The
Chairman: Before I call the hon. Member for Taunton, who
speaks for the Liberal Democrats, let me say that I have now been in
the Chair for two and a half
hours. I understand that the Government and Opposition are seeking to
get to the end of clause 86. For my own good health, I would seek to
adjourn the Committee for a dinner or refreshment break. I am prepared
to go as late as 8 o’clock, but I would then seek to adjourn for
three quarters of an hour. I merely offer that as advice to the
Committee, whose interest and mine I am taking into
account.
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.
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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