Schedule
24Annual
investment
allowance
Mr.
Hammond: I beg to move amendment No. 200, in
schedule 24, page 288, line 33, leave
out from ‘partnership’ to
‘or’.
The
Chairman: With this it will be convenient to discuss the
following: Amendment No. 201, in
schedule 24, page 288, line 34, at
end insert ‘; or (d) a
trustee’. Government
amendment No.
146 Amendment No. 202,
in schedule 24, page 289, leave out lines
41 and 42. Amendment
No. 203, in schedule 24, page 290, line 14, at end
insert— ‘(7A) Where AIA
qualifying expenditure incurred in a chargeable period is less than the
maximum allowances, the unused allowance may be carried forward to
relieve future qualifying expenditure in a subsequent chargeable period
or carried back to relieve unrelieved qualifying expenditure in the
previous chargeable
period.’. Government
amendment No.
147
Mr.
Hammond: Schedule 24 deals with the substance of the
annual investment allowance changes. While I shall try not to rise to
the provocation of the Exchequer Secretary’s previous remarks, I
will say that the Opposition’s proposals are to scrap the annual
investment allowance and the increases in the small companies
corporation tax rate, which the Government are imposing. Since it is
not within our power to table amendments to the Bill that would have
that effect, as the Committee will understand, it would be entirely
inappropriate to scrap the allowance without being able to do the other
side of the equation and maintain the 20 per cent. rate of small
companies corporation
tax.
Mr.
Browne: I appreciate the limitation that the procedures of
the House put upon us, but will the hon. Gentleman confirm for the
avoidance of doubt that it remains the Conservative party’s
policy to have exactly the same overall tax burden as the Labour
Government?
Mr.
Hammond: I think that we are going slightly wide of the
point, but as the hon. Gentleman knows, we have made a commitment to
match the Government’s spending plans for the three years of the
comprehensive spending review period. When that commitment was made, it
looked as though that would only bind an incoming Government for the
first year, 2010-11, but by the way they are going, one wonders
whether the change might occur rather earlier. However, I am sure that
you would not wish me to explore that line of thinking in any detail
this morning, Mr.
Cook. As the Exchequer
Secretary said, schedule 24 introduces the annual investment allowance
that was announced in the 2007 Budget and a capped, 100 per cent. first
year writing-down allowance of capital expenditure up to a limit of
£50,000. Let us focus on what the provision will replace. It
will replace the first year allowances for small companies that have
been available in recent years. It also has to compensate small
companies for the loss of industrial buildings allowance and
agricultural buildings allowances and the drop in the standard
writing-down allowance from 25 per cent. to 20 per cent., or 10 per
cent. in the case of integral features, as we have just debated. It is
also supposed to compensate small companies for the staged increase in
the small companies corporation tax rate.
It is true to
say that the overall package of capital allowance reforms and
corporation tax changes is neutral, broadly, but it would not be true
to say that the impact of these measures on small business was neutral.
The cuts in capital allowances for large companies are offset by cuts
in the main rate of corporation tax, but overall this package of
corporate tax changes raises the taxes on small companies, which will
see their allowances cut and the rate of corporation tax they pay
increase. Of course, the annual investment allowance will also be
introduced; I will come to that in a
moment. 12.15
pm The average
gain for a UK business from the introduction of the AIA in 2008 will be
somewhere between £60 and £70. That is calculated by
taking the Treasury’s annual cost of the AIA—£920
million—and dividing it by the Treasury’s estimate of the
number of businesses in operation. In contrast, the average cost of
additional corporation tax for small companies as a result of the
removal of the small companies rate will be will be approximately
£1,000
extra. All
the amendments to the schedule have been grouped together. Therefore,
with your permission, Mr. Cook, I intend to address not only
the amendments, but one or two other points that would relate to the
schedule in a stand part debate, as the amendments cover quite a wide
ranging
area. Government
amendments Nos. 146 and 147 correct a defect in the drafting. I am glad
that that was spotted before the Bill got through the House. This is a
matter of parliamentary procedure. We are happy with those amendments
and agree that they are sensible and should not have any unintended
consequences. On
amendments Nos. 200 and 201, the annual investment allowance to be
introduced under schedule 24 is available only to companies, sole
traders and partnerships exclusively between individuals. That
treatment discriminates against mixed partnerships, which are formed
between companies and individuals. It also discriminates against any
form of business carried on by a trustee, whether as a partner in a
partnership—I shall mention in a minute how that might
arise—or where a trustee or trustees are carrying on business in
their own right as trustees.
Partnerships
between companies and individuals are common, particularly in the
agricultural sector and they are not unknown in the property sector.
Partnerships between companies are a common form of joint venture
structure. Trustees, particularly trustees of farmland, may wish to
carry on a trade or enter into partnerships to carry on such a trade.
There is also a possibility, where a partner in a partnership of
individuals dies and a settlement arises, that the trustees may wish to
continue trading the partnership interest on behalf of the settlement.
In such circumstances, I understand that the whole partnership would be
denied annual investment allowance, because one of the partners had
died and that partnership interest had passed to a settlement. That
outcome seems inequitable. The Government have not explained why it is
necessary to have such an unfair, distortive restriction. The
assumption in the industry is that they must fear some kind of
avoidance or abuse. In our view, discriminatory action against certain
structures of business is not justified unless the Government can show
a specific concern about a likely area of
abuse. The
Exchequer Secretary will be aware that the Government have a stated
policy of neutrality in respect of different types of business
structure and of fairness between taxpayers who are in similar economic
situations, regardless of their legal structure. The schedule is quite
at odds with that stated objective in the way that it discriminates
against mixed partnerships and trustees engaging in a trade. The
amendment would delete the restriction on an eligible partnership so
that all partnerships become eligible for the annual investment
allowance rather than those partnerships being excluded that are formed
otherwise than as partnerships of individuals. Amendment No. 201
includes an explicit provision that would allow a trustee or trustees
to qualify for annual investment
allowance. Over
the next few provisions of the Bill, the Committee is being invited to
approve a wholesale reform of the capital allowances regime, not just a
minor tinkering. To pre-empt the Exchequer Secretary’s response
to the amendments, I say that in these circumstances, we do not think
the mere fact that something has or has not been allowed in the past is
sufficient justification for continuing with clearly inequitable
treatment. In the context of a wholesale reform of the capital
allowances regime, if any such unequal treatment is to continue, it
must be justified on a case-by-case basis on the grounds of serious
risk to the Exchequer of avoidance or abuse. I look forward to hearing
the specific justification for the exclusion of mixed partnerships and
trustees. Amendment
No. 202 would delete the requirement for the taxpayer to own the
relevant plant and machinery at some point in the chargeable period. On
the face of it, that may seem a rather odd amendment, but there is
already a condition that the taxpayer must have incurred the relevant
expenditure on the asset during the chargeable period. It is
unnecessary and potentially inequitable to require him also to have
owned the asset during the chargeable period. The first condition that
he must have incurred the expenditure is sufficient to deal with the
issue. Why does the Exchequer Secretary consider it necessary to have
the supplementary condition that he has owned the asset during the
period? It is not
uncommon for expenditure on plant and machinery to be incurred before
the person incurring the expenditure has ownership. For example, where
special-purpose machinery is being constructed, such as the building of
a customised production line, payments on account will typically be
required while the process of design, development and manufacture is
underway. The expenditure will perhaps be incurred many months before
the equipment is transferred to the ownership of the taxpayer. It seems
irrational not to allow that expenditure when it is incurred on the
basis that ownership has not been acquired at that point. Again, if the
Exchequer Secretary has some significant anti-avoidance concern that
causes her to make this restriction, we would be very interested to
hear it. I hope that she will acknowledge that something will have to
be done to ensure that staged payments on the construction of
special-purpose plant and machinery, for example, are not caught in the
way that I have
suggested. Amendment
No. 203 deals with the transfer of annual investment allowance forwards
or backwards. Under the schedule, the annual investment allowance can
be carried neither forwards nor backwards. For medium-sized businesses
in particular, which may invest £50,000 a year on average over a
period of time, there is a risk that the lack of a carry-forward or
carry-back provision will lead to tax-driven behaviour, which in turn
will lead to sub-optimal outcomes in economic efficiency. That would be
bad for the individual business and for the
economy. My point is
that businesses will be tempted to plan their capital spending on the
basis not of the economic requirements of the business or the
economically most appropriate point at which to replace capital assets,
but the availability of the allowance in-year. There will be a strong
incentive to spread capital expenditure, which in some cases will mean
delaying capital expenditure. That does not make sense for anyone, if
the equipment in question needs to be replaced or new equipment needs
to be purchased to increase business capacity. Perhaps that is not
likely at the moment, but we live in hope that we may come to a point
in the cycle where capacity is under
pressure. If
the allowance were able to be carried forward, a company might be
inclined to invest larger sums in new plant and equipment, knowing that
it could apply some of that expenditure to first-year allowance in the
second year or subsequent years. Clearly, the attractiveness of rolling
expenditure forward to use a future year’s annual allowance
decreases sharply beyond the first or second subsequent year, as
writing-down allowances would have to be forgone. However, there is a
view that there should be the ability to roll expenditure forward, and
to some extent backwards, to take advantage of unused annual investment
allowance. The amendment proposes an unlimited ability to roll the
allowance forward, and a one-year limited ability to roll it backwards.
If the Government were minded to accept the proposal in principle,
further drafting would be necessary to ensure that expenditure was not
relieved twice. Just to be clear about that, we envisage that
writing-down allowance would be denied where capital expenditure was
treated in that way, or alternatively that it would be the written-down
value that was relieved in the later year. We certainly do not suggest
a double tax allowance. I would be interested to hear the Exchequer
Secretary’s reasons for the non-inclusion of an ability to carry
forward or backwards the allowances.
As I said
earlier, the schedule sets how the annual investment allowance will
work, and individual businesses will have to look at that and see to
what extent it will compensate them for the additional costs that they
will face from the abolition of industrial buildings allowances and
agricultural buildings allowances, and from the higher rates of
corporation tax imposed on small companies. As ever with this
Government, even sensible measures are dragged into disrepute by being
implemented by stealth. If the generosity of capital allowances is
being reduced to fund a reduction in the mainstream rate of corporation
tax, why not say so, rather than pretending that the introduction of
annual investment allowances is some kind of bonus for smaller
companies that have, of course, not seen any reduction in their
corporation tax rate? In the past few years, those companies have
suffered an increase in that rate, unprecedented in the developed
world, when the trend among all our competitors is to reduce corporate
tax rates to stay competitive in the face of increasing global
competition from the developing economies, particularly in Asia. There
will be a significant distributional impact on different types of
businesses. Those with regular eligible capital expenditure will
benefit from the annual investment allowance, whereas those without
such qualifying expenditure will merely suffer the impact of the
abolition of industrial buildings allowances and agricultural buildings
allowances, and the increase in the corporation tax rate for smaller
companies. Apart from
the issues that I raised regarding mixed partnerships, the lack of
carry-back and carry-forward and the unnecessary restriction on
ownership of an asset, there are a couple of other points that I would
like to raise with the Exchequer Secretary. There is no index-linking
provision in respect of the £50,000 cap on the AIA. New section
51A enables the Treasury to amend that cap, but there is no restriction
to ensure that that power is used only to increase the limit in line
with inflation. Mr. Cook, the Financial Secretary has
written to your co-Chairman, Sir Nicholas, about how the Treasury
intends to use powers where draft statutory instruments have not yet
been published, but there is no clue in that letter as to how the
Treasury intends to use this particular power. It is possible that it
could use the power under new section 51A to decrease that limit. We
have to assume that that is not the Treasury’s intention. Can
the Minister confirm that the Government’s intention, with
respect to the power under new section 51A, is simply to be able to
increase the limit in due course? I accept that it might not make sense
to index it precisely year by year, but the intention is to increase
the limit periodically, so that its real value is broadly
maintained.
12.30
pm New section 51B
introduces a restriction on the availability of the allowance for
groups of companies under common control. New section 51A does the same
for other companies under common control. In both cases, the
restrictions apply where companies are controlled by the same person
and the companies are related to one another—two separate
criteria have to be satisfied. New section 51G defines
“related” and provides that two companies are related if
they either carry out similar activities or share premises. The similar
activities test is clearly required to avoid artificial fragmentation
of businesses—we do not have
any argument with that. However, the shared premises test potentially
gives rise to a number of problems. The first is that it is not clear
what the term “carry on” means in new subsection (5),
which
states: “The
shared premises condition is met...if...the companies carry
on qualifying activities from the same
premises.” I
shall use a hypothetical example to illustrate the concern. I hope that
the Minister is briefed on it; as it was raised at the open day as an
example of a potential problem, she should have a briefing note. A
farmer manages his farming company, which carries on a farming
business. He also manages a separate holiday lettings company that lets
cottages adjacent to, but not part of, the farm. He manages both
separate businesses from his home. Is it possible that both businesses
could be said to be “carried on” from the same premises?
They are administered from the same premises, even though the premises
used for the delivery of the businesses are clearly separate—in
one case the farm premises and in the other case the holiday cottages,
which are let out. It is an important point, as there is a danger that
many small businesses could be caught unintentionally—I
think—by the shared premises test, if the Minister has to tell
the Committee that two businesses administered from the same office
will be caught by the test.
There are also issues about the
definition of “premises”. I am advised that there are a
number of different definitions used in different areas of tax
legislation and it is not clear what definition of premises is intended
to apply in the new section of the Capital Allowances Act 2001. Can the
Minister clarify where the relevant definition of premises is
found? Depending on
the Minister’s answer to my question about sharing
administrative offices, and whether that constitutes the sharing of
premises and thus a connection between businesses for the purposes of
new section 51E, the Committee may need to address a question of
principle. Again, I illustrate the issue by an example. A husband and
wife jointly own two companies—a taxi business and a small
building firm. Mrs. A operates the taxi company, perhaps
from their home or a small office that they rent nearby. Mr.
A runs the building business, which is administered from the same
office, but obviously will not be carried out, in the sense of
delivering building activity, in that office. The taxi business is
actively run from the office—taking phone calls, making bookings
and so on—while the building business is merely administered
from the office, in ordering materials, communicating with customers,
and dealing with record keeping, accounts and all the bureaucracy
entailed in running any small business these
days. Surely to
goodness, we in the Committee do not want to create a situation in
which two such businesses have to operate from separate premises to
secure a tax benefit in the form of the annual investment allowance.
That would be crazy, forcing the husband and wife pair of businesses to
operate from separate premises, rent additional offices, pay two sets
of overheads and heat and light two sets of offices. I know that the
Minister will be worried about the carbon impact. Surely the objective
of tax policy cannot be to force people into tax-driven behaviour that
is, frankly, economically bonkers. I cannot think of another word for
it.
We do not want the tax tail
wagging the economic dog, and I hope that the Exchequer Secretary will
offer the required reassurance to make it crystal clear not only to
Committee members but to those who advise small businesses throughout
the land that it is not the intention for businesses operating in that
way to be caught by the shared premises condition. If she can be clear
about that, I hope that she will also give us a commitment—even
if she cannot do anything right now—to look between now and
Report at whether anything can be done to the drafting of the shared
premises condition to make it absolutely clear that it does not apply
to the kind of case that I have given as an
example.
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