Aviation (Capital Allowances) (Hansard, 13 May 1998)

§ Mr. John Wilkinson (Ruislip-Northwood)

It is a great privilege to introduce this debate on the impact on the long-life assets capital allowance provision on British aviation. The subject may sound arcane, but it is of real concern to business owners and operators of civil aircraft in this country, and to those who manufacture or lease them, or provide equipment for their operation, assembly and maintenance—indeed, to many thousands who earn their livelihoods in the British civil aviation industry, not least my constituents who work at Heathrow airport.

I declare an interest as chairman of a very small aviation consultancy company. However, I assure the House that my desire to raise this topic was driven entirely by the strength of the public interest case against the long-life assets provision and my desire not to see British aviation, which is broadly competitive and successful internationally, hobbled by an impost, the inherent contradictions and negative consequences of which have not been appreciated by those responsible for the formulation of fiscal policy.

Parliament's role is to assist British industry and commerce, not to damage it through imperfect knowledge or lack of intellectual rigour. The origins of this overtly discriminatory and selective tax provision go back to the Finance Act 1996, in which the annual rate of capital allowances on types of plant and machinery with a working life of 25 years or more were cut from 25 to 6 per cent. per annum, with the notable exception of ships and railway assets. The provision applied only to businesses that spend more than £100,000 on such assets in any eligible year with effect from Budget day 1996.

Let me anticipate immediately the Minister's reply: that it was a Conservative measure, that the previous Government are to blame for the consequences and that it is hypocritical of me to demand repeal of the provision by the present Government. Such an attitude denies the possibility of improving legislation by parliamentary scrutiny and of governmental rectification of past errors.

A year and a half has passed since the effective date of the measure, during which representatives of the industry, the Society of British Aerospace Companies, the British Air Transport Association, the Aerodrome Owners Association, the General Aviation Manufacturers and Traders Association, and leasing institutions have come together under that repository of professional excellence, the Royal Aeronautical Society, to present their case against the long-life assets provision in meetings with the Inland Revenue and, most notably, with the Secretary of State for Trade and Industry.

To date, there has been not so much a meeting of minds as a comprehension gap between those who work in the industry and those whose job is to try to make illogical tax legislation workable. Nevertheless, I believe that logic should prevail and the Government should introduce the necessary amendment to rescind that damaging provision in the Committee stage of this year's Finance Bill. In a letter dated 7 April to Mr. Roy McNulty, chairman of 352 Short Brothers, the Secretary of State for Trade and Industry not only encouraged the industry to continue to talk to the Inland Revenue, but stated: It also goes without saying that my own officials"— in the Department of Trade and Industry— will be pleased to continue to discuss the details of your case with you and your colleagues whenever you wish. Begotten in distortion and anomaly, the measure was brought forth in inconsistency and illogicality. Indeed, my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) claimed in his Budget speech in the House on 26 November 1996 that it would end unjustifiable distortion in the tax system in favour of particular types of business and investment. However, he added: Ships and railways will … be exempt".—[Official Report, 26 November 1996; Vol. 286, c. 166.] That was a remarkable non-sequitur.

Explaining that groups spending less than £100,000 a year on such assets will be exempt, my right hon. Friend asserted that it meant that the vast majority of small companies would not be affected. In aviation, that is more fantasy than mere traditional Budget hyperbole. A light training aircraft or helicopter, fully equipped, usually costs more than £100,000, so the tiniest aviation business will be affected. A civil airliner costs tens of millions of pounds, so even the smallest airline will be affected in a big way.

Aviation in Britain is already suffering discriminatory taxation in the form of airport passenger tax, from which ferry and Eurostar railway passengers are exempt. The adverse effects of the European Union's proposed abolition of the duty-free concession, which we were discussing with the Financial Secretary only last week, will not be felt by Eurostar, to which it is not extended. It will be felt by airlines and airport operators and, to a lesser extent, by ferry operators. The railways also receive generous state subsidies, which put them in a favoured position.

The present Chief Secretary to the Treasury grasped the central point at issue during the Committee stage of the Finance Bill on 22 January 1997. He said Aeroplanes are, by definition, very mobile. Unlike power stations or water pipelines, they do not have to be in this country. It has been said—although such threats should be taken with a pinch of salt—that some operators might decamp and set up abroad in order to avoid these provisions and, in a global economy, we must of course be very aware of the tax competition issues that may arise".—[Official Report, 22 January 1997; Vol. 288, c. 979.] Quite so. Unfavourable tax regimes in Britain in the post-war decades contributed to the mass migration of the British merchant marine to flags of convenience in the Isle of Man, Panama and Liberia—hardly a happy precedent for British civil aviation in such circumstances.

There is no reason why British owners and operators of civil aircraft should remain within the British fiscal jurisdiction. One need not see the expensive graffiti on the tail of a British Airways aeroplane to realise how international and mobile the airline business is. While the British rate of capital allowances was 25 per cent. on non-time-limited assets, we could compete with, for example, Sweden and Denmark's maximum rate of 30 per cent. Italy's 20 to 25 per cent., which sometimes rises, in inimitable Italian style, to eight times that figure, Belgium's 33.3 per cent., France's 25 per cent. And 353 Germany's rate of up to 25 per cent., to take but six European Union examples. At 6 per cent., it will be very hard for the British to compete. Our rate is way below the global norm in industrialised countries.

A competitive capital allowance rate in the United Kingdom was critical because of the huge subsidies, amounting to hundreds of millions of pounds, disbursed by European Governments to their state carriers, such as Air France, Iberia, Air Portugal, Olympic and Alitalia. We must recognise that long-life aviation assets are not just aircraft. They include the most sophisticated computer-controlled design equipment and machine tools, simulators, air traffic control radars, radio beacons, instrument landing systems—a vast range of items. Revenue officials could be asked to make a judgment, which they are technically not qualified to make, on the life of such assets, which, by virtue of type, utilisation and technical specification, can vary enormously.

An item is a long-life asset if it is reasonable to expect that the machinery or the part will have a useful economic life of at least 25 years. But what is "reasonable"? Are Inland Revenue officials to become prophets? Of 25 main airliner types in the Price Waterhouse and Airclaims report of December 1997, only four had more than 50 per cent. still in service after more than 25 years. The Government have those figures, because they were in a recent submission by the Royal Aeronautical Society to the Secretary of State for Trade and Industry.

Certain consequences are clear. British aviation companies that operate aircraft can move to other EU countries and still serve the United Kingdom market, but from another jurisdiction. Is that what we want to happen? The soundest airlines commercially, which usually have the best safety record, are those with the most modern fleets, such as British Airways, Lufthansa and KLM in Europe, and Singapore Airlines and Cathay Pacific in Asia. The provisions will be a financial disincentive for British airlines to re-equip. We know the dangers of operating geriatric aircraft because of the fatal incidents involving an ALOHA 737 over the Pacific and a United Airlines 747 200, both of which suffered fuselage structural failure. Passengers were sucked into the air in flight. The other recent example is damage to fuel tank wiring found in many high-time 737s following the inspections required after the fatal mid-air explosion of a Trans World Airlines jumbo jet off New York.

An aeroplane's age is not measured in calendar years or in tax years, but in fatigue life and flight cycles. Is the Revenue to measure those? If so, how? Will it carry out an integrity audit on aircraft structures? Will it differentiate between short-haul and long-haul operations on the same type of aircraft, for example Boeing 757s and 767s, which can perform both? What would happen if a carrier interchanged between the two route sectors? It appears that the Revenue will categorise aero-engines as short-life assets, but aircraft are usually bought with engines installed. The value of the power plants is aggregated in the price, although occasionally power can be bought by the hour and individual engines have to be replaced.

The provisions appear to be an incentive to buy an aircraft almost in kit form for assembly by the airline and to claim higher capital allowances on evidently short-life items—not only engines, but tyres, interior seating and furnishings, windscreen wipers and many others. Only the 354 basic structure can be expected to last 25 years, but even that is over-optimistic: many systems are replaced or upgraded during that time and the value of the aeroplane is written down and, under British aviation accounting practice, depreciated in the books over 10, 12, 15 or 20 years—never over a longer period. To base tax allowances on guesstimates of an item's future life is inherently inequitable. The provisions are wholly inimical not only to small aviation businesses—the tiniest flying school will be affected—but to business aviation and manufacturing.

Even the Government's stated objective of fruitful European industrial co-operation could be prejudiced. There have been repeated arguments in Airbus Industrie about the location for the building of airbus wings, which is currently performed by British Aerospace at Chester. Such manufacturing investment and location decisions in Europe are finely balanced. If Britain will not give the balance of fiscal advantage to the British aircraft industry, the nature of aerospace co-operation will ensure that the work ends up in another partner's country, with a consequent loss of revenue and jobs in Britain.

I hope that the Government will rectify a clearly damaging provision. Since it was introduced, British manufacturing industry has moved officially into recession, but the budget deficit has greatly narrowed, so surely we need greater investment incentives. Fiscally, we can afford them. For employment, commercial and competitive reasons, we should be honest and recognise that the effect of the long-life assets provision is damaging in practice and dangerous in principle, inasmuch as it will institutionalise subjective decision making by the Revenue, as its bulletins on the subject show. Revenue officials are no more technically qualified to take such decisions than aerospace engineers are technically or professionally qualified to comment on fiscal and taxation matters, and why should they be?

There is bound to be much litigation, and aviation business will be lost to this country. If the Financial Secretary does not believe me, she should read the Royal Aeronautical Society paper of November 1997 on the implications for the United Kingdom aviation industry of the fiscal changes of November 1996 to July 1997. It is a brilliant paper of irrefutable logic, and, if she will allow me, I shall hand it to her at the conclusion of the debate. If she read it in its entirety, she could only be convinced that what I have argued is borne out by a full examination of the facts, and that the Government should put the situation right forthwith.

§ The Financial Secretary to the Treasury (Dawn Primarolo)

I congratulate the hon. Member for Ruislip-Northwood (Mr. Wilkinson) on securing this important debate, but he was quite wrong in his forecast of what I would say. I am glad that he pointed out that the measures were introduced by the previous Government: there was a debate on the Floor of the House and many of the points that he raised were covered, although I regret that he was not able to participate.

I share the hon. Gentleman's interest in the aviation industry, beyond my ministerial responsibilities. He will be aware of the importance of the industry to Bristol, for which I am a Member of Parliament. I concede, however, that my knowledge is not as detailed as his—he has 355 personal experience of the industry. I concur with his points about its importance to the United Kingdom economy and in terms of the development of technology.

I am aware of the United Kingdom aviation industry's concerns about the impact of the long-life assets legislation. The Government have received numerous representations from bodies such as the Royal Aeronautical Society, the British Air Transport Association and the General Aviation Manufacturers and Traders Association.

At the end of the debate, I shall be happy to take the submission offered by the hon. Gentleman. We probably already have it, but, in the spirit of co-operation, I shall respond positively to his suggestion on that matter. I met representatives of the bodies I mentioned in January this year to discuss this matter and I understand that the industry has several distinct areas of concern. These have to be addressed in a logical order.

The first area is the nature of the test to be applied in determining whether the long-life asset rate of 6 per cent. of capital allowance applies. The legislation applies to any asset with an expected useful economic life as an asset of any business of 25 years or more. I listened to the hon. Gentleman's points about the practice of British aircraft companies and how long they would keep an aircraft in operation, but he knows full well that that is not necessarily the end of that aircraft's working life, because the company will sell it on. Therefore, asset life reflects several decisions that the company will make.

Outside the aviation industry, most long-life assets are likely to remain in service in the hands of one owner throughout their economic lives, so the test is easy to apply in most cases. The accounting policy of the business will have to take into account the expected service life of the asset in that particular business; in such cases, the tax treatment will follow whatever accounting treatment is reasonably applied. However, aeroplanes are different: they are likely to be sold in working order and will still have a stretch of useful economic working life after they have left the hands of their first owner. Not only will the expected length of service with the first owner have to be taken into account, but expected subsequent useful life will have to considered.

I entirely accept that the test is a new one imposed by the legislation to which the hon. Gentleman referred, which may create uncertainty and may involve additional costs. However, there is a potential way round those problems of uncertainty and additional compliance costs. The Inland Revenue has been negotiating with 356 representatives of the industry with a view to arriving at an industrywide agreement that would set out which categories of aircraft should be treated as being within the long-life asset rules and which should continue to receive 25 per cent. allowance as before. The most recent meeting held to discuss that was held on 6 May.

As a first step in those negotiations, the industry submitted a claim, supported by a report examining evidence on existing aircraft lives, that no commercial passenger plane can be reasonably expected to have a useful economic life exceeding 25 years. The Inland Revenue is currently discussing that claim with the industry. If the industry is right—this relates to the hon. Gentleman's point about possible amendments to Finance Bills—and an industrywide agreement is reached that no commercial aircraft come within the long-life asset rules, the long-life assets capital allowance rules will have no effect on the British aviation industry. It is incredibly important that that point is first settled by agreement between the Government and the industry.

However, if it turns out that the industry is wrong and the facts do not support the claim that aircraft are not long-life assets, then, and only then, the aviation industry's other areas of concern, on which the hon. Gentleman has touched today and which have been detailed in submissions to the Inland Revenue and in discussions with me, will come into play.

I do not want to prejudge the issue, but, in recognition of the seriousness of the hon. Gentleman's points and my own keen interest in the subject, I have asked the Inland Revenue to press on with its negotiations with the industry to establish whether aircraft do come within the long-life asset rules. Only when we have an answer to the questions whether aircraft are long-life assets and, if so, how many are involved will we be able to gauge the real impact of these provisions on the aviation industry and deal with the other issues raised by the industry.

I assure the hon. Gentleman that, although the rules were inherited from the previous Government and were passed without criticism from Conservative Members at the time, the matter is one which we take seriously. We are pursuing it actively with the industry to ensure a satisfactory conclusion. If, at a later stage, the hon. Gentleman wishes to pursue the matter in correspondence with me, I shall be happy to respond as positively as I can and keep him informed of developments.