§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Mather.]11.11 pm
§ Mr. John Heddle (Lichfield and Tamworth)
I wish first to thank you, Mr. Deputy Speaker, for selecting this motion for debate on the Adjournment of the House. I also thank my hon. Friend the Financial Secretary to the Treasury for coining here at such a late hour after waiting in the wings, penned in his office whilst the House debated the issue of battery hens.
I wish to draw the attention of the House to industrial building allowances and, because of the rigidity of the rules that govern them, to their inability to create new jobs. I must record my gratitute to my hon. Friends the Members for Chipping Barnet (Mr. Chapman), for Hereford (Mr. Shepherd) and for Huntingdonshire (Mr. Major), who have agreed to support me in the Chamber this evening. Their knowledge; of the building industry and the creation of new jobs is acknowledged by all hon. Members and far beyond the House.
My hon. Friend the Financial Secretary will know how badly the West Midlands in general—and my constituency of Lichfield and Tamworth especially—has been hit by the world recession. He will, I hope, agree to consider amending a well-intentioned piece of legislation that has sadly, with the: benefit of 13 years' experience and hindsight, gone off the rails.
My hon. Friend the Financial Secretary will have received a brief entitledIndustrial Buildings Allowance and Small Manufacturing Businesses—An Urgent Case for Legislationprepared by Mr. Anthony Grant, an acknowledged expert in industrial relocation. I am grateful to Mr. Grant for having brought the matter to my attention so that I may bring it to the attention of the House. Industrial building allowances and their effect on job creation, affects every hon. Member. It is sad that I must place on record the fact that the Opposition benches are bare, especially when we are debating a subject that so often exercises the minds of Opposition Members—the vital issue of unemployment and the creation of new jobs.
§ Mr. Heddle
My hon. Friend is right. The Social Democratic Party has not seen fit to add its weight to my proposition.
In accordance with the custom of the House, I must declare a non-pecuniary interest. I am a consultant to a firm of chartered surveyors that will have knowledge of these matters. I do not have a direct influence in the practice.
Just over 18 months ago, following my right hon. and learned Friend's Budget of 1980, the rules concerning industrial building allowances were revised to encourage the development of what have come to be known as nursery units. That was a laudable aim. Incentives to industrial building contractors and investment companies were created in the form of tax allowances to encourage the building of small, light industrial factory premises. The result was a flurry of construction activity which was confidently expected to create many thousands of jobs throughout the country. So far so good.
258 A mood of optimism prevailed at that time, just 18 months ago. Hundreds of nursery units, many in regions suffering from the worst effects of the recession, were built on spec. The square feet were provided to stimulate small business, but those who drafted the legislation were found to have their feet firmly planted in clay. They had failed to study the small print of their handiwork. The theory was that building contractors and investors would obtain their 100 per cent. allowances and that the industrial units would become available for occupation by small seedcorn—acorn—companies anxious to get on with the business of creating jobs.
I am aware that the scope of an Adjournment debate does not allow one to put forward constructive alternative suggestions to existing legislation, so I merely draw the attention of the House to the way in which the loose drafting of the Finance Act 1980 and possibly of the Capital Allowances Act 1968 tend to act as a disincentive to job creation.
Regrettably, all the optimism is still theory. Most of the units built since the rules were revised are still standing empty. Even allowing for the recession, vacancies are unusually high. Building contractors, investors and would-be tenants are sadly disenchanted with the Government's industrial building allowance programme.
The basis of the problem is terminology rather than concept. It is widely felt that the difficulty over letting units is an accident arising purely from the retention of an archaic definition of what constitutes an industrial development. My hon. Friend will know that certain criteria were laid down in the Capital Allowances Act under which buildings could qualify for industrial building allowance, but, in essence, pure and simple, only 100 per cent. manufacturing operations qualify for the incentives.
As a spur to production and a boost to exports, the provisions of the Act were arguably at the time perfectly adequate. However, I ask my hon. Friend the Financial Secretary to agree that the face of industry in Great Britain has changed dramatically in the intervening 13 years. An increasing proportion of occupiers of the new buildings are now in the trades of servicing, storing and distributing rather than in manufacturing goods. Many manufacturing industries are now capable of employing high technology and automation. The modern paradox is that factories can employ fewer people than service depots and other firms of equivalent size. Service industries are at least as labour intensive today as manufacturing industries were in 1968.
If the aim of the industrial buildings allowance procedure is to create jobs in the hign technology 1980s, the legislation introduced in last year's Budget should surely be amended to take that into account. It is simply a question of contradiction between the aim of the 1968 Act and the 1980 provisions for small workshops and nursery units.
The 100 per cent. industrial building allowance introduced in 1980 was largely employment related and its measures reflected the Government's laudable aims to contain unemployment and to encourage existing small businesses to modernise. New businesses could be expected to emerge in the place of obsolescent industries.
I am delighted to note, too, the presence on the Front Bench of the Under-Secretary of State for Industry, my hon. Friend the Member for Norfolk, South (Mr. MacGregor). Clearly, the matter that we are considering is a fiscal matter and one of definition, but it equally affects my hon. Friend's responsibilities in the Department 259 of Industry, and also my right hon. Friend the Secretary of State for Employment, with whom I raised the matter at Question Time today.
When the 100 per cent. IBAs were introduced, the Government of the day took the view that, if corporate and private investors could offset 100 per cent. of the capital cost, at the time when the expenditure was incurred, against all types of income, there would be a major incentive to provide small industrial units. That was absolutely right. However, within months of the Finance Act 1980 receiving the Royal Assent and 100 per cent. IBAs becoming a certainty, there was a spate of activity throughout the country by builders and contractors starting to construct terraces of nursery units. Today, those terraces remain empty and a silent epitaph to the rather loose and unsympathetic drafting of the 1980 Act.
Local authorities, as well as central Government agencies, were keen to assist in the provision of nursery units in most parts of the country, and it was regarded as a legitimate means of combating unemployment and stimulating new industries and seed-corn firms. There was a welcome degree of unanimity between trade unions, local authorities, public authorities, private investors and the building industry.
However, a by-product of this bricks and mortar stalemate is that further investment in nursery units is bound to be prejudiced, with regrettable economic and social consequences, having regard to the high unemployment in the building industry that that implies. The irony is that those units do not stand empty because of any lack of demand. The problem is that most firms want to occupy the buildings, but they do not comply with the guidelines set out in the Capital Allowances Act 1968. Most prospective tenants for nursery units are in the servicing sector today not the manufacturing sector. An absurd legislative anomaly has arisen in that buildings, erected as a direct consequence of my right hon. Friend's welcome initiatives to industry, are standing empty at a time when new expanding and existing firms would be willing to take the space and create jobs if only they were allowed to do so. Investors seeking industrial building allowances must refuse applications from prospective tenants who are service companies, because otherwise they would lose the advantage of the IBA. The dilemma is aggravated by high interest rates on completed buildings which produce no income or profit but which simultaneously incur the burden of rates, insurance and other outgoings.
Even the Inland Revenue appears to have cold feet about the whole IBA procedure. In March 1980, Inland Revenue officials said that they would be prepared to deal with industrial building allowances claims for estates consisting of small industrial workshops on a global instead of an individual basis. An inspector would normally be satisfied with a general description of uses and would not ask for particulars of trade carried on by individual tenants or for details of the uses to which the premises were put.
At first sight, that appeared to be a welcome relaxation on the part of the Inland Revenue. However, the Revenue statement concluded that the new practice was intended to simplify administration and would not apply in circumstances where— 260the relief available would be significantly lower in a strict application of the Industrial Buildings Allowances rules".There is a solution to the problem, and it could be completed in a matter of weeks, given the will by the Government, dedicated—as my right hon. Friend the Prime Minister said at the Lord Mayor's banquet last night—to giving every form of encouragement and incentive to the small business sector, on which the prosperity of Great Britain Ltd. depends. It is simply an appreciation of the problems created by the Inland Revenue. I suggest that all buildings capable of generating employment on industrial and trading estates should qualify for industrial buildings allowances, provided that they are within the use classes III—light industry—IV—general industry, including furniture factories, plastics factories, metal working and engineering concerns—X which is warehouse and distribution depots. I do not suggest that my hon. Friend the Minister should widen the definition beyond classes III, IV and X. I would not expect the definition to include retail shops or offices.
The Inland Revenue and the town planners should be speaking the same language. It is logical that the definition of industrial development in the Finance Acts should be the same as they are in the Town and Country Planning Acts. That makes sense to the firms throughout the country which want to create new jobs. It would be particularly welcome in the West Midlands because many firms there would take up immediately the advantage of industrial building allowances and begin the business of creating wealth and jobs once more.
§ Mr. Sydney Chapman (Chipping Barnet)
Not for the first time, I rise to support my hon. Friend the Member for Lichfield and Tamworth (Mr. Heddle), who, in his characteristic way has dealt with a complicated, technical matter with clarity and eloquence. I support him fully.
I declare an interest in the subject as a non-executive director of a development company and a professional interest as a fellow of the Royal Town Planning Institute.
In southern England, as my hon. Friend the Member for Sevenoaks (Mr. Wolfson) will agree, there has been a change in the nature of industrial employment in recent years. The problem in the West Midlands—and I see that my hon. Friend the Member for Dudley, West (Mr. Blackburn) agrees—is that many prospective lessees of workshops in large industrial buildings tend to be in the servicing and repairing sphere rather than, traditionally, in the manufacturing of goods. Under the present tax laws they are not acceptable to a builder who has put up such buildings, because he would lose the industrial building allowance.
The evidence is that it is not an exaggeration to say that many premises stand empty while a suitable lessee, who has to qualify within tax legislation, is sought and while other lessees who would employ as many or more people are turned away. I cannot believe that that is right.
Far too many politicians have a hang-up and discriminate between basic manufacturing industries and servicing and repairing industries. We need both and we should encourage both, particularly when unemployment is high.
Many service people are in manufacturing industry. Not a few in service and repair industries make goods. The assertion is that the problems facing builders searching for 261 lessees could t e solved by making the tax legislation definition of industrial premises the same as the definition in the Town and Country Planning Acts. I support and congratulate my hon. Friend on bringing the attention of the House to a problem that will become increasingly acute unless action is taken. I hope that the Minister will respond favourably.
§ Mr. Colin Shepherd (Hereford)
I am grateful to the Minister for allowing me a brief intervention in this timely debate originated by my hon. Friend the Member for Lichfield and Tamworth (Mr. Heddle). I want to illustrate my point by citing the case of a firm of expert air conditioning and refrigeration engineers and manufacturers in my constituency that is desperately trying to expand its servicing facilities all over the country. The expansion of its facilities would lead to more employment, but it is inhibited because it cannot find premises except those denied it by the current legislation.
I put it to the Minister that the servicing and repair sector of industry is just as important as the manufacturing side. There are many instances when outlying service engineers, working from a depot, would create more employment than would be the case if it were a manufacturing-only operation.
§ Mr. Mark Wolfson (Sevenoaks)
I should like to add my support to the clearly articulated points made by my hon. Friend the Member for Lichfield and Tamworth (Mr. Heddle) in an admirable speech. The Government have, in my view, lacked a clearly articulated and developed industrial strategy during the past two years. Action to put this right has been encouraging. This debate has pointed to the case for the Government accepting the view put forward by my hon. Friend because I believe that it would be in line with an acceptance of the reality of the situation. We all agree that new jobs will come from the service sector. The Treasury should be assisting the creation of those jobs by developing policy in the way that has been outlined.
§ The Financial Secretary to the Treasury (Mr. Nicholas Ridley)
I congratulate my hon. Friend the Member for Lichfield and Tamworth (Mr. Heddle) on raising this important and interesting subject, which will certainly benefit from an airing. I thank my hon. Friends the Members for Hereford (Mr. Shepherd) and Sevenoaks (Mr. Wolfson) for their contributions, although lack of time may mean that I shall not be able to deal at length with them.
The time is right to consider industrial building allowances. We inherited a 50 per cent. initial write-off with a 4 per cent. per annum figure thereafter. The changes that we have made since then have been staggering in their scale. My right hon. and learned Friend the Chancellor of the Exchequer, in his 1980 Budget, introduced a 100 per cent. allowance for industrial and commercial buildings in enterprise zones. He introduced a similar allowance for the small industrial workshops for a three-year experimental period in the 1981 Budget. He also increased the general level from 50 per cent. to 75 per cent. for the initial allowance for industrial buildings. We have, therefore, a fairly mixed pattern.
262 Apart from enterprise zones, no commercial buildings receive the allowance, hotels being a special category where special remedies have been found. My hon. Friend the Member for Lichfield and Tamworth would widen the definition of qualifying industrial buildings. This definition is contained in the Capital Allowances Act 1968 and legislation would be required to alter it. It is predominantly transport undertakings, mills and such other concerns that are classified as "industrial".
I share the views of my hon. Friends that there is something invidious about the distinction between industrial, or manufacturing, and service industries. There were strong reasons for my right hon. and learned Friend's decisions in the original legislation. The purpose of the legislation was to increase employment by increasing manufacturing activity. There appeared to be a serious national shortage of these small industrial units for new manufacturing companies. It was to put that right that the 100 per cent. small industrial workshops allowance was introduced.
Secondly, often these small manufacturing businesses need almost purpose-made buildings, buildings that are suited to their needs and which are not normally suitable for commercial purposes. There is a difference between the requirements of the two sectors. The manufacturing buildings are more expensive, which is the reason for the improved capital allowance.
Thirdly, there was a worry that, because of the strength of the services sector, to which my hon. Friends have drawn attention, the service industries could crowd out manufacturing and take so much of the new industrial buildings that there would not be enough space for the manufacturing side. The purpose of the whole relief would thus have been negated.
There has been a greater success than my hon. Friend seemed to indicate. The response is patchy across the country, but in many areas there has been a complete take-up of the new small workshops, and it is only elsewhere that some are still standing idle. I think that my hon. Friend underestimated the large number of workshops that have been provided under the scheme, and the success that the scheme has enjoyed.
My hon. Friend suggested that the problem arises from no more than loose drafting in the Finance Act 1980. Perhaps he should have described the drafting as too tight, because it excludes the service industries, as he made out.
The question is and always will be where to draw the line. My hon. Friend said that he does not want to go as far as shops and offices, but the line has to be drawn somewhere. I do not think that he remembers our debates on the selective employment tax. They always led one to the point that, wherever the line was drawn, someone pushed for it to be drawn a little further one way or the other.
The following considerations therefore seem to me to be relevant. Is there, then, such a great shortage? The take-up has been greater than my hon. Friend suggests. Will we not find manufacturing businesses that want to take the empty factories in due course? If there are empty factories, would it not perhaps be as well to allow their availability to be restricted to manufacturing concerns so that the pressure of shortage of demand forced down the rents to a certain extent, leaving them more within the purchase range of new small manufacturing concerns? That is a possibility, and I put it no higher than that.
263 The cost of the scheme is quite considerable. It is done at the expense of allowing people to make investments in these small factories which is very generous, particularly to high taxpayers, which was, indeed, the point. I am not complaining about that, but we do not want to extend that sort of relief wider than is right from the point of view of providing jobs, because the whole purpose of the scheme is to provide not only small businesses but the jobs that they bring.
When considering whether they will provide jobs, one has to consider the nature of the service industries concerned. Repairs and storage and such activities may often not provide net new jobs because the volume of business in such concerns depends to a large extent on the state of economic activity, and there is no room for more repairs and service businesses than the state of the economy allows. Perhaps in certain classifications it is possible that assistance would encourage employment, but I am sure that my hon. Friends agree that that should be one of the criteria by which we seek to draw the line. Will extending the line produce a resumption of business, and increase in new business and an increase in jobs? Or will it simply take people from one set of premises, give them 264 a subsidy and put them into another set of premises, possibly to the disadvantage of manufacturing concerns which might want to occupy those premises in due course?
As my hon. Friend said, the labour intensity of service industries often tends to be greater than that of manufacturing industry, but we must distinguish between those that are labour-intensive but are incapable of expansion and those where expansion is possible. Therefore, it is a question of where to draw the line. I can only assure my hon. Friends that we take seriously what they have said tonight. We shall consider carefully where that line should be drawn. We shall keep the whole question under careful review.
There will be an opportunity to study this subject further, because shortly we shall be publishing the Green Paper on corporation tax, which is perhaps the parent tax under which capital allowances come, and there will be sections dealing with capital allowances in it. We shall welcome views from all quarters, and certainly from my hon. Friends, on how changes can be made in order to—
§ The Question having been proposed after Ten o'clock and the debate having continued for half an hour, Mr. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at nineteen minutes to Twelve o'clock.