 per cent. cut in the main rate of corporation tax
from 30 to 28 per cent. and a simplified capital allowances system,
with two main rates of plant and machinery allowances: the 10 per cent.
rate and 20 per cent. rate. The clause puts into effect the list of
integral features, as the hon. Lady has
said. Against
that background and as part of those reforms, the Government announced
their intention to introduce a separate capital allowances
classification of assets that are commonly integral features of a
building or structure so that expenditure on those assets can be
included in the new 10 per cent. pool. The Government decided to
introduce the new classification because over the years—this is
an important point that relates to what the hon. Lady said about
simplicity—the boundary between plant and machinery and
commercial buildings has been an area of considerable doubt and
uncertainty in tax law. The current law fails to reflect commercial
reality, in that, over time, assets commonly regarded as integral parts
of modern buildings, such as central heating and lifts, have come to
attract plant and machinery capital allowances at the main rate, which,
although it is
reduced—
Mr.
Bone: Will the Minister give
way?
Angela
Eagle: I will give way when I have finished my
sentence—although the rate is reduced from 25 per cent. to 20
per cent. by clause 77, it does not generally reflect the average rate
of economic depreciation. With the full stop approaching rapidly, I
give way to the hon.
Gentleman.
Mr.
Bone: I apologise for interrupting the Minister
mid-sentence. Where a company has had to put in a disabled lift because
of Government legislation, how
would that have been treated in the past? What rate would it have
attracted? I assume that it will attract a 10 per cent. rate in the
future. What does it currently
attract?
Angela
Eagle: I will deal with that point, if I can, in due
course. I was talking about economic depreciation and how the new 10
per cent. rate is more easily aligned with that. Our purpose in
introducing the new classification is to ensure that certain assets,
commonly standard in modern buildings, should be eligible only for the
10 per cent. “special rate” of writing-down allowance and
should not be classified as plant and machinery. The rationale is that
a 10 per cent. rate is more appropriate than 20 per cent. on selected
assets, because they can have longer average economic lives than plant
and machinery do
generally.
Mr.
Hammond: Has the Treasury surveyed what the average
economic depreciation of plant and machinery assets is across the
board? I have seen other organisations’ estimates that suggest
that the average rate of depreciation in financial accounts is
something like 11.9 per cent. Is the Treasury’s 10 per cent.
based on a different analysis or has it just taken 11.9 and sliced a
bit off for good
measure?
The
Chairman: Maria Eagle.
Angela
Eagle: Angela, Mr. Cook. You are not the first
person to make that error and I am convinced that you will not be the
last.
The Treasury
does not just take a number and slice bits off in that way. It does its
own research on these matters. There have been efforts to establish,
not only in the accounting professions but in the Treasury itself,
precisely what the rate of economic depreciation on such assets would
be. Her Majesty’s Revenue and Customs looked at 190 large UK
groups and found average depreciation rates of 17 to 19 per cent. on
those assets.
Mr.
Hammond: The Minister will anticipate the next
intervention. If the average depreciation rate is 17 to 19 per
cent. and, as she has told us, the purpose of bringing it down from 25
to 10 per cent. is to bring it more into line with economic rates of
depreciation, how does her Department’s survey justify the
figure that she has
chosen?
Angela
Eagle: The survey was about all assets and it did not look
at the difference between short and long-life assets. I am sure that if
the hon. Gentleman stopped and thought about it, he would have known
what I was going to
say. I shall respond
to the hon. Member for Putney, but I have been sidetracked down
highways and byways. I want to answer the hon. Member for
Wellingborough’s question about disabled lifts—the rate
was 25 per cent. before April 2008 and it is 10 per cent now.
To go back to our purpose in
introducing the new classification, the rationale for the change is
that for long-life assets the 10 per cent. rate is more appropriate
than a 20 per cent. rate, because long-life assets last longer and one
can get more services out of them before they depreciate. The clause
lists the selected
integral feature assets, which, as the hon. Lady said, include
electrical systems, hot and cold water systems, heating, air
conditioning systems, lifts, escalators and moving walkways. The list
also contains a building feature that is environmentally beneficial,
which is external solar shading. Such expenditure on the fabric or
shell of the building itself would not normally qualify for any plant
and machinery capital allowances, but its inclusion on the list means
that it will attract allowances of 10 per cent. a
year. 12
noon I
want to spend a little time dealing with the hon. Lady’s
questions. The 2007 consultation document explained why we were not
attracted to the so-called purposive approach to the new classification
of integral features. I detected from her contribution that she was of
that opinion. She was certainly very understanding of the
approach.
Justine
Greening: As ever, my party wants to listen to businesses
and work with them to achieve solutions that work for them. It was
therefore encouraging that the Treasury adopted the approach that
businesses said they favoured at the initial stage. My concerns are
about the implementation of that approach that appears in the Bill. We
must resolve these issues so that the measure can work as businesses
had intended when they said that they felt this was the better route to
take.
Angela
Eagle: I am grateful to the hon. Lady for saying that she
holds a similar opinion to the Government on this issue. I welcome her
view that simplicity is an important effect that we are trying to
achieve. We believe that the measure should simplify the current
systems. The definitions of electrical systems have not changed and the
trade-specific qualifications are no longer there, which is a major
simplification of the
system. The hon. Lady
asked about guidance and I can tell her that it will be produced for
Royal Assent. Once the Bill has become law, HMRC will ensure that there
is guidance on the interpretation of the new capital allowances that
she talked about so that companies can take advantage of
them.
Justine
Greening: May I press the Exchequer Secretary to see
whether there is any chance of getting the guidance earlier? The sooner
business can look at the guidance and understand the impact in
practice, the better. I appreciate that Royal Assent is a calendar
point when everything can be issued at the same time, but that will not
give business much time to look at this matter. I encourage her to look
at whether it is possible for the Treasury to bring forward guidance
earlier.
Angela
Eagle: The Treasury will have to bring forward guidance
when it can ensure that it is appropriate in detail and robust enough
to stand up to scrutiny. There is no point in producing guidance
quickly if much of it is wrong. There is always a balance. I have said
to the hon. Lady that we intend to produce the guidance for Royal
Assent. If it came to my attention that the guidance was in existence
and was ready and waiting to go, it would be in everybody’s
interests to make it available as soon as possible. However, it is
important that we ensure that it is as robust as possible before it is
issued so that confusion does not
result. The hon. Lady
asked about the removal of active façades from the list. She was
quite right to point out that that means windows in ordinary language.
She will know, as will anybody who has lived in a leasehold property,
that there is the outside of a window and the inside of a window. For
the purposes of her question, that is an important distinction, believe
it or not. She asked why active façades are being excluded from
the list. It is already accepted that the external skin of the active
façade—I will not say window—is not eligible.
However, the internal skin can be eligible because in effect it creates
a duct within which the cooling or heating air circulates. In other
words, the relevant parts of these systems, if they are ducts within
which cooling or heating air circulates, already qualify as integral
features by virtue of being part of the cooling or heating systems of
the building. So the answer is that if air is circulating and it is
part of a cooling or heating system—the windows internally count
as integral parts—the outsides are not but the insides can
be.
Angela
Eagle: I am not sure what further light I can cast on this
issue, but I am happy to
try.
Justine
Greening: There is further light. Will this be the kind of
clarification that businesses can expect to see in the guidance
notes?
Angela
Eagle: Well, they can see it in the proceedings of this
Committee if they care to look. Clearly the guidance will also deal
with issues such as that.
The hon. Lady also asked about
transfers. We recognise that it is common for property and other
companies to transfer properties intra-group. In those circumstances it
would be unfair to require the company acquiring the property on or
after April 2008 to reallocate old expenditure to the new 10 per cent.
special rate pool. So we have provided in clause 79 and schedule 26
that in these circumstances the parties may elect that their old
integral features expenditure be allocated to the buyer’s main
rate pool. In the case of unconnected persons, the existing section 198
rules which enable parties to agree the value of fixtures on transfer
already require the parties to identify amounts and actual assets
covered. So allocating the expenditure attributed to some of these
identified assets to the new 10 per cent. pool should not pose too much
of an additional burden.
The hon. Lady
also asked about the replacement rule. She used the example of the
electrical system being replaced in three floors of a building and
asked whether that would be replacement or repair. If the company owned
three floors and replaced the electrical system for one
floor—those of us who are whiz at mathematics can work out that
that is a third rather than 50 per cent.—it would be classed as
a repair, not a replacement. She also mentioned some of the worries
that have been expressed by the water and electricity industries about
the classification of cold water systems and so on in the list and
wondered whether that would apply to bigger utility plants. I am glad to take this
opportunity to clarify that the inclusion of cold water and electrical
systems of a building or structure in the new integral features
classification does not mean that the disparate assets that comprise a
water processing and supply system of the water industry or the
electrical systems of an electricity undertaking would be caught by the
new definition. The classification applies to systems for the use and
consumption of water and electricity, not for their production and
distribution. I hope that the hon. Lady will consider that clear
enough.
To come back
to the guidance not being published yet, companies will not have to
submit returns including their integral features calculations for up to
12 months. Long before that time, HMRC will have provided full guidance
on the new classifications in order for the transfer from the old to
the new system to proceed with as little disruption as possible. I hope
that with those clarifications, the clause can stand part of the
Bill.
Justine
Greening: I am grateful to the Minister for providing some
clarity. Obviously the sooner we can get the guidance the better.
Particularly with respect to some of the concerns that businesses have
raised since the original consultation, I urge her to work closely with
businesses to address any remaining concerns, especially on some of the
issues I have raised today. Although they may be clear to Ministers, we
need to make sure that they are clear to tax inspectors who are working
with businesses day to
day. Question put
and agreed
to. Clause 70
ordered to stand part of the
Bill.
Clause
71Annual
investment
allowance Question
proposed, That the clause stand part of the
Bill.
Angela
Eagle: The clause introduces the schedule that introduces
the new annual investment allowance. That is part of a wide-ranging
package of business tax reforms that the Government announced in the
2007 Budget, the main objective of which is to promote investment and
growth, not only through a lower corporation tax rate on a broader
base, but by refocusing the tax system for small businesses by means of
generous and better-targeted incentives for investment. The new annual
investment allowance will provide that generous new
incentive. The annual
investment allowance will provide, in effect, an annual 100 per cent.
allowance for the first £50,000 of investment in plant or
machinery—other than cars—to businesses, regardless of
their size. It is also a major simplification for the 95 per cent. of
businesses that invest less than £50,000 a year in plant and
machinery. The
Government consulted extensively about the design and technical detail
of the annual investment allowance
through the publication of formal consultation documents in July and
December 2007. Respondents to the consultation generally welcomed the
proposed annual investment allowance and agreed that it would be of
particular benefit to smaller businesses. In its documentation, the
Conservative party proposed to abolish the annual investment allowance,
so it will be interesting to see whether Conservative Members vote
against the
clause. Question
put and agreed
to. Clause 71
ordered to stand part of the
Bill.
| 
