EXPENSIVE CARS (Hansard, 3 July 2002)

§ Mr. Flight
I beg to move, That the clause be read a Second time.
This is an especially dry clause to deal with when the time is getting on for midnight, but it represents proposals made by the Chartered Institute of Taxation in one of its "quick wins" papers on tax simplification, going back to last autumn. I thought that the proposals had been discussed with the Inland Revenue, which had welcomed them. The new clause is intended simply to update some definitions that have become rather out of date. The net effect is not a tax cost and may even be a tax gain.
For capital allowance purposes, there are different rules for so-called expensive and non-expensive cars. An expensive car is one that costs more than £12,000. The limit was last raised in 1992 from £8,500 to £12,000. When a car is expensive, instead of being able to claim 25 per cent. of the balance of expenditure every year, the allowance is restricted to £3,000. Separate tax records must be kept for all expensive cars; that can lead to a tedious amount of administration.
Since 1992, car prices have increased in nominal money terms and it is unrealistic to define an expensive car as one that costs more than £12,000. I suggest that £24,000 is a more realistic definition of what is supposed to be an expensive car. The Capital Allowances Act 2001, which replaces the 1990 measure, describes the cars as over the cost threshold rather than expensive. That is an example of a bit of spin, which has confused the original intention.
The tax system does not allow any deductions for depreciations or amortisation. Instead, capital allowances—the tax man's equivalent of depreciation—are given. The system requires careful consideration of whether expenditure falls into qualifying categories and precise calculations of the allowances that are due.
The capital allowance computed replaces depreciation in the tax computation as a deduction from profits in calculating tax. Whether the process is efficient and whether it achieves anything is a wider question. In the past, there have been restrictions on what is allowable. In many ways, capital allowances have been used as investment incentives. However, the system is being improved, notably in the Finance Bill, with a system of reliefs, not via capital allowances but through generally permitting a deduction for whatever is charged in the accounts for intangibles.
Surely we are approaching a stage where businesses should simply be allowed to deduct depreciation. That happens in, for example, Germany in computing taxable profits. If there is a need to give special incentives, for example, for computer equipment that small businesses buy, they can be provided through an enhanced deduction in the same way as research and development relief.
351 Plant and machinery constitute key allowances for business. In general, all purchases that fall into that category are pooled and written down en bloc at a rate of 25 per cent. on a reducing balance basis. There are some exceptions for long-life items.
The new clause deals with a limited simplification of the system and is aimed at administrative savings. It has been tabled for efficiency and applies to cars that are bought or leased by businesses for use in their activities. They are treated as plant and machinery. A requirement to run a pool for cars that is distinct from the general pool was abolished in 2000.
The capital allowances system continues to restrict allowances on so-called expensive cars. The system operates by requiring the business that holds any expensive cars to write them down separately, with separate records, as I have described. Given that the majority of cars that businesses run cost more than £12,000, the restriction causes substantial extra administration, to which I referred. The new clause would double the limit for an expensive car for current accounting periods.
The Inland Revenue might argue that it needs some protection against chairmen deciding to run Rolls-Royces on the business. Although the business may regard that as a legitimate expense, it could be questioned. However, the new clause would remove, at a stroke, the need for a great deal of record keeping; the argument against the new clause is that would cost the Exchequer significant sums of money. That is unlikely—it may even make money for the Exchequer given the interaction in the change of methods in the sale of a vehicle.
It is perhaps necessary to appreciate what happens when a business disposes of an expensive car. The disposal proceeds are compared with tax value that is written down. That will normally produce a balancing item and an extra allowance for the business. If the new clause is accepted, the business would get a modest allowance on the car in the first year and so on thereafter. There would be no balancing allowance because the expenditure would be lost in the pool of plant and machinery assets.
The bottom line is that the use of company cars is declining dramatically anyway. There is a complexity in the rules that incurs costs to administer and, in terms of tax gains or losses to the Revenue, this measure would probably produce a tax gain. There is a generally accepted case for simplification and, while we certainly would not press this matter to a vote, we hope that the Minister will respond that the Revenue is looking at this measure or a variant of it—we understand this to be the case—to simplify something that can easily be simplified at low tax loss.

§ John Healey
The new clause deals with capital allowances for expensive cars. This is, as the hon. Member for Arundel and South Downs (Mr. Flight) has said, a misnomer now, because cars costing more than £12,000 are not generally considered expensive these days, although I still think so. More significantly, the term is not used in the rewritten Capital Allowances Act 2001. It is, therefore, something of a misnomer and, as the hon. Gentleman said, the provision is somewhat complex to administer.
We have a developing strategy for the use of fiscal and economic instruments to encourage the use of cleaner, more environmentally friendly cars. The rules for taxing 352 employee company cars and fuel, vehicle excise duty and the new capital allowances for cars with low emissions of carbon dioxide all work within this framework. Raising the £12,000 limit for cars generally would work against this environmental aim because it could benefit the purchasers and users of larger and more expensive cars, which tend to be more environmentally polluting. Encouraging investment in such cars would be both expensive and counter-productive to our environmental aims.
I am aware of the submissions made by the Chartered Institute of Taxation. My right hon. Friend met representatives of the institute earlier this year, and we have invited them to submit the detailed workings that led them to suggest that there may be a gain to the Treasury from this measure. Our calculations suggest that the cost to the Exchequer of the proposals to raise the limit would be significant.
We are aware of the concerns that some businesses have about the cost of administering the rules. This is a hardy perennial in Budget representations. However, as many businesses recognise, there are no clear alternatives that do not raise other significant issues that are difficult to deal with. So, while I recognise that the rules can add significantly to the administration of businesses, there are no easy solutions that fit with our environmental aims, avoid introducing perverse incentives and provide good value for money for the country and the Exchequer.
I can tell the hon. Gentleman, however, that the Inland Revenue and my colleagues and I are keeping—and will keep—these rules under close review. We will consider suggestions for simplifying them in ways that do not compromise our other objectives, but his new clause is not compatible with those objectives. If the hon. Gentleman presses the matter to a vote, I will have to advise the House to reject it.

§ Mr. Flight
This is not the time of night to spend more time on this matter. The new clause was intended to be dealt with in Committee, but time ran out. The CIOT feels that it has an argument, and the Minister has made it clear that the door is open for dialogue. I do not think that the proposal necessarily conflicts with the Government's environmental objectives, and I hope that this brief discussion will enable us to begin the process of considering how a sensible simplification might be administered. On that basis, I beg to ask leave to withdraw the motion.