Investment Incentives

HC Deb 19 April 1972 vol 835 cc107-17W

Mr. Tugendhat

asked the Secretary of State for Trade and Industry if he will publish a table comparing the discounted value to industry, as a percentage of the cost of investment, of the new investment incentives set out in the White Paper, Industrial and Regional Development, Cmnd. Paper No. 4292, and of the previous two investment incentives systems operating at 26th October, 1970 and from 27th October, 1970, respectively, distinguishing between assisted and non-assisted areas.

TABLE COMPARING THE NET PRESENT VALUE OF GRANTS AND TAX SAVINGS FROM CAPITAL ALLOWANCES, AS PERCENTAGE OF COST OF INVESTMENT, FOR THE PRE- AND POST- 27TH OCTOBER INCENTIVE SYSTEMS AND THE NEW (MARCH, 1972) INCENTIVE SYSTEM
		Pre October, 1970 System	Post October, 1970 System	New System
New Plant and Machinery only(1)
Eligible for grant under pre-October, 1970 system:
National and Intermediate Areas	…	36.1–39.6(2)	31.9	33.9
Development Areas	…	49.8–52.4	33.9	52.9
Special Development Areas	…	49.8–52.4	33.9	54.8
Ineligible for grant under pre-October, 1970 system:
National and Intermediate Areas	…	26.4–29.6	31.9	33.9
Development and Special Development Areas	…	26.4–29.6	33.9	33.9
Second-hand Plant and Machinery
All areas	…	26.4–29.6	31.9	33.9

from 1st January, 1970, to 31st December, 1971.

Mr. Chataway

Following is the information:

Mr. Chataway

Yes. The information is given in the following Table for both plant and machinery and industrial buildings. Since the discounted value for industry's investment projects will vary according to the mix of plant and buildings in each project, the Table also contains for illustration a typical example. I must emphasise that the figures should be read in conjunction with the notes to the Table, since the figures alone cannot entirely reflect all the differences between the three incentive systems or the benefits to industry of the Government's other fiscal and economic measures introduced in the last 18 months.

Industrial Buildings only
National	22.2	22.2	24.9
Derelict land Areas	22.2	22.2	43.9
All Assisted Areas (if ineligible for Local Employment Act grant)	24.9	24.9	43.9
Intermediate Areas (attracting a full Local Employment Act grant)	41.4	41.4	43.9
Intermediate Areas (attracting a full higher Local Employment Act grant)	48.0	48.0	43.9
Development Areas (attracting a full Local Employment Act grant)	41.4	48.0	43.9
Development Areas (attracting a full higher Local Employment Act grant)	48.0	54.6	43.9
Special Development Areas (attracting a full Local	41.4	48.0	45.8
Special Development Areas (attracting a full higher Local Employment Act grant)	48.0	54.6	45.8

A typical industrial investment project containing both Plant and Machinery and Industrial Buildings(3)
National	33.3–36.1(2)	30.0	32.1
Derelict Land Areas	33.3–36.1	30.0	35.9
Intermediate Areas (no Local Employment Act grant)	33.9–36.7	30.5	35.9
Intermediate Areas (full Local Employment Act grant)	37.2–40.0	33.8	35.9
Intermediate Areas (full higher Local Employment Act grant)	38.5–41.3	35.1	35.9
Development Areas (no Local Employment Act grant)	44.8–46.9	32.1	51.1
Development Areas (full Local Employment Act grant)	48.1–50.2	36.7	51.1
Development Areas (full higher Local Employment Act grant)	49.4–51.5	38.0	51.1
Special Development Areas (no Local Employment Act grant)	44.8–46.9	32.1	53.0
Special Development Areas (full Local Employment Act grant)	48.1–50.2	36.7	53.0
Special Development Areas (full higher Local Employment Act grant)	49.4–51.5	38.0	53.0

NOTES TO TABLE
A	Significant differences between incentive systems not reflected in the Table
	1. The reflationary economic and fiscal measures introduced since October, 1970. These include cuts in Corporation Tax, reductions in Income Tax, Purchase Tax and SET, cuts in Bank Rate, abolition of consumer credit controls, acceleration of capital expenditure by the nationalised industries, and increased public expenditure on the infrastructure.
	2. Selective assistance under the new system. As the White Paper "Industrial and Regional Development" (Cmnd. 4942) stated, the Government are seeking new powers to provide selective assistance more widely than hitherto in the assisted areas. It is proposed that such help should be available for the modernisation of industry as well as for projects providing additional employment. This assistance would also be available in Intermediateas well as in Development and Special Development Areas. It is also intended to take powers making selective assistance available in certain circumstances outside the boundaries of the assisted areas.
	3. Differences between the range of assets qualifying for grants. In general, only those buildings which provided additional employment in assisted areas were eligible for Local Employment Act grants and some of those which did receive grant did not qualify for the full grant; under the new system the employment link is being abolished and reduced grants will not be applied. In addition, the Intermediate Areas have been widely extended, thus bringing into qualification for regional development grants many industrial buildings which did not qualify for Local Employment Act grants since they were outside the assisted areas. More plant and machinery attracts the 100 per cent. first year allowance (free depreciation) under the later systems than qualified for investment grants under the pre-October, 1970 system (e.g. plant used in the service industries and, in the manufacturing industries, office machinery, welfare and canteen equipment). There are also differences in the range of plant and machinery qualifying for investment grants in the pre-October, 1970 system and qualifying for regional development grants under the new system.
	4. Difference in offset of capital allowances. The net present value of allowances is reduced if firms are unable, because of insufficient current profits, to claim their benefit at the earliest possible moment. To ease this position, the 100 per cent. first year allowance for plant and machinery in excess of current year profits may now be carried back against Corporation Tax profits of the previous three years. This provision was not available under the pre-October, 1970 system, was confined to Development and Special Development areas in the post-October, 1970 system, but is now to be extended throughout the whole country.
B	Footnotes
	(1) Excluding motor cars, ships, computers and assets used in scientific research, for which there were or are special arrangements.

	(2) Where a range of figures is given, they relate 10 the lowest (15 percent.) and highest (25 percent.) of the old writing down allowances. There was an intermediate rate of 20 per cent., but the average rate was between 16 per cent. and 17 per cent. so the lower net present value figure is the more typical.
	(3) The ratio of plant to buildings is 4:1, which is about the average for investment projects by manufacturing industry in 1970. It has been assumed, for illustrative purposes, that the plant element qualified for both investment grants (pre-October 1970 system) and regional development grants (new system).
C	Assumptions
	(i) Rate of discount 10 per cent
	(ii) 21-month delay for tax; 12-month delay for investment grants and Local Employment Act grants; six-month delay for regional development grants.
	(iii) Firms have sufficient profit to take advantage of tax allowances as early as possible (but, see Note A, 4, above).
	(iv) Life of assets: industrial buildings in excess of 22 years, plant and machinery 10 years (if written down at 25 per cent.) or 20 years (if written down at 15 per cent.) The undepreciated balance on plant and machinery taken as a balancing allowance.
	(v) All assets brought into use in the year when expenditure was incurred in their purchase.
	(vi) Grants and allowances at the rates in force at the end of the pre- and post-October, 1970 systems. For this reason, figures for all three systems are calculated with Corporation Tax at 40 per cent. During most of the time the pre-October, 1970 system operated (i.e. in respect of expenditure incurred between 17th January, 1966, and 26th October, 1970, inclusive). Corporation Tax was at 42½ per cent. or 45 per cent.

Mr. Tugendhat

asked the Secretary of State for Trade and Industry if he will publish a table to show what proportion of the net present value to industry of the new investment incentive system outlined in the White Paper, Industrial and Regional Development, Cmnd. Paper No. 4942, is profit related, and showing comparative figures for the net present values of the two incentive systems in operation at 26th October and from 27th October, 1970, respectively.

Mr. Chataway

Yes. The following Table gives the figures asked for by my

TABLE COMPARING THE PERCENTAGES OF THE TOTAL NET PRESENT VALUE OF GRANTS AND TAX SAVINGS FROM CAPITAL ALLOWANCES WHICH ARE PROFIT RELATED FOR THE PRE-OCTOBER, 1970, POST-OCTOBER 1970, AND NEW (MARCH, 1972) INCENTIVE SYSTEMS
	Pre-October, 1970 System	Post-October, 1970 System	New System
New Plant and Machinery(1)
Eligible for grant under pre-October, 1970 system:
National and Intermediate Areas	49.7–54.1(2)	100	100
Development Areas	27.0–30.6	100	64.0
Special Development Areas	27.0–30.6	100	61.7
Ineligible for grant under pre-October, 1970 system:
National and Intermediate Areas	100	100	100
Development Areas	100	100	100
Special Development Areas	100	100	100
Second-hand Plant and Machinery
All Areas	100	100	100
Industrial Buildings
National	100	100	100
Derelict Land Areas	100	100	56.6
All assisted areas (if ineligible for Local Employment Act grant)	100	100	54.2–56.6
Intermediate Areas (attracting a full Local Employment Act grant)	45.1	45.1	56.6
Intermediate Areas (attracting a full higher Local Employment Act grant)	33.7	33.7	56.6
Development Areas (attracting a full Local Employment Act grant)	45.1	33.7	56.6

hon. Friend, in the form of percentages of the total net present value in each case, for both plant and machinery and industrial buildings and also for an investment project containing a typical plant/buildings mix. The Table reflects the fact that the availability of grants is unaffected by whether a firm is profitable or not whereas the benefit of tax allowances depends on a firm's profit position. As the Table shows, the post-October, 1970 and new systems are generally substantially more profit related than the pre-October, 1970 system.

	Pre-October, 1970 System	Post-October, 1970 System	New System
Development Areas (attracting a full higher Local Employment Act grant)	33.7	25.1	56.6
Special Development Areas (attracting a full Local Employment Act grant)	45.1	33.7	54.2
Special Development Areas (attracting a full higher Local Employment Act grant)	33.7	25.1	54.2
Industrial Investment Project containing both Plant and Machinery and Industrial Buildings(3)
National	56.4–59.7	100	100
Derelict Land Areas	56.4–59.7	100	89.4
Intermediate Areas (no Local Employment Act grant)	57.0–60.3	100	89.4
Intermediate Areas (full Local Employment Act grant)	48.6–52.2	86.6	89.4
Intermediate Areas (full higher Local Employment Act grant)	45.7–49.3	81.9	89.4
Development Areas (no Local Employment Act grant)	35.1–38.0	100	62.7
Development Areas (full Local Employment Act grant)	30.1–33.0	82.6	62.7
Development Areas (full higher Local Employment Act grant)	28.3–31.2	78.5	62.7
Special Development Areas (no Local Employment Act grant)	35.1–38.0	100	60.4
Special Development Areas (full Local Employment Act grant)	30.1–33.0	82.6	60.4
Special Development Areas (full higher Local Employment Act grant)	28.3–31.2	78.5	60.4

NOTES TO TABLE
A	Footnotes
	(1) Excluding motor cars, ships, computers and assets used in scientific research, for which there were or are special arrangements.
	(2) Where a range of percentages is given, they relate to the lowest (15 per cent.) and the highest (25 per cent.) of the old writing down allowances. There was an intermediate rate of 20 per cent., but since the average rate was between 16 per cent. and 17 per cent. the lower profit related percentage is the more typical.
	(3) The ratio of plant to buildings is 4:1, which is about the average for investment projects by manufacturing industry in 1970.
B	Assumptions
	(i) Rate of discount 10 per cent.
	(ii) 21-month delay for tax; 12-month delay for investment grants and Local Employment Act grants; 6-month delay for regional development grants.
	(iii) Firms have sufficient profit to take advantage of tax allowances as early as possible.
	(iv) Life of assets; industrial buildings in excess of 22 years; plant and machinery 10 years (if written down at 25 per cent.) and 20 years (if written down at 15 per cent.). The undepreciated balance on plant and machinery taken as a balancing allowance.
	(v) All assets brought into use in the year when expenditure was incurred in their purchase.
	(vi) Grants and allowances at the rates in force at the end of the pre- and post-October, 1970 systems. For this reason, figures for all three systems are calculated with Corporation Tax at 40 per cent. During most of the time the pre-October, 1970 system operated (i.e. in respect of expenditure incurred between 17th January, 1966 and 26th October, 1970 inclusive), Corporation Tax was at 42½ per cent, or 45 per cent.

Mr. Edward Taylor

asked the Secretary of State for Trade and Industry if he will publish a table comparing the differential between the discounted value to industry in development areas and non-assisted areas of the new investment incentives set out in the White Paper, Industrial and Regional Development, Cmnd. Paper No. 4942, and of the previous investment incentive systems operating at 26th October, 1970 and from 27th October, 1970, respectively.

Mr. Chataway

Yes. The information is given in the following Table in the form of percentages of the cost of investment. I must emphasise that the figures should be read in conjunction with the notes to the Table, since the figures alone cannot entirely reflect all the differences between the various incentive systems nor some variable factors which can affect comparisons. With this qualification, it is clear that the regional differential in

favour of investment in Development Areas is generally greater under the new

TABLE COMPARING THE DIFFERENTIAL BETWEEN THE NET PRESENT VALUES OF GRANTS AND TAX SAVINGS FROM CAPITAL ALLOWANCES (EXPRESSED AS A PERCENTAGE OF COST OF INVESTMENT) ON INVESTMENT IN DEVELOPMENT AREAS AND INVESTMENT OUTSIDE ASSISTED AREAS FOR THE PRE-OCTOBER, 1970, POST-OCTOBER, 1970 AND NEW (MARCH 1972) INVESTMENT INCENTIVE SYSTEMS
							Pre-October, 1970 System	Post-October, 1970 System	New System
Plant and Machinery(1)
Development Areas	…	…	…	…	…	…	49.8–52.4(2)	33.9	52.9
Non-Assisted Areas	…	…	…	…	…	…	36.1–39.6	31.9	33.9
Differential(3)	…	…	…	…	…	…	13.7–12.8	2.0	19.0
Industrial Buildings(4)
Development Areas	…	…	…	…	…	…	41.4	48.0	43.9
Non-Assisted Areas	…	…	…	…	…	…	22.2	22.2	24.9
Differential(3)	…	…	…	…	…	…	19.2	25.8	19.0
Industrial Investment Project containing both plant and Machinery and Industrial Buildings(5)
Development Areas	…	…	…	…	…	…	48.1–50.2	36.7	51.1
Non-Assisted Areas	…	…	…	…	…	…	33.3–36.1	30.0	32.1
Differential(3)	…	…	…	…	…	…	14.8–14.1	6.7	19.0

NOTES TO TABLE
A	Footnotes
	(1) Excluding motor cars, ships, computers and assets used in scientific research, for which there were or are special arrangements. The comparison is of plant which qualified for investment grant under the pre-October, 1970 system and which will qualify for regional development grant under the new system. These two categories of plant are largely co-terminous, but there are differences on the margin.
	(2) Where a range of figures is given, they relate to the lowest (15 per cent.) and highest (25 per cent.) of the old writing down allowances. There was an intermediate rate of 20 per cent. but since the average rate was between 16 per cent. and 17 per cent. the lower figure is the more typical.
	(3) There is no difference, for the pre- and post-October, 1970 systems, between the regional differential for Development Areas and Special Development Areas. Under the new system, the differential in favour of Special Development Areas is about 2 percentage points higher than for Development Areas.
	(4) The figures for the pre- and post-October, 1970 systems assume buildings qualifying for building grant under the Local Employment Acts at the rate of 35 per cent. Under certain conditions buildings could qualify for Local Employment Act grant at 45 per cent., but equally grants could be abated depending on individual circumstances. Under the new system, regional development grant may be given for buildings without the employment link that existed under the Local Employment Act system.
	(5) The ratio of plant to buildings is 4:1, which is about the average for investment projects by manufacturing industry in 1970.
	(6) In addition, as the White Paper "Industrial and Regional Development"(Cmnd. 4942) stated, the Government are seeking new powers to provide selective assistance more widely than hitherto in the assisted areas. It is proposed that such help should be available for the modernisation of industry as well as for projects providing additional employment. This assistance would also be available in Intermediate as well as in Development and Special Development Areas. It is also intended to take powers making selective assistance available in certain circumstances outside the boundaries of the assisted areas.
B	Assumptions
	(i) Rate of discount 10 per cent.
	(ii) 21-month delay for tax; 12-month delay for investment grants and Local Employment Act grants; six-months delay for regional development grants.
	(iii) Firms have sufficient profit to take advantage of tax allowances as early as possible.
	(iv) Life of assets: industrial buildings in excess of 22 years; plant and machinery 10 years (if written down at 25 per cent.) or 20 years (if written down at 15 per cent.). The undepreciated balance on plant and machinery taken as a balancing allowance.
	(v) All assets brought into use in the year when expenditure was incurred in their purchase.

system than under either of the previous systems.

(vi) Grant and allowances at the rates in force at the end of the pre- and post-October, 1970 systems. For this reason, figures for all three systems are calculated with Corporation Tax at 40 per cent. During most of the time, the pre-October, 1970 system operated (i.e. in respect of expenditure incurred between 17th January, 1966 and 26th October, 1970 inclusive) Corporation Tax was at 42½ per cent. or 45 per cent.