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 yearsthis is an important point that relates to what the hon. Lady said about simplicitythe 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
Angela Eagle: I will give way when I have finished my sentencealthough 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
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 Treasurys 10 per cent. based on a different analysis or has it just taken 11.9 and sliced a bit off for good measure?
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 Majestys 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 Departments 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 Wellingboroughs question about disabled liftsthe 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
I want to spend a little time dealing with the hon. Ladys 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 everybodys
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 façadeI will not say windowis 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 systemthe windows internally count as integral partsthe outsides are not but the insides can be.
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 buyers 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 floorthose 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
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.
Annual 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 machineryother than carsto 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
Question put and agreed to.
Clause 71 ordered to stand part of the Bill.
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