Clause 35

Finance Bill – in a Public Bill Committee am 10:45 am ar 22 Mai 2007.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Industrial and agricultural buildings allowances

Photo of Roger Gale Roger Gale Ceidwadwyr, North Thanet

I have taken a look at the scope of the amendments to this clause and I am reasonably satisfied that, given some flexibility from the Chair, it will be possible to cover the stand part issues within the debate on the amendments. I therefore advise the Committee that I probably will not allow a stand part debate on the clause.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment No. 15, page 26, line 30, after ‘No’, insert

‘qualifying expenditure shall form any part of the residue of qualifying expenditure when a’.

Photo of Roger Gale Roger Gale Ceidwadwyr, North Thanet

With this it will be convenientto discuss the following amendments: No. 16, page 26, line 33, after ‘Part,’, insert—

‘(ab) the qualifying expenditure in question is incurred after 21st March 2007 otherwise than pursuantto a relevant pre-commencement contract (seesubsection (7));’.

No. 17, page 26, line 38, leave out ‘before 1st April 2011’.

No. 18, page 26, line 40, leave out subsections (2) and (3).

No. 19, page 27, line 9, after ‘No’, insert

‘qualifying expenditure shall form any part of the residue of qualifying expenditure when a’.

No. 20, page 27, line 10, after ‘if’, insert—

‘(a) the qualifying expenditure in question is incurred after 21st March 2007 otherwise than pursuant to a relevant pre-commencement contract; and

(b) ’.

No. 21, page 27, line 12, leave out subsection (5).

No. 22, page 27, line 16, leave out ‘subsections (4) and (5)’ and insert ‘subsection (4)’.

No. 23, page 27, line 19, leave out ‘before 1st April 2011’.

No. 24, page 27, line 27, at end add—

‘(8) This section shall not come into force unless the Treasury have laid before Parliament a report setting out the impact of the abolition of balancing adjustments and of the agricultural and industrial buildings allowances.’.

No. 183, page 27, line 27, at end add—

‘(8) This section shall not come into force until the Treasury has laid before the House of Commons a report on consultations which it shall undertake with the agriculture and tourism industry within the period of six months from the date of the passing of this Act about the effects on those industries of the provisions of this section.’.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Welcome to the Chair, Mr. Gale. I am grateful for your guidance on the breadth of the clause, which is just as well, given that my remarks are broad.

The clause marks the start of a long process of reform of the capital allowances system that the Chancellor highlighted in the Budget speech in March. Those reforms are designed to help offset the costs of the reduction—the 2p cut—in corporation tax, which we debated earlier. The clause sets the ball rolling on two particular groups of allowances—for agricultural buildings and for industrial buildings—by withdrawing balancing adjustments in connection with the disposal of qualifying industrial and agricultural buildings, unless that adjustment has taken place within a qualifying enterprise zone or pursuant to the relevant pre-commencement contract.

It is worth highlighting the fact that buildings allowances have been in place since the end of the second world war, when they were introduced to encourage post-war reconstruction and to give businesses an incentive to invest in buildings by enabling, as the law still states, the cost of investment in those buildings to be written off over 25 years, at a rate of 4 per cent. per annum. Those are quite valuable reliefs, and the HMRC website says that the value of claims for both allowances in 2004 was just over £3 billion. Therefore, the Chancellor is embarking on quite a significant reform, at significant cost to taxpayers.

As I said earlier, the clause withdraws balancing adjustments that arise when the proceeds from the sale of an industrial or agricultural building differ from its tax written-down value. Where the proceeds exceed the tax written-down value, there is a recovery of the allowances claimed to date. Where the proceeds are less than the tax written-down value—[Interruption.]

Photo of Roger Gale Roger Gale Ceidwadwyr, North Thanet

Order. I have no objection whatever to hon. Members holding private conversations, but would they go outside if they want to do so?

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

The hon. Gentleman mentioned the second world war. Does he agree that the economy has changed slightly since that time, as commercial buildings are at least as important to the economy these days, if not more so, than agricultural and industrial buildings, and it is about time that we modernised our economy? Is not that proposal part of such a measure?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

No one can escape the fact that the economy has changed somewhat since the end of the second world war. As I drive around the country, I see new industrial buildings springing up to house distribution centres and meet the needs of the growing retail sector. The leisure sector is becoming increasingly important as a source of employment in the economy, and I will come on to the way in which those changes affect that sector in particular. I agree in part that modernisation is needed to allow for the changing economy, but that does not mean that industrial buildings are redundant. They are still an important part of the productive and service sectors of the economy.

Notwithstanding that, the Chancellor announced a reduction in the rate of the industrial buildings allowance, so that it will be zero by 2011-12 and there will be no allowance for businesses to claim on industrial or agricultural buildings. As you might anticipate, Mr. Gale, that has caused concerns among various industry groups, which fall under four headings. The first is the lack of proper consultation on the change. It is a significant change because the value of the allowances is just over £3 billion.

I spoke to a senior tax adviser before the Budget and asked whether he thought that it would make any significant reforms to capital allowances. He replied, “No, it would not be possible, because the Government would have to consult first.” The reality is that the Government have not consulted on the scale and depth of the changes. It is worth looking at the remarks of the British Property Federation:

“The proposed changes are inconsistent with previous government policy statements. In December 2004, the government issued a consultation document on capital allowances and the conclusions from the consultation were announced in the December 2005 Pre Budget Report. The conclusions were that there were no current plans to take forward proposed reforms on a partial schedular system or the taxation of capital assets, but continue to consider the scope for the modemisation of capital allowances.”

The summary of the responses in paragraph 14 said:

“There was general support for a commercial buildings allowance, incorporating the current Industrial, Hotel and Agricultural Buildings Allowances.”

Paragraph 15 said of the consultation:

“Respondents indicated their dissatisfaction with the current IBA regime pointing towards the compliance costs involved and the shortcomings of a system which did not recognise the actual cost incurred when determining the level of allowances available.”

It appears from the consultation on which the Government embarked that there was widespread support for the continuation of IBAs and agricultural business allowances, which were seen as an important part of setting the costs of capital investment in property.

The second concern about the reforms goes back to the Chancellor’s announcement about the broader reforms of capital allowances and the fact that there should be a move to align more closely the writing-down allowances with the economic rate of depreciation on capital assets. Changes in subsequent years will reduce the writing-down allowance on plans from 25 per cent. to 20 per cent. per annum to reflect the change in the accounting charge that most businesses incur in relation to the depreciation of assets.

We are discussing something slightly different. Under FRS 15, most businesses make a depreciation charge against property. That is a change from the previous accounting regime, SAP 12, under which it was common practice not to charge depreciation. The overall package aligns accounting rates and the tax rates for plant and machinery, but there is a divergence from that policy in respect of property: the Government are abolishing the writing-down allowances, but businesses charge depreciation on property in their accounts.

The third worry that has been expressed most widely concerns the retrospective nature of the measure. Investment decisions taken 24 years ago when people expected to be able to claim industrial buildings   allowance and ABAs are now called into doubt. Such decisions about investment were made on the assumption that they would receive capital allowances, yet capital allowances will be withdrawn over the next three or four years. That causes great concern to people whose investment plans were predicated on the basis that capital allowances would be available on their property. The fourth point concerns the impact on the profitability of a number of UK business sectors.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

My hon. Friend might wish to consider the point made by the National Farmers Union. Farmers in my constituency consider that the phasing out of the agricultural business allowance will be a clear disincentive to upgrade and improve their facilities.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My hon. Friend has just beaten me by a few paragraphs to the impact that such a measure will have on the farming community. He has highlighted the fourth worry, which is how the changes will have an impact on different sectors of the economy, of which agriculture is one. Another is the leisure sector, to which the hon. Member for Wirral, West referred. The small companies sector, too, will be particularly affected, as I shall explain later.

It is worth reflecting on some of the more general comments that have been made about the changes. The Tax Journal states:

“The removal of IBAs will affect not merely owners of traditional industrial buildings but many utilities and transport companies.”

It refers to the hotel sector and says that it is capital intensive. It argues that the economic case for the change would undoubtedly be more convincing if some measure of depreciation were allowed for buildings themselves.

John Whiting of PricewaterhouseCoopers, a well known commentator on tax matters, has said:

“Whilst there have been calls for years to rationalise the allowances on buildings, to deny any allowance seems perverse—property does depreciate. The transition is far too short: financing arrangements just set up on the basis of 25 years of hotel, industrial or agricultural allowances will now receive as little as 10 per cent. of the expected allowances.”

In addition, Property Taxation said:

“Property is generally the second highest area of business expenditure besides salaries and so all UK businesses will feel the brunt of these changes. Many will no doubt choose, in due course, to pass on to their customers the ultimate costs incurred through loss or reduction of allowances as proposed in the Budget.”

Clearly, there is widespread concern from business and tax commentators about the impact that removal of the allowances will have on the economy as a whole. However, let me address some of the specific sectors that will have an issue with the change. The tourism industry is the UK’s seventh largest industry, generating £17 billion per annum in export earnings and employing more than 2 million people. Bob Cotton, chief executive of the British Hospitality Association, has said that the association

“believes that the Chancellor’s decision will discourage investment at a time when there is more pressure than ever to  build new quality hotels and restaurants, to add extra rooms and to upgrade facilities generally.”

He added that the association has

“one member who, with a £3 million extension to his hotel, would have been allowed to claim tax relief over the next three years alone on nearly £1.2m of the costs. Under the new proposals, his tax relief will be reduced by as much as £600,000 or possibly even more.”

It is not just hotels that are affected; every hospitality company that wants to expand will be affected too.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West 11:00, 22 Mai 2007

If the hon. Gentleman accepts—although he might not—that a regime that is 60 years old is somewhat outdated, surely the time to change it is when the sector is buoyant and not when it is depressed.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The very same argument was deployed by the Chancellor back in 1997 when he made his tax grab on pension funds. He said that it was fine, because the sector was buoyant, but we know what happened—the pension sector declined as a consequence of the tax grab. So the argument does not constitute a particularly robust support for the Government’s proposed changes. I know that you would not wish me to be tempted down the tax dividend route, Mr. Gale, so I shall return to the impact of the proposed changes on particular sectors.

Graham Gross is the chairman of the British Hospitality Association. He is from the west country and he owns two hotels there. In a letter, he has said:

“As a result of the Budget, the extension to the Thurlestone will not go ahead as we were planning and we will have to severely curtail our plans to develop the Mullion Cove.

At a time when the hotel industry is being urged to refurbish its facilities and build new units to meet international competition and growing customer sophistication the consequences of the Chancellor’s Budget will be felt for many years into the future.”

That shows that the tourist sector is already having to adjust to the Chancellor’s changes. When we deal with amendment No. 24 I shall address some of the things that the Chancellor should perhaps be thinking about before proceeding to implement the regime.

My hon. Friend the Member for Braintree mentioned the plight of farmers. The NFU has been very vocal in its comments on the proposals and has pointed out that most of the assets that qualify for the agricultural buildings allowance—steel barns, structural parts of dairy sheds, and poultry and pig houses—have limited useful economic lives and are depreciating assets. Notwithstanding that, they will not benefit from the allowance.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

Does the hon. Gentleman share my concern that there might be a disproportionately negative effect on smaller farmers, who are exactly the farmers who might look to diversify into other industries and who might also be hit by the increases in the corporation tax rate for small businesses?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed. The hon. Lady makes an important point about the interaction of the reforms with other Finance Bill proposals that we have already debated. I shall address that later, because it is  important to understand the impact that will be felt by different sized businesses that are subject to different tax regimes.

The NFU said that

“it is unjust simply to withdraw relief completely on expenditure already incurred. It is clear that the phasing out of ABAs will result in a significant loss of relief over what would have been the remaining tax lives of qualifying assets.”

One accountant in the south-east told the NFU that his firm’s larger clients currently have unrelieved balances totalling £12.5 million. That is a significant amount of tax relief that farmers felt would be due to them in the future that they will now no longer receive. If they seek to sell one of their agricultural assets when clause 35 comes into effect, they will not even receive the balance of the adjustment on that sale.

Therefore, there are concerns in the farming sector. In Oxfordshire, one accountant produced examples of a range of clients who currently have ABA balances ranging from £814,000 to £4.2 million. Those are significant sums for individuals working in the agricultural sector.

I come now to the argument of the hon. Member for Falmouth and Camborne. The Government have argued that the reform of capital balances, the abolition of balance adjustments and the phased withdrawals of IBAs and ABAs will fund the corporation tax cut that they announced at the time of the Budget; the 2p reduction in the headline rate. One can accept the loose argument that the reductions in one area will be funded by increases in tax in another, and that there will be winners and losers. There is a logic to that. However, as the hon. Lady points out, a problem arises for small companies; they will lose the historic tax balances that they would have received relief on and, in addition, will have to pay a higher corporation tax rate themselves. Therefore, there is a double whammy there. They will not be able to receive the benefit of tax relief on investment already incurred and they will have to pay the higher corporation tax rate as the Chancellor proposed in the Budget.

Mr. Gale, if you owned industrial property—and I do not know whether you do—you would see the loss of IBAs and ABAs but would not receive compensatory reduction in your tax rate as a consequence. The only people who seem to be potentially net in balance will be those companies paying the main rate of corporation tax. The small company sector will want from the Chief Secretary some acknowledgment of the impact that that will have on the sector when taken in conjunction with other changes to the tax system.

Amendments Nos. 15 to 23 are designed to achieve a degree of grandfathering for expenditure already incurred, or contracted to be incurred prior to the Budget. That means that, where there is a disposal, they will still be eligible for a balancing adjustment. That reflects the concern over the retrospective nature of the changes. It is worth remembering that there is a precedent for grandfathering in this area. When the industrial buildings allowances were increased from 2 per cent. to 4 per cent., only new investment qualified for the 4 per cent. rate. Therefore, when Governments have made changes on IBAs and ABAs in the past,  they have thought about the issue and taken it into account. They differentiated between past and future investment.

In Amendment No. 24, and I think in Amendment No. 183 tabled by the hon. Member for Falmouth and Camborne, we ask the Treasury to lay before Parliament a report setting out the impact of the abolition of balancing charges, in particular in the abolition of IBAs and ABAs more generally. As Committee members on both sides will acknowledge, there are legitimate concerns about the impact that the abolition of IBAs and ABAs will have on those sectors that are heavily dependent on capital investment for their business. It is important that that analysis is made available by the Treasury and that it is able to work through that process more speedily. These issues would have emerged more properly through a process of consultation. Although the Government have often been congratulated on carrying out proper consultation in other areas—I will congratulate them myself later for that—it is a pity that we have a major change here that has really been introduced without proper consultation.

In conclusion, these amendments would provide protection for past investment and would also provide the Government with some time to think about the impact of the changes on property-intensive businesses such as tourism, leisure and agriculture. They would also give the Government the opportunity to think carefully about the impact of the changes on different types of business, whether they are small companies or larger businesses. I think that it is perhaps small companies that will have a great deal to lose from the abolition of these allowances, as they do not have the compensatory reduction in the corporation tax rate.

The Government have embarked on a major reform without carefully thinking through the consequences for different groups. By accepting amendment No. 24, the Government would create some room for manoeuvre and give them the opportunity to think again about the clause and how it might affect different businesses.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

It is a pleasure to welcome you to the Chair this morning, Mr. Gale.

As we have heard in the remarks made by the hon. Member for Fareham, the clause is the first part of proposals announced in the Budget to abolish the IBAs and ABAs as part of the wider package of reform of the capital allowance system. If one examines the timetable, the clause eliminates balancing adjustments but allows the existing writing-down allowance to continue. Then, in subsequent years—presumably we can expect legislation in next year’s Finance Bill—we will see the rate of allowance cut down from 75 per cent. ultimately to zero.

This package of reform has been portrayed as a balanced package and ultimately it may well be a balanced package. However, the difficulty for many businesses is working out how all these changes that they have heard about will interact with one another, and determining at what point they may benefit and at what point there may be significant difficulties or disbenefits for them.

We see a headline reduction in the rate of corporation tax, which will not benefit small businesses; instead, they will see an increase. Although such businesses may benefit from an annual investment allowance next year, in the meantime, they must work out what the impact will be. They are left with this huge package of change, which, as we have heard, there has not been much consultation about, and the wash of all these different decisions will affect different businesses in different ways. I have received representations from businesses that feel that they will be negatively affected, but I am sure that there are many other businesses that simply will not have any idea about how all these measures will interact with one another.

Of course, these changes will have an impact on future decisions, but they will also have an effect on areas where decisions have already been taken and investment has already been made. There will be significant changes to things that businesses have already set down in their budgets.

We have already heard about the concern over the lack of consultation. The Institute of Chartered Accountants in England and Wales recognised that this was a balanced package, but it said:

“Such a major change to the capital allowances rules should have been exposed beforehand for detailed consultation. We appreciate that reform of the capital allowances rules was mooted as part of the wider package of corporation tax reforms but no firm proposals were discussed and we think that most respondents thought it was a bad idea.”

The Chartered Institute of Taxation said:

“We welcome the extent of prior notice of future changes, although consultation would have been preferable.”

That brings us to an issue that has been raised by the Liberal Democrats on previous occasions. In some aspects of this Bill, we see that there has been detailed consultation that has resulted in widely welcomed proposals that are largely uncontroversial; in other areas of the Bill, we see that changes are being put forward unannounced and there is no opportunity for some kind of consultation before we have to debate those changes, either on the Floor of the House or in Committee. It is another example of how a limited, formal consultation procedure would assist our ability to go through the Bill and give it detailed scrutiny.

My concern is whether the Government have fully thought through the changes’ impact not only on businesses but on Her Majesty’s Revenue and Customs. Has a regulatory impact assessment been undertaken? Presumably, it must have formed the basis for the Red Book predictions of how much revenue the changes would generate for the Exchequer. There may be a regulatory impact assessment, but I have not seen one, so I should appreciate the Minister’s comments on whether one exists. Have the Government considered the differential impact of the changes on various sectors?

In amendments Nos. 24 and 183, we are trying to tease out what sizes of business and which sectors will be most disadvantaged by the changes. We have heard that tourism, agriculture and industrial building are among them. Has a regulatory impact assessment been  undertaken, and will it be made available for Parliament to see on what basis the decisions were made?

The Chartered Institute of Taxation has raised concerns about whether businesses will end up re-categorising integral fixtures and plants. Before, it did not matter how such things were categorised, but now it will make a difference. The CIT said in its representation:

“Until now, the split of costs between buildings, plant and fixtures did not affect the sum of the long-term allowances given. However, the change, because it is to apply to existing buildings, might result in many companies that own industrial or agricultural buildings deciding to review open tax returns with a view to re-categorising integral fixtures or plants previously included as part of the building costs, as fixtures and fittings. If this were to occur, it would result in additional administration for those businesses and for HMRC. There is also the possibility of error or mistake in claims being made for earlier years.”

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury) 11:15, 22 Mai 2007

The hon. Lady will know that the guidelines on fixtures and fittings, plants and machinery are very well defined. If people try to redefine them, does she see the possibility of a new avoidance industry which we will have to tackle in two or three years’ time?

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

That may well be a problem. We shall revisit the issue in future Finance Bills to tackle the potential for avoidance. Again, I should like the Minister’s comments on whether the Government anticipate any such changes in behaviour, and what additional burden it might represent for Revenue and Customs.

I shall give some examples of the businesses that have contacted my colleagues and me, to demonstrate how they feel they will be adversely affected. The hon. Member for Fareham commented on examples from the tourism industry of how decisions to invest will be affected by the changes proposed in the clause, but I shall give an example relating to my earlier intervention.

A farm in my constituency has diversified into cheese production. It is a small farm struggling to get by. It was one of the first farms to benefit from a European objective 1 grant application, which resulted in the extension of the dairy. The farm already benefits from the agricultural buildings allowance, but has recently made a decision to make a significant investment in a dairy for cheese production, which has an IBA residue of more than £300,000.

The decision was made in good faith. It has resulted in the creation of jobs, is supporting the agricultural industry and is helping to develop one of the most underperforming economies in the country, but money that the farm could have reinvested will now be paid to the taxman. Unfortunately, the farm is a small enough business that it will not benefit from the higher rate of corporation tax—its corporation tax will increase. The farmers will be all-out losers.

Cornwall is one county among many that consists largely of smaller businesses. It has a lot of industrial buildings and small-scale businesses, whether agricultural or industrial. Its people will mostly lose out. I am interested to know whether any assessment has been made of the differential impact in terms of  geography on places where there might be large numbers of smaller businesses.

At the other end of the country, my hon. Friend the Member for Orkney and Shetland (Mr. Carmichael) has written to me about Lerwick’s port authority, the deputy chief executive of which wrote to him to raise huge concerns about the changes to the industrial buildings allowance. She said:

“For 2006, Lerwick Port Authority has IBA’s of £680,000 resulting in a corporation tax saving of £204,000 (30 per cent.). The abolition of this is very detrimental—even on current projects the additional corporation tax due over 25 years is immense. More worryingly, the capital investment programme we have for developing the port will be affected”.

That, too, chimes with the hon. Gentleman’s comments. We are concerned about the impact on investment decisions that have already been made, and how the change will affect future investment decisions in the tourism industry and other sectors all over the country.

Many companies either fear that they will lose out or have not yet been able to get a handle on how this package of reform will ultimately affect them. Some are part of the way through the change process; others do not know what will happen at the end of it. I hope that the Minister will respond to my questions by reassuring those companies that the Treasury fully understands the cross-cutting effects of the range of changes.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

The clause concerns the short-term phased removal of agricultural and industrial buildings tax incentives, which were designed to encourage the building of such buildings. It amends parts 3 and 4 of the Capital Allowances Act 2001. I would welcome the simplification of capital tax allowances if that were the sole purpose of the measure. Certainly, an alignment of all sorts of allowances throughout the economy and business taxation to coincide with a simple, straight-line depreciation method would be an understandable manoeuvre; it would be a simplification.

Given that we all accept that it is clear that the economy has changed since the second world war, it would be understandable if we were to review the incentivising of the building of agricultural and industrial buildings. However, it seems that the Government have, to a degree, misled investors. It is a bit like offering somebody a chair and then, as they position themselves to sit down, pulling it away. The agricultural sector, hoteliers and the industrial sector—manufacturing companies—have been working on the basis that the allowances would continue for 25 years, and have made decisions intended to last for that period. All of a sudden, the Government have changed direction and said, “Actually, we are removing those allowances,” but have not compensated them in some other way. Indeed, as the hon. Lady pointed out, not only are the allowances being removed, but the changes disproportionately affect smaller businesses. They face the corporation tax increase over the next two or three years and they are also having their allowances taken away. A pincer movement is being made on smaller businesses, smaller agricultural businesses, hoteliers and, in particular, manufacturers.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

May I gently remind the hon. Gentleman that the Government that I suspect he supported did exactly the same thing in 1984 when I was taking out a mortgage? They got rid of life assurance premium relief and subsequently ran down mortgage interest relief at source over the 25 years of my mortgage.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

There is the old adage that two wrongs do not make a right. I am not arguing that past bad decisions should persist into the future, but I would argue that businesses have had a clear framework—they have had the certainty that if they make investments for 25 years, the writing-down allowances will be available for that period. Then, all of a sudden, the rug has been pulled and people who purchased buildings only two or three years ago find that their reliefs have disappeared.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

Very small businesses might in future benefit from the annual investment allowance. However, their concern is that that still has no effect on past decisions to invest.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

That is precisely my point. All hon. Members, not just those on the Conservative and Liberal Democrat Benches, must become very nervous whenever there is retroactive legislation, particularly on taxation, unless it is to close tax loopholes.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

Just to clarify the matter, we are anxious to point out the extent of the Opposition’s expenditure commitments. The hon. Gentleman said that the abolition of MIRAS—mortgage interest relief at source—and tax relief on life assurance was wrong. He said that two wrongs do not make a right; it was the wrong thing to do to abolish those tax reliefs.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

That was a lovely schoolboy trick, but it is well outside the scope of our discussions. I was making a general observation that any retroactive tax legislation needs to be considered very carefully. I will not rise to the Economic Secretary’s schoolboy remark.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

There is a more serious point that follows from my hon. Friend’s remark—that the retroactive legislation is saving the Government £3 billion, which will plug a £3 billion black hole in their finances.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

My hon. Friend pre-empts me wonderfully, as he made exactly the point that I was coming to—that the Government are clearly in some difficulty because of their tax-and-spend attitude. They gave a reduction in corporation tax to large businesses, but they are now having to scrabble around to pull back the tax take from smaller businesses and businesses that felt there was a certainty in their investment framework. I am not comfortable with that behaviour.

My observation, to which the Chief Secretary may wish to respond, is that if the proposal was not designed as a tax-raising measure—a retrospective tax-raising measure to a large degree—why not allow  the balances to be paid up front? Why not give businesses an option? If there are 10 years to run at 4 per cent., for example, on an agricultural or industrial building, the business can claim a 40 per cent. allowance. Why not just say, “It is your choice. You can either have 20 per cent. now or let it run.” If this is not purely a tax-raising measure, largely on smaller businesses, why not give them the option to take a larger amount or to have more of the allowances reclaimable? In that way, businesses which, without a shadow of a doubt, will be struggling, will have an option to do something different in the short or longer term. They may decide that they would rather continue taking the allowances for the next 10 years, but they may decide to take a lower amount of tax rebate now.

It appears that the Government have duped farmers, hoteliers and manufacturers, and then pulled away from the behaviour they were encouraging. I do not disagree with the argument that the investment environment probably needs to change; it is a fair point that we may not require more agricultural buildings, but if that is the case, why not announce that two or three years from now the allowances will disappear completely and enable those who are already claiming them to continue to do so until the end of the period?

I have two key questions for the Chief Secretary. First, why was there no consultation on this scheme when there was plenty on tax-avoidance schemes? Secondly, on tax allowances for the music industry, there are new, first-year capital allowances for new investment over a single-year period. What certainty is there that the Chancellor will not withdraw those allowances? If the Government are prepared to withdraw what I argue is a stabilising allowance for investment in the agricultural and industrial building sectors, what confidence can businesses have that the new allowances, which as yet are not clearly defined, will remain? Or are they going to offer single-year allowances and then withdraw those to rake in even more money for the Exchequer, in order to fill that black hole of several billion pounds that has been created over recent years?

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree 11:30, 22 Mai 2007

I had assumed that we had finished the section of the Bill on anti-avoidance, and I would like to hear the Chief Secretary’s justification for the surprise with which this move has been greeted by those sectors that it affects. My hon. Friend the Member for Fareham alluded to two of them—the British Hospitality Association and the NFU. Given that the capital allowances referred to in clause 35 influence long-term investment decisions, it would not have been difficult for the Chancellor to consult—the point that my hon. Friend the Member for Windsor was pressing—and to give fair warning of these changes. After all, the Chancellor has had 11 Budgets in which to do so.

If I were cynical, I might be tempted to think that clause 35 has less to do with beginning to correct an anachronism within the capital allowance regime than it has to do with propping up the Government’s balance sheet to the tune of £3.042 billion in forgone revenue. The Government have justified the clause as  the first step in the process of withdrawing the industrial buildings allowance and agriculture buildings allowance in order to prevent some businesses from obtaining an unfair or arbitrary tax advantage. However, the Chartered Institute of Taxation had to perform gymnastics to determine if any advantage might be possible. Try as it might, it could not find one that could be considered as unfair. Perhaps the Chief Secretary could give us some examples of the unfair or arbitrary situations that are intended to be caught by the clause.

On the wider issues raised by the Government’s interference with the capital allowances regime, there seems to be a number of flawed assumptions at play here, the worst of which is the fiction that industrial and agricultural buildings do not depreciate and should not therefore qualify for a writing-down allowance. Budget note 7 referred to the industrial buildings allowance and agricultural buildings allowance as “outdated and unjustified distortions.” As alternatives, the Red Book has “longstanding and unjustified”, as well as “distortive”, which I cannot help thinking is something of a distortion in itself. Nevertheless, that is fairly scathing language to describe what are admittedly well established and even venerable capital allowances. Whatever their provenance, the IBA and ABA reflect the fact that industrial and agricultural buildings depreciate. I say that that is a fact, but if I am wrong, I hope that the Chief Secretary will correct me for the record.

I represent a constituency that is largely rural, in which many people will be hard hit by the withdrawal of these allowances. If I were to suggest to a farmer in my constituency that his working buildings did not depreciate, as he thought they had for so many years on the basis of good empirical evidence of seeing them rusting or collapsing in front of him, I suspect that he would not be impressed by my argument. If I were to say that his buildings were appreciating in the manner of houses in Connaught square or the eco-homes in Gallions Park, he would laugh at me.

Agricultural buildings are worked hard and they have a useful life, after which they are replaced. That is the reason for the straight-line basis of the write-down over 25 years. Farmers are not going to be able to sell, say, an 18-year-old cowshed at a profit, on the basis of the appreciation of either the structure itself, or in the vast majority of cases, the land on which it stands. Those buildings depreciate from the day that they go up to the day that they are pulled down or replaced.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

If I understand my hon. Friend correctly, is he saying not only that the Government were wrong about the IBA and the ABA but that they have cut off any route for taking into account appreciation in writing down these assets?

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

The Government have done that by removing that opportunity that my hon. Friend referred to in his speech. The image he used was of pulling the rug from under them. The clause is explained away in terms of removing an unjustified distortion, but the distortion accounts for a difference between a certain kind of working building and other commercial property. I want to explore that distinction a little further.

The Red Book claims in paragraph 2.38 that the IBA, and presumably by extension the ABA, is poorly focused and a historical anomaly. This lack of focus seems to derive from the Government’s inability to engage with the difference between commercial property, which might in the ordinary course of events be expected to appreciate, and agricultural property for which the opposite is usually true.

I can imagine the thinking in the Treasury when this idea cropped up. Sitting in the impressive new office building at 1 Horse Guards road it would have been easy to envisage the steady and inevitable appreciation of commercial property and to question why any special allowance for depreciation should be made for agricultural or industrial property. Likewise if this Committee had been sitting over the road in Portcullis House, we would have another example of a building that ought not to depreciate throughout its designed lifespan of in excess of 125 years. But commercial real estate in central London is worlds away from the cowsheds and pigpens in Essex and worlds away from the businesses that rely on the capital allowances hit by clause 35.

The Government have rolled these things together on the spurious grounds that they all involve, as the Red Book would have it, “land and buildings”. That is not robust reasoning. Rather than trying to tighten the focus to correct any potential inequity, the Government have simply charged in. I would say that they have gone like a bull at the gate but I do not think that anything as rural as that occurred to Ministers when they looked at this issue. If the distinction between the buildings that are likely to depreciate and those that are not needs to be tightened up, so be it. I would not disagree with that, but it should be tightened up after proper consultation and reporting has taken place.

I have two further brief comments to make. The first concerns the constant injunction that we should look at all of the Chancellor’s measures in the round or as part of a balanced package. What that really means is the process by which a tax-cutting budget is revealed as a tax-conning budget, but we should not stray too far from what we are talking about.

I share the concerns of my hon. Friend the Member for Fareham that small businesses and unincorporated businesses will not benefit from the 2 per cent. cut in the headline rate of corporation tax that sits in the balance against the withdrawal of IBA and ABA. What concerns me more than that is that the detailed shape of the whole package on capital allowance has yet to appear.

The Chancellor is withdrawing balancing adjustments and the recalculation of writing-down allowances now, but is also dithering over bits and pieces of the package that will appear in future Finance Bills. I suppose that once the Secretary of State for Trade and Industry is installed in No. 11, the case for industrial buildings allowance might conceivably be looked at again, but I doubt very much that the Secretary of State for Environment, Food and Rural Affairs will be able to effect a positive outcome for the farmers.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Could the hon. Gentleman explain what the effect of withdrawing balancing adjustments would be?

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

The effect of withdrawing the balancing adjustments will have the knock-on effect that we are talking about here. That is the removal of capital allowances and, to use my hon. Friend’s analogy again, pulling the rug from those businesses that have made certain assumptions about their cash flows in respect of commercial or agricultural buildings. It would be preferable to defer the beginning of this process until after the detailed study called for in amendment No. 24 has been undertaken.

My final point concerns one piece of the future package: the rate of writing down allowances for certain fixtures that are integral to a building. That raises the spectre of a raft of artificial manipulations in respect of what constitutes an integral fixture for accounting purposes. Paul Howard, a senior tax consultant with Chiltern plc, has said:

“You could always claim capital allowances on fixtures, but I suspect they will ring fence the definitions to restrict what you can claim as integral...This could make buildings and capital allowances more complicated than they already are.”

In other words, the prospective changes open the door to error, complexity and artificial manipulations. Rather than shutting the stable door after the horse has bolted, or indeed after the stable door has been reclassified as a plant, will the Chief Secretary give some indication of the Treasury’s thinking on this issue and the scheme set out in Budget note 2? Better still, will he agree to amendment No. 24, so he can set out his thoughts and listen to others at greater length?

Photo of James Duddridge James Duddridge Ceidwadwyr, Rochford and Southend East

The bigger the tax grab, the less innocuous its title. If one were sat in the Treasury wanting subtly to plug a black hole with a large amount of money, one would choose something that sounded quite verbose and not very exact and would probably make it an acronym. In fact, that has been done with ABA and IBA. One would also try to disguise what was actually going on. In respect of the ABA—the agricultural buildings allowance—one would say, “Agricultural buildings allowance? The farming sector’s only 1 per cent. of GDP, so this must be about a small section of the economy.” However, the measure involves industry as well, in respect of industrial estates and property, and so forth, which is a significant, but not massive, part of our economy. The definition of industrial property covers not just farming, but all industry. We have received submissions from various sectors, including hotels, transport, distribution and tourism. It is effectively a tax grab from everyone, and a huge one at that. I had to re-read briefs several times to confirm that the figure of £3 billion was correct. That is an enormous sum.

A number of colleagues mentioned certain items: my hon. Friend the Member for Windsor talked about a chair and my hon. Friend the Member for Braintree spoke of a rug. Retrospective legislation is truly appalling—in the sense of carpets, that is, as mentioned by the hon. Member for Braintree, who is looking at me—and the issue of retrospection is critical in my assessment of the relevant clauses and the Bill.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

The Chief Secretary may argue that the writing-down allowances are contained in clause 36. However, if a small or medium-sized  business has invested in a building for the long term, that is its biggest capital expenditure, and their allowances will be cut off. It is incredibly unlikely that the first-year allowances will apply to any great degree.

Photo of James Duddridge James Duddridge Ceidwadwyr, Rochford and Southend East

My hon. Friend is right. It is not only that business about which I am concerned, but the broader message that this measure is sending to entrepreneurs, which is that they cannot look at the present tax system with any certainty and know it will not be changed overnight, retrospectively in the Budget by the Government, effectively reducing capital investment in the United Kingdom, taking away business and jobs from the UK and removing in the longer term the absolute level of tax brought in to be spent on public services.

My hon. Friend the Member for Ludlow, whose constituency is rural in parts, unfortunately cannot be with us today. However, he was passed some information from a chartered accountant who specialises in the farming sector in Herefordshire. Mr. James Hutchinson of the Hutchinson partnership wrote to him and estimated that based on his client base, changes to the agricultural buildings allowance would lead to an effective tax increase of 8.5 per cent. for farmers. I specifically want to understand what the Chief Secretary’s assessment is of that and what advice he has received on it.

My constituency has one or two farms, but it is not largely a farming area. However, having visited those farms I realise that far from farmers being rich—the impression one might occasionally get from television programmes—they are instead suffering. It is ironic—I hope that I shall not be ruled out of order if I present the broader picture of what is happening in farming—that Europe and the Government are giving with one hand, by way of the common agricultural policy, while increasing taxation with the other. That seems completely inconsistent.

The chartered accountants’ letter points out, with no sense of irony, that

“the detail is not always apparent immediately” from the Budget. That is a consistent theme of our debates, particularly in terms of these amendments and the substance of the legislation. The letter mentions the retrospective effect of the legislation and considers its likely impact on the client base of Mr. Hutchinson’s firm. I admit that that is only one example, but given that the Government have not done a systematic impact assessment, because they have not gone through a proper consultation, we are reliant on anecdotal examples. However, the firm does specialise in agriculture. Over the next four years, the firm’s client base will be left with £6.4 million of unused allowances that they would otherwise have had. That seems totally and utterly unfair.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury) 11:45, 22 Mai 2007

The hon. Gentleman mentions the impact of the provisions. Does he think that it is perverse they will have an impact on low-margin sectors, such as agriculture and tourism? Does he  believe that the law of unintended consequences will apply? When people consider the cost, there will be fewer new entrants to the agricultural sector. Tourism businesses that have been pressurised to invest and up their quality will no longer be able to do so. At a time when manufacturing industry in particular is being encouraged to invest to compete, it will be unable to do so because the forecasted financial plans will be thrown into turmoil.

Photo of James Duddridge James Duddridge Ceidwadwyr, Rochford and Southend East

The hon. Gentleman is absolutely right. My constituency might be a long way from his patch, but there are further contradictions within the Thames Gateway area, where the Government are encouraging investment—this type of expenditure—prior to the 2012 Olympics. The Bill does not fit within the thrust of what they are trying to achieve.

The Government’s changes are bad. They are not transparent, and they represent an enormous £3 billion tax increase.

Photo of David Gauke David Gauke Ceidwadwyr, South West Hertfordshire

I add my voice to those who have expressed concern about the lack of consultation. A number of hon. Members raised that point and questioned why something that has been described as the biggest reform of business taxes since the mid-1980s has been undertaken with little or no consultation. I venture to suggest that the answer is that the Government have been slow to realise that the corporation tax rate was becoming increasingly uncompetitive. Other jurisdictions have been reducing their rates and the Government have been under pressure—not least from the Opposition. In an attempt to respond, they have hurriedly sought to reduce corporation tax and to pay for the reduction by reducing allowances.

I am not sure that I would disagree with that as a general policy direction. As the Chief Secretary said, the corporation tax rate is, in itself, an important point, as well as the overall burden of taxation. However, that suggests that the Treasury perhaps took its eye off the ball on corporation tax and business taxes as a whole. Hence, we have this rather hurried proposal, with all the disadvantages that hon. Members set out.

I want to return to two points that I raised on Second Reading. The first relates to the impact on major infrastructure projects, including the Olympics. The reason why I raised that was because of the evidence that the Select Committee on the Treasury received from, among others, John Whiting of PricewaterhouseCoopers, to whom my hon. Friend the Member for Fareham referred. In John Whiting’s oral evidence to the Select Committee, he identified those who will lose as a consequence of the proposals set out in the Budget. That will include:

“somebody in long-term property infrastructure including some very prominent projects that are around at the moment where commitments have been made on the assumption that allowances are going to come in over 20-25 years and suddenly they are not.”

When Mr. Whiting was referring to

“some very prominent projects that are around at the moment”,

I think that he was referring to the Olympics.

The Financial Secretary was good enough to respond to me on that particular point when he wound up the Second Reading debate. He stated that

“the changes to capital allowances have a largely temporary timing effect. Those will be more than outweighed by the dominant effect of the cut in the main rate that the Bill and Budget introduce.”—[Official Report, 23 April 2007; Vol. 459, c. 758.]

As a number of hon. Members pointed out, the cut in the main rate obviously only applies to those companies that pay mainstream corporation tax rate. It will not apply to small businesses.

I am not an accountant, but I would also question the claim that the changes to capital allowances have a largely temporary timing effect. They are clearly substantial raisers of revenue and if they are substantial raisers of revenue, presumably somebody is paying that revenue, or at least not claiming allowances of some description.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Perhaps I can illuminate my hon. Friend on his point about temporary timing differences, and I say that as an accountant. If the Government varied the rate of capital allowances, that would accelerate or decelerate the rate at which that expenditure is recognised for tax purposes. Where an allowance is abolished and not replaced, there is a permanent loss of tax relief. So the changes in the subsequent clause accelerate capital allowances. The changes that we have debated in this clause—in subsequent years, we are talking about the abolition of IBAs—will lead to the permanent elimination of that tax relief.

Photo of David Gauke David Gauke Ceidwadwyr, South West Hertfordshire

I am extremely grateful to my hon. Friend for clarifying that—or at least it will perhaps be clarified in my own mind when I carefully read his contribution in the Official Report subsequently. For those who understand these matters, I suspect that that was a very useful contribution.

I would be grateful if the Chief Secretary agrees with my hon. Friend’s comments and further explains whether the changes announced in the Budget and contained in the Finance Bill could have a detrimental effect with regard to the Olympics and cause an additional cost as far as they are concerned. I am obviously conscious that the Chief Secretary follows these matters closely from a constituency point of view. If he is able to shed any light on them and on the concerns raised by John Whiting and others, I would be grateful.

The second point that I raised on Second Reading, which the Financial Secretary did not pick up on his closing remarks, related to the impact on certain private finance initiative projects. I raise this matter rather tentatively because I have only heard it discussed anecdotally, but there is a concern that some of the PFI projects that the Government have entered into in recent years contain clauses whereby changes to allowances that would be detrimental to the PFI provider might trigger additional payments from the Exchequer to that PFI provider. In other words, there might be a revenue cost as a consequence of the changes to the allowances.

Photo of David Gauke David Gauke Ceidwadwyr, South West Hertfordshire

I gave way to the hon. Gentleman on this section on Second Reading, and I shall give way to him again.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

I am glad the hon. Gentleman remembers that.

The total amount of capital in PFI projects at the moment is £53 billion. The total published outstanding liability to 2030-31 is £162 billion. Does the hon. Gentleman have any idea what the impact might be if he is correct and the changes trigger additional costs to the Treasury?

Photo of David Gauke David Gauke Ceidwadwyr, South West Hertfordshire

No. That is why I am raising that concern. For the sake of completeness, I have also said that the concern does not arise in many PFI contracts, but it appears to arise in some. I am grateful to the hon. Gentleman for providing numbers on the potential scale of the problem, but I should be grateful if the Chief Secretary clarified that point. As I said, I make the point tentatively, because I have heard it only anecdotally, but if there is something in it, as the hon. Gentleman suggested, it could create a considerable cost to the Exchequer, so we must consider it.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I shall start by outlining the purpose of the clause. The Committee is already familiar with the main features of the package of business tax reforms in the Budget. The main rate of corporation tax will be reduced from 30 to 28 per cent., giving the UK the lowest rate of corporation tax in the G7—lower than the EU15 and Organisation for Economic Co-operation and Development averages. A set of reforms will modernise and simplify the capital allowances system.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I will, but I need to get a bit of a move on.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

The Chief Secretary mentioned the reduction in corporation tax. Will he also confirm, as I am not sure whether he is going on to mention it, the increase in corporation tax for small business?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Indeed, that was my next sentence. The refocusing of the small company taxation system will tackle the rising Exchequer costs of tax-motivated incorporation and provide a better-targeted incentive for investment in the shape of the new annual investment allowance, which was conspicuously absent from the comments of Opposition Members, although not from those of the hon. Member for Falmouth and Camborne. I shall refer to that in a moment. In addition, enhancements to both the large company and small and medium-sized enterprises research and development tax credits will increase business R and D and strengthen the UK’s competitive position.

The packages are designed to be fiscally neutral for both small and larger businesses in each of the years listed on the Red Book score card, maintaining and strengthening the UK’s international competitiveness and encouraging further economic growth through high levels of investment. To underline the point for the  hon. Member for Windsor, the package will be fiscally neutral for small businesses in all the score card years, because the benefits of the additional allowances will be set alongside the increase in the small company rate of corporation tax.

Clause 35 paves the way for gradual withdrawal of industrial and agricultural buildings allowances over four years. The hon. Member for Fareham is right to point out that the allowances were first introduced more than 60 years ago. They replaced the old mills and factories allowance, which dated back to the early years of the 20th century. Sixty years ago, it made a lot of sense to assist in the post-war reconstruction of British industry, but as my hon. Friend the Member for Wirral, West pointed out in his intervention, the allowances no longer reflect the reality of the modern economy.

There is no good economic case for continuing to provide a selective subsidy for some kinds of business property but not others. It may come as a bit of a surprise to some listening to this debate, in the light of the slightly overblown rhetoric of Opposition Members, to hear that 13 per cent. of the stock of business property is eligible for industrial or agricultural buildings allowances—80 per cent. is not eligible. There really is no justification for having subsidies for this small proportion of business properties and no allowances at all for the rest. It is perfectly true that a case has been made for a general system of allowances for all commercial properties so that the other 87 per cent. would be eligible too, but given the performance in recent years of the commercial property sector, it would be hard to argue that a more generous tax arrangement for them would be the right thing to do.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury) 12:00, 22 Mai 2007

The Chief Secretary says that there is no justification for the allowances for small industry sectors, but he makes a point about the commercial sector. The per footage rental for commercial retail space is buoyant and has been for many years. There is an expectation that it will stay buoyant. However, the small margins on agricultural businesses, the tiny margins in the hospitality sector and the huge pressures in the manufacturing sector surely show that there is a justification to provide the assistance to invest where investment is needed in those sectors that are most hard pressed by competition and very small margins.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

The small businesses to which the hon. Gentleman refers are exactly the ones that will benefit from the annual investment allowance that we are introducing, which my right hon. Friend the Chancellor set out in the Budget. That is a much better-targeted form of support than this rather random and arbitrary arrangement that goes back 60 years. I can give a little example. A crèche attached to a factory is eligible for an industrial buildings allowance but a crèche attached to an office is not. There is no rationale for such anomalies, and it is high time that we put them right.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

While the annual investment allowance will bring benefits to many small businesses, it affects future decisions, not those that have already been made based on the current industrial and agricultural buildings allowances.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

But many of those businesses, particularly farms, that will see an increase in what is due from them because of the withdrawal of allowances will see a reduction in what is due to them because of the availability of the annual investment allowance. Farm businesses are investing year after year. They will benefit. Small businesses will benefit very substantially from the annual investment allowance.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I need to make a little more progress. I want to clarify a point that was made repeatedly in some of the slightly overblown comments from Opposition Members about the amount of money that is at stake.

The hon. Member for Rochford and Southend, East referred to a £3 billion tax increase. The hon. Member for Braintree made a similar point. The hon. Member for Fareham referred to the £3 billion figure, but I think he understood that the figure is the value of the claims. The cost to the Exchequer is £600 million, so we are talking about an order of magnitude smaller than Conservative Members appeared to believe. That may account for the slightly overblown character of some of their points.

The amount at stake is £600 million, and £540 million of that is in industrial buildings allowances, which incidentally is equal to about 4 per cent. of total allowances available to business. It helps to put this into perspective. The remaining £60 million is in agricultural building allowances: 95 per cent. of the benefit of these allowances goes to large businesses and 50 per cent. of the total amount of industrial buildings allowance—the £540 million—goes to the 100 largest companies. Those companies will gain substantially from the reduction in the main rate of corporation tax.

Let me pick up another point. Both the large business package and the small business package in the Budget are fiscally neutral in each of the years set out in the Red Book. Without these measures, those packages would not be fiscally neutral. I shall be interested to see how Opposition Members will vote. If they vote in favour of the amendments, they will be forgoing substantial sums—hundreds of millions of pounds of income for the Exchequer—to add to the £400 million that they decided to forgo when they voted against schedule 4 last week.

Let me pick up some of the other points that have been made. A good deal has been said about consultation. The rate of writing-down allowance remains unchanged for this year. It will be gradually reduced between 2008 and 2011. As my hon. Friend the Member for Wolverhampton, South-West said, it is not customary to consult on changes in rates of taxation or on the reduction or removal of tax reliefs. That is not the practice of this Government, nor was it the practice of previous Governments. However, we will consult  later this year on the design of new measures such as the annual investment allowance, on which the hon. Member for Falmouth and Camborne commented, and the new credits for environmental technologies. We will certainly welcome contributions to those consultations.

Rather than withdrawing the allowances overnight, we have given businesses a year’s notice of their eventual withdrawal. From April next year, the writing-down allowance will be reduced by one percentage point per year until 2011. That will give businesses ample time to plan and adjust. The clause is designed in particular to prevent forestalling and other behaviours that would otherwise have allowed some businesses to accelerate allowances unfairly at the expense of others. It is not right to describe this as a retrospective change. Corporation tax is an annually set tax. We have pre-announced the withdrawal, and will withdraw the allowances in a phased manner.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I understand the Chief Secretary’s point, and he is absolutely right on corporation tax. However, when it comes to making capital investment and building decisions, one bases those on the amortisation or depreciation that one can get on a building over a certain period, because cash flows cascade off that. Making an annual decision on corporation tax is a different matter from having the taxation that is suggested in this clause.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

There are a couple of points to be made in response to that. First, the value of a building plus the land on which it sits has commonly, in recent years, appreciated rather than depreciated.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

Let me finish the point.

The hon. Gentleman is right in respect of agricultural buildings, but the picture is different because the tax system recognises depreciation in other ways. It is common to all commercial buildings that deductions against corporation tax are available for the costs of repair and insurance, and the depreciation of business premises is recognised at the point of sale in the capital gains tax system. The system properly takes account of that point.

On hotels, it is interesting that the industrial buildings allowance regime was extended to qualify hotels in 1978—it is a much more recent feature of the regime than most—to assist with the growth of UK tourism. I suggest that the rationale for giving extra help to hotels at that time does not apply today. There is not a good economic case for preserving that selective subsidy. In general, the sector is enjoying high levels of profitability and it will also derive significant benefit from the 2 per cent. cut in the headline rate of corporation tax from 2008. In the case of smaller hoteliers, the annual investment allowance will act as a big incentive for investment as well.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

The tourism market has changed beyond recognition since 1978. The long weekend city break holiday, which generates huge amounts of money, particularly in urban areas where it did not  previously exist, is now subject to competition from places such as Prague and Dublin, where people did not go, even for short breaks, in 1978. There is a constant demand to increase quality and availability in all those areas. Surely the demand to keep the quality of the service high and to improve constantly makes the argument that the world has changed and therefore we do not need to do it completely wrong.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

No, not at all. People do not benefit from an industrial buildings allowance if they are upgrading a facility in the way that the hon. Gentleman talks about, and that is exactly the kind of investment that will benefit from the annual investments allowance. The new arrangements that we are introducing are much more effective for encouraging the kind of investment that he wants to see rather than the anomalous and outdated system that we are replacing.

On the Olympic games, I can give the hon. Member for South-West Hertfordshire the reassurance that the London Organising Committee of the Olympic games has been exempt from corporation tax since its incorporation in October 2004, and so will not be affected.

Photo of David Gauke David Gauke Ceidwadwyr, South West Hertfordshire

It is not so much that; the concern is that other property infrastructure providers may find themselves hit. That is the concern that the likes of John Whiting have raised.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I am not sure who will be hit. The only sector that I can think of that might be affected would be the hotel sector. We have just had an exchange about that, and it will benefit overall from the cut in the main rate of corporation tax or the annual investment allowance.

The main effect of amendments Nos. 15 to 23 would be to undo the main anti-forestalling purpose of the clause. That would give a big incentive to businesses without taxable profits against which to set allowances, having valuable, older industrial or agricultural buildings, to enter into sale and lease-back arrangements so that a taxpaying purchaser could access relief on a high market value over the remainder of the 25-year term. There would be a number of opportunities for forestalling if the amendments were agreed and if this clause were not agreed. The potential Exchequer cost of that is very large indeed—probably around £250 million in the first year. A number of other opportunities of that kind would open up.

I should also point out that there must be an error in the drafting, because as drafted the amendments would create new or increased balancing charges and would be a significant deterrent to businesses from selling qualifying buildings. I hope that for that reason as well, Opposition Members will not press the amendments to a vote.

Amendments Nos. 24 and 183 propose delays pending reports. We have set out in some detail the rationale for reform and the fiscal impact in this year’s Budget report. It is our intention to publish a regulatory impact assessment on the withdrawal of the industrial and agricultural buildings allowances, and on the package more widely, over the next year, in time for the implementation of the reforms. Those who are  calling for a report may perhaps be reassured by that. That information will be published before the withdrawal takes place and will also address the regional impact, although I do not think that it will be large.

Photo of Adam Afriyie Adam Afriyie Ceidwadwyr, Windsor

A regulatory impact assessment is to assess the impact of regulations. Surely it should be done before the regulation is drafted into legislation. If the regulatory impact assessment shows the complete opposite of what the Minister has said, will he then withdraw the regulation?

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I can give the hon. Gentleman the reassurance that the regulatory impact assessment will not say the complete opposite of what I have said. The RIA will be published before the legislation puts the changes into effect. I refer him to clause 35, which is simply about balancing charges, and does not put into effect the wider changes to the allowances.

The real impact of this pair of amendments would be to introduce a delay. I do not imagine that Opposition Members want a delay in reducing the main rate of corporation tax. The clause is designed to stop forestalling, and any delay would re-create opportunities for that, and would give some businesses an opportunity to gain an unfair advantage over others. The right way of withdrawing these outdated allowances is in a fair and orderly way. I commend the clause, without the amendments, to the Committee.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 12:15, 22 Mai 2007

I want to make a few remarks about the Minister’s response to our extensive debate on the clause and the amendments.

From my perspective, the Minister’s response betrayed a failure to appreciate the interaction of a complex series of reforms on enterprises of different sizes. He was wrong to argue that the package of tax reductions for large businesses is ring-fenced from the refocusing, as we must now call it, of tax increases for small businesses. The two allowances—IBAs and ABAs—can be claimed by enterprises of different sizes and different forms of ownership. ABAs can be claimed by people who pay income tax or by small and large companies. It is therefore difficult to try to disaggregate them as the Minister sought to do in his remarks.

Photo of Stephen Timms Stephen Timms The Chief Secretary to the Treasury

I am grateful to the hon. Gentleman for giving way, especially as I failed to give way to him, for which I apologise. The point that I emphasised was that for large businesses, and separately for small businesses, the packages are fiscally neutral in each of the years set out in the scorecard in the Red Book. It is not as a whole a business package, but it works separately for large and for small businesses.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Given that the abolition of ABAs and IBAs has been justified in the context of the reduction of corporation tax for large businesses, there is a knock-on effect on small businesses and that is where the problem arises. I take on board the Minister’s comments about consultation and the fact that a regulatory impact assessment will be published before the next Finance Bill. Apparently, we all know the answer to that, so there is no point in professional bodies wasting their time responding to the consultation document because it is almost written as we sit here today.

Those are complex issues and there should be a clearer way of thinking through the impact on different sectors and different types of enterprise. The Chief Secretary said on several occasions, “Don’t worry about the abolition of ABAs and IBAs because there will be an annual investment allowance for small businesses”. However, in the past, small businesses evaluated projects on the basis of the available ABAs or IBAs, and their cash flow was based on that. Those businesses assumed that tax relief would come on-stream, but they will no longer receive it, which will make it more difficult for them to continue to invest. It is difficult to rationalise the matter by saying, “Don’t worry, there will be a new allowance for investment in the future,” because we are talking about the withdrawal of investment relief to which businesses expected to continue to be entitled. They have made financial projections on that basis, and taken that tax relief into account when determining whether the investment will go forward. That is an important issue.

The hon. Member for Falmouth and Camborne talked about the matter in the context of rural diversification, and many businesses have based those very difficult decisions on the assumption that the allowances would be in place, so they will now wonder how well they will stack up in the future.

Photo of Kitty Ussher Kitty Ussher PPS (Rt Hon Margaret Hodge MBE, Minister of State), Department of Trade and Industry

Can I take it from the hon. Gentleman’s remarks and those of his hon. Friends that a future Conservative Administration would reverse the abolition of IBAs and ABAs?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

No, the hon. Lady cannot take it; she falls into the same trap as the Economic Secretary has fallen into, with great delight and desire, throughout proceedings on the Bill. It behoves parties, whether they are in government or in opposition, to think through fully the changes that they make, but in this case, the Government have failed to do so. That is why there should be a report, which could consider the impact of the changes on small businesses, the agriculture sector and tourism and ensure that they have been properly thought through. The principal issue is the lack of thought.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

A lot of rural diversification is assisted by European funding. There are very strict criteria about the business planning that needs to take place before a decision is made to provide such funding. Plans have been made on the basis of the current tax system rather than a changed version. Businesses need certainty, not the greater uncertainty posed by the threat of more changes.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

That is helpful. I am sure that the hon. Lady and others know from having talked to those in business that one of the things that they want, particularly when considering long-term projects, is a degree of certainty in the tax regime. That is an important factor to bear in mind when proposing any set of reforms—[ Interruption. ] The Economic Secretary is itching to get in.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

When the shadow Chancellor made his proposals for corporate tax cuts two days before the Budget, saying that they were to be paid for by the abolition of allowances—after consultation, I am sure—was the allowance part of the package of allowances that he was going to abolish to pay for those tax cuts?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My hon. Friend the shadow Chancellor referred to the reform of capital allowances generally. That is something that we will consider—[Interruption.] The Economic Secretary is desperate to help us write our 2010 Budget. I suppose that we should be grateful that he recognises that that is going to happen.

Let me repeat what I said to the hon. Member for Burnley. It is important that there should be proper consultation; changes should be discussed so that their impact can be understood. I do not think that the Government have done that properly in relation to the abolition of the two allowances. We are not going to stand here and write the 2010 Budget. We need to ensure that the changes are thought through and that we understand the consequences for different sectors—we object to the fact that that has not happened in this case.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I shall give way in a second to the hon. Gentleman, who will give us a breathtaking analysis of change in this country since the second world war. Such measures need to be thought through properly, and I am not sure that this one has been. It would have been better, given the package that the Chancellor announced in the Budget, for the regulatory impact assessment to be produced then; not at some time in the future. It would be much better to have a clear analysis now rather than having to wait. Does the hon. Gentleman still want to intervene?

Stephen Hesford indicated dissent.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I want to draw this discussion to a conclusion. We have had a full debate on the topic at the same time as colleagues in Westminster Hall have been discussing the fate of the dairy industry. There is a curious irony—you see, Mr. Gale: accountants can do irony occasionally—in the timing of our debate and the debate in Westminster Hall. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 24, in clause 35, page 27, line 27, at end add—

‘(8) This section shall not come into force unless the Treasury have laid before Parliament a report setting out the impact of the abolition of balancing adjustments and of the agricultural and industrial buildings allowances.’.—[Mr. Hoban.]

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 15.

Rhif adran 7 Nimrod Review — Statement — Clause 35

Ie: 10 MPs

Na: 15 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Clause 35 ordered to stand part of the Bill.

Clause 36 ordered to stand part of the Bill.