Finance Bill

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Mr. Browne rose—
Mr. Browne: This is my first opportunity to welcome you to the Chair, Sir Nicholas—just as you outline the timetable for vacating it. While I make a few brief comments, perhaps the Whips for the other parties could arrange a more civilised timetable for our departure.
I shall speak briefly to clause 81, on which I have received a number of representations from interested parties. The hon. Member for Runnymede and Weybridge has already outlined the principles underlying the difficulties that many people have with the Government’s proposal. To sum up my position, I think that there is a genuine point about a lack of consultation and, as a result, the retrospective nature of the changes being put in place. They were sprung on those affected, who could have had no reasonable expectation that they would be put in place. There is also an issue of certainty—or in this case, lack of certainty—about business planning decisions made over a quarter of a century. The expectations and time scale that people have in mind when making such investment decisions are long-term, and the Treasury is acting on a completely different time scale, which changes the approach that people would otherwise have taken had they known in advance.
Then, of course, there is the absolute effect of the withdrawal itself. For illustrative purposes, it is worth explaining to the Committee what the impact will be. A person who made an investment of £100,000 in 2006-07 would receive a £4,000 allowance in 2006-07 and 2007-08. After that, it would go down, on the graded scale put before us, to £3,000 in 2008-09, to £2,000 in 2009-10, to £1,000 in 2010-11, and that would be it—the guillotine would fall. They could claw back £14,000 of their £100,000, but £86,000—at the cut-off point in April 2011—would remain unrelieved for tax purposes. It is not hard to see why many people, who made that decision in good faith in the 2006-07 financial year, with no expectation of any changes in the foreseeable future, because no consultation took place, are aggrieved that 86 per cent. of the relief that in good faith they had anticipated receiving is no longer available to them.
A retrospective 25-year time scale could impact on investments going right back to the 1980s. People who invested in the 1980s will obviously have received most of the relief already, but they would still have qualified for some of the relief being tapered off, which consequently they might not receive. So we are talking about business decisions taken over a very long period. The Institute of Chartered Accountants made the point that in accountancy terms—it does not judge the politics of the proposal—the abolition would be neater and more reasonable if only expenditure incurred after the 2007 Budget statement was affected. It would be interesting to hear the Minister’s response to that specific point.
I shall conclude with a couple of questions. How much revenue will the abolition of the allowances be likely to raise for the Treasury? I sourced an estimate in the region of £15 million annually, but that sounds far too low, particularly taking into account the points made by the Conservative spokesperson. However, if there is scope for significant revenue to be clawed back, it would be interesting for the Minister to give a figure. Furthermore, given that it is being tapered out, what will that figure be on a rolling basis, through to the absolute abolition in 2011? It would also be interesting if she indicated how much impact the measures will have on businesses in the United Kingdom, which is a slightly different point from how much revenue will be raised for the Government. Finally, she would do the Committee a service if she outlined precisely what form of consultation the Treasury embarked upon in advance of making the changes, and what lessons it learned during that process.
Jane Kennedy: The clause withdraws industrial and agricultural buildings allowances with effect from April 2011 and introduces a schedule containing various consequential amendments and savings, which we have been considering. The hon. Member for Runnymede and Weybridge, who is deep in the throes of negotiating his way through the proposition that you just made, Sir Nicholas, asked a number of questions, but other points have been made.
Mr. Todd: We would be interested in hearing the answers.
Jane Kennedy: Exactly.
Our changes to capital allowances, which are associated with the abolition of IBAs and ABAs, are principled and reasoned. They are a necessary step forward. I have been listening to the concerns expressed from all parts of the Committee, and I have had representations on them, so I continue to look closely at how the whole change will work in the coming months and years.
The changes have sound reasons behind them. They refocus the incentives for investment in innovation by removing the inefficient and distortive features of the current system. One example that I was given when discussing the changes was that a company may gain industrial buildings allowance for a particular type of investment, but a similar set of companies, if they wanted to develop, for example, a bus station, would not be entitled to that allowance. There is a serious distortion in the way that the current system works, but our proposals are also part of a wider reform package that includes the 2 per cent. reduction in the main rate of corporation tax, which is effected to promote investment and growth. By realigning the rates of allowance more closely with the average rates of depreciation, the reforms remove the distortions between investment decisions and between sectors.
The Budget package is not intended to target particular sectors—one or two sectors have been mentioned this afternoon—but is intended to remove the distortions between the sectors that are currently inherent in the system. Our primary driver for the withdrawal of the IBA and the other wider reforms is the desire to reduce the tax system’s distortive impact on commercial decisions.
One guiding objective was simplification. The IBAs have long been recognised as a significant compliance burden, and in responses to the 2002-05 corporation tax reform consultation, and in the independent administrative burden advisory board’s list of priority irritants of the tax system, the IBA features. To leave IBAs in place would mean retaining that burden and complexity in the system for up to 25 years. It would also continue to give a tax advantage to some sectors by providing that relief.
The hon. Member for Runnymede and Weybridge asked how we consulted on the measure. The allowances are not being withdrawn overnight. We announced in the 2007 Budget that they would be gradually withdrawn over four years, and we did so to give businesses time to plan and to adjust to the change, as I explained last year—
Mr. Hammond: Will the hon. Lady give way?
Jane Kennedy: If I can just finish my sentence, I shall be happy to give way.
It is not our policy to consult on changes to rates of taxation or allowances, or on the removal of allowances, although we invite evidence. We consulted extensively on the new elements of the capital allowances reforms, such as the design of the AIA, and we received many useful comments that we reflect in the new relief for small pools of unrelieved expenditure introduced by clause 78 to name one example. We are giving business the certainty it demands by setting a clear direction and by consulting on the technical details.
7 pm
Mr. Hammond: The Minister said that announcing the intention to withdraw IBAs four years in advance of the full withdrawal date should give business the opportunity to plan and prepare. How does she suggest that BAA plans and prepares for the withdrawal of the IBAs that they factored into their business model when they decided to invest £5 billion in terminal 5?
Jane Kennedy: The hon. Gentleman asked me a question on a point that I will come to in a moment.
The Committee needs to be reassured that, if we left things as they were, the current system of capital allowances would not result in a fair outcome for all businesses. The reality is that industrial buildings allowances are a relatively small tax relief: they apply to only 30 per cent. of property value and only 5 per cent. of the value goes to small firms. There are a total of 25,000 to 30,000 claims per year, but as I have already said the top 200 claims account for more than half the cost. I do not want to get drawn into debating one company in isolation. I acknowledge that there are consequences not just for BAA, but for other businesses. However, it is important to remember that the top 200 claims out of up to 30,000 claims a year account for more than half of the cost. The true objective of the reforms is to leave the UK with a better, modernised tax system.
I was asked how the provision will impact on company balance sheets. The rules for deferred tax accounting are complex, as I have learned. The loss of industrial buildings allowances may need to be recognised, but it is important to note that BAA was also able to recognise a credit in this year’s accounts for the reduced rate of corporation tax. Any accounting impact is distinct from the tax impact.
The hon. Member for Taunton asked how much revenue would be raised by abolition. I direct him to the Red Book, which shows that in 2008-09 to 2010-11 the yield will be £75 million in the first year, £225 million in the second year and £375 million in the third.
I appreciate that hon. Members are conscious of the time and I do not want to detain the Committee, but I should like to take a moment to explain things a little bit further because this is a serious issue that is worth exploring in detail. Both my hon. Friend the Member for South Derbyshire and the hon. Member for Runnymede and Weybridge raised concerns about the impact of these changes. The latter said that the changes should be made in a three-year cycle. I understand that that is part of the recommendation from the CBI business tax taskforce. I am attracted to that idea. However, as I have said, the Government gave a four-year period of notice that the allowances would be gradually phased out. Those allowances will only begin to be reduced from this April and they will not finally be withdrawn until April 2011.
Clause 81 plays an integral part in the reforms that were advanced in 2007. The IBAs and the ABAs were introduced more than 60 years ago as an incentive for post-war reconstruction and agricultural recovery. They no longer reflect the reality of modern business. There is no good economic case for continuing to provide a selective subsidy to some buildings but not others. Indeed, the existence of those allowances has distorted commercial property investment decision making by providing a tax relief that reduces the costs of such buildings relative to shops and offices, for example, which do not receive relief. We have decided to withdraw those allowances on the basis that they have become a poorly focused subsidy that is selectively available on a disparate range of assets, some of which appreciate in value.
Mr. Browne: Why did not all the arguments that the Minister has just made apply in the then Chancellor’s first Budget in 1997? Why did it take 10 years for him to find them compelling?
Jane Kennedy: My right hon. Friend the Prime Minister is on record as having expressed trenchant criticism of the idea. I shall not quote him without having his words to hand, but for some time he has been saying that the building allowances were poorly targeted and are in need of reform.
Mr. Browne: Is the Minister implying that businesses that paid close attention to the Prime Minister’s words and indications when he was Chancellor would have had a sense that the allowance was to be abolished, and that it was not entirely retrospective for those who did pay close attention because, as Chancellor, he had a long track record of indicating that he was looking to bring the allowance to a close before finally doing so in 2007?
Jane Kennedy: I can be flippant, but it certainly was not my intention to suggest that businesses should have known because the allowances had been criticised. The hon. Gentleman will know that the allowances have been criticised heavily for their lack of focus. Although the steps that we are taking raise questions of which I have been taking careful note, they will none the less bring about a better regime.
I said that the allowances have long been recognised as imposing a significant administrative burden on business. That was established in 2006 by a measuring exercise of compliance burdens. However, rather than withdrawing the allowances overnight, we decided to give businesses time to plan. In the 2007 Budget, we announced that the allowances would be phased out over four years. The large companies of which we have spoken—BAA has been singled out—will benefit from the reduction in the main rate of corporation tax. Retaining the allowances for expenditure incurred up to 2011 would continue the distortion for future investment. It will mean that until 2036 certain businesses will receive tax relief that other businesses do not. That is inefficient and inequitable.
Business property—buildings and land—can appreciate rather than depreciate in value. Giving depreciation relief therefore does not make sense. Buildings are also eligible for other tax relief—for example, on the interest payments if they are purchased through borrowing—
Mr. Hammond: Will the Minister give way?
Jane Kennedy: I will when I reach the end of this sentence. Tax relief is available on the interest payments if the buildings are purchased through borrowing and on the maintenance and repair of the building, and relief is given through the corporate capital gains system when they are sold.
Mr. Hammond: The Minister says that it does not make sense to give relief on buildings that may appreciate, but if that is her concern why—I think it was in the Finance Act 2006—did the Government abolish balancing charges and allowances in respect of IBAs?
Jane Kennedy: The hon. Gentleman must forgive me once again. In the light of comments made in this debate, not least those of my hon. Friend the Member for South Derbyshire—I know that other Labour Members in Committee and in the House are concerned that certain businesses in their constituencies are affected—I want to take note of the representations being made about our proposals. I cannot answer the hon. Gentleman immediately, but I shall write to him on that and any other questions that he has raised that I have not been able to answer in detail.
Financing the phased withdrawal of the allowances will give business time to plan. We are taking an important step, as I have said, to improve the efficiency of the tax system and to reduce complexity, as well as undertaking a wider package of reforms. Clause 82, which we shall come to shortly, contains provisions for the phased reduction of the allowance. Our approach will allow business to calculate the amount of allowance to which they are entitled and then to restrict the amount that can be set off by a quarter, a half, three quarters and then in full. That effectively gives an allowance rate of 3 per cent., 2 per cent., 1 per cent. and finally 0 per cent., at which point there will be no allowance to claim. Clause 81 is intended to repeal legislation that no longer provides relief from the relevant date. I hope that the Committee will give the clause a fair wind.
Mr. Bob Blizzard (Waveney) (Lab): I beg to move that the debate be now adjourned.
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