Mr. Deputy Speaker:
With this it will be convenient to discuss the following amendments: No. 40, in page 57, line 27, leave out '1987' and insert '1990'.
No. 41, in page 57, line 42, at end add
'(5) For the purposes of this section as it applies for income tax purposes the date "6th April 1989" shall be substituted for the date "1st April 1986" in subsection (1) hereof and the date "6th April 1990" shall be substituted for the date "1st April 1987" in subsection (1)(b) hereof.'.
This amendment, together with amendments Nos. 40 and 41, has the effect of modifying by deferring the severe impact upon the agricultural industry of the elimination of the initial allowance and the reduction of the annual write-off from 10 to 4 per cent. per annum. The amendments relate to the Bill as a United Kingdom Bill. Most of the right hon. and hon. Members who have put their names to these amendments represent Northern Ireland constituencies. That is not surprising, since the impact and the arguments in relation to the change are probably the most severe in relation to the general run of the farming industry in Northern Ireland. Nevertheless, we are happy that the broad acres of Cheshire have been associated by the hon. Member for Tatton (Mr. Hamilton) with the drumlins and mountains of Ulster.
Bogs could well, as the hon. Member for Workington (Mr. Campbell-Savours) suggests, be added to the landscape for the sake of completeness.
The reduction of these allowances was made in a specific context. It was made in connection with corporation tax relief. Consequently, for most farm businesses that are not liable to corporation tax there have been the disadvantages, unaccompanied by the counter-balancing advantages. In the case of the writing down figure in particular, the reduction from 10 to 4 per cent. per annum is severe in its impact upon most forms of agricultural capital. There are certain forms of agricultural capital where a 25-year period of write-off might be reasonable, but for most agricultural buildings a period much shorter than 25 years before they are required to be renewed and replaced is now reasonable. Buildings that are associated with use for animals or buildings where the processes of corrosion, as in the handling of slurry, are relevant are particularly short in life. Consequently the write-off over 25 years instead of 10 years is serious in its impact.
I know that it can be argued that there is always at the end of the life of an asset a balancing allowance which can be made if the value has been unexhausted by the annual write-off. However, that does not affect the financial position of the farm or undertaking during the life of the asset. It remains a disadvantage that an asset that is replaced after 10 years has been depreciated over 25 years.
The supporters of the amendments appreciate that the new system of initial and write-off allowances hangs together. Therefore, we ask only for a deferment of the impact so that those who will be severely affected will have the opportunity to rearrange the finances of their businesses to meet the new conditions under which they will have to operate.
The problem comes home particularly to the small farmer who will be affected by the income tax rather than the corporation tax aspects of the new provisions. I hope that my right hon. and hon. Friends will further illustrate to the Government why a deferment of the impact for three years, as proposed by the amendments, would be just and welcome.
I endorse the closing comments of the right hon. Member for South Down (Mr. Powell). The amendments are designed to ameliorate the position of the small farmer and the family farmer who is not incorporated.
When we discussed in Committee a number of other amendments affecting agriculture, I was the butt of some ridicule and ribaldry from Labour Members for defending an interest that was already heavily subsidised by the taxpayer. As the House knows, I hold no brief for the common agricultural policy and all the anomalies and absurdities that characterise it.
The income of a small farmer is relatively low, although he has a large capital asset, the value of which has been built up largely because of the CAP. The amendments seek to ameliorate the position of farmers who survive on low incomes, who will be greatly affected by the speed at which we move from the old system of allowances to the new one.
Most farmers in my constituency are dairy farmers and they have been adversely affected by changes in the CAP. Their incomes have been depressed and their businesses weakened. I am no friend of the surpluses inherent in the CAP and I want us to move to a more rational system, but the transitional period must be a reasonable one. The amendments seek to help the small family farmer for a transitional period.
The amendments would also give an impetus to conservation of the countryside. When farmers' incomes are reduced, they are less likely to spend money on farm buildings and other visible assets. As a result, the countryside may be adversely affected. Several farmers in my constituency have spent money on buildings so that they merge attractively into the countryside. All hon. Members would applaud that aim. It is a question of improving cash flow so that such schemes can be continued.
The 4 per cent. writing down allowance does not represent a realistic rate of depreciation for many modern farmers. That is unfortunate. It is extraordinary that, under the new system, the balance of tax relief is moved in favour of investment in machinery and against buildings, the construction of which creates more employment. The machinery write-off in the first year will be 25 per cent. instead of 100 per cent., but for farm buildings the write-off in the first year will be 4 per cent. instead of 30 per cent. Machinery allowances are reduced by a factor of four, but for buildings the factor is over seven.
I agree with what has been said about the unincorporated business. There is a counter-balancing advantage for incorporated businesses in the reduction in corporation tax. I applaud the Government's strategy, but I hope that we can do something for the income tax payer rather than the corporation tax payer. The amendments suggest changes to help farmers.
The hon. Member for Tatton (Mr. Hamilton) referred to small farmers. Very few large farmers exist in Northern Ireland. By reducing allowances, the Government are simply trying to return to the position which prevailed before the high inflation rate under which we have suffered in the last 10 to 15 years.
It is laudable for any Government to take such steps. However, the Government are treating all farm and industrial buildings as if they were the same. I declare an interest since I own a small farm. I have a farming background and I know how to dig a drain. That is how I earned my living for 15 years.
The Government are treating buildings which are different as if they were the same. They do not seem to recognise that farm buildings are different from industrial buildings in many respects. Industrial buildings have a long life; even if they cannot be used for their original purpose they are so adaptable that they can be used for many other purposes. Most farm buildings have a relatively low output and many are used for only part of the year. Cattlehouses, for instance, are used only in the winter months. During those months the metal work deteriorates more quickly than it does in other buildings. That is a fact of life. If barley is dried in a building it will deteriorate even more quickly.
The life span of farm buildings varies according to the use to which they are put. For instance, a store is a simple and cheap building which will usually last a long time, but a silage pit is a building which has to be roofed over in the wetter parts of the United Kingdom and it is costly although it is used for only a short time each year. Pig and poultry buildings are intensively used. We must give closer consideration to the matter.
Many farm buildings, especially those erected for pigs and poultry, are highly specialised and cannot be used for any other purpose. Big changes have taken place in farming in the last 10 to 15 years — so much so that once profitable enterprises have vanished from the scene, especially in Ulster. It is not apparent to those who are not farmers that severe working conditions apply on farms during the winter months. That is why buildings are vital, for the comfort not only of farm animals but of those who look after them.
A highly specialised work force has grown up in erecting farm buildings, with many people employed permanently on that work. In recent years, however, farming has suffered a number of blows which have reduced the amount of money available for the erection of farm buildings. The industry has lost the initial allowance, the writing down allowances are being reduced and there are lower farm grants. It is clear from what was said in the House on Monday that those grants will be greatly reduced in the future. The cash flow problems of farmers will increase considerably in the near future, and I regret that the Government seem to be adding daily to their problems.
In Northern Ireland — I cannot speak for the rest of the United Kingdom—most industry receives industrial development grants for machinery. Farming does not. Farm buildings have always had a short writing down period. Conditions have not changed so much in recent years as to enable the Government to depart from the long-established practice in that respect. I hope that the Government will look again at this issue, will take on board the representations that are being made tonight and will act to relieve farmers of the burdens that are currently being heaped upon them.
I support what hon. Members have said on this subject. Like my hon. Friend the Member for Londonderry, East (Mr. Ross), I have an argicultural interest and am well aware of the problems that are being caused to the industry in Northern Ireland.
The proposed changes will greatly add to the difficulties of those engaged in agriculture. The proposal to extend the 10-year write-off period to 25 years will mean many agricultural buildings becoming obsolete and having to be replaced by more modern ones even before the old ones have been written off. My right hon. Friend the Member for South Down (Mr. Powell) outlined the position correctly when he referred to the various types of agricultural building, and I will not go over the ground that he covered.
The present system has been in operation for over 40 years and has proved adequate. We are asking for farmers to be given a reasonable period in which to adjust to the changes. Cash flow is vital to any business, including farming. In the long term and the short term, cash flow plays an important part, and I urge the Minister to consider the types of people who will be most affected by the changes.
In Northern Ireland, the small family farmer will be the hardest hit. The young farmer trying to get started at the bottom of the ladder will be hard hit as well. The proposals will be most damaging to those people. They will not be able to claim relief through the reductions in corporation tax. Few, if any, small farmers will be able to alleviate their problems if there is no offsetting.
How many farmers are incorporated? Such farmers are few and far between in Northern Ireland. Farm businesses have already suffered from the changes in plant and machinery allowances which were introduced last year. I am informed — I may be corrected on this — that the changes will cost agriculture more than £400 million in the five-year transitional period. We must consider also what will happen in the transitional period for building allowances. Judging by present ceilings, the change could cost agriculture another £400 million.
Unfortunately, the changes can lead only to a severe decrease in investment in agriculture. Because the small farm system in Northern Ireland means that it is necessary to apply a more intensive system of agriculture than in other parts of the United Kingdom, this policy will be to our detriment. We live in a time when technology can transform any sector. This feature is most pronounced in the intensive sector of horticulture. Existing buildings can become obsolete and outdated within a short period. Will the Government award any recognition to this point, as it will concern us in the future?
Agriculture is facing a difficult time and it is unwise to add an extra burden. I ask the Financial Secretary to reflect on the changes last November in the farm capital scheme when the amount available was reduced by £40 million. My hon. Friend the Member for Londonderry, East referred to this week's announcement on the scheme. We can expect another large slice to be taken from the farm capital scheme. That is another reason why the Financial Secretary should afford the amendment consideration and support. Such a proposal, if passed, would have far-reaching consequences for United Kingdom agriculture, and more particularly for Northern Ireland.
I have great reservations about the amendment. The right hon. Member for South Down (Mr. Powell) is essentially asking for special arrangements to be made for agriculture because of the reduction in allowances associated with the corporation tax changes. I do not regard tin sheds, slurry sheds, barns, and so on as short-life assets. I cannot understand why it is necessary to give agriculture yet another boost in this way while other industries are deprived.
I should like the high tech industries to be given even more help. I know that the Government are making special arrangements to assist those industries. This is as a result of the 1984 changes arising from the Chancellor's statement on these matters. The deferment to which the right hon. Member for South Down referred is bound to mean that less money will be available for other industries. It would be of interest if the Minister can tell the House how much that will cost.
We are aware that all businesses—farming, industry and financial institutions — want to improve their cash flow, but the amendment amounts to giving agriculture special assistance. The hon. Member for Tatton (Mr. Hamilton), who supported the amendment, is asking for yet another subsidy. It is not a lump sum handout or anything like that; it is a revenue subsidy. I understand the thrust of the argument, but I cannot support the amendment.
I am not sure that I go along completely with my hon. Friend the Member for Kingston upon Hull, West (Mr. Randall). I hope that the right hon. Member for South Down (Mr. Powell) might elucidate a little. My experience is that small farmers in many areas need help. They do not all conform to the image commonly held of the farmer in East Anglia growing a great deal of cereals, driving a Jaguar and having two or three Range Rovers in a shed.
I have been to Northern Ireland. It is similar to Wales. I do not know what the pattern of farming in Ulster is or what the acreage is. I imagine that it is not large and that many farmers farm small acreages and just manage to make a living. I also believe that the land is not especially good. If I am wrong no doubt hon. Members will tell me. That is true of many parts of Wales.
Small farmers need help. If the amendment seeks to help them I support it. There is, however, a caveat. I do not know whether the amendment will also help the large unincorporated farmer. If it does, the amendment is not tuned finely enough. That is the problem. I do not know what effect the amendment will have. No doubt the Minister will enlighten us about that.
My sympathies are with the small farmer. More needs to be done for him, but I am not sure that the amendment is the right way to go about it.
Like all my hon. Friends, I am sympathetic to small farmers. The Labour party will long be remembered for the position that it took on the dairy quotas that the Government introduced which seriously hit many small farmers.
This amendment and the clause apply to farmers in general. It does not distinguish between large and small farmers. We must decide whether we should single out agriculture for yet another subsidy, because whether or not one calls it a subsidy that is what the provision amounts to. Those who vote for the amendment will have decided to give agriculture special treatment. There is no way of getting out of that.
One of the features of our debate this evening has been the degree to which certain hon. Members opposite have been totally against subsidies in general but wholly in favour of subsidies in particular. The hon. Member for The Wrekin (Mr. Hawksley) spoke about business within his constituency and the hon. Member for Tatton (Mr. Hamilton) talked about particular interests. They appear to adopt a view of the economy which is wholly inconsistent with the view that they adopt as monetarists in other areas. If only the same concern was shown for building up our industry, in particular our manufacturing industry, that is shown towards the special interests which they represent we would all be much better off. The truth of the matter is that when allowances were done away with last year there was a substantial withdrawal of the incentive to invest in industry. We are still dealing with those problems this year.
Opposition Members are unable to support these amendments, although we are not unsympathetic to the problems raised by hon. Members. Capital allowances should be looked at as they relate to industry in its entirety and not to individual sectors which may have the particular sympathy of Conservative Members.
I shall turn my attention to the specific amendments of the right hon. Member for South Down (Mr. Powell). The principal purpose of his amendments is to defer by three years the proposed reduction in the rate of agricultural building allowance. I am very conscious of the contributions which he and his hon. Friends have made about particular problems in the agricultural industry in the areas they represent. Having said that, it is essential that I put that request for a deferral into the context of the overall background of the Government's proposals last year. I should mention as an aside that the detailed proposals were announced in March 1984 and do not go into effect until April 1986.
As the House will know, the Government last year embarked on a major reform of business taxation. Our aim is to move to a system which is much more neutral as between different types of investment so that the pre-tax return on capital investment rather than the post-tax return becomes the basis of commercial decision making. Coupled with this is a determination to achieve lower tax rates on business profits since high rates are themselves a disincentive to investment and therefore to worthwhile economic progress.
We reduce the small companies rate of corporation tax to 30 per cent. with immediate effect. In addition, the main rate of corporation tax is being reduced by one-third over the period from 1984 to 1986. And for income tax, which is of principal concern to the unincorporated sector, there are a number of significant benefits flowing from both last year's Finance Bill and this year's.
These include real increases in income tax thresholds which continue the progress made in reducing levels of personal tax since this Government took office in 1979; the abolition of both the investment income surcharge and the national insurance surcharge; the capital taxation changes; the proposed reform of the capital gains tax retirement relief; and the national insurance contribution changes such as the reduction in class 2 contributions and the giving of relief on one-half of the class 4 contributions. Those have to be put in context because those last two changes in class 2 and class 4 are worth £155 million to the unincorporated sector in a full year.
The changes to the main allowances for machinery and plant and for industrial buildings were made last year. At the same time, we announced our intention to make changes this year to other allowances, including the agricultural buildings allowance. When all these changes are in place, the capital allowance system will generally be much more streamlined than before 1984; most assets qualifying for relief will attract allowances either at 25 per cent. on a reducing balance basis if they are machinery or plant, or at 4 per cent. on a straight line basis if they are buildings.
The proposed changes to the agricultural buildings allowance in this year's Finance Bill have to be seen therefore as a part of this pattern of reform. The rate of allowance for expenditure which qualifies for relief will become 4 per cent. straight line so that agricultural buildings will be treated in the same way as industrial buildings from 1 April next year, thus bringing to an end the present distortion between them in the tax system. I stress the word distortion because, before this change, industrial buildings were on a slightly better system than agricultural buildings. Both will now be on a 25 year or a 4 per cent. straight line. Industrial buildings move from six years to 25 and agricultural buildings from approximately eight years to 25.
Many buildings qualifying for the agricultural buildings allowance have long life spans so that for them relief for construction costs over a 25-year period—which is what an annual allowance of 4 per cent. straight line means — will represent a reasonable rate of relief for tax. However, I recognise, as right hon. and hon. Members have said, that this is not the whole story.
Some specialist agricultural buildings, such as some kinds of farrowing houses used in pig breeding, are regarded in entirety as machinery or plant rather than "buildings" so that the entire cost qualifies at machinery and plant rates of allowance — 25 per cent. on a reducing balance basis. This writes off their cost for tax to a residual 10 per cent. over eight years. In other buildings, such as milking parlours and glasshouses, a significant part of the cost of the building may be attributed to fixtures which are also treated as machinery or plant. In either case, the building or part of it could also benefit from the new rules for short-life assets which are being introduced by clause 55, as the right hon. Member for South Down appreciates.
It has been put to us that some modern purpose-built agricultural buildings do not qualify as machinery or plant and have working lives that are very much shorter than the average. For these buildings, it is said, an annual allowance of 4 per cent. on a straight line basis is unfair; and the unfairness — this is an important point — is compounded by the absence of rules which would at least permit balancing allowances to be made when the building is sold or scrapped.
We recognise the strength of this argument. It is indeed an unusual feature of the agricultural buildings allowance that as the rules now stand, and unlike the industrial buildings allowance, balancing adjustments on the sale or destruction of an agricultural building are not possible. This has always been the case but the matter naturally assumes greater importance against the background of a longer writing-off period for tax.
Accordingly we have already set in hand a detailed review of the present agricultural buildings allowance rules so that we can consider the most appropriate ways in which the code might be restructured. How to introduce a system of balancing adjustments will be central to that review.
I know that the right hon. Member for South Down, his colleagues and my hon. Friend the Member for Tatton (Mr. Hamilton) will be pleased when I say that it is our intention to include proposals for restructuring the allowance, to include balancing adjustments in next year's Finance Bill, with a starting date of 1 April 1986 to coincide with the date on which the annual allowance becomes 4 per cent. I shall consider carefully the particular points that have been made in the debate.
The effect of these three amendments would be to put back the starting date for the new rate of allowance by three years either for all taxpayers — incorporated and unincorporated alike — or, alternatively, possibly only for the unincorporated. It is not absolutely clear from the way in which the amendments are drafted whether they are intended to stand as a whole or whether they are alternatives.
A deferral of the new rates of agricultural buildings allowance for all taxpayers, that is companies, partnerships and individuals alike, would clearly be welcomed by those likely to benefit. However, such a deferral would be difficult both to explain and to justify to taxpayers whose capital investment is in other types of buildings such as industrial structures and hotels, for which initial allowances will have been phased out by 1 April 1986 and which will thereafter attract only the same annual allowance — 4 per cent. — as is proposed for agricultural buildings. Equally the changes to the allowances for plant and machinery, which we are making over a three-year period, will be completed next April.
As my hon. Friend has made a significant concession for next year for shorter life agricultural buildings, does he plan any comparable concession for short-life buildings in any other industries, particularly bearing in mind that agricultural buildings are the only ones that do not bear any rate liability?
My hon. Friend misunderstood. I was drawing attention to the absence under the present agricultural buildings allowance system of a set of balancing charges, in contradistinction to the existing balancing charges on industrial buildings.
What I was saying was that the agricultural building allowances being put on all fours merited clear consideration in advance of the review, and it seemed to me to be right that that be included in the changes taking place next year. They will not be treated advantageously in relation to industrial buildings. It would give them the same opportunity, because obviously the relevance of the change from eight to 25 years is significant in the need for such buildings to have such balancing charges.
If, on the other hand, what is intended in the alternative is a deferral for income taxpayers only — and this was raised by my hon. Friend the Member for Tatton—it is difficult to see how the exclusion of company taxpayers from such a deferral can be justified. The case for a general reform of the capital allowances which we explained in detail to the House last year — in essence making the commercial assessment of business investment more important than the tax assessment — is as valid for the unincorporated sector as it is for the incorporated. While it is true that rates of income tax are not being reduced in the same way as rates of corporation tax, we have taken a significant number of important steps to help the self-employed, some of which I have already mentioned.
Farmers carrying on their businesses as individuals or in partnership would benefit, as would the private landowner who invests capital in buildings on agricultural or forestry land. But companies carry on similar activities and also claim the agricultural buildings allowance and would have every right to feel unfairly treated.
We have looked at the matter most carefully in the light of the comments and other representations which we have received since our intentions were announced last year. We think it right, however, to proceed as planned and, in this year's Finance Bill, bring the rate of this allowance into line with the other buildings allowance with effect from 1 April next year. At the same time, we also think it right to proceed with a thorough examination of the structure of the agricultural buildings allowance so that changes which bring the rules of the present allowance also more into line with the other buildings allowances and, in particular, provide for balancing adjustments, may be introduced in next year's Bill. On that basis I urge the right hon. Gentleman to withdraw his amendment. I hope he understands the points I have made.
Mr. J. Enoch Powell:
It was certainly necessary that the impact of these changes upon the agricultural industry, and particularly upon some parts of it, should hake been openly debated during the debate on this Finance Bill, especially as that did not happen at the Committee stage. I recognise that the form of the amendments, framed to raise the whole question, was not in itself wholly satisfactory, partly because it went for a deferment rather than for any other remedy, and also because it was unable to distinguish between one section of the industry and another. For instance, it does not distinguish between the incorporated and the non-company sector of the industry.
The result has been that it has drawn from the Government not only a recognition of the problems which the industry undergoes in making the transition from one approach to another, to capital allowances and capital taxation, but also the important statement that the Minister has made about the review of balancing charges in the context of agricultural buildings. That has been more than sufficient to justify the debate. On that basis, I beg to ask leave to withdraw the amendment.