CLAUSE 12.—(Allowance for depreciation of mills, factories, etc.) (Hansard, 10 June 1937)

Colonel Sandeman Allen
I beg to move, in page 12, line 14, to leave out "actual," and to insert "replacement."
Sub-section (3) proposes, as regards premises to which it applies, that depreciation shall be an amount equal to r per cent. of the actual cost of any buildings to the person carrying on the trade, and not to the replacement cost. This would work out very unequally in the case of similar buildings. There have been great fluctuations in the cost of building since 1914. There may be two buildings exactly similar in size and used for the same purpose, one built before the War and one built after the War, and by the wording of this Clause they might be very badly penalised. Depreciation should equal the cost at the time of repair and not the cost at the time of erection. Take a building acquired many years ago, or a group of buildings such as those acquired by the Port of London Authority in 1908 from the London dock companies. It would be almost impossible to put a cost on an individual house. Is it reasonable that allowances should vary according to the price at the time of acquiring. Buildings to which Sub-section (2) applies are to have a depreciation allowance of one-sixth of the cost or one-fifth of the net value. Those values are not original costs but current costs. That is the whole burden of the point that I wish to make and if the Chancellor of the Exchequer cannot accept the Amendment I hope he will at any rate give a reassuring explanation.

§ Mr. H. G. Williams
I feel in some doubt about the Amendment, because it might cut both ways. Anyone who erected a building in 1920 would be worse off if he were now put on a replacement basis. The whole argument of my hon. and gallant Friend was based on the 1988 buildings. I am not certain whether we are discussing buildings alone or buildings and certain of their contents. Therefore in considering the Amendment we must know what the word "building" is interpreted to mean, whether it is the actual cost of the building or the actual cost of the building and of plant and machinery inside it. My hon. and gallant Friend will notice the proviso in line 19, which says: Provided that no non-rateable machinery within the meaning of section twenty-two of the Finance Act, 1936, shall be deemed to form part of a building for the purpose of this subsection. If non-rateable machinery is left out, by implication rateable machinery is part of the word "building." I notice that on the Paper there is an Amendment in the name of the Chancellor of the Exchequer that the word "building" is to include also the site. Therefore we have to judge the Amendment not merely having regard to replacement of the actual building but the replacement of the building and the plant and machinery in it which is not loose plant, as well as the site. I am inclined to think that on balance the ordinary trader might be better off if we stand by the words of the Clause rather than the words of the Amendment. Whichever we do, there will from time to flute be those who complain of injustice. Some people will do a little too well and some not as well as they ought to do. It is open to question whether from the point of view of the ordinary manufacturer or trader the word "actual" is not better than "replacement." I say that having regard to certain communications from experts in these matters, indicating that the word "buildings" goes beyond the mere shell and includes the rateable machinery.

§ The Financial Secretary to the Treasury (Lieut.-Colonel Colville)
In order to answer this Amendment it will be necessary to say a word on the purpose of the Clause. The primary object of the Clause is to prevent an abuse of an existing allowance, but not in any way to detract from its proper value. The allowance was granted on account of the special depreciation of premises due to vibration caused by power machinery, and has been in operation since 1918. It is not measured directly by the effect of the depreciation on the life of the premises, but takes the form of a deduction, in the 1989 computation of profits for Schedule D purposes of one-sixth of the gross annual value of the premises as computed for the purpose of Income Tax Schedule A. Some owners have tended to inflate the gross annual value in order to increase the amount of the allowance. The Clause meets this by fixing the amount of the allowance, in the case of premises that are assessable under Schedule A, at one-sixth of the gross Schedule A value or at a given fraction of the rating value, whichever is the less.
In the case of premises not assessable under Schedule A, for example such concerns as gas works, coal mines, and premises abroad, it has hitherto been necessary to compute a notional gross Schedule A value. This has given rise to some difficulties and it is provided that in the case of such premises the allowance shall be an amount equal to 1 per cent. of the capital cost of the premises. The present cost to the Exchequer of the allowance is some £1,500,000, and it is not intended to detract from that allowance; but in fairness to the revenue and to the great majority of owners who are operating fairly we wish to put a stop to undue inflation.
Having said that I can deal with the point raised by the Amendment. First of all the Amendment suggests that we should leave out the word "actual" and insert the word "replacement." Subsection (3) of the Clause provides a measure, by reference to cost, for an allowance to the trader for the special depreciation caused by the operation of machinery. The cost to which regard is properly paid for this purpose is the actual cost of the existing buildings to the trader and not the estimated cost of replacing those buildings now or in the future. The allowance given for wear and tear of plant and the machinery is given by reference to the actual cost of the plant and machinery to the trader and not by reference to replacement costs. We could not accept an Amendment which in our view would change the basis of this allowance altogether.
My hon. Friend the Member for South Croydon (Mr. H. G. Williams) has raised the issue of what exactly is meant by "buildings." The Committee will see that on the Paper there is an Amendment in the name of my right hon. Friend the Chancellor of the Exchequer to make 1990 this point absolutely clear—the cost of the building by reference to which an allowance for depreciation is made, in the case of premises not assessed for tax under Schedule A, and electricity works and brickworks, will include the site and the building. Some hon. Members, including the hon. Member for South Croydon, have written to us on this subject and when we looked into it there seemed to be a little doubt as to what was the definition of "building." We are, therefore, making it quite plain what is included in the term.

§ Mr. H. G. Williams
Rateable machinery is included?

§ Lieut.-Colonel Colville
Yes, and the site as well as the buildings.

§ Lieut.-Colonel Colville
I beg to move, in page 12, line 15, after "building" to insert "(including the site thereof)".
It is not necessary, I think, to add more, as I dealt with this point on the last Amendment.

Colonel Sandeman Allen
I beg to move, in page 12, line 18, at the end, to insert or of any other building which forms part of the premises and the depreciation of which is substantially increased by the operation of machinery so worked. It may be said that this point is already covered, that the depreciation allowance under Sub-section (3) is limited to buildings wholly or mainly operating machinery, worked by steam, electricity, motor or any other mechanical power. But dock and harbour authorities may have buildings not wholly or mainly used for operating machinery, such as transit sheds, heavy goods lifts, roof cranes, band conveyors and even railways through the buildings. They may not be described as machinery within the meaning of the Clause and it is for the purpose of getting some clarification that I move the Amendment.

§ Lieut.-Colonel Colville
This Amendment involves some extension of the deduction. Under Sub-section (3) the deduction was to be of an amount equal to the capital cost only of buildings containing and used wholly or mainly for 1991 the purpose of operating machinery. The extent to which a building not containing power machinery may be subject to a substantial increase of depreciation owing to vibration and the operation of power machinery elsewhere is a question of fact and one that clearly can give rise to difference of opinion. On the whole, therefore, having considered my hon. Friend's Amendment, we are inclined to think that the question does deserve to be looked into further. We want to be sure that there is no hardship inflicted by the change we are making. It is not our desire to take away from this allowance, but simply to avoid abuse. I do not think that the Amendment would be satisfactory as it stands, but in order to ensure that the point which the hon. and gallant Member has in mind is fully considered, I should like him to withdraw the Amendment and we will consider whether the point can be met by an Amendment on the Report stage.

Colonel Sandeman Allen
In view of the Minister's promise to investigate the matter, I beg to ask leave to withdraw the Amendment.

Colonel Sandeman Allen
I beg to move, in page 13, line 38, at the end, to insert: (e) Where any premises are held by the occupier thereof on a lease granted for a term exceeding fifty years, such premises shall be deemed to be owned by the occupier. The Amendment relates to all classes of premises to which Clause 12 applies. It is not limited to mills, factories or other similar premises owned by the person carrying on the trade. It will be seen from lines 32 and 33 of the Clause, on page 11 that depreciation allowance for Income Tax purposes is only conceded in respect of a mill or factory or similar premises owned by the person carrying on the trade. I submit that that restriction would work very unfairly to harbour authorities or to traders who hold considerable property on long leases. The Amendment is to provide that where the lease is for at least 50 years the lessee shall come within the terms of the Clause. Sub-section (5) begins: For the purpose of this Section. 1992 The only effect of the Amendment would be to give the occupier of the premises leased for 50 years or a longer period equivalent rights with the owner.

§ Lieut.-Colonel Colville
My hon. and gallant Friend has put forward a point which, again, is worthy of consideration. It is intended that the deduction should go to the benefit of the person on whom actually falls the cost of making good the depreciation that occurs through shaking or vibration by machinery. In the ordinary case that person is the owner, and it is for that reason that the Clause is confined to premises owned by persons carrying on the trade. It is not, however, intended to exclude and it has not been the practice in the past to exclude—