CAPITAL ALLOWANCES (Hansard, 7 July 1971)

HC Deb 07 July 1971 vol 820 cc1434-42 1434

§ Mr. Patrick Jenkin
I beg to move Amendment No. 58, in page 90, line 20, at end insert: (1A) Where a person enters into a contract under which, on the performance thereof, he will or may become the owner of machinery or plant which has been in use for the purposes of a trade carried on by the person to whom the machinery or plant belongs, and—

(a) he and that person are connected with each other within the terms of section 533 of the Taxes Act, or

(b) the machinery or plant continues to be used for the purposes of a trade carried on by that person, or

(c) it appears with respect to the transaction, or with respect to transactions of which it is one, that the sole or main benefit which, but for this sub-paragraph, might have been expected to accrue to the parties or any of them was the obtaining of an allowance under Chapter I of Part III of this Act,
a first-year allowance shall not be made in respect of any expenditure incurred by him under the contract so far as relating to that machinery or plant, or if made shall be withdrawn, and there shall be disregarded for the purposes of section 41 of this Act so much (if any) of the expenditure as exceeds the disposal value to be brought into account under that section by reason of the contract so far as so relating. I think that it would be convenient if, with this Amendment, we were to discuss Amendments Nos. 59, 60, 62 and 63, as these are all related Amendments.
The purpose of the change that we are making to the capital allowances is to simplify the system, and the 25 per cent. writing-down pool enables us to dispose almost entirely with the old system of balancing allowances and balancing charges. Paragraph 3 of the Schedule prevents advantage being taken of this system by associated traders dealing with items of plant and machinery between themselves so as to secure a tax advantage.

§ Amendments Nos. 58 and 59 extend this anti-avoidance provision to cover disposals by way of hire-purchase and assignments of hire-purchase contracts. 1435 This is necessary to make sure that the legislation is not abused by two firms that are associated with each other seeking to take advantage of it.

§ The other Amendments are purely consequential upon the substantive Amendments, Nos. 58 and 59, and I commend the group to the House.

§ Amendment agreed to.

§ Amendments made: No. 59, in page 90, line 27, at end insert: (b) the machinery or plant continues to be used for the purposes of a trade carried on by him, or.

§ No. 60, in line 42, leave out 'subparagraphs (1) and (2) above' and insert: 'the preceding provisions of this paragraph '.—[Mr. Patrick Jenkin.]

§ Mr. Patrick Jenkin
I beg to move Amendment No. 61, in page 90, line 43, at end insert:

§ Further effects of disposal etc. before bringing into use (1) Subject to sub-paragraph (2) below, the following provisions shall have effect where a person has incurred capital expenditure on the provision of machinery or plant for the purposes of a trade and, by reason of any event, the machinery or plant ceases to belong to him without having been brought into use for those purposes—

(a) if that expenditure exceeds the disposal value which by reason of the event that person would be required to bring into account under section 41 of this Act if he had previously brought the machinery or plant into use for the purposes of the trade, the amount of the excess shall, for the purposes of that section, be added to his qualifying expenditure for the chargeable period related to the event;
(b) if the event is one such that, if that person had previously brought the machinery or plant into use for the purposes of the trade, any of the provisions of paragraph 3 above would have applied to the allowances to be made under Chapter I of Part III of this Act to another person, there shall be disregarded for the purposes of that Chapter so much (if any) of the expenditure incurred by that other person in acquiring the machinery or plant as exceeds the expenditure incurred by the first-mentioned person in providing it.

§ (2) Where the event referred to in subparagraph (1) above is the assignment of the benefit of a contract—

(a) paragraph (a) of that sub-paragraph shall have effect as if the expenditure there referred to were the total capital expenditure which the person in question would have incurred in respect of the machinery or plant if he had wholly performed the contract, and
(b) paragraph (b) of that sub-paragraph shall have effect as if, for the reference to the expenditure incurred by the other person in acquiring the machinery or plant, there were substituted a reference to the consideration given by that other person for the assignment.
(3) All such assessments and adjustments of assessments shall be made as may be necessary to give effect to the preceding provisions of this paragraph.

§ On 15th June, in Standing Committee, the hon. Member for Heywood and Roy-ton (Mr. Barnett) raised the point that, under the present tax law, if a trader sells a machine which he has bought for use in his trade before having actually used it, he can get a balancing allowance for any loss that he suffers. Under the new code, the sale of one particular machine will not throw up a balancing allowance, and, as the Bill stands, the difference between the cost of the machine and what he gets for it on disposing of it, cannot be brought into account in the pool for writing-down allowances, since those allowances apply only for expenditure on assets that have been brought into use. Therefore, the loss he makes will be unrequited, and he will get no capital allowance for it. My hon. Friend the Chief Secretary recognised that that could well be inequitable, and he undertook to consider the point.

§ We have considered it, and we have tabled the Amendment to provide a remedy. It allows the difference between the cost and the disposal value to be added to the qualifying expenditure in the pool on which the writing-down allowance for the year of the disposal, and subsequent years, will be calculated. In other words, the loss on the unused asset is written off along with the expenditure on the plant and machinery which has been brought into use. Perhaps I could add, in commending the Amendment to the House, that this matter was raised with us by the accountancy bodies also, and I understand that they are well pleased with the action that we have taken to deal with the point.

§ Mr. Barnett
It would be discourteous were I not to thank the hon. Gentleman for one of the few concessions that he has made to the number of speeches that I made in Committee. I am grateful to the hon. Gentleman for accepting and recognising the point that I made.

§ Amendment agreed to.

1437

§ Mr. Patrick Jenkin
I beg to move Amendment No. 83, in page 91, line 43, leave out from "as" to end of line 46 and insert: may be just and reasonable having regard to all the relevant circumstances of the case and, in particular, to the extent to which the machinery or plant was used in that chargeable period or its basis period otherwise than". This is a somewhat technical Amendment, and I think that perhaps it is not really necessary for me to attempt to explain it to the House at length.
All I need say is that paragraphs 4 and 5 of the Schedule deal with the case in which an item of plant or machinery—and often it is a motor car—is used partly for trade, and partly for other purposes. It also covers related cases where the user receives payment—perhaps from an employer—which covers only part of the cost, that is to say a mileage allowance which is not adequate to cover an appropriate share of the depreciation. Clearly the extent to which, in those circumstances, the employee can write down the car for tax purposes will be complex.
What we originally sought to do in the Bill was to reproduce the existing law, but we are satisfied that the provision as drafted does not achieve that result. We have, therefore, put down the Amendment to give the Revenue power to make the necessary adjustments effectively to reflect the existing law on this slightly complex matter.

§ Amendment agreed to.

§ Amendments made: No. 62, in page 96, tine 26, leave out 'sale or assignment' and insert 'transaction'.

§ No. 63, in line 33 leave out from 'incurred' to 'capital' in line 37 and insert: 'on the provision of the motor car by the person disposing of it, and

(b) the person acquiring the motor car shall be treated for the purposes of Chapter I of Part III of this Act as having incurred on its provision'.—[Mr. Patrick Jenkin.]

§ Mr. Patrick Jenkin
I beg to move Amendment No. 64, in page 97, line 28 at end insert:

§ Effect of successions to trades between connected persons Where a person (the 'successor') succeeds to a trade which was until that time carried on by another person (the 'predecessor') and 1438 the two persons are connected with each other within the terms of section 533 of the Taxes Act, those persons may by notice in writing to the inspector elect that the provisions of this paragraph shall have effect; and in that event—

(a) for the purpose of making allowances andd charges under Chapter I of Part III of this Act, the trade shall not be treated as discontinued;
(b) allowances and charges shall be so made to or on the successor as if everything done to or by the predecessor had been done to or by the successor, but with no account being taken of the sale or transfer from the predecessor to the successor of any machinery or plant which was in use for the purposes of the trade at the time of the succession.

§ The Amendment is intended to cover the sort of situation which arises when plant or machinery is transferred from one company to another within a group when, on a reorganisation, the latter takes over the former's trade. The existing law has two provisions to deal with this situation, which I do not need to outline to the House, but what one aims to do is to make sure that in those circumstances the capital allowances, as it were, run through from the old company to the new so that no complicated transfer needs to take place on that reorganisation. The Amendment is intended to facilitate that and further to simplify the system that we have introduced in the Bill.

§ Mr. Dalyell
There is a general issue which I think is relevant, and perhaps this is the appropriate place at which to raise it.
There is a problem—or there has been in certain development areas—of what one might call soiled machinery. A grant goes to firm A for a building or machinery. For some reason firm A decides to close down, and the machinery or the building is handed over to firm B. Perhaps that happens after only three or four months, but during that period there is sufficient time to create an interregnum whereby firm B, the successor, does not get the advantages that had accrued to firm A, and would have continued to accrue to it had it continued in business.
Perhaps I should have given the Treasury warning of this. I have a particular case that is more than five years old, but it is the sort of thing that could happen again. I think that this is the right place at which to raise the issue, but I leave it there, and perhaps the Treasury could correspond with me about it.

1439

§ Mr. Patrick Jenkin
With the leave of the House. I would ask the hon. Member to bring the particular details to my attention. One of the advantages of the new system is that, when items of plant are taken out of the pool—for instance, when a particular activity of the firm ceases, but the firm continues so the pool continues—there is no balancing charge or allowance on the old firm; the amount of the disposal proceeds is then taken out of the pool.
This may simplify the transaction in the sort of situation which the hon. Gentleman has in mind, but if the whole firm closes down and sells its assets or transfers them to another firm in the group, balancing allowances and charges may well operate, because the pool itself may come to an end. I should like to consider this situation in the light of the new simplified system.

§ Amendment agreed to.

§ 8.30 p.m.

§ Mr. Patrick Jenkin
I beg to move Amendment No. 84, in page 99, line 35 at end insert: ( ) Section 177 of the Taxes Act shall be amended by adding the following subsection after subsection (3)—

'(3A) Where a company incurs a loss in a trade in an accounting period for which one or more first-year allowances fall to be made to it under Chapter I of Part III of the Finance Act 1971 in respect of expenditure on the provision for the purposes of the trade of machinery or plant within section 39(2)(b) of that Act, subsections (2) and (3) above shall have effect in relation to so much of the loss as would not have been incurred if the allowance or allowances had been totally disclaimed as if the time specified in the said subsection (3) were a period of three years ending immediately before the accounting period in which the DSS is incurred'
This is a much more significant and important Amendment than those which we have been considering. It is far more than a matter of mere detail. What we are doing is adding a significant improvement of the 100 per cent. first-year write-off allowance in development areas.
Last October, the Government decided to provide a system of investment incentives for plant and machinery based on accelerated depreciation. One of the criticisms which has been advanced inside and outside the House against that is that it narrows the differential in favour of investment in the development areas. 1440 Much of this criticism has been misplaced, because it would be wrong to consider any particular measure in isolation. The whole package of my right hon. Friend's measures should be considered together, and on that, as has been said in many of our debates, the differential has been maintained.
However, the criticism had validity in one respect. Where a tax allowance depends for its value on there being an adequate flow of profits against which the allowance can be set, clearly, if there is a period when the profits are inadequate, the allowance does not achieve its full purpose and its present value is reduced. We accept that the criticism has some justification and the Amendment is intended to go a long way to meet the criticism.
It is possible, when making a claim for a 100 per cent. first-year allowance, to set it against the profits of either the current year or future years—if it has not been possible to write it off wholly against the first year—or alternatively one can go back for one year. It has been represented to us that there may be periods—certainly the current period and the months past have been one such—when the flow of profits to businesses has not been at the level that the managers or indeed the Government would have hoped and when there was an inadequate availability of profits to enable firms to take all advantage of this allowance.
Because the present worth of the allowance would be significantly diminished if it had to be carried forward to be set against profits in future years, and because merely to set it against the profits of one year would not be adequate, the Amendment provides that the allowance can be carried back for a further two years before the year in which the expenditure was incurred.
In other words, there can, for this particular form of investment—the 100 per cent. first-year allowance in development areas—be a carry back for two years to make sure that the allowance can be effectively given in the year in which the expenditure is incurred.
This may mean that accounts will have to be reopened and tax repayments will have to be made, but it is an effective method of making sure that as much of the full value of this write-off can 1441 be given in the year in which the expenditure is incurred, despite the shortage of profits in that year.
This will reduce the necessity for firms to lose part of the benefit of the 100 per cent. allowance by having to carry forward to a future year the unexpended balance of the allowance. So the Amendment creates a special rule in favour of the free depreciation allowance for plant and machinery in development areas in that it can be carried back, unlike any other cost, against the profits for two further years.

§ The Amendment will give a valuable boost to those firms which are prepared to invest in the development areas and it can be accounted a significant addition to the package of the Government's measures intended to improve investment in the development areas.

§ Mr. Nott
I welcome the Amendment and the principle enshrined in it. Am I right in interpreting it to mean that if a company made a profit in the years prior to the publication of the Bill, any capital expenditure which it now incurs will be eligible to be offset against those profits previously made?

§ Mr. Patrick Jenkin indicated assent.

§ Mr. Nott
This is a welcome change, but if the Government are prepared to go this far, why could they not be more sympathetic towards the more major problem of mining expenditure? I raised this matter the other night and hon. Gentlemen oposite will recall a brief meeting that took place in the Lobby on this issue.
The complaint in respect of mining expenditure has always been that under the old cash grant system a company was eligible for grant if it indulged in development expenditure on a new mine knowing that there would be no profits for a considerable time, and in some cases, in the development of a new shaft, no profits at all. In those cases the cash grant was available, whereas under the new tax allowance system, no allowance will be available because there will be no profits on the development of an unsuccessful shaft or mine.
If the Government are prepared to make this important concession and tamper with the principle and say "Profits 1442 made in years prior to the publication of the Bill will be eligible to offset against allowances," why are they not able to tamper with the principle a little further and allow mining in the development areas a similar concession?
Will it be possible in next year's Finance Bill to devise a system by which mining in the development areas—which has come off worse than any other activity as a result of the change from cash grants to tax allowances—is given a similar concession in view of the departure made here against the basic principle of Government legislation? In other words, will something be done next year to help this important industry in the development areas? In the debate the other night I referred to the potash side of the mining industry. I spoke of the development areas and Cornwall. I will not repeat those arguments now.

§ Mr. Dick Taverne (Lincoln)
Like the hon. Member for St. Ives (Mr. Nott) we welcome the Amendment. It represents an improvement, but as he said, it is nothing like as good as grants would have been for mining. The Government will increasingly come to realise that what they have offered is not good enough and that, in the end, only a grants system can help to solve the problem to which the hon. Member for St. Ives referred.

§ Mr. Patrick Jenkin
I welcome the approval given to the Amendment by my hon. Friend the Member for St. Ives (Mr. Nott). I will not be drawn into the question of mining, except to say that plant and machinery used for mining in development areas will benefit from this proposal. The House has been informed that the Government have the problems of the mining industry under active review, but it would be wrong for me to anticipate the results of that review.

§ The Amendment is designed materially to improve and enhance the differential that exists between the development areas and the rest of the country. I am glad that the hon. and learned Gentleman the Member for Lincoln (Mr. Taverne) welcomed it on behalf of the Opposition, and I know that it will be welcome to all hon. Members on both sides who represent constituencies in development areas.

§ Amendment agreed to.