First-year tax credits

Finance (No. 2) Bill – in a Public Bill Committee am 2:15 pm ar 11 Ionawr 2018.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss new clause 12—First Year Tax Credits: Review of effectiveness—

‘(1) The Chancellor of the Exchequer must commission a review of the effectiveness of First Year Tax Credits.

(2) The review under this section must consider—

(a) the effectiveness of First Year Tax Credits on—

(i) encouraging investment in efficient plant and machinery,

(ii) reducing the consumption of energy by business,

(iii) aiding the UK’s carbon reduction obligations, and

(b) the impact on revenue of the tax credits.

(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section within twelve months of the passing of this Act.”

This new clause would require the Chancellor of the Exchequer to commission and lay before the House of Commons a report into the effectiveness of First Year Tax Credits.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Clause 29 will extend the first-year tax credit scheme to 2023 and reduce the rate of eligible claims to two thirds of the corporation tax rate. That will ensure that loss-making companies are appropriately incentivised to invest in energy-saving equipment following reductions in the corporation tax rate.

As the Committee will be aware, first-year allowances allow companies immediately to deduct the cost of qualifying energy-efficient and water-efficient equipment from their tax liability. However, loss-making businesses are not able to benefit from tax deductions, so in 2008 the first-year tax credit was introduced, which provided loss-makers with a payable credit to ensure that they were still incentivised to invest in energy-efficient equipment. The original legislation was amended in 2013 to include a sunset clause that stipulated that the scheme would expire in March 2018 unless the Government legislated to extend it.

The first-year tax credit scheme helps as many as 100 loss-making companies annually to invest in energy-saving and water-saving equipment. It enables a business to bring forward its investment to get the machinery it needs when it is needed. The changes made by the clause will extend the life of the policy to 2023 to ensure that that support continues.

Since 2008, the tax credit rate has been fixed in law at 19%, but over the same timeframe the corporation tax rate has been reduced from 28% in 2008 to 19% today, and it is legislated to fall to 17% in 2020. Therefore, the incentives for profit-making and loss-making companies have become misaligned from their original policy intention.

The clause will therefore peg the tax credit rate to two thirds of the corporation tax rate, as opposed to a specific percentage. That will ensure that the policy is in line with its original intention by ensuring that the incentive to invest in energy-saving equipment is not disproportionately greater for loss-making companies than for profitable companies that can deduct their expenses from their tax bill. Pegging the tax credit rate to the corporation tax rate will also ensure that the scheme operates as intended when powers to set the corporation tax rate are devolved to Northern Ireland.

New clause 12 would require a review of the effectiveness of first-year tax credits in encouraging business energy efficiency and of their impact on tax revenues. As with all aspects of the tax system, the Government regularly review tax reliefs to ensure that they are effective in fulfilling their objectives. In line with that practice, and to allow an opportunity fully to evaluate the relief, the legislation includes a sunset clause that means that it will expire in 2023 unless renewed.

In addition, first-year tax credits are available only for investments made on qualifying equipment published on the energy technology list or the water technology list, which are routinely updated to ensure that the technologies listed meet efficiency criteria. The reviews of qualifying products are administered by the Department for Business, Energy and Industrial Strategy and the Department for Environment, Food and Rural Affairs respectively. The performance criteria for each review and the products that meet those criteria are publicly available.

To conclude, extending the policy will ensure that loss-making companies remain incentivised to invest in equipment with the greatest environmental benefits. Following the reduction in the corporation tax rates, the changes in the clause will also ensure that the scheme remains in line with the original policy intention.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am grateful to the Minister for his summary of the background to the measures and their purpose. I certainly agree that their initial purpose was to mitigate the barrier of high purchase costs where the efficiency of a product might provide savings to business and wider environmental benefits. The measures were introduced under a Labour Government in 2008 before being reintroduced in 2013. The Committee is considering their extension and some recalibrations, as the Minister set out.

None the less, we have tabled an amendment requiring a review of first-year tax credits as they currently exist. As the Minister stated, our review would examine the extent to which they encouraged investment in efficient plants and machinery, reduced the consumption of energy by business, and aided the UK’s carbon reduction obligations. We would also like the review to assess their impact on revenue. After all, as is the case with every tax relief, the tax credits amount to forgone tax.

Looking at this issue as a Member of Parliament, it does not appear to me—perhaps Conservative Members have had different experience when investigating this change in readiness for the Committee—that a huge amount of information is available on the current impact of the tax relief. It is not clear exactly who is using it, the average size of the companies or their sector. From what I can gather from the experts I have asked, the overall cost of the tax relief seems to be bundled up in HMRC’s summary of the estimated cost of all capital allowances, within its overall summary of the estimated costs of principal tax reliefs.

Incidentally, if colleagues are interested, the estimate for the cost of all capital allowances for 2016-17 is £22.5 billion.

The Government have stated that they will keep the measure under review through regular communication with affected taxpayer groups—the Minister has just explained how, in particular, the list of products that can be supported through the scheme is kept under review—but there is no commitment publicly to review the revenue impact of the relief as it operates at the moment, or to review exactly what its incidence is in terms of different sectors, firms, their size and so on. We believe that that is necessary.

From what I understand, the only formal attempt to review the tax credits’ use and cost is through boxes on tax returns. I am unclear how the evidence from filling in those boxes is collected and collated and whether it is then publicly reported anywhere; it does not seem to be. It is essential that we understand the extent and impact of the expenditure. To put this in context with the Government’s cuts to environmental efforts in other areas, colleagues will be aware, for example, that the energy company obligation has been reduced to £640 million a year from £860 million a year under the previous obligation, which itself was a reduction from the ECO in its original form, which came to £1.2 billion. There has also been a reduction of about 88% in the installation of major insulation measures compared with rates under the Labour Government.

Part of that context is that the Government released their strategy for clean growth—more than a year after their initial commitment to do so—only after coming under significant pressure within and outside Parliament and, apparently, breaking a commitment under the Climate Change Act 2008 that required them to produce a climate change plan, to be published as soon as its order had been laid. That has not come as a surprise to those of us who follow the issue of air quality, which has already been mentioned in the Committee, on which the Government have repeatedly been taken to court successfully.

We need to be able to assess the efficacy of the first-year tax credits in generally boosting water quality and efficiency and reducing carbon emissions against measures that could be introduced but have not been and those that this or previous Conservative Governments have cut. Many of us had hoped that the Office of Tax Simplification would be able to undertake just such a detailed analysis for us, but that has not yet happened for environmental measures. Therefore, I repeat our request for a proper review of the tax reliefs.

Photo of Ruth George Ruth George Llafur, High Peak 2:30, 11 Ionawr 2018

The total corporation tax take in the last year was £56 billion and capital allowances reduced that bill by £22.5 billion—almost half as much again of the total bill. Does my hon. Friend not agree that that makes it even more important that we review such a substantial area of reduction in corporation tax?

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I thoroughly agree with my hon. Friend. I must admit that the UK is not alone in its general lack of consideration of the incidence of tax reliefs and their impact on forgone expenditure, but surely we need to be at the forefront of public administration and public policy globally. We should be considering the issue. As my colleagues mentioned, we are talking about not small amounts of money but very substantial amounts, which to all intents and purposes are forgone tax, although they are classified differently from expenditure within Government accounts. For that and many other reasons, I commend the amendment to the Committee.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

It is pleasing to see that the hon. Lady and I can agree on a measure that was introduced under a Labour Government. It is something good that we are keeping going, but improving at the same time. That is our mission.

I will be brief, and will not go into all the discussions around the climate change arguments put by the hon. Lady; I will focus on the amendment specifically and the review that it calls for. The measure affects only a small number of businesses, in the order of about 100. We will, of course, keep this tax measure under review, as we do all tax measures. On the basis of the size of the measure and the universe to which it applies, I feel strongly that it would be disproportionate to introduce a full review of its effects.

On that note, I urge the Committee to agree to the clause. I think that the Chief Whip—sorry, I mean the Whip—will intervene shortly to suggest that the Committee adjourn. With that information in mind, I thank the Committee for its deliberations today and look forward to further deliberations on Tuesday. I wish everybody an enjoyable weekend when it comes.

I am grateful to the Minister, who is on top form. For clarification, we are not considering an amendment; it is a new clause. The vote on it will be held at a later stage, so I will put the question that clause 29 stand part of the Bill.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned.—(David Rutley.)

Adjourned till Tuesday 16 January at twenty-five minutes past Nine o’clock.

Written evidence reported to the House

FB20 WTT Consulting Ltd

FB21 This person wishes to remain anonymous

FB22 WTT Consulting Ltd—further submission

FB23 Chartered Institute of Taxation (clause 35 and schedule 10)

FB24 This person wishes to remain anonymous

FB25 This person wishes to remain anonymous

FB26 James D Jones-Tinsley FPMI APFS, for and on behalf of Barnett Waddingham LLP