Clause 10 — Plant and machinery writing-down allowances

Sex Education (Required Content) – in the House of Commons at 1:15 pm on 4th May 2011.

Alert me about debates like this

Votes in this debate

Photo of David Hanson David Hanson Shadow Minister (Treasury) 1:15 pm, 4th May 2011

I beg to move amendment 6, page 6, line 22, at end add—

‘(14) The Chancellor shall publish, by 31 October 2012, an assessment of the impact of the changes to capital allowances on the UK economy.’.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

You have caught me slightly off guard, Mr Hoyle. I was expecting my hon. Friend John McDonnell to participate in the previous debate, but I shall plough on as ever. It is good to see you back in the Chair. I hope that you had a refreshing evening’s sleep after we had considered earlier matters.

Clause 4, which we have just agreed without a Division, and clause 10 are inextricably linked. I hope that there will be another opportunity to discuss and probe with the Minister the impact of the proposals in clause 10, as they relate to the proposals in clause 4 that we have just approved. The effect of clause 10 is to reduce the rates of writing-down allowances for new and unrelieved expenditure from the relevant dates, which are 1 April 2012 for corporation tax and 6 April 2012 for income tax. As the Minister will know, the main rate will be reduced from 20% to 18% and, for special rate expenditure, from 10% to 8%. Special rate expenditure includes expenditure on long-life assets, thermal insulation and integral features, as well as expenditure incurred on or after 1 April 2009, with cars with CO2 emissions of more than 160 grams per km due for consideration under the clause. For chargeable periods that straddle the relevant date, the rate of the writing-down allowance is a hybrid of the rates before and after the change. The purpose of the amendment is not necessarily to oppose clause 10, but simply to ask the Government for a review of the impact of the abolition of capital allowances for smaller businesses and businesses that are more likely to invest, such as manufacturers generally.

Photo of Andrew Gwynne Andrew Gwynne Shadow Minister (Transport) 1:30 pm, 4th May 2011

My right hon. Friend is making an important point that is indeed linked with the previous clause. Clause 4 deals with the corporation tax cut, which is one side of the coin, but the other side is obviously investment. Constituencies such as mine are still heavily dependent on manufacturing industries—indeed, almost disproportionately so. Although local businesses that have spoken to me about the Budget measures have welcomed the corporation tax cut, they are incredibly concerned about the changes to capital allowances, which they think will serve as a disincentive for them to invest in the long term.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes some valid points. I know that he defends his constituency and the whole of the north-west region strongly when it comes to the importance of manufacturing industries. One issue that I want to explore with the Minister is the very question of whether the capital allowance reductions proposed in clause 10—as well as other in clauses, which we will consider in due course upstairs in Committee—will have an impact on the job creation and investment proposals that we are considering today. Unemployment in my hon. Friend’s region in the north-west will be very high, at around 9%, which again indicates the importance of generating and regenerating manufacturing industries in those areas.

Capital allowances allow businesses to write off the cost of certain capital assets, including plant and machinery, to arrive at their business profits. Capital allowances take the place of commercial depreciation, which is not allowed for tax. There are certain first-year capital allowances that allow 100% of a business’s expenditure on specific, environmentally-beneficial plant or machinery to be written off in the year that the expenditure is incurred. There is also the annual investment allowance, which allows businesses to write off the whole of their expenditure on most plant and machinery, up to a limit in the year in which it is incurred. Expenditure on plant and machinery not covered by the allowances also attracts writing-down allowances, at either the main rate or a special rate.

The changes in clause 10 are part of the package of corporate tax reforms announced in the Government’s 2010 Budget, as the Minister will undoubtedly explain later. The amendment calls for a review of the impact of the Government’s abolition of capital allowances for smaller businesses in 15 to 16 months—that is, October next year—when these allowances will have been operational and we can see what the growth potential in the economy has been over that period thanks to the corporation tax measures in the Budget, as well as the impact of stringent public spending cuts and rising unemployment across the UK.

Photo of Jim Fitzpatrick Jim Fitzpatrick Shadow Minister (Transport)

In the debate yesterday evening and earlier today, there were many references from Opposition Members to the concerns raised by the British Chambers of Commerce and the Federation of Small Businesses, and my right hon. Friend has referred to the CBI. Can he say whether those organisations support the review that is being requested, and whether he has had a chance to discuss the Government’s plans with them?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I want to refer to a number of comments that have been made in this debate. Perhaps I could start by being helpful to my hon. Friend and referring him to what Lord Northbrook said. Lord Northbrook does not take the Labour Whip in another place or even the Liberal Whip; he takes the Conservative Whip. He considered a range of issues on Second Reading in another place, and said of this proposal:

“How does the reduction in capital allowances square with the Government’s wishes to encourage a more manufacturing-based economy?”—[Hansard, House of Lords, 26 July 2010; Vol. 720, c. 1172.]

That is a tempered criticism, but it raises the very question that I wish to raise with the Minister. On the one hand, to help growth we have corporation tax cuts—which the Committee has just supported, although we want to see an estimate of the outcomes—but on the other hand, we have massive reductions in capital allowances, which are specifically designed to encourage businesses to invest in plant and machinery, and environmentally efficient equipment, all of which will help to build jobs and growth for the future. However, I will return to my hon. Friend’s point in due course.

The key reason to consider the matter in depth is that, as the Office for Budget Responsibility—the Government’s own creation—has said, even after this year’s Budget, which the Chancellor has dubbed a “Budget for growth”, growth will be lower this year and next year than it was predicted to be around this time last year, when my right hon. Friend Mr Darling was Chancellor of the Exchequer. Slower growth and rising unemployment will make it harder to make the deficit fall. It is therefore even more important that we encourage as much growth, manufacturing and manufacturing investment as we can, to help counterbalance the massive effects of large spending cuts, which will put many people out of work and have a knock-on effect in the private sector.

Even after the measures in the Budget are taken into account, the OBR has said that growth will be much lower this year and next. In 2011, growth is now forecast to be just 1.7%, compared with a forecast of around 2.6% a year ago. The estimated rate of unemployment has been revised upwards to 8.2%, from 8%. Despite all the discussions and the measures that we have seen so far, there is still fragility out there. We are not sure how the economy will perform in the next 12 months, nor are we sure whether it will retain its strength and grow, or whether manufacturing investment in particular will grow. We are taking a potential risk by balancing the growth in corporation tax, which the Minister believes will occur because of the cuts that have been proposed, against the cut—admittedly of 2%, but still a cut—in capital allowances proposed by clause 10.

The amendment simply says that at some point in the future—October 2012—we should have a break point, when we review what has happened since the allowances came into effect, which will be next year, against the corporation tax cuts, which come into effect now, and the other issues in the economy, which, although they are not before the Committee, are still relevant to this debate. As I did last night, I wish to refer to the fact that unemployment is still high across the United Kingdom. We need to grow the economy and grow manufacturing jobs, yet the cut in clause 10 may well impact on our current fragile growth. As I mentioned last night, unemployment in the UK is highest in the north-east, at 10.2%. I notice that my hon. Friend the Member for Hayes and Harlington is here, as well as my hon. Friend the Member for Poplar and—

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I still think of my hon. Friend as the Member for Canning Town; it is a habit that is hard to break. Just as I was about to say “Canning Town”, I realised that I was wrong, which is why I paused for a moment. In London—including the constituency of my hon. Friend Lyn Brown—the unemployment rate is 9.4%. London is a centre of prosperity, and it has growth in many parts, but if we are to encourage manufacturing industry in London to soak up those unemployed people and get them back into jobs and spending, it will be necessary to have an assessment of whether, downstream, the capital allowance cuts have been good or bad for unemployment rates.

The unemployment rate in the west midlands is 9.9%. In Yorkshire and the Humber, it is 9.3%. In my own region, Wales, it is 8.7%, and in Scotland it is 8.1%. Those are high levels of unemployment, and I want the Government to make an assessment of whether the capital allowance cuts will particularly hurt manufacturing industry in the north, the north-west, Yorkshire and the Humber and in the north-east, where my hon. Friend Mr Campbell has his constituency, more than it might do in the south, the south-east and the south-west, where the unemployment level is only 6%. That level is still high—it is 100% for those people who are unemployed—but it is still only 6%, compared with the higher levels at the heart of challenging constituencies in London and in the north and north-east.

Photo of Jim Fitzpatrick Jim Fitzpatrick Shadow Minister (Transport)

When I won the seat of Poplar and Canning Town in 1997, the level of unemployment there was almost 17%. When Labour left office last year, it was down to about 9%. That was still between two and three times the national average, but it was a lot less than it was when we won the election in 1997 because of the efforts that the Labour Government put into attacking unemployment as the scourge of our economy. My right hon. Friend is making a strong argument that unemployment is not now going to be attacked as aggressively as we would hope, because of the economic policies of the coalition Government. I would like him to continue in this vein and to outline how we think it ought to be attacked, because it is the scourge of our economy.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful to my hon. Friend for making that valid point. I know that he is committed to bringing jobs and investment to his part of east London, as indeed my hon. Friend Andrew Gwynne is to the north-west and elsewhere.

I am not saying that we will not approve the cuts in capital allowances in due course. I am simply asking the Minister to monitor their impact, and if they are becoming detrimental, given the corporation tax cut to which they are inextricably linked, we shall need to look at how the process will continue.

Photo of Andrew Gwynne Andrew Gwynne Shadow Minister (Transport)

My right hon. Friend is right to say that we shall need a regular assessment, because the regional economies do not stand alone. The decisions taken in one region might have an impact on another. An example is Mono Pumps, a manufacturing company in the Tameside area, part of which my constituency covers. It was one of just 50 schemes announced in the regional growth fund, and it is to relocate to a new facility on the Ashton Moss regional employment site in my constituency. That move is now being jeopardised because of supply chain issues with a manufacturing company based in Gloucestershire and south Wales. We need to ensure that manufacturing as a whole is supported across the United Kingdom, and only the kind of assessment that we are proposing will ensure that such regional disparities are properly looked into.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 1:45 pm, 4th May 2011

My hon. Friend makes my case for me very powerfully. I am simply saying to the Committee that these are important changes. We have approved the corporation tax cut, but we are still sceptical about whether the capital allowance cut will be a successful policy, rather than simply an addition to the public spending cuts that the Government are making across the board, which will have a knock-on effect on the private sector just as much as on public sector jobs.

Photo of Mike Freer Mike Freer Conservative, Finchley and Golders Green

Just a quick question: if the higher corporation tax and the capital allowances were so valuable, why did manufacturing jobs shrink under the previous Government?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The hon. Gentleman will know that there are many challenges across the board, and manufacturing is always going to be a changing, moving field. In my area of north Wales, for example, manufacturing grew quite dramatically. In my constituency, we make the Airbus aeroplanes, which you will know very well from your constituency in Bristol, Ms Primarolo. That has been a major growth industry, in partnership with Government investment, Government backing for investment and Government loans and grants to help to grow the private sector and create jobs. The people who have those jobs then spend their wages in the local economy, creating further jobs in shops and in other manufacturing areas across the board. It is therefore an ever-changing field.

I have tried to make it clear to the Minister that we support the general direction of travel on cutting corporation tax, because we do not want the UK to be uncompetitive with our neighbours. In our discussion on clause 4, I was simply seeking an assessment of how the Minister will measure the success of the provision, because we will be forgoing a considerable amount of resource and we will need to measure a success that we do not yet know. The proposal on capital allowances goes hand in hand with the proposal on corporation tax. We will be paying for that cut in part with a major slashing of investment allowances by £2.6 billion under these proposals. Again, I am simply asking for an ongoing assessment of the impact of the measure, because it might work and it might not. I fear that cutting the allowances will lead to a lack of investment, a lack of growth and a further reduction in the manufacturing industry that Mike Freer is seeking to protect and develop. I want to test the Minister on these issues so that he can justify to the Committee why he is making these cuts.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

The right hon. Gentleman is making an interesting case. Would he care to comment on whether any work was done by the previous Government when the capital allowance rate was reduced from 25% to 20% to determine whether that cut had the kind of damaging consequences that he now envisages with the cut to 18%?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

To be honest, I do not know. I was not a Treasury Minister in the last Labour Government. I spent my time in Northern Ireland, in prisons, in probation and in the Home Office[ Interruption. ] Perhaps that is not an area into which we should progress this afternoon, however. In the spirit of cross-party discussion of these matters, I acknowledge that Nigel Mills has made a valid point, but, whatever the previous Government did or did not do, the economy was stronger than it is now when those cuts were made to the capital allowances. We can debate the reasons for that for a long time, and we can disagree or agree on the issues, but we now have growing levels of unemployment, slowing growth and public spending cuts that have not yet hit the public and private sectors. There are estimates that up to 500,000 people in the public sector will lose their jobs, which will have a knock-on effect on the private sector. We are seeing the squeezing of the middle in relation to child benefit and working families tax credits, and poverty and wage freezes are hitting hard.

All those factors are going to hit the economy hard in the next 18 months to two years. The Minister is proposing to cut the capital allowances from April next year, and all we are asking in this modest amendment is that the Government review where we are in October 2012, given the tortuous procedures that we are going to go through in the next 18 months as the squeeze has its effect. The Minister will undoubtedly accept that that is going to happen, because it is part of the Government’s policy to make it happen, and we are keen to ensure that, at the end of that period, we do not lose valuable manufacturing capacity and jobs.

Photo of Andrew Love Andrew Love Labour, Edmonton

Is not the key point here the Minister’s inability to give us hard figures on the improvement in growth and employment? Our request, through the amendment, is that we look carefully at that, because the Government are making major claims about growth in the economy as a result of these measures, as well as rebalancing the economy away from financial services towards manufacturing. Surely the amendment will give us the opportunity to test those claims.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Indeed. We are dealing specifically with clause 10, but it overlaps, as will be discussed further, with clauses 11 and 12. Manufacturing is a key part of our economy, but it needs support in order to fuel future jobs growth. The Government thus need to explain today and later in Committee upstairs why they are cutting investment allowances for manufacturers by about £75,000 and using that money to give a corporation tax cut that will go predominantly not to manufacturing, but to financial services industries.

I have made a claim, and I am happy for the Minister to challenge it and to explain why the corporation tax cut we considered and agreed in clause 4 will be skewed towards the financial services industries which are not creating manufacturing jobs. I originally hoped to have clauses 4 and 10 considered in tandem as they are inextricably linked. The key issue is that the corporation tax cut is going predominantly to a certain sector, while the manufacturing capital allowance cut will predominantly hit manufacturing industry. We need to reflect on that.

I will refer briefly back to clause 4, but it is relevant, Ms Primarolo. The Chancellor’s “Budget for growth”, which he trumpeted in March, included an additional

1% corporation tax cut at the final moment. We know that, because the Office for Budget Responsibility said in paragraph B13 of the Budget 2011 policy costings:

“The OBR was notified of the change to corporation tax and the 1p cut in fuel duty from 1 April 2011 too late to incorporate any indirect effect of these measures in the economy forecast.”

If so, the capital allowances under clause 10 will come into effect with that reduction next year, but there is no assessment of whether the additional corporation tax cut, along with the fuel duty rise and other issues I have mentioned, will impact positively or negatively next year. Given the lack of thought and consultation on those issues, we need to reflect on them at an early stage, which is what the amendment says.

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

There is anxiety about the lack of assessment; it was undertaken so perfunctorily by the OBR because it was a last-minute decision by the Chancellor. Will my right hon. Friend comment on the grounds for that decision being taken in such a last-minute manner? Was it a political stunt? Was there a rationale for it? How does he understand not just the decision itself, but the fact that it happened literally in the final 24 hours—at the last minute—before the Budget?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I could speculate on those points for my hon. Friend, but the Minister might be in a better position to comment on them. I will give my hon. Friend one thought, however. Perhaps the Chancellor realised that unemployment is rising because of the squeeze on public spending over the year; that growth is slowing because people feel uncertain in their jobs and businesses are not willing to invest; and that the level, depth and speed of public spending cuts over the next two years will lead to growing unemployment—not just in the public sector, but in the private sector, as people in private businesses depend on public investment. For those reasons, I suggest, the Chancellor has had to make additional changes to do what I believe is the right thing: to try to stimulate private sector growth.

If last-minute thought has been given to the impact of corporation tax changes and if full assessments have not been made of the impact of VAT on public spending cuts, we need to be aware that capital allowance reductions are coming into effect in April next year. The amendment simply says:

The Chancellor shall publish, by 31 October 2012, an assessment of the impact of the changes to capital allowances on the UK economy.”

I find it difficult to think of anybody who would object to that. I am sure that the Treasury would make such an assessment as a matter of course in any case. Any good business—and the Treasury is a good business—would look at its outputs, outcomes and impacts and reflect on how they will affect the customer base, which in this case is manufacturing industry.

I have real concerns about the decision to reduce the rate of writing-down allowances for new and unrelieved expenditure, as I believe it could impact adversely on smaller businesses and on businesses that are more likely to invest, such as manufacturers. I say this because the Government regularly claim that small businesses are the key to future growth in the economy. Who depends on a capital allowance more—a very large or a smaller business? The argument I put to the Minister is that small businesses would be more affected.

Nobody disagrees with the fact that the UK should have a competitive tax regime, and the corporation tax cut should help with that in principle. The Government are paying for it by the measures in clauses 10, 11 and 12—slashing investment allowances by £2.6 billion. The package will penalise companies that invest, particularly manufacturing companies, in order to offer tax cuts that will disproportionately benefit the banks and the financial sector. At a time when the Government claim they are rebalancing the economy by trying to encourage manufacturing, this package could—I say could—do the reverse.

The Institute for Fiscal Studies has said:

“The largest beneficiaries from the package of measures”— including corporation tax and capital allowances—

“will be high-profit, low investment firms”,

such as financial services, while the cuts to allowances under clauses 10, 11 and 12 will

“have the largest impact on those firms with capital-intensive operations”,

such as manufacturers. That is a direct quote—from page 229, for the Minister’s reference—from the IFS Green Budget 2011. The IFS also agrees:

“The losers would be firms that invested heavily but made little profit—notably in the manufacturing and transport sectors but also some capital-intensive service-sector firms. The winners will be less capital-intensive but more profitable firms, historically typified by the financial sector.”

I do not know whether it will pan out like that in real life, but my point is that if it does, clauses 4 and 10 together will mean giving a corporation tax cut that benefits the financial services sector most and a capital allowance cut that damages the private sector of small and medium-sized manufacturing industries most. That cannot be a good recipe for growth in the economy.

Photo of Andrew Gwynne Andrew Gwynne Shadow Minister (Transport)

One of my concerns is that as we try desperately to rebalance the economy, we need to invest in some of the new high-tech and emerging industries, particularly in the renewable energy sector, which is incredibly capital-investment intensive. Does my right hon. Friend worry, like me, that these changes could put off growth in that emerging technology?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes a valid point, as it is exactly those companies that require capital investment support. The move will penalise companies that invest in manufacturing—for example, the car industry, advanced manufacturing, wind turbine manufacturing, and research and development across the board. These big manufacturing concerns are going to create the jobs of the future as well as protect current manufacturing jobs at a time when consumer demand might well be fragile because of high levels of unemployment, high levels of public spending cuts and general concerns about the squeeze on the economy and on people’s living standards and incomes generally.

PricewaterhouseCoopers has said:

“Many clients will balance the modest reduction in the capital allowances rates with the staggered reduction of the rate of Corporation Tax…Whilst the declining rates of capital allowances, in isolation, do not produce any winners, some businesses will benefit when the CT rate change is also taken into consideration. Capital intensive businesses”— this is the key point—

“are likely to feel the reductions more, since they will have larger capital allowances pools.”

Deloitte has said:

“For some businesses the reduction in writing-down allowances for plant and machinery will be offset by the reduction in the main rate of corporation tax from April 2012.”

We accept that.

“However”— and this is the key point—

“capital intensive companies…may not benefit to the same extent.”

In its response to the Treasury Committee in the tax experts’ report on the Bill, the Chartered Institute of Taxation reported:

“The various changes to capital allowances do not score well under coherence”— its key test.

“The changes to short life assets seem to be an attempt to solve problems created by the reduction in writing down allowance rates at a cost of increasing administrative burdens. It would be better to have a proper long-term commitment to capital allowance rates. Reducing capital allowances to 'pay' for corporation tax rate cuts penalise unincorporated businesses and make the business tax system look as if it is lacking coherence.”

I am not arguing that we should not undertake those capital allowance cuts. There may or may not be such an argument to be made, but what worries me is the overall impact of those cuts when married to the corporation tax cut. I am simply asking the Government to make a continuous assessment. I am asking them to publish an assessment six months after the implementation of the capital allowance cuts in April next year and, during the run-up to their implementation, to monitor the economy as it is now, so that we can establish whether they are on the right track.

In a report published yesterday, the Association of Chartered Certified Accountants said that

“it should be borne in mind that for large businesses with significant investment in plant and equipment, any changes to the tax cost of those assets will impact on long-term investment plans.”

I do not know whether that statement will prove to be right or wrong. I am simply saying to the Minister that he should reflect carefully, monitor the situation, and report back to the House. In October 2012, we will have experienced six months of the capital allowance regime and 18 months of the corporation tax cuts. We need to ensure that we are indeed on the right track, and that growth has not been hampered by the Government’s measures.

I should like to know what consultation took place and with which business organisations. I suspect that the consultation was not as thorough as it might have been. Will the Minister tell me with whom he discussed the proposals, when he discussed them, what the responses have been, and what he considers to have been the response across the board from capital-intensive businesses since the announcement in the Budget? When we deal with clauses 11 and 12, I shall want to know whether there was any adverse reaction to them.

I suggest to the Minister that there should be an assessment of the long-term position. I hope he will accept that the amendment is designed not to torpedo his proposals, but simply to express our concern about certain aspects of the configuration between the corporation tax cut proposed in clause 4 and the capital allowance cut under clause 10 and the clauses that we will consider later. I ask him to place a flag in the sand signifying that after a period the Government will review the impact of those cuts to establish whether the fears expressed by people including my hon. Friends and me are materialising. We hope that they will not materialise, but if they do, we shall need to consider how to change track in due course.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley 2:00 pm, 4th May 2011

It is with a small amount of pleasure that I rise to speak about tax issues, having spent 13 years advising companies on them, mostly under a Labour Government. It was kind of Mr Hanson to mention my two former employers and the various comments that they have made, which I happily endorse.

I want to comment on the request for a review of the proposed reduction in capital allowances partly because I think that we are in a strange position overall. The purpose of capital allowances is to give businesses tax relief on their capital investment in order to encourage them to invest in plant and machinery. We used to try to encourage them to invest in industrial buildings and factories, but we have stopped doing that now.

The attraction of the capital allowance system used to be the ability to incentivise people by accelerating tax relief. Forty years ago someone who invested in a piece of equipment with a 10 or 15-year useful life could accelerate the tax relief on it quite far in advance of the overall spread of its useful life, but I am not sure that that is where we are now. How many businesses in our constituencies will invest in equipment when they are not certain that its useful life will be even 10 years? If they expect it to be five or six years, the present mechanism will not work at all.

A simple calculation will show that, given an 18% writing down rate, an investor will still not have received tax relief on 30% of his investment in a piece of equipment. After eight years, he will still have not have received 20%. He may anticipate a fairly large residual scrap value if he can sell the equipment on, but that is on the assumption that a good deal of its useful life remains, and I am not sure how realistic that assumption is.

If we are to have a review, let us review the whole capital allowance system to establish whether it is really giving businesses an incentive to invest. Perhaps we should have a look at what they are actually doing in their accounts. The right hon. Member for Delyn mentioned that. What is the useful life over which they are writing off assets? I think that we may be adding a huge amount of complexity to the system by preventing all the businesses in the country from employing actual accounts depreciation for this purpose, and requiring the creation of a capital allowance pool requiring all the assets to be tracked separately. In the past it was said that businesses were receiving a tax incentive, but this huge and unnecessarily complex system may have an adverse impact on them. Our review should ask whether the capital allowance regime is the right one.

Later—not today—we will come to clause 12. The Government have responded to some lobbying, and have recognised that it will cause huge problems for manufacturing business in particular. The clause proposes that the lives of short-life assets should end after eight years. Someone who invests in equipment whose life he expects to be less than eight years will have to make a separate election to treat it as a short-life asset rather than putting it in his main capital allowance pool. He can try to obtain the tax relief over the eight years; otherwise, as I have said, he will still have 20% unrelieved. We are building additional complexity into the system, and I am not sure that that is necessary.

The Bill contains various responses to businesses that are trying to find ways around the capital allowance rules. Clause 33, for instance, proposes anti-avoidance rules for long-funding finance leases. Year in year out, we see new and complex rules intended to prevent businesses from getting around the rules. Sometimes they are trying to obtain extra deductions to which they are not entitled, and sometimes they are trying to find ways of receiving a deduction over the period for which they think they should receive it.

If we are to be a tax-simplifying, tax-reforming Government, perhaps the Office of Tax Simplification could conduct a review of whether the capital allowance is still fit for purpose, and whether it is the right way to attract business investment over the next 10 or 15 years. Should we, in fact, try to find a way out of it, and adopt a system that allows businesses simply to look at their accounts to be eligible for some kind of tax relief, rather than having to adjust the depreciation for those assets? I know that that too will be complex, because there will be a huge hangover from the existing system, and there will be problems when people try to accelerate relief over far too short a period. However, I think that all those problems can be addressed, and that we shall be able to stop increasing the complexity of the system.

I cannot vote for the amendment, because I think that it is merely an excuse for a debate. If we are to have a review, let us have a proper one.

Photo of Andrew Love Andrew Love Labour, Edmonton

In recent years there has been a move in all western countries to reduce the headline rate of corporation tax and widen the tax base, and that is what has been proposed in the Budget. Does the hon. Gentleman support that move?

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

If we want a competitive corporate tax system, the tax rate is key. However, we probably need to examine four things, which include the tax base, as the hon. Gentleman said, and the complexity, stability and predictability of the system. We are in danger of just ticking the first box; I am not sure we are ticking the tax-base box well with this approach, and we are adding extra complexity. Many regimes around the world do not have capital allowances but do let businesses take the depreciation that they see in their accounts. That is a far more attractive, simple and predictable system, because businesses would not think, “I might invest in this piece of equipment, but they might reduce this to 15% in three years’ time and my relief suddenly starts to look different.” As the hon. Gentleman was trying to say, this involves a combination of things. We need to get not only the rate right, but the base and the underlying system right; we will not get all the advantages from simply reducing the rate.

However, for most businesses the first headline comparison is about the overall tax rate, so that is the main thing to focus on. I am not going to vote against this rate reduction. Paying for the reduced rate partly by reduced capital allowances is the right way to go in this financial situation, but we need to go in the direction of simplifying our incredibly complex corporate tax system. We can all work out the statistics by saying, “When I started work 13 years ago, my tax legislation was so big and when I left a year ago it was much bigger, and I have not even got the VAT and inheritance tax book.” We can look at how many schedules on income—actual capital—we have and consider how many of them we actually need. The capital allowance regime is part of that problem, because it was written 50 or 100 years ago, when it actually worked. A lot of these things are out of date, so we must look to simplify things if we want to ask businesses to invest. I am not sure that they are going to worry about whether something is at 18% or 20%, but they do want tax relief for their investment over the useful life of their asset provided in a way that is simple for them to manage. I am not sure that we are anywhere near providing that at the moment.

A lot of my clients use the capital allowances regime to add flexibility to how they get tax relief in the years when they have profits and in the right entities in which they have profits. They will not entirely welcome my idea of simplifying this system and taking all that away from them. However, if we are to get a modern, competitive corporate tax system, it must be simple and easy to understand. It must also do what we want it to do: incentivise the investment that we desperately need to have a growing economy.

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

I have a fair amount of sympathy with Nigel Mills, because if he ever wants to return to his former profession he may well find that he has lost a number of clients as a result of that speech.

The linkage between clauses 4 and 10 is inevitable, as my right hon. Friend Mr Hanson said from the Front Bench, because the corporation tax reductions are being paid for by these cuts in capital allowances. I do not want to upset the consensus that has emerged on the cuts in corporation tax, but I do not support them and believe that they will be an error in the long run. I address the issue of capital allowances in that context.

I am unclear as to what the Government’s strategy is on stimulating the economy to tackle the recession in a way that rebalances the economy. I thought that this was not just going to be a rebalancing between the public and private sectors. I listened to some of the statements made by the Chancellor and the Secretary of State for Business, Innovation and Skills about rebalancing the economy as between the finance sector and the manufacturing sector, which gained support across the House. We heard about the development of a manufacturing strategy that would enable us to have a balanced economy between the finance, manufacturing and service sectors, so that if there was a crisis in one sector, the whole economy would not collapse as a result of overdependence on that sector. However, these Budget measures seem to fly in the face of that balanced approach.

A number of methods can be used to re-stimulate the economy, one of which is tax cuts, including corporation tax cuts, as have been introduced in this Bill. Another method is the more directional approach of considering a form of tax cuts through the capital allowances, whereby the Government try to influence economic behaviour in a way they believe to be beneficial. The other method is to invest in largely capital expenditure through public services—I am talking about public investment.

Let us deal with the formation of policies through this Bill. I am anxious about the fact that clause 4 cuts corporation tax almost as an act of faith, in the belief that that will translate into investment, the stimulation of the economy and, thus, more jobs. Very slight evidence has been produced to suggest that that will happen. My right hon. Friend the Member for Delyn has mentioned the range of debate that has taken place in the Treasury Committee and elsewhere, and the evidence that has been produced by some witnesses, but it is fairly slight. The addition of a further 1p cut in corporation tax at the last minute—again, the Office for Budget Responsibility did not even have time to assess it properly—demonstrates that the calculations have almost been done on the back of a fag packet. This smacks of something that other Chancellors have been prone to in the past: a last-minute political stunt just to surprise us on Budget day. Paying for that cut by cutting capital allowances flies in the face of the argument that the Chancellor and the Prime Minister have put forward in the past about ensuring that we stimulate the manufacturing base to rebalance our economy.

I also find it worrying that the capital allowances are paying not only for the cuts in corporation tax more generally, but for the cuts in the treatment of the taxation requirements on multinationals. The briefing that we received from the House of Commons Library contains a quote from Mr Peston of the BBC about the treatment the Government are proposing for controlled foreign companies. The rules mean that there will be a 5.75% levy on cash held by multinationals in non-trading entities overseas and a low rate of tax, whereas various commentators thought it would be 8%. These are the same multinationals who

“stash cash in tax havens and low-tax countries.”

What seems to be happening is that UK companies that are struggling to obtain loans from banks, in the first instance, to invest in capital equipment to stimulate the local economy, and therefore jobs, and thus have an impact on the economy nationally are having their capital allowances cut so that we can reduce the rate that was intended to be introduced for tax multinational companies, which are avoiding, or evading, tax through the use of tax havens. That contradicts the statements that the Chancellor has made for some time.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 2:15 pm, 4th May 2011

May I assure my hon. Friend that we will return to those clauses in some detail?

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

As my right hon. Friend said earlier, all these clauses are linked and it is difficult to disaggregate them. Clause 10 is certainly being used a mechanism to fund the allowances being distributed to companies overall. As I say, I find it extremely difficult to link that to the rationale that has been given by both the Chancellor of the Exchequer and the Prime Minister in the past.

Photo of Jim Fitzpatrick Jim Fitzpatrick Shadow Minister (Transport)

One of the biggest elements of British manufacturing is the food industry. When I was a Minister of State in the Department for Environment, Food and Rural Affairs, the National Farmers Union lobbied me aggressively. Consequently, I lobbied the Treasury, as DEFRA does, about capital allowances in respect of buildings and equipment for the farming community. Has my hon. Friend had a chance to talk to the NFU about the comments he is making? Has he any understanding about whether it is being penalised in order to assist transnational corporations from outside the UK? Is this being done instead of supporting British manufacturing and British business people?

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

Strangely enough, given that I represent Hayes and Harlington, an urban area, I do not have an awful lot of engagement with the NFU, although my area does still have one farm left in it. I have an engagement with Hillingdon chamber of commerce—I am meant to be hosting its annual parliamentary lunch at the moment—and a number of its members have explained to me their concerns about the impact on small firms. I share the view of the hon. Member for Amber Valley: capital allowances should not be used just as mechanisms to be manipulated in years of high profit. There is a need for an overall review of capital allowances, but I find it unacceptable to cut them in the short term to pay for corporation tax reductions and for the beneficial treatment of multinational corporations. That is why I support the amendment, which is fairly mild-mannered and simply asks whether we can reconsider the matter.

As my right hon. Friend the Member for Delyn said, I would expect a wise Government to have the Treasury carry out such an assessment regularly. The amendment asks for that process to be more open and transparent and for it to be reported to the House so that we can have a full and thorough debate. I hope that the Minister can assure us that he can at least give us some line of reporting on the implementation of the policy over the coming period.

It worries me that as we cut capital allowances, which will reduce corporation tax in this country, we will get into a cycle just like that in the 1930s with an internecine battle between countries about reducing corporation taxes. That will lead to a policy of beggar thy neighbour in order to secure some short-term gain in the form of overseas investment in the UK. I do not believe that that is the solution and I think it will be found to be counter-productive in the long term, even though there might be some short-term gains to tide the Government over for the next 18 months, if they survive that long.

I believe that the Government are mistaken in bringing forward this process of corporation tax reduction. If we are paying for that through the capital allowances changes, we will divide industry and the private sector. A large number of small firms, particularly in the manufacturing sector, will lose out and will not gain sufficiently as a result of the corporation tax cuts. Other areas of the economy, particularly the finance sector, will gain yet again and yet more anxiety will be expressed in the private sector about the Government’s divide-and-rule policy.

Photo of Andrew Gwynne Andrew Gwynne Shadow Minister (Transport)

Is it not worse than that? Many of the small manufacturing industries in my constituency have been dependent on an old declining style of manufacturing. The capital allowances were the mechanism that they used to diversify. On my hon. Friend’s point about rebalancing the economy, if we are to do that in areas that are heavily dependent on manufacturing industry, we must allow them to diversify into the new technologies and new manufacturing sectors.

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

That is exactly the point that my right hon. Friend the Member for Delyn made and that I wish to reiterate. Capital allowances were introduced as a method of the Government’s trying to shape behaviour within industry as best we could. They were a way to stimulate sectors of the economy, but they have also been used to stimulate innovation. The Government are committed to the stimulation of the green economy and I, like other Members on both sides of the House, deeply regret the Government’s failure to act sufficiently swiftly to establish the green investment bank and to get it up and running, but that is a subject for another debate.

The role of capital allowances, particularly in the environmental field, could be key and cutting them with this broad-brush approach will deny the opportunity to the environmental industries, particularly those involved in the development of renewables, to become world leaders as the Government envisaged that they would in the coming period, an idea that we all supported. This is my right hon. Friend’s point: if a review of the impact of the capital allowances were linked to the disastrous corporation tax policies overall, we would have the opportunity to consider the implications sector by sector and industry by industry as well as the design of the appropriate mechanisms, allowances or other things to stimulate those sectors of industry.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Does my hon. Friend accept that one key factor is the lack of a focus on outcomes in the consideration of the impact of the changes in both clause 4 on corporation tax and clause 10 on capital allowances? One key thing that the review would do, if we can secure from the Government today an aspiration to find out what the changes will mean for real jobs and the manufacturing industry, is test in 18 months’ time whether those changes have been successful.

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

Let me put it this way, as mildly as I possibly can: we hardly have a description of evidence-based policy making before us. Let us go back to the example of the additional 1p cut given by my right hon. Friend. When the Treasury Committee considered the matter, it invited evidence and Paul Johnson, the director of the Institute for Fiscal Studies, was questioned about the impact it would have. He said that we did not know about that with any precision. We do not know with any precision what the impact of the overall cut in corporation tax will be and we certainly do not know with any precision, globally or sectorally, what the impact of the capital allowances cuts will be. We are stepping into the dark and going down the wrong path and that is why we should have the review.

I fear that a number of companies might have planned their development in advance based on the capital allowances that they thought were secure and would be forthcoming because of the statements of the previous Government as well of the Chancellor of the Exchequer over the past 12 months. They will now not proceed with that investment and as a result, the companies might not be put at risk but they will certainly not expand in the way that they planned and that will have consequences for jobs. In certain areas—my right hon. Friend has mentioned at great length the higher unemployment rates in certain regions—the effects on individual communities will be fairly catastrophic if this job growth does not go ahead.

I oppose the reduction in corporation tax, as I think it is misguided. I would prefer it if, instead of cutting taxes to companies and forgoing that income, we could use the income from the top companies and corporations to invest in public infrastructure projects that will get people back to work and stimulate the economy overall. The last thing I would suggest the Government should do, even if they are cutting corporation tax, is pay for that cut with cuts in capital allowances. In my view, that flies in the face of everything that the Government have said about rebalancing the economy, stimulating the manufacturing base and shaping behaviour so that there is a longer-term view of investment in the capital and manufacturing infrastructure of this country based on security and the knowledge of the income that a company will have to invest in the future.

Even if the Government cannot withdraw these provisions on the cuts in capital allowances and reconsider those on the corporation tax, I urge them at least to allow us to reconsider the matter within 18 months, as the amendment says, to see the implications overall. I honestly do not understand the fear within Government of having an open examination of this matter within that time scale. If I were a Minister, I would welcome it. If I were an advocate for this policy, I would welcome the opportunity to come back in 18 months or so and, if necessary, to gloat at its success. I certainly would not want to feel that I was on the run and hiding from the consequences of the decisions that I had proposed in a Finance Bill of this nature.

Photo of Andrew Love Andrew Love Labour, Edmonton

I echo the final comments of my hon. Friend John McDonnell about the amendment. It mentions capital allowances—that is what we are discussing—and the impact they will have on the UK economy is of particular concern at the moment.

We must comment on the backdrop to this debate, as the economy has stalled over the past six months. We had a very bad final quarter of 2010 and although things improved in the first quarter of this year, the reality is that everyone was expecting much larger growth in the first quarter to compensate to some extent for the lack of growth in the final quarter of last year. If one reads what the commentators and forecasters have said, one sees that there is genuine concern, which is reflected in the figures provided by the Office for Budget Responsibility. The predicted growth rate has gone from 2.6% to 1.7%, but that figure might already be out of date, so there could be further reductions in the rate.

It is suggested that unemployment will go up from 8% to 8.2% but, just as other Opposition Members have reflected on unemployment in their areas, I note that unemployment in my constituency is 9.3%, which is just under the London average. With the best will in the world, it is quite hard to see how we are going to turn the corner against the backdrop of what is happening internationally. One point that I think will hit home harder about the Government’s strategy is that the reductions in growth rates and the increases in unemployment mean that there will have to be an additional £43 billion-worth of borrowing over this Parliament at a time when the Government are telling us that the overwhelming strategy is to reduce the deficit.

The Government’s recent paper on the growth strategy also forms part of the backdrop. It would not be hyperbole to say that there has been widespread dismay about the report because it does not contain the germs of ideas that people can reasonably hope will have an impact on the growth of the economy. As far as enterprise zones are concerned, we have been here before: they shift employment around their local region but they do not make a great contribution to growth or employment creation. On the national insurance holiday for small companies outside London and the south-east, we understand from a report in the Financial Times that it is unlikely to measure up to the claims that were made for it when it was introduced last year. Whether it is because of bureaucracy or other problems, it is not being taken up by small businesses and the reality is that it is not going to contribute to strengthening our growth rate.

Photo of Andrew Gwynne Andrew Gwynne Shadow Minister (Transport) 2:30 pm, 4th May 2011

My hon. Friend is making a good start to his speech by setting out the background. Not long ago, when the Chancellor was promoting his Budget and introducing the measures that my hon. Friend is talking about, he did so on the basis that it was a Budget for growth. However, do not the OBR’s forecasts show that even with the measures in the Budget, growth is predicted to be lower than it would have been had Labour’s plans remained in place?

Photo of Andrew Love Andrew Love Labour, Edmonton

Absolutely. One has to question, as I am doing, the Government’s whole strategy, which they call a growth strategy but which does not appear to be delivering what we would expect from a proper growth strategy. Indeed, the previous Government’s growth strategy produced a far better result, as I shall discuss in a moment.

I want to cover two other issues that have caused quite a lot of surprise and concern in relation to the Government’s policies. First, on construction, the first quarter growth figures for this year show one glaring and prominent inadequacy is in construction activity, which is going down rapidly. If we add to that the incoherent policies that the Government are pursuing on house building, planning consents and oiling the wheels of the construction industry’s infrastructure, one can only be very gloomy about the prospects for the next year or two.

Secondly, I will mention manufacturing because it would be part of the report that we are suggesting the Government should produce. Manufacturing did rather better than I had suspected it would in the first quarter. Internationally, it seems to be delivering some of the changes in net exports that all the economic forecasters suggested, but we need a much more growth-oriented manufacturing sector if we are to bring about the changes that will be necessary if the changes in capital allowances are to go forward.

Those considerations lead me to conclude that the Budget proposals before us—the reduction in the headline rate and the compensatory measures widening the tax base to pay for that—are the main thrust of the Government’s growth strategy in real terms. The Government suggest that those measures will help to rebalance the economy. I look at all issues as objectively as I can and I have to say that, given the measures being undertaken in the comprehensive spending review in relation to the public sector, we certainly need to do something to boost the private sector. We are told that the measures will do that, but will they? That is the question being addressed in the amendment.

The Minister and the Chancellor have told us that a lower rate of corporation tax should act as a signal that we are open for business. There is some evidence that that approach has worked previously to a limited extent, but the question is whether it will work in the current economy. I am not a sceptic but, like the shadow Minister, I would like to see some Government projections about the number of businesses they expect to come from other countries either to expand existing operations or to start new ones here as a result of that signal.

In his Budget statement, the Chancellor proclaimed from the Treasury Bench that we have

“the lowest corporation tax in the G7”—[Hansard, 23 March 2011; Vol. 525, c. 955.]

but we already had the lowest rate of corporation tax in the G7. If all we are trying to do is send a signal, surely we could have proclaimed that. There is also the wider Group of Twenty to consider. Looking at countries such as Ireland we must ask whether it is feasible and rational for our strategy to be to compete with that in Ireland. As we know, there is debate in Northern Ireland about whether corporation tax should come down to the level in the rest of the island. There is genuine debate about that, but I do not think it is being suggested that we want to compete with Ireland. We compete with the major G7 economies and our rate is already below theirs. The cut in corporation tax will re-emphasise that, but what we would like to know from the Minister is what benefit that will deliver to the British economy.

Photo of Andrew Gwynne Andrew Gwynne Shadow Minister (Transport)

Is it not a fact that for the international companies seeking to invest inwardly in the United Kingdom, corporation tax is only one small part of the overall picture? They are looking at much more than just the headline tax rate.

Photo of Andrew Love Andrew Love Labour, Edmonton

Yes, absolutely. If we look at business investment, which in some senses reflects how optimistic employers, manufacturers and other parts of the economy are about the future, we will see that we have not had the increase in business investment that all the forecasters, economists and coalition politicians have been telling us we should have. That reflects the wider issues in the economy that should be of such major concern. We cannot expect a cut in corporation tax to solve all the problems, but the merit of the amendment is that it proposes that the Government try to indicate how much additional growth and employment will be created as a result. In the previous debate, the Minister suggested that a cut in corporation tax would boost investment.

Photo of Dawn Primarolo Dawn Primarolo Deputy Speaker (Second Deputy Chairman of Ways and Means)

Order. I appreciate that the Government themselves have said that corporation tax and capital allowances are part of a package, and I have therefore allowed a linked debate, even though we have finished debating corporation tax. However, the hon. Gentleman needs to focus a little more on capital allowances, which are the subject of the amendment.

Photo of Andrew Love Andrew Love Labour, Edmonton

Thank you for your guidance, Ms Primarolo. I will move swiftly on to capital allowances. The Government have discussed the need to widen the tax base and they have told us that reducing capital allowances is partly a method of paying for the cut in the headline rate. As I mentioned in an intervention, that phenomenon has been apparent in most western countries in recent years and, indeed, all the economists project that there will be much greater competition in business taxes. Corporation tax is likely to continue to come down, and the reduction will be partly made up by widening the tax base.

Like my right hon. Friend Mr Hanson, I am prepared to consider the changes to capital allowances, although I am concerned about the cut in the annual investment allowance from £100,000 to £25,000. I am perfectly happy, however, to look at that if we are reassured that the proposal in the amendment will make a significant difference. As has been said—and I have said so myself—the Office for Budget Responsibility added a rather sceptical note to the debate by suggesting, even though it had been informed at a late stage of the 1% cut in corporation tax, that that would not have a great impact on growth.

Finally, I want to focus on the issue of who will benefit from the changes to capital allowances. As a number of Opposition Members have said, high-profit, low-investment companies will be the main beneficiaries of the package, which is unfair and, if I may say so, will not achieve the rebalancing of the economy that the Chancellor has promoted for a considerable period, away from financial services towards the manufacturing and production of export-oriented goods. The change militates against all that. In particular—and I refer to the cut from £100,000 to £25,000—it will penalise manufacturing, particularly businesses with high capital costs. My right hon. Friend the Member for Delyn mentioned the motor industry and others, but I am concerned, because I have a number of small, capital-intensive manufacturers in my constituency. Sadly, they are only a remnant of the manufacturing sector that we had 25 or 30 years ago, but we need them and we need to promote them. I am therefore worried about the Government’s proposals.

Photo of Andrew Gwynne Andrew Gwynne Shadow Minister (Transport) 2:45 pm, 4th May 2011

My hon. Friend has been incredibly generous in accepting interventions. I am not sure of the extent of the manufacturing base in his constituency, but I imagine that it is pretty similar to mine. Small manufacturing industries tend, as he said, to be a remnant of the larger-scale manufacturing that once operated in our constituencies. Does he not regard the capital allowances scheme as a mechanism for manufacturing industries, however small, to diversify into the new sector?

Photo of Andrew Love Andrew Love Labour, Edmonton

I agree. If we take the coalition at face value, it has suggested that we need a vibrant small business and manufacturing sector, much of it consisting of small businesses. I would think that it would want to promote that by incentivising it through the taxation system. One wonders whether the measure would achieve that. I do not want to suggest, without any concrete figures, that that will in fact happen. We urge the Government to produce those figures, so that we can all make a judgment. Indeed, they can make a judgment about whether their policy has achieved their objectives.

Photo of Jim Fitzpatrick Jim Fitzpatrick Shadow Minister (Transport)

My hon. Friend, like most of the speakers in this debate, is generously supporting the modest amendment tabled by our right hon. Friend the Member for Delyn. It does not attack what the Government are trying to do; it is just asking for

“an assessment of the impact of the changes”.

We are therefore giving the Government the benefit of the doubt, as their proposal may well be beneficial and positive. As my right hon. Friend has said, the Treasury will examine, monitor and scrutinise the impact of the measure on businesses, so what is wrong about publishing an account as suggested by the amendment?

Photo of Andrew Love Andrew Love Labour, Edmonton

I agree, as other Members do, that that is not an unreasonable request. If the Government choose not to support the amendment, are they concerned about the impact of capital allowances and the prospects for the UK economy? One wonders whether they do not want the debate that would ensue in 2012 when, if we are to believe Government figures and the OBR, the economy should turn a corner. That would be an appropriate time at which to carry out that investigation.

There are 5 million small businesses in this country, and it is a symbol of the unity that we occasionally achieve in the Chamber that Members from all parts of the House recognise the role that they play now and, importantly, in future. If we add to the impact of capital allowances on small businesses the failure of the banking system in this country to provide the credit necessary to expand the sector, I wonder whether we can achieve all that the Government hope to achieve through the shift from public sector to private sector activity. I merely raise that as an additional issue, but I hope that the Government will address the credit needs of the small business sector a little more robustly. That is what underpins the amendment.

Photo of John Martin McDonnell John Martin McDonnell Labour, Hayes and Harlington

I apologise, Ms Primarolo, for leaving the Chamber earlier. Should there not be some consultation of small businesses in particular so that they could describe the nature of the investments that they would forgo if they failed to secure the capital allowances that they normally secured under previous regimes? That would allow the Government to assess the overall impact of the loss of those investments to sectors of industry and on employment overall.

Photo of Andrew Love Andrew Love Labour, Edmonton

My hon. Friend makes my point. That is exactly why, once the changes have been introduced, we need to review and assess their impact, particularly on small businesses and more generally on the economy. We would like to be reassured that the headline rate cap with the changes to the allowances will make a material and positive difference to the economy.

I commend the amendment to the Committee and in particular to the Minister. I hope he will consider carefully what is asked for and agree that it is a constructive amendment that he can support. I hope that together we can make a real difference to the prospects for the UK economy.

Photo of David Gauke David Gauke The Exchequer Secretary

Amendment 6 would require the Chancellor to publish by 31 October 2012 an assessment of the impact of the proposed changes to capital allowances on the UK economy, as we have heard. The amendment was tabled to clause 10, which reduces the rates of writing-down allowance on the main rate pool of plant and machinery expenditure to 18% and on the special rate pool to 8%. Before I deal with the amendment, I will explain the purpose of clause 10, which is key to the amendment.

Capital allowances allow businesses to write off their expenditure on capital assets, such as plant and machinery, against their taxable income. They act as a simple, statutory system in place of commercial depreciation. Capital allowances are given at different rates, depending on the year of investment and the type of asset acquired. The principal year-on-year allowance for plant or machinery expenditure is the writing-down allowance. The main rate is currently 20% per annum, and the special rate is 10%.

Both are calculated on the reducing-balance basis. We are making changes also to the annual investment allowance, in clause 11, reducing it to £25,000, as we have heard, and extending the short-life assets regime from four to eight years, in clause 12.

The changes announced last year, which are given effect by clauses 10 and 11, enable a reduction in the main rate of corporation tax, which will reaffirm Britain’s competitive tax system and support enterprise and growth. Mr Hanson was right to highlight the fact that this is part of a package. In his earlier remarks, Mr Love pointed out that this was a partial contribution. There is none the less a gap, and further funding has been found—from the bank levy, for example—which has enabled us to reduce the corporation tax rate.

We have already debated the benefits of reducing the corporation tax rate and we have returned to that topic to some extent in the present debate. I note that it does not have the support of all hon. Members, although it is supported by the Opposition Front-Bench team. It is helpful to repeat what was said by John Cridland, the director general of the CBI:

“The extra 1p cut in corporation tax will help firms increase investment.”

The objective is not just to reduce the amount of tax that companies pay, but to enable them to invest and grow businesses in the United Kingdom. I am pleased that that is welcomed throughout much of the Chamber.

Our initial assessment of the package as a whole suggested that that would lead to an additional £13 billion of business investment by 2016 by making the cost of capital investment cheaper. The additional reductions in corporation tax rate and the extension of the short-life assets regime will help to increase further the levels of investment by business. We estimate that the overall effect of these measures will be to reduce the tax liabilities of the manufacturing sector by around £700 million by 2015. The changes to the rates of writing-down allowances do not mean that businesses will not continue to receive full tax relief for their investments in plant and machinery. Rather, the relief will be over a slightly extended time frame.

Let me give an example. Where it would have taken 11 years under the current rate to write off more than 90% of the cost of a machine, it will now take 12 years. Meanwhile, the rates will continue to align broadly with average rates of depreciation across the economy. This does not mean that we intend to remove capital allowances in favour of pure accounting depreciation.

On the issue raised by my hon. Friend Nigel Mills, the previous Government did consult in some detail on their reform of corporation tax between 2002 and 2004. I am sure you remember it well, Ms Primarolo. The business response to that consultation was strongly in favour of retaining capital allowances. It was argued that capital allowances provide certainty and a level playing field, with the same rates of allowances applying to all. The flexibility of the system allows the pooling of expenditure and the ability to claim less than full allowances, depending on the individual’s business circumstances. My hon. Friend set out the case for a different approach to capital allowances. He brings great expertise on the matter and there is ongoing debate, but we do not intend to reopen discussion of that point.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

I am grateful to my hon. Friend for reminding me of that study from almost a decade ago. I gently point out to him that the rate of capital allowances was quite a bit higher at the time of the study. If he did the same exercise now, he might get a slightly different answer.

Photo of David Gauke David Gauke The Exchequer Secretary

Again, my hon. Friend raises an interesting point. We look forward to receiving any representations that he may wish to make on that. He is right to say that the rate of capital allowances has changed since 2004, and he highlighted in an intervention the fact that the previous Government—as I am sure you will recall well, Ms Primarolo—reduced writing-down allowances in 2007, a point that my hon. Friend made to the right hon. Member for Delyn.

In response to those Opposition Members who raised their concern about the approach that the Government have been taking, I point out the approach taken by their Government in the previous Parliament, when they were all Members of this place. Whereas we are reducing the writing-down allowance from 20% to 18%, the previous Government reduced it from 25% to 20%. In our case that is a contribution towards reducing the main rate of corporation tax from 28% to 23%. The previous Government reduced it from 30% to 28%. Ours is a much more generous package for business and as a consequence a much better package for manufacturing than that contained in the 2007 Budget, where essentially the entire reduction in corporation tax from 30% to 28% was paid for by the reduction in the writing-down allowance from 25% to 20%.

On amendment 6, the Government are fully committed to providing greater transparency on the impact of tax measures. I am sure Opposition Members have examined the tax information and impact notes that we published on 9 December relating to clauses 10 and 11, and the additional note that we published at Budget in relation to clause 12. It is clear that there is no need to publish a report into the impact of the capital allowances changes. We have provided a great deal of detail already, but for those hon. Members who have not had the opportunity to read the published notes, let me provide a brief summary.

The note states:

“The OBR assessment of the package was that the cuts in CT”— that is, corporation tax—

“rates more than offset the reductions in investment allowances”,

and that the businesses affected

“will benefit from related reductions in the rates of CT.”

As I said earlier, we expect the overall effects of the cuts in corporation tax rates and capital allowances changes to lead to an additional £13 billion of investment, and the additional changes to increase that further.

Although this is not strictly in scope, as the amendment is to clause 10, I hope I may be allowed to make a few comments about the other changes to capital allowances in the Bill, to which we shall return in Committee upstairs. The reduction in the annual investment allowance to £25,000 is estimated to affect between 100,000 and 200,000 businesses. As the tax information and impact note clearly states, however:

“The CT reform package will promote higher levels of business investment than would otherwise have been the case.”

Further, more than 95% of businesses in the UK will be unaffected, as the qualifying capital expenditure will continue to be completely covered by the annual investment allowance, so companies, be they small, medium or large, will benefit from the CT cuts, including the cut in the small profits rate in clause 5, while most unincorporated businesses, which by their nature tend to be the smallest businesses in the economy, will still have their expenditure covered by the annual investment allowance.

Clause 12 contains changes to the short-life assets regime, which will enable a business to obtain allowances that equate to the actual depreciation of the asset over the period of actual ownership. That change was described by Terry Scuoler, the chief executive of the Engineering Employers Federation, the country’s leading manufacturing organisation, as a change that

“will make the tax system more efficient and remove in part barriers to investment.”

The change will better recognise the cost to business of investing in modern machines with shorter lives.

I can understand the right hon. Member for Delyn wanting to table an amendment calling for a report. It is a mechanism that Oppositions down the ages have used; it has been well used during our debates in Committee of the whole House and, indeed, I suspect that I may well have tabled such amendments in the past as an Opposition Front Bencher. They tend to be tabled and they tend to be rejected. Of course, the Government will always keep matters under review, but the proposed amendment does not add very much of great value. The changes that we are setting out to corporation tax are a vital component of the reforms that are essential if we are to achieve our goal of creating the most competitive tax system in the G20, and we have already set out clearly the impact of the changes to capital allowances.

The right hon. Gentleman raised the question about employment and manufacturing, but the fact is that in the three months to February employment rose by 143,000, while in the first quarter of this year manufacturing grew by 1.1%, and in Q4 of 2010 the net rate of return of manufacturing companies rose to 10.4%, up from 8.6% in Q3.

We are taking steps to support manufacturing and to make the UK more competitive with a stronger tax system. I therefore propose that the clause stand part of the Bill and ask the right hon. Gentleman to withdraw his amendment.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Good afternoon, Mr Evans. Can I welcome you to the Chair of this seemingly unending Committee, which has been going on for the past couple of days?

I have listened very carefully to the Minister, but I think that the amendment is very modest: we are asking for a report in 18 months’ time, in October 2012, on the impact of the changes. We ask for that, because my right hon. and hon. Friends retain an element of concern that the cut in manufacturing capital allowances will damage some manufacturing sectors. Based on those concerns, we wish to continue to reflect on those matters, and I therefore wish to put the amendment to a Division, so that we can place on the record our concerns about the capital allowance cuts and state that we wish to review the matter very clearly in 18 months’ time, in October 2012.

Question put, That the amendment be made.

The Committee divided:

Ayes 121, Noes 249.

Division number 267 Sex Education (Required Content) — Clause 10 — Plant and machinery writing-down allowances

Aye: 121 MPs

No: 249 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Clause 10 ordered to stand part of the Bill.