I just want to ask really one major question on this Clause, particularly in view of the constructive reply we have just had from the Economic Secretary. I feel that on Finance Bills the hon. Gentleman has only two styles. One is the polemical and the other the platitudinous, and he tends to go from one to the other in rather rapid succession. It is nice to be told that we are an old country, and that we are committed to steady expansion, but perhaps we can have too much of a good thing.
What I have to say on this Clause concerns something we have debated before, and that is how the Government justify the discrimination, that will be increased by this Clause, between industrial buildings, which attract the increased allowances, and commercial buildings, which do not. As hon. Members will know, there is a long history to this argument. The first Millard Tucker Committee considered it, and decided that commercial building should
be treated in exactly the same way as industrial building. The matter was again considered by the Royal Commission which, in its final Report, came to the same conclusion. Perhaps I may quote from that Report. It states:
Although these arguments"—
the arguments of the Inland Revenue—
must be taken into account we do not believed that in the long run they can be decisive…We could find no fiscal justification for distinguishing between commercial and industrial buildings and we think both should get the allowance.
That conclusion was arrived at at a time when the allowance was less than it will be under this Clause; in other words, the discrimination between the two types of building is increased as a result of this Clause.
I should like briefly to mention what have been the traditional objections to giving the allowance on commercial buildings. These were quoted in the evidence given by the Board of Inland Revenue to the Royal Commission. The first was:
Commercial buildings Last a very long time; they are not nearly as much subject to obsolescence as factories are.
They may not be as much subject to obsolescence, but I can think of a great number of hotels to which one could quite happily apply the word "obsolescent", and certain types of commercial buildings are certainly obsolescent.
The second was:
Over very long periods they tend to appreciate rather than depreciate in value, so that if allowances were given they would very often have to be withdrawn when a sale took place.
That objection would still stand.
The next point was that at present there is no economic importance in stimulating the construction of commercial buildings. It seems a very crude notion if one lumps commercial buildings together and assumes that all of them are of less economic importance than industrial buildings. I do not think that that is an assumption that could stand up to serious examination. No doubt there are types of commercial buildings which are in some sense of less obvious national economic importance, but there are many types of commercial buildings which are just as important to the country, or indirectly to the balance of payments, as are some factory buildings.
It would be hard to say that a factory producing fireworks, or sweets, which create dental decay, is more important to the country than commercial buildings earning invisible exports and thus saving the balance of payments. It seems extraordinarily crude to make this distinction between commercial and industrial buildings and to say that one is more important than the other.
Other objections are made in the evidence before the Royal Commission, none of which seems to be vital. I am not definitely trying to make a case for including commercial buildings. It may cost something and one might find more valuable use for the money in this year. All I seek is the Government's view of this matter, because their decision to continue the distinction has aroused the criticism of some of their natural supporters. The Economist was particularly acid, saying that it was a matter of surprise that the Chancellor, yielding to certain arguments, had still not done anything for commercial buildings. It ought to cause disquiet on the Treasury Bench that it should be opposed by the Economist. Though it rouses no disquiet in my breast, I should be grateful for an explanation.
I do not intend to go into what the hon. Member for Grimsby (Mr. Crosland) has said at any length, but there are two points on which I should like an answer. These were raised during Second Reading. One is that there has been some anxiety about industrial buildings where there is a mixture of use partly for offices and partly for industrial purposes. The second is that many farmers have objected to this allowance not being extended to farm offices and other such buildings. I should like to have these matters dealt with in the reply by the Government.
I should like to deal, first, with the point raised by my hon. Friend the Member for Belfast, East (Mr. McMaster). It is, of course, not easy. without knowing the circumstances of the sort of case that he has in mind, to say, without either holding out false hopes or bringing depression to individuals or companies concerned, what the result would be in any particular case. I would say in all seriousness to my hon.
Friend that if he cares to get in touch with me about any cases which he has in mind I should be glad to look into them.
The hon. Member for Grimsby (Mr. Crosland) raised very fairly a point about the reasons which have prompted the Government, once again, not to include commercial buildings in the annual allowances for capital expenditure with which we are dealing in this Clause. The Clause increases the annual allowance for capital expenditure incurred after 5th November, 1962. in the construction of industrial buildings or structures or on dredging, and it does so from 2 per cent to 4 per cent.
I should like to get one minor point clear by pointing out that the reference to expenditure incurred after 5th November, 1962, in the Clause means, by virtue of the provision in the Income Tax Act, 1952, sums payable after that date, whenever contracted for. In fact, payability, if I may use that awful word, is the criterion, and as these words appear in both of these Clauses the criterion to which I have referred applies to both Clauses.
This change, unlike the one which my hon. Friend dealt with on Clause 33, was not foreshadowed in my right hon. Friend's statement on 5th November last year. The Chancellor then announced a minimum annual allowance of 15 percent. for plant and machinery and has since then announced other improvements in this allowance, all to take effect in respect of expenditure incurred after 5th November last year.
This proposed change for industrial buildings is in some degree a counterpart to those changes which had the effect of reducing very substantially the period over which allowances are given. I think that it is right, and I hope that the Committee will agree, that this change should also have effect for expenditure after 5th November last year, so as to complete a coherent pattern in respect of major types of expenditure incurred by industry.
To get into its proper setting the effect of the Clause, I should remind the Committee that new industrial buildings and structures will qualify for an investment allowance of 15 per cent.—and that follows from a previous Clause—an initial allowance of 5 per cent., which remains unchanged, and an annual allowance now of 4 per cent. Therefore, 24 per cent. of expenditure will be allowed in the first year, and 4 per cent. in the second and successive years and as a result 100 per cent. of expenditure will be allowed in twenty years, leaving 15 per cent. to come by way of four further annual allowances.
My hon. Friend the Member for Louth (Sir C. Osborne), who, unfortunately, is not now in his place, raised a question on the merits of whether we should proceed by way of historic cost or by way of replacement cost. I would have said to him if he had been here, though I think that it is of general interest to the Committee, that if we take into account the investment allowance of 15 per cent., the initial allowance of 5 per cent., and the first annual allowance of 4 per cent., making a total of 24 per cent., this is in fact based on replacement cost rather than historic cost and I think that the first Millard Tucker Committee came out in favour of the basis of historic cost which is applied to these annual allowances.
At any rate, the effect is to reduce the period of the allowances to twenty-four years in respect of industrial buildings and structures instead of forty-eight years as previously. The effect, including the initial and investment allowances, is to treat the effective life of an industrial building as reduced from fifty years to twenty-five years.
I do not think that I need trouble the Committee with the various types of buildings and structures which will qualify for allowance, because they are all set out in the 1952 Act and are not changed by this Clause, which merely doubles the annual allowance. The hon. Member for Grimsby, however, referred to the controversy, which I know has been going on for a number of years and which hotted up a little before the Budget, as to whether or not my right hon. Friend should have brought commercial buildings generally within the scope of these annual allowances which are limited to industrial buildings and structures, apart from dredging. Certainly the allowance does not run for building or structures used in commerce generally.
I think that the Committee will remember that this exclusion was made as a matter of deliberate policy in 1945 when these allowances were introduced. The reason was that the purpose of these allowances was to encourage the expansion and modernisation and re-equipment of the premises of productive industry. It was quite right to query this to some extent but, after all, many years have passed since 1945 and it may be in the minds of some that circumstances have also changed.
No, I am not doing that. I am simply trying to follow in general terms the point raised by the hon. Member for Grimsby, who asked whether, in the circumstances of today, there might be a case for extending these allowances to commercial buildings generally. The hon. Gentleman put the matter fairly. He did not express a definite view himself and he did not say whether his party was in favour of such a change, but he suggested that this was an important issue and that it would be right that I should, on behalf of my right hon. Friend, say something about it.
All I add to what I have said on the subject is that, in my view, it is really all a question of priorities. I doubt that the needs of the economy today would justify the cost of an extension of the annual allowances to commerce generally. In saying that, I have in mind the more urgent need to expand our major basic industries.
I agree with the hon. Member for Grimsby when he says that there is something in the argument that to grant annual allowances to commercial buildings would really be of doubtful merit because of the long life of commercial buildings generally and because of their tendency to appreciate in value over the years rather than to depreciate. This is a factor which is relevant in considering whether to provide annual allowances. Also, of course, one must bear in mind that there is already a substantial volume of commercial building which certainly does not suggest that any additional relief is needed in this sector at present on economic grounds.
The hon. Gentleman asked about the cost. If we were to bring commercial buildings within the scope of Clause 34 on the new rate of annual allowances applied to industrial buildings and structures, that is, 4 per cent., the cost would not be very great at first, but I understand that it would ultimately rise to no less than £145 million a year, which shows that this would be a quite big decision to take.
While I appreciate the concern of those who have been pressing this particular case, I think, if I may say so, that the hon. Member for Grimsby was wise not to say more than that he wished to raise the matter, without committing himself or his hon. Friends.
Mr. J. T. Price:
This is not the kind of Clause on which we should be justified in spending a great deal of time. I recognise that, in relation to other matters which we have to discuss, it may be of minor importance, but perhaps am not alone in being a little bewildered by all the expertise with which we have been regaled. I tried to follow the Financial. Secretary with my usual diligence, recognising the courteous and happy way in which the hon. Gentleman always conveys his brief to us, but there are implications of what he has told us which should, I feel be further considered. If I have got the wrong end of the stick no doubt I shall be corrected.
The doubling of the rate will entail a much greater liability in respect of new buildings than is represented by the stark contrast between 2 and 4 per cent. All the buildings which will qualify for the new rate after 5th November, 1962, will be present-cost buildings, perhaps five or six times the cost of the buildings which they have replaced in the development of the companies concerned. In fact, therefore, this is a much more valuable concession than may appear on the surface. I do not know what incentive it is meant to give, but, as I read it, it represents a material improvement in the value of the concessions so far, although, no doubt, it can be justified from the Treasury's point of view.
There are various chartered accountants and professional Members in the House who are interested in the bookkeeping side of this. We have discussed the investment allowances. We have discussed the impact of the 100 per cent. write-off of depreciation in the first year, plus 30 per cent. which makes 130 per cent. in all. I should be interested to know how the accountants will calculate the new concessions of 4 per cent. when the total investment has been written off in one year as a matter of book-keeping.
These comments of mine may appear irrelevant to the Financial Secretary, but I feel that the Committee is entitled to have some elucidation, because the 4 per cent. allowance on industrial buildings of the type defined in the Clause will represent a far greater liability on the Treasury than the 2 per cent. would because of the vastly increased cost of new buildings.
The Financial Secretary told us that the new rate of 4 per cent. instead of 2 per cent. will cause the allowance to liquidate itself within. I think he said, twenty-four years instead of forty-eight years as previously. As a matter of arithmetic, I suppose that that is right, but it is significant that this period of twenty-four years exactly squares with the period for which the Government have taken a lease on another building in which they are interested, State House, in Holborn, at an annual charge of, if I remember aright, £238,000. I am somewhat intrigued by this. The period of twenty-four years happens to coincide with the period for which the Government are now leasing properties when they decide to lease in preference to buying or building out of the nation's resources.
I do not think that I should be wise, Sir Robert, if I were to go into the question of Government leasing of office buildings. Perhaps i may just tell the hon. Gentleman that he is quite right in thinking that the period of allowance as a result of these various improvements will now be twenty-four years instead of forty-eight. This, of course, is the period for the total of the allowances, including the investment allowances. In fact, as a result of these various allowances, 100 per cent. of the expenditure will be allowed in twenty years, leaving 15 per cent. of investment allowance to come by way of a further four annual allowances.
The hon. Gentleman asked me three other questions which I shall try to answer shortly, because I think that it is the wish of the Committee to get on.
In general, my right hon. Friend's purpose in increasing these annual allowances is the same as the purpose for which they were introduced originally, that is, to encourage the extension, modernisation and re-equipment of the premises of productive industry.
The hon. Gentleman asked whether we might be taking on a big liability because, if inflation should remain with us to any extent, the cost of buildings would rise. He will understand that it is extremely difficult to make calculations of what the cost is likely to be. I can only tell him that the best estimate we can make is that, ultimately, the cost of this particular proposal will be in the region of £57 million in a full year.
Finally, the hon. Gentleman referred to what he thought were certain difficulties of accountancy. What we are doing in the Clause is simply to double the allowance. As far as I know, no difficulties of accountancy will arise. I see the hon. Member for Gloucester (Mr. Diamond), who is far better versed in these accountancy matters than I am, nodding. If the hon. Gentleman agrees with that, I hope that that will satisfy the hon. Member for Westhoughton (Mr. J. T. Price).