§ 'For expenditure on plant and machinery in respect of which first year allowances were made, the writing down allowance provisions of Chapter 1 of Part III of the Finance Act 1971 shall not apply but instead there shall be given an allowance at the rate of 25 per cent. of the expenditure in each year other than that in which a first year allowance was given, on a straight line basis.'.1080
§ Government amendment No. 44, and the following amendments to schedule 12:
No. 45, in page 160, line 44, leave out from beginning
to end of line 2 on page 161, and insert
'1985 and before 1st April 1986, the words "one half' and
§ No. 47, in page 161, line 17, leave out '1984 and before 1st April 1985' and insert '1985 and before 1st April 1986'.
§ No. 48, in page 161, line 19, leave out from 'or' to end of line 23 and insert 'after 1st April 1986 and before 1st April 1987, the words "one half'; and no first year allowance shall be made in respect of expenditure incurred on or after 1st April 1987'.
§ No. 159, in page 161, line 20, leave out 'and before 1st April 1986'.
No. 189, in page 161, line 36, at end insert—
'2A. Where in charging a business to tax there is taken into account any capital allowance and the taxpayer concerned submits or has submitted his returns for accounting periods or years of assessment ending on or before 31st March 1984 or 5th April 1984 respectively on the basis that relevent expenditure was incurred when the asset first belonged to him or if earlier when the sum in question was paid, then that expenditure shall be deemed to have been incurred at that time. '.
No. 52, in page 161, line 38, at end insert—
'3(1) In section 46(1)(a) of the Finance Act 1971 for the words "at the commencement of the letting" there shall be substituted "at the following time:—
(2) This paragraph has effect in relation to capital expenditure incurred under a contract entered into on or after 14th March 1984.' .
§ No. 174, in page 163, line 6, leave out '1986' and insert`1990'.
§ No. 175, in page 163, line 9, leave out '1985' and insert `1989'.
§ No. 176, in page 164, line 7, leave out '1986' and insert '1990".
§ No. 177, in page 164, line 13, leave out '1985' and insert '1989'.
§ Mr. Moore
I hope that I shall not take too long to explain the new clauses and amendments, but I apologise if I take longer than normal. The group includes a large number of new clauses and amendments, which we have discussed before. It would be improper if I did not give the subject the attention that it merits.
The new clauses deal with tax reforms made in the Finance Bill. The corporate tax system which existed before the Budget was one of high nominal rates of tax, tempered unevenly by substantial reliefs. The reliefs introduced a wide measure of distortion. They gave the wrong signals. Taxpayers were persuaded to take decisions such as whether to invest in capital-intensive or labour-intensive machinery and plant, not because of the underlying commercial considerations, but mainly—and sometimes wholly — because of the taxation implications. They were responding not to the stimuli of the market place but to those of the Government.
Hence, even though there might have been a considerable amount of investment in plant and machinery 1081 it was not necessarily worthwhile investment which could be used productively or effectively. Our comparative performance over the years, when we were falling behind our European and other competitors in the industrial world, shows the results all too clearly.
The strategy announced in the Budget is to bring down substantially — by one third — the main rate of corporation tax over three years and to cut the small companies rate of tax immediately to the same level as the basic rate of income tax.
At the same time, the Chancellor has abolished stock relief and is reducing the level of capital allowances so that they broadly reflect depreciation, that is, the extent to which capital assets are used up in the course of producing goods or services. I shall deal later with the point with which the hon. Member for Colne Valley (Mr. Wainwright) has discussed in correspondence with me.
The new system, when fully in place, will thus treat companies in a more even-handed manner. They will be encouraged to find projects which are commercially efficient rather than merely tax-efficient. The discrimination between different assets and different sectors will be reduced and the market will be left to determine the most effective allocation of resources between them.
In the longer term, as the transitional period is fully worked through, companies will see a reduction in their effective rate of tax. The overall effect will be to encourage enterprise and reward success.
Hon. Members and people outside have been discussing the flexibility of allowances. The substitution in the case of machinery and plant of writing-down allowances for first-year allowance goes rather further than simply substituting an allowance of 25 per cent. for one previously given at 100 per cent. Writing-down allowances, which date back to 1878, involve different rules from the more recent first-year allowances. In particular, first-year allowances have tended to be more flexible.
We have therefore, looked at the rules for each allowance in detail to see how far the greater flexibility of first-year allowances was attributable to the fact that they were providing an incentive to investment. Where they were not, there was a case for amending the rules for writing down the allowances to bring them into line.
One such difference between first-year allowances and writing-down allowances was covered by my right hon. Friend on Budget day. This concerns the timing of the allowances. First-year allowances become due when the expenditure is incurred. Writing-down allowances do not start to run until an asset is brought into use. In the case of assets with a long lead time, such as ships, this can be substantially later. Accordingly, my right hon. Friend announced that he intended to drop the condition for writing-down allowances that the asset is brought into use. Instead, writing-down allowances should be available when the expenditure is incurred.
My right hon. Friend made it clear, however, that the change should not be made until next year's Finance Bill. Subsequently, in an answer to my hon. Friend the Member for Buckingham (Mr. W.alden) on 30 March 1984 I explained that the change would take effect for expenditure incurred after 1 April 1985. Since then it has been put to us that anomalies could arise in the case of 1082 expenditure incurred in the current year for which the first-year allowance was 75 per cent. In such cases the remaining 25 per cent. of the expenditure might not start to attract writing-down allowances next year because the asset was not immediately put into use. Accordingly, I can now say that we shall drop the condition for writing-down allowances that the asset must be brought into use in respect of chargeable periods ending on or after 1 April 1985.
Another point that has been put to us concerns identifying the actual date on which expenditure is incurred. The point follows a question put to us by my hon. Friend the Member for Strathkelvin and Bearsden (Mr. Hirst). It is also the subject of amendments Nos. 187 and 189 tabled by my hon. Friend the Member for Croydon, South (Sir W. Clark).
Briefly, the position is as follows. Allowances normally become due when expenditure is incurred and the asset belongs to the taxpayer. Under contract arrangements where there is a settlement period — usually 30 or 60 days—following the invoice date, the normal tax law indicates that the allowance is due when the purchaser is legally required to pay it, that is, on the settlement day. However, if payment is made earlier the Revenue is usually prepared to accept the date of payment as the date on which the expenditure was incurred.
Representations have been made to us by a number of bodies that, under normal accountancy practice, expenditure is regarded as having been incurred on the date that the invoice is sent out, whenever payment may actually be made and whatever the date on which settlement is required. My hon. Friend's proposal is similar because it could deem expenditure to he incurred when the asset first belongs to the purchaser.
At first sight I do not find the proposals attractive. They involve a significant change, potentially opening up considerable possibilities for abuse. Moreover, potentially very significant amounts of tax are at stake. However, I have asked the Inland Revenue to explore the point over the next few months with the representative bodies which have raised the matter and to see whether conforming to the letter of the law does, as the bodies say, cause problems for them in record-keeping and other internal procedures. I hope that my hon. Friend agrees that that is the right way to approach the issue.
I shall now explain the changes made in clause 34. First, the present rules for first-year allowances provide that they may be disclaimed. If they are, writing-down allowances at 25 per cent. a year on a reducing balance basis take over.
There is no similar provision for companies to disclaim writing-down allowances. These allowances are force fed to companies and must be taken in the year in which they fall due. If they cannot be used, they are converted into tax losses and used only in future against the profits of the same trade. Most businesses will wish to take their writing-down allowances as they arise. There may be circumstances in which a business, whether unincorporated or a company, would prefer not to take them in a particular year so as to increase the writing-down allowance available in subsequent years for setting sideways against other income. Subsection (1) of new clause 34 will provide an option to allow a company to disclaim writing-down allowances.
The other changes being made relate to the transitional period. Under existing law a company cannot disclaim all 1083 or part of the first-year allowances on a new ship. With first-year allowances at 100 per cent. and free depreciation, the point was immaterial, but during the next two years it could be important in the transitional period. Therefore, it is right to make that change.
A further change in the rules relating to the allowances for new ships is also needed because of the reduction in the rate of first-year allowances to ensure that the difference between the expenditure on the new ship and the first-year allowance qualifies for writing-down allowances. This requires an amendment to schedule 8 of the Finance Act 1971 and is introduced by the first half of amendment No. 44, which adds two new subsections to clause 57, the first of which makes the necessary change.
This is a very complicated area. The final change made by new clause 34 is the most significant. It is of general application but will be of particular value to the shipping industry because of the lumpiness of its investment. The purpose of the change is to provide that when, during the transitional period, a taxpayer disclaims first-year allowances—which would be at the rate of 75 per cent. this year and 50 per cent. next year—the expenditure will go immediately into his pool of assets so that it can receive writing-down allowances.
I apologise to the House for having to move a manuscript amendment, which has been put with this group, to new clause 34 to correct a technical defect in subsection (7). A purpose of new clause 34 is to enable a taxpayer to choose not to have first-year capital allowances as part of his expenditure on equipment, but instead to put that part of his expenditure into his writing-down allowance pool for that year. That is to help taxpayers in certain circumstances. Unfortunately, subsection (7), which deals with the calculation of the expenditure which is to go into the pool, is defective and produces the wrong result. That must be put right, and the amendment makes the necessary correction.
The change that we are proposing was put to me helpfully and clearly by my hon. Friends the Members for Macclesfield (Mr. Winterton) and for Hampstead and Highgate (Sir G. Finsberg) in correspondence this year after the Budget. It will mean that, when a business replaces an asset and obtains the replacement in the same year as it makes the disposal, it will be able to set the cost of the new asset against the proceeds arising from the disposal of the old asset. That will be of particular value where the second-hand value of an asset is high and where a considerable balancing charge could otherwise arise.
Were we not to make this change, taxpayers who replace assets with a high second-hand value would find themselves worse off during the transitional period because we are phasing out the first-year allowances over a period of years and not going straight to the system which will be in operation after 1986. That will be an important change and will affect many businesses. For example, if a business operates fleets of cars and changes its fleets each year, it will have important consequences for the British automobile industry.
The cost of this change, which is at the heart of the changes in the new clause, will be about £50 million over the next three years. However, it is only a transitional measure, of which about one half will go to the shipping industry. The change will be of considerable value to that industry and will be welcomed by all hon. Members.
1084 It has been put to us, notably by my right hon. Friend the Member for Spelthorne (Sir H. Atkins) and my hon. Friends the Members for Banff and Buchan (Mr. McQuarrie), for Bristol, North-West (Mr. Stern), for Croydon, South and for Romsey and Waterside (Mr. Colvin) that, although they welcome any help that we give the shipping industry, the proposal is not sufficient. They believe that the shipping industry should be able to retain the special tax treatment which it has enjoyed for many years, especially given the difficult period through which it is passing.
I know that my right hon. and hon. Friends appreciate why the Chancellor of the Exchequer set his face in the Budget against having any special rules for particular industries or types of assets. The main reason was the economic case. We intend to get rid of the distortions which special tax rules introduce and which inhibit the flow of resources to areas where they can be put to best effect. There is also the practical problem, which hon. Members on both sides of the House, skilled advocates though they are, are slow to argue, that the reasons advanced for favouring industry A apply equally and perhaps more strongly to industry B. At the same time, I accept that there are reasons for accepting that the shipping industry is a special case. These arguments are not concerned primarily with economic considerations. I recognise that, set against the worldwide shipping recession, the low profitability and high costs of our shipping industry make it especially vulnerable to the forces of change.
There are, however, two further strategic considerations. The first relates to our defence needs and to our requirement for merchant ships both for military reinforcement and for naval support. All hon. Members in Committee brought that point out in great detail. We are all well aware of the invaluable role played by our Merchant Navy in the Falklands, and hope that a similar need will never arise again, but our policy cannot be determined by hope.
Secondly, we are an island and live by maritime trade. We reject the argument that this industry or that industry is essential. We know that it pays us to concentrate on what we do best, to import what we do less well and to let the international market be the test. The argument is equally fallacious today when it is applied to shipping as it is to other industries, for we can also import shipping services cheaply. There is, however, one major distinction: one day we may not be able to do so, in which case we may be unable to import the other goods and services required.
Given those two strategic and largely uneconomic reasons for regarding our shipping industry as different from other industries, we recognise, despite the general arguments for avoiding special cases, that there are strategic grounds for continuing into the new system of corporate taxation special provisions for shipping. We therefore decided to continue the system of free depreciation for new ships, which has been part of the tax code since 1965. Free depreciation within the new system of corporate taxation will not work in the same way as it did when we had first-year allowances. In those years allowances on the whole of the expenditure could be taken as soon as it was incurred.
§ Mr. Moore
I shall give way in a moment, but I wish to conclude the section on shipping, because it is important for the hon. Gentleman to understand its full ramifications.
In future, free depreciation will be limited to the writing-down allowances in respect of expenditure on new ships which have already become due at any particular time.
This will mean that, by contrast with the general facility to disclaim writing-down allowances under subsection (1) of the new clause, when a new company has decided not to take its writing-down allowances for a new ship in any particular year, it can carry them forward and use them in a subsequent year in addition to the writing-down allowances falling due for that year. In that way, free depreciation will give shipping companies a valuable measure of flexibility by allowing them to utilise group relief. The legislation to permit this to be done will be included in next year's Finance Bill and will relate to writing-down allowances due for accounting periods ending on or after 1 April 1985. The benefit of the change will have no negative impact as a consequence of that timing change. The benefit of the change will take some years to build, but we estimate that it could cost the Exchequer, and therefore benefit industry by, about £30 million a year.
§ Mr. Robert Hughes
I missed the beginning of the Minister's speech, so if he covered the point that I am about to make, I apologise. The Minister spoke about shipping, but he will know that representations have been made that the tax changes on capital allowances will adversely affect the fishing industry. Do the changes he has just announced cover fishing vessels?
§ Sir William Clark (Croydon, South)
I welcome the free depreciation for shipping, but is it a 100 per cent. allowance or a 75 per cent. allowance?
§ Mr. Moore
The free depreciation relates to the new system, so in the transitional period it will be a 75 per cent. and then a 50 per cent. allowance, and after the transition it will be a 25 per cent. allowance. On that basis, it will benefit the shipping industry by £30 million a year after the transitional period. That demonstrates its potential significance to the industry.
§ Mr. Richard Wainwright (Colne Valley)
Why is it not proposed to retain those allowances for the passenger aircraft industry, having regard to the fact that in an emergency passenger aircraft are requisitioned and are often of prime importance?
§ Mr. Moore
That is a different point, which I shall be happy to address later. There is a different dimension to our maritime needs which was recognised in Committee and has been recognised in all the debates outside the House. Another factor is that the shipping industry is the only one that already has free depreciation on new ships.
§ Mr. Michael Colvin (Romsey and Waterside)
I am grateful to my hon. Friend for giving way, as it will probably save me from having to make a speech later. Does the free depreciation extend to second-hand ships? We are worried about the number of ships laid up at 1086 present, and although I appreciate the importance of having a thoroughly modern British fleet, the ability to bring ships back into service is important.
§ Mr. Moore
No, it relates to new ships, as it clearly did in the past.
I have taken some time to explain the essence of the major changes in new clause 34 and the provisions associated with it. It was for the benefit of the House that I covered shipping, although the 1985 legislation will substantiate what I said.
I shall now deal with some of the criticisms made about the thrust of our budgetary reforms in this area. Obviously, not every company will benefit from the changes. Nor have we pretended that every sector will benefit to the same extent, especially during the transitional period, and some companies may need to make fairly rapid adjustments under the new regime. Inevitably, with such a far-reaching reform of the corporation tax system, there have been criticisms. Researchers at the Institute of Fiscal Studies recently suggested that the Budget proposals on corporation tax would impose higher tax burdens on companies. We do not accept that. The proposals will cost the Exchequer, and so benefit companies by, £280 million in 1984–85 and £450 million in 1985–86. During the transitional period, they should have a broadly neutral effect. When the changes are fully worked through, companies will enjoy substantial reductions in the tax that they pay.
The object of the exercise is to stimulate enterprise and encourage expansion. The IFS comes to a different conclusion for two main reasons. First, it assumes that inflation will increase to about 7.5 per cent. in 1987 and will then remain at 7 per cent. There is no basis for that. Our estimates reflect our determination to continue reducing inflation from its present level of about 5 per cent. They derive also from the assumptions implicit in the medium-term financial strategy and in the Green Paper on public expenditure and taxation in the 1990s.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
May we infer from what the Financial Secretary says that if inflation remains at between 7 per cent. and 7.5 per cent. the conclusions of the IFS are correct?
§ Mr. Moore
I was about to mention the second major problem with the institute's analysis. However, the assumption of inflation is a critical factor in the debate in consequence to the removal of stock relief, which is another factor in the pattern of taxes paid by corporations to the Treasury. Secondly, as the IFS acknowledges—the right hon. Gentleman will recognise this — the sample of companies on which its projections are based does not represent industry and commerce as a whole.
I shall now consider how we should implement the policy in relation to allowances for capital expenditure. Several arguments must be disentangled.
§ Mr. Mark Fisher (Stoke-on-Trent, Central)
Does the Financial Secretary concede that the IFS study concentrated on manufacturing industry, not on industry as a whole?
§ Mr. Moore
I certainly concede that, since the study disproportionately did not reflect the whole of British industry.
After the transitional period, the aim of the capital allowance should be to match in the tax system the using 1087 of capital assets while producing goods or services—that is, depreciation. We are seeking to remove from capital allowances the other purpose that they presently serve, which is to provide an incentive to investment by means of front-end loading of the tax allowances. By removing the incentive element we shall go a long way towards getting rid of the distortions now running rampant in the business tax system. We shall not be able to eliminate them completely, but that is no reason for not making a good start.
We wish to provide a system of writing down allowances that will ensure that machinery and plant is written down for tax purposes to 10 per cent. of its original value, usually taken as scrap value, within eight years. That is rather shorter than the average life of business assets generally, so that, taking one asset with another, depreciation will be more than fully covered for tax purposes. At the same time, the investment subsidy will have been largely removed. The hon. Member for Colne Valley asked me about expenditure being written off after eight years. It is simply a matter of arithmetic; writing off an asset by means of annual writing-down allowances of 25 per cent. reduces the scrap value to 10 per cent. after eight years. The analysis was based on the accumulative data of the Central Statistical Office, which relates to industry's experience with the Revenue.
A different strand of the argument in Committee was whether there should be a uniform rate of writing-down allowances or varying rates. I accept that there are arguments both ways. By definition, any average figure will write off some assets faster than their true lives, while others will be written off more slowly. That is what we mean by an average, and it applies also to a figure on the generous side of average, which is what we have here. There is a case for saying that assets with short lives—my hon. Friend the Member for Macclesfield has raised this point with me many times—such as some of those using the latest high technology, should be written off before eight years. Proponents of that view will doubtless be prepared to accept in logic that assets with long lives, such as ships, should be written off more slowly than we have proposed. Many other countries have varying rates of depreciation from five to 15 years, and there were similar arrangements in the United Kingdom until the late 1960s.
The hon. Member for Colne Valley asked me about practices in other countries, especially France and Germany. Of course, for some assets, including road transport vehicles and construction equipment, the writing-down allowances will be more generous than they are here. Equally, our allowances for other assets will be more generous. Overall, and taking the average our system will be broadly in line with those abroad. Nevertheless, before the Budget we considered carefully the possibility of having more than one rate. We concluded that, on balance, the comparative simplicity of applying a uniform rate would save much work and argument for the taxpayers, their advisers and the Revenue. I am constantly pressed to introduce a simpler tax system. It does not lie in the mouths of those who do so to complain about the inevitable round-ups. Moreover, the majority of companies will have assets with varying lives, so in their case an average figure would not be unreasonable.
1088 Once we have decided on the level of allowances and whether they should be at a uniform rate, there is a rather more technical argument: is it better to write off assets for tax purposes on a straight-line basis or on a reducing basis?
We in the United Kingdom are now using both systems —the straight line basis for industrial building and the reducing balance basis for machinery and plant.
My hon. Friend the Member for Croydon, South has a new clause, No. 27, which would introduce straight-line depreciation for ships. The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) has another, new clause 31, which would make straight-line depreciation applicable to all machinery and plant.
Again, there are arguments on both sides. But the one which weighs most with us is that retaining reducing balance allowances for machinery and plant enables us to keep the very considerable administrative saving in the system of pooling expenditure. Before the present system of capital allowances was introduced, each item of capital expenditure had to be separately calculated. Now they can all be brought together and the expenditure can be pooled. Acquisitions of machinery and plant can be lumped together, as can disposals. Thus, the administrative complications of the straight-line basis are not nearly so serious for industrial buildings, because obviously there are far fewer acquisitions of those.
But those are technical arguments. We must not let them get confused with the substantive argument which concerns the thrust of the Budget strategy for business taxation introduced by my right hon. Friend, which brings us back to Opposition new clause 8. The aim of our proposal is clear, and I do not apologise for repeating it. It is to encourage risk taking and initiative and to reward success; to remove the distorting effect of tax subsidies so as to let market forces, rather than tax planners, determine which projects proceed; and to get tax rates down.
The proposal of hon. Members opposite — as incorporated in new clause 8—would fail on all these counts. It would retain within the business tax system a substantive tax incentive, distorting investment decisions in the way that has in the past discouraged business men, who would prefer to make decisions on the basis of genuine commercial judgment. It would continue to promote projects which, without the subsidy, were only marginally economic or even totally uneconomic while projects which provided the nation with a better real return were squeezed out.
The cost of the proposal for a first-year allowance of 66⅔ per cent. would be enormous, in excess of £3 billion over the next five years, and then at a rate of £1.5 billion per year thereafter. It would substantially restrict the opportunity for making cuts in the corporation tax rate.
That brings me to the alliance proposal in new clause 31 for a 25 per cent. writing-down allowance on a straight-line basis for all machinery and plant. We debated this proposal at length in Standing Committee. I pointed out that, since it would write off total cost in four years, it would retain a significant investment incentive in the system.
I also explained the extra administrative costs it would entail for industry and the Revenue, because the pooling system would have to be dismantled, a point to which I have already referred. I pointed out that it would cost over £2 billion—not quite as expensive as the proposal of the hon. Member for Thurrock (Dr. McDonald)—over four years. Like the proposal put forward by the official 1089 Opposition, it seeks to make major increases in tax subsidies without any indication of how that amount of money is to be recovered or where the offsets are to be found.
That brings me to the more moderate proposals of my hon. Friend the Member for Croydon, South. The first is his proposal in new clause 27, that 25 per cent. writing-down allowances on a straight-line basis should be available in respect of new ships. Clearly, that would not attach to it the enormous cost involved in the previous two proposals, but it would still be significant. It would, nevertheless, involve a special rate of allowances for one industry alone, which would not be consistent with our policy of an even-handed approach. Nor would it be consistent, as I have explained, with the policy arrangements, and for those reasons I could not recommend my hon. Friends to accept the proposal.
However, I hope that my hon. Friend the Member for Croydon, South noted what I said earlier about our proposals for providing increased flexibility in the use of allowances and, in particular, what we have undertaken to do for the shipping industry by continuing for it alone the concept of free depreciation in respect of writing-down allowances. As I said, these changes will be of considerable value to the shipping industry, and I hope that hon. Members will agree that we have gone as far as we reasonably could in recognising the special position of that industry.
§ Mr. Campbell-Savours
Has the Minister seen comments in the media in recent months to the effect that the combination of the changes in capital allowances, taken with corporation tax, will affect company cash flow by 1986 to the tune of £1.5 billion? Are the Government not concerned about the effect that that will have on the employment prospects of people who might otherwise be employed?
§ Mr. Moore
If those comments were accurate, of course we should be extremely concerned, but I argued earlier about the impact that we thought the Government's capital allowances and corporate tax changes would have, and they are different from outside analyses. I have, in previous discussions, illustrated why, for example, I thought that the comments of De Zoete and Bevan and others were inaccurate in that regard, but I shall return to that subject if hon. Members wish me to do so. I still have much to say and I am anxious not to belabour the House for too long, but my speech must cover many important areas.
My hon. Friend the Member for Croydon, South—supported by the hon. Member for Come Valley — in amendments Nos. 45, 47 and 48, has proposed a change of a more general application, which is the deferral, effectively, by one year of the phasing out of the initial and first-year allowances. I am aware that my hon. Friend approves of the reductions in corporation tax rates that are proposed but that he is also concerned about what he sees as an over-abrupt removal of incentives to investment from the capital allowances system. I recognise that it is of the nature of the change that some businesses will need to reassess their investment programmes in the light of the new circumstances. In some cases, I accept, the result may be that projects will be less profitable after tax than they were before the Budget.
1090 Clearly, the question how the new system of capital allowances should be phased in was an important factor in the mind of the Chancellor in constructing his business tax reforms. He concluded that it was right to start the change immediately, rather than delay it for a year or even longer.
A number of reasons lay behind my right hon. Friend's decision. First, it is these changes in the capital allowance structure which, together with the abolition of stock relief, allow us to make the very significant cuts in taxation which have attracted the approval of my hon. Friend the Member for Croydon, South. If the reductions in allowances were deferred, the cost would be £2 billion, and this alone would slow down the staged reductions in the corporation tax rate.
Secondly, we have provided a two-year transition period during which incentives to investment remain available and are still generous. We have also retained the pre-Budget rates of capital allowance for certain regional projects and for expenditure contractually committed on or before Budget day. In this way, we have fully protected these projects from the changes.
Thirdly, we believe that the sooner we reach the new system of lower allowances and lower tax rates the better. My conclusion is that I see no real advantage in delaying the reform of the capital allowance system, and many good reasons for starting the process at once.
That brings me to amendments Nos. 159 and 160 tabled by my hon. Friend the Member for Banbury (Mr. Baldry). These, likewise, would make radical changes with which I regret I cannot concur. I shall listen with care to what my hon. Friend says about the self-employed and I shall address the points he makes when I reply. On the face of them, I do not find his proposals attractive.
Amendments Nos. 174 to 177 in the name of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) and his hon. Friends, if I have understood them correctly, purport to amend the provisions in paragraphs 5 and 6 of schedule 12 dealing with the spreading of expenditure where arrangements are undertaken which will artificially forestall the reductions in the first year and initial allowances.
It is difficult, however, to see how they would mesh in with any of the official Opposition's other proposals. Their effect would appear to be to extend the period during which contracts would be caught within the spreading provisions by a further four years, beyond 1986; that is, beyond the transitional period.
There can, however, it seems, be no purpose in doing this unless, at the same time, provision is made for the withdrawal of first-year and initial allowances to he phased over a longer period and for a corresponding adjustment of the formula for calculating how expenditure is to be allocated among the further four years of the transitional period. I shall deal with the spreading provisions in due course, when we discuss paragraphs 5 to 8 of schedule 12, and I shall be proposing some changes. But the proposals here do not seem to be capable of serving any useful purpose.
Before coming to the important new clauses tabled by my hon. Friend the Member for Tatton (Mr. Hamilton), I should mention a further addition that we are proposing to clause 57 of the Bill, which is contained in the second part of amendment No. 44. I have already discussed the first part of the amendment when referring to ships.
This change is mainly for the purpose of clarification. On Budget day, the Chancellor announced that the 100 per 1091 cent. initial allowance for buildings in enterprise zones would not be affected by the capital allowance changes; that the 100 per cent. initial allowance for small industrial workshops would continue until that scheme ended on 26 March 1985; and that no change would be made this year in the 20 per cent. initial allowance for hotels, though that allowance would be abolished in 1986.
It has been suggested that, with clause 57 and schedule 12 in their present form, it is not certain that the objective sought by my right hon. Friend has been achieved. For the avoidance of doubt, therefore, the second part of the amendment makes it clear that the allowances are not affected by the provisions in the Bill.
The purpose of new clause 17, which stands in the name of my hon. Friend the Member for Tatton, is to provide for allowances to be given to a lessee of a building who incurs capital expenditure on plant and machinery, such as lifts or heating and ventilation equipment, which forms part of its fabric and thus becomes a landlord's fixture. Under the law as it stands, a lessee would be entitled to allowances only if he were required to incur the expenditure under the terms of his lease. Where he is not entitled to capital allowances it is likely that under the law no other person will be entitled to allowances either.
The clause arises out of the case of Stokes v. Costain Property Investment Limited. I shall not weary the House with details of that case, apart from saying that it concerned expenditure on the installation of lifts and central heating equipment in two buildings which Costain was developing for use as offices and shops. In neither case was Costain the freeholders of the property and in each case the property was under-let for use by other companies. Hon. Members on both sides of the House will be aware that this has wide ramifications for industry.
The Court of Appeal decided that no allowances were due for expenditure on the lifts and other fixtures. My hon. Friend is proposing to widen the law to cover the statutory gaps in the provision to which attention was drawn in the judgment of the House of Lords and I have considerable sympathy with his aim. Where expenditure of this nature has been properly incurred in the course of a person's trade, it is only right that capital allowances should fall due.
I have to say to my hon. Friend, however, with all due respect to a member of the tax Bar, that the clause will not do as it stands. It would enable more than one person—for example, the freeholder and another lessor, and possibly a trading lessee as well — to obtain an allowance for what was essentially the same expenditure. I do not wish to labour the point, because the subject matter is far from straightforward. I know that my hon. Friend did not intend his clause to go any further than repair the omission to which the Court of Appeal referred. Clearly there would have to be rules to avoid double allowances.
The Costain case ended its passage through the courts only just before Easter and because of the complexity of the issues raised we have not yet been able fully to work out all the necessary details. However, in principle I accept the point made by my hon. Friend in his new clause and, if he will seek leave to withdraw it, I can assure him that the Government will include their own clause to deal with the matter in next year's Finance Bill. This is of great importance to the outside world.
1092 In essence, the purpose of our clause will be to provide that, when in the course of carrying on a trade or an investment letting business expenditure has been incurred on machinery or plant which becomes a landlord's fixture, someone should get an allowance even though the machinery or plant might not belong to him. However, there will have to be ordering rules to decide who should be entitled to the allowances where more than one taxpayer can claim to have incurred such expenditure. We intend that a financial lessor of the plant, such as a bank which leases the plant to the tenant of the premises, should get priority to the allowances as it will originally have financed the expenditure. But where there is no equipment lessor, the allowances should go to the most subordinate of the lessees with an interest in the land who qualifies under these rules.
There will have also to be rules to ensure that a balancing adjustment—either a charge or an allowance —can be made at the appropriate time. This will be where the person with the allowance sells the freehold, or assigns, transfers or surrenders his leasehold, or if the lease comes to an end but not where a sub-lease is granted out of the lease; if the machinery or plant is dismantled and sold, scrapped, demolished or destroyed; if the trade in which the machinery or plant is used is permanently discontinued, or if the plant permanently ceases to be let; or if the equipment lessor sells or assigns his rights under the leasing contract. In many of these instances there will then be some other taxpayer who will have incurred expenditure on the machinery or plant and who will then be entitled to capital allowances for the expenditure under the rules which I have described.
I propose that the Government's clause next year should take effect in relation to expenditure incurred after today. However, where a taxpayer has already entered into a lease which obliges him to install fixtures, the existing law will apply satisfactorily and the provision will not disturb his entitlement to the allowance. Meanwhile, the practices which the Inland Revenue has been running in an attempt to overcome some of the weaknesses in the present provisions have been shown by the decision in the Costain case to have no statutory foundation. I have, however, authorised the Revenue to continue to apply these practices to expenditure incurred up to and including today, and to expenditure, whenever incurred, on contracts entered into on or before today.
The House will have gathered that the matters covered by my hon. Friend's new clause are far from straightforward. The Inland Revenue has already had several discussions on the issue with most of the representative bodies and I should like to thank all those who have taken part. The discussions have proved useful in enabling us to determine what needs to be done, but I do not think that the consultations should end there. I shall be asking the Inland Revenue to issue draft legislation on this matter in the course of the autumn along the lines that I have just spelled out. This will provide a basis for fuller discussion of the details before we return to the subject in next year's Finance Bill. In the meantime, I hope that the statement which I have made of the Government's intentions will provide a sufficient basis for transactions to proceed with reasonable certainty on the tax implications.
§ Sir Geoffrey Finsberg (Hampstead and Highgate)
My hon. Friend will recall that I raised this matter with him 1093 in April. He responded by sending me a helpful letter. Am I to understand from what he has said that, until he is able to produce a clause for next year's Finance Bill, there will be what I might loosely call an extra-statutory concession, which will cover that which the House of Lords judgment said should he covered?
§ Mr. Moore
My hon. Friend raised this matter shortly after the Budget statement. It is an important and complex one. I can confirm that the existing practices, which have continued to apply until today, and the practices for the ordinary rules as outlined in my statement, will continue under the provisions and the direction which I have given to the Revenue, which will be covered by next year's Finance Bill.
My hon. Friend the Member for Mid-Staffordshire (Mr. Heddle) tabled amendment No. 52, which is primarily concerned with the capital allowances due on plant and machinery which is fixed to a building. This is another proposal with which I regret I am unable to concur. I shall naturally listen to what my hon. Friend says and I shall address myself to his arguments when I come to reply. I do not find his amendment attractive.
I must apologise to you, Mr. Deputy Speaker, and to the House for the length of this speech. However, I have attempted to cover at least briefly the wide range of topics with which this group of new clauses and amendments is concerned. Some of the matters on which I have touched have been of considerable technical complexity and of great importance to industry and commerce. Although they are matters of detail, they are nonetheless important to those concerned.
The major issues to arise have been related to one of the most important strands of the tax strategy which my right hon. Friend introduced in his Budget. Taken in conjunction with the substantial reductions in the rates of corporation tax and the abolition of the national insurance surcharge, the changes in capital allowances that we are making hold out an exciting prospect for all those who have the enterprise to reach out for it and the efficiency to grasp it. We are taking one more step along the road of freeing the economy from the grip of Government intervention and letting it grow as the market—all of us, as consumers, savers, investors and producers — determines.
§ Dr. Oonagh McDonald (Thurrock)
We have certainly had a long and detailed speech from the Financial Secretary dealing with deficiencies in the legislation that was first introduced in the Finance Bill. It seems that the deficiencies were not discovered during our long debates in Committee. Even a manuscript amendment has had to be produced at the last moment. This does not seem to be an especially efficient way of introducing legislation.
Certain changes have been made to shipping taxation and allowances. As Tilbury docks are in my constituency, I understand a little about the needs of the shipping industry. However justified they may be, these are generous tax concessions. Depreciation will amount to £30 million per year and allowances to £50 million per year.
Two issues have not been tackled. Having granted generous and unique concessions to the shipping companies, by phasing out capital allowances the Government have departed from the provisions laid down in the Financial Secretary's statement. Having said that 1094 those allowances would be phased out to ensure free competition and to prevent distortion through taxation, the Government have singled out one industry for taxation concessions. However justified the Government may think their action, it is a departure from their principles.
§ Mr. Moore
I apologise for interrupting the hon. Lady. I made a very long speech, and obviously some facts need to be commented on in more detail later. Let me make the record clear. The £50 million of benefit in the transitional period is for the whole of British industry. Only half relates to the shipping industry—that is approximately £25 million. There is also £30 million in depreciation.
§ Dr. McDonald
Nevertheless, it is a generous concession. Given the parlous state of the British shipbuilding industry, I believe that the concession should be linked to encourage British companies to buy British ships, and I should have liked the Financial Secretary to say something about that aspect. The hon. Gentleman justified the measure by claiming that we need British ships to engage in trade, leading to other benefits. Those ships can be requisitioned for use by the Merchant Navy, as was done during the Falklands war. I am not sure whether that condition applies if the ship flies not a British flag but a flag of convenience. These tax concessions could allow shipping companies, first, to purchase a non-British ship from one of our major competitors and, secondly, to use those ships under a flag of convenience, so that they would not be available for defence purposes. That reason was part of the Financial Secretary's justification for the measure.
§ Dr. McDonald
I shall not give way. I hope that the Financial Secretary will deal with that point later, if that is not the case.
I turn to the main thrust of the Government's changes in capital allowances. The Government have decided to phase out those allowances, replacing them with a reduced rate of corporation tax. The changes that were announced to clarify the original legislation and the reaction of industry, the City and the banking sector might have been avoided if the Government had done what they said they would do when introducing the Green Paper in 1982. The Government expressed the wish that thematerial in this Green Paper will contribute to the full and informed public discussion which they believe is an essential precondition for any further major change.The Government went on to introduce changes in the Budget which, in this case, were shrouded in the usual pre-Budget secrecy—I do not believe that there were any leaks about the corporation tax changes announced in the Budget—and set aside any public discussion about the effects on industry and commerce generally. If the Government had done what they said, more sensible changes might have been introduced.
The Financial Secretary pointed out that new clause 8 would be rather expensive, and that may be the case. As the hon. Gentleman knows, the purpose of introducing such a new clause is to give us an opportunity to look critically at the Government's changes. We want to make it clear in our comments on phasing out capital allowances that we believe that companies should pay their fair share of taxation and make a proper contribution to total revenue. As the hon. Gentleman also knows, since 1970 1095 that contribution from corporation taxation has been declining and is now about 5 per cent. Since 1979 that percentage has varied a little from year to year.
It might well be the case that companies should pay a larger share of taxation to total revenue, but we should ensure that investment, especially essential capital investment, is not discouraged by any taxation change. We want to take two sides of the coin into account. The Opposition believe that companies should be properly taxed, that there should not be ways of avoiding taxation, that companies should contribute to total tax revenue and that too much of the burden of taxation should not fall on individual taxpayers paying taxation from their earned income either directly or indirectly through VAT. At the same time, we do not wish to discourage investment. That is a major criticism of phasing out capital allowances and reducing the nominal rate of corporation tax.
Criticisms have been made not only by the Institute for Fiscal Studies but by stockbroking firms, some of which pointed out that the rate of return on investment must be considerably higher for it to be worthwhile for capital investment to occur. In April 1984, the stockbroking firm, W. Greenwell and Co., said that it was particularly concerned aboutthe squeeze on corporate liquidity in 1985 to 1987 when total capital allowances fall away rapidly with the abolition of the first-year allowance.Greenwell agrees with the point made by the Financial Secretary. The firm said:by the early 1990s net cash flow should be healthier than they were pre-Budget.That is a long way off, and by then the economic position could have changed considerably. We are not in a position to forecast with any degree of certainty what will happen in this regard. Others in the City have made that criticism also. They have forcefully reiterated the point made by the Institute for Fiscal Studies — the burden wil fall especially on the manufacturing and distribution industries.
The Financial Secretary attempted to answer the institute's criticisms by suggesting that the companies it chose were somehow unrepresentative. About 4,000 companies were surveyed, involved mainly in manufacturing and distribution. Many of those 4,000 companies were large organisations. I do not believe that the hon. Gentleman's argument showed that that was not a suitable sample. It is a representative sample of the major and most important part of our economy. There is a predominance of large companies in manufacturing, and it is important to examine what will happen to them. Therefore, it is entirely unfair to suggest that the institute selected much too restricted a range and that in some way that undermines all its comments, especially when they are supported strongly in the City.
The fact is that companies with high investment related to their profits will be penalised at a time when there has been a rapid decline in manufacturing investment. In spite of the optimistic forecasts quoted each year, when, for example, the Confederation of British Industry says, as it did earlier this year, that manufacturing investment will increase by 7 per cent., the fact is that investment in manufacturing industry has fallen by 42 per cent. since 1979. It is against that massive drop in manufacturing investment that we must look at the changes that have been made.
1096 Supposedly, jobs will be created through companies being persuaded to substitute labour for capital. However, there is no guarantee that that will happen. For example, Alan Clements of Imperial Chemical Industries said that he very much doubtedthat the tax changes will encourage us to employ more men and less machines.These tax changes will strike particularly hard at capital-intensive firms and shift the corporate tax burden from labour-intensive to capital-intensive firms. In the main, it will be shifted from service to manufacturing industries. The institute argues that the tax burden could go up to 35 per cent. and that companies could pay a much higher rate of taxation by 1986.
Some companies will benefit from the changes —companies with a large overseas content such as Rio Tinto-Zinc. Such companies will pay extra tax on repatriated profits less often because they will be able to take advantage of the rate paid abroad while the withdrawal of capital allowances here is maintained. Therefore, if companies such as Rio Tinto-Zinc are to benefit from the tax changes because of their large overseas content, that is a little puzzling. I am not sure whether the Government can make up ther mind whether they love or hate Rio Tinto-Zinc. The Financial Secretary might tell us exactly what their attitude is.
The companies that will be particularly hard hit are those that invest in advanced electronic components. The justification for what the Chancellor has done is that it makes sense to substitute labour for capital. What does that mean? It cannot be true of high technology products such as advanced electronic components, some of which cannot be made manually, yet which are absolutely essential if we are to maintain competitive standards of quality and reliability. We also need continued investment in industry to update it by the use of such electronic equipment. It cannot be tested or manufactured manually. It has to be produced by other sorts of equipment and subjected to automatic tests, with automatic electronic inspection and test equipment.
The Government are making it much harder for such industries to invest. The encouragement to invest in high technology will be removed by the change in the basis of corporation tax at a time when we face increasing competition from abroad. For example, France and West Germany substantially support their microelectronic industries. At present, the Government have in place a scheme to support microelectronics amounting to about £120 million, but it will not be sufficient to make up for the withdrawal of capital allowances. We might lose out in competition with France, Germany, America and Japan because of the tax changes.
For example, investment in the Scottish computer industry was built up as a result of favourable capital allowances. If that industry is to be maintained in an area that particularly needs jobs, we must be able to offer the same concessions that are offered abroad. France and West Germany are prepared to move into the vacuum left by Britain and to entice high-growth computer companies to leave Scotland by advertising the support that they give.
The claims that the institute has made about the future of the corporation tax system introduced in the Budget depend, as the Financial Secretary said, on assuming that the rate of inflation is 7 per cent. in 1986, 1987 and 1097 thereafter. In saying that, the institute could properly appeal to some of the economic forecasts made earlier this month and in June that put the rate of inflation at over 6 per cent. and nearing 7 percent. in 1987. We have just had news today that the interest rate has gone up to 12 per cent., with the possibility of the mortgage interest rate going up to 13 per cent. on Friday. I do not know whether that will happen. Obviously, that rise will have an impact on inflation. If interest rates continue to rise, as is likely following the impact of American interest rates, the rate of inflation might easily go up to 7 per cent., on which the institute's assumption depends.
The Chancellor replied to the institute by saying that currently the rate of inflation is 5 per cent. and the Government are determined to reduce that figure still further. However, that is all that he said in reply to the institute earlier this month. That is odd because it seems that the Chancellor was suddenly overcome, rather unusually for him, with a fit of modesty. He does not usually make modest claims about his plans for the future. Such modesty did not affect him in June when he delivered the Mais Lecture, and spoke about the Government's commitment to a further reduction of inflation. He said that since 1979low levels of inflation have been the norm—as indeed they are throughout the industrialised world. Stable prices are a blessed condition, but one that we in this country have not experienced other than very fleetingly for 50 years.To achieve stable prices thus implies fighting and changing the culture and the psychology of two generations. That cannot be achieved overnight. But let there be no doubt that that is our goal.In other words, the Chancellor was preparing to announce that he wanted to reach the "blessed condition" of a zero rate of inflation. That was his goal. However, when he replied to the institute he was still stuck with the 5 per cent. rate of inflation. That makes one doubtful about the future and makes one feel more confident in the institute's analysis that there will be a heavier tax burden on manufacturing industry, the industry on which we shall depend in future.
§ Mr. Campbell-Savours
Does my hon. Friend accept that, in view of the differences between the Government and the insitute and other outside organisations, many of which the Government pray in aid in debates on other matters, there should be an annual review so that if there is evidence that things are moving in the direction that those bodies suggest and that employment is being affected various aspects in the legislation can be reconsidered and perhaps reversed?
§ Dr. McDonald
My hon. Friend makes a very sensible suggestion. As inflation is likely to rise and manufacturing companies are likely to be hard hit by the changes in corporation tax, not just employment but the entire economy will be affected, so it is vital that we re-examine the position, especially after 1986 and 1987, to see what the impact has been.
Underlying the Chancellor's proposals is a clear expression of hostility to manufacturing industry. He wants to switch the benefits from the manufacturing sector to the service sector because he sees no real future or contribution for manufacturing industry. It comes out clearly time and again in his comments on the future of the balance of payments or the development of the economy. He always stresses the importance of oil and of invisible earnings from the City and fails to mention manufacturing 1098 industry, which has been systematically destroyed by the Conservatives in the past five years. The Chancellor sees no future for manufacturing industry. He does not believe that it will be important in the creation of wealth for this country in the future. He expects oil to solve all the problems, even indulging in propaganda suggesting that there will be no decline in oil revenues and exports from 1986 until new fields are opened up in the rnid-1990s. The Chancellor's lack of concern for manufacturing industry has given rise to ill-considered changes, introduced without any consultation with the companies likely to be affected. Indeed, the Government have already had to reconsider their proposals and improve them by means of the new clause.
§ Sir William Clark
I am sure that the whole House is grateful for the opportunity to debate the changes in capital allowances. My hon. Friend the Financial Secretary will recollect that when clause 57 was discussed in Committee of the whole House the debate was extremely thinly attended, so it is essential that we go into the implications of the changes in more detail.
The hon. Member for Thurrock (Dr. McDonald) did not really address herself to the changes in the capital allowances but made a Second Reading speech about inflation, the Institute for Fiscal Studies, and so forth. Her allegation that the Government are not interested in manufacturing industry is disgraceful. She should bear in mind the fact that manufacturing industry, especially heavy industry, has been subject to disruptive and often frivolous strikes which in some cases have priced us out of world markets.
§ Mr. Budgen
My hon. Friend refers to pricing ourselves out of world markets. Presumably he welcomes the fall in the sterling exchange rate, which must have the effect of pricing many of our fellow citizens back into work.
§ Sir William Clark
I agree with my hon. Friend, but I was dealing with capital allowances, not with the value of the pound. If the value of sterling falls, our exports naturally become more attractive overseas. My hon. Friend will be the first to admit, however, that the cost of our imports rises. It is a Box and Cox situation. I am sure that my hon. Friend does not mean this, but the logic of his argument is that we should have an exchange rate of just $1 to the pound so that we can export even more—but what will be the impact on imports?
A new phrase—"fiscal neutrality"—has crept into our economic jargon, but we should not become too phobic about it. At one time, the "in" concept was indexation, but in many instances indexation has been a curse and for a long time it has concealed the weakness of our economy because it has shielded the public from the effects of inflation. In introducing the Budget, my right hon. Friend the Chancellor said that capital allowances were aggravating unemployment in manufacturing industry. Industrialists buy new machines to reduce unit costs, which are determined to a large extent by the number of people employed. Some of us have argued that allowances should not be taken away from manufacturing industry but that help should be given to the generally more labour-intensive service sector.
When I first saw the new clause yesterday, I could not make head or tail of it. It was so complicated that it appeared to be gobbledegook. I consulted two tax experts, 1099 but neither could understand it. In the end, I had to get on to the Inland Revenue to find out what it meant. My hon. Friend the Financial Secretary has now explained how the new clause will operate and it is clear that it will help not just shipping but all industry. I suggested straight-line depreciation for the shipping industry. We must certainly do something for that industry because our merchant fleet is constantly diminishing and we must not do anything to accelerate that process. The provision that the Government intend to bring in next year for free depreciation for ships will help cash flow, but that is all it will do. In the long term, capital allowances cost the Exchequer nothing. It is merely a question of cash flow, whether it be in shipping or any other industry.
Amendment 189 defines the date on which one is deemed to have paid for capital equipment when one is given the allowance. There is no difficulty there. In normal accountancy procedure, the date on which one becomes legally liable to pay for something is the date from which one should receive one's capital allowance. The fact that one may receive 20 or 30 days credit is immaterial. If a company told the Inland Revenue that it had made some sales but had not yet received the money and that therefore the amount would not be shown in that year's accounts, the Revenue would say that, as soon as the money was available, it must appear in the accounts. The same principle must apply to expenditure, whether capital or revenue.
My hon. Friend said that he thought there were some loopholes in this area. In all sincerity, I must say that I believe that the Revenue often becomes paranoid about the taxpayers. It is convinced that everyone is going to use some loophole or other. It would therefore prefer to do nothing to alleviate the tax burden, just in case someone should get through a loophole.
My hon. Friend knows that I do not entirely agree with the changes to capital allowances, although I welcome the reduction in corporation tax. Having some experience in business and in connection with capital equipment, however, I know that companies fix their capital programmes two or three years in advance. Consequently, a sudden reduction to 75 per cent. and then 50 per cent. will be a problem for them. Industry should have been given some notice. That is why I have suggested in amendment No. 47 a postponement for one year. That would enable companies to gear themselves up to the fact that the figure was to be only 75 per cent.
My hon. Friend says that we must not give a tax subsidy to industry. The capital allowance is not a subsidy. The problem is one of cash flow and the deferment of the payment of tax.
As far as the writing-down allowance is concerned, the period of eight years and the reduction to 10 per cent., this is a system of balancing allowances and charges. There is no administrative difficulty in having a straight line. If 25 per cent. each year is too generous, it could be 20 per cent. or 15 per cent., but the writing-down allowance is somewhat hard on industry.
My hon. Friend spent some time discussing shipping. The shipping industry will welcome the slight alleviation of £25 million plus £30 million in the first year. That is a help. However, my hon. Friend did not mention the film 1100 industry. I thought that that industry was to benefit from capital allowances. Perhaps there will be a later amendment on that point.
In essence, I accept my hon. Friend's arguments. I understand his judgment about a reduction in corporation tax and the withdrawal or withholding of capital allowances. It is a question of judgment, but we could have given industry far more notice. My fear is that there will be a rush to invest this year. Indeed, capital investment in industry this year has accelerated already, and I fear that it will slow down next year and in the year after that. I hope that my hon. Friend will not close his mind to the fact that there will be another Budget next year. If it is thought then that capital investment is declining, we should reconsider at that point whether the figure should be 50 per cent. next year or whether we should retain the 75 per cent. for an extra year.
§ Mr. Wainwright
I hope that the hon. Member for Croydon, South (Sir W. Clark) will not lose much sleep over his fear of a Government passion for fiscal neutrality ravaging our tax statutes, because that fashion, proclaimed in the Budget, seems to have evaporated already. The Budget itself introduced new distortions into the tax structure. For instance, there was the new share option incentive. By the time the Chancellor appeared before the Treasury and Civil Service Committee, he was backtracking hard about the distortions and saying that he had no intention of pursuing distortions throughout the taxation system. He seems to have had enough of dealing with distortions and no doubt will produce some new fashion for next year's Budget.
In spite of the bizarre way in which new clause 34 has been presented—being amended as it was presented to the House — Liberal Members welcome it as far as it goes. However, it shows that the Government, and especially the Treasury, are paying a high price for having left vacant for 12 months the key post of head of the Government accountancy services. If someone had been appointed to that post and been in place when the proposals were drawn up, he would have pointed out—off the top of his head—the need for a measure such as has now been presented to us at the last minute. Incidentally, the House might like to consider appointing a head of Labour Opposition accountancy services, too—but it would be out of order for me to pursue that idea.
The greatest impudence in the sermons we have heard from the Government about capital allowances is the idea that it has been wrong in the past for the taxation system to contain incentives for capital investment. There has never been as pressing and immediate an incentive to reckless capital investment as is contained in this Bill. The Government are telling firms that if they get cracking with their capital investment and do not spend much time looking at the details, they can have their first-year allowances. But if they give the investment plan mature consideration and travel round the world to inspect different plants, they will be too late and will miss the first-year allowances. A synthetic boom in stupid and shortsighted capital investment will be launched by the Bill. The Financial Secretary should acknowledge the truth of that when he preaches about the wickedness of tax incentives—and he does so on the basis of out-of-date information which goes no further than 1980.
One of the gravest accusations against the Government's economic policy is that it has brought about 1101 a lamentable decline in investment in the manufacturing industries. I wholly agree with the hon. Member for Thurrock (Dr. McDonald) that investment in manufacturing industry has declined by such substantial proportions in the past three or four years that there is real cause for alarm.
New clause 31 was tabled by my hon. Friend the Member for Roxburgh and Berwickshire (Mr. Kirkwood) and myself on behalf of Liberal Members. Our case is that, in order to obtain—for effect—a seductive new low rate of corporation tax on Budget day, the Chancellor was thereby obliged to do two very unwholesome things. First, he made manufacturing companies with large capital assets cook their books in respect of their taxable profits so that the new rate of corporation tax could be financed. Secondly, it involved the pretence—which must have become wholly threadbare with a two-point hike in interest rates announced today and the pound dropping through the floor—that an annual inflation rate of no more than 5 per cent. is now a firm feature of our system and that there is no risk of inflation rising above that. Once those two cheeky sleight-of-hand tricks are removed, there is no justification for the reversion to a depreciation rate for tax purposes of only 25 per cent. on the reducing balance.
I am arguing not for incentives for capital investment, but that the depreciation rates allowable for tax purposes should be as close as possible to commercial and industrial reality. A 25 per cent. allowance on a reducing balance of an asset is miles away from commercial reality, except in firms that are so old-fashioned that they must be in an almost terminal state. There is a great deal of evidence in that respect.
The Government are cooking their own books in this regard. The Financial Secretary reproduced again today the claim that, under his method of depreciation, capital assets will effectively be written off in eight years because only 10 per cent. of the original cost would be left on the books. By a marvellous conjuring trick, he said that that would be the scrap value. If he had had a head of Government accountancy services, he would have been told that, in many cases, manufacturing firms have to pay someone to take the obsolete item away. There is no scrap value in intricate machinery that is made largely of plastic and other synthetic materials. A contractor has to be paid to come with his lorry or articulated truck to take the things away. The idea that assets finish their time in a company with a firm residual value of 10 per cent. that can be obtained on the market is nonsense.
Nowhere in his long speech did the Financial Secretary face the fact that, during a period of continued inflation —even if it is limited to 5 per cent., which I doubt—companies are entitled to have taken into consideration the replacement cost of assets that are wearing out. I find it difficult to keep patience with people who do not realise that someone who uses a motor vehicle fairly heavily in a business in 1984 should not kid himself that he is merely incurring the cost of the motor vehicle when it was purchased. He is wearing out the motor vehicle at the present replacement value of such vehicles. The Financial Secretary, other Treasury Ministers and the Bill totally ignore that consideration.
In regard to taking inflation into account, I am willing to give the Financial Secretary an enormous benefit of the doubt by assuming that, for the next eight years, there will be an annual inflation rate of only 3 per cent. I do not believe for a moment that that will happen, but, in order 1102 not to be accused of over-egging the pudding, I shall assume that it will be 3 per cent. Taking such a rate of inflation into account and talking in real terms, under the Government's system of depreciation, 17 per cent. o f the replacement cost will still be left on the books after eight years depreciation. The Government's system is not one of fair, reasonable and realistic depreciation. Furthermore, the Financial Secretary has simply glided over the appalling unfairness of the Government's scheme to companies which use high technology and whose plant is kept absolutely up-to-date to cope with the Japanese and the Germans. Why should they be landed with this absurd 10 or 12-year write-off when all around the world it is acknowledged in their line of business that such pieces of plant are obsolete within about three or four years?
The answer that the Government gave in Committee is that their scheme applies fairly tothe mix of assets likely to be purchased by the average business".—[Official Report, Standing Committee A, 26 June 1984;, C. 1429.]Since when has this Government operated to respect the average business? We have always been taught— and we are told twice a week by the Prime Minister at Question Time—that the Government are out to help the thrusting companies that are well above the average and are shining examples to the rest of British industry. When it comes to saving the Treasury money and raking the revenue in from cooked books, we are told that it is quite satisfactory if the scheme fits merely the "average business".
Perhaps I should say that my observations are not off the top of my very out-of-date accountancy head. They are supported by a remarkable variety of hard-headed business and professional organisations, most of which, I suspect, are in some sympathy with the general thrust of overall Government policy. I merely made it known in a modest way in Accountancy that I was interested in pursuing this matter. Without any further pressure, I have had assurances of support for new clause 31 from the Institute of Cost and Management Accountants, the Institute of Chartered Accountants in England and Wales, the Institute of Taxation, the Engineering Employers' Federation, the National Farmers Union, the 100 Group of Chartered Accountants—to be a member of which people have to be senior directors of really large United Kingdom companies—the Institute of Directors, the Association of European Machine Tool Merchants and, from my region, the Leeds chamber of commerce and the Kirklees and Wakefield chamber of commerce. I have also received supporting letters from a considerable number of individual practising accountants. Nobody could claim that that list is weighted in favour of people who just use computers, lasers, or microelectronics. It represents a reasonable cross-section of manufacturing and service industries.
It is necessary for me to try to deal—as I believe that I can—with some of the Government's arguments when the matter was debated in Standing Committee at the instance of my hon. Friend the Member for Roxburgh and Berwickshire. We regard our proposal not as a distortion or as an incentive, but as part of commercial reality. I hope that the Financial Secretary will ponder on the fact that, before about 1945, we had a first-class Inland Revenue service which allowed different rates of depreciation for different types of asset. That was regarded as fair by the commercial community and it seemed to get on without 1103 any great difficulty. I am not prepared to concede that we necessarily need to have just one overall rate of depreciation for all plant that is used by industry.
Moreover, in Committee, the Financial Secretary accused the Liberals of moving away from actual commercial depreciation. I should like to take the example of a few major companies, which are household names and which, for all I know, are generous subscribers to the Conservative party. All of Plessey's plant is depreciated by our straight-line method over three to 10 years. All of ICL's plant is depreciated on a straight-line basis at rates between three and 10 years. Guest, Keen and Nettlefolds plc computer department writes off all of its installations in five years, using the straight-line method. With the patchy recovery in the economy, some manufacturing firms use their plant on double or treble shifts, so they are using it to two or three times more intensively than the Financial Secretary's "average business" would dream of doing. Are they to have no compensation for the fact that they obviously wear out their machinery twice or thrice as fast as normal?
I must deal with another hare that the Financial Secretary started in Committee. He said that our system —the straight-line basis—would be far too complicated for industry to cope with. That is the most enormous red herring. The 100 Group of Chartered Accountants has assured me in some detail — with which I shall not burden the House—that there would be no difficulty in operating a pooling system under the straight-line method. The Institute of Chartered Accountants in England and Wales is recommending the 25 per cent. straight-line method, saying that it is perfectly capable of being administered. In fact, it must be, because sensible companies operate the straight-line method in their own books and regard the reducing balance method as a piece of mumbo-jumbo from the distant past which is operated by people who use only an abacus or bead frame instead of proper calculators.
In Standing Committee, the Financial Secretary, despairing of being sufficiently eloquent to persuade the entire Committee, produced a tract in the manner of street preachers, patent medicine vendors or suchlike who want people to read the virtues of their product rather than to take the operator's word for it. This tract was "Economic Progress Report No. 167", published by the Treasury. Of course, everyone's hackles rise when these things are called economic progress reports, because for the last four years they should have been called economic decline reports, with a special urgent edition published today in relation to interest rates.
On page 3 of this economic progress report, printed on tasteful blue paper, there is a chart No. 5 which purports to set out the various competitor countries' rates of depreciation. There is no key to the chart. It is not explained why some parts of it are shaded and other parts are blue. Its purpose apparently is to show that the rate of writing-down allowances for plant and machinery in the United Kingdom will, when the Bill becomes law, be broadly comparable with those overseas. I do not know what that is supposed to mean. Of course rates of depreciation can be comparable. It is perfectly possible, in other words, to compare rates of depreciation in one 1104 country with those in another. I do not think that it needs a Treasury paper to say that these things can be comparable and are suitable and apt to be compared with one another.
However, I suspect that what the paper was trying to say was that United Kingdom rates would be as good as the rates of most other countries, even though it did not succeed in saying that. In fact, this is a deception. It says—and the Financial Secretary repeated it this afternoon— that in France assets can be written off for tax over five to 10 years. The Financial Secretary did not tell the House that in France it is permissible to apply a replacement cost index to the value of plant that one is writing off. The French system, to its great credit, takes account of inflation instead of pretending that inflation will cease to exist. I could go on with these meretricious comparisons. They show, even at face value, that three of our keenest competitors abroad have more effective and realistic rates of depreciation than we will have in this country.
I believe that there is everything to be said for a four-year straight-line write-off, unless the Government are willing to become even more realistic and to have two rates of depreciation, at least, for different types of plant—for instance, plant with moving and operating parts and plant which is static in every sense. Unless the Government come forward with some such proposal, I shall recommend my right hon. and hon. Friends to support new clause 31 in the Lobby.
§ Mr. Neil Hamilton (Tatton)
The problem with which new clause 17, which stands in my name on the Amendment Paper, is concerned was reported in The Times in February this year, and it shows up some of the deficiencies of the present capital allowances situation. Although initial allowances will be phased out in the course of the next few years, if no change is made in the legislation, the problem will still exist because it also concerns writing-down allowances which will continue.
I am grateful to my hon. Friend the Financial Secretary for the encouraging remarks that he made in his speech, which I am sure will be widely welcomed throughout industry. It might be useful if I were to spend a short time talking about the problem that needs to be resolved. I am sure that we can return to this matter next year in rather more detail.
The problem that arises is to be found in section 41 of the Finance Act 1971. Briefly, the section provides that initial allowances are available where a person carries on a trade and incurs capital expenditure on the provision of plant or machinery for the purposes of his trade, but the allowance is obtainable only if the plant or machinery belongs to him at some time during the chargeable period relating to the incurring of the expenditure.
The problem has arisen in relation to the word "belonging". In the case of a lessee of a property, it was held in the case of Stokes v. Costain, to which my hon. Friend referred, that only the freeholder, in effect, has that belonging interest. Consequently, the developing company in that case, and of course in many other cases, is unable to obtain the capital allowance. The problem is that nobody else is able to obtain the capital allowance either. Therefore, there is a gap in the system. Thus, I welcome very much what my hon. Friend said.
1105 I will end with a few words from Lord Justice Fox's judgment in Stokes v. Costain. In spite of having had to hold that the initial allowances were not available to the taxpayer in that case, he said that he could notregard the state of the law as satisfactory. The purpose of the statutory provisions is evidently to encourage investment in machinery and plant. In this case very large sums were expended on such investment but, under the enactment as it stands, nobody will receive a tax allowance in respect of it. The freeholder will not because the freeholder did not incur the expenditure and is not carrying on the trade. And the taxpayer company will not because the items did not belong to it. The Crown is unable to suggest any policy reason why a person in the position of the taxpayer company should be refused relief. It is to be hoped that the ambit of the legislation in this respect will be reconsidered.I therefore very much welcome the reconsideration that my hon. Friend promises, which I think is sufficient evidence of the flexibility of Ministers in the course of the Bill to respond to good ideas which are put forward, at least sometimes, by their hon. Friends. I welcome what my hon. Friend said, and I am sure that it will be welcomed generally throughout industry.
§ Mr. Fisher
I apologise to the Financial Secretary and the House for having missed part of the debate. I believe that this may be the most important debate that the Committee will have tonight, and I believe that it is the most wide-reaching part of the Finance Bill.
The changes that the Chancellor and the Government propose to make, whether or not they are correct, will affect the future of investment in industry. They will affect manufacturing industry in particular and will decide whether it declines and continues to decline or whether it manages to reflate, recover and form a manufacturing industrial base in the country that can provide employment. At risk is not only our industrial future and future investment but the question of future jobs and employment and thus, indeed, the economic future of the country.
In the proposal that the Chancellor put forward in his statement to the House, I felt that he was guided more by his desire to establish a reforming reputation in proposing these reforms than by a well-considered attack on, or reform of, the corporate tax structure. I shall deal later with the tax structure, but I think that probably the whole House will recognise the inadequacies and weaknesses of the corporate tax structure in a number of ways. Reform in itself was therefore welcomed on both sides of the House.
Opposition Members feel that this reform has been ill-considered and has been pushed through. Indeed, the very existence of manuscript amendments, even tonight, after the longest Standing Committee stage for a Bill in the history of the House, indicates that the Government are still having to reconsider and adapt their recommendations because they have not got it right. That has serious implications for everybody.
To his credit, the Financial Secretary has worked extremely hard in Committee and has defended his corner —often a very ill-advised and ill-considered corner—admirably. He was not at his best in this debate. He produced the familiar case, the one that he made both in Committee and, as far as I can recall, in the Committee of the whole House earlier, about the corporate tax purity of the Chancellor's recommendations. He usually puts that case with more energy, conviction and enthusiasm. Tonight, there was a danger that he would rival the 1106 whistling wizard from Wrexham and become the mumbling Minister as he went through his brief. He could not produce a single new argument or forceful item in favour of those changes. He confined himself to details of the changes. That was fair enough, because undoubtedly they were difficult to understand on paper, and I was grateful to him for taking us steadily and slowly through the details, although once he had explained them and teased them out it became apparent that there were distinct weaknesses.
For example, if I correctly understood what the Financial Secretary said on the timing of the writing-down allowances, he appeared to be effectively equalising them with first-year allowances by redefining the time condition of writing-down allowances. There is a potential abuse because of the date at which expenditure would be incurred—a problem that he recognised, but to which he did not fully address himself. I do not know what plans he has to guard against that, or to monitor it if it happens, but for a Chancellor whose great claim in the Budget Statement was that he would resolve abuses and destroy anomalies—which hon. Members on both sides of the House would welcome—to introduce a change that even the Financial Secretary recognises has the potential for abuse is not satisfactory.
§ Mr. Fisher
I am grateful to the Financial Secretary, and somewhat relieved. There is considerable potential for abuse in the point about the date at which an expenditure was confirmed.
The first part of new clause 34 is concerned with when people may disclaim or defer writing-down allowances. There is a possible loophole in this. By allowing, and even encouraging, people to defer writing-down allowances, the new clause appears to be a manipulation of the tax system. That is what the Government said that they were seeking to avoid. That is an unsatisfactory element in the new clause.
A later element of the new clause is the transitional help in the change from the old to the new assets. This begs a question that the Financial Secretary should answer. What happens after the transitional period? Is not the result vulnerable to the criticism that the Opposition have made in Committee, that there will be a disincentive to invest? The Financial Secretary referred particularly to the fact that 50 per cent. of the impact of this change would affect shipping. He was on weak ground on that point. We welcome the fact that the shipping industry, and in particular the fishing industry, will be reprieved in this way, but in accepting that there could be exceptions, such as shipping, the Financial Secretary is driving a carriage through the Chancellor's claim that he is correcting anomalies. Whatever he may say about the strategic grounds of the defence and maritime considerations, special concessions have been made for fishing and for shipping, and so the strength of the Government's case begins to disappear over the horizon.
In many ways the case for corporate tax purity that the Financial Secretary is recommending to the House is both naive and crude, even if it is well-intentioned. He is proposing an eight-year write-off period. He knows very well that some assets, such as ships, have a far slower 1107 depreciation period, whereas others, such as computers, have a far faster one. As the hon. Member for Come Valley (Mr. Wainwright) said, having only one system and one period of write-off is not satisfactory, as it is not flexible enough to deal with the multitude of different circumstances that arise.
Similarly, the idea of averaging is crude in the extreme. The Financial Secretary recommended this to the House because he said that it was a more simple tax system, but there is a danger, with the form of averaging that he recommends and with the single write-off system, that he is presenting the House not with a more simple system but with a more simplistic one.
The Government recommend that the House does not accept new clause 8, because they wish to encourage risk-taking, to reward success and to allow market forces to dictate investment in industry. That is the Government's philosophy, and that is what is dragging manufacturing industry in particular, and industry as a whole, into a further decline. The Financial Secretary said that tax incentives distort investment decisions, and Labour Members would agree, but do we need to encourage investment? It is to that that the Financial Secretary must address himself. If he is simply abandoning manufacturing industry to market forces in investment, he is saying that in his opinion it is not a problem for the Government. They are not involved with the problem of whether manufacturing industry or industry as a whole is sufficiently well invested.
However, the Labour party thinks that this is a prime issue, to which the Government should address themselves. They must be responsible for the conditions of investment in manufacturing industry, and industry as a whole. For them to abandon their responsibility and say that it is not a concern for them, and that investment must find its own level, does not augur well for investment in industry, and therefore for jobs.
Many young people leaving school this summer are not likely to get jobs. The Government are saying to them that they do not mind, because they do not consider it to be their responsibility to ensure that there is investment in local industry or that there is new potential for jobs in industry. They say that is solely a matter for the industries concerned, and it is for market forces to condition those industries. It is up to such forces to decide whether those young people get a job and it is no concern of the Government. If young people realised that, they would be horrified by the Government's stance. Investment must be a Government responsibility, and it must be a matter of concern to them that the level of investment is declining, and shows every sign of continuing to decline in spite of some of the figures that both the CBI and the Department of Trade and Industry are putting out.
The thrust of what the Financial Secretary and the Chancellor have been saying concerns reform. Labour Members find the corporate tax system as it has worked over the past few years extremely unsatisfactory. It is not effective. It is not a tax on profits. It is honoured more in the breach than the observance. Indeed, 50 per cent. of industries in this country do not pay mainstream corporation tax. The Financial Secretary has not brought that to the attention of the House, although he is very familiar with that fact. It should be of grave concern to any Government.
1108 The declining revenue base of corporation tax was becoming something of a national scandal. In 1967 the corporate tax system provided 7.2 per cent. of all tax revenue for the Government, but in 1982 that figure had been reduced to 2.7 per cent. The level of corporation tax disastrously failed to provide tax revenue for the Government. That shows that companies in this country are not contributing to the tax base in the way that they should.
The Financial Secretary and the Chancellor, in recommending reforms of corporation tax, could undoubtedly count on support from Labour Members. Whether corporation tax should be reformed is not at issue, but how and when that reform can be introduced. Corporation tax is failing because it is too complicated and has about 10 categories of physical assets that are allowed for through allowances, exemptions or special cases. It was only too easy to avoid, as the banks showed when they jumped into the breach in the leasing business and found that they could enjoy benefits. Hon. Members on both sides of the House would agree that there was far too much differentiation between the companies that could benefit from having plant and machinery eligible for allowances, and those that did not because their assets were more in monetary holdings.
Although there is an agreement throughout the House in favour of reform, and, indeed, throughout industry and in the financial world, it is not for this reform. As my hon. Friend the Member for Thurrock (Dr. McDonald) has said, the 1982 Green Paper proposed that there should be discussions and that consensus should be reached.
Could the Financial Secretary, when winding up, tell the House what discussions have taken place and what consensus has been arrived at? Was the 1982 Green Paper used as the basis for discussions? Can the Financial Secretary honestly claim that these reforms of corporation tax come out of the discussions that took place as a result of that Green Paper? Would he admit to the House that these jumped out of the Treasury fully-fledged, so to speak, in the Budget and did not result from counselling, discussion and general canvassing throughout industry and the monetary world?
I am afraid that the Financial Secretary will have to admit that these reforms have not been canvassed and that the CBI and the TUC have not been consulted. Perhaps many hon. Members would consider that to be typical of this Chancellor's approach. Have the possible deficiencies resulting from corporation tax been considered since 1982, and will corporation tax be put on to a corporate tax flow basis? Is that possible? What difficulties have the Treasury identified if a possible tax on cash flow were introduced? We are being asked to revert to a system similar to that existing in the 1960s. We moved away from that system because we discovered that it discouraged investment and made no allowance for the effects of inflation on corporate profitability or liquidity. Can the Financial Secretary tell the House that this system is significantly different from the corporate tax system that existed in the 1960s, and explain how it will not have a discouraging effect after the transitional period of investment? How will it make allowance for the effect of inflation on corporate profitability and liquidity?
I do not believe that the system will have any effect. The Minister will effectively be saying that the Government are going back to the system of corporate 1109 taxation that existed in the 1950s and the 1960s, which has already proved to be woefully inadequate to meet the needs of this country.
§ Mr. Campbell-Savours
Does my hon. Friend accept that this is perhaps one of the most important areas of debate? Does he agree that the Minister should have addressed himself to this point? Clearly, the system being introduced existed at one time, but was removed because it was failing. Therefore, the Minister must prove that bringing the matter before the House in this way will not cause the same deficiencies as in the 1960s. I hope that my hon. Friend will press the Minister on this point for a reply.
§ Mr. Fisher
I am grateful to my hon. Friend for that intervention. I urge the Minister to address himself to that matter and to explain to the House how the system differs from that introduced in the 1960s. I urge the Minister to consider the two areas of discouragement of investment and the effect of inflation on corporate profitability and liquidity.
§ Mr. Maples
Would the hon. Gentleman not agree that the two main reliefs that may be changed, stock relief and capital allowances, were introduced to cope with the problem of inflation and taxation of companies on historic costs, and that the reliefs have nothing to do with the previous tax system? They were introduced as ad hoc measures, largely to cope with a specific problem.
§ Mr. Fisher
I do not entirely agree with that. There is a certain element of truth in that. The reliefs were introduced to meet the problem of underinvestment in manufacturing industry in the 1950s. Governments of both parties needed to introduce some form of positive tax incentive to persuade private industry to invest. The Heath Administration of the early 1970s chose to reflate the economy and hoped that investment in manufacturing industry would follow. That has not proved to be true. We have always suffered from far too narrow an investment base.
§ Mr. Campbell-Savours
My hon. Friend should, equally, refer to the debates that took place in the House following the Finance Bills of the 1960s, in which there was a consensus between the parties about the need for change. It was accepted that the existing arrangement was not working. The Minister must address his mind to the fact that the consensus existing at that time is being broken as a result of this arrangement.
§ Mr. Fisher
I was not in the House in the 1960s, so I must take the word of other hon. Members that those debates were conducted along those lines. I believe that it was generally recognised in the late 1960s that we were woefully underinvesting and that industry desperately needed some form of incentive to invest. If it was true then, it is even more true now.
As my hon. Friend said, between 1979 and 1982 investment in manufacturing industry fell by one third. If we include leasing, the figure reaches 42 per cent. Even after removing the leasing element, investment has fallen by one third. Now, manufacturing industry accounts for only 24 per cent. of total industrial investment. Manufacturing investment fell by 5 per cent. in 1983. Fixed investment accounts for only 15 per cent. of total GDP, whereas 10 years ago it was 20 per cent. of GDP.
1110 From that, even when incentives existed, we can;see that investment was declining and the incentives had no effect in staunching the flow away from investment. The Government are trying to take away even this small form of investment incentive. I fear the consequences greatly.
The Chancellor may have been reassured that this is right moment to introduce the measure, based on CBI forecasts that investment in manufacturing industry will increase in 1984 by 5 per cent. Indeed, the DTI has predicted that it will rise by 9 per cent., which is even more encouraging. However, most non-partisan and objective commentators say that investment in manufacturing industry is likely to increase by only 2 per cent. or 3 per cent., this year, or at the most 4 per cent. Indeed, if it reaches 4 per cent., most people would consider that to be a satisfactory result. Even if the DTI is right, such an increase would add only half per cent. maximum to the growth of GDP. That does not address the problem at all.
The Minister says that we are going over to a market system. That would make sense, even to the Tories, if industrial investment was strong. There might then be a case for saying, "We have good industrial investment, let us go on to a market-based system." However, the reverse is manifestly true. As the figures show, industrial investment is woefully weak, and it is unsatisfactory to choose this moment to push this feeble child of investment into an unfriendly world.
In his evidence to the Treasury and Civil Service Committee, and in his speech to the House, the Chancellor claimed that these proposals would accelerate investment. He did not amplify that. I do not know whether the Financial Secretary goes along with that, but in their evidence to the Select Committee the Treasury officials did not do so. When askedThe acceleration is purely a response to the phasing mechanism?",the Treasury officials answered:Yes.When asked:Could you give us some figures for the acceleration you see as a result of the phasing in or phasing out?",the Treasury official said:It is very difficult to estimate that. We can give you some figures of the incentive to accelerate, the reduction in the cost of investment if it is carried out a year earlier.But when asked:If you did have some figures to give to the Chancellor, if he is going to make a categorical statement like that .… he must have based it on the figures you gave him.",the Treasury official replied:No, the statement can be based on the expectation, or more or less knowledge, that there will be an incentive to accelerate and the assumption there that a number of firms would take advantage of it.Therefore, the Chancellor's claim that there would be an acceleration appears, on the basis of the Treasury official's evidence, to be based not on the facts given to him but on expectations that his policy would work. That is too unsure a base on which to change the fundamental basis of industrial investment.
After the transitional period I fear that investment—particularly investment in manufacturing industry—will fall faster and that we shall all suffer as a result. If that is so, these are not a couple of insignificant new clauses, because they will prejudice the future for many people who do not have jobs, who desperately want jobs and who want to contribute to the future of this country. By prejudicing the investment base of manufacturing industry 1111 the new clauses will prejudice the future of those industries, and that will have a serious effect on employment.
A major responsibility in this area falls on the Government. They ought to recognise that they cannot leave this solely to market forces. They ought to take control, accept responsibility and recognise that by returning to a system which was found wanting in the 1960s they are not addressing themselves to the problem of a rational and coherent form of corporation tax. That is what the House expects of the Government, but this new clause does not help.
§ Sir Geoffrey Finsberg
I wish to say a few words in my capacity as chairman of the all-party retail group, because for some time we have been disturbed about the question raised in new clause 17. The Financial Secretary's response clearly shows that he has taken on board the real problems which the Costain case and several others brought to light.
The real problem which the retail trade has experienced has been uncertainty about the legal position on capital allowances for machinery and plant on lease, particularly where there are funded developments. If next year the effect of the new clause will make it possible for capital allowances to be available to anyone who takes a grant or assignment at a premium on leasehold premises containing plant, which is landlord's fixtures, that will be particularly helpful. It will ensure that a tenant or lessee is placed in the same position as a freeholder in relation to balancing charges and allowances.
From the correspondence that I have had with the Minister, I appreciate that the uncertainty of this situation is a lawyer's paradise. It is right for the Minister to say that he will need time to work this out.
Far from the comments of the hon. Member for Thurrock (Dr. McDonald) and the hon. Member for Stoke-on-Trent, Central (Mr. Fisher), the open-mindedness of the Government in considering points as they arise has in many cases caused the tabling of new clauses and even manuscript amendments. I can just imagine the howls from the hon. Lady if, after Royal Assent, the Minister said, "I did not want to introduce a manuscript amendment on Report because it would not be quite fair." The hon. Member for Thurrock may laugh, but she cannot have it both ways.
The Minister has been extremely fair to the House. He has apologised for doing this, but he need not do so because he has shown that, if these points do arise, he is prepared to look at them as fast as possible.
The Minister referred to the fact that at a later stage this year the Revenue would consult interested parties on the draft rules that would be needed to give effect to his proposals. I ask for two assurances. First, will the Retail Consortium be among those consulted, as it represents the interests of all sections of the retail trade? Secondly, in some way will he make certain that hon. Members who have expressed an interest will be sent copies of the consultation document so that, if necessary, they may contribute to the continuing discussions?
With those brief remarks, I welcome the Minister's helpful attitude.
§ Mr. Paddy Ashdown (Yeovil)
I listened with interest to the remarks of the hon. Member for Hampstead and 1112 Highgate (Sir G. Finsberg), but I hope that he will forgive me if I do not follow that tack, in relation to which he has more expertise than perhaps I shall ever enjoy.
I wish to branch off on the question of capital allowances. I well recall the Chancellor's Budget speech. I was sitting beside my right hon. Friend the Member for Glasgow, Hillhead (Mr. Jenkins). When I heard the Chancellor announce the corporation tax, budgetary allowance and stock relief provisions, I told my right hon. Friend that that was a clever move. I used the word "clever" in its best as well as worst connotations. While it appeared that the Chancellor was giving some tax concessions, I recall that the overall result of his announcement was a further lien on industry.
It is interesting to note that the Financial Secretary has said:the Chancellor …did not conceal in his Budget speech"—I would not have gone that far—that the effect of his stock relief and capital allowance measures and corporation tax changes, taking into account the transitional period, would be some increase in revenue." —[Official Report, 1 May 1984; Vol. 59, c. 275.]The Financial Secretary admitted that that would not only be during the transitional period. Indeed, later, in reply to the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), he was unable to dismiss the suggestion that the overall rate of tax on industry at the end of the transitional period was likely to be higher than it is now.
It is quite remarkable that the Government are able to say, on the one hand, that they are getting more revenue out of these provisions both within the transitional period and immediately after it, and, on the other, that they can dress them up as being of significant advantage to the business sector as a whole. Where can that revenue come from, except from industry? It can come from no other source. Therefore, the Government, as usual, seem to want to point in both directions at the same time. They want to commend themselves on raising revenue and at the same time do the three-card trick of pretending that those provisions will be useful overall for business.
I can understand the Chancellor of the Exchequer's reasons for introducing the capital allowance and stock relief provisions. Indeed, in many ways I welcome them, in the sense that the capital allowance provisions will hand decision-making back to the board room. Consequently, the managers of industry will be able to make decisions that relate to their judgments about the future, instead of having those decisions shaped by tax provisions or, perhaps, even having them made for them. That must be a welcome move. Therefore, I welcome what lies behind the Government's thinking in moving decision-making away from the Inland Revenue to the board room. That must be a good thing.
The capital allowance provisions before us suffer from three major defects. First, as Conservative Members have said just as forcefully as other hon. Members, they will have a dampening effect on investment and re-equipment. Obviously, at this juncture we do not accept the Government's suggestion that British industry is about to take off. Indeed, today's announcement gives the lie to that. But whether or not one accepts that analysis, it must be in the overall best interests of British industry to reinvest and re-equip, particularly in the high technologies. There can be no doubt that those capital 1113 allowance provisions will have a depressing effect on re-equipment. However, I shall not go into that point in detail, as other hon. Members have covered it.
The second key element concerns the effect on the new technologies, in particular. Indeed, my hon. Friend the Member for Colne Valley (Mr. Wainwright) has already put the case more eloquently than I could. That is the sector in which there is heavy capital investment and rapid turnover in terms of reinvestment in the new technologies. The Government have often said that they want to encourage the new technologies and would like to see our industries, and particularly some of our older and more outdated industries, re-equipped with some of the new technology. Again, the capital allowance provisions must act as a depressant, despite the fact that such reinvestment in British industry is vital.
However, I should like to concentrate briefly on the third element, which is that the corporation tax and capital allowance provisions taken together are discriminatory. When I read the debate on 1 May, I noted that in column 278, in reply to the hon. Member for Stoke-on-Trent, Central (Mr. Fisher), the Financial Secretary made much of the fact that he was seeking to get over the problem of a discriminatory system. However, we now have a highly discriminatory system as between the incorporated and the unincorporated. That important point has not so far been made.
I am sure that Conservative Members recognise, as we do, that there is much that is unincorporated, particularly in the small business sector, that we wish to encourage. I refer to the sole trader or partnership. Although both incorporated and unincorporated will suffer—I use that word advisedly—it is only the incorporated sector that will have the benefit of the corporation tax reduction. That seems to be very discriminatory against a section of our industry that we are, by all accounts, seeking to encourage.
I turn to the likely effect of these provisions on the farming industry and community, which form part of the unincorporated sector of British industry. The overwhelming majority of farm businesses consist of sole traders or partnerships. They will not obtain any benefit from the reductions in corporation tax. I suspect that the Financial Secretary does not need to be reminded of the fact that agriculture is the largest primary industry in Britain after North sea oil. It is a huge investor, and its capital expenditure per head is about the same as that of manufacturing industry.
The National Farmers Union calculates that if the Government's proposals are accepted unamended, the loss of first-year allowances will probably result in an increase in the farming industry's tax liabilities of some £500 million over the next few years. That will obviously reduce investment in agriculture, which will be bad for the industry. As hon. Members know, agriculture is one of the most highly capitalised industries in Britain. Indeed, it has achieved four times the labour productivity of manufacturing industry as a whole, precisely because it has gone in for high capital investment. The benefits to the nation as well as to the industry are obviously great. Therefore, I hope that the Financial Secretary will admit that they are likely to be threatened by the provisions before us.
Farmers claim between one third and one half of all first-year allowances in the unincorporated sector. Therefore, they are very vulnerable. Other sectors, too, on which the farming industry depends, such as road haulage, 1114 are also vulnerable. What makes the provisions worse is that they come at an especially difficult time for the farming industry, as well as perhaps for others in the unincorporated sector. As hon. Members are no doubt aware, farm incomes have fallen. The farming industry is having to face up to restructuring as a result of the reforms of the CAP and, in particular, of what has happened over milk quotas. There is a need to redress the balance of benefits and disadvantages between the incorporated and unincorporated sectors.
I suggest that the farming industry and certain other sectors will be particularly hard hit by the provisions.
§ Mr. Ashdown
I am drawing my remarks to a close, so I shall not give way. I hope that the hon. Gentleman will forgive me, but I know that other hon. Members wish to speak.
I support new clause 31, which provides a more realistic system for writing off capital assets. On that basis, I commend it to the House, together with the other amendments that may overcome some of the worst effects of the Government's proposals in their new clause.
§ Mr. Nicholas Winterton (Macclesfield)
The hon. Members for Yeovil (Mr. Ashdown) and for Colne Valley (Mr. Wainwright), who spoke from the Liberal Benches, both made very constructive speeches which will no doubt be properly considered by my hon. Friend the Financial Secretary. I hope that he will give them serious consideration, because both hon. Members are experienced in this matter. The hon. Member for Yeovil referred to the farming industry, and I know that my hon. Friend is aware of my deep concern for the state of the dairy sector as a result of the milk package negotiated in Brussels. However, I shall not pursue the comments made by those hon. Members, other than to say that they merit proper and full consideration.
I thank my hon. Friend the Financial Secretary for meeting a number of the points that I raised with him both directly and through correspondence. Like my hon. Friend the Member for Hampstead and Highgate (Sir G. Finsberg), who is sadly no longer in his place, I think that it is unfair and unjust that Opposition Members in all parties should criticise the Treasury Bench for introducing new clauses and even manuscript amendments on Report I believe, rather, that it shows a flexibility that is very necessary where complicated legislation is concerned. Moreover, it shows that the Government are prepared to listen right up to the last moment to representations that are made not only from outside the House but by hon.. Members. That is highly commendable.
I am extremely grateful to my hon. Friend the Financial Secretary for the careful attention that he gave to the views that I expressed on behalf of our industry. Apart from the hon. Member for Yeovil, I believe that I am the first participant in this debate not to have sat on the Finance Committee.
§ Mr. Campbell-Savours
The hon. Gentleman is well known in the House for being most forthright, clear-minded and courageous. In Standing Committee, there were times when we would have welcomed his presence, At an early date next year the hon. Gentleman should apply to join our notable team. He will be welcome.
§ Mr. Winterton
The House is full of good humour. I hope that in a few hours' time that humour continues to prevail and that we shall deal with all these complicated matters with expedition.
§ Mr. Winterton
I am not getting worried. I shall refrain from responding to the blandishments of the hon. Member for Workington (Mr. Campbell-Savours). He will appreciate that one can make representations which are heard without taking part in the longest Standing Committee on a Finance Bill in the history of the House.
I made representations to the Financial Secretary about the unintentional injustices in clause 57, particularly about the injustices which would result from the transitional period to 31 March 1986. My hon. Friend has dealt satisfactorily with all the matters to which I drew his attention on behalf of important sections of British industry which employ large numbers of people.
I have deep regard and respect for the hon. Member for Stoke-on-Trent, Central (Mr. Fisher). I share with him, and with the hon. Member for Yeovil (Mr. Ashdown), a deep concern for the manufacturing base of industry. Many of my hon. Friends disagree with me, but I think that it is vital. The service sector cannot survive without a healthy manufacturing base. It cannot create the wealth to produce the necessary services and infrastructure. Manufacturing will always play a vital part in our economy. The condemnation levelled at my hon. Friend by the hon. Member for Stoke-on-Trent, Central, who made a similar speech at least seven times in Standing Committee, is not justified.
I made known to the Financial Secretary my feelings about the many injustices in the Bill. I said that it was inequitable in two respects. First, I said that it placed at a tax and cash flow disadvantage any company needing, for whatever reason, to replace capital assets on a short cycle. Secondly, I argued that Governments of both parties have over a number of years encouraged companies to plan investment on the assumption that replacement assets would be the subject of the same allowances as those which they replaced.
Clause 57, which new clause 34 amends, would have had an adverse effect on companies in three situations. My hon. Friend the Financial Secretary knows, through discussions and correspondence, the three situations. The first is where advances in technology necessitate the replacement of obsolescent — albeit perhaps new —equipment by more sophisticated designs to retain competitiveness and efficiency. That equipment still has a sell-on value for less innovative users. I refer, for example, to electronics, biotechnology, research and development and other equipment in science-based companies.
The second is when the asset is replaced, frequently because a higher than normal performance or safety standard is required, and the asset still has a residual value to other, less exacting users. In his well-delivered description of this complicated new clause, the Financial Secretary referred to motoring schools, road freight and passenger transport companies. The third circumstance is when an asset is lost through accident and the value is fully or nearly recovered by insurance.
In all such cases the clawback on the original capital allowances, plus the lower rate of allowances on the 1116 replacement, would have meant under clause 57 that the effective purchase price of the replacement would be significantly inflated.
I am surprised to find my hon. Friend the Member for Croydon, South (Sir W. Clark) an ally on this issue, because he is a purist in monetary and economic matters. I am pleased to have his support in relation to the part that capital allowances have played in investment in British industry. It seemed wrong that under clause 57 a company, because it sensibly replaces assets, should be worse off than if it did not.
It would be ridiculous if the only way to avoid the penalty was not to replace plant and equipment until after 31 March 1986, when the anomalies to which I have referred would disappear. That would have been harmful to the economy.
My hon. Friend the Financial Secretary studied the matter carefully with his colleagues on the Treasury Bench and with officials because a cost to the Government is involved and the Government have to find the money from somewhere. New clause 34 meets my reservations about the injustices in clause 57. I am grateful to the Government for introducing a new clause which meets my requirements and satisfies those who have made representations to me. Far from being disappointed, I believe that industry in many respects was encouraged by the Budget and the Finance Bill.
I admit that I should like some provisions in the Finance Bill to be changed. I am worried about the phasing-out of capital allowances. I should like to see the purity referred to by the hon. Member for Yeovil so that a board of directors can assess future investment from a knowledge of what can be produced in the market rather than by being influenced by Government and artificial incentives provided by Government through the tax system. The proper long-term thrust of Government policy is right. However, like the hon. Member for Yeovil and my hon. Friend the Member for Croydon, South, I think that the timing for introducing the change is unfortunate. Unlike the hon. Member for Yeovil, who does not see any improvement in industry's economic prospects, I believe that gently we are beginning to get off the ground. An economic improvement is on its way, as is shown by several indicators. I hope that the hoisting of interest rates will not set back that improvement.
I welcome the reduced corporation tax rate to be introduced in three years' time. Ultimately, it will encourage industry. I concede that income from corporation tax received by Government is minimal. However, changes in corporate tax should occur when the economy is more robust than it is today. Capital allowances give companies the incentive to invest. If they invest, they provide employment and if they provide employment the Government get clawback through taxation and the pay-as-you-earn system. Despite my reservations about the timing of the phasing out of capital allowances and the reductions in corporation tax, I warmly welcome new clause 34, which meets all my requests. I hope that it will be overwhelmingly accepted by the House. I repeat my hope that the goodwill that has prevailed during my speech will remain with the House during the rest of the sitting.
§ Sir Paul Bryan (Boothferry)
I wish to speak about shipping, but first I must declare an interest as a director of the Furness Withy Group.
After the Budget, the Inland Revenue press handout on the changes in investment allowances stated:The Chancellor pointed out that the long term underlying effect of this reform would be to encourage the movement of resources into investment projects with a genuine worthwhile return, to discourage uneconomic investment and to permit industry as a whole to improve its profitability and expand.I agree with this reform. All hon. Members can think of plenty of industries where the pattern of investment has been distorted to a ridiculous degree by the incidence of investment allowances. Therefore, I concede that to qualify for exemption from the new regime, an industry should have not merely to make a strong case but to prove itself unique.
As I said in the debate on the defence Estimates, shipping has done that in the past. It was taken for granted that shipping was the lifeline of the country, and our history has shown that to be so. The time has now come when the Government cannot delay for much longer an answer to the thorny question: is shipping still the lifeline of the country?
The Financial Secretary has shown that he knows that to be true. As other hon. Members have said, the size of the merchant fleet during the past 10 years has not merely dwindled but plummeted, and will soon be a third of its size in 1975. As if the figures were not warning enough, the Falklands crisis came along to bring home in the starkest form the lesson that we have only enough shipping to support even a limited action of that sort.
In shipbuilding, where the industry has declined drastically, one can get some comfort from the fact that we still have the naval shipyards to maintain our defence capability. However, no such safety net exists for the merchant fleet. What could be described as the financial safety net is being removed by the abolition of the 100 per cent. free depreciations. The Financial Secretary can claim that he has recognised this industry to be unique—the hon. Member for Stoke-on-Trent, Central (Mr. Fisher) complained of that. He has granted concessions, which are welcome. They will soften the blow and give some flexibility, which is what the shipping industry has constantly asked for. I welcome them and am grateful for them. If I say that the concessions will not totally satisfy the shipping industry, my hon. Friend will not be surprised. The reason is that exceptional methods must be used in the industry to maintain some calm in an impossibly turbulent financial sea.
Few people realise the size of the investment involved or what the General Council of British Shipping calls the "lumpiness" of the investment. In a lean year, one cannot decide to limit one's capital expenditure to a moderate sum. Either one buys a ship or one does not. If one owns container ships, one spends £30 million or nothing. A cruise ship costs £100 million. By the time the ship is built, the volatile nature of the world market can have increased or decreased the ship's value by up to 30 per cent. To increase further the peaks and troughs, the market operates in a number of currencies so that the profits are subject to all the changes and chances of exchange rates. I know of no industry where a calming factor is more badly needed to maintain continuity of planning and investment.
Other countries have this problem and have dealt with it either by high protection or by subsidy. Among the 1118 major maritime flags, competitors enjoy a wide array of benefits, ranging from a no-tax regime for the flags of convenience to investment grants, tax-free reserves and exceptionally favourable credit for investors in ships.
The British 100 per cent. initial investment allowance has been a particularly flexible and efficient way to elevate the industry from a complete gamble to a reasonable business enterprise. The erratic movements of profits tax, payments and cash flows are at least mitigated. Shipping does not qualify for the aids available to other United Kingdom industries. It has no protection and faces severe international competition, all of which is benefited, aided or subsidised in one way or another. Shipping's big advantage, its capital allowance— which is unique to this country — is being scaled down in spite of its contribution to defence, the balance of payments, employment and trade.
Once again, I express my gratitude to the Minister. He has undoubtedly shown that he understands the depressed state of the industry, that it is still decreasing in size and that he appreciates that some immediate action has to be taken. But I hope that he will allow the debate to continue with the industry during the coming year.
§ Mr. Maples
I wish to take up one point made by the hon. Member for Yeovil (Mr. Ashdown), who said that unincorporated businesses were being discriminated against. That is not true, because the average unincorporated businesses pay tax at the basic rate of 30 per cent. As much of their income is exempted from tax by personal allowances, they are paying tax at a lower rate. If anything, the previous system discriminated in their favour. If they ever had to pay higher rates of tax, they could incorporate themselves and thus continue to pay 30 per cent., which would be the smaller companies' rate.
Apart from one small reservation, I welcome the reforrn that the Government have introduced to the system of corporation tax. The philosophy behind removing deductions and reducing tax rates is right. In this case it will make productive investment much more profitable than it has been, because Britain will have one of the lowest rates of corporation tax in the world. I am sure that we all know of companies which have made unnecessary investments, or at least investments that were only marginally profitable, because of tax concessions. I know of private companies, with which some of my friends are involved, which have bought capital assets in the last weeks of their financial year so as to reduce their tax bills, with no regard to whether those assets could be used profitably in their businesses.
We should also remember that much of the justification for capital allowances and stock relief was that at a time of high inflation, when companies prepared their accounts on an historic cost basis, they faced an unfair tax bill unless such allowances were in place. They were being taxed on the basis of historic cost profits which were completely unrelated to what was happening in their businesses, the need to increase the monetary value of stock and the increased monetary cost of replacing physical assets.
In many cases—I have done some calculations—the return on investment at a 35 per cent. tax rate with a 25 per cent. depreciation rate is considerably better than the return on 100 per cent. depreciation in the first year and a 52 per cent. tax rate. We have seen in the press and in the report of the Institute of Fiscal Studies some argument 1119 about whether the change will reduce the total amount of tax. Much of the argument was based on the assumption that people will continue to behave as they did under the old system, but that will not happen. The answer is almost certainly that it will affect them in different ways.
My only reservation—I should be grateful if my hon. Friend would deal with it—is that some companies have genuine, long-term, large investment programmes on which, under the old scheme, they paid almost no tax. Now many of them will have to pay tax. I am concerned not with all of them, but with those companies in the manufacturing sector which have a genuine potential for a substantial increase in output, exports and employment. Those of us who watch the trade figures in manufacturing goods must be worried about the trend that has developed during the past few years, and must be asking ourselves, "What will happen when the oil runs out?" We need a competitive manufacturing sector. Wherever the Government can encourage lower unit costs in the sectors where there is a real potential for increased output and employment, they should do so.
An unwanted effect of the reform might be to increase the costs of a few companies. Perhaps during the next three, four or five years my hon. Friend the Minister will keep an eye on this matter. If it becomes a problem, perhaps the Government could introduce proposals to ameliorate the problems of those companies in the manufacturing sector.
§ Mr. Campbell-Savours
When the Chancellor of the Exchequer made his statement on Budget day, the linked arrangements between capital allowances and corporation tax reductions were welcomed by pundits commenting on television and radio upon the Budget provisions. However, it is significant that during the following few weeks there was an abrupt change in the way they put forward their case, as information came from the major City institutions that the net effect of the Budget measures would be to cost British industry a great deal.
Conservative Members may have welcomed the thrust of the Budget strategy, but today they have not placed on record as effectively as they should the representations being made to them by innumerable bodies, including some representatives of the CBI and the British chambers of commerce, about the effect on companies' cash flows of stock relief and the introduction of VAT on imports at ports.
At first I welcomed the Chancellor's comments to some extent, because he said:Over virtually the entire post-war period there have been incentives for investment in both plant and machinery and industrial, although not commercial, buildings. But there is little evidence that these incentives have strengthened the economy or improved the quality of investment. Indeed, quite the contrary: the evidence suggests that businesses have invested substantially in assets yielding a lower rate of return than the investments made by our principal competitors. Too much of British investment has been made because the tax allowances make it look profitable, rather than because it would be truly productive. We need investment decisions based on future market assessments, not future tax assessments ."— [Official Report, 13 March 1984; Vol. 56, c. 295–96.]In those few final words the Chancellor was expressing the views held by many people in industry. Indeed, that comment is at the root of the changes.
1120 Some believe that the Chancellor went too far. For example, the National Federation of Self Employed and Small Businesses drew the attention of members of the Standing Committee to that federation's view that the Chancellor's statement, to which I have referred, underlined the Government's emphasis on generating jobs in medium-sized companies but illustrated their lack of understanding of the small business sector.
I should have thought that the Government would have been particularly sensitive to the small business sector. After all, the Secretary of State for Trade and Industry and other Ministers are constantly telling us of the success that the Government have had with the business expansion scheme, the venture capital fund arrangements and the loan guarantee scheme, all of which have made a contribution to the development of small businesses in recent years.
The National Federation of Self Employed and Small Businesses expressed concern to us about the position of small traders. It reported that in recent years its members had improved their efficiency and expanded as a result of the 100 per cent. tax relief on capital equipment purchases. It referred to small haulage firms—hon. Members can think of other examples—which would not now be in existence if they had bought capital assets out of profits subject to the normal income tax rates.
The Minister may have dealt with these matters while I was temporarily not in my place. If not, he should deal with the concerns of small traders, because they represent a body of British commercial public opinion; and we have been told that small traders will form the basis on which the new industrial revolution in Britain will take place.
In its submissions to us, that federation spoke of small business investment "naturally declining"—the phrase it used — in the next two or three years. Many commentators had said, according to the federation, that the consequences of the withdrawal of capital allowances for small firms had been offset by the reduction in the small firms' rate of corporation tax. Many small incorporated firms did not pay corporation tax, while unincorporated businesses were not subject to corporation tax, as they were taxed on their income and were subject to income tax, so there was no offsetting relief.
I trust that the Minister will deal with the problems faced by traders in that position, because in constituencies such as mine—in the absence of major industrial plants, many of which have closed down in recent years—we are told that small firms are the seedcorn of our industrial regeneration. If those firms are feeling the pinch as a result of the Budget, their voice should be heard.
The annual review, of which I spoke earlier, should take into account—indeed, to an extent should be based on—the position of smaller companies to ensure that they are not being unreasonably damaged during the recession.
The Chancellor referred to the transitional tax arrangements for certain investment projects in the development and special development areas. He said:When a project in those areas has had an offer of Industry Act selective financial assistance and also attracts regional development grants, the existing capital allowances will continue to apply to the expenditure to which the selective financial assistance is related."—[Official Report, 13 March 1984; Vol. 56, c. 296.]He then went on to discuss the timing of such arrangements.
1121 I understand that there are to be reductions in capital allowances which will affect the regions, the peripheral areas, which include areas of high unemployment, such as my constituency. In the longer term the transitional arrangements do not remove the full thrust of capital allowances, although they provide for a more easy changeover arrangement whereby companies do not feel penalised as they would if they were in other parts of the economy where regional aid is not available. If companies are to suffer from the loss of capital allowances, we should ensure that the Government take the reductions into account by increasing regional assistance. However, that would run contrary to the White Paper on regional aid which was published some months ago—about which representations were made by hon. Members and by outside lobbies — and which proposes reductions in regional aid.
Capital allowance reductions cannot be considered in isolation. They must be taken in conjunction with the losses of regional aid and the redrawing of the assisted areas map. In regions such as that in which my constituency lies there is to be built into the regional strategy an arrangement whereby we shall lose our ability to attract capital-intensive industries because of the plan to gear regional assistance to the number of jobs that are created. Regional aid has been based to some extent but not solely on that criterion because there has not been a ceiling.
The Government are not legislating for the arrangements that were published in the White Paper some months ago. They are suggesting in parliamentary replies and ministerial statements that, despite the representations that are being made in the process of consultation, they are likely to pursue a strategy of maximum levels of assistance being made available based on the number of jobs that are created.
That approach militates against constituencies such as mine which historically have relied on the attraction of capital-intensive industries to provide jobs. My area managed to attract Thames Board Mills and the Leyland National Bus plant in the late 1960s and early 1970s. Those organisations came to the area because of the availability of labour and the high levels of regional assistance that were available. We are now likely to lose those levels of regional assistance. We lost our special development area status two or three years ago.
These factors must be taken in conjunction with the new arrangements that will exist for capital allowances. When the Minister replies he will have a duty to veer slightly from the central and main thrust of the new clause and to address himself to the problems of areas that will lose regional assistance if the proposals in the White Paper are implemented.
The Minister referred to the possibility of introducing a clause in next year's Finance Bill to deal with the problems caused by the case of Costain and to take up its court arguments with the Inspector of Taxes. The argument seems to be whether a lessee has the right to claim capital allowances on his purchases. As I understand it, the court ruled that, in so far as the freeholder was the real beneficiary in the longer term, the lessee was not in a position to claim. I hope that next year the Financial Secretary will conduct the review in the light of how it may affect rental and lease values. By allocating a consession within the law he might be subsidising leases by enabling lessors to set a higher value on any leases they grant.
§ Mr. Moore
This has been a long and worthwhile debate on a matter which many hon. Members from both sides of the House realised had not been fully discussed before. I was interested to sit throughout the debate to hear what hon. Members had to say. I shall take up some of the points made by the hon. Member for Workington (Mr. Campbell-Savours), although I shall not go into too much detail. I must correct a slight misapprehension about the Costain case. The result was that, theoretically, a legitimate allowance could relate to either a lessee or a lessor and not be able to be claimed by anyone. We are seeking to rectify the position that could arise when the allowance disappears. I note the hon. Gentleman's point, but I do not believe that it has relevance to the issue at which we are looking.
The hon. Member for Workington fairly raised the matter of problems in the regions, and I shall draw his remarks to the attention of my right hon. Friend the Secretary of State for Trade and Industry, who is responsible for that aspect. I am not saying that I do not see the connection between that problem and the capital allowances regime. I understand the hon. Gentleman's point, and shall ensure that my right hon. Friend is aware of it also.
My hon. Friend the Member for Lewisham, West (Mr. Maples) asked about companies with high levels of investment but paying no tax. I thank him for his overall endorsement of our budgetary policies in that respect. Obviously, we shall keep the effect of the changes under review, particularly those affecting companies with a high level of investment. We shall carefully watch how the changes affect industry and the economy. I thank my hon. Friend the Member for Macclesfield (Mr. Winterton) for his fulsome thanks for our actions.
My hon. Friend the Member for Boothferry (Sir P. Bryan) welcomed the amelioration in conditions in the shipping industry. He would have liked the Government to go further. My hon. Friend talked especially about the lumpiness in relation to the shipping industry. I have sought to recognise that problem by offering greater flexibility and the continuation of free depreciation for new ships. I know that my hon. Friend generously welcomed our measure.
I enjoyed the speech of the hon. Member for Yeovil (Mr. Ashdown), who, I am sure, is absent for only a moment. I say without in any way being patronising that I think the same of the speech of the hon. Member for Colne Valley (Mr. Wainwright). We may disagree about some aspects, but those hon. Members have sought to approach the matter constructively.
We began our discussion on the problems of the unincorporated sector in Committee, and we have debated the matter at considerable length since then. I do not propose at this stage to go into the details again. I shall certainly examine the points made by the hon. Member for Yeovil. I understand his statements about the farming community, which I believe were shared by my hon. Friend the Member for Macclesfield. I remind the hon. Member for Yeovil and my hon. Friend the Member for Macclesfield of what my hon. Friend the Member for Lewisham, West said.
My hon. Friends the Members for Tatton (Mr. Hamilton) and for Hampstead and Highgate (Sir G. Finsberg) — he apologised for not being here for my 1123 reply, because he had to go to a constituency function—thanked me for my response to new clause 17. I was asked to ensure that the Retail Consortium was involved in any discussions in this critical area, and I give that assurance. I shall ensure that, as the debate develops, information will be given to all those hon. Members who have an interest in it.
The hon. Member for Thurrock (Dr. McDonald) rightly tackled the debate from a fundamental point of view. She argued that companies should be properly taxed. She said that at the same time we should not discourage them in their investment programmes. The Government do not think that they have sought to do either. I am sure that the hon. Lady, as well as us, takes some comfort from the great statement from "Labour's Programme" of June 1982 on company taxation, to which I refer again and again. I am sure that the hon. Lady was thinking of that when she made her remarks. It stated:We must have a corporation tax system with lower percentage rates of tax than in the past, but with more restricted reliefs and allowances. It must be less prone to manipulation that can reduce taxable profits below any fair assessment of profitability.I do not think that either of us would disagree with the fundamentals. The problem is how the present system was working. The hon. Member for Stoke-on-Trent, Central (Mr. Fisher) properly said that he recognised some of the fundamental difficulties. I have to say to Opposition Members that the suggestion that the system preceding the Budget was succeeding is not correct. I hesitate to quote myself, but I should like to refer to a speech that I made outside the House to The Times business conference on 22 May. We all seriously considered the matter, and I said:The United Kingdom system, before budget day, offered probably the most generous tax subsidies in the world.This was the problem that we all faced. I stated:It was assumed that this would mean more and better investment in the United Kingdom than in competing nations.That is the assumption with which hon. Members on both sides of the House lived for many years, yet it has not been correct. Investment activity in this country has not exceeded investment by our competitors, even on machinery and plant, which has received the most generous allowances of all. We have not out-performed our competitors. Data from 1970 to 1981 show that investment as a proportion of gross domestic product was much the same here as in the other OECD nations.
I shall not go into that in more detail, except to say that the essence of the argument seems to be that we should have generous incentives. There could be a debate with the hon. Member for Colne Valley about the nature of the life cycle of plant and assets. I accept that that is a legitimate debate, but there is no debate, on the Government's analysis, about the fact that there were generous investment subsidies for many years, under Governments of both major parties. However, they have not worked. They have not produced a greater quantum of investment or a qualitative investment pattern that allows us to act in relation to our competitors. I could give the same data that I gave in the speech to which I referred, but I think that that would bore the House.
Many hon. Members discussed in considerable detail what they thought was an attack by the Government on manufacturing. The matter was raised by the hon. 1124 Members for Thurrock, for Colne Valley and for Stoke-on-Trent, Central. There is no truth in the assertion that the Government are not concerned with manufacturing. The question whether a manufacturing company will benefit from the changes that we have made, which include reductions in the rates of corporation tax, abolition of the national insurance surcharge and stock relief as well as the capital allowance changes, depends on several factors, including the level of profits and profitability, the timing of investment and the numbers employed in a company. Even within the same industry, there will be differences between companies—some will benefit and others will be disadvantaged. Companies that are very profitable, with high taxable profit, will tend to gain. That is how it should be. The changes are designed to encourage enterprise and success.
It is important to remind the House of the latest Department of Trade and Industry survey of investment intentions in manufacturing. It expects volume increases of 12 per cent. in 1984 over 1983. I accept that there is a long way to go before there is a complete pick-up in investment in manufacturing industry, but it is investment in profitable industry of whatever character that we are seeking to argue.
The hon. Member for Thurrock referred to the IFS sample. I mentioned that the total sample was 4,000, but the projections for future years were based on 600 companies, which therefore are only a small proportion of the total of manufacturing and distribution companies.
The hon. Member for Stoke-on-Trent, Central asked about writing-down allowances and was worried about abuse. He asked whether the increased flexibility in writing-down allowances opened the way for abuse. I say categorically that it does not. All that it is doing is allowing taxpayers to use allowances in a later year if they wish. It reduces the amount of what might be called force feeding. This is critical. The abuse arose when taxpayers were allowed to accelerate allowances. Our proposals are in the other direction. Taxpayers are being permitted, in their own interests, to delay them.
The hon. Member for Colne Valley asked about the economic progress report chart 5. He also wrote to me about it. I hope that he will not mind if in future I always seek to give out tracts, as I believe that it is useful for Governments to spread information of whatever kind throughout the House. At least it allows us to debate these matters on the basis of interesting objective comment. The hon. Gentleman asked about the shading of the chart. As he now knows, it shows the ranges of write-off periods available, as the accompanying text makes clear.
The hon. Gentleman made many fair points about the judgment of the relative size and lifetime of company assets. I remind him of his own words in the Select Committee on the Treasury and Civil Service on 22 March when he interrogated Mr. Willingale of the CBI, an expert in this area. The hon. Member for Colne Valley said:May I ask … a point which I think may well arise quite acutely in the Finance Bill, and that is the Government's alternative proposals for depreciation. Now that they are scrapping the 100 per cent., the Chancellor stated that future depreciation would be 25 per cent. on the reducing valueHe succeeded in expressing aptly and shortly most of the past few hours' debate on this. Mr. Willingale replied:It is a realistic period if you have a low rate of tax.That is a critical aspect, which has not emerged in the debate. He continued: 1125The only reason why you want high relief is if you have a high rate of tax to suffer, because you have to compensate for it.That is the real reason. It is quite normal to write off slowly.
The hon. Member for Colne Valley then asked:Regardless of the rate of tax, do you not think it is fair and efficient that the tax system should allow a write off which corresponds with reality?That question is essentially one for the Treasury Bench. Mr. Willingale replied:I think that raises the question of standardisation. It is true that originally there was a whole system of different rates of write off. There may be something in that, I do agree. But 25 per cent. reducing balance probably takes the middle line on various kinds of assets.I accept that there is much room for debate about varying rates, and so on. I tried to address the subject rationally in my earlier very long speech, which I shall not seek to repeat.
Perhaps I may put one comment on record. The hon. Member for Colne Valley is very fair and I am sure that, when he said earlier that before 1945 we had a first-class Inland Revenue service, he did not intend to imply that we no longer had such a service.
§ Mr. Wainwright
I am grateful to the Minister, but I cannot accede to his request. I readily acknowledge, as I always have done, that the staff of the Inland Revenue today are every bit as dedicated, well-equipped and concerned as their predecessors, but the absurd cuts in the Civil Service in the Government's numbers game without any regard to the efficient running of public services have crippled the Inland Revenue so that an appalling amount of tax now remains uncollected.
§ Mr. Moore
I am glad that the hon. Gentleman intervened, although I cannot agree with what he said. Nevertheless, he has made it clear that his criticism was directed not at the Inland Revenue or civil servants but at the Government. Our shoulders are broad enough to take and reject that criticism, but it would not be proper to leave on record any uncorrected criticism of our civil servants.
I think that I have covered most of the major points. If any remain outstanding, I will write to hon. Members. We have had an excellent debate. I have argued—correctly, I hope—that we have tried to remove the distortions and the incentives to invest for subsidy and, as the hon. Member for Yeovil rightly said, to put the decision making back into the board room.
§ Question put and agreed to.
§ Clause accordingly read a Second time.
Amendment made to the new clause, in subsection (7) leave out
reduced allowance or allowances referred to in paragraph (c) of that subsection bears to what that amount would have been apart from the reduction
reduction mentioned in paragraph (c) of that subsection bears to what the amount of the allowance or allowances would have been apart from that reduction."—[Mr. Moore.]
§ Clause, as amended, added to the Bill.