'(1) The Capital Allowances Act 2001 is amended as follows.
(2) For subsection 44(1), substitute—
''(1) Expenditure is first-year qualifying expenditure if—
(a) it is incurred by a small or medium-sized enterprise, or
(b) it is incurred by a lessor on equipment leased to a small or medium-sized enterprise, and
(c) it is not excluded by subsection (2) or section 46 (general exclusions).''
(3) In the table in subsection 52(3) insert in the second and third lines after ''small or medium-sized enterprises''—
''or incurred by a lessor on equipment leased to a small or medium-sized enterprise''.'.—[Mr. Flight.]
Brought up, and read the First time.
I beg to move, That the clause be read a Second time.
We have tabled new clauses 4 and 5 at the request of the CBI. New clause 4 provides for the first year allowances available under the Capital Allowances Act 2001 for assets purchased by small or medium-sized companies to be available also for assets that such companies lease. The Government's increases under the Companies Act 1985 in the small and medium-sized enterprises thresholds have been welcomed throughout and should substantially increase the number of companies able to qualify for first year allowances for plant and machinery, but SMEs that lease plant and machinery do not currently benefit from first year allowances.
The evidence from the surveys undertaken by the CBI shows that the performance of the SME sector is lagging behind the trend of economic recovery. In manufacturing, the level of investment would arguably benefit from further encouragement. Enhanced first year allowances might therefore be extended to SMEs leasing plant and machinery, which would also help to address the productivity performance issue.
Asset finance, including leasing, is a crucial source of investment finance for SMEs. The Finance and Leasing Association estimates that over half its members' business finance goes to businesses with a turnover below £5 million. Over time, the revenue effect of such an extension should be neutral. In the case of assets leased by SMEs, it should be over a relatively short period.
I would welcome the Government's response to the new clause. I look forward to hearing their overall position on SMEs and on whether the arrangement should be extended to leasing.
As the hon. Gentleman says, the intention of the new clause is to extend enhanced first year capital allowances for SMEs to expenditure by lessors, which are normally large businesses, on the equipment leased to SMEs. The advocates of that move generally argue that part of that benefit to lessors could be passed to SMEs, but nothing in the new clause would require them to do that. I am not convinced that any consequent reductions in rental
costs to SMEs would be more than marginal. If that is right, the high Exchequer cost—almost £500 million over 3 years—would be entirely deadweight. That does not represent good value for money.
We originally introduced the first year allowances to address the cash-flow constraints faced by smaller businesses and to provide a boost to small business investment. Smaller businesses that lease their plant and machinery do not face the same cash-flow problems because their rental payments are spread over the life of the lease.
As part of the ongoing reform of corporation tax, we are including the tax treatment of leased assets, and we will consider further whether the capital allowance system can be modernised in order to produce a regime that is modern and competitive. We explained that in regular meetings that we had with the Finance and Leasing Association, which was the main proponent of the new clause. The CBI is heavily involved in the corporation tax reform process, so it is also aware of the consideration that we are giving to these issues.
I am glad that the Government are looking at addressing the underlying issue by other means, and I take on board the point that there is no guarantee that the leasing benefits would be passed on, although commercial forces argue in that direction. I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.