Angela
Eagle: Before I speak to the amendments, it might be
helpful if I set out the purpose of the schedule. The Budget 2007
package of reforms that announced this change was intended to encourage
investment. It includes a refocusing of the incentives for small
companies towards incentives. First-year tax credits, also referred to
as payable enhanced capital allowances, are one of the incentives. Like
the annual investment allowance, which we discussed earlier, first-year
tax credits are aimed at promoting business investment specifically in
environmentally sustainable places. The Government recognise that high
and sustainable levels of economic growth must not come at a cost to
the environment, and a number of policies are currently in place aimed
at trying to make that growth more environmentally
sustainable. The 100
per cent. first-year allowances and ECAs are already available for
investment in designated energy-saving and environmentally beneficial
plant and machinery—that means water-efficient as well as energy
saving. Those allowances deliver a cash-flow boost by way of a
shortened payback period to businesses that invest in green plant and
machinery, which becomes more attractive to purchasers owing to the
reduced relative cost. The purpose of the ECAs is to address market
failure. The more environmentally sustainable infrastructure, to which
I have just referred, is often much more expensive than less
environmentally sustainable water and energy efficient
systems.
Mr.
Hammond: I am sorry to be pedantic, but market failure is
a phrase that trips off the lips of Ministers rather too easily. Why is
it a market failure just because the environmentally-friendly kit costs
more than the non environmentally-friendly
kit?
Angela
Eagle: It is a market failure simply because the price
signal would suggest that one would purchase a cheaper kit—be it
water or energy efficient infrastructure—to do the job intended.
A more environmentally sustainable kit might have been only just
developed—it will probably be new technology,
used by fewer people and only just getting its feet in the
market—and so be more expensive. I do not need to explain the
reasons for that to the hon. Gentleman. The idea, therefore, is to
level the playing field in the choice between those two options. That
is the economic justification for an ECA, which would be payable if an
individual company were to choose a more environmentally sustainable
kit over a well-established but less environmentally sustainable one
already on the market. That is well-established economic theory on
which I do not need to lecture
him. The
benefit to businesses of ECAs can be reduced when they are
loss-making—this is the point of the schedule before
us—particularly when the tax losses cannot be relieved for a
number of years, perhaps because the business remains loss-making for
an extended period. That would reduce the incentive for loss makers to
invest in the green plant and machinery, because they would not get the
benefit of the credit. The schedule introduces first-year tax credits
available in respect of qualifying expenditure incurred on, or after,
April 2008, and will be of particular benefit to start-up companies
investing in equipment for their
businesses. The
first-year tax credit regime will allow companies, within the charge to
corporation tax, to surrender losses attributable to investment in
designated energy-saving or water-efficient plant and machinery to the
Government in return for a cash payment. The regime is broadly based on
the well tested model for research and development tax credits.
Obviously, a company may utilise losses that it has made only once, so
once a loss is surrendered for a tax credit, it cannot be carried
forward or relieved in any other way. The cash payment that a company
will receive is 19 per cent. of the loss surrendered—subsequent
amendments will deal with that point, so I shall not labour it now.
Provisions are in place to vary that percentage, but there is an upper
limit, or cap, on the amount that can be claimed, which is a necessary
feature of the scheme to prevent the Exchequer from unlimited exposure
and to ensure that the annual cost of the measure does not exceed
anticipated levels. The cap must be set at a level to ensure that
companies of all sizes can obtain a genuine benefit from the tax credit
scheme.
The amendments
seek to extend the benefits of the scheme to sole traders or
partnerships. There are issues here about fraud, abuse and complexity,
which we dealt with in a similar context earlier. The hon. Gentleman
again raised the point about the Government being in favour of fairness
between different legal forms of companies. That is true, but it is not
the same as saying that there should be no differences between the tax
treatment or legal treatment of different forms of company.
5.15
pm If
the hon. Gentleman were to take his comments to their logical
conclusion, he would seem to be arguing for a single tax form for all
types of company, be they partnerships, sole traders or those limited
by legal liability. I am not certain that I understand the
philosophical point that he was making when he said that we are
discriminating between different forms of company. In UK law there are
different legal forms of company that have different types of tax
liabilities, ranging from income tax to dividends and corporation tax,
and which are long standing in UK law. I am not certain why he seems
to be saying that the Government discriminate against those different
forms of company, because we do not. There are several different
strands of ownership that individuals who wish to set up either as
limited liability companies, sole traders or partnerships can choose to
adopt. Mr.
Mark Field (Cities of London and Westminster) (Con): I
understand the point that the hon. Lady is trying to make and do not
think that anyone is suggesting that there should be an absolutely
identical tax treatment for different sorts of business organisation.
Nevertheless, surely the market failures and the cash flow problems
that emerge in the early stages of any business, which she put forward
as a justification, apply every bit as much to sole traders and
partnerships as they do to companies, if not
more.
Angela
Eagle: There are different tax systems for sole traders
and partnerships, which allow them to make different arrangements for
writing off investments they make. There are issues relating to how one
would define what limited liability partnerships are. For example,
there is a long history of limited liability partnerships being used as
a way of abusing R and D tax credits, and there are examples that we
have to avoid so that in any system in which we create a circumstance
where money is available to be paid back, set against losses, we must
ensure that that can be done in a way that does not encourage fraud,
avoidance or abuse. The hon. Member for Runnymede and Weybridge said
that we are discriminating against sole ownerships and partnerships who
need those payments the most, whereas companies in fact currently
access ECAs far more than sole traders and
partnerships.
Mr.
Hammond: Unless I have misunderstood, they are not
available now, so how can companies access them more than partnerships
and sole traders?
Angela
Eagle: The allowances are available currently, and what we
are discussing in this clause is a payment for those who are loss
making, and that is what is different.
Mr.
Hammond: I understand that point, but does she agree that
it is a big extrapolation to say that because companies access ECAs
more than sole traders and partnerships, they need the payable tax
credit more than sole traders and partnerships? It will be small,
start-up and unprofitable businesses that can take advantage of this
payable credit. We are creating another artificial driver to
incorporation. We have seen that before in the incentives that the
Prime Minister introduced while Chancellor to incorporate with
zero-band small companies rates that had to be clawed back when the
consequences were not those that he had wanted to
see.
Angela
Eagle: The Government’s aim is to encourage and
support companies, particularly start-ups, to invest in green plant and
machinery, and the tax rules differ for incorporated and unincorporated
businesses. With regard to aspects such as tax rates and personal
allowances, unincorporated businesses already have
more generous provisions than companies for relieving losses in the
early years of trading, and allowing companies to surrender losses for
tax credits redresses a difference there. There is form in that some
schemes have been set up using limited liability to abuse R and D tax
credits. That would be likely to happen again if we allowed the
extension of this generous scheme to sole traders and partnerships, as
proposed in the Opposition
amendments.
Mr.
Field: This is the second occasion on which the Exchequer
Secretary has mentioned the notion of fraud and form, as she put it.
Can she give the Committee some evidence of this behaviour by sole
traders and partnerships that has deprived the Treasury in the way that
she has explained? It is important in this debate that we have some
direct evidence that we can look at so that we can make a judgment
about whether the amendments are the right way
forward.
Angela
Eagle: Some of the issues with the film tax credit would
give such examples. I can write to members of the Committee with
examples if that is what they wish. I do not intend to stand here and
detail particular instances of fraud and abuse. That would be quite
wrong. The hon. Gentleman can take it from me that there are plenty of
examples where limited liability partnerships have been created to make
extremely dubious claims and avoid tax liabilities. That is far from
the intended purpose of either the R and D tax credit scheme or this
measure.
Mr.
Hammond: The hon. Lady has alluded to fraud in the R and D
tax credit system. The structure of her argument was that the
first-year payable tax credits broadly reflect the arrangements for the
R and D tax credits and there have been problems with those. She has
mentioned only limited liability partnerships, but says that we will
therefore exclude all partnerships and all sole traders. If there is
evidence to suggest that there is a problem with limited liability
partnerships, she should by all means exclude them, but she should not
throw the baby out with the bathwater and exclude all of the sole
traders and ordinary partnerships that make up the great majority of
SMEs. If there is evidence of such abuse, where is the proposal in the
Bill to correct that by excluding partnerships and sole traders from
access to the R and D tax
credit?
Angela
Eagle: I have talked about limited liability partnerships,
but we have also seen avoidance schemes where individuals seek to abuse
the first-year allowances available to SMEs for expenditure on
information and communications technology. There is evidence that these
schemes are targeted for avoidance by the self-employed. The
anti-avoidance group advice is that we would need very robust
anti-avoidance rules if the tax credit regime were to be extended to
the self-employed. The
hon. Gentleman should give us some insight into what he thinks could be
done if the amendments were accepted to reduce what we believe is a
real danger of avoidance activity, which would be very costly to the
Exchequer. It is clearly much easier for an individual than a limited
company to receive a spurious
payment and disappear, although both individuals and companies are
within the self-assessment regime. Her Majesty’s Revenue and
Customs has the facility to check a company’s address and
directors’ details at Companies House. It has no way of checking
the bona fides of an individual claimant. It is the hon.
Gentleman’s amendment, not mine. He must explain to the
Committee whether he is being complacent about the avoidance potential
for his amendments or whether he has a view about how he could shore up
what we believe is a high risk of avoidance behaviour should his
amendments make it on to the statute
book. Mr.
Hammond: I am slightly taken aback by a challenge from the
Exchequer Secretary to explain my proposals for anti-avoidance, when
she has been completely unable to explain to the Committee the
avoidance that she is so concerned about. She has, however, made a
couple of specific points that are worthy of consideration. She
referred to the availability of sideways relief in some cases for
partnerships and sole traders, and I accept that to some extent, it
would be a way of relieving unrelieved capital expenditure for a
loss-making start-up business. That is a sound point and worth
considering. I do not accept, however, her lecture on economic
theory—that where a low-volume product costs more than a
high-volume product, it is evidence of market
failure.
Angela
Eagle indicated
dissent.
Mr.
Hammond: The hon. Lady did say that. It may be evidence of
a situation that the Government do not like and want to intervene on,
but it is not evidence of market failure. We must be careful about
detecting market failure. I may have said this before, but her
predecessor detected market failure in every corner, and it is not the
culprit in the situation under discussion.
The hon. Lady raised the issue
of sideways relief and the way it interacts with the ability of sole
traders and partnerships to claim it. I shall seek the
Committee’s leave to withdraw the amendment so that I can
consider the issue and talk to others outside the House about it. She
has not, however, answered the question about reform to the R and D tax
credit regime. If there is abuse on the scale and of the order that she
talks about, the Government should table amendments to the R and D tax
credit regime similarly to exclude partnerships and sole traders, but I
have not seen any sign of such activity. I beg to ask leave to withdraw
the amendment.
Amendment, by leave,
withdrawn.
Mr.
Hammond: I beg to move amendment No. 214, in
schedule 25, page 301, line 39, leave
out ‘19%’ and insert
‘20%’. This
is a probing amendment; it will not take me a moment to make the point.
The amendment seeks to alter the payable rate of credit from 19 per
cent. to 20 per cent. There is no particular magic about
the 20 per cent. rate, other than that, conveniently, it was
the small companies rate before the proposals to increase it still
further. We cannot see any magic about 19 per cent. Perhaps there is a
complex calculation that shows why the payable credit has been set at
that level.
It is not, after all, the main rate of corporation tax, it is no longer
the small companies rate, and it is not the capital gains rate or any
rate that I am aware of. It may be the VAT rate in one or two European
countries, but what is the logic of 19 per cent? How was it calculated,
and how was it arrived at? Angela
Eagle: It may help if I explain why the Government have
set the rate of credit at 19 per cent., which is essentially what the
hon. Gentleman asked.
As with the R and D tax credit,
first-year tax credits are intended to help loss-making companies by
delivering the benefit of the tax relief provided by enhanced capital
allowances earlier than they would otherwise receive them, because of
their loss-making status. Reflecting the time value of money,
and—this is the balance in setting the rate—the fact that
we do not wish to incentivise companies to be loss-making, because it
would result in all sorts of negative behavioural consequences as I am
sure the hon. Gentleman agrees, we discount the rate at which the
credit is given to loss-makers. That is the first thing: it must be
less than the credit that would be delivered to those making a
profit. Secondly,
based on how long a company, on average, makes a loss before it turns a
profit as a start-up, 19 per cent. is a generous rate of allowance for
companies paying the small companies rate of tax. It was decided upon
by undertaking research to find out how long in general start-up
companies take to get into profit, analysing how it works and knowing
that it must be below 20 per cent. so that we do not incentivise actual
loss making. Nineteen per cent. is above the amount of credit that
would be implied by taking a value of the time aspect of money for cash
flow, which would make it
generous.
5.30
pm There is a
balance between recognising that in future the rates of tax might
change and recognising that the generosity of relief to loss makers and
profit makers might shift. The hon. Gentleman might notice that we have
taken up the question of how to vary the rate of the credit in future
years. However, the key balance is to ensure that we do not reward loss
makers to the same degree as profit makers.
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