Schedule 18 - Capital allowances: fixtures provided in connection with energy management services
Finance Bill
5:45 pm
Mr Oliver Letwin (West Dorset, Conservative)
That is easily answered, Mr. O'Hara, if you will allow me. It is the declaration in the Register of Members' Interests. I am a director of a merchant bank. It does not engage in leasing and I am about to make an argument against the interests of the banking sector as a whole.
I shall try to explain to the Economic Secretary what has caused the problem and why it is a problem, from the point of view of the Government rather than the Opposition. I do not expect the Economic Secretary to answer now, but I hope that the Government will later have the opportunity to think about it and decide whether they would like to make a change.
I understand why the exception for leasing that I mentioned is in the Bill. The Government were aware of how tax-based leasing operates. A commercial bank with profits shields those profits by buying a piece of machinery, against which it can count writing down and answers. It then leases that machinery on to a company which, as my right hon. Friend rightly said, has not got profits and does not buy the machinery on balance sheet but sets up, for example, a project finance vehicle to take on the item in question. Under those circumstances the gain of the writing down allowances is split 50:50 between the bank or leasing finance company that has bought the machinery and which directly obtains the writing down allowances to set off against its profits from the Inland Revenue and the project company that has originated the transaction.
If the new and generous 100 per cent. allowance for energy intensive machinery were introduced and if it were allowed for leasing companies, in other words if proposed new section 180A (e)(i), were removed, half the benefit would go to the companies that the Economic Secretary is trying to induce to engage in energy-intensive machinery acquisition. The other half would go to the banks and finance leasing companies, which she does not want to benefit. I can understand that. There is no reason why the Government should arrange matters so that there is a large uncovenanted bonus for commercial banks and finance leasing companies. I think that that is why the item is included in the Bill.
As my right hon. Friend and the hon. Member for Torridge and West Devon rightly exposed, however, the result of the manoeuvre is, in the Economic Secretary's ironic phrase, to target the 100 per cent. allowance at the wrong target. For the reasons that I have given, if she pursues the current version of the legislation, large rich companies with high profits will use the allowance, because they can buy the machinery on the balance sheet and set the allowance off against their profits.
However, small nascent companies, which have to engage in project financing, will be unable to do that. The point about a project finance vehicle is that it is a single machinery vehicle set up to buy a specific piece of plant. When it buys the plant, it has no revenues, but receives them later, after it has started operating the plant. It has no profits, so it cannot use the 100 per cent. allowance. It must roll it over and use it later. The current value of doing that is very much reduced. In many circumstances, it would probably still make sense for such a company to use ordinary writing-down allowances and lease the machinery as before.
As I have said, I understand the Economic Secretary's reasons, but the policy has been so designed that it will, mistakenly, induce large rich companies, which probably do not need the incentive, to engage in energy-saving investment, while not inducing smaller poorer companies to do so. I should have thought that the Government's admirable aim was to do the reverse.
If the drafting and the cause of the problem are as I have described, the remedy is straightforward, so I hope that the Government will go away and think about it. The drafting should ensure that the part of the advantage of the 100 per cent. allowance that accrues not to the company engaging in the investment, but to the finance company or bank providing the leasing, does not accrue. There should be no additional advantage to that company or bank over and above the advantage that it would have with normal writing-down allowances. It cannot be beyond the wit of man to redraft the provision to have that effect. I do not say that that will be simple. In fact, I can gesture mentally towards its being quite complicated—but at least the effect would be rational as opposed to irrational.
That said, this is a relieving measure, so the fact that it will not do much good in its current form, and would do rather more good in another, does not lead me to jump up and down on my pogo stick. I pray that the Economic Secretary will not take all that as a great attack on the Government. I am merely making a genuinely helpful suggestion about how the legislation could be improved so as to achieve what I think the Committee agrees would be a good effect. It is pretty clear that the current drafting does not achieve that.