Clause 41 - Plant and machinery: restricting exception for manufacturers and suppliers
Rachel Reeves (Leeds West, Labour)
Clauses 41 to 46—I will speak on clause 41—have to do with specific measures on capital allowances and relate mostly to anti-avoidance measures. We support the attempts to close loopholes in tax legislation and to crack down on tax avoidance. On a wider level, the Government this week released consultation on the general anti-avoidance rule, which we will scrutinise, because we all have a responsibility to ensure that companies and individuals pay their fair share of tax. We support the measure, but we have some specific questions about the clauses in this part of the Bill.
In a previous sitting, my hon. Friend the Member for Pontypridd (Owen Smith) talked about the effect of the Government’s choices with regard to capital allowances on a plastics manufacturer in Ebbw Vale. Last year, the Government decided to cut corporation tax, paid for by a £2.6 million cut in capital allowances. When considering these measures, it is important to remember that context, and it is vital that the Government show some consistency on the issue, and any issues relating to capital allowances. We know that changes to capital allowances have the largest impact on firms with capital-intensive operations. Although these measures are aimed at tax avoidance, it is important to bear in mind who will be dealing with the new rules in the course of the business.
Clause 41 is designed to tackle a specific avoidance scheme in relation to plant and machinery. What steps will be taken by HMRC to ensure that the measures work as planned to close the loophole, and to ensure that manufacturers and suppliers cannot use these measures to facilitate avoidance?
David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)
Clause 41 is related to the changes being introduced by clause 42 and schedule 9 to improve the generic plant and machinery capital allowance anti-avoidance rules. The clause removes the special exception known as the “manufacturers and suppliers” exception from those generic rules, but only when the transaction has an avoidance purpose. The capital allowance anti-avoidance rules applying to transactions involving plant or machinery are being amended in the Bill to make them more effective at preventing tax avoidance.
We announced this proposal in the 2011 Budget, and a formal consultation took place over the summer of 2011. One of our original proposals was to repeal a section of the Capital Allowances Act 2001, which broadly excludes transactions from the anti-avoidance rules when plant or machinery is acquired new from manufacturers and suppliers. There were concerns that this exception was being exploited for avoidance purposes.
During the consultation, HMRC became aware that an avoidance scheme was being marketed that was designed to take advantage of the manufacturers and suppliers exception in advance of its repeal. To counter that scheme, the Government announced that this particular exception would be repealed, in part, with effect from 12 August 2011.
In our statement at that time, we also said that consultation responses would be taken into account when finalising the legislation. Respondents to the consultation subsequently pointed out that certain commercial transactions between connected parties that have no avoidance purpose could be adversely affected by the August announcement. We therefore decided, in effect, to reinstate the manufacturers and suppliers exception, but only for transactions that do not have an avoidance purpose.
The modified repeal, which is effective from 12 August 2011 in terms of this clause, counters abuse, which is the concern raised by the hon. Lady, without adversely affecting commercial transactions that have no avoidance purpose. I hope that the clause can stand part of the Bill.