First-Year Allowances for Ships

Orders of the Day — Finance Bill – in the House of Commons at 10:30 pm on 11th July 1989.

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'In paragraph 2(1) of Schedule 12 to the Finance Act 1984 after sub-paragraph (b) there shall be inserted the following sub-paragraphs:—(c) with respect to capital expenditure incurred on or after 1st April 1989 on the provision of ships, the words 'one-half;and before the words 'no first-year allowances' there shall be added the words 'subject to sub-paragraph (c) above'.(d) in its application to capital expenditure incurred on or after 1st April 1989 on the provision of ships section 44(4)(a) of the Finance Act 1971 shall have effect as if the word 'or' at the end of sub-paragraph (i) were omitted and as if sub-paragraph (ii) were omitted.".'.—[Mr. Shore.]

Brought up, and read the First time.

Photo of Mr Peter Shore Mr Peter Shore , Bethnal Green and Stepney

I beg to move, That the clause be read a Second time.

I know that new clause 20 has support in all quarters of the House. That is self-evident from the names of the right hon. and hon. Members who have joined me in tabling it. Anxiety about the disastrous decline of the British merchant fleet has been expressed in the Chamber on many occasions in recent years. No fewer than 234 hon. Members have put their names to early-day motion 429 which, among other things, urges the primary importance, with an ageing fleet, of the early provision of fiscal and other measures to encourage British shipping companies to undertake the substantial re-investment in ships which will be needed if the decline of the British-owned and controlled merchant fleet is not to accelerate again over the years immediately ahead. New clause 20 proposes the reintroduction of a 50 per cent. first-year allowance for capital expenditure on new ships. The much-reduced British-owned shipping fleet is steadily aging, and assistance with the heavy cost of replacement is essential if we are to avoid a further decline, let alone reverse the trend of the past decade or so.

10.45 pm

With a record Budget surplus that is likely to be repeated—certainly this year—I do not think that the cost is of real concern to the Treasury. According to the Inland Revenue's own gloomy estimates, with which the Select Committee on Transport was provided last year, the cost of an additional 50 per cent. investment allowance was expected to rise to a maximum of £200 million a year for a two-year period, and then to decline to about £90 million by 1995–96. Our proposal is more modest: it is not additional to the existing 25 per cent. allowance, but in place of it. That will cost not £200 million a year at the peak, but more like £140 million.

The principal objection rehearsed by Treasury spokesmen on previous occasions when help for the shipping industry has been discussed is that the introduction of investment allowances runs counter to the general thrust of the Government's corporation tax policy, the general effect of which has been to reduce the rate of corporation tax on profits substantially and at the same time to abolish allowances against capital expenditure. I do not propose to challenge that general philosophy tonight, but I should like to state as strongly as I can why I believe that shipping should be the exception to the corporation tax rule.

First, world shipping markets are not free. Governments intervene, in varying degrees, in capital and crew costs, and many reserve some part of their trade for their own nationals. Third world countries have their own special shipping regime; the Soviet Union, eastern Europe and China subsidise their shipping on a massive scale; the United States protects its own merchant navy. In the European Community there is no common shipping policy. Most European Community countries assist their own shipping industries with many forms of subsidies, grants, tax concessions and the like. Let me give just one example: German shipowners have the benefit of accelerated depreciation, investment grants and very low interest rates. Not surprisingly, there is twice as much tonnage on order for the West German register as for the United Kingdom register today.

There is, therefore, no level playing field in European or world shipping. To refrain from assisting our own shipping industry with its replacement costs is not to operate a hands-off, non-interventionist policy, but positively to discriminate against our own shipping. It is a profound paradox that the United Kingdom, an island nation more dependent on shipping for its imports and exports than any other European country, should—virtually alone among the west European nations— offer no protection or assistance to its merchant fleet.

My second reason for urging the Government to accept the new clause is the direct contribution that British-owned shipping makes to the country's overseas earnings. When the 1984 Budget removed the British shipping industry's main tax incentives to invest, the balance of payments was remarkably healthy. Unhappily, that is no longer the case. We now face massive deficits. The shipping industry is still a major earner of foreign exchange—the third largest invisible earner after financial services and tourism—and there is a close correlation between its foreign exchange earnings and the size of the fleet. An enlarged United Kingdom-owned fleet would generate, or save, much of the additional foreign exchange that the country so badly needs.

My third reason is that our Merchant Navy is essential to the nation's defence during a period of tension or war. It gives direct support to the military, it is essential for the rapid reinforcement of Europe from North America, and is crucial for the continuing economic re-supply of the civil population and industry in a period of conflict. The United Kingdom fleet has already shrunk to a level where all three tasks can no longer be undertaken. This was broadly the conclusion of the Select Committee on Defence in its report last year and is the subject now of a major NATO study.

There is one other negative argument that the Minister may be tempted to deploy: that investment allowances, before their abolition in 1984, did not prevent the rapid rundown of the United Kingdom's Merchant Navy. True; but it is difficult to think of any measure that would have prevented a substantial decline in United Kingdom and, indeed, in world shipping in the decade of severe recession that is now ending.

At the end of 1985, the year after the abolition of capital investment allowances, 7·5 per cent. of world shipping was laid up. Today that figure is down to 1 per cent. Freight rates are improving; shipbuilding capacity has, tragically, been sharply reduced; the world fleet is aging; and it is clear that a large part of the existing world fleet will have to be replaced over the next decade.

The effects of this can be seen in the sharp rise in the price of both new and second-hand ships. The key question for the shipping entrepreneur is how the enormous capital costs of replacement can be financed —which depends in turn on the fiscal regimes applied by the Government for such investment, because this is the major variable in capital costs.

We have now a major opportunity to revive our merchant fleet. Strengthening the incentives to invest in ships will enable the United Kingdom to gain a substantial share of new shipping to overcome the handicaps of unfair competition, to strengthen the balance of payments and to help maintain the credibility of our defences against the threat of conventional war.

The maintenance of a large, modern and efficient Merchant Navy is essential to the well-being and security of an island nation. I do not believe that the Government would dispute that assertion. I urge them therefore to accept the proposal in new clause 20.

Photo of Mr William Clark Mr William Clark , Croydon South

I support the right hon. Member for Bethnal Green and Stepney (Mr. Shore). He has pointed out the importance of the shipping industry to our invisible earnings. I have no vested interests in the shipping industry. The United Kingdom is unable to compete with other countries in many ways. At one time the shipping industry benefited from the free depreciation allowance, but it has now disappeared. The 25 per cent. depreciation allowance has taken its place.

I well understand why my right hon. Friend the Financial Secretary to the Treasury will say that because corporation tax has been reduced to its present level capital allowances must be reduced, too. The shipping industry, however, is in a slightly different position. It is one of the most competitive international commodities, if it be a commodity, that there is. Shipowners in other member states of the European Community are provided with far better allowances.

The new clause provides for a 50 per cent. capital allowance. There would be no loss of revenue. The shipping industry faces a cash flow problem. If one cannot obtain a capital allowance of 50 per cent., the capital that is required to buy a ship will put British shipowners at a disadvantage vis-à-vis their foreign competitors. In 1992 the United Kingdom's capital allowances will probably be the least advantageous of all.

The Government should take another look at shipping. It may be too late at Report stage of this Finance Bill to do something about it, but I hope that my right hon. Friend the Minister will give some assurance that the Government are seized of the importance of the shipping industry and are aware that our competitors are far more generous to their shipping industries than we are, although our corporation tax has decreased.

The right hon. Gentleman referred to the surplus in our domestic budget. I am not suggesting that we should spend that, but the shipping industry has a cash flow problem. If our shipowners could buy a ship with a 50 per cent. rather than a 25 per cent. allowance, it would put the nation in a better competitive position. I urge my right hon. Friend to consider the new clause sympathetically.

The size of our merchant fleet has continued to decrease and I can give the statistics to show that. As an island nation we depend on our shipping industry for more than our defence. Let us encourage British shipping rather than allow foreign shipowners to move our goods in and out of our ports because they have better fiscal arrangements than we have. For those reasons, I support the right hon. Gentleman.

Photo of Julian Brazier Julian Brazier , Canterbury

As is often the case, we find ourselves late at night discussing important matters, but if the hour is late, the quality of the first two speeches makes up for it. I am honoured to follow the right hon. Member for Bethnal Green and Stepney (Mr. Shore) and my hon. Friend the Member for Croydon, South (Sir W. Clark).

I used to work as a management consultant and many of my clients were shipyards. As I spoke at length in Committee I shall add only a few brief points. Other countries provide advantages for their shipping industries in many ways that we do not. Besides the visible methods of assistance, including capital allowances, tax-free reserves, advantages in personal taxation to seafarers, and direct Government subsidies and grants, which together ensure that we have a higher effective rate of tax on shipping, whatever the nominal rate, than most other countries, there are three hidden ones.

First, safety is expensive and many of our competitors are not interested in it. That immediately gives an unavoidable handicap to our shipowners because no one wants dangerous British ships. Secondly, some seafarers in foreign merchant navies are disgracefully badly paid. That is another unavoidable handicap for us. Thirdly, considerable amounts of cargo reservations are sometimes legally enforced and at other times achieved through back-door arrangements.

Our shipowners operate with considerable fiscal and other handicaps. It is sad that as a result of those considerable handicaps the British merchant fleet has not only declined—nearly every merchant fleet has—but declined compared with other fleets. The Greeks have by far the biggest fleet in Europe, but there is no taxation on Greek shipowners, except a minuscule tonnage tax.

I share the Government's distaste for capital allowances as a normal medium for industry. I wrote a pamphlet calling for the abolition of capital allowances and all forms of regional capital grants some years before it became the fashion. However, it seems to me inescapable that shipping is a special case. If we want to restore British shipping to even part of its former standing, we must face up to these handicaps and to the enormous difference between the way in which we treat our shipowners and the way in which other countries treat theirs.

11 pm

I do not want to go into all the reasons why it is important to restore shipping, because they have already been well covered by the two previous speakers, but I will mention two reasons briefly. First, besides the immediate effects of shipping, there are many peripheral areas that bring in considerable foreign exchange, such as the Baltic exchange and the shipping insurance side of Lloyd's. They require a captive domestic market if they are to continue to bring in the considerable export earnings they bring in at present, which are over and above the export earnings mentioned for shipping itself.

Secondly, I echo again the defence considerations—my right hon. Friend the Financial Secretary would be surprised if I did not—which are real. The arrival of the NATO report on strategic shipping is becoming rather like the second coming. However, it will come at some point and it is common knowledge that it is certain to show that NATO has insufficient for its needs in times of tension, let alone war.

I sum up by saying that two early-day motions—one in the previous Parliament and one in this—have shown that the majority of Back Benchers of all political persuasions are concerned about the issue. Two Select Committees—on Transport and on Defence—have expressed real worries on the matter. I put it to my right hon. Friend that if he finds new clause 20 unacceptable for one reason or another, we must look at what we can do for our shipping. If we stand back and do nothing and, in effect, say unilaterally that we believe in the free market and not in intervention—while almost every other country with a significant fleet is intervening and supporting its fleet—the little temporary recovery we have in shipping, which gives us a bit of a breathing space, will disappear and our merchant fleet will continue to decline.

Photo of Mr Charles Morrison Mr Charles Morrison , Devizes

It may be surprising that an hon. Member representing a wholly land-locked, largely rural constituency receives two or three letters a year expressing concern about the inadequate size of our merchant fleet, yet that is my lot. I have several constituents who are still well aware that we are an island race and that we depend to a considerable extent for our existence on shipping and overseas trade. If our country were a vast, land-locked area which was entirely self-supporting, we could perhaps disregard the need for a merchant fleet and even go further and say to ourselves that not having a merchant fleet of our own would help developing countries. That concept, however, does not exist for us. As my hon. Friends the Members for Canterbury (Mr. Brazier) and for Croydon, South (Sir W. Clark) and the right hon. Member for Bethnal Green and Stepney (Mr. Shore) have pointed out, we are all aware that we remain an island. We may soon he attached more closely to continental Europe by means of the Channel tunnel, but a huge proportion of the basis of our national existence will still depend on shipping.

I do not think that my right hon. Friend the Financial Secretary can argue that a merchant fleet is unnecessary. Indeed, he has not argued that. As my hon. Friend the Member for Croydon, South pointed out, it is important in terms of allowances that we should be able to compete with the assistance that shipping receives in other countries. There has been a pretty continuous deterioration in the size of our merchant fleet. That in my view is shameful, but, regardless of that, I believe that from a strategic point of view we are putting ourselves in an increasingly weak and dangerous position.

I hope that my right hon. Friend the Minister will take full account of the new clause. For all I know, it may not be properly drafted and may need further thought, but I hope that my right hon. Friend will at least express some sympathy with the proposition behind it.

Photo of Nick Brown Nick Brown Shadow Spokesperson (Treasury)

My right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) was right to remind the House of the strategic importance of shipping and, indeed, shipbuilding to our country. As a number of hon. Members have perceptively pointed out, our country is an island, and the conveyance of goods by sea is therefore important to us—indeed, 92 per cent. of out trade is carried in ships. I should have thought that it was fairly clear to everybody, therefore, that shipping has a unique place in our island's economy. My right hon. Friend the Member for Bethnal Green and Stepney asks the Treasury to recognise that unique place. I suspect that the Treasury will not do so. I say that because we have explored this matter before.

Help for shipping, needed though it is, is not the same as help for domestic shipbuilding, needed though that is. Although the EEC has no common policy on shipping, it certainly has one on shipbuilding. That is embodied in the sixth directive on shipbuilding, which provides for intervention funding for some merchant yards in the different member states.

The new clause would not necessarily mean that those who availed themselves of the tax concession would order new vessels in British yards, because they could purchase abroad or purchase secondhand ships. The new clause would not necessarily help the domestic merchant shipbuilding industry, which is certainly in need of help. Just about the only chance of survival for our merchant shipbuilding industry lies in relocating to Northern Ireland.

The shipping industry is deserving and worthy of support, and the new clause has considerable merit. I was taken by the statement of the hon. Member for Canterbury (Mr. Brazier) that he had acted as a consultant for a number of shipyards. That alone does not explain the serious crisis that British shipbuilding faces; the explanation has to be sought elsewhere. I am able to name the guilty man—the man responsible for closing down merchant yards when he was at the Department of Trade and Industry and for starving warship yards of defence orders when he was Minister of State for Defence Procurement. That man is, of course, the Financial Secretary, and he will no doubt reply to the debate by telling the shipping industry that it will not receive the assistance that every hon. Member who has spoken in the debate says it so badly requires.

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

The right hon. Member for Bethnal Green and Stepney (Mr. Shore) has a long-standing interest in shipping and speaks with great authority. Some months ago, he came to see me about a specific tax matter, which might have been dealt with in this Bill. The right hon. Gentleman argued vigorously against the proposal because of the effects that he thought it might have on the shipping industry. Having listened to representations from the right hon. Gentleman and others, we decided not to proceed with that tax change. I hope that that experience will at least have confirmed him in the view that we try to listen and are not indifferent to the plight of the United Kingdom shipping industry.

The new clause would introduce a special 50 per cent. first year allowance for capital expenditure incurred on or after 1 April 1989 in the provision of a ship, whether new or second hand. It would permit also a writing-down allowance to be taken for the same period, thus providing allowances totalling 621/2 per cent. in the year of acquisition instead of the 25 per cent. that would otherwise normally be available.

As the right hon. Member for Bethnal Green and Stepney well knows, the issue of accelerated depreciation for ships is by no means new. It was discussed at considerable length in the Finance Bill debates in 1984 and 1985. Clauses with the same objective were tabled in 1986 and 1987. There was a further debate when last year's Finance Bill was considered in Committee, when a nearly exactly similar proposal to that in the new clause was not accepted. As we had the issue raised in almost exactly the same form from 1984 to 1988, it is not surprising that the right hon. Member for Bethnal Green and Stepney was able to anticipate many of the arguments on which I rely.

We also debated these issues when my hon. Friend the Member for Canterbury (Mr. Brazier) introduced an amendment that sought that a balancing charge arising on the disposal of a ship should be rolled forward and relieved from tax provided that the proceeds of the disposal were reinvested within up to four years. As the right hon. Member for Bethnal Green and Stepney has recognised, relief on these would reintroduce to the system a significant measure of accelerated depreciation. The new clause would go further still by allowing the entire cost of a ship to be written down to a residual 10 per cent. over five years or so. As ships are long-life assets with working lives greatly in excess of five years—perhaps 18 to 20 years, on average—a depreciation system that provided allowances on the scale that is proposed would constitute a substantial element of acceleration.

The right hon. Member for Bethnal Green and Stepney recognised that our reform of corporation tax is based on the reduction of allowances to 25 per cent. per annum, combined with the reduction in the rate of corporation tax, with the result that the rate of corporation tax is the lowest in Europe and one of the lowest in the industrialised world. That is something that very much affects most industries, including the shipping industry.

My hon. Friend the Member for Canterbury and I debated these matters extensively when the Bill was being considered in Standing Committee. He argued that perhaps the more marginally profitable shipping industries were better off under a system of allowances than a lower rate of corporation tax combined with smaller allowances. I in turn argued that the Government believe that the purpose of the tax system should be to encourage profitable investment and profitable industries and not merely the marginally profitable or the near loss makers.

Photo of Mr William Clark Mr William Clark , Croydon South

The fact that these matters were debated from 1984 to 1987 is completely irrelevant. Why is it that the merchant fleet continues to decline? It is far better from a fiscal point of view to have a ship under a foreign flag. Corporation tax is lower here than in many other countries, but the shipping industry is being penalised in Britain when comparisons are made with competitor countries.

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

I cannot agree with my hon. Friend's analysis. I do not believe that the period of the greatest decline in British shipping, to which the right hon. Member for Bethnal Green and Stepney referred, was linked to the tax system. The right hon. Gentleman acknowledged that, even when we had 100 per cent. first-year allowances, that did not halt the dramatic decline of the fleet between 1975 and 1986 from 33 million gross registered tonnes to under 11 million tonnes. Fundamental factors—not tax factors—were in operation, and they were connected with excess capacity and, obviously, with the structure of the British fleet. They played a large part in the decline of the fleet during that period when we had 100 per cent. depreciation allowances, and they were unable to stop the decline at the time. There have been structural and capacity factors.

Photo of Mr William Clark Mr William Clark , Croydon South 11:15 pm, 11th July 1989

On the 100 per cent. allowance, does my right hon. Friend recollect what our corporation tax was?

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

People were able to use the 100 per cent. allowance and go on investing, and the actual effective rate of corporation tax was much lower. My hon. Friend is looking extremely puzzled. I am not saying that tax matters are unimportant or have no part to play, but the decline of the British fleet has been due to much more deep-seated reasons than tax alone.

Photo of Julian Brazier Julian Brazier , Canterbury

My right hon. Friend is absolutely correct, but his remark does not detract from the new clause. Surely the reasons for the great decline which occurred in every merchant fleet in the world in the 1970s were the deep-seated factors of overcapacity and overinvestment to which my right hon. Friend referred. Now that we have come out of that period of overcapacity, which the right hon. Member for Bethnal Green and Stepney (Mr. Shore) described, the precise reason why other fleets are now expanding while the British one is static—and we are falling as a percentage of the EEC fleet—is this country's fiscal factors, which are different from those in other countries.

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

That is open to argument if we say that the reduction in the fleet in the past was due to non-tax reasons, but today we believe that it is due to tax reasons. I do not believe that our tax system leaves shipping at a massive disadvantage. We must look at the tax system in the round. We must compare allowances and rates and also look at local taxes. We must look at the overall fiscal position of one country compared with another. It is not proven that British shipping is at a tax advantage compared with all its competitors. I have given my view of the fundamental factors that have been responsible for the decline in shipping. I do not believe that one can suddenly say that they are different, even though those were the reasons for the decline in the past.

Photo of Mr Charles Morrison Mr Charles Morrison , Devizes

My right hon. Friend is missing the point. He is speaking from the Government Front Bench. I put it bluntly that there is no point in arguing a Treasury brief. Hon. Members are concerned about the steady decline in the British merchant fleet. That is what perhaps surprisingly concerns my constituents. They are more and more worried that we are living on an island and our merchant fleet is getting smaller and smaller, as my hon. Friend the Member for Canterbury (Mr. Brazier) pointed out. We probably could not even mount a Falklands-type campaign. The situation is getting worse, not better. It is all very well arguing the details from the Treasury Bench, but the Government must consider whether or not we are to have a merchant fleet. What is the answer to that?

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

I apologise to my hon. Friend the Member for Devizes (Sir. C. Morrison) if I sound too like a Treasury Minister. I have great difficulty in disguising myself on occasions. It is difficult to disguise myself when I am replying to comments about tax and the Finance Bill.

It is utterly astonishing that I should sound like a Treasury Minister. I apologise unreservedly to my hon. Friend for the disguise that I have put on.

Of course, I accept what my hon. Friend the Member for Devizes has said about the strategic importance of merchant shipping and about the importance of the British merchant fleet for defence reasons. My hon. Friend the Member for Canterbury raised that in Standing Committee when we discussed his amendments. I assured him that we shall bear in mind the recommendations and remarks of the Select Committee on Defence and that the matter will be kept under review. I shall draw the attention of my colleagues in both the Ministry of Defence and the Department of Transport to what has been said.

The Ministry of Defence very much disagrees with what my hon. Friend the Member for Devizes has said and believes that it would still be possible today to mount an out-of-area operation involving the British fleet. As my hon. Friend has said, I am a mere Treasury Minister and I can assure him that I should not make that statement without having had some advice from those who know about these matters.

I have dealt with the fiscal problems as I see them. It has been said that shipping is a slightly different case. I am afraid that all sorts of industries also regard themselves as different, especially capital-intensive industries and the chemical and engineering industries. Even the film industry has a great attachment to capital allowances. I believe that the lower rate of corporation tax, combined with the lower allowances, has been of great benefit to British industry overall. That does not mean that substantial sectors of heavy industry do not raise these issues all the time, but, despite what my hon. Friends have said, it would be extremely difficult to distinguish between shipping and other industries.

As in the measures that we have taken in other Finance Bills, we have shown here that we are not indifferent to the problems of the shipping industry. Indeed, we made a special relief, through our changes on foreign earnings deductions, to meet some of the problems that had been raised about low-wage seafarers and low-wage competition. We leant over backwards to try to have a tax system that would minimise the disadvantages.

We have also used the business expansion scheme for both chartering and investment in ships. I have already referred to the representations that we received from the right hon. Member for Bethnal Green and Stepney and to the fact that we have listened to those representations as well as to those from shipping when we discussed residence.

As my hon. Friend the Member for Devizes said, this is not just a tax issue; it is also a defence issue. We are keeping the matter under review, particularly because other Departments are looking at the Select Committee's recommendations. However, I am afraid that, although we will look at the matter in that way, I cannot recommend the acceptance of the new clause, which would go sharply against the thrust of our business tax reforms.

Photo of Mr Peter Shore Mr Peter Shore , Bethnal Green and Stepney

I shall not pretend to conceal my disappointment and frustration, but I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.