HC Deb 01 May 1984 vol 59 cc300-14
Sir William Clark

I beg to move amendment No. 38, in page 154, line 11, at end insert 'and expenditure shall be deemed to be incurred when the asset first belongs to the person in question or, if earlier, when the sums in question are paid.'.

The First Deputy Chairman

With this it will be convenient to take amendment No. 41, in page 154, line 36, at end insert 'and expenditure shall be deemed to be incurred when the machinery or plant first belongs to the person in question or, if earlier, when the sums in question are paid.'.

Sir William Clark

I wonder whether it might be for the convenience of the Committee if we dealt with not only amendments Nos. 38 and 41 but amendment No. 45, in page 156, line 6, leave out paragraphs 5, 6, 7 and 8. The amendments are all interconnected.

The First Deputy Chairman

If the Committee agrees with that, it is in order.

Sir William Clark

Thank you, Sir. These are probing amendments. I hope that my hon. Friend the Financial Secretary will say that he will have further talks with industry. The schedule has given rise to much concern in industry and commerce. If, before Report, my hon. Friend could give me an assurance that he will have further consultation with outside parties, I should be happy.

Mr. Moore

My hon. Friend the Member for Croydon, South (Sir W. Clark) has said that this is an area of great technical difficulty. Debates are still going on between the Revenue and outside accounting bodies. I assure him that that consultation is proceeding. There is no debate about the aims of the schedule. I shall report back.

Sir William Clark

In view of what my hon. Friend has said, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Moore

I beg to move amendment No. 43, in page 154, line 43, after 'March', insert '1984'.

The amendment corrects a textual error. It inserts the year "1984", which was left out of paragraph 3(1)(a).

Amendment agreed to.

Mr. Moore

I beg to move amendment No. 44, in page 155, line 47, leave out from beginning to end of line 5 on page 156.

The amendment is required to remove eight lines of text that were inadvertently included in schedule 12(4). I am sorry to burden the Committee with an amendment to delete superfluous words, but I hope that it will be at least some consolation to hon. Members to know that the proposal involves a reduction in the size of the Bill rather than an addition to it.

Amendment agreed to.

Question proposed, That this schedule, as amended, be the Twelfth schedule to the Bill.

Mr. Austin Mitchell

The schedule constitutes the guts of the clause that we briefly and tangentially touched on earlier. It embodies discrimination against manufacturing industry, about which Opposition Members complained earlier. Over the next few years the schedule will first stimulate a rush of investment to beat the cut in the allowances, and then over the long term of reducing investment in British industry, particularly manufacturing industry. That is appalling for a nation that has seen, after a long period of low investment compared with our competitors, a drastic fall of 42 per cent. in investment in manufacturing since the Government came to power in 1979. Now that trend will be hardened by the schedule.

When the Minister was speaking about the decline in the manufacturing industry earlier, he made the point that some investment was attracted into sectors that it might not otherwise be in, and argued that investment decisions should be left to market forces. That is not a rational way to approach such decisions, in a world in which we are competing with a whole series of other economies that give incentives, and in which we have to deal with the inertia of the status quo. Investment cannot suddenly pick up sticks and march into another sector as the allowances in one sector are changed. We are dealing with existing industries, particularly in manufacturing, which compete in the international trading sector, and which have been unsuccessful in it, even with the tax allowances that the Government have provided.

What aid to future success is it to remove those incentives to investment? There is not a tabula rasa, where the investment can simply transfer to another sector. If it does so, it will be lowered by profit, but profit is not necessarily linked with the country's ability to survive in the competitive world. It can be in the candy floss industries such as commercial television, serving the consumer market distribution, which does not give us the wherewithal for success in a competitive world economy.

Instead, the schedule tilts the balance from manufacturing to services by reducing the incentive to invest in heavily capitalised manufacturing industry. In a nation that has effectively discounted manufacturing industry, that is a disastrous approach. We shall have to face the decline in oil revenues and the need to rebuild manufacturing industry to provide the jobs so that we can survive in the world and pay our way. The latest figures show the disastrous trend of manufacturing decline, and that we are becoming evert more a net manufacturing importer. There is nothing in the schedule to reverse that long-term trend, which can be reversed only if the Government encourage investment in manufacturing industry and provide further incentives for manufacturing investment rather than eliminating it.

As we have not been able to provide the only real incentive for success—profit—because of the way that the economy has been run, with an over-valued pound and interest rates that are far too high, inevitably Governments have had to redress falling profits by providing tax incentives. If we remove that prop as well without providing the alternative, which is a competitive pound and low interest rates to provide the only genuine incentives to investment, we enfeeble an industry that has already been drastically beaten by the Government's economic policies.

In particular, we do not provide for the investment climate that we need in high technology industries. It is interesting how many other countries are providing incentives to invest in micro-electronics and manufactures in that sector, and how inadequate our tax incentives to invest in that sector are when compared with that.

Two further specific points arise out of the schedule, which must be touched on by the Opposition. The first relates to the effect of the changes in the schedule on cable television. The Government threw themselves into the expansion of cable television with enormous enthusiasm. Great expectations were held out that this would be the second railway age, the new dynamic of investment. The country would be linked by cable as it had been linked by the railways in the 19th century. The assumption was that investment would be drawn in by the law of the profits made on entertainment, and it would also provide information and interactive services through the profits made on entertainment. Grandiose expectations were held out by the Prime Minister and by the Minister for Information Technology.

On that basis, the decision has been given to go ahead with pilot projects. The people investing in those pilot projects, the groups which have been formed and the consortia that will bid for them have made their projections, investment plans and plans for a return on the capital invested on the basis of the 100 per cent. allowances, which the schedule eliminates. The foundation of their decision-making which was encouraged by the Government, and into which they were lured by the Government, has been swept away in one fell swoop. Before the Budget, these groups were told that they would get full capital allowances on the plant involved in the cable operations. That promise was swept away suddenly by the elimination of the capital allowances on which they based their calculations.

11.15 pm

. The prospects for cable television have been seriously undermined by the increasing trend for independent assessments of the prospects of the industry to become more and more gloomy, and by the increasing tightening up of the market as the firms involved merge into fewer units. Indeed, Mr. James Lee of Goldcrest, which took on the former editor of The Times, Mr. Harold Evans, said:

I believe that only an existing organisation can now provide a news service. ITN, the BBC, and Ted Turner in America have a huge advantage. It is not possible for an independent. The groups that went in holding out prospects of profit were already realising that those profits were not going to materialise, they were already on the merger trail, and the market was already tightening before this prop was swept away. It looks as though one section of the Government does not know what the other section is doing. The prospectus is based on 100 per cent. capital allowances, and the Chancellor suddenly sweeps them away.

When the industry goes to see Treasury Ministers, it has a sympathetic hearing, but nothing else. The Financial Times has said:

those involved in cable television development were taken by surprise by the Chancellor's statement on capital allowances. Not only they but the entire industry were taken by surprise. As a result of the Budget, the yield on these investments after 1986 will be a maximum of 4 per cent. the break-even date on which many of those involved have planned is moved back years in many cases. The foundation of their planning has been kicked away by this decision, which appears not to have involved the Department concerned with cable television. Nobody else seems to have been consulted about this change, which has altered the basis of investment in the industry.

One wonders whether that is why the Government are now talking along the lines of cable television having to be associated with telephone development. In other words, they have to be offered extra profit opportunities, because it is profit opportunities that the Chancellor has eliminated. This represents a threat to British Telecom, and to its provision of television services.

It is clear that at least three of the 11 successful applicants for these trial contracts now have serious financial problems. Those problems will be greatly increased by what the Chancellor has done in the schedule. The customers for interactive cable services, and the people proposing to invest in them, are holding back, and will continue to do so. It is also clear that Plessey needs two of the applicants to purchase its equipment if it is to make a profit on that equipment, and the positive orders will not now be forthcoming. The crisis generated by the Chancellor will therefore spread back into other services supplying the industry.

Finally, the provisions in the schedule will adversely affect the British film industry. Again, one section of the Government seems not to have consulted with others. After all the talk about the renaissance of the British film industry and the need to encourage it and extend its boundaries, the Chancellor without any consultation eliminates the capital allowances and thus removes the basis of so much of what has been achieved in the industry. Without tax incentives and the deliberate state subsidies of the kind that have encouraged the boom in the Australian industry, for instance, the film industry in this country which has been badly battered over the years with the decline of the British independents and the British giants cannot sustain the revival.

The revival of the industry has been based on three factors, the removal of any one of which will seriously undermine the whole revival and probably extinguish it. First, the industry is based on skills developed by the British film industry and since nurtured by television. Those skills are available to outside film companies such as American companies coming in to use them as well as to British film makers if they can raise the capital because it is now a matter of stitching together the capital package needed to keep the industry going. Secondly, the industry has been based on the Eady levy which is now threatened by the Government. That levy provides basic continuity of finance for the industry. Thirdly, the industry has been encouraged by the tax inducements provided by capital allowances which the schedule would eliminate.

Those three factors have formed the basis of the revival that has finally come and has been so greatly welcomed by those of us who regard a vibrant, exciting and excellent British film industry as an essential part of national culture which must be nurtured in this cold, hard world if it is to survive. Unlike the French and other European industries, and indeed the Indian industry, our industry does not have the advantage of a huge natural market with natural non-tariff barriers such as language and without any one of those three bases it will be in danger.

On 19 January last year, the then Financial Secretary told the House and the world in a written answer that the 100 per cent. allowances for the film industry would be extended until 1987. Perhaps the Minister will tell us exactly what was said to the film industry and what was meant by that apparently specific answer on the basis of which investment decisions have been taken. A prop has suddenly been knocked away from the industry by the Chancellor with his brisk, bustling approach, charging at fundamental and difficult problems like a bull at a gate, without regard for present realities, with a flat rule to sweep away capital allowances and encourage what he regards as the right kind of healthy investment.

What is to replace that prop which is to be removed from the industry? What prospects can the Minister hold out for a British film industry in which at least a proportion of the investment is based on the incentives provided by capital allowances? The managing director of the National Film Finance Corporation, Mr. Hassan, has said specifically that the fall in production will be between a third and a half. In other words, the removal of the tax incentives will lead to a steep decline in production, and unemployment, which is already high in the film industry, will increase among technicians whose skills in my view and in the view of others are among the best in the world and constitute another of the bases on which the industry rests.

The Chancellor is producing hard times for a film industry which we need as part of our national culture. That industry makes us different and explains us to the world. At this late hour, it is no use cataloguing the triumphs of the British film industry, but my worry is that no film industry will be left to carry on these skills and to provide future films if this tax incentive, on which so much investment in recent years has been based, is eliminated in this fashion.

Mr. Ian Wrigglesworth (Stockton, South)

I strongly support the remarks of the hon. Member for Great Grimsby (Mr. Mitchell) about the film industry. Several other similar industries—although the film industry is probably the most outstanding—will be damaged by the changes in the Bill. I hope that the Government will respond to the pleas that have been made, not least by some of the Minister's hon. Friends, on behalf of those industries.

I hope that the hon. Member for Wealden (Sir G. Johnson-Smith), who spoke in the previous debate, will come forward with new clauses to amend the Bill to take account of the damaging impact that it will have on certain industries. Despite that, I and my colleagues support the general thrust of the reform that the Government have undertaken. That is why we have supported them in the Lobby this evening. This is an overdue reform, and the Government are to be congratulated on taking a bold step, which has been canvassed for a long time.

It was something that the hon. Member for Great Grimsby said about the relationship between the manufacturing and service industries that more than anything stimulated me to make this brief contribution. For several years in our discussion on Finance Bills I have moved that allowances available to manufacturing industry should be extended to the service industries. I was particularly concerned with the interests of the distributive industry, especially the co-operative movement, which felt that it was unfairly discriminated against by the non-availability of the allowances to that sector.

In previous Finance Bill Committees I have argued the case for the service sector, and although I have always received a sympathetic response in principle from Ministers, both Labour and Conservative, there has been no further action in support.

The case for the service sector is extremely powerful. Manufacturing [...] cannot succeed without the support of the [...] sector, particularly the distributive sector. If the [...] that industry makes are not distributed to the consumer and if the raw materials are not transported to the places where the goods are made, manufacturing industry cannot succeed. The economy must be looked at as a whole, and we cannot draw these clear distinctions between the manufacturing sector and the distributive sector. They are dependent one upon the other.

I do not disagree with the hon. Member for Great Grimsby in his anxiety about the decline of the manufacturing sector. How could I, coming from an area such as Teesside which has seen so much decline in that sector? The distributive and service sectors have been penalised by that decline, and they are also dependent one upon the other. For that reason, they should be treated equally in tax terms. I have not heard this argument marshalled in favour of the Government's case for these reforms. I therefore felt it right to make it clear to the Committee that the service sector will now be on all fours with the manufacturing sector, something for which those in the distributive, retail and service sectors have been campaigning for many years.

11.30 pm

Mr. Austin Mitchell

It may be argued that in a mature economy the manufacturing sector will decline and the service sector—which I believe to be parasitic on it—will grow. But what has happened in Britain has been much more abrupt and cataclysmic than that. There has been a drastic decline in manufacturing that has not been paralleled in any other country. There has been a greater loss of jobs, a greater fall in output and a greater shrinkage generall0y. In such a position, should not discrimination in favour of manufacturing industry not only be maintained but increased, to try to revive a sector that alone must provide jobs on the scale that a nation of 52 million will need?

Mr. Wrigglesworth

I have some sympathy with the hon. Gentleman. The decline in manufacturing industry in recent years—and even right back to the beginning of the century—has has been catastrophic for Britain. But I disagree with him in his antagonism towards the service sector. He referred to it as being parasitic upon the manufacturing sector. I have been prejudiced in favour of manufacturing industry, and largely remain of that view. But we should not describe the service sector as being parasitic upon the manufacturing sector.

The two sectors are dependent one upon the other. Manufacturing industry cannot survive without insurance, banking and all the other services it needs to succeed in world competition and if Britain is to be a major trading country. Despite Eltis and Bacon—I am sure that the hon. Gentleman will remember their writings on the subject—it is inevitable that the service sector will grow steadily and the manufacturing sector will decline over a long period — not in the current dramatic way — in employment prospects because of the technological changes and the greater wealth that is available in such developing societies as ours.

The local authority sector, the National Health Service and all the other services have been growing steadily during the past couple of decades because of the increased wealth available for people to spend. That is a welcome development. We should not decry it on that old puritanical and noble view of life that the pinnacle of achievement is to be a miner and do that dirty, awful job to which we should not condemn any person. If we had a civilised society we would not want anyone to go into the earth to dig our coal—we would want machines to do it so that people would not be subjected to that environment and danger—work that we are happy for others to do, but which we could well do without.

Mr. Austin Mitchell

I am sure that the Social Democratic party would like to keep the miners in being if only to have an object to attack in its usual fraternal greetings to the trade union movement. Surely the distinction is not between mining and other occupations, but between those who produce things and those who manipulate money. The whole tendency in Britain has been to encourage people to enter the professions—the financial sector, advertising and the media, rather than the manufacturing industry that has been the basis of our success in the past and of the success of our competitors, especially West Germany and Japan.

Mr. Wrigglesworth

I am slightly surprised to hear the hon. Gentleman criticise people in the media. However, I accept the general thrust of his argument. Not only is the service sector abused by some people — whether speculators playing bingo on the Stock Exchange or on the futures markets — but curious things happen in the manufacturing sector that are not essential to our way of life in Britain or anywhere else. It is a waste of resources that could be spent on much more worthwhile purposes.

Mr. Bell

Will the hon. Gentleman agree that there is nothing mutually exclusive between supporting a service industry and supporting a manufacturing industry? Lest he gives the impression that we in the Labour party believe that the manufacturing industries should, in the years ahead, be wound down, may I urge him to accept that that is not our philosophy, because we believe in a strong manufacturing base, assisted by capital allowances, and we support a strong service sector because, in our view, there is nothing mutually exclusive between the two?

The Second Deputy Chairman of Ways and Means (Mr. Paul Dean)

Order. The debate is becoming rather too wide. Hon. Members must not go into the respective merits of various types of investment.

Mr. Wrigglesworth

He may have been unaware of it, but the hon. Member for Middlesbrough (Mr. Bell) made my case for me. He said that the two sectors were mutually dependent, which was the case I was adducing in supporting the Government in the change in the tax base that they are making. I accept that there is no reason to draw a distinction between the two sectors in the way that some Opposition Members wish to do.

There are certain actions that the Government should have taken long ago to help the manufacturing sector of industry and to prevent the devastation in that sector that has occurred in recent years. However, the direction in which the Government are moving in the schedule is, in my view, right and I am sure that many people who perform a valuable function in society in the service sector welcome the change that is taking place.

Mr. Bell

My hon. Friends and I oppose the schedule, which deals with capital allowances, and I have a particular constituency reason for opposing it.

We were discussing with ICI at Wilton the possibility of a coal conversion unit being installed at Wilton power station, rather than the station using another type of fuel. When it became known that the Government were proposing to phase out capital allowances, there was a pause in the development of that project because the chairman of ICI's division in my constituency was not sure whether phasing out would affect the project.

I accept that we are talking about transitional arrangements; I think I see the Financial Secretary nodding in assent. However, my local experience belies his earlier argument that not only does industry welcome these changes and the abolition of capital allowances but that the decision is not having any effect. In fact, it is having an effect and is making industry pause.

Mr. Moore

I wish to correct the misapprehension that the hon. Gentleman had when he thought that I was nodding in agreement with what he was saying. I was indicating that it would not be proper of me, without full knowledge of the subject, to go into it. But as I was involved, as an energy Minister, in the introduction of the coal conversion scheme and as I have considerable knowledge of that industry and area — I obviously welcomed the developments that were occurring—I can say that it is clear that the discussions that no doubt take place on the security of supply are probably today more critical than ever before when considering conversions, remembering that we should all like to see more British coal being used.

Mr. Bell

I am grateful to the Financial Secretary for his intervention. I am grateful also to you, Mr. Dean, for allowing us to wander slightly from the scope of the schedule. It is in the interests of my constituents that we do so, as the Financial Secretary understands. He has advanced a valid case on supplies, but supplies should not be made a scapegoat or used as a threat to prevent units being converted to coal burners.

The proposals of the Chancellor of the Exchequer for capital allowances in his Budget statement made ICI, a major industrial company, pause to consider its plans. That belies the statement that the abolition of capital allowances will not have an effect upon industry. It is having an effect, and it will have a greater effect upon other industries such as shipping. The General Council of British Shipping Ltd. has expressed serious concern at the abolition of capital allowances. It believes that the Government's proposals will mean the loss of free depreciation for the industry. That must cause great concern to my constituents who live on Teesside, facing the North sea. Many of them are involved in merchant shipping as merchant seamen. They and the general council are concerned that the phasing out of capital allowances will have an adverse effect upon the merchant fleet and merchant shipping generally.

The adverse effect which is feared cannot have been an unforseen consequence of the Budget. It was foreseen, and this shows a lack of consideration and care; for, and attention to, our manufacturing and genuinely productive industries. If the schedule is allowed to stand part of the Bill, we shall see unfortunate consequences for our merchant fleet in years to come. Our fleet is losing tonnage at an alarming rate because of the severe and protracted recession in world shipping. Orders [...] fleet stand at less than 1 million tonnes. In 1975, [...] United Kingdom had 9 per cent. of the world's fleet [...] 1983 its share had decreased to 3 per cent. British or [...] are now less than 2 per cent. of world orders. The general council has stated aptly that the outlook is grim. It considers that the Government are proposing measures that will inevitably lead to a smaller, ageing and uncompetitive fleet.

The Chancellor of the Exchequer and the Financial Secretary must know that shipping does not qualify for the aids that are available to other industries. It has no protection in the face of severe international competition from low-cost flags and subsidised operators. The allowances that are to be phased out over a transitional period have been an advantage for the industry. The general council believes that they were its only advantage, but the allowances are to be removed despite the valuable contribution that shipping has made to defence, our balance of payments, employment and trade. It is a matter of concern to the shipping industry that the allowances will be phased out.

We have heard a great deal in the House of Commons and elsewhere about silicon glen, which is the equivalent of silicon valley in California. The glen is where the sunrise industries are establishing themselves. As the hon. Member for Stockton, South (Mr. Wrigglesworth) has said, we are not opposed to these industries. We welcome and support them and their contribution to our national economy and unemployment prospects. However, the investment in the Scottish computer industry was the result of favourable capital allowances. If the schedule remains part of the Bill, the allowances will be removed. These important industries would be dissipated if the allowances were discontinued. Other Governments have used the vacuum created by Britain to entice high-growth computer companies by advertising their capital allowances. West Germany is never slow to tell industrialists throughout the world that it has substantial capital allowances to offer. The Germans must smile and shake their hands with joy on seeing that we shall phase out these capital allowances as part of the Government's Budget strategy.

11.45 pm

In a letter to the Financial Times on 26 April 1984, the director general of the Electronic Components Industry Federation drew attention to the substantial capital allowances extant in the United States and Japan. The letter states:

None of your readers, I am sure, would be so naive as to suppose that US and Japanese success in electronics has been achieved by the pure milk of private capitalism untainted by public funds or subsidies; directly or indirectly vast expenditures of taxpayers' money have been devoted to ensuring it. The director general pointed out also—this aspect relates to capital allowances and belies the strategy put forward by the Chancellor and supported by the Financial Secretary—that the Government believe in support for high technology. The Government support that strategy to such an extent that they announced the microelectronics industry support programme mark 2. That measure was generally welcomed by the computer industry. The programme was a creation of the Department of Trade and Industry and was designed to provide support for the microelectronics industry in addition to capital allowances. There is a 100 per cent. capital allowance regime, and additional support of £120 million is to be given to the microelectronics industry support programme. With one hand the Government are providing £120 million for microelectronics, and with the other hand they are taking from the industry by removing capital allowances.

It is late in the evening, and I shall not prolong the debate. We are again seeing a dramatic attack on our manufacturing industry which will hit the so-called sunrise industries in the same way as it will hit the old-fashioned manufacturing industries. The hon. Member for Stockton, South pointed out that we are dealing with an attack on manufacturing industry when we should be seeking to build that industry as we build the service industry. In future years, we shall look back on the Budget, the Government's programme and the abolition of capital allowances and live to regret them.

Mr. Fisher

I join my hon. Friend the Member for Middlesbrough (Mr. Bell) in opposing schedule 12, especially part II, which withdraws first-year allowances. The Financial Secretary, speaking about corporation tax, tried to summon up a brave new world of tax purity in which tax-led investment would be reduced, if not entirely eliminated, on the grounds that such investment was artificial, anomalous and bad. The hon. Gentleman attempted to make a general case for the Government by saying that the Government's proposed changes in corporation tax and capital allowances will increase investment. He failed to make that case. Although the Financial Secretary may have been well-intentioned, he was a little naive about how the real world works. The real world does not operate according to the simple and theoretical model he applies. Matters in the real world are more paradoxical and complicated.

The Financial Secretary said that the abolition of capital allowances in industry generally would lead to employment. By implication capital allowances are a disincentive to employment because they attract investment in plant and machinery rather than labour. Exactly the opposite has happened in the film industry. Capital allowances have created jobs. The abolition of those allowances will cause employment in the film industry to plummet.

The film industry is a recently successful industry. In the early 1970s it was sometimes extremely unsuccessful. Capital allowances were the crucial factor that made the difference and helped employment. It is an interesting example because the film industry proves the Financial Secretary's point. Investment by means of capital allowances had been to a large extent artificial. The investment was made solely for tax reasons, and not for industrial or investment reasons.

The use of capital allowances in the film industry has often been cynical, and the Financial Secretary might say that it is therefore undesirable. It has made a fortune for tax lawyers, solicitors and entrepreneurs and has in many ways been a form of subsidy for ridiculously highly paid men and women.

Mr. Austin Mitchell

It has also made films.

Mr. Fisher

It has also made films, but the Financial Secretary may say that the industry proves his point. It is an artificial, and therefore unhealthy, way of investing in the film industry. As my hon. Friend the Member for Great Grimsby (Mr. Mitchell) said, if these capital allowances are theoretically undesirable or cynical, they have led to profitable investment, and artistically good films, which are a credit to the country and project an interesting, intelligent and vigorous image of this country abroad. That is something of which we should be proud. Activity is essential to success.

The Financial Secretary, on behalf of the Chancellor, is doing exactly the opposite with the changes. He is seeking to cure what he identifies as impure, bad and artificial investment by ending the activity. He is trying to cut out the cancer of impure and artificial investment by cutting all activity — in this case investment. It may sound a good idea but it is bad and impractical surgery in the real world.

I shall not delay the Committee by referring to the industry's success. People know of it. They know about "Gandhi", "Chariots of Fire", "Ploughman's Lunch", the many films made for Channel 4 television and sold abroad, and this year's entry to the Cannes film festival "Another Country", which is partly financed by the National Film Finance Corporation. Those films have gained prestige abroad. The Government are killing the industry in the search for investment purity.

It is important to see how the Government intend to fill the gap that they will leave if they withdraw first-year capital allowances. The Minister for Information Technology's plan for films, which will replace capital allowances has been long awaited, and often long despaired of, by the industry. The industry has a smell of what is likely to be in the plan for films. It is feared because it appears that when capital allowances go, there will be no National Film Finance Corporation, or its privatised counterpart, the ending of the Eady fund and no effective Government involvement. The industry will be left solely to market forces.

The Government would say, "Surely, that is a good thing." It will be a market completely changed, and influenced for the worse, by the Government's withdrawal of capital allowances. Such negative action is as potent and effective as Government investment could be for the good of the industry. The industry, left without capital allowances and left to market forces, will be left with almost nothing.

Mr. Austin Mitchell

Market forces will operate on a world scale. In those circumstances the big film companies, and the big investors who are largely American, will film in those countries where the costs of production are cheapest. Unless there are incentives to direct them to this section of the world market we shall be losing the kind of investment and organisational company involvement that we have had from the American film industry, thanks to the incentives we have been able to offer them.

Mr. Fisher

I agree entirely with my hon. Friend. He referred earlier to an assessment of his, together with Mamoun Hassan, of a loss of between one third and one half of the industry's investment. I was speaking to Mr. Hassan earlier today and he said that it might even be as bad as two thirds, something in the region of £200 million in a full financial year.

The Financial Secretary may say that we are withdrawing this artificial capital allowance and we are leaving a strong, profitable and interesting industry to stand on its own feet; I presume that is what the Financial Secretary might say, although I should like him to confirm it. However, it does not work like that in the real world. If the Financial Secretary examined an industry like this rather than making generalised points, he would be able to identify that there are good reasons for making an investment in this industry as in others. Things are not as simple as he seems to think.

Investment is made in the film industry for a variety of reasons. Expertise is here in the form of actors, writers, directors and technicians. All of those are mobile. They can all get on a plane and take their expertise elsewhere. Investment is made partly because of the creative climate and environment. Where there is activity, people will follow. They, too, are mobile.

Investment is made primarily because of the cost of money. What makes investment attractive or otherwise is the cost of money in terms of interest rates and the exchange rate. In spite of the Government's often stated view that they have no exchange rate policy, interest rates and the exchange rate are significantly affected by Government economic policy. I am glad to see the Financial Secretary nodding; now he is shaking his head. He almost betrayed himself into a recognition of what he really knows, that, of course, the exchange rate is affected by Government policy.

Investment is affected by interest rates and the exchange rate but also by the tax climate, in this case capital allowances. If capital allowances are withdrawn, where will production go? It will not stay here. It will go to Europe, to France, where the exchange rate is lower and where the Government are keen on investing in films. Apart from the non-tariff barriers of language they give positive incentives. Alternatively, in the English-speaking world, it will go to Florida, which recently has bid heavily to take away the film industry from Hollywood. Florida wants production because it recognises something that our Government ought to recognise—that where production is, there is money and there are people with money. Following that money and that activity is employment. The Financial Secretary should recognise on behalf of the Government that that is the reality of the world. If the Government want to attract investment they can, but they will not do it by withdrawing capital allowances as proposed in schedule 12.

There is an irony here because the Department of Trade and Industry, which has schemes earmarked for supporting innovation in industry by means of grants which will to some extent support other industries when their capital allowances are taken away, does not use those innovative grants in the film industry, although it has the potential to do so. That is very sad. Without grants, without Government responsibility for investment and the recognition that the Government have a cultural, as well as an economic, interest in this industry, and without capital allowances this industry, in reality rather than in the perfect world of tax security for which the Financial Secretary is seeking, will be left with nothing.

The schedule, along with other Government policies or lack of them, will leave this small but successful British industry broken-backed. That is the price of the quest of the Financial Secretary and the Government for the Snark of tax purity. It is not a Snark he will find when he has achieved this tax purity. Like the other Snark, this is no Snark but a Boojum.

12 midnight

Mr. Moore

We have had a useful debate and the Committee would not want me to delay it further. The purpose of the schedule is to restructure the main capital allowances in three annual stages by phasing out the accelerated first year and initial allowances for plant and machinery, industrial buildings and assured tenancy properties. The changes will create a better balance for the capital allowance system and enable us to embark on the major programme of progressive reductions in corporation tax.

The hon. Members for Great Grimsby (Mr. Mitchell), Stockton, South (Mr. Wrigglesworth) and Stoke-on-Trent, Central (Mr. Fisher) talked about the difficult problems facing the film industry. I shall not go into them in detail, but I know that the hon. Member for Stoke-on-Trent, Central, with his obvious knowledge of exchange rates, will appreciate the nature of exchange rate changes in the last three or four years in relation to the dollar and the pound. I recognise the implications of the other parts of the fiscal system, but all who are familiar with the film industry will know that they are only one factor in the way in which the industry has developed.

I am fully aware of the importance which the industry attaches to first year allowances. Wider considerations have to be taken into account when deciding the proper pattern for corporate taxation.

Mr. Austin Mitchell

rose—

Mr. Moore

I should like to respond and explain to the hon. Member about the film industry. Films are being treated no differently from machinery and plant generally. We see no case for special treatment. Other industries may be regarded as more vital to the economy—I am not denigrating the film industry—but they will not receive such benefit.

I met film industry representatives on 12 April. We had useful discussions. I [...] why it was not possible to make exceptions for the film industry. I arranged for further discussions on ways in which expenditure might be written off and how far the industry might be able to take advantage of the business expansion scheme. The discussions are in progress.

The hon. Member for Middlesbrough (Mr. Bell) talked about the impact of the changes on the shipping industry.

Mr. Mitchell

The point that we are making about the film and cable industries is that they are involved in an ancillary Government decision. The Government want to encourage labour rather than capital and so abolish capital allowances. The accidental victim is the cable television industry, which has been led to invest on a Government prospectus, and the film industry which is flourishing. Specific questions about both industries must be asked. What consultation took place about the effects of Government decisions on the industries and what prospects can the Government hold out for success, without capital allowances, given that the industries rely so heavily on capital allowances?

Mr. Moore

I recognise the importance to the hon. Member for Great Grimsby of the cable and film industries. I have said that discussions are taking place. I do not accept that the Government are concerned only with the wider concept and do not consider the impact on each industry.

The Government sought to take account of particular problems in many industries. Some which have become used to a system of allowances may be in more difficulty than others. We are pursuing the problems in discussions.

Mr. Fisher

I am most encouraged, if not reassured, by the knowledge that the Financial Secretary is having continuing discussions and that his mind is not entirely closed. Will he, in those discussions, give some thought to the lead time for investment in the film industry because the film industry, unlike many others, sometimes has three years of investment before the film is made? That investment is heavy and often involves millions of pounds for a large proportion of the final production costs. The Financial Secretary is to cut off investment that has been entered into for a long time on the assumption of the existence of capital allowances.

Mr. Moore

I am conscious of lead times in the film and many other industries. That was a factor in the transitional phasing pattern. I must re-remind the hon. Gentleman that we could not make an exception for the industry—I have described the type of discussions that we are having.

The Budget changes in regard to shipping must be seen as part of the whole package, which we believe will have an effect on efficiency and profitability throughout the economy. It is inevitable that there are some sectors—shipping is one—in which companies might not do as well or even be disadvantaged. The extent of the disadvantage should not, however, be exaggeraed. Cuts in corporation tax will help some companies. The impact of capital allowance reductions will be less severe for assets with long lives, such as ships, than for those with short lives. Ship owners did not normally qualify for stock relief, for example, so they will not lose there. The Chancellor is proposing to alter the timing of writing-down allowances in such a way as to help long-lead assets when stage payments are normally made in advance of delivery. The changes are being staged to give companies time to adjust. I recognise that the shipping industry has been going through a difficult period, but to introduce special provisions for everyone who feels disadvantaged would undermine the financial basis on which business tax reforms are founded.

I met the General Council of British Shipping on 13 April and trade unions representing seafarers yesterday. I explained the objections to exempting them from the changes, even temporarily. I have arranged for further discussions with officials on the balancing charges and on seamen's earnings. Those exchanges are taking place.

I do not want to detain the Committee, but I must refer to the speech of the hon. Member for Stockton, South. I welcomed his recognition of the valuable challenge that the Government have embraced. I accept that he envisages the difficulties associated with change, but he brought a sense of balance to the debate, which sometimes gets a little sterile about the difference between service industry and manufacturing industry. We all want both to be successful and not to be disadvantaged. On that basis, I trust that the Committee will allow the schedule to proceed.

Question put and agreed to.

Schedule 12, as amended, agreed to.

To report Progress and ask leave to sit again.—[Mr. Peter Rees.]

Committee report Progress; to sit again this day.