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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. 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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