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
81Abolition
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 ABAsin other
words, to make it as though they never existed? Why effect that
abolition only from the relevant date in subsection
(3)?
6.30
pm 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 longereven 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 withdrawnthat 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, youre right.
This was pretty low-grade drafting. We dont need them.
Well 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.
Mr.
Hammond: The clause provides for abolition of industrial
and agricultural buildings allowances. That decision was announced
without any prior consultation
by the Government. Regardless of the merits of the substantive action,
the Governments precipitate action in relation to business
taxation has once again undermined the UKs reputation as a safe
and secure place to do business. I have thought about this quite a bit
and I do not believe that Ministers want to damage the UKs
business reputation. Therefore, I have to conclude that they simply do
not understand the way that business thinks and the way that it reacts
to this kind of surprise being sprung upon
it. 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
Oppositions 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 Britains 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.
As Britains largest
airport operator, BAA faces the withdrawal of tax relief on investment
worth some £5 billion that the group has already made
on infrastructure assets at its seven UK airports. The Minister will
know that BAA is in the process of proposing to invest very substantial
further sums in Heathrow, which in its current state, as everyone in
this Committee would agree, is something of a national
disgrace and yet another impediment to promoting Britains
attractiveness as a place in which to do business. The creation of the
Heathrow east terminal complex very badly needs investment. The net
present value of the reduced post-tax cash flow implied by the
abolition of IBAs to BAA alone is around £500 million.
Can the Minister tell us how such a move will impact on company balance
sheets under generally accepted accounting practice? Will companies
have to take a hit on their balance sheets to reflect the changed
anticipation of future tax liability as a result of these changes to
IBAs and ABAs? Will it show up on company balance
sheets? I
fully recognise that there will be lots of members of this
CommitteeI will not say listening because they are probably
notwho 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
Governments 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 years
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. 6.45
pm 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 effectwith respect to
BAA, it is tough out therebut 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
phasethat 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. Gentlemans 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 applyvery
long payback periods for very durable pieces of
investment. However, I
think it gets worse. With regard to the airport infrastructure in
particularlet us use that as an exampleit 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 IBAsthus, the
reduction of the tax relief that BAA will earnwill 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 Governments
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 consumerone might say, the ordinary
voterwho is going to pay for the tax
change?
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