Schedule 17 - Capital allowances: energy-saving plant and machinery
Finance Bill
12:00 pm
Mr Richard Ottaway (Croydon South, Conservative)
We welcome the introduction of energy-saving plant and machinery, because it is a sensible and environmentally acceptable idea. We support the Government's objectives, but I want to quiz the Minister on three points.
First, several factors trigger permission to receive an allowance for an energy-saving plant. The first factor is that the plant must be of a description specified by Treasury order. On the face of it, that seems reasonable, but no one has any idea what such an order might describe as energy-saving or efficient equipment. We are aware that it may be made by reference to a technology list issued by the Secretary of State. Will the Minister give me guidance on that?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
A list has already been published on the website, which I believe the industry has found helpful.
Mr Richard Ottaway (Croydon South, Conservative)
The Minister scores a hit. I was unaware of that list, as were those advising me.
The second point is that the
``Treasury may by order provide that''
no allowance can be claimed
``unless a relevant certificate of energy efficiency is in force.''
The important word is ``may''. Does the Treasury intend to exercise that discretion?
My third point relates to the issuing of energy efficiency certificates. They are issued by the Secretary of State or an authorised person in England, by Scottish Ministers in Scotland, by the National Assembly in Wales, and by the Department of Enterprise, Trade and Investment in Northern Ireland. That sounds like a recipe for confusion. We are aware of the Government's objectives on devolution and we agree to differ on that, but we could end up with different criteria, themes and structures. What would happen if a large company with equipment in England moves it to Scotland? Would the company have to get a certificate in both regions? There is understandable concern, so will the Minister clarify those points?
Mr Michael Jack (Fylde, Conservative)
I have a number of points that reflect the representations that have been sent to Committee members. Before I move to those, will the Minister explain paragraph 2? It contains new section 45A, which says:
``Expenditure is first-year qualifying expenditure if...it is expenditure on energy-saving plant or machinery that is unused and not second-hand.''
What happens if someone buys a piece of demonstration equipment? It might have been used to demonstrate how the energy-saving equipment operates in a manner that is compatible with the purchaser's facilities. However, the equipment may not be second-hand in that it has not passed from the manufacturer to a purchaser. Given that there may well be new and novel equipment on the list to which my hon. Friend referred, it would help to know what qualifies as first-year expenditure. In my experience in the horticultural industry many years before becoming a Member, manufacturers would often bring some piece of novel technology for growers to try that might prove to be sufficiently effective that they decided to buy it. I am grateful that the legislation is in plain English, which enables me to understand it, as this is the first time that we have had the chance of debating a piece of legislation that has been subject to the capital law re-write exercise, which I am delighted to see.
With regard to proposed new section 45A(1)(c) of the Capital Allowances Act 2001, the Chartered Institute of Taxation states:
``We note that lessors are to be excluded under new s 45A(1)(c) of the CAA 2001.''
It makes the reasonable point that
``As long as energy-saving plant or machinery is being provided and allowances are given only once, it should not matter whether they go to the user or to a lessor.''
If its assumption is correct, that worries me, because it could be that energy-saving equipment may be the subject of a lease arrangement. I cannot believe that, if the Government wish people to have a high uptake of that type of equipment, they would want to exclude the use of the allowances by those providing the facility by a leased mechanism. Can the Economic Secretary clarify that point?
My hon. Friend the Member for Croydon, South (Mr. Ottaway) rightly teased from the Economic Secretary the point that the list, of which I understand the authors are the energy and environment best practice division of the DETR, is indeed to be published on a website, but nowhere else. I appreciate that there is an assumption that all businesses now have access to the web, but what about embryo businesses that may have some difficulty in that respect? I am equally interested to know how people will know where to find the information. Will the Government, in the great spending splurge on advertising, use some of that money to try to advise people on where they can find the information?
I move on to representations received from the Institute of Chartered Accountants on the matter. Interestingly, referring to proposed new section 45B(4), it says that the certificate will be granted not to the taxpayer, but to the manufacturer of the equipment. That worries me. To save me reading out large amounts of text, will the Economic Secretary describe the processes to be gone through to ensure that, when a manufacturer receives the certificate, there can be no doubt that the subsequent machinery will qualify. Someone may unwittingly decide that their machinery is likely to qualify for the certificate, only subsequently to discover that there is some point of difference between the DETR and the manufacturer. The problem then arises of retrospective withdrawal of the allowance. It may be that that has been carefully thought through, and that the certificate would have to be provided ahead of any transaction. However, to avoid doubt, will the Economic Secretary address the issue?
How will the certification process operate in the context of someone who buys a piece of machinery with a certificate, but finds that it has to be modified in some way to fit into the workplace. Sometimes the dimensions given in the manufacturer's catalogue do not correspond to the actual machinery, so that it does not fit into the workplace. Does a modification to the equipment in some way invalidate the certificate? These are practical problems, and those who would seek assistance under this part of the Bill would like to know whether the original certificate also covers modification.
There is some debate about whether proposed new section 45C is sufficiently clear, and the Chartered Institute of Taxation makes the point that, where one has a mixture of approved and non-approved equipment, there may well have to be some form of apportionment in terms of the relevant capital allowances. The institute's representation states:
``In that event, we would expect the normal apportionment rule in section 562(3) of the Capital Allowances Act 2001 would need to apply. However, new section 45C(5) excludes the operation of section 562(3) in all cases where there both approved and non-approved components.''
Now, this is the kind of nitty gritty problem that needs to be resolved before the schedule comes into operation, and I should be most grateful for the Economic Secretary's enlightenment on these representations.
Mr John Burnett (Torridge and West Devon, Liberal Democrat)
This is my first opportunity to welcome you to the Chair, Mr. O'Hara, although I have been fortunate enough to serve under your chairmanship before.
I rise to endorse the points made by the right hon. Member for Fylde (Mr. Jack). I, too, have received representations on the Bill from the Chartered Institute of Taxation and I know from past experience that many purchasers of plant and equipment prefer, for cash-flow reasons, to buy through leasing or hire purchase. The Government are pursuing the laudable aim of encouraging the purchase of energy-saving plant and machinery, but why are they excluding lessors from that? The object of the exercise is to get as much energy-saving plant and equipment into use in businesses and companies throughout the country, so I look forward to hearing a compelling explanation of why lessors are excluded.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
The energy technologies list sets out qualifying technologies and products, and was issued by the Department of the Environment, Transport and the Regions on 1 April. It is available on the DETR website, as I said in response to the hon. Member for Croydon, South, and it is also published—hard copies are available from the DETR's energy and environment hotline. I am sure that the same problems exist in locating something whether it is on a website or in hard copy. Until one knows that it exists, one does not know to look for it. That is also a problem with signposts, but that is beside the point. It makes no difference which form is used.
On the question of whether the certificates can be issued by the devolved administrations, responsibility for some environmental technologies has been transferred to the devolved assemblies. However, that does not include responsibility for the technologies currently included in the scheme, and, in particular, it does not include responsibility for combined heat and power technology. That is the only kind of technology that currently requires a certificate of energy efficiency. The schedule caters for future cases in which responsibility for environmental technology included in the technology list has been transferred to the devolved administrations, which would also issue certificates of energy efficiency.
Mr Michael Jack (Fylde, Conservative)
Let us say, for example, that a piece of equipment was approved in Scotland, then moved to England, but came under the unified tax jurisdiction. How would the allowance operate if the piece of equipment had not been certified in England?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
My understanding is that, at the moment, certificates are issued centrally, so the right hon. Gentleman's point is hypothetical. The DETR will delegate it to the combined heat and power quality assurance programme. That is how the issuing of certificates is dealt with. I appreciate that the right hon. Gentleman's point might need to be borne in mind in future, and I shall write to him on the subject. The energy-saving criteria will apply nationwide, so there should not be any marked difference between decisions, even though they are not being made centrally.
A modified design can be re-certified if the new design still meets the criteria. The point made about the modification of equipment to fit in with other equipment, perhaps when it arrives on site, can be tackled in that way.
Mr Michael Jack (Fylde, Conservative)
How will that information be communicated to taxpayers, so that someone does not unwittingly buy a certified piece of equipment, modify it and forget to re-certify it? Will people be given guidance?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I do not know exactly what form of communication there will be, but I shall write to the right hon. Gentleman on the details later.
The retrospective withdrawal of certificates was referred to. Products on the product list are not covered by the special rules concerning the certificates of energy efficiency, and can be given to the taxpayer. The certificates are used only for technologies specifically designed for the taxpayer's business, and the energy savings depend on the design. Combined heat and power is the only technology for which a certificate is needed. A certificate can rightly be withdrawn if, for example, a combined heat and power installation is not built according to the certified design. Obviously, people must discharge some criteria if they are expected to do so.
The energy efficiency of a combined heat and power installation can be measured from its design, and the certificates can then be issued at the design stage. They will certify that the energy efficiency standards required for the scheme are met, and the purchaser should thus be certain that the installation can qualify for 100 per cent. allowances before he makes the investment.
Some hon. Members spoke about leasing arrangements and the exclusion of leases. First-year capital allowances, such as given by the scheme, aim to encourage targeted capital investment by businesses. They help them to overcome the cash-flow disadvantages that they face when they make up-front investments out of profits after tax. They also enable businesses to receive tax relief earlier than would otherwise be the case. Businesses that lease assets do not suffer the same disadvantage, and can claim the full tax relief on their lease payments during the term of the lease. There is a marked difference between the profile and the nature of the leasing arrangements, hence the exclusion.
Mr Michael Jack (Fylde, Conservative)
Can the process of leasing not be an aid to the cash flow of a business? With it, a business need not put a capital sum up front, albeit one that is assisted by the capital allowance that the Minister has outlined? If the objective is a high uptake of energy-saving equipment, does it matter how the initial purchase is funded?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I have just made the point that we are trying to ensure, by the use of first-year capital allowances, that we overcome the difficulties of the cash-flow disadvantage for those not leasing. The up-front investments have to be made out of profits after tax, but that is not the case for leasing.
Mr John Burnett (Torridge and West Devon, Liberal Democrat)
I think that the Minister is explaining that the payments that lessees make—the lease payments—are tax deductible in toto. It would help lessees greatly if the lessor company received a capital allowance, as the lease payments would be diminished by the tax saving.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
Energy service providers can claim 100 per cent. allowances on their spending only on qualifying technology. As I said, such equipment is not for leasing. It is equipment that the providers are contracted to install and operate on clients' premises as part of a comprehensive energy management agreement to achieve energy savings or energy efficiencies. The energy-saving services provided in such cases are different from normal commercial leasing arrangements. Unlike usual lessors, the energy-saving service companies are responsible for the day-to-day operation of the equipment. The difference is that the energy-saving service providers do not operate the same arrangements.
Mr Michael Jack (Fylde, Conservative)
I am struggling to follow the logic of the Economic Secretary's argument. If I understand it correctly, her argument is that, because the equipment might be provided by an energy service company—perhaps a company that has entered into an agreement with the company to which the service is being provided, in order to share the energy savings—there might, in her judgment, not be a case for the energy service company to receive the 100 per cent. allowance.
I come back to the point that I made earlier, that the objective is surely to achieve a high uptake of the energy-saving systems. As the hon. Member for Torridge and West Devon (Mr. Burnett) said, it may be to the advantage of the company to use a leasing arrangement to get hold of the equipment because of the cash flow advantages. However, there can be only one capital allowance, and it can be used only once. If it is used once by the leasing company ultimately to reduce the cost to the user of the equipment, as the hon. Gentleman said, does it matter that it is not the company or the principal who claims the allowance but a leasing organisation?
I do not know whether there are any financial implications for allowing only the company to claim the allowance rather than a leasing company, but it throws into question the raison d'etre of leasing. I should be grateful if the Economic Secretary would expand a little on that. I do not understand why such discrimination has crept into the legislation.
The other point that the hon. Lady did not cover concerned proposed new section 45A and what is unused and what is second-hand. An answer would help the industry.
Mr Richard Ottaway (Croydon South, Conservative)
My right hon. Friend makes a strong point about leasing. Indeed, it is mentioned also in the next schedule.
I return to the issuing of certificates of energy efficiency. The Minister said that they were being be issued centrally, but the schedule does not provide for that. Proposed new section 45B(3)(b) states that
``in the case of plant of machinery used or for use in Scotland''
the certificate is issued by Scottish Ministers. There is no provision for it to be issued centrally. The schedule makes it clear that certificates will be issued in Scotland under criteria decided by Scottish Ministers, and with a fee structure imposed by them. It is not good enough for the Minister to say that it is not so. The truth is that what the Bill provides is different from what the Minister is telling us.
Mr John Burnett (Torridge and West Devon, Liberal Democrat)
I remind the Minister that the rental costs of leasing agreements of qualifying plant and machinery are invariably deductible, if the equipment is qualifying equipment for business purposes, either against the corporation tax profits of the business or against the income tax paid on the profits of sole proprietorships or partnerships. That deduction is made in full. Will the Economic Secretary answer the central thrust of the question that the right hon. Member for Fylde and I asked? Why will the lessor company—the acquirer—not be entitled to such laudable relief for energy-saving machinery?
Mr Richard Ottaway (Croydon South, Conservative)
Is not the point about leasing that the lessee derives some benefit from leasing? If that benefit is 50 per cent. and we add 100 per cent. allowances on top, the lessee will receive 150 per cent. I would understand that. Will the Minister confirm that that is the thinking?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I shall go over the devolution point once more, although I shall not say any more than I did before. The schedule provides for the certificates to be issued by the Secretary of State or—as an alternative, not a mandatory requirement—by the devolved assemblies. All the bodies will use the same criteria, in any event.
Mr Richard Ottaway (Croydon South, Conservative)
The schedule does not use the word ``or''. Perhaps an amendment is required to add it at the end of proposed new section 45B(3)(a). The Minister might like to return to that on Report.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I shall bear that in mind, and if we discover problems with the drafting, we will be grateful for the hon. Gentleman's support in dealing with them on Report.
I forgot to talk about second-hand equipment being used for demonstration. Demonstration equipment would not be treated as second-hand. That meets the demands that the right hon. Member for Fylde sketched out, drawn from his life before he entered the House.
Several Opposition Members made another point. The provision is designed to help users in the industry to adapt to the levy, to be as energy efficient as they can, and to contribute as much as they can. It was alleged that to give lessors allowances could help lessees' payments. What is important is energy-saving equipment, and the aim of the allowances is to help capital investment in energy-saving plant by the users of the equipment. That is the point. They are not designed to help more widely.
Mr Michael Jack (Fylde, Conservative)
Is there a difference in definition between the user of a piece of equipment that he has bought outright, and the user who leases it?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I have just answered that question by pointing out that the focus of the policy is to help those who use equipment in the industry to adapt. Those going through leasing arrangements do not make a capital investment, so they do not meet the criteria for the scheme.
Mr John Burnett (Torridge and West Devon, Liberal Democrat)
If the aim of the policy is to encourage the purchase and use of energy-saving plant and machinery, why exclude the many assets—I cannot give a percentage, but let us say half the total—that will be purchased on hire purchase or lease?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I have already explained why we are not doing that. There is not much to be gained by my repeating the reason, probably ad nauseam. The scheme is designed to support the costs for those who have to make up-front capital payments to invest in equipment. Leasing, which has other forms of financial structure, does not require the same pattern of investment and will be helped in a variety of other ways through the tax system. It does not need the same assistance as capital investment by the companies and businesses that we are trying to help with the scheme. That is why leasing arrangements are excluded.
Mr Oliver Letwin (West Dorset, Conservative)
Is the Economic Secretary talking about tax-based leasing? Does she mean to exclude it specifically from the provisions?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
What I am talking about is what we have been talking about all along. The hon. Gentleman is drawing me into a conversation that he was having with the hon. Member for Croydon, South. Assets for leasing are excluded.
Mr Michael Jack (Fylde, Conservative)
The Economic Secretary seemed at one point to challenge the idea of using of any kind of capital allowance structure in the context of leasing. She almost gave the impression that virtuous investment—in this context, for example, energy-saving combined heat and power systems—is good if one puts 100 per cent. of one's own money up front, but bad if one finances it by any other mechanism. Companies are concerned about their outgoings. A brand new start-up company in an energy-intensive business might not, in the first instance, have any profits against which it could use the capital allowance—the subject of the schedule—because it might take some years to build up enough profitability to take advantage of the scheme. However, in the context of leasing, if the capital cost of the energy-saving equipment could be lowered, so giving companies that lease such capital allowances would seem to be an advantage.
Mr John Burnett (Torridge and West Devon, Liberal Democrat)
It was laudable that the Economic Secretary referred to cash flow. Does the right hon. Gentleman agree with me that there can be no greater assistance with cash flow than for the company, individual or business that is the lessee to be able to pay significantly lower lease charges or rent, while the lessor receives a 100 per cent. capital allowance?
Mr Michael Jack (Fylde, Conservative)
The hon. Gentleman, who has considerable experience in these matters, demonstrates the purpose of leasing and the usefulness of transferring the capital allowance from the user to the leasing company, which can use it to reduce the charge for the equipment to the person who leases it. I thought that that was the purpose of capital allowances in the context of lease arrangements. To make an artificial distinction is illogical. If the objective is to have a high take-up of energy-saving schemes, does it matter how they are financed? The fact that lessors are excluded seems to militate against the start-up company that may not have any profits in the first year against which to claim the 100 per cent. capital allowance. A lease arrangement might therefore be entirely to the advantage of that company, and of the Government, because it would achieve the energy-saving objective.
I should be grateful if the Economic Secretary would have one further go at clarifying this. Otherwise, it will be on the record that the Government cannot explain why an important element of business finance cannot be used to further their energy-saving objectives.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I am happy to make one comment in response to the right hon. Gentleman. First, there is a clear distinction between capital investment and leasing. It is not a fancy distinction; it is made in 101 other contexts. Secondly—
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I am trying to respond. We are not making progress. First, there is a clear distinction. Secondly, Opposition Members may find it difficult to accept the fact, but we want to target the scheme. I know that I am not allowed to return to this morning's debate, but I wish to refer to it. The right hon. Gentleman made a point about virtue and said that some things are regarded as virtues and others are not. That is not the case; the Bill is not about virtues. It is about focusing, targeting our actions and responding in an appropriate manner to incentivise and help certain groups.
In this case, capital investment requires up-front investment and does not have the same advantages. Obviously, leasing has a different pattern of arrangements. It is for that reason that we have focused on it and devised the scheme in the way that we have. I appreciate that our decisions might not be the same as those that the right hon. Gentleman would make if he were in Government, but he is not in Government, and we have made those decisions.
Mr Michael Jack (Fylde, Conservative)
I forget whether I am in the Cabinet. I am a humble Member of Her Majesty's Opposition, but I receive regular representations from the Finance and Leasing Association, which goes out of its way to emphasise the contribution that it makes to help capital investment in business.
Mr Edward O'Hara (Knowsley South, Labour)
Order. I see out of the corner of my eye certain literature that should not be read in Committee.
Mr Peter Luff (Mid Worcestershire, Conservative)
I apologise, Mr. O'Hara, but this is a piece of mail that I received from the Labour party, not a newspaper.
Mr Edward O'Hara (Knowsley South, Labour)
Order. It is literature that is not germane to the business of the Committee.
Mr Michael Jack (Fylde, Conservative)
An interesting observation came to mind during that helpful interregnum. If a company were running a fleet of leased cars and decided that it wanted to take advantage of the new regimes that we discussed earlier in the Bill, it might choose a more environmentally efficient fleet of cars by virtue of leasing arrangements. Those arrangements would benefit from the transfer of the capital allowance to the lessor organisation. The objective of diminished environmental outputs from motor vehicles would be assisted by the leasing facility that the Government are happy to put a tick beside, but the Economic Secretary says that we are focusing—that is the word that she used. I want to examine the word ``focusing'' for a moment. We are focusing on those companies that are in the fortunate position of having enough money to buy a piece of energy-saving equipment. They are making a profit and can, therefore, use all of the capital allowance under the schedule at one fell swoop.
However, the Economic Secretary is aware that many parts of British manufacturing industry are showing the opposite characteristics. They are making a loss and struggling to stay in business. They might want to deal with the impact on their businesses of the climate change levy by purchasing energy-saving equipment, but they might need to spread the purchase over time through hire purchase. That was the term used by the hon. Member for Torridge and West Devon; leasing is the more modern terminology for such an arrangement. Discrimination has crept in: unless a company is an up-front, 100 per cent. purchaser, it will not receive an allowance from the Government for acquiring energy-saving equipment.
I do not expect that the Economic Secretary will bother to reply to those points. We have now teased out from the Government the fact that there is discrimination against those who want to use lease finance. I hope that the Finance and Leasing Association will read these proceedings and correspond with the Economic Secretary, because they might do a better job of persuading the Government to re-examine the issue than I have this afternoon.
Mr John Burnett (Torridge and West Devon, Liberal Democrat)
I exhort the Economic Secretary to think again on this. The businesses that will be penalised by excluding leasing, hire purchase and all those arrangements are small businesses with a low cash flow. They could be significantly assisted if the Treasury took on board the various points that we have made. The established, well-heeled companies will not be prejudiced by the arrangements. They will be helped to some extent, but let us help the smaller man and the new businesses.
Question put and agreed to.
Schedule 17 agreed to.
Clause 66 ordered to stand part of the Bill.