Annual 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 Secretarys previous remarks, I will say that the Oppositions 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 partys 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 Governments 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
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.
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 Treasurys annual cost of the AIA£920 millionand dividing it by the Treasurys 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 partnershipI shall mention in a minute how that might ariseor 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 Secretarys 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
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 years 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 Secretarys 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 Treasurys intention. Can the Minister confirm that the Governments 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.
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 anothertwo 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 businesseswe do not have
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 separatein 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 unintentionallyI thinkby 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 Ministers 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 companiesa 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 officetaking phone calls, making bookings and so onwhile 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 commitmenteven if she cannot do anything right nowto 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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