Clause 165 - Expenditure on software for sub-licensing

Finance Bill – in a Public Bill Committee at 6:15 pm on 20th May 2003.

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Question proposed, That the clause stand part of the Bill.


Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The clause prevents software qualifying for first-year allowances when it is acquired with a view to sub-leasing. The Paymaster General may be aware that some concerns have been expressed that the clause could prejudice companies engaged in school private finance initiative contracts. Such companies may well incur capital expenditure on software with a view to the software being used by the school or its pupils. I am sure that that is not intended. Perhaps we could be assured that that will not be an unintended by-product of the clause.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The clause contains anti-avoidance legislation that continues the Government's commitment to tackling tax avoidance wherever we can. The legislation that was introduced in 2000 gave small businesses 100 per cent. first-year allowances on investment in information and communications technology, such as computers, software and internet-enabled mobile phones. The allowance encourages small businesses to invest directly in that technology and enables them to embrace e-commerce and make their dealings with the Government and businesses faster and therefore more efficient.

The original legislation prevents a claim to allowances when the technology is acquired for leasing, but not when software rights are licensed out to others. An avoidance scheme has developed, using the loophole by allowing higher rate taxpayers to claim the allowances without expenditure being incurred on bona fide investments. I will briefly describe how the scheme works. It uses partnerships to purchase software. Individuals may put up around 20 per cent. of the money to make the purchase, with the rest being loaned by banks. The software is then licensed back to the software developer. One hundred per cent. first-year allowances are claimed on the total investment, so an individual putting up £20,000 would get tax relief of nearly £40,000 without any risk and without making an investment for the purposes intended to qualify for the relief. The effect of such a scheme is to give participants a risk-free profit at the Exchequer's expense.

Photo of Michael Jack Michael Jack Conservative, Fylde

When the Economic Secretary was first exposed to the avoidance scheme, did he ask himself whether he could have seen it coming, and if so, what was the answer?

Photo of John Healey John Healey The Economic Secretary to the Treasury

Hindsight is a fine thing, and the right hon. Gentleman will know better than I that there are advisers and others who will work at finding ways around any legislation. We are now trying to tackle an avoidance scheme that has been developed since the legislation has been put in place and confounds the original purpose of the legislation.

The hon. Member for Arundel and South Downs expressed a concern about school PFI contracts. I can reassure him to a degree but, I suspect, not entirely. The vast majority of expenditure incurred on the right to use software under PFI contracts is likely to be revenue, and will not be affected by the clause. If capital expenditure is incurred on the right to use software, it will continue to qualify for capital allowances. It is only the right to 100 per cent. first-year allowances that might be lost. The original legislation prevents such schemes where the

technology is leased, and the clause will put a stop to the attempted avoidance by putting licensing on the same footing as leasing. The clause will not affect bona fide investment in information and communications technologies by small enterprises, and I commend it to the Committee.

Question put and agreed to.

Clause 165 ordered to stand part of the Bill.