I beg to move amendment No. 135, in
schedule 30, page 360, leave out lines 26 to 28 and insert—
'(5) Where this section applies, the expenditure is apportioned under section 562(3) (apportionment where property sold with other property) subject to the limitations imposed by this section.'.
New section 45I of the Capital Allowances Act 2001 provides that the Treasury may by order provide that no allowance on environmentally beneficial plant or machinery may be made unless a relevant certificate of environmental benefit is in force. New section 45J is intended to provide an alternative method of apportioning expenditure to that provided in section 562(3) of the 2001 Act, where one or more of the components of a particular plant or machinery are of a description specified by Treasury order. However, the new section as drafted seems merely to limit the expenditure that can qualify for capital allowances on environmentally beneficial plant or machinery. The amendment therefore proposes that section 562(3) should continue to apply, subject to the limits imposed by new section 45J—in other words, that apportionment should be provided for. Without our amendment, expenditure on other items may not qualify for allowances. That is the Government's objective and I hope that the Economic Secretary will make a statement to that effect. The clause could have been drafted more clearly.
Various questions arise following an examination of the schedule. I agree with my hon. Friend the Member for Arundel and South Downs about the lack of definition. I am sure that the Treasury has a good reason, but it seems bizarre that the qualification of expenditure will not apply if the equipment is second-hand. We are discussing environmentally friendly equipment and it is ironic that the green allowance system rejects recycling as a qualification. What is the reasoning behind the system?
Can the Economic Secretary explain the process by which the Treasury would order the certificate of environmental benefit? How would it make a judgment and would that judgment be based on reports? Does it intend to use a panel of experts? Has it already decided which items will comply or will the process be ongoing? That question applies not only to whether the equipment works but to the definition of a friendly environment. Would the allowance apply to building an incinerator from which power could be generated? There are a few questions relating to the subject matter and I shall be interested to hear the Economic Secretary's response.
I want to pursue the same point as my hon. Friend. The equipment that qualifies for the allowance must be unused and not second-hand. If a
manufacturer of a qualifying piece of equipment had a demonstrator, took it round to various users of the equipment, convinced them of its efficacy and subsequently sought to sell it, it would not qualify for the allowance because of paragraph 1(a). As far as the company is concerned, however, it would be an entirely new purchase because the company would have been convinced by its effectiveness and would therefore want to purchase it.
If someone took a demonstrator back in-house to undertake some rudimentary refurbishment—perhaps a new coat of paint—they could claim that it was new. They could tell a potential user, ''You know it's the demonstrator and I know it's the demonstrator. We have put a new coat of paint on the outside so it looks new and we will give you a discount.'' We could have a wholly artificial situation in which a used, second-hand piece of equipment would technically qualify for the allowance although it was not what it purported to be.
Our discussions of avoidance were interesting. There may be a rational explanation of the provision but it has defeated my understanding, particularly when it comes to encouraging the uptake of environmentally important equipment. For example, margins are tight in the horticulture industry. If people want to move from a less environmentally friendly regime to a more environmentally friendly regime, they might only be able to afford second-hand or refurbished equipment. My hon. Friend the Member for Huntingdon made an excellent point about not encouraging recycling. I am concerned about not encouraging artificiality when the objective is to introduce new types of equipment.
On suggested new section 45H(1)(c), what is the reasoning behind
''it is not long-life asset expenditure''?
A new pipe system that did not leak might be installed to replace a leaky system. Pipes are a long-life asset and have a separate and special tax regime. There may be a rationalisation of why an enterprise that seeks to minimise water loss should be penalised because an item is a long-life rather than a short-life asset and I shall be grateful if the Economic Secretary will explain it.
New section 45I(3) deals with the certification arrangements. I note that there are separate arrangements for certification for each of the devolved or assemblied parts of the United Kingdom. How will the measure ensure consistency? If there are different certification mechanisms north and south of the Scottish border, there are the usual arguments about what happens to an enterprise that straddles the border. Would such an enterprise get a better deal on one side of the border than the other? I do not want to labour the point because I am sure that the Economic Secretary understands it.
Finally, paragraph 4 of schedule 30 deals with first-year allowances. Is there a carry-forward provision because a new enterprise may not have any profits in year one against which to use them? It would be helpful to know whether they can be carried forward.
The discussion has been interesting. I shall try to deal with the important points, finishing
with those raised by the hon. Member for Arundel and South Downs.
The right hon. Member for Fylde and the hon. Member for Huntingdon asked why second-hand equipment does not qualify for the particular tax treatment. Members of the Committee will recall that I placed clause 166 in the context of the green technology challenge, which the Government launched in 2001. The scheme, which covers water technologies, cleaner vehicles and fuels and energy-saving technologies, aims to encourage businesses to invest in state-of-the-art, environmentally beneficial technologies that are innovative and have yet to achieve market penetration. It is not designed for long-life assets, as the right hon. Member for Fylde argued, or reused assets, as the hon. Member for Huntingdon argued. In the same way as the existing first-year allowance schemes, it applies to new and unused equipment—to do otherwise would dilute its focus.
The hon. Member for Huntingdon also asked about heat-generating equipment. I have tried to explain—the explanatory notes make this clear—that clause 166 deals with water technologies, so the answer to his question is no.
As we do with other schemes, we shall keep the operation of this provision and the scheme for water technologies closely under review. We shall consider extending or amending the list of qualifying technologies, if there is evidence to show that there is a case for doing so.
I am grateful for the Economic Secretary's attempt to clarify, but I come back to the point that I made. Could he deal with the prototype situation? If a prototype of a state-of-the-art piece of equipment that qualifies for the allowance has been in use for six months as part of a trial experiment, it cannot be determined as new. How is such a piece of equipment dealt with under the clause?
It is dealt with in the following way. The manufacturer of the equipment will assess, according to the criteria that DEFRA will publish over the summer, whether it believes that the technology fits the criteria and warrants this special relief. The manufacturer would then apply to DEFRA for an assessment and the issue of the certificate.
I am sorry to press the Economic Secretary on this point. I understand his point about the novelty of the technology, but if the equipment was a prototype that had been used for six months, by definition it could not be determined as new. To my understanding, new means unused. Could the Economic Secretary deal with that, because in the world of new technology, he has only one piece of equipment?
If the equipment and the technology are a prototype, that implies that they are still new. The only answer to the right hon. Gentleman's question is, as I explained, that the manufacturers of the equipment will consider the criteria to be issued by DEFRA over the summer and decide whether they believe it meets the criteria. They would then submit an application for certification under this scheme to DEFRA, which would make the judgment.
If I understand what the Economic Secretary has just said, he was giving a definition of new which was not ''This is in no way second hand'' but, ''This equipment has a technological aspect to it which puts it into a new category, so it has nothing to do with ownership''.
I am not trying to define the term ''new''. I was explaining, in response to direct questions, that this is not a scheme devised to support assets that are necessarily reused or long-life. The definition and then the judgment of what will constitute a qualifying technology will be produced by DEFRA and will be the conclusion of a detailed set of discussions and consultations about the qualifying criteria and the types of technology that should be supported. Those discussions and consultations have been held with a broad range of manufacturers, users and other Government regulatory agencies. That is the point at which to encourage manufacturers of such technologies to examine the published criteria and decide whether it would be appropriate to submit an application for such a certificate.
Surely the problem with the question put by the right hon. Member for Fylde is that he was describing a demonstration model, not a prototype. If it was a demonstration model in the car industry, inevitably it would be sold as a car that had been used for demonstration purposes, which is entirely different from a prototype.
My hon. Friend adds a further dimension to our debate, to demonstrate how tricky will be the decisions, and the questions that DEFRA is currently weighing in consultation with a range of interests, and makes the case that the Bill is not the appropriate place in which to legislate for and specify such definitions. That is not what we are doing in the clause or the schedule.
The hon. Gentleman may not have been listening earlier, but I have been at pains to point out the length and breadth of the consultation. I say again that DEFRA has been in detailed discussion with a range of interests, from manufacturers to users to regulatory bodies, on what might constitute appropriate technologies and the criteria for defining those. Confirmation of those qualifying technologies and the criteria for them will be published in the water technology list when the Bill has received Royal
Assent. That is the appropriate place in which to publish the information, not the Bill.
I am glad that the hon. Gentleman has now got the point.
Turning to the comments of the hon. Member for Arundel and South Downs on amendment No. 135, we do not believe that such a change is necessary, particularly as it would add to the complexity of the new scheme and could reduce the amount of expenditure qualifying for the new 100 per cent. allowances. The Bill provides an appropriate method of apportionment. The Treasury order to which new section 45J(1) refers will specify the actual amount to be treated as the cost of a particular product if it is used as a component in a larger item of plant or machinery. New section 45J will ensure that the part of the expenditure qualifying for 100 per cent. first-year allowances does not exceed that amount.
New section 45J is closely modelled on section 45C of the Capital Allowances Act 2001, which was enacted when the scheme offering 100 per cent. allowances for energy-saving plant or machinery was introduced. No problems have arisen in practice from the operation of section 45C of that Act and the use of a different method of apportionment in essentially similar legislation would add unnecessary complexity and could cause confusion. I encourage the hon. Gentleman to withdraw his amendment and my hon. Friends to support the schedule unamended.
I have listened carefully to the Minister, but in a world of novelty the definitions that he gave refer to ''new'' as in technology and do not address what is in the schedule, which refers to
''machinery that is unused and not second hand''.
A company might work with the developer of a new piece of technology—for example, putting money into the development of the novel technology—using the equipment in the company's factory. The point will come when the technology has become established and the unique piece of equipment is working. A decision must then be made on whether the company buys it outright. By definition, if it has been a unique piece of equipment with unique, ground-breaking technology, it will have been used. If it has been used, it must, by definition, be second hand. The novelty is there with the environmental benefits, but if that technology receives its certificate, it would not qualify for the relief. The Treasury must sort that out one way or another.
I was not entirely happy with the Minister's response. May I draw his attention to the specific points made by the Institute of Chartered Accountants and spell out the point in a little more detail? The institute comments that it finds it
''difficult to discern the exact effect of new section 45J without seeing an example of the Treasury order in question.''
From reading section 45J(2), it states that
''it appears that the order would simply specify a maximum amount which can be treated as section 45H expenditure in respect of the component in question. That would not in itself displace the basic rule that the amount qualifying for capital allowances of any sort cannot exceed the expenditure incurred on the asset in question. Hence it appears that an apportionment would still be necessary in order to establish the expenditure actually incurred on the component, and that the disapplication of section 542(3) CAA 2001 by section 45J(5) is therefore inappropriate.''
It also rightly raises the issue of what might be
''the circumstances under which a certificate of environmental benefit, once issued, might be revoked''.
The institute raises the same concerns that I expressed with regard to the last clause.
We always take seriously the representations of the Institute of Chartered Accountants. The provision that the hon. Gentleman is concerned about is modelled closely on section 45C of the Capital Allowances Act 2001. No problems have arisen with the operation in relation to energy-saving technologies. However, I shall look again at the point that the institute raises.
I thank the Economic Secretary for his comments. On that basis, the point is made, and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment made: No. 60, in
schedule 30, page 360, line 37, at end insert—
'(2) In section 46(5) for ''or 45E'' substitute '', 45E or 45H''.'.—[John Healey.]
Schedule 30, as amended, agreed to.