ELECTION FOR CERTAIN MACHINERY OR PLANT TO BE TREATED AS SHORT-LIFE ASSETS

HC Deb 07 May 1985 vol 78 cc745-56

Mr. Wainwright

I beg to move amendment No. 9, in page 51, line 19, leave out 'fourth' and insert 'fifth'.

The Second Deputy Chairman

With this it will be convenient to take amendment No. 10, in page 51, line 23, leave out 'fourth' and insert 'fifth' and amendment No. 11, page 51, line 34, leave out `fourth' and insert 'fifth'.

Mr. Wainwright

At this exhilarating hour of the morning, I offer the House a respite from the feeble ritual of the cracked Tory pot calling the leaky Labour kettle black, a dreary procedure that reminds me every year of the occasion when a far eastern ambassador judged the beauty finals at Skegness. After surveying the two girls, each of whose charms had great supporters in the town, he announced to a breathless crowd, "Both are worse." That describes what the Liberal party and the SDP have to contemplate every time that the Finance Bill is debated.

This amendment relates to what the Treasury chooses to think are short-life assets. In addition to the three amendments, we shall also have to amend similarly lines 8 and 12 in page 52. This matter began last year in reaction to the rather sweeping and ill-considered reform of the capital allowances for business taxation introduced in the Finance Act 1984.

In Committee on that Bill, my hon. Friend the Member for Roxburgh and Berwickshire (Mr. Kirkwood) tabled an amendment to improve greatly and make much more realistic the capital allowances. That is what we seek to do in these amendments. We returned to the matter on Report, by which stage we had the welcome support of the hon. Member for Croydon, South (Sir W. Clark), the well-known chairman of the Tory finance committee. He explained to me that he was unable to attend our debates today or tomorrow, but he did not explain why so few members of that committee would be attending the debates, although perhaps that was not altogether within his power.

Last year, our amendments had the united support of the various branches of the accountancy profession, although some of the best-known business organisations were rather slow to appreciate the threat which the Chancellor had implemented in the Bill and came round to our point of view only in the late summer or early autumn, by which time it was too late for last year's Bill.

The nub of our case, last year and this, is that the Government still have not taken on board the proposition which, in the view of the alliance, should be fundamental to all taxes on the profits of going concerns. It is that taxes on business profits should fall only on the true profits, no less and no more, which means profits computed on accepted accounting conventions, not on rackety ideas of depreciation used for special purposes by the Inland Revenue. The accountancy profession today does not accept the medieval reducing balance method of calculating depreciation. It disappeared with the Ark, and the statutes up to the early 1950s gave the taxpayer the option to use straight line depreciation, which people used in their own accounts. Therefore, we have gone backwards in recent years.

Where the basic proposition that taxes on profits should fall only on the true profits is flouted, gross unfairness is inflicted between one business and another, some trades are crippled, and some are even extinguished. On this matter of taxing true profits, not spurious ones, the Government start, as previous Governments have started, with two great minuses. First, they fail to distinguish between incorporated and non-incorporated businesses. Last year, the story that such injustices over capital allowances were as dust in the balance compared with the promised reduction in corporation tax took no account of the fact that many traders—the very traders whom the Prime Minister so frequently purports to support, including new and small businesses—do not pay corporation tax. They are assessed under schedule D, and they do not receive a penny benefit from the proposed reduction in corporation tax.

The second minus is the glaringly obvious one that the Government, like all their unfortunate predecessors, make no allowances for the ravages of inflation. However, almost a generation ago—years ago—our neighbours across the channel in France and Belgium started to allow their tax-paying businesses to index their assets for depreciation purposes. They caught on to that obvious intellectual approach to the problems of continuing inflation, while we still pretend for revenue purposes that inflation does not exist, let alone, as at present, increasing.

It is important that the tax statutes should provide honest and realistic allowances. That was done at one time, when the Committee was rather wiser than it seems to be now. Until the late 1940s, there were separate schedules of depreciation allowance for different sorts of machinery. In those golden days, the Inland Revenue thoroughly and conscientiously met the various trade associations for different industries, discussed the type of machinery that those industries were using and negotiated a rate of depreciation for it. The schedules were long, but they were meticulously drafted. They ensured that some type of justice impregnated the tax statutes. The Inland Revenue not only tailor-made the allowances but gave the company the option of choosing the straight-line method. All that was lost on the Chancellor when last year he hit upon this crude idea of imposing the 25 per cent. reducing balance on all traders.

Before this year's Budget, the London Chamber of Commerce expressed its concern about this injustice, saying that the new allowances have already hit machinery-intensive firms very hard …in the light of the pace of technological change, capital expenditure should be written off for tax purposes by straight-line allowances over four years. The CBI virtually echoed the warnings of the London Chamber of Commerce. Since the Budget, and in the light of the Finance Bill, the Association of Independent Businesses, one of the leading organisations of new and independent business, has offered its support. It has said: This Association would support your amendment to alter clause 54 of the Finance Bill to read 'fifth anniversary'. The association went on to give its reasons.

An interested body, the British Precast Concrete Federation Ltd., whose members employ 23,000 people, also supports this change. It estimates that, taking favourable and unfavourable factors into account, under the system of depreciation introduced last year, the industry will be worse off by about £6.3 million a year. That is a large deprivation. It is a ravage caused by the tax system to an important part of the hard-hit building industry.

A distinguished accountant who is the head of taxation for one of the clearing banks and a member of the "One hundred" group of chartered accountants, so-called because they are the finance directors or the taxation managers of the 100 largest companies in the kingdom, wrote to me saying: I would …wish to generally support the thrust of your proposed revision which appears to give a more realistic interpretation of short-life assets used in industry and commerce …it must be right to tailor the relief given as closely as possible to circumstances in economic life. That is just what our amendments intend.

In brief, the amendments have a different definition of short-life assets from that of the Government. We believe that short-life assets are much better described and treated as those assets that are expected to have a life of up to six years. The Government choose to take a more restricted view. For the most part, the clause as drafted would apply only to computers and allied equipment and to some highly experimental high technology equipment. That is all very well and splendid. Our amendment would include not only equipment that has a high risk of obsolescence but a good deal of equipment that is the victim of wear and tear through being knocked about and heavy work in the earth shifting sector. Many of the tools used in the building trade and tractors which are used in rough country are quickly bashed to pieces. In other words, the clause should include a much more earthy range of plant and equipment than the somewhat esoteric and sophisticated equipment which will probably obtain relief under the clause as drafted.

I come to the human side of the matter. The people who we believe need the more realistic definition are those who run new and small businesses. They are dependent upon ploughed-back profits to keep going, let alone to expand. With today's news that lower interest rates will be deferred owing to the money supply getting out of control, the message from small businesses, whether they are incorporated or unincorporated, is that unless they are allowed to keep a reasonable proportion of their profits we can say goodbye to much growth in that sector, because the Government's regime has made borrowing intolerably expensive for small and new businesses.

There are several other serious defects in the clause, and it would not surprise us if the Government were to table some fairly substantial amendments at a later stage. I do not believe that they have considered the enormous administrative burden that their system of requiring irrevocable elections, item by item, will mean. When they have second thoughts, they may come a little closer to our view.

12.45 am

I warn the Committee, if "warn" is the right term, that we do not intend to let this matter go. Unless the Government see sense, we envisage returning to the subject in a big way on Report. In the meantime, we hope that the Government will realise the importance of giving a signal of hope to manufacturers by taking on board our amendments and adopting a much more realistic definition of a short life asset.

Mr. Moore

I am not sure to what extent I should cover all the ground that the hon. Member for Colne Valley (Mr. Wainwright) covered. I am fascinated by his description of some aspects of our accountancy scheme as medieval reducing balances. I do not profess to be an accountant. I am not blessed with that expertise. During my 20 months in the Treasury I have heard that large chunks of British industry have benefited in the past from the pooling system which plainly requires the benefits of reducing balances. At some stage we can have a longer debate. I see the hon. Member for Birmingham, Hodge Hill (Mr. Davis) nodding. He is a former auditor and professional accountant.

I understand the point that the hon. Member for Colne Valley is making. The second part of his speech was more an expression of his frustration at the nature of parts of last year's corporation tax changes, and the extent to which the clause and the amendments relating to it go from that base. I understand the points that he is making, but I do not accept them.

I hoped that the hon. Gentleman could have started with a general welcome for the way in which we recognised the point which he and hon. Members on both sides of the House, although they did not like the system honourably made about what they saw as one of the flaws in it.

Mr. Wainwright

The Financial Secretary may recall that I presented that bouquet on Second Reading. I am anxious not to bore the Committee with repetition.

Mr. Moore

I assure the hon. Gentleman that flattery and compliments can never bore Treasury Ministers. I am only too happy to receive such plaudits again and again. The hon. Gentleman is correct. He mentioned the point on Second Reading.

It might be helpful if I spoke a little wider than the amendments, as the hon. Gentleman legitimately did. The amendments relate to a refinement of the capital allowances code which has been welcomed by both sides of the House—the hon. Gentleman confirmed that welcome—and industry since my right hon. Friend the Chancellor announced it on Budget day.

Hon. Members will recall that one feature of the fundamental changes to the system of business taxation launched by my right hon. Friend in his 1984 Budget was the reduction in the rates of corporation tax. I can discuss unincorporated busninesses, but it would not be the moment as we have just had a debate which covered them. I hope that at some stage I shall be able to put on the record the other benefits that the Government believe they have added to unincorporated sector. He was right to say that the small company rate was reduced to 30 per cent.—obviously of benefit to the unincorporated—and the main rate is being reduced by a third over three years.

Another benefit is the gradual phasing out of the 100 per cent. first year allowances on business machinery and plant. The effect will be to encourage business investment, which is expected to be commercially worth while and profitable and to discourage investment which is made only because of the tax incentive. When first year allowances are phased out on 31 March 1986, machinery and plant will generally attract an annual writing-down allowance of 25 per cent. calculated on a pooling basis. I have explained why that has some advantages. The cost of plant goes into the pool, the proceeds from sales are deducted from it and the annual allowance is given on the balance.

The pooling of expenditure and disposal proceeds in this way means that balancing adjustments are not made when individual assets are sold or scrapped. Separate records and tax computations for each and every asset are not therefore needed. These are many of the advantages that exist under the WDA system. That saves work for the business, its accountants and for the Inland Revenue.

A 25 per cent. writing-down allowance on a reducing balance basis enables 90 per cent. of the cost of a business asset to be written-off for tax over eight years. This is, on average, more than adequate for the machinery and plant of many businesses, but we recognise that for some assets—especially, but by no means exclusively, those commonly referred to as high tech—it does not adequately reflect the rapid depreciation which they experience whether through technical absolescence or exceptionally heavy use. The definition goes way beyond high tech into many other items—for example, for some items in the heavy contracting industry there is usually a two to three year life rather than the eight year average life.

It might be useful if I write to the hon. Gentleman and circulate the letter to illustrate the categories of assets that we could identify, which might be helpful. The new scheme represented by clause 54 together with schedule 12 will enable the tax allowances for assets of this type to be brought into line with actual depreciation when they are sold or scrapped.

The new scheme will inevitably complicate the system introduced last year. That is an unavoidable price to be paid. It has been designed with simplicity very much in mind in order to keep to a minimum the additional compliance burden on businesses.

I ask hon. Members to understand that the kind of administrative detail required is required anyway within a business organisation. I do not think that it will much extend that work, but it will complicate matters. It is a relief to help businesses, and to that extent it must add complications to an otherwise simple pooling system.

Traders will be able to elect to have the capital allowances on business assets of their choosing—that is a critical phrase—calculated separately from the main business pool for a period of up to five years—that is, depooled. It is this period which the movers of the amendment seek to extend by a further year.

If the asset is sold or scrapped in this time, a balancing adjustment will be made so that the tax allowances over the business lifetime of the asset are equal to its commercial depreciation. That means that if an asset is scrapped altogether, a balancing allowance will ensure that the cost is fully written-off for tax. On the other hand, if the asset is sold in the five-year period for more than its tax written-down value, a balancing charge will be made to recover the excess allowances given.

If the asset is not sold or scrapped within the five year period, its tax written-down value at the end of that time will be transferred to the main machinery and plant pool. Thereafter, it will be dealt with for capital allowance purposes as if it had never been depooled.

Traders will have two years—a substantial amount of time—from the end of the year in which they bought the asset to make a depooling election. That time limit means that about a half of the five-year depooled period will have passed before an irrevocable choice has to be made. Traders will therefore be able to elect—

Mr. Michael Stern (Bristol, North-West)

While accepting that two years is a long period, does my hon. Friend agree that in many cases the logical time to make an election will be when a business, whether incorporated or unincorporated, is submitting its tax computations to the Inland Revenue, in conjunction with, but often frequently later than, its accounts? There may be cases when accounts have been submitted on time but the detailed computations cannot be sorted out within the two-year period. That has been found in applications for stock relief, which are also within the two-year period. In that case, will my hon. Friend consider whether a rigid time limit on such an election is necessary or whether, given that this is a relieving provision for tax purposes, it would be more appropriate to leave it at the discretion of the Inland Revenue?

Mr. Moore

We considered the issue with care and took on board the point that my hon. Friend makes. One of the most important features was to try not to increase the Inland Revenue activity; we do not want, as the hon. Member for Hodge Hill earlier pointed out, to add to the already heavy burdens that the Inland Revenue bears. Although we looked with care at the timing, I will look at the point that my hon. Friend raises, but I cannot say that I am attracted to it at first blush.

I was saying before my hon. Friend intervened that if the asset is not sold or scrapped within the five-year period, its tax written down value at the end of that time will be transferred to the main machinery and plant pool. Thereafter, it will be dealt with for capital purposes as if it had never been de-pooled. As I pointed out, traders have two years from the end of the year in which they bought the asset to make a de-pooling election.

This time limit means that half of the five-year de-pooled period will have passed before an irrevocable choice has to be made. Traders will, therefore, be able to elect selectively knowing which of their assets have already been sold or scrapped and which are likely to be during the rest of the de-pooled period.

The new arrangement in clause 54 and schedule 12 has the twin advantages of enabling assets the working life of which, based on the knowledge and experience of the trader, is much shorter than the average, to be fully written off, while at the same time maintaining the advantages of pooling for the generality of business machinery and plant.

The scheme as proposed in the Bill requires the transfer of unrelieved expenditure on an asset to the main business pool at the end of the fourth year following the year of acquisition, if the asset has not been sold in this time. These four years, together with the year of acquisition, make up the five-year period of separate treatment.

The amendment seeks to extend this period to six years by requiring the transfer to the main pool to be made at the end of the fifth year, following the year of acquisition, if the asset has not been sold. It is a matter of judgment and analysis. We believe that that would be going too far for a scheme deliberately aimed at short-life assets; and, in any case, we do not believe that it is necessary.

On any test, a five-year de-pooled period embraces the genuine short-life asset. It is not, therefore, immediately obvious that other and deserving categories of machinery and plant would be brought into the new scheme by a one-year extension, or, alternatively, are being kept out by the period proposed in the Bill.

I am sure that the hon. Member for Colne Valley has done the calculation, but it is relevant to note that after six years, more than 80 per cent. of the cost, under the WDA system, of the plant dealt with in the main pool has been written off for tax. To accept the amendment would add to the compliance costs of business and to the administraive costs of the Revenue, both of which we want to minimise. The amendment would not, therefore, improve the proposals as drafted but could introduce some additional and unnecessary costs, and on that basis we could not commend it to the Committee.

Mr. Wainwright

I regret the fact that the Financial Secretary did not give some indication of the different classes of asset which he claims will be helped substantially by the Bill as drafted. Until I have seen his list and had an opportunity of testing it with industrial organisations, I remain profoundly sceptical.

There are limits to what an individual hon. Member can do under the present arrangements in Parliament, but I did some investigation into what short-life assets really consist of, and that satisfied me that the period in the Bill is narrow and will leave out a good deal of plant which is heavily knocked about in the course of construction and other operations and for which about six years is a reasonable life.

1 am

I am sorry to differ from the Financial Secretary on a matter of the simplest third form arithmetic, but it is misleading to suggest that, on the reducing balance system, the asset is virtually written off by the eighth year. Even at this hour of the morning, we must not get our arithmetic so wrong.

I have been provided with an example from the files of a firm of distinguished city accountants. It involves a small, hard-working businessman who set up as a small haulage contractor. His capital equipment cost him £12,800 and consisted of a tractor and two trailers—a fairly classic example of someone trying to get a living in the harsh economic climate that has been thrust upon us.

Suppose that man elected for depooling, on the honest basis that he thought that the tractor would shake to bits in about five years, but he found in the fifth year that not only was the tractor miraculously just surviving, but he had no money to renew it and could not afford a bank loan for the purpose. The accountants have worked out that by the end of year five, out of the initial expenditure of £12,800, he would still have £3,037 not written off.

It is wrong that small traders, struggling to establish themselves, should be taxed on profits that do not exist and are merely imaginary. The claim that the asset is virtually written off by the eighth year is not true.

I shall spare the Committee a long dissertation on pooling, but the Financial Secretary is trying to have it three ways at once. He extols the virtues of pooling, but also extols the virtues of the clause, which is a depooling measure and will mean that all the individual items that he professes to regard as so burdensome to business and the Inland Revenue will all appear. A vast number of businesses will make the election, just to be on the safe side.

What is the objection to the proper, diligent method of recording each asset? Any self-respecting company keeps a plant register. It does not have an amorphous mass called "machinery"; it has a register of assets, who made them, their cost and their estimated life on installation. As most businesses use the straight line method of depreciation, they keep detailed individual depreciation records. It is bad management to have a vast, unspecified collection of assets with no identification.

If the Financial Secretary believes that the Inland Revenue will object to the record keeping, let him say so. It is inaccurate for him to claim that business does not want to keep the records. It keeps them, anyway. I am not convinced by the hon. Gentleman's reply, but at this hour it would not be wise to press the amendment to a Division. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Mr. Blair

As has become apparent from the speeches on the amendment moved by the hon. Member for Colne Valley (Mr. Wainwright), in many ways clause 54 is a belated attempt to recover from some of the disasters of the 1984 Budget changes in capital allowances. The distorting effects of those changes can be seen in the capital investment figures for 1984 and the projections for 1985. There was a considerable rise in the amount of capital investment in 1984, dropping away in 1985. This bulge seems largely to be a result of companies bringing forward their purchases before the capital allowances changes fully take effect.

It is worth mentioning as a matter of background that the CBI survey, which is fairly heavily relied upon by the Government, says that many companies expect capital investment to fall quite sharply. Secondly, capital consumption as a whole in the United Kingdom has exceeded investment by some £1.6 billion since the end of 1981. Without going in detail into what occurred before 1984, that system of capital allowances seems to me to have had three major commercial advantages. First, it allowed a first year allowance of 100 per cent. on the purchase of plant and machinery. That obviously gave a tremendous advantage to companies that were purchasing plant and machinery at the time because they could set off the entirety of the purchase price. Secondly, the pre-1984 system looked at the matter in terms of the purchase of assets, not the sale of assets. I am uncertain whether the clause, based as it is upon the sale of assets rather than the purchase of assets, will create as many problems as it seeks to solve.

Thirdly, under the pre-1984 system, there was no distinction between short and long life assets and thus none of the problems of what we will call depooling were brought into operation by the pre-1984 system. All the assets being in the same pool meant that, for example, in year one, if a company decided not to take the full 100 per cent. of its first year allowance, in year two it could set off any outstanding balance against the proceeds of sale in the same pool of assets.

The purpose of clause 54 is that the company could elect to treat an asset as a short life asset and, provided it is disposed of within the four years after acquisition, the balance of the loss could be set off against taxable profits.

It is right to acknowledge the problem of short life assets, particularly in relation to difficulties arising from obsolete technology. Under the 1984 Budget, prior to the clause 54 change coming into effect, the 25 per cent. could be claimed only in the first year of acquisition, and then 25 per cent. of the writing down allowance was claimed in the recurring years. If, for example, an asset was brought and disposed of in year two and sold at a loss, although that loss arose in year two, 25 per cent. of the writing down allowance has recurred over the years and therefore the loss can be spread only over a period of years.

I wish to put four specific points to the Minister in relation to the way in which the clause operates. It is quite difficult to judge what the precise effects of the clause will be. It is a matter of concern to me that the clause may have hidden problems that have been given inadequate consideration by the Government in introducing it in its present form.

First, I appreciate that any sensible company will have a register of its plant and machinery. In simply identifying a piece of plant and machinery, therefore, the clause is not placing any greater burdens on it in an administrative way. However, the election that will be made under the clause is an election on an individual basis for each item of machinery. Those items of machinery will then have to be shown separately as those that are depooled and treated as short life assets and those that are not. Has any consideration been given to the administrative and accounting problems involved in keeping a proper check to ensure that the assets sold as short life assets are the same assets that were purchased?

Secondly, will the Minister confirm that, if an asset treated as a short life asset is not disposed of within the five-year period, it simply goes back into the ordinary pool of assets? If an asset is not appreciating or certainly if it is depreciating by at least 25 per cent. per year, it would surely be in the interests of any sensible company to treat virtually any asset as a short life asset; because if the company decides not to sell it within the five-year period the asset will simply be treated in the usual way, but if it is sold the company will obtain the benefit of the short life asset provision.

Thirdly, the ability to set the balance against taxable profits arises on the sale of the machinery, not on the purchase as it did under the pre-1984 system. Has any consideration been given to the difficulties of companies in predicting when they are likely to sell? If allowances are given at the time of purchase, capital expenditure decisions are much easier to calculate. The time of sale is more difficult to judge, especially with new technology which may become obsolete at a time which is virtually unpredictable.

Finally, although I am a lawyer by training, I am not used to reading Finance Bills in great detail, and I am uncertain as to the mechanism which triggers the ability to set off the balance against taxable profits within the four-year period after the year of acquisition. What brings into being the ability to claim the benefit of clause 54 on short life assets? Is it the disposal as such, or is it what the clause describes as the discontinuance of the notional trade?

As I understand the clause, once the election is made the asset is treated as part of the notional trade separate from the actual trade and continues to be treated in that way until such time as the notional trade is permanently discontinued which is when the short life asset begins to be used wholly or partly for purposes other than those of the actual trade", at which point discontinuance arises and the ability to claim under clause 54 ceases. If that is so, could not discontinuance of the notional trade be artificially brought about by the company starting to use the asset wholly or partly for purposes other than those of the actual trade, at which point discontinuance would arise and the triggering mechanism of clause 54 would come into operation? I put that point to the Minister because it is important for the practicality of the clause.

We do not propose to vote against clause. However, detailed consideration of it may show that it creates as many problems as it solves.

Mr. Moore

I commend the hon. Member for Sedgefield (Mr. Blair) for saying that he was not an accountant. As a lawyer he has a far better grasp of the details than I have as a non-lawyer, let alone as an accountant. The hon. Gentleman raised some legitimate detailed points, but he started with some general points. I shall start with the general issues because it is sometimes difficult to find time to discuss them. It will also ensure that my officials advise me accurately about the hon. Gentleman's detailed questions.

1.15 am

The hon. Gentleman was a little unfair to go over the old ground of last year. It would be hard for me to go into great detail about the basic rationale behind the Government's corporation tax changes. The Government considered the investment achievement in the United Kingdom. Most people recognise that in the 100 per cent. first year allowances we probably had the most generous allowances in the Western world. I assume that the presumption would have been that they served one of two purposes—either they produced a greater quantum of investment and or at least as good, if not better, quality of investment. Otherwise why should valuable tax reliefs be given to encourage investment? There were many debates in Committee and on the Floor of the House last year including one about the long-term nature of jobs and investments. The basic assumption from the OECD data, as opposed to the Government data, was—I have no figures to confirm the points that I made last year, buy my membory is reasonably good on this—that the overall quantum record was no better, and probably a little worse than the OECD average. Our supposed generosity, therefore, of first year full 100 per cent. allowances did not seem advantageous in that sense.

The second feature of the OECD figures suggested that, when one examined in detail the quality of investment, in all cases our rate of return on investment was below the unit return on capital employed. The country did not seem to benefit from the supposedly generous 100 per cent. first year allowances according to those two basic criteria. I shall explain why in a moment.

Mr. Wainwright

The Minister said that the OECD figures suggested that the British quantum of investment was no better than the other OECD countries, despite our admittedly generous allowances. Could the explanation not be quite different? Could it not be that to overcome the enormous political handicap of the continuous stop-go rhythm in the United Kingdom since the end of the war, British industry had to be given super-incentives to invest, otherwise there would have been no investment?

Mr. Moore

We could debate the matter for a long time. I accept that many other factors are involved. An analyst who looked at the nature of our 100 per cent. first year allowances would have been surprised to find that the two theoretical main advantages that might have flowed from them had not. The analysis that many people drew was that most people were consciously concerned with the post-tax, not the pre-tax, rate of return, that that had changed people's attitude prior to investment, and that to that extent we did not have the quality investment that might have flowed from a commercial analysis of investment potential as opposed to a fiscal or tax analysis. That was the basic pattern behind the very substantive changes. Having said that, we acknowledged, in the debates upstairs, that those were substantive changes in the whole of our system.

I accept that change does not necessarily run in line with the basic concept of pooling, but to the extent to which we saw a specific problem relating to short life assets—the fundamental problem that we think we are tackling in the clause—we have sought to retain the basic advantages in the major system, together with the additional advantages that we offer for de-pooling.

The hon. Member for Sedgefield asked four specific questions, and I am happy to answer them specifically.

First, the companies will keep records and the inspectors will monitor claims.

The hon. Member asked about the blanket election proposals. He is right in the point that he made. The legislation will not prevent traders from making blanket elections, since the choice of which plant is to be treated as a short life asset is deliberately left to them. It is unlikely that they will do so, however, since they would then be at risk of balancing charges which would not arise were the plant to be kept in the main machinery and plant pool. A blanket approach would also require businesses—a point that the hon. Member also recognised—to keep separate records and make separate capital allowance computations for five years for each and every item of their business plant. It is much more likely that businesses will elect selectively so that the new arrangements will apply only to assets which they believe to have shorter than average working lives.

In thinking about how we could best help the business community in this area, our purpose was to try to allow the business community to seek to make their selective decisions themselves. Of course, we shall have to watch the particular point that the hon. Member rightly raised.

There is a clear two-year period for election which I think gives reasonable time, although my hon. Friend the Member for Bristol, North-West (Mr. Stern) has already intervened to question that point. I said that I would consider it with considerable care.

Finally, the disposal will normally trigger the balancing adjustment. There are some protections within the clause. I will look again at the last point that the hon. Member for Sedgefield made, and if I feel that there is any need to deal with it I shall do so before Report.

Question put and agreed to.

Clause 54 ordered to stand part of the Bill.

Schedule 12 agreed to.

To report progress and ask leave to sit again.—[Mr. Moore.]

Committee report progress; to sit again today.