John Butterfill (Bournemouth West, Conservative)

I remind the Committee that with this we are discussing amendment No. 61, in page 28, line 31 [Vol 1], leave out from ‘in' to end of line 32 and insert

‘2006-08 or financial year 2006 and 2007.”.'.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

Amendments Nos. 60 and 61 are probing amendments dealing with the proposed changes to the time scale to which the increase in the amount of allowance for small enterprise applies. Clause 30 proposes to increase for one year the first-year capital allowance for spending by small businesses from 40 per cent. to 50 per cent. The amendments propose to increase that time to two years.

I seek the rationale behind the Government’s decision to propose the increase for only one year. I should be interested to know the Minister’s opinion on how capable small businesses are of responding to relatively small and rapid changes. If the changes proceed as proposed by the clause, that will represent year-on-year change in the capital allowance for four years. I have received many representations expressing concern that that uncertainty will undermine business confidence about how the allowances can be used. Has the Department assessed how such a small temporary change will affect small businesses’ behaviour?

Brooks Newmark (Braintree, Conservative)

Does the hon. Lady share my earlier concern that the Government are dealing with the issue wrinkle by wrinkle? What the Government really need is a major facelift in dealing with the issue of R and D tax credits. They should use a big bang, rather than doing things slowly and one by one.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

The issue is whether the Treasury decided that it wanted creases down the front or not. It seems to keep changing every year.

I know that the Minister does not particularly approve of the report referred to earlier, which was undertaken for the Institute of Chartered Accountants in England and Wales by the Manchester and Nottingham business schools. The report examined the role of tax incentives in capital investment and expenditure. Looking specifically at the capital allowance issue, the report found that

“if it is intended that the capital allowances regime should provide positive incentives to increase or accelerate the level of investment in capital, this is not being achieved. Capital allowances, with the exception of some generous investment incentives such as those for environmentally friendly investment, are too small to influence the expected payoffs from the investment.”

The Minister has already expressed his concerns about the small scale of the study, and other hon. Members have referred to it as a focus group. Does the Treasury know whether the businesses claiming such capital allowances are aware of the fact that the capital allowance has increased and select it, or do its figures showing take-up of the scheme actually reflect small businesses that have already made a business investment decision and then look to see what allowances are available?

It is doubtful that capital allowances accelerate investment. Any further uncertainty would undermine it.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I welcome you to the Chair for our proceedings this afternoon,Sir John. Those of us on the Conservative Benches look forward to serving under your chairmanship. I am sure that you will ensure that the business of the day proceeds as smoothly as it did this morning.

Rob Marris (Wolverhampton South West, Labour)

Without wrinkles.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

The hon. Gentleman tempts me down a route of metaphor that I do not wish to exploit further. We had too many ironing metaphors this morning for me to risk continuing with that train of thought. [Interruption.] I know that the Economic Secretary to the Treasury is getting excited because he is on the next chapter of the Bill, but it might be better for him if he can just control himself for a moment and hold his firepower for that stage—I should like to give him that advice from the Opposition side.

I want to comment briefly on clause 30 and pick up on the point that the hon. Member for Falmouth and Camborne (Julia Goldsworthy) made about the fluctuating fortunes of the rate of first-year allowances. It is worth remembering what has happened since 1998. From 1998 to the fiscal year 2003-04, first-year allowances were 40 per cent., and there was a nice period of stability, but in 2004-05 they went up to 50 per cent., in 2005-06 they went down to 40 per cent., in 2006-07 they will be at 50 per cent., and in 2007-08 they will go down to 40 per cent.

The hon. Lady suggested that the 50 per cent. rate should continue for two years. However, if small businesses are to expand, invest capital and take on some of the challenges that have been discussed in the debate, they need some stability and predictability in the first-year allowance rate. How can a business plan confidently for the future, taking into account the incentives offered by the Government, if it is difficult to predict the level of first-year allowances from year to  year? Will the Minister therefore give some indication of the Government’s thoughts on how long the 50 per cent. rate will continue and when there will be stability on first-year allowances?

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I welcome you to the chair, Sir John, and I look forward to serving under your chairmanship again. The clause increases the rate of first-year capital allowances for small businesses from 40 to 50 per cent., for one year from April 2006. It is designed to assist the cash flow of small businesses and to provide enhanced funding for new investment.

The hon. Member for Falmouth and Camborne addressed the amendments that she has tabled as probing amendments and she cited again the Manchester business school survey that was commissioned by the institute. However, although the study sample was larger than the one that we discussed this morning, it was still based on interviews with only 20 respondents, which is not a terribly strong basis on which to determine important policy. Its findings do not contradict the fact that first-year allowances provide a valuable cash-flow boost to small businesses.

The purpose of the hon. Lady’s amendments is to extend to the 2007 financial year the increase in the allowances that the Government are introducing inthe Bill. I remind the Committee that it was in the pre-Budget report that we announced the package of changes of which the proposal in the Bill is a part, and there was a considerable discussion on other elements of the package in a Committee of the whole House. The package includes the one-year increase in first-year allowances for small businesses—an element that was introduced in response to submissions from a number of bodies that represent the interests of small firms. It was warmly welcomed at the time.

The hon. Lady and the hon. Member for Fareham (Mr. Hoban) asked for an explanation of the thinking behind the decision. Although we recognise the value of certainty and stability in the tax system, we have to ensure that the system is responsive to increasingly flexible and global business pressures. That was manifest in the package of announcements of which this proposal is a part and which was set out in the pre-Budget report. The Government are committed to supporting small firms, and we shall keep the options that may be appropriate for the future under close review. In doing so, we shall try to ensure that small business support is provided in the most effective way, but in a manner that is consistent with a set of principles that could be summarised as simplicity for businesses that comply with their tax and legal obligations, support for small businesses that have aspirations to grow and determination to maintain the attractiveness of the United Kingdom as a business location. The amendments would tie our hands rather than enable us to continue to work with business interests on these factors.

I emphasise that the changes in clause 30 were not only requested by business organisations; they were also welcomed when we announced them. On 5 December, the Federation of Small Businesses said:

“We welcome the small business measures and the simplification they will offer, especially the corresponding increase in the level of capital allowances that can be claimed by small businesses.”

On the same day, the Institute of Directors said:

“The replacement of the zero rate corporation tax by increased capital allowances for small businesses was welcome.”

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

The Minister spoke of turning capital allowances on and off as part of a package. We need to remember that the abolition of the zero rate corporation tax is not just for this year, yet one of the measures that he offers in compensation is for one year only.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

The hon. Gentleman is right. The matter was debated in Committee of the whole House. I quoted the responses of business representative organisations, such as the Institute of Directors, to the package that was announced, including the moves on zero rates. The Institute of Directors supported that move, or gave the response that it did on 5 December, because it will reduce the differences in taxation for small businesses, depending on how they are organised. He will remember that that was the principal rationale for the moves that we have made on the zero rate.

Finally, the response and the welcome from those organisations is significant not only in policy terms, but because it may help to deal with the concern of the hon. Member for Falmouth and Camborne about how small firms will become aware of the changes. In addition to the sources of Government-sponsored advice and information, we would expect their tax agents and advisers to play a large part in ensuring that they are aware of changes that may benefit them.

However, organisations such as the Institute of Directors with its large membership and the Federation of Small Businesses with its federated network also have an important role to play in helping to ensure that their members and small businesses in general are fully aware of the tax support and benefits. On that basis, I hope that the hon. Lady will feel comfortable about withdrawing the amendment.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I must apologise, Sir John, for not yet welcoming you to the Committee. That was perhaps due to my eagerness to debate the amendments.

I listened carefully to the Financial Secretary’s response. I am keen to press upon him that the issue is not simply awareness of the allowances, but whether there is an incentive to take up the first-year allowances or whether it is something that small businesses come to after they have made the decision to invest. The support for the proposals, which have been welcomed by many parts of the industry, has not been entirely unqualified. Although it refers to the changes as beneficial changes, the Chartered Institute of Taxation said that

“this constant change and uncertainty undermines the effectiveness of any particular beneficial change and generally increases the complexity of the system unnecessarily”.

On the basis that the Financial Secretary has spoken of his commitment to small businesses and has left the door open to greater stability and consistency in future, I beg to ask leave to withdraw the amendment.