Budget 2011 and Environmental Taxes

Written evidence submitted by the Finance and Leasing Association

1. The Finance and Leasing Association represents the UK’s providers of equipment finance through leasing and hire-purchase. Our members are banks, independent asset finance companies, or captive finance companies owned by equipment manufacturers. In 2010 FLA members provided £19.6 billion of new finance to UK businesses and the public sector, representing around a quarter of all fixed capital investment (excluding real property and own-account software) in the UK last year.

2. We believe Budget 2011 missed an opportunity to further the Government’s green objectives. The Budget did not address an unhelpful exclusion in the tax allowances for investment in energy-saving plant and machinery, Enhanced Capital Allowances (ECAs). The current ECA rules exclude leased equipment.

3. In his evidence to the Committee’s Inquiry into The Green Investment Bank last October, James Wilde from the Carbon Trust described a ‘massive’ opportunity to unlock energy efficiency in Small and Medium-sized Enterprises (SMEs). We believe that the exclusion of leased equipment from ECA is a significant and unnecessary obstacle to that opportunity.

4. SMEs are already investing in energy efficiency. The Open University Business School [1] reported in January that 29% of SMEs had in the last year invested in equipment or machinery for environmental reasons.

5. Particularly at the moment, however, few businesses are in a position to pay significant amounts up-front for energy-saving plant and machinery. There is a growing awareness that asset finance can help businesses to afford to invest in energy-saving plant and machinery.

6. For example, in their February 2011 report, Financing the Low Carbon Economy [2] , Accenture noted that financing energy-efficient or micro-generation equipment can be expensive. To reduce the impact on cash-flow, a leasing scheme – "energy-efficient and micro-generation leases" – could be developed so that principal and interest repayments on the equipment are calculated based on the estimated amount of energy saved.

7. The importance of asset finance can also be seen by the launch in April 2011 of the new Carbon Trust green equipment finance loan scheme. This is being run by Siemens Asset Finance and is intended to provide UK businesses with green equipment finance worth up to £550 million over the next three years.

8. Asset finance offers benefits beyond helping businesses to afford to invest. Because the finance company owns the equipment being funded there is less need for additional collateral. The application process is generally simple and is often administered by the equipment supplier rather than a bank. We estimate that over a thousand small businesses obtain new asset finance every working day.

9. The exclusion of leased equipment from ECAs makes investment using leasing less accessible and more expensive. Making ECAs available for leased equipment would reduce the capital needed by finance companies, allowing them to lend more at lower interest rates. This could reduce the reliance on alternative, untested mechanisms including the Green Deal and any relevant Green Investment Bank activity.

10. The existing restrictions on using ECAs for leasing were implemented to address concerns that ECAs for leasing might promote tax avoidance or might result in UK taxpayers supporting investment elsewhere in Europe. Recently-introduced rules for disclosing avoidance arrangements and the new Code of Practice on taxation for banks should mitigate much of the risk of avoidance. Further safeguards might be appropriate, such as restricting the value of qualifying investments, or restricting investments to certain regions. Our call is for the Government to work with business to overcome the obstacles to including leased equipment in the Government’s incentives to invest in low-carbon equipment. This would include the ECA tax incentive as well as the Renewable Heat Incentive.

11. In summary, we believe the Committee should recommend that the Government actively seek to overcome any obstacles to extending ECAs to leased equipment. We would be pleased to provide oral evidence to the Committee.

14 April 2011

[1] Open University Business School Quarterly Survey of Small Business in Britain Q4 2010

[2] Carbon Capital: Financing the Low-Carbon Economy, Accenture, February 2011