Finance Bill


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Jane Kennedy: Schedule 26 introduces the new chapter to the Capital Allowances Act 2001 that defines all expenditure and long-life assets, integral features and thermal insulation as we discussed earlier, and special rate expenditure. It brings into effect the new special rate pool and sets the rate of writing-down allowance for special rate expenditure at 10 per cent. It preserves the North sea fiscal regime but, as a result of changes introduced by clause 103 that relates also to the North sea, the hon. Gentleman says that I should have briefing on his specific question. It is part of the blood sport of such Committees for the Opposition to find weaknesses in the briefing of Ministers. I do not have a specific answer to his detailed question, but I undertake to find out the answer, write to him and share it with the Committee.
Mr. Hammond: The Minister was frank about her position. She kindly circulated to members of the Committee the questions that were asked at the open day and therefore might have anticipated that some of them might be asked in our proceedings. Perhaps she will ask her officials to ensure that they have emergency briefing on hand on all the questions.
The Chairman: In my view, the Minister has been very gracious. I am sure that the Committee is pleased with her honesty.
Question put and agreed to.
Schedule 26 agreed to.
Clause 80 ordered to stand part of the Bill.

Clause 81

Abolition of allowances from 2011
Mr. Hammond: I beg to move amendment No. 217, in clause 81, page 44, line 15, leave out subsections (2) and (3).
The Chairman: With this it will be convenient to discuss amendment No. 184, in clause 81, page 44, line 16, leave out subsection (3).
Mr. Hammond: I shall make substantive comments in the clause stand part debate, but I just want to refer now to a narrow, drafting issue. Amendment No. 184 deals with the issue in a slightly different way. Amendment No. 217 would leave out subsections (2) and (3). The amendment tabled by the hon. Member for Taunton only seeks to leave out subsection (3), for some reason which he will no doubt explain.
It is a question of understanding the clause a little better. We believe that subsections (2) and (3) are redundant. Subsection (1) says that industrial buildings allowances and agricultural buildings allowances do not apply after the relevant date, which is provided in subsection (4) as a date in 2011. Having established that IBAs and ABAs will not apply after a date in 2011, why is there then a need in subsection (2) to abolish the provisions that introduced IBAs and ABAs—in other words, to make it as though they never existed? Why effect that abolition only from the relevant date in subsection (3)?
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It seems to me to make no difference at all if subsections (2) and (3) are removed from the face of the Bill. This is just a drafting issue, but we already have the longest tax code in the world, and we do not want to make it unnecessarily longer—even by two subsections. We can deal with this matter perfectly adequately simply with subsections (1) and (4).
Mr. Jeremy Browne (Taunton) (LD): I think the ground has been covered by the hon. Member for Runnymede and Weybridge. I would like to speak to clause stand part, but I waive this opportunity to speak to the amendment.
Jane Kennedy: We are clearly going to have a debate of some substance on clause stand part, so I will reserve my more general comments for that. The amendments tabled by both Conservative and Liberal Democrat members of the Committee seek to apply the withdrawal of IBAs and ABAs only to expenditure incurred after the relevant date, which is to say 1 April or 6 April 2011. This means that anyone who incurred expenditure on industrial or agricultural buildings up to 31 March or 5 April 2011 would still be able to claim the full amount of IBAs or ABAs.
It is not clear to me why Conservative or Liberal Democrat Members would wish not to apply the withdrawal to expenditure entered into in the knowledge that IBAs and ABAs were being withdrawn—that is, any time after the announcement in 2007. The hon. Member for Runnymede and Weybridge asked me a specific question about subsections (2) and (3) and suggested they were redundant. Subsection (1) applies to expenditure incurred after April 2011, and subsections (2) and (3) remove the allowances for existing expenditure. I am not sure whether that entirely answers his question.
With regard to expenditure before that point, just as corporation tax is an annual tax, so IBAs and ABAs provide an annual entitlement to claim relief. It is not therefore retrospective to repeal the entitlement to these allowances, as has been argued. I and other Ministers have made clear since the announcements in the 2007 Budget the reason for the withdrawal of these allowances, which is to remove the distortion they cause by giving tax relief selectively to certain sectors while leaving other sectors completely unable to enjoy relief of this nature.
That change was part of the wider package we debated earlier today. Just 200 claimants claim 95 per cent. of the value of IBAs: the vast majority of relief goes to companies, and only 6 per cent of the combined total is claimed by the unincorporated. I will not go into the more general points, which I wish to make in the clause stand part debate, but I hope that I have dealt with the specific question asked by the hon. Member for Runnymede and Weybridge.
Mr. Hammond: I am not sure that the Financial Secretary has answered my question, to be honest. Let us run through the logic of this because she presents her argument in a reasonable way. Subsection (1) says:
“Parts 3 and 4 of CAA 2001...do not apply in relation to expenditure incurred on or after the relevant date.”
That date is in April 2011. Therefore, parts 3 and 4 do not apply to any expenditure incurred after April 2011. The Government want to ensure that any money spent after 2011 is not eligible for industrial and agricultural buildings allowances, so the job is done in subsection (1).
Why does subsection (2) need to say:
“Omit those Parts of that Act”?
Why does subsection (3) need to say not to omit those parts of the Act until after April 2011 because doing so would mess up the whole architecture? Why do we need to omit them at all when we have neutered them in subsection (1)? We were probing to suggest that subsections (2) and (3) were redundant.
There are worse things in tax law than redundancy. I was hoping that the Financial Secretary might just say, “Yeah, you’re right. This was pretty low-grade drafting. We don’t need them. We’ll take them out. Thanks very much.” She did not say that. I will not detain the Committee by pressing the point, but I hope that when she is sitting at home with a gin and tonic in her hand and nothing better to do, she will read the clause again and consider whether she needs an answer to this point. [Interruption.] Sorry, a tonic water. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
The business mentality is simple and straightforward, as you know, Sir Nicholas. Businesses like certainty. Anything that undermines their sense of certainty and their understanding of the direction of travel in the environment in which they are operating is debilitating. In practical terms, it increases the premium and the return that businesses need to operate in that environment. Businesses operating in an uncertain and unstable environment need a higher rate of return than businesses operating in a stable and predictable environment.
The Opposition’s concerns relate not so much to the principle of the abolition of the allowances. Our preference is well known for a simplified system with fewer allowances and lower rates. Our concern is over the handling of this matter. A huge degree of retrospectivity is attached to the provisions of clause 81 and schedule 27. The abolition of the allowances as part of a general simplification and reduction in rates of taxation may be acceptable, but investment decisions have been made on the basis that industrial and agricultural buildings allowances are in place. The announcement of their abolition in the 2007 Budget was too late for people who had committed to investment decisions.
We will all have in our minds the image of terminal 5 nearing completion at the time of the 2007 Budget announcement. Frankly, that sudden change is yet another nail in the coffin of Britain’s reputation as a safe and predictable place in which to do business. I ask the Minister to imagine how she would feel if she had spent £5 billion of her savings constructing a building in anticipation of industrial buildings allowance being available, only to be told just as the roof was going on that this allowance was going to be scrapped. She would be pretty cheesed off with the regime and she would be thinking very hard about whether she wanted to make further investments on that basis.
It is very important that when Government do these things and when we in Parliament allow them to go through, we do so with our eyes wide open. The package of measures that we are considering in this Committee represents a significant shift in the burden of taxation between sectors. The abolition of IBAs will hit some sectors particularly hard. Airport operators are the most prominent example of losers, but the accelerated rate of depreciation on long-life assets will hugely benefit utility companies.
I fully recognise that there will be lots of members of this Committee—I will not say listening because they are probably not—who might not be that inclined to feel sympathetic towards BAA. I fear that such a view misses the point. This is not just about BAA. It is about the signal that we are sending to any potential large-scale infrastructure investor in the UK about the certainty of the tax depreciation regime that they face. Investment decisions are based on models using current and known tax regimes. Sudden and effectively retrospective changes alter the returns that have been predicted. That will impact on our ability to get private sector investment into infrastructure projects in the UK.
Mr. Todd: I have been listening and have sympathy with some of the points that the hon. Gentleman makes. What would his optimum time scale be for planning the sort of tax changes that he talks about? He is not disputing the principle of simplification. He is arguing that it needs to be planned over a longer period of time. What would his recommended time scale be?
Mr. Hammond: That is a sensible question, and I would like to answer it. I do not have a prepared answer, but I will answer it on the hoof. I will divide the question into two parts. In most cases, I would say that a three-year cycle of signalling to business the Government’s intentions for the tax regime and then fleshing it out a year or two in advance so that there can be a proper consultation period is probably the right regime. I have said that in other places and I will say it again today. Business would be hugely reassured by a commitment to a three-year rolling programme. In each year’s pre-Budget report, the Chancellor could set out the general direction in which he expects business taxation policy to travel over the coming two or three years. In the following PBR he perhaps sets out some more detailed proposals, which can then be consulted upon and brought into concrete form in the PBR after that. That would be a constant rolling process.
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There is a different issue around large-scale, effectively Government-mandated infrastructure. The terminal 5 project has been going on for decades. Almost one of the first things that I did as a Member of Parliament was to appear at the terminal 5 planning inquiry. We have only got the thing open now. There is an issue about significantly impacted companies and pieces of infrastructure needing to be the subject of specific discussions between Government and the providers of those pieces of infrastructure, to ensure not only that we do not have an unfair effect—with respect to BAA, it is tough out there—but that we do not have an unintended impact on future behaviour by that company or similar companies. We will need other airport facilities in this country in the future.
Mr. Todd: I do not want to prolong things with my colleagues, but it is an interesting line of discussion. The nearest example of something similar that I can think of at the moment is incentivising development of major investments in the North sea, to take a further phase—that is a quasi-Government initiative, or potentially so. That might raise some of the issues that the hon. Gentleman is talking about.
Mr. Hammond: I think that the hon. Gentleman’s argument is a good one. One can envisage such situations with railway or new road infrastructure, if we are trying to encourage private companies, as the Government have done with the M6 toll motorway for investment in road infrastructure. Similar considerations would apply—very long payback periods for very durable pieces of investment.
However, I think it gets worse. With regard to the airport infrastructure in particular—let us use that as an example—it is going to be about price. It is all very well to talk about the matter as if it will be tough luck on BAA, but what happens when we withdraw an available tax relief or defer its benefits? Deferring a relief in time costs money. We will increase the cost of providing that infrastructure in future. It will be end users who have to pay more. The incidence of the tax change will ultimately fall on end users of publicly used infrastructure such as airports.
It is worse still, even with regard to existing, historic investment. BAA is a regulated operator. It has a restriction on the rate of return that it can earn on its capital base. I would like the Minister to confirm to the Committee whether the abolition of IBAs—thus, the reduction of the tax relief that BAA will earn—will have the effect of increasing its regulated asset base. It seems to me that it will, thus increasing the amount of income that the company is permitted to earn from its regulated activities. If that is the case, put in plain English, what that means in the case of a regulated operator is that the abolition of IBAs, even in respect of past capex, is not effectively a hit on the operator, but becomes a hit on its customers. When travellers are facing fuel surcharges and the effects of the currency markets’ verdict on the Government’s economic policies, that apparently non-consumer-related tax change will, in the end, be paid for by the users of those regulated infrastructure services. The users will have to pay higher charges in order to deliver BAA and others the return on their regulated capital base that is permitted under the terms of the operating licence. Would the Minister please confirm whether that is correct, and that it is, once again, the ordinary consumer—one might say, the ordinary voter—who is going to pay for the tax change?
 
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