RELIEF FOR PRE-TRADING EXPENDITURE (Hansard, 16 July 1980)

§ Sir Graham Page
I beg to move amendment No. 24, in page 28, line 35, after 'incurred', insert: 'on a new ship not more than three years but otherwise'.

Mr. Deputy Speaker
With this we may also take the following amendments:
No. 25, in page 28, line 35, leave out 'one year' and insert 'three years'.
No. 26, in page 28, line 35, after 'incurred', insert: 'on heavy machinery, heavy plant or heavy equipment or ships not more than three years but otherwise'.

§ Sir Graham Page
The amendments are alternatives. They deal with the relief given by the clause for expenditure incurred by a person for the purpose of his trade but before he starts that trade. In order to qualify for relief the expenditure must be incurred within the 12 months prior to the start of trading. Second, the expenditure must have been that which would have been deductible as a trading expense if it had been incurred after the commencement of trading.
12.30 am
In many cases one year would be unrealistic. If construction is involved, a company must start preparations for trading much more than 12 months in advance. Amendment No. 25 proposes that the one year should, in all cases, be extended to three years. When construction work is involved, 12 months is too short a period for the relief to be realistic. Of course, we are grateful for the relief given in clause 39, but if it is to be given let us make some sense of it. I am 1682 talking not about the cost of construction but about the trading expenses in connection with it.
If amendment No. 25 is not acceptable, an alternative amendment, No. 26, deals specifically with the construction of heavy plant and machinery that is bound to take longer than 12 months before trading begins. That provision is fairly wide. It would make the clause acceptable, without providing for any extravagance in the relief that the Government are giving away. The third choice, amendment No. 24—against which there can be no argument—is where trading requires a new ship. It is impossible to think of its taking less than three years, and certainly not such a short time as 12 months, to prepare for and to build a ship, during which time trading expenses would be incurred by a company where trading had begun. I press the third choice because it would not be of great expense to the Government and would encourage the shipbuilding trade which, as my hon. and learned Friend the Minister knows, is not in the best of shape. It needs encouragement of that sort, even if it is only a tax concession. If my hon. and learned Friend is not prepared to accept amendmend No. 25, I hope that he will accept amendment No. 24.

§ Mr. Peter Rees
My right hon. Friend the Member for Crosby (Sir G. Page) makes, at first sight, a powerful case. I find the case more compelling on amendment No. 25 than on the other amendments, for reasons that I shall outline.
Amendment No. 25 seeks to allow pre-incorporation expenditure for tax purposes for the previous three years rather than the one year that we propose. It is a matter of fine judgment about how far back the Revenue and the taxpayer should be obliged or entitled to look to find items that should be relieved. For administrative reasons the Revenue would want to circumscribe the period because there would be problems in determining expenditure incurred a considerable time before incorporation. Subject to the points made by my right hon. Friend about amendments Nos. 24 and 26, he has not produced any examples. I hope that we shall proceed a little cautiously and start with the relief, which is a novel relief in tax law, on the basis 1683 of a 12-month period and see how we progress. I can assure my right hon. Friend that I am quite open-minded about this. If in the course of time we have drawn to our attention obvious cases of hardship, or obvious cases in respect of which the period should be extended, we shall look at them with an open mind.
My right hon. Friend narrows our gaze to two particular questions—expenditure on a new ship, and expenditure on heavy machinery, plant and equipment. The relief proposed in clause 39 is intended to cover only items which would have been relievable after the trade had started—that is to say, expenditure of a revenue and not of a capital nature. The various categories which he has outlined in amendments Nos. 24 and 26 are pre-eminently, as I see it—perhaps my right hon. Friend will disabuse me of this—items of a capital nature. As I have said, had expenditure been incurred on them after the trading start, relief would not have been allowed against the company's trading profits, although I at once concede that there would have been capital allowances. However, that is quite a different matter.
There are already provisions in section 50 of the Finance Act 1971 dealing with capital expenditure on new ships. Broadly speaking, they allow pre-trading capital expenditure to be carried forward and claimed for capital allowance purposes as though they had been incurred on the date on which the trade started. Therefore, capital allowances are covered to a degree.
Having said that, I must tell my right hon. Friend—with a certain amount of diffidence, because he has such experience in these matters—that I believe that amendments Nos. 24 and 26 are misconceived because they do not relate to revenue expenditure. Having ventilated what is obviously an important problem, I hope that my right hon. Friend will feel able to let the matter drop.

§ Sir Graham Page
These amendments were not intended to apply to capital expenditure in any way. I certainly 1684 thought that clause 39(1)(b) would make it quite clear that the intention was purely in regard to trading expenses—expenses which would, if they were spent not before the trading had started but during the trading, have been allowed against profits or treated as a loss.
I should have thought that the word "ship" in amendment No. 24 would have sufficiently limited the effect of the clause. I am quite sure that I shall be able to produce examples in time for the next Finance Bill. Of course, before a relief of this sort has come into operation, it is rather difficult to produce hypothetical cases. My hon. and learned Friend said that I had not produced examples. When a relief is only just introduced, it is a little difficult to point to cases in respect of which the relief has not been obtained because of some incident in the length of time.
However, I shall not press the matter at this time of night. I hope that by the time we reach next year's Finance Bill there will be plenty of cases to show that the 12 months allowed in the Bill is unrealistic. In that hope, I beg to ask leave to withdraw the amendment.

§ Mr. Peter Rees
I beg to move amendment No. 27, in page 28, line 37, leave out 'would, if incurred after that time, have been' and insert 'is not'.

Mr. Deputy Speaker
With this we may discuss Government amendment No. 28.

§ Mr. Rees
This amendment, together with amendment No. 28, is designed to clear up some possible ambiguities in clause 39, I hope that the House will find them entirely acceptable.