Clause 24
Finance Bill
5:00 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I was not sure whether the Minister was going to speak to the clause—he has a text in his hand—but I will kick off the debate. Clause 24 amends the provisions of part 2 of the Capital Allowances Act 2001, which relates to plant and machinery allowances, to provide a one-off, first-year allowance of 40 per cent. on expenditure incurred on plant and machinery. The allowance is available for unincorporated businesses, such as that in which my hon. Friend the Member for Beverley and Holderness is a partner, during the 12 months from 6 April 2009, and is available for businesses that pay corporation tax, which again applies to a business in which my hon. Friend has an interest, during the 12 months from 1 April 2009. He will be noting the measures very carefully when looking at his capital expenditure plans for the year ahead.
Only a year ago, the rate of allowances was reduced from 25 to 20 per cent., but now we are doubling it in the context of the economic crisis. The timing of relief is central to capital allowances, and when the first-year allowance is increased, relief for the expenditure is accelerated when it would otherwise be spread across later accounting periods.
One of our concerns about the issue takes us back to the debate about cost and the question of what benefit we can expect from the introduction of the first-year allowance. When the Chancellor announced the allowance in his Budget statement, he was very bullish about what it meant in practice. He said:
“I want other industries to invest, too. Businesses already benefit significantly from the annual £50,000 investment allowance, which was announced two years ago. I want to go further to promote investment now. So for this year, I will double the main capital allowance rate to 40 per cent. That will encourage firms to bring forward investment, in particular those companies in the growth sectors that will deliver the rewarding jobs of the future. It will mean enhanced tax relief to support investment of up to £50 billion this year. That includes £10 billion of investment in the vital communications sector.”—[Official Report, 22 April 2009; Vol. 491, c. 247.]
Will the Minister elaborate on where that additional investment is coming from? The Chancellor explicitly expects to bring in an extra £60 billion in total, £10 billion of which will be from the communications sector. How can the Government be so certain that that will be the case?
Page 206 of the Red Book, for example, notes a contraction from 11.5 to 11 per cent. in gross fixed capital formation for business in 2009, and a smaller contraction from 4.75 to 4.25 per cent. in 2010. The Minister has been probed this afternoon and his colleague, the Exchequer Secretary, was probed this morning on what models were used to estimate those figures. It would be interesting if the Minister could tell us what the figures for gross capital formation would have been if the temporary increase in the first year allowance from 20 to 40 per cent. had not happened.
There is some scepticism among outside bodies about this measure. PricewaterhouseCoopers said:
“The problems with this measure are first that it is ad hoc and temporary. This will only help a business that is able to react quickly as there is very little time to plan and incur the expenditure. A business needs to have sufficient one off, immediate expenditure requirement to make the allowance useful, and of course, sufficient profits available against which to set it off. How effective it will be must be problematic.”
I think that the Institute of Chartered Accountants in England and Wales made similar comments in their representations. If we are going to bring forward investment of that magnitude, in excess of the amount that will benefit from the annual investment allowance, we need to use what several Government Ministers have termed shovel-ready projects—things that are ready to go. Suddenly telling businesses in April this year, “You have a 40 per cent. capital allowance for the first year; use it now” actually makes it very hard for businesses to respond promptly. In reality, what I suspect will happen is that they will get enhanced relief for expenditure that has already been planned, but further allowances will not necessarily be brought forward in the future.
Businesses will have already sat down and worked out their plans. Businesses will have done cash flow budgets for this year some time ago. They will have already put those plans in place, and so will not be in a position to respond quickly to the Government’s pledge. Of course, businesses know that there is no point in trying to accelerate things too much, because we know that by the end of March 2010, the first-year allowance will go back to 20 per cent. for incorporated business. So they know that it is a transitory allowance, and their willingness to respond quickly will be limited by that.
There have been some suggestions about how the Government could have responded and dealt with this better. They could have looked at the scope of excluded expenditure to identify investments that would not have otherwise qualified for capital expenditure, but which might have been brought forward this year. They could have looked at lengthening the period beyond one year to two years to give businesses time to bring forward that investment so that they could take advantage of the relief. Alternatively, given the expense of the measures—it costs £1.6 billion and in the previous debate the Financial Secretary was concerned about doubling the relief for losses carried back from £50,000 to £100,000 on grounds of cost—the Government could have found some way of capping the benefits arising from the introduction of the 40 per cent. rate for capital allowances and to use the money saved elsewhere in a more targeted way to help businesses.
So there is some concern about the effectiveness of the measure and what the Government are seeking to achieve. The point that the Chancellor made in the Budget statement was that the relief would stimulate additional investment. There was scepticism among accountants and business advisers as to whether that was actually going to happen. I would be grateful if the Minister could further explain the Government’s thinking on this and whether he is confident that it will bring forward additional investment, as outlined by the Chancellor in the Budget statement. Was it wishful thinking on his part, like so much of the economic forecasts that were announced in the Budget in April?