Angela
Eagle: The schedule introduces rules for the new annual
investment allowance of £50,000 a year for business
investment—
The
Chairman: Order. May I beg for a little more volume? I am
having difficulty hearing. It is part of my
job.
Angela
Eagle: Having difficulty hearing or hearing in
general?
The
Chairman: I need more volume.
Angela
Eagle: I am happy to oblige.
The schedule
introduces the rules for the new annual investment allowance of
£50,000 a year for business investment 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
business. As befits a major simplification measure, the Government have
taken a light-touch approach to the targeting of the annual investment
allowance, which should ensure that the allowance is a welcome and
effective investment incentive for the vast majority of
businesses.
We have
deliberately sought to make the process as simple as possible, but at
the same time we must of course protect the Exchequer by ensuring that
certain basic rules protect that valuable new allowance from
exploitation and avoidance. We have done everything we can to make
those basic rules as simple and clear-cut as possible to keep the
compliance burdens to a minimum. In outline, the basic rules are
contained in the schedule and are broadly as follows. Unless,
exceptionally, two or more businesses are controlled by the same person
and also fall within one of the two simple tests per related business,
the annual investment allowance will be available to any individual
carrying on a qualifying activity. That includes trades, professions,
vocations, ordinary property businesses and individuals having an
employment or office, any partnership consisting only of individuals,
and any singleton company or group of companies.
The rules
give a business almost complete freedom to allocate the annual
investment allowance between different types of expenditure in any way
that it chooses. For example, a business may allocate the annual
investment
allowance against any expenditure on integral features—the new
classification that we have just discussed—or long-life asset
expenditure. Both qualify for the lower 10 per cent. rate of
writing-down
allowance. As well as
being financially beneficial, the measure should operate as a proxy for
a de minimis provision for integral features expenditure by smaller
businesses. In other words, smaller firms may be able to dispense
altogether with a 10 per cent. special rate pool if the amount of their
integral features expenditure does not exceed £50,000 a year.
The rules also allow persons in control the freedom to allocate the AIA
between companies in a group, between related companies or between
related unincorporated businesses in any way that they see fit. There
is no requirement to apportion the allocation of the AIA in any way or
on any particular basis; so, for example, in a group of five companies,
all of the AIA could be allocated to one company or split between all
or any of the five as the group finds most
convenient. The rules
provide that a company is related to another company in a financial
year—and, separately and independently, that an unincorporated
business is related to another in a tax year—if the businesses
in question are controlled by the same person and either the shared
premises condition or the similar activities condition, or both, is met
in the relevant year. Whether commonly controlled businesses share the
same premises is a very simple test, and it should be straightforward
for taxpayers to understand.
I shall take this opportunity
to deal with the holiday let and farming business example mentioned by
the hon. Gentleman in his opening remarks. He is right to say that the
matter was raised at an HMRC open day, but Her Majesty’s Revenue
and Customs confirmed then that the holiday let business and farming
business that he described would not be regarded as conducted from the
same premises just because the owner of both did his paperwork in the
farmhouse. “Premises” has its everyday meaning in that
context. In other words, it is not where the paperwork is done; it is
where the business is actually carried on. I hope that gives him some
of the reassurance that he was after, but he wants to get to his feet,
so I am happy to
oblige.
Mr.
Hammond: I am grateful to the Minister for clarifying that
point, although there is something of a caveat in the clarification.
She implied that what she said is the case because the activity carried
on in the farmhouse is de minimis—a bit of paperwork is being
done. Perhaps she will address the other example that I used later,
which involved a more substantive carrying on of a business: the taxi
and building companies carried on by a husband and wife, not from their
home but from a rented office. She may not have the answer immediately
to hand, but can she confirm that the same rule would apply as in the
case of the farming and holiday letting business? That would be a great
reassurance.
Angela
Eagle: I will come back to that question and try to be as
helpful as I can. It is always difficult to give tax advice on the hoof
when it will be read by many tax advisers. I do not want to seem as
though I am making it up as I go along, but I can confirm at least that
administration would not determine the location of the qualifying
activity. As with all such matters, a certain amount of checking and
considering each example will happen as we go along, in order to
clarify the rules. I hope that gives the hon. Gentleman some
comfort.
It should be
remembered that the vast majority of people do not control a
multiplicity of related businesses. The issue may worry some, but it
will not be at the forefront of everybody’s mind in every
circumstance. In general, the related businesses rules have been
welcomed in the accounting press as clear and simple to apply. We
always keep such measures under review to see how things develop.
However, there has been a general welcome for our approach with respect
to related
businesses.
12.45
pm The hon.
Gentleman spoke about the annual investment allowance. It is important
to remember that it is a major simplification for the 95 per cent. of
UK businesses that invest up to £50,000 a year. It will provide
a valuable cash-flow boost, especially for smaller businesses, as it
effectively gives 100 per cent. write-down. It will therefore encourage
investment. In that context, it is important to remember that three
quarters of small businesses are unincorporated and will therefore
benefit from the annual investment allowance without being affected by
the increases in the small companies rate. In general, if separate
businesses are engaged in separate business activities, even if they
are controlled by the same person, they will be entitled to one annual
investment allowance each.
The first two
of the Opposition’s amendments deal with the basic rules on who
can qualify for the annual investment allowance. They seek to extend
the allowance to any partnership, including what are called mixed
partnerships—those that involve both individuals and
companies—and the second of them would extend it also to include
trusts. The
restriction on such partnerships and trusts claiming annual investment
allowance is carried forward from the existing first-year allowance
regime, which the new system replaces.
[Interruption.] I hear the hon. Gentleman
chuntering, but he made those points himself. He said that just because
a rule had been in place in a previous system did not mean that it
should automatically be included in the new system. I do not disagree
with him in principle. However, it is important to understand the
reason for the rules. After careful
consideration—[Interruption.] I shall
explain why in a moment if the hon. Gentleman will let me finish the
sentence. There was a
reason for introducing the rules under the previous system. When they
were introduced in 1997, the then Financial Secretary, my right hon.
Friend the Member for Bristol, South (Dawn Primarolo), who is now
Minister of State, Department of Health, explained to the Finance Bill
Committee why the allowances would not be extended to those entities.
Her explanation holds good today in relation to the annual investment
allowance exclusion. My right hon. Friend
said: “Incredibly
complex rules would be required to bring them in, which would open
possible abuses of tax-driven options that the hon. Gentleman would
deprecate.”—[Official Report, Standing Committee
A, 23 April 1997; c.446.]
In other words, there is an issue about
fraud avoidance, fragmentation and so on. They are all things that the
hon. Gentleman, who is a sophisticated member of the Opposition, knows
can be done; he knows what some people will do, and the lengths that
they will go to in order to attract investment allowances if they are
given the chance. He knows the implications.
In addition, extending the
annual investment allowance to partnerships involving trusts would
complicate the rules for determining whether a business was in common
control—rules that accounting experts have described
as “very simple and easy
to understand, and likely to prevent abuse without troubling ordinary
businesses.” I should
have thought that that was welcome. I am at some loss as to why the
hon. Member for Putney should think that simplification is a good thing
yet the hon. Member for Runnymede and Weybridge should say that we
ought to extend the rules to partnerships, trusts and mixed
partnerships. The latter would create massive complications, bringing
company tax as well as income tax rules into play, and creating a whole
string of rules to minimise the potential for avoidance. It would be
far more complex than the simple rules that we are trying to create,
which include the exclusions that the hon. Gentleman seeks to
abolish. Those
amendments are likely to increase the Exchequer cost of the measure by
approximately £50 million a year. Continuation of the
existing exclusions strike the right balance between simplicity and
providing a valuable incentive to businesses to invest. I ask the
Committee to resist the first two Oppositions
amendments. This
group of amendments includes two minor Government amendments.
Government amendment No. 146 deals with the basic annual
investment allowance entitlement rules and seeks to correct some
defective wording by replacing it with a new subsection. The purpose is
to ensure that if a business in start up incurs pre-commencement
expenditure on or after the relevant annual investment allowance start
date in April 2008, that expenditure will qualify on commencement of
the businesses qualifying activity. The amendment therefore makes a
beneficial change.
The defective
wording that amendment No. 146 replaces occurs later in the schedule
and so, chronologically, our second amendment—No.
147—should be debated after that. The amendment amounts simply
to a technical tweak, and I hope that the Committee will be content for
me to refer to it as that. These Government amendments will be of
benefit to business and I encourage the Committee to support
them. I
confess that the remaining Opposition amendments have caused me some
confusion because I had thought that the plans they had published
reduced the main rate of corporation tax, for which they tabled an
amendment to clause 4, and that they wished to abolish the annual
investment allowance. However, these amendments would increase the
scope of the annual investment allowance at significant
cost. Amendment
No. 202 undermines the fundamental tenet of the way in which capital
allowances operate and could lead to more than one business claiming
relief for the same expenditure. I heard the comments of the hon.
Member for Runnymede and Weybridge, but
the amendment would remove the requirement for a business to own the
plant and machinery during the chargeable period for which they are
claiming annual investment allowance. For obvious reasons, businesses
are generally required to own or be deemed to own the plant and
machinery on which they are claiming plant and machinery allowances.
Where a business does not own the plant and machinery, it may be
possible to claim tax relief on contributions to that expenditure, but
that is governed by a different part of capital allowances legislation.
That legislation prevents the same business from claiming both for
capital allowances and for contributions. However, because the
amendment would allow businesses to claim annual investment allowance
on contributions, it is possible that one business would be able to
claim for contributions and the other for owning the plant and
machinery. That is clearly not
desirable. Amendment
No. 203 would allow businesses to carry forward or back any annual
investment allowance—effectively it would prevent the annual
investment allowance being annual. The amendment would significantly
undermine the simplification benefits of the annual investment
allowance and would require businesses to track both their expenditure
and their unused annual investment allowance over a number of years.
Additional legislation would be required to deal with how to cumulate
unused allowances if they were carried forward indefinitely, which
would result in unintended behavioural effects, such as businesses
deliberately saving up annual allowance entitlement to spend
significant amounts in one year. It is likely that that would have a
significant cost that would build up considerably over
time. As
I said earlier, 95 per cent. of businesses invest less than
£50,000 in any one year and the Government have taken a power,
about which the hon. Gentleman asked, to vary the level of the annual
investment allowance. I can confirm that what is in our mind with
regards to that power is perhaps not strict indexation, but it
certainly relates to going up, not down. The power to vary that is in
the Bill and the hon. Gentleman noticed it. The annual investment
allowance represents an incentive for investment and simplification for
the smallest businesses in particular. Opposition amendments tend to
complicate and with all due respect these amendments leave the annual
investment allowance open to abuse in some cases. That is particularly
true in relation to the Opposition’s proposal to extend mixed
partnerships, which would certainly complicate things and lead to
situations in which there might be difficulty in defending the
integrity of the allowance.
Therefore, I ask the Committee
to support the two minor Government amendments in the group, but to
oppose the Opposition
amendments.
Mr.
Hammond: I am grateful to the Minister for clearing up one
or two things. I am also grateful for confirmation that the
Government’s intention with regards to a broad indexation over
time is what we had hoped. To be clear, the Minister suggested that
there is some incompatibility between being opposed to something in
principle and seeking to probe the way that it will work in practice.
The truth is that the Government will get their measures through the
Committee—they may even get them through the House, although
this subject is
something that increasingly consumes our attention. Whatever our
principled objections and preferences at strategic level, we must
establish how the Government intend to deal with something like the
annual investment allowance and we must challenge the individual
aspects and workability of that.
Angela
Eagle: I suppose that my point was a slightly narrower
one. I can understand the hon. Gentleman’s point, it is
perfectly legitimate and that is what these Committees are for.
However, some of the amendments tabled by the Opposition widen the
scope of the annual investment allowance, they do not probe how it
would work.
Mr.
Hammond: The amendment in relation to carry forward and
carry back seeks to obtain the Minister’s comments on an issue
that has been raised by an outside professional body. We are interested
to hear what she says. She has told the Committee that significant
costs would be involved, and that is a perfectly legitimate
consideration. In my remarks, I raised the concern that investment
behaviour may be tax-driven in a way that might be unhealthy and
economically inefficient. Although she did not refer to it, I hope that
the Treasury will also have considered that as a balancing factor. I
accept that there must be a balance drawn in these
things.
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