Clause 132 - Temporary increase in amount of first-year allowances for small enterprises

Finance Bill – in a Public Bill Committee at 4:45 pm on 25th May 2004.

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Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following amendments:

No. 99, in

clause 132, page 123, line 5, after 'small', insert 'or medium-sized.'.

No. 100, in

clause 132, page 123, line 7, after 'small', insert 'or medium-sized.'.

No. 101, in

clause 132, page 123, line 12, after 'small,' insert 'or medium-sized.'.

I remind the Committee that this is a very narrow group of amendments, which deals only with changing ''small'' to ''small or medium-sized''. The meat of the clause is in the clause itself.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I have much sympathy with the comments made by my hon. Friend the Member for Chichester (Mr. Tyrie) and the hon. Member for Yeovil (Mr. Laws), which have some relevance to this clause and these amendments.

The four amendments are all concerned with the proposed widening of the increase in first-year allowances, which will go up from 40 per cent. to 50 per cent., to include medium-sized as well as small businesses. As I understand it, the definitional territory is that a small business has a turnover of up to £5.6 million, a balance sheet of up to £2.8 million and up to 50 employees, and a medium-sized business has a turnover of up to £22.8 million, a balance sheet of up to £11.4 million and up to 250 employees.

The amendments reflect one of the suggestions in the CBI response to the clause. There are others, which I will come to later, in the stand part debate. It is fair to say that, in a sense, medium-sized businesses have become the poor relation. There are a great many tax and other incentives in the venture capital area. Large businesses have better access to markets. If anything, while a business is medium-sized, wherever the lines are drawn, it really does not have many advantages.

It is questionable whether such measures really work—as the previous comments made clear—but if they are to be introduced there does not seem to be much logic in restricting them to small companies, when if anything the medium-sized sector needs more assistance.

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

I was interested to note that the hon. Gentleman started by saying that he had a great deal of sympathy with the comments made on the previous clause. Those comments argued that we should not be extending the R and D tax relief scheme.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I was duly obeying our Chairman's instructions. The other comments will come later. The amendments are to the clause as it will stand if we are to have such incentives.

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

I am in no doubt about the effect of the amendments. My point was simply that the hon. Gentleman expressed sympathy with the argument that was made about the previous clause, in which it was claimed that we should not be committing extra Government expenditure to the R and D tax relief scheme, when his amendments would do just that—to the tune of £180 million a year. The hon. Member for Chichester anticipated what he described as bees round the honeypot of claims for extending the relief in the future. Amendment No. 104 is clearly looking to the honeypot.

The purpose of the amendments is to extend to medium-sized businesses the increase in first-year capital allowances that we are introducing for small businesses. We are talking about something that is of a similar nature to what we have just discussed under clause 131. I want to ensure that the Committee is clear about the treatment of medium-sized companies, which is the concern behind the amendments. Earlier this year, we increased the thresholds for small and medium-sized businesses to the maximum allowed under European Union regulations. It is anticipated that that will cost the Exchequer £100 million this year, £170 million next year and £125 million in 2006–07. From January 2004, a business with a turnover of up to £5.6 million may be classified as small. In fact, about 99 per cent. of UK businesses are classified as small and so will be able to benefit from the increased allowances in the Bill.

Medium-sized businesses, which include businesses with a turnover of up to £22.8 million, will continue to benefit from the generous 40 per cent. first-year allowances for small and medium-sized enterprises that we made permanent in 2000. Increasing the rate of the first-year allowances for medium-sized enterprises from 40 per cent. to 50 per cent. would carry the high Exchequer cost that I mentioned, of £180 million for one year. That additional cost could not be justified. I am surprised that the hon. Gentleman is in favour of that. He has made it clear that it is the result of a representation made to him by the CBI.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Is my hon. Friend aware that the Institute of Directors, which has made submissions to me—and, I suspect, to other Committee members—has not suggested an extension of the allowance to medium-sized companies. The IOD has historically had a greater tendency to represent small and medium-sized enterprises than the CBI, which has a greater tendency to represent the big boys, although it does not do that exclusively, so it seems that the big boys want the extension and the little boys do not.

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

My hon. Friend makes an interesting point. I suspect that it will help him make up his

mind—as I hope it will all my hon. Friends—that the Committee should reject the amendments if they are pressed to a vote.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I have not heard any rationale for why the allowance should be increased from 40 per cent. to 50 per cent. for small companies and not for larger ones, other than money. I take issue with the figure. I want to hear the Government's logic in doing this for small companies but not for medium-sized enterprises, which if anything are the poor relations.

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

The hon. Gentleman suggested that, if you were to allow a stand part debate, Mr. McWilliam, he would make some general points. I therefore thought it appropriate to consider such general questions if you do allow a short stand part debate.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I look forward to hearing the Economic Secretary's response on stand part. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I will use the stand part debate to mention the two other issues raised by the CBI. The first concerns whether the Government are considering extending the benefit to businesses that do not buy plant but lease it. A later new clause—new clause 4—deals with that issue. Secondly, the CBI raised the issue of whether relief might be given for making physical alterations to premises to meet the requirements of the Disability Discrimination Act 1995, where I understand that the capital investment that is required to be in place by 1 October 2004 does not count as capital investment for first-year allowances.

More widely, and echoing the previous points, my concern is that the reason for the Government giving what it is giving to small businesses is, in fact, a sop or fig leaf to hide the removal of the 100 per cent. allowance on information and communications technology equipment and the introduction of the 19 per cent. non-corporate distribution rate tax. There seems little logic in a period of just two years. Small businesses do not have armies of accountants and finance directors to know about all these things. It does not seem logical to turn the tap on and turn the tap off. If anything, the economy is already at full capacity this year, so I look forward to hearing the Minister's justification for the measures.

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

This clause increases the rate of first-year capital allowances for small businesses from 40 to 50 per cent. for one year from April 2004. In our view, the increased allowances will assist small businesses' cash flow, and will provide enhanced funding for new investment. They are, of course, a vital part of the UK's economy, currently investing over £3 billion in plant and machinery. The increase in the first-year allowances at this time is designed further to support small businesses, encouraging them to innovate, invest and grow in the long term, ensuring that the UK economy more generally remains one of the fastest-growing in Europe.

The hon. Gentleman asked why now. If we accept the proposition that it is essential that our small businesses invest for the future, the upturn in the economy means now is the right time to provide the additional support to new, and in particular small, growing businesses. That is the reason for this targeted temporary increase.

On the CBI's representations over leased plant, the hon. Gentleman knows well that at present we have a radical review of the reform of corporation tax, and we have already announced that we will consider further whether the taxation of leased plant and machinery can be modernised. It makes sense to consider the CBI's representations and the points that he makes in the wider context, rather than in the narrower context of this clause.

On that basis, I commend the clause to the Committee.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

On a point of order, Mr. McWilliam. I would like some clarity from you, perhaps via a Minister, as to whether Members should be declaring interests on this in terms of capital allowances to Members' expenses, and so on.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Anybody who has an interest should declare it.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I certainly did not imagine that there was something other that Members of Parliament could claim here. If it is the case, it is yet another example of the lack of wisdom of such measures.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

I can imagine one: if Members of Parliament wanted to buy an old steam typewriter out of their allowances, it would be covered.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I just raised the question of incorporation versus non-incorporation, but if an interest is to be declared, let us declare it on behalf of all of us.

I suggest that the real reasons for this measure are that there is likely to be a general election in the next year, and it is a sop to the 19 per cent. non-corporate distribution rate. As I pointed out, there is no economic logic for benefiting small rather than medium. This is an example of a less than properly thought through economic justification for legislation.

Question put and agreed to.

Clause 132 ordered to stand part of the Bill.

Clause 133 ordered to stand part of the Bill.