§ '(1) Any grant received under the Fishing Vessels (Decommissioning) Scheme 1993, shall be taxed in accordance with subsections (2) to (4) below.
§ (2) For the purposes of capital gains tax, a sum payable to an individual by virtue of the scheme referred to in subsection (I) above shall not be treated as part of the consideration obtained by him for, or otherwise as accruing to him on, the disposal of any asset.
§ (3) Where a vessel is scrapped in compliance with grant conditions under a scheme referred to in subsection (1) above, then for all the purposes of capital allowances legislation, and in particular Part II, Chapter II of the Capital Allowances Act 1990, the disposal proceeds to be brought into calculation of the balances adjustment for the purposes of section 24 of the said Act and the value attributable under section 26 of the said Act or otherwise shall be deemed to be nil.
§ (4) No part of a sum payable by virtue of a scheme referred to in subsection (1) above shall be treated as a trading receipt in the Schedule D Case/computation of profits of the applicant.'.—[Mr. Wallace.]
§ Brought up, and read the First time.
§ Mr. James Wallace (Orkney and Shetland)
I beg to move, That the clause be read a Second time.
I hope that the hon. Member for Hastings and Rye (Mrs. Lait) will remain in the Chamber as she said in last Wednesday's debate on decommissioning that she was very much on the side of the fishermen, and I think that today's debate will give her the opportunity to reaffirm that. Last Wednesday the House approved the decommissioning scheme for 1993–94, which is expected to be the first of three annual decommissioning schemes amounting to £8.4 million per annum.
§ Mr. Robert Hughes (Aberdeen, North)
I am not sure that the order says £8.4 million per annum, but it says £25;million over three years.
§ Mr. Wallace
I think that the hon. Gentleman is right. I do not think that the order specifies the amount, but the Ministry of Agriculture, Fisheries and Food stated what the amount was likely to be over three years. In the present year the figure is expected to be £8.4 million, and the same in each of the two succeeding years.
An official explanatory leaflet sent to people in the industry stated that, in order to qualify for a decommissioning grant—for which hon. Members on both sides of the House have called for many years—three specific conditions must be met. First, the vessel must be scrapped—permanently broken up or disabled so that it is incapable of going to sea. Secondly, registration in the register of fishing vessels must be cancelled. Thirdly, all valid fishing licences must be surrendered.
The leaflet comments on the tax treatment and states:Decommissioning grants are taxable in the same way as other grants to the agriculture and fishing industries".That is an unilluminating statement which begs the question of what prompted the new clause. I hope that the Treasury team will be prepared to accept what I believe to 738 be the most favourable taxation treatment of decommissioning grants. If that is not acceptable, it would be helpful to those in the industry if the Treasury team could state how decommissioning grants are to be taxed.
The hon. Members for Aberdeen, North (Mr. Hughes), for St. Ives (Mr. Harris) and for Greenock and Port Glasgow (Dr. Godman) have all taken part, over many years, in debates on decommissioning. I think that they, like me, will recall that when we have tried to do the sums, the Fontainebleau agreement has often been introduced into the debate so that it becomes unclear how much the scheme will cost the Treasury. We have always asked what sum will be taken back from the fishermen in tax. I do not recall fisheries Ministers ever giving a clear answer to that question. There is an opportunity this evening for Ministers to clarify the position.
We are asking businessmen to submit tenders and make serious business decisions to scrap their vessels when a key element in the calculation is unclear. I very much hope that tonight we can do something to clarify the position, not least because it was announced last Wednesday that fishermen have until the end of this month to make their submissions for decommissioning grants. Any further information that can be given this evening will be most welcome.
§ Dr. Godman
Is the hon. Gentleman confident that the scheme will not be hogged by Humberside trawlers in the same way that the previous scheme was so manipulated?
§ Mr. Wallace
The previous scheme was much criticised, not least by the Public Accounts Committee, and we shall want to watch how the new scheme operates. We do not want money to go only to one port. I shall be ruled out of order if I become too embroiled in a debate on the merits or otherwise of the decommissioning scheme. Many of us would argue that money is not enough, but this evening we are concerned with the tax consequences.
It appears that there are four ways in which the sums can be taxed. First, the receipts could be taxable as trading income. Although nothing in the scheme requires the applicant to cease trading, it would, for the most part, seem reasonably self-evident that if a person scraps his boat, he is unlikely to carry on trading. Such a method will probably not commend itself to the Treasury, particularly, as has been said, if the licences have been returned. Secondly, the receipt could be considered to relate solely to the scrapping of the vessel and accordingly to be taken into account when calculating capital allowances. I suspect that the Treasury may wish to pursue that policy.
Thirdly, the receipt or part of it could be treated as a capital gain. In addition to receiving compensation for the vessel, it could be argued that the value received also includes an element for the surrender of a precious stock licence and the forfeiture of the right to fish with that vessel. I believe that there is case law to support the argument that payments for those items—which amount to goodwill attached to the vessel—could be regarded as capital receipts.
When a grant is allocated, no indication is given as to the amount awarded in respect of the vessel and the amount awarded in respect of the licence. The Ministry of Agriculture, Fisheries and Food and the Scottish Office Agriculture and Fisheries Department may consider that no value is attributable the licence on the basis that nothing was paid for it. I understand that in the north-east 739 of Scotland the Inland Revenue routinely pursue a policy of attributing value to a licence as a capital asset when a vessel is sold. It is possible that a grant in excess of the vessel's current market value could be treated by the Revenue as capital.
Fourthly, it could be accepted that no tax is to be paid on the grant—a proposal that I commend to the House. I believe that that may have been the case in some previous decommissioning grant schemes, although the status of some of those grants has not been made clear from the commissioners' decisions. Perhaps the Ministers will tell us about the operation of decommissioning grants under previous schemes.
The new clause has no implications for capital gains or income tax and it has some precedent. I refer the House to the tax treatment of grants under section 27 of the Agriculture Act 1967. That Government grant was to encourage people to reinquish the occupation of uncommercial agricultural units. The parallel between relinquishing such units and the decommissioning of fishing vessels is immediately obvious. Section 249 of the Taxation of Chargeable Gains Act 1992 states:For the purposes of capital gains tax, a sum payable to an individual by virtue of a scheme under section 27 of the Agriculture Act 1967 (grants for relinquishing occupation of uncommercial agricultural units) shall not be treated as part of the consideration obtained by him for, or otherwise as accruing to him on, the disposal of any asset.The leaflet from which I quoted said that the method of taxation would be similar to that which applies to other agriculture and fishing grants.
I have given an example of an agricultural grant that is not included for the purposes of capital gains tax. I am sure that the Financial Secretary is aware of other agricultural grants such as those payable under sections 9 and 12 of the Agriculture (Miscellaneous Provisions) Act 1968. Section 9 deals with grants for reorganisation compensation. When dealing with it the then Minister of Agriculture, Fred Peart, said:This is a difficult matter, and right hon. and hon. Gentlemen opposite are right to ask whether the new payments will be liable to Capital Gains Tax, Income Tax or betterment levy.Tenants will not be liable for Capital Gains Tax, Income Tax or betterment levy on sums received under Clauses 9 and 12. These sums do not constitute a capital gain or, in the Land Commission's view a realisation of development value, nor do they constitute part of the tenant's taxable income."—[Official Report, 21 February 1968; Vol. 759, c. 473.]That is another example of agricultural grants not being taken into account for tax purposes.
The new clause seeks to have the grant accepted as non-taxable and to permit the balancing allowance to be granted on the vessel. I do not purport to be an expert in understanding how balancing allowances and balancing charges work. However, they may be of little practical use to taxpayers who have applied for a grant and who have accumulated trading losses in recent years. It would preserve a measure of equity between those who have claimed allowances to augment losses and produce relief against other income and taxpayers who have sought to preserve the tax value of their vessel to set against future taxable balancing charges on a sale.
The share fishermen system operates in Scotland and there are differences throughout Scotland. Unlike parts of the north-east of Scotland, the practice in my constituency for a new person joining a partnership is for continuation 740 elections to be signed when there are partnership changes. The effect of that is that the new partner takes on a share of the tax written down value of the vessel which reflects previously granted allowances. Subsequent allowances do not reflect the price that he pays for his share. There is always the possibility of that person having to pay tax on a balancing charge in excess of the allowances to which he may have been entitled. That means that there may well be a disincentive to Shetland fishermen applying for grants or at least to gross bids up more than would otherwise be the case.
That brings us to the purpose of the grants. The primary obligation is to reduce capacity to meet multi-annual guidance programme targets. Value for money can be measured in how much capacity can be taken out of the fleet. Many of us would have liked to see more money for decommissioning, but surely the effect of the small amount that has been made available should be maximised. An applicant must include the tax impact of accepting a grant in his calculation. If the effectiveness of the scheme is to be judged on catching capacity taken out, the clear efficiency argument says that if no tax is levied on the receipt there will be lower tenders and, therefore, more bids accepted and more capacity removed from the fleet. There will be greater value for money. I accept that that may not mean so much revenue for the Treasury, but it would be pleasant for once to see the Treasury trying to support the policy of another Department rather than trying to frustrate it.
§ Dr. Godman
Does the hon. Gentleman agree that one of the developments that we wish to see with a sensible decommissioning scheme in some of our ports is the pulling out of the older vessels so that the fleet can remain fairly modern? Does the new clause encourage that development?
§ Mr. Wallace
I suspect that it would certainly help. If I recall correctly, it was said in the debate on Wednesday that vessels had to be at least 10 years old.
If a person applying for a tender has to gross up to take account of the tax that he must subsequently pay, fewer vessels will be taken out of the fleet and the relatively small amount of money will not go so far in reducing capacity. Making the grant tax free would be the best contribution towards achieving the object of the exercise. Those who are engaged in the exercise should know where they stand on taxation before making important business decisions.
§ Mr. Salmond
I should like to be associated with the arguments advanced by the hon. Member for Orkney and Shetland (Mr. Wallace). He has presented the detail of the technical argument and I shall concentrate on why the industry needs some additional tax incentive as part of the decommissioning package. It is highly appropriate that this matter should be debated during consideration of the Finance (No. 2) Bill because many of the decisions, not just for the fishing industry but for all resource-based industries, have been Treasury and Revenue led. That is true for oil, gas and whisky and it is certainly true for fishing.
The Ministry of Agriculture, Fisheries and Food has argued for some time that its original two-year decommissioning scheme was extended to three years with no more money because of pressure from the Treasury, perhaps from the Financial Secretary himself. In a debate on fishing on Wednesday, I quoted an example given to me 741 by Mr. Hugh Allen, the secretary designate to the Mallaig and North West Fishermens Association, on the precise detail of the proposal by the hon. Member for Orkney and Shetland.
I do not propose to quote the example again because it is available in Hansard. Mr. Allen reasonably set out a case study whereby a fisherman putting in a decommissioning bid of £150,000 on a 15-year-old capital asset that might be worth that amount would be left, after the operation of taxation and other obligations on the decommissioning grant, with a grand total of £4,000. That money would have to be disbursed among four members of his crew.
If that is the current taxation system, it will severely inhibit a successful decommissioning scheme and will lead to one that is designed merely for the convenience of the Treasury. In the past few years, virtually every other fishing fleet in Europe has had access to substantial structural funds of hundreds of millions of ecu. Only the United Kingdom fishing fleet—the fishing fleets of Scotland, Northern Ireland, England and Wales—has not had access to that sort of structural funding. I hope, and it would be a triumph of hope over experience, that when the Financial Secretary replies he will go beyond the narrow Treasury accounting view of what is absolutely convenient and look to the possible success of the decommissioning scheme.
It has not escaped those of us from fishing constituencies that when Ministers argue about the costs of a decommissioning scheme, they always take the costs net of the deduction resulting from the Fontainebleu agreement—for example, even a scheme that is financed 75 per cent. from the European Community would have an impact greater than that on Treasury revenues because of the deduction from the United Kingdom rebate under the Fontainebleu agreement. Yet those same Ministers have always refused to look at the scheme net of taxation and net of the effect on the Treasury of taxation. That argument has been used to produce a very modest decommissioning package for the fishing industry.
Surely, tonight, the Financial Secretary should show that he appreciates that, without some tax concession, the decommissioning scheme could flounder and not have the effect that we all want, which is to bring capacity in the fishing industry into line with catching potential.
§ Mr. Nicholas Brown (Newcastle upon Tyne, East)
For some years, the Labour party and the fishing industry have urged the Government to introduce a decommissioning scheme. Despite the existence of European Community funds towards the cost of national decommissioning schemes, the Government have repeatedly declared their opposition to such schemes. In February 1992, they announced that £25 million would be made available for a two-year scheme. That scheme is now to last for three years, but the money being made available—which includes EC grant—is unchanged.
That money is quite inadequate for an effective decommissioning programme. Indeed, the House of Lords Select Committee on European Affairs concluded that the £25 millionis not even enough to prevent the fleet from expanding; four or five times that amount is now needed to make up for the lack of a decommissioning scheme in the United Kingdom during the last decade.742 Given the wide agreement that the Government are putting forward too little money for decommissioning, the House should not reject the opportunity to lighten the tax burden on decommissioning grants.
§ Mr. Dorrell
The hon. Member for Orkney and Shetland (Mr. Wallace) accurately said that this evening we are here to discuss the tax treatment of decommissioning grants, not their level or nature or the rules surrounding the scheme. The issue of the tax treatment of payments under the scheme is relatively simple. Tax law provides that those payments should be treated in exactly the same way as any payment that a boat operator would have received had his boat been sold. That is the principle that needs to be applied.
On the sorts of specific tax charges that might arise, the main case is that of fishing boats being sold at less than the full new value paid by the operator. In that case, as with any other capital asset sold by a trading entity, if it is sold for less than the tax written down value, no tax is payable; if it is sold for more than the tax written down value, a balancing charge is made. That is the usual provision in income tax for an individual or in corporation tax for a corporation when a capital asset is sold.
If a boat were sold for less than the new price paid for it by the business, that is the only circumstance in which tax would not be payable. If, however—I suspect that it would be relatively unlikely—a boat were sold for more than its original cost, there would be a balancing item because it would have been sold for more that the written down value. Potentially, a capital gains tax charge would be payable and the normal capital gains tax would apply. In calculating the charge to capital gain, the first consideration would be the new price paid for the boat, and then that would be indexed in accordance with the usual indexation provisions. If the boat were sold for an amount greater than the index-based value, once again—in exactly the same way as is with all other businesses operating in the economy—a capital gains tax charge would be payable.
§ Dr. Godman
Given the seriousness of the issue and the good sense of the new clause, will the Financial Secretary tell us whether his officials have costed the proposal? It is an important matter. If the hon. Gentleman rejects the new clause, many fishermen may reject the decommissioning scheme.
§ Mr. Dorrell
Every time a proposal is made to us, we estimate its cost. The cost of the proposal in the new clause is not just the cost that would arise from the benefit to the fishing industry; it is the cost of establishing the precedent of treating Government grants as tax-exempt payments and the distorted incentives that would be built into the system. It would not be rational to build into the system a set of rules to provide that a payment under the decommissioning scheme was tax free, whereas if a boat operator had sold his boat on the open market he would incur a tax liability. That would build in all sorts of distortions, almost all of them undesirable.
In the circumstances surrounding the decommissioning scheme, the main case is not the capital gains tax charge that I described, although that is the law, but the fact that a boat operator is likely to be selling the boat for less than 743 he paid for it, in which case all we are talking about is a balancing charge. That is familiar to any practising accountant dealing with business accounts.
§ Mr. Robert Hughes (Aberdeen, North)
Having considered the provisions of the decommissioning scheme and the likely price of the vessel if sold, has the Financial Secretary calculated what that would mean for the Treasury? Although he says that most accountants can understand the matter, those who have to make the decision do not necessarily understand it. Will the Treasury issue guidelines in clear language that everyone can understand?
§ Mr. Dorrell
I understand that the calculation of the balancing charge can sometimes be complex, but it is a well-established concept of tax law. We are not dealing with circumstances that differ from the circumstances of a farmer or any operator of a manufacturing or other trading business.
§ Mr. Hughes
Has the Minister done that calculation? Given the great importance that everyone in the fishing industry attaches to the decommissioning scheme and the paramount need for the scheme to succeed, will the Treasury issue letters of guidance so that the matter is clearly understood and no one is under any illusions about the exact position?
§ Mr. Dorrell
I have tried to set out the position in very clear language. It would not be clarified further by issuing what would be represented as a special guidance letter. I have said that, in determining whether a tax charge is payable on the disposal of a boat under the decommissioning scheme, the tax rules that would apply are the general rules that apply to all trading businesses when they sell a capital asset that has been employed in their trade.
§ Mr. Harris
I appreciate the pressure on my hon. Friend, but we are discussing important matters. I want to ask him two questions. First, will he deal with the point fairly raised by the hon. Member for Orkney and Shetland (Mr. Wallace) that an operator selling a boat is not just selling a capital asset; in most cases, he is going out of business? Secondly, will any allowance be made for the considerable cost of scrapping the boat? According to last week's debate, as much as £10,000 might be involved in the disposal of the asset. It is not just a question of a sale to someone else; the seller must then physically carry out the scrapping—or, in most cases, get someone else to do it.
§ Mr. Dorrell
Obviously, I shall need to take specific advice. As I have conceded to the hon. Member for Aberdeen, North (Mr. Hughes), these issues are not 100 per cent. simple; however, I assume that, if the business received a payment for the disposal of the boat under the decommissioning scheme and then incurred a cost, scrapping would be an allowable expense. It appears that the hon. Gentleman agrees with me. I emphasise, however, that those rules would be applied in the general case of 744 traders disposing of a capital asset, whether in the course of their trade or on the day on which they closed down—which, sadly, is not unknown in the fishing industry.
§ Mr. Hughes
I think that we would all feel reassured if the Minister would state specifically that the Treasury was not banking on obtaining revenue from the scheme.
§ Mr. Dorrell
I have clearly stated that the amounts involved are extremely small from a tax-revenue point of view. However, if we are talking about establishing a precedent and about a sense of grievance among other traders in precisely similar circumstances, I do not believe that a tax-principle case has been established for departing from the general rules that any fishing boat operator would be able to secure from any practising accountant.
§ Mr. Wallace
The Minister's reply was very disappointing. He does not dispute any of our arguments; he does not deny that the new clause would be the best way in which to maximise the effect, and the objective, of the decommissioning scheme. He has virtually conceded that the cost to the Revenue would be minimal, possibly nothing. He seems to have based his argument on unwillingness to set a precedent; yet in his speech—in which he refused to give way to me—he singularly failed to address the precedents that I cited in my speech.
Fishermen should know that the tax treatment to which I referred applies to any other trader. As I said, the official leaflet sent to fishermen referred to taxation that applied in the same way to other agricultural and fishing grants; however, I referred to two—if not three—agricultural grants involving no tax treatment. Section 27 of the Agriculture Act 1967 contains a concession that was re-enacted as recently as last year. The precedents are already there; those in the fishing industry, hard pressed as they are, will wonder why on earth they cannot be given a little additional help, at virtually no cost to the Treasury.
§ Mr. Salmond
No doubt the hon. Gentleman will agree that some hon. Members are better briefed than the Minister in this regard. It is clear that the Minister still does not wish to contradict the interventions that have been made.
The Minister said that small amounts were involved, and that he was not very worried about that aspect. We have been given to understand that Treasury pressure turned the decommissioning scheme into a three-year scheme rather than the two-year scheme that was originally proposed. How do the two propositions sit together?
§ Mr. Wallace
It is not for me to try to understand that; I do not entirely understand it either. The opportunity to explain exists; the Minister has clarified the law as he sees it. However, we are here to legislate. The House had an opportunity tonight to change the position at no cost to the Treasury, but the Government have not sought to take that opportunity. I believe that the hard-pressed fishing communities on our coasts will notice that.
§ Dr. Godman
I, too, find the Minister's response disappointing. The hon. Member for Orkney and Shetland (Mr. Wallace) claimed—with considerable confidence— 745 that such tax-free concessions were not unknown in agriculture; if that is true, his claim that we must not distort the tax system does not hold water. I feel that a general principle is involved. Let us suppose that several fishermen own a vessel, that they are involved in a share arrangement. They may well feel reluctant to give up that vessel for scrapping if they are not to receive such a concession.
The object of such a scheme is to reduce the capacity of the fleet. Without such small concessions, fishermen who—in many instances—have no alternative occupations to turn to in the community may be deeply unwilling to agree to a decommissioning scheme. We shall then be forced to continue with a fleet that is far too big for the stocks on which it relies.
I am extremely disappointed by the Minister's rejection of this sensible and fair-minded proposal.
§ Question put and negatived.