HC Deb 07 July 1971 vol 820 cc1415-28

7.30 p.m.

Mr. Cranky Onslow (Woking)

I beg to move Amendment No. 45, in page 35, line 3, at end insert 'aircraft, or'.

If I may paraphrase the famous remark, I have not had time to prepare a short speech, but I do not wish to make a long one. I am certain that, even on so important a matter as aviation, the House does not wish to be detained for long and I would hate to disoblige hon. Members. This is a subject on which my hon. Friend on the Front Bench and I have been in correspondence. My purpose in putting down the Amendment, which I am well aware is imperfect, as all my Amendments are, is to give him the opportunity to answer one or two questions.

I am sure that he knows that the collective voice of aircraft manufacturers and British aerospace companies would welcome any Amendment to the Finance Bill which would give the United Kingdom operators a free hand in the depreciation of their aircraft. They take the view that it is illogical that aircraft operators should be treated less well than the shipping industry, which is now to be allowed free depreciation.

This subject was considered by the Edwards Committee in a different context at a time when investment grants existed. The conclusions of the Committee in paragraph 831 of its Report were that the Committee understood that the airline industry was excluded from the investment grants scheme because about three-quarters of the industry was nationalised and all transport except shipping was excluded from the scheme. The Committee did not believe, even if it were right to exclude nationalised industries, that it was sensible that there should be this distinction. The Report said specifically: We do believe that United Kingdom air transport, which is predominantly international in character, is more comparable to shipping than to other forms of transport. It is for this reason that I seek to persuade my hon. Friend to agree in principle at least that it is desirable for aviation and shipping to be treated on equal terms for the purposes of depreciation. If an Amendment were to be incorporated in a future Bill, supposing it cannot be made in this one, there would be a need for safeguards, and it would probably be necessary to restrict the enjoyment of free depreciation to aircraft which were employed solely on air transport services as defined under the Civil Aviation Bill, or something of that nature. Nevertheless, I hope my hon. Friend will understand that in the independent sector of British aviation there is a general desire that something should be done to increase its competitive ability around the world. If some additional financial advantage can be given to the independent sector comparable to that which is enjoyed by the United Kingdom shipowners this would be extremely welcome. It would, of course, be the independent operators who would principally benefit from it.

My hon. Friend may say that a great deal has been done for the independents in the Civil Aviation Bill, but it is equally fair to remind the House that the consequence of that Bill and other recent developments, is that the costs which have to be borne by operators have increased. This is true in the sphere of international competition, and also domestically. Fuel costs have gone up and they may go up again. Operators face the burden of the administrative charges of the Civil Aviation Authority and of gradually working towards a situation where the whole share of air traffic control costs which is attributable to British operators will be borne by the airlines. There is in addition the considerable bill which will accrue for airport costs which—and I am sure my hon. Friend the Member for Horsham (Mr. Hordern) will not mind my reminding the House—are made all the greater by the fact that the new airport will be at Foulness instead of Gatwick.

Faced with these considerable costs, some applying only in the United Kingdom sector, which are borne by United Kingdom operators and not by their competitors, I hope my hon. Friend will agree that it is illogical for the Government to encourage the spread of airline operation and at the same time fail to provide equal opportunities in this Bill for airlines and shipowners. I hope that my hon. Friend will give an encouraging response.

Mr. Dalyell

I agree with the hon. Member for Woking (Mr. Onslow) that when one compares the advantages that accrue to certain foreign operators with those that accrue to British operators one realises that foreign Governments give help to their airlines which ours do not get. I therefore think that there is the beginning of a good case, but I also believe that the case should be carried a bit further.

One of the troubles in the aircraft manufacturing industry in recent years has been that it has had hardly any interim payments from operators. Therefore, any advantage that can be given to the operators to enable them to make interim payments on time to manufacturers would help the liquidity of the manufacturers and prevent the manufacturers from using sub-contractors for banking purposes. One feature which emerged from the recent Rolls-Royce problems is the extent to which that company used its sub-contractors for banking facilities. This general problem that surrounds the whole of the aircraft industry could well be taken into account by the Treasury when it formulates policy in this area.

Mr. Norman Tebbit (Epping)

I will not repeat the arguments which my hon. Friend the Member for Woking (Mr. Onslow) has put so well. Reaching back in my memory to the time when I was an officer cadet and having the mysteries of the Royal Air Force Act, Q.R.s and A.C.I.s explained to me, I am reminded that therein is a classical definition of a horse. A horse, I discovered, was a horse or any creature doing the work of a horse. I ask my hon. Friend to look again at the Bill in that context and realise that whatever is good for a ship or for a shipping interest is equally good for an aircraft or an aircraft operating interest. Very often we find that the same operators are involved in operating those two different types of vehicle carrying similar payloads to similar parts of the world. In all common sense in 1971 there is no need for the implied distinction between one sort of horse and another.

Mr. Stanley R. McMaster (Belfast, East)

The Bill has changed for the worse the position of aircraft operators. The change in the capital allowance pattern moves aircraft from the previous 50, 20 and 10 per cent. structure to a higher 60, 10 and 7½per cent. profile. I remind my hon. Friend that the aircraft industry is an internationally competitive industry. The operators, whether the State corporations or the independents, are competing against other airlines, often prestige airlines, which are supported for nationalistic reasons by their Governments. Their position is analogous to that of ships and any advantage which is provided for our shipping interests should equally be extended to aircraft operators. It is in the national interest not only of the aircraft operators but also of the aircraft manufacturers. The aircraft industry as a whole is going through a recession and there may, therefore, be no immediate advantage in the Amendment.

I urge my hon. Friend to consider the long-term interests of the British aerospace industry. The fact that few profits are being earned at the moment is not relevant in the long term. One hopes that an increase in air traffic will mean an early return to profitability and that the allowances which we suggest will be of considerable benefit to our airline operators. For these reasons I strongly urge my hon. Friend to look sympathetically at this Amendment.

Mr. Maurice Macmillan

My hon. Friend the Member for Woking (Mr. Onslow) said that some safeguards would be necessary in relation to this Amendment, and perhaps I could deal with that relatively minor point first. It will be recalled that we had considerable discussion in Committee about the benefit of accelerated depreciation allowances, and leasing arrangements in regard to foreign airlines. After some deliberation the Committee agreed that this was a matter which could be controlled through balance of payments means. What my hon. Friend proposes in his Amendment would considerably increase the incentive, and no doubt the complexity, in dealing with this particular problem. I thank him for recognising that there are difficulties involved in this problem.

On the matter of principle, aircraft have never had free depreciation nor, unlike ships, have they qualified for investment grant. In making the comparison between aircraft and ships, one must remember that ships were first given free depreciation in 1965. That decision was related to the introduction of corporation tax in that year, the effect of which would, it was then considered, be especially unfavourable to shipping companies. But, quite apart from that, British shipowners are subject to competition from ships registered in flag-of-convenience countries whose owners are thereby in a position to enjoy special tax advantages.

The hon. Member for West Lothian (Mr. Dalyell) suggested that foreign competitors of our airline operators were enjoying similar tax and other advantages, whether by direct or indirect assistance, through Government or in other ways. I agree that we must look into this matter to see whether there has been any unfair competition with which our British operators are faced, particularly in regard to freight-carrying, in the same way as flag-of-convenience and other methods provide unfair competition for our shipping operators.

The hon. Gentleman also asked me to look further into the question of liquidity and any direct help that might be given to aircraft manufacturers in the form of interim payments. I would point out that the habit of larger businesses partially financing themselves by not paying their bills is not confined entirely to the aircraft industry.

My hon. Friend the Member for Woking mentioned other special costs which were peculiar to airline operations, particularly in regard to the independent companies. He also referred to difficulties facing the United Kingdom operators.

For all these reasons which have been given, I feel that this matter should be looked at in the coming months with considerable care. I am sure my hon. Friend will not expect me to give any sort of undertaking about this matter, but clearly the development of air transport is a matter of extreme importance for the future. It is equally important that our airline operators should not be faced with unfair competition, and this clearly is a matter that should be considered in relation to the whole fiscal structure.

Mr. Onslow

I thank my hon. Friend for that reply, which is sympathetic in tone and encouraging in content. Since he shows such willingness to continue with the correspondence which has passed between us during the past months, I shall respond by bombarding him with many more tons of paper. I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

7.45 p.m.

Mr. Peter Hordern (Horsham)

I beg to move Amendment No. 127, in page 35, line 19, leave out from ' purposes ' to end of paragraph (iii).

This is a simple Amendment concerning free depreciation in the development areas. In the past it has been the practice in development areas to allow free depreciation on all new plant and machinery, respective of where it happens to be sited; but there is a bar in this Clause which confines such new plant and machinery to factories and industrial buildings generally. If the new plant and machinery happens to lie in dwelling houses, retail shops, showrooms, hotels and offices it does not qualify for free depreciation.

I wish to ask my hon. Friend why it has been thought necessary to confine the objective of free depreciation to machinery in a factory or industrial building. I see no good reason for so confining it, and I hope that my hon. Friend will be able to explain the situation.

Mr. Patrick Jenkin

I can respond to my hon. Friend's request by explaining the purpose of the provision. The first 100 per cent. first-year allowance applies to expenditure incurred by industrial firms in development areas broadly on industrial plant and machinery, that is to say plant and machinery for use in the productive processes carried on in development areas. It does not apply, and was never intended to apply, to plant and machinery used either in the service industries or in service activities of industrial firms.

There are many manufacturing firms which carry out service activities or activities which overlap into the service sector, For instance, one has in mind sales and administrative organisations quite separate from the factory. There may be wholesale or retail showrooms; there may even be a chain of retail establishments for selling products directly to the consumer. These are all service activities and it is not the Government's intention that the 100 per cent. first-year allowance should apply to those activities.

We need some relatively simple rule to determine whether a particular item of plant and machinery qualifies for the allowance as being industrial plant or whether it does not qualify in that it is being used in the service side of the firm's activities. Here we have adopted—this is where I part company with my hon. Friend—exactly the same rule which applied and, so far as I am aware, applied successfully and without creating any difficulties when free depreciation existed before 1964–65 in the development areas. The rule is to look at the nature of the building in which the plant or machinery is to be housed. If the building is an "industrial building"—I put those words in inverted commas because it is a term of art derived from Section 7 of the Capital Allowances Act—the 100 per cent. first year allowance applies. If the building is not an industrial building, the allowance does not apply.

I have no reason to suppose that the application in this new context of the existing distinction between industrial and non-industrial buildings will cause any difficulties. If we were to abandon the distinction and accept the Amendment, we would arrive at the strange and anomalous result which I can best illustrate with an example. Let us suppose that in a town in a development area there is a factory which makes boots and shoes and which also, in the same town, runs two or three retail establishments which directly sell the boots and shoes to the customer. If there is then industrial plant and machinery in those shops, because it is an industrial concern it would receive the 100 per cent. allowance. But those shops might well be in direct competition with independent boot and shoe retailers which might have exactly the same pieces of plant and machinery, which, for instance, might be shoe repairing machinery of one sort or another, and yet, because they were not operated by an industrial concern operating in a development area, they would not be entitled to the first year allowance. Perhaps that is a homely and over-simplified example, but I am sure that my hon. Friend can readily think of other examples where the anomaly might be more serious.

Therefore, we have to have a test which establishes whether or not the plant or machinery qualifies for this valuable 100 per cent. first year allowance. We do not consider it right that the fiscal system should be used to distort competition in the way I have described. It should be a test which is simple to administer. The test which is to be found in paragraph 3, which the Amendment proposes to leave out, is a satisfactory one which worked satisfactorily before when we had free depreciation, and we have no reason to believe that it will not work equally satisfactorily again with the new 100 per cent. first year allowance.

Having heard my explanation, I hope that my hon. Friend will not wish to press his Amendment.

Mr. Dalyell

I share the curiosity of the hon. Member for Horsham (Mr. Hordern) about this subject. Without making too much of an issue of it, I reflect that night after night we used to hear from the Conservative Scottish Opposition, as they then were, some pretty strident speeches about how the service industries were being discriminated against. In a sense, the then Opposition were right to make those speeches because it is undoubtedly true that some areas are almost by definition discriminated against by this kind of legislation, especially the Scottish Highlands. I do not pretend that it is a very serious matter in West Lothian. But if they were present, the hon. Member for the Western Isles (Mr. Donald Stewart) or my hon. Friend the Member for Enfield, East (Mr. Mackie), who knows the North of Scotland very well, would bear me out in saying that there are a lot of very small scale industries which do not function in a building the nature of which can be called "industrial" and which would not fit this kind of definition.

Just as the Financial Secretary's hon. Friends had a point when in Opposition, so I suspect that in putting forward this kind of case I have a point tonight. It may be an administratively simple distinction to make, and having said more about administration in discussing the Finance Bill than practically any other back bench Member, I realise that this is a very real kind of argument.

If we do not press it this year, I hope that the Treasury will at least reflect and will talk to the Highlands and Islands Development Board in the hope that in the coming year they can come up either with a more liberal attitude to these matters or some other definition to help those in small cottage industries, who are often the people who need the most help.

Mr. James Dempsey (Coatbridge and Airdrie)

After listening to the Minister, I feel that there is a need for further clarification on the attitude that he has adopted. He went a long way to explain how this particular depreciation allowance applied to industry. He gave an illustration of the boot manufacturer also selling boots which aroused my curiosity.

I found it very difficult to follow the argument at that stage, that although whatever was happening was in the manufacturing sphere and it involved a retail shop, I gained the impression that such would be entitled to free depreciation allowance. This should be made a little clearer, because it is a bone of contention in my area, which is a development area.

I draw the Minister's attention to my experience in dealing with a somewhat similar problem. I was concerned with a manufacturing industry. I do not yet know whether the Minister's interpretation of an "industrial undertaking" applies to a manufacturing industry. He did not make that clear. He explained that industry was an industrial undertaking and that the depreciation allowance would apply to such an industrial form of activity if it were in a development area. But, rightly or wrongly, I understand that the allowance did operate for manufacturing industries. I am very much concerned with manufacturing activities, not necessarily industrial production. I have always had the impression that manufacturing qualified. I was surprised to learn that manufacturing did qualify, but provided that the equipment was installed in the manufacturing factory. I ask the Minister to consider this point.

The equipment necessary for this manufacturing factory, which keeps scores of people in employment in my area, had to be installed in a retail unit. The purpose of installing it in a retail unit was so that it would come into operation if the equipment in the manufacturing factory broke down and threw 50 or 60 men out of work. The equipment was being used primarily for manufacturing purposes, although it was installed in the retail section of the operations. After a spate of meetings with Ministers in Scotland, and a Minister of my Labour Government, a very fine definition was given that, although the equipment would be used for manufacturing purposes, because it was installed in a retail unit it would not qualify for the allowances that were operating under the Labour Government.

This is somewhat in conflict with what the Financial Secretary has just said. He spoke of a boot manufacturer and related it to the retail sale of such a commodity, saying that even if it was complementary, in so far as it manufactured for sale and was associated with the retail unit, it would qualify for the depreciation allowance.

I should like the Minister to compare my experience with what he has said. I was told unequivocally by the then Minister that as this manufacturing plant was installed in a retail unit as a duplicate to that in the manufacturing unit, it did not qualify. The manufacturer lost a fair sum of money because he was refused the ordinary grants, for example, for equipment for this particular purpose. While the hon. Gentleman is dealing with depreciation allowances, I can understand it. But I am attempting to have defined the principle that equipment established in a retail unit for the purpose of manufacture qualifies for the depreciation allowances that we are discussing.

When my constituent hears about the illustration given by the hon. Gentleman tonight, he will make further representations. Quite rightly, he will ask why, when he provides manufacturing equipment in the retail part of his business with a view to keeping men in jobs, he is not allowed financial assistance from the Treasury.

I should be grateful if the hon. Gentleman would look at the point again and give me some further clarification about whether, on the illustration that he has just given the House, the manufacture qualifies for the allowance. Certainly that will enable me to explain to my constituent and others who have similar interests where depreciation allowances will be granted and where they will be refused.

8.0 p.m.

Mr. Patrick Jenkin

With the leave of the House, perhaps I might reply briefly to the points made by the hon. Member for Coatbridge and Airdrie (Mr. Dempsey) and the hon. Member for West Lothian (Mr. Dalyell).

I deal first with the speech that we have just heard. Broadly, the position is as the hon. Member for Coatbridge and Airdrie has stated. If this was machinery installed in a retail establishment, it would be covered by the rule which I outlined a few moments ago. But that is not necessarily the end of the matter. The Inland Revenue is always prepared to look at a building with a view to seeing whether part might be treated as a retail establishment and part as an industrial building. If the industrial plant is in the part treated as an industrial building, it will qualify for the 100 per cent. first-year allowance. On the facts as stated by the hon. Gentleman, it is not possible to determine whether that would be right. But perhaps I might invite him to follow up the matter, as he suggested his constituent might, and to draw the case to my attention, in which event I shall ensure that it is looked at urgently and with sympathy. Naturally, we are anxious wherever possible to help firms in development areas to qualify for the allowances in respect of the industrial plant that they buy.

In response to the hon. Member for West Lothian, it is fair to point out—I do it in no party sense—that the distinction between now and the period to which he referred is that, whereas the industrial plant in the development area was entitled to the higher rate of grant and to the depreciation allowances, the service plant in the development area lost the former investment allowances and got nothing else. It was reduced to the straight initial allowance of 30 per cent. and an ordinary depreciation. We have made sure, at any rate, that service industries and service plant in manufacturing industries is entitled to the 60-year accelerated write-off and the 25 per cent. after that. We have restored a valauble capital allowance to the service industries and, although there is still a margin between industrial plant which qualifies for the 100 per cent. first-year allowance and the rest, it is nothing like as wide as it was.

I am glad to say that the change has been warmly welcomed by the service industries in the development areas and elsewhere. But I take the hon. Gentleman's point that there may be cases similar to that referred to by his hon. Friend where industrial plant is not in an industrial buildling. As I have said, the Inland Revenue is always prepared to see whether there is ground for justifying the division of a building into industrial and non-industrial parts, so that the plant in the industrial part qualifies for the allowance. Of course, if less than 10 per cent. of the building is used for service purposes, the whole building is treated as industrial.

Mr. Hordern

My hon. Friend the Financial Secretary has been extremely helpful in providing an illustration. Obviously there will be anomalies and difficulties in carrying out this policy, but I am sure that they will be looked at sympathetically.

As this is the last non-Government Amendment, perhaps I might be allowed to congratulate my right hon. and hon. Friends, the Chief Secretary, the Financial Secretary and the Minister of State and to thank them for their answers to the many Amendments that my hon. Friends and I have tabled. Indeed, we on this side of the House have tabled more Amendments than right hon. and hon Gentlemen opposite. We are grateful to my right hon. and hon. Friends on the Treasury Bench for their perseverance and for their helpful replies. We are perhaps even more grateful to the Whips for allowing so many Amendments to be tabled and discussed at such great length.

In view of the reply of my hon. Friend the Financial Secretary, I beg to ask leave to withdraw the Amendment.

Amendment, by leave, withdrawn.

Mr. Maurice Macmillan

I beg to move, Amendment No. 46, in page 36, line 5, at end insert: '(d) in the construction, alteration or demolition of buildings or other fixed works of construction or civil engineering, including roads, or'. The purpose of the Amendment is to remove any possible doubt that the building and civil engineering industries will qualify for free depreciation on expenditure on immobile plant and machinery used in development areas and in Northern Ireland. Clause 39 provides for free depreciation for such plant and machinery used for industrial purposes in these areas.

Mr. Barnett

Is not the phrase "free depreciation" something of a misnomer? It is not free depreciation at all.

Mr. Macmillan

I was using a shorthand phrase for the 100 per cent. first year allowance.

"Industrial purposes" are defined to include the purposes of any trade which consists in … the manufacture of goods or materials or the subjection of goods or materials to any process". The scope of the latter words is very wide and would appear to include almost everything done in the course of building or civil engineering work. But doubts have been expressed on behalf of the industry whether all its activities are included, as was intended. For example, simple earth-moving could be argued not to be the subjection of any materials to a process. The Amendment removes these doubts and uses words which should make the position clear.

Amendment agreed to.

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