Corporation tax deduction for expenditure on energy-saving items

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

With this we may discuss clause 18 stand part.

Welcome to the Chair, Mr. Gale. The clause marks the beginning of the part of the Bill that deals with the environment. It is progress to have such a part, given that there was no similar part in last year’s Finance Bill.

By way of introduction, I shall point out that my hon. Friends and I have done some research and discovered that in last year’s Budget alone, the Chancellor mentioned climate change no fewer than 15 times, whereas in the Budget and pre-Budget statements between 1997 and the autumn of 2005, he mentioned it on average only once. I shall leave it to the Committee to work out what stimulated his interest in the environment, and what might have happened in the autumn of 2005 to awaken that interest.

Will the hon. Gentleman confirm that, under the Governments of the party that he represents, the Budget documentation never included an environment chapter? Our documentation has consistently done so since 1999.

I can confirm that carbon emissions have risen since 1997. I am afraid that I have to disappoint the Chief Secretary by saying that my research has been less rigorous than his; I have not sat back and looked at every Bill that was issued in every year since 1979. I should want to check his claim closely, as we always want to examine with great care claims that are made by the Treasury.

Will my hon. Friend confirm that, during the Chancellor of the Exchequer’s period in office, not only  has climate not featured heavily in Bills and Red Books, but green taxes, as a proportion of taxation as a whole, have fallen?

I can confirm that. Green taxes represented 9.4 per cent. of receipts in 1997; that figure has slid to 7.7 per cent.

The Chief Secretary gave 1999 as the critical year in which green issues suddenly became important for his Department. I note that since 1999, 15 Departments have increased their carbon emissions. What does that say about the Government’s green strategy?

I am grateful to my hon. Friend. I assume that he refers to the Sustainable Development Commission’s finding that said exactly that.

Will my hon. Friend also accept that although 15 Departments have increased their carbon emissions since 1999, of all Departments the Treasury has the third highest carbon dioxide emissions per person from air travel?

Order. It has taken me 24 years to work out that Parliament is a reasonably party political place. I would be awfully grateful if we could discuss the clause under debate.

I shall not respond to my hon. Friend’s question, Mr. Gale, although I was prepared to do so. I shall instead turn to clause 17, which, by amending the Income and Corporation Taxes Act 1988, seeks to extend to corporate landlords the availability of the landlord energy savings allowance. Proposed new section 31ZC sets out regulatory powers associated with the earlier provisions of the clause. How many corporate landlords does the Chief Secretary expect to install energy-saving devices as a result of the clause? What does he expect total carbon saving to be?

I shall be brief in dealing with clauses 17 and 18. The hon. Gentleman was right: this is the first time that we have seen part of a Finance Bill deal specifically with the environment. That is slightly confusing, as we have just discussed some environmental clauses under the previous part.

Clauses 17(5) and (6) specify the definition of an energy-saving item and stipulate that such items will be defined by regulation. I am not sure that I have seen the regulations; will the Chief Secretary provide some detail of exactly what kind of items those will be? Will they refer just to electricity, or will they include items like ground source heat pumps, the development of which is making great strides in my constituency? I also note at the bottom of page 11 in the proposed new section 31ZB(3) that expenditure relating to holiday lets has been excluded. Can he explain why that is the case? Surely, we want to encourage greater energy efficiency in all properties, and not limit that process. Finally, I would like to know what the projected cost to the Exchequer of these measures will be, and what the  Chief Secretary expects take-up to be in terms of the number of properties that will respond to these incentives to improve energy efficiency.

I welcome clause 17, because it begins to deliver on the Treasury’s promise of fiscal incentives for energy efficiency. Although I am sad to see that the hon. Member for Wolverhampton, South-West is not here, I saw in the explanatory notes that the measure is an attempt to standardise corporation tax reliefs with an existing income tax relief. The explanatory notes state:

“A similar deduction...is currently available for landlords who pay income tax.”

I also welcome that principle, if only because the clash between the two regimes has caused so many problems elsewhere in our Finance Bills over the past few years.

I have a few questions about the details, which I hope that the Chief Secretary can answer. My first question is whether there is any need for new section 31ZA(5), regarding the definition of an “energy-saving item”. If the aim here is to achieve harmony between the income tax and corporation tax regimes, why is it not possible to use the existing regulations that were made for the purpose of income tax deduction? I do not want to stray into the territory of the next clause, but we have had some recent regulations, a copy of which I have here, that define what an energy-saving item is for the purposes of income tax deductions under section 312 of the Income Tax (Trading and Other Income) Act 2005. The Energy-Saving Items Regulations 2007 were laid before the House on 14 March and came into force on 6 April. They define energy-saving items as

“(a) hot water system insulation;

(b) draught proofing;

(c) solid wall insulation; and

(d) floor insulation.”

They also prescribe limits on expenditure.

If the idea is to achieve harmony between the deductions possible under the Income and Corporation TaxesAct 1988 and the Income Tax (Trading and Other Income) Act 2005, I must ask the Chief Secretary whether it is not possible to use a common definition of an energy-saving item, and if possible the same regulations.

Proposed new section 31ZA(7) seems to imply a wide range of possible conditions, which may be imposed upon the definition of an energy-saving item. I hope that the Treasury does not intend to develop a definition of an energy-saving item that is so specific that no one can make use of the relief. The list given in the Energy-Saving Items Regulations 2007 is hardly exhaustive, and I hope that the Treasury is not signalling that it is going to become any shorter. If this relief is to be useful and not another of the Chancellor’s gimmicks, it will be helpful if the Chief Secretary could offer the Committee some idea of what will be covered by the proposed definition, and whether that definition will be based on the existing regulations.

My second question concerns restrictions on the use of the relief, particularly that it is not applicable if a house is in the course of construction. I would have thought that the best time to make the relief available is during the acquisition and construction phase; I see the Chief Secretary nod there. It is at that point that the  availability of a deduction is best able to influence commercial decisions about whether to proceed with energy-saving measures.

The Government seem to be establishing a false dichotomy between businesses that improve the energy efficiency of an existing building and those that elect to improve the specification of a prospective building. I am sure that there is some logic in that distinction and I would be grateful for the Chief Secretary’s explanation.

My third point concerns the restriction in proposed new section 31ZB(5), which restricts any deduction in respect of expenditure which

“is not for the benefit of a dwelling house.”

That seems very nebulous and the Chief Secretary may be able to put my mind at ease by providing the appropriate legal definition. As it stands, I can think of a number of possible disputes arising over whether an energy-saving item has been installed to the benefit of a dwelling house or for another commercial purpose. The scenario I am thinking of is tied accommodation in which there is very little differentiation between residential and commercial premises, such as a pub.

If a pub landlord were to install some energy-saving technology, even choosing from the very modest list in the current regulations, would he be benefiting his dwelling or his commercial premises? Presumably both to some extent, but does that mean that no deduction is allowed at all or that the benefit should be apportioned out in some way or another? My concern with the whole of the clause is that its intentions are positive, but its details risk producing a deduction that is so specific or so complex that nobody bothers to use it. I should like to see the clause put to good effect by business, rather than providing another two pages of primary legislation and yet another set of regulations.

I rise briefly to express my support for the clause. Obviously its purpose is to address the market failure that exists because landlords have a disincentive to invest in energy efficiency in their properties because the benefits of the investment flow to the tenant so they cannot get a return on it. The clause would correct that by giving a direct financial return to the landlord. I should like to explore the parallels between this clause and the clauses relating to microgeneration that we discussed late one evening on the Floor of the House. Those clauses give individuals exemption from income tax on income from any surplus electricity generated from installing solar panels and wind turbines, perhaps we should consider a similar provision for landlords. For a landlord there is also, presumably, a market failure to invest in microgeneration, solar panels, wind turbines and so on because he would not be the one to benefit from selling the surplus energy back. Surely, the microgeneration clauses should also be extended to landlords. Perhaps the Chief Secretary can clarify that point.

Good morning, Mr. Gale. I welcome you back to the Chair. Let me briefly repeat the point that I made in an intervention. The Chancellor introduced in the Budget documentation for the first time an environmental chapter and it has been in each pre-Budget report and Budget Red Book since 1999.  Before that we published a statement of intent on environmental taxation in July 1997. I will not go further down that road, Mr. Gale, given your wholly proper strictures to Opposition Members earlier on.

I want to comment on clauses 17 and 18 as they are grouped together on the selection list. About one third of the UK’s carbon emissions come from residential properties. We have therefore introduced, not as the hon. Member for Wycombe suggested this first measure, but a series of measures to encourage household energy efficiency. For example, energy efficiency measures professionally installed in residential properties now qualify for a reduced rate of VAT. The energy efficiency commitment provides incentives under which energy suppliers are installing a range of energy efficiency measures in residential properties. By 2010, in combination with initiatives introduced as part of the warm front scheme, that will reduce carbon dioxide emissions by more than 2 million tonnes per year.

The Government have also set out our ambition that, by 2016, all new homes will be zero carbon. We will shortly come to a clause that introduces a stamp duty exemption for zero-carbon homes. However, action targeted specifically at the rented residential sector is needed, since such properties typically produce about 500 kg more carbon dioxide a year than other homes. There is an obvious incentive for home owners to improve the energy efficiency of their homes, but, as my hon. Friend the Member for Burnley said, that does not apply in the case of rented properties, hence the need for this measure.

In the 2004 Budget, we introduced the landlords energy saving allowance—LESA—which allows private landlords to deduct the cost of installing loft and cavity wall insulation from their taxable profits. Since then it has been extended to include solid wall and hot water system insulation, and draught-proofing.

We have explored the options for a green landlord scheme in some depth. An option that we discussed in the past was to reform the wear-and-tear allowance, linking it to the energy efficiency of a property but, having fully investigated the practicalities, we concluded that LESA provided a more cost-effective and better targeted way to encourage improvements in the energy efficiency of privately rented properties.

LESA has been successful in encouraging investment: landlords spent more than £1.3 million on energy efficiency improvements to rented properties in its first year. The Energy Saving Trust and the Energy Efficiency Partnership for Homes are also doing good work in encouraging landlords to improve energy efficiency in their properties. Building on that progress, we announced several extensions to LESA in the pre-Budget report last year to ensure that its scope and coverage are as comprehensive as possible. Those extensions are expected to reduce carbon emissions by up to two thirds of a million tonnes a year by 2011.

LESA is at present available only to private landlords subject to income tax, and clause 17 extends it to landlords in the corporate sector. Corporate landlords own about a quarter of all properties in the  residential rental sector, so that is a very significant widening of access to the allowance. As a Government support to businesses, the extension requires state aid approval from the European Commission before it can be implemented and we will be shortly be submitting notification of this aspect of the LESA and seeking approval.

The clause also gives powers to the Treasury to change the level of allowance available to ensure that the allowance operates fairly in all situations and to specify the types of energy-saving items covered. I will return to that matter in a moment.

We will lay regulations introducing the same conditions for corporation tax that are already in place under the existing allowance for income tax, and the regulations will set the maximum deduction available at £1,500 per property per year and provide for that deduction to be apportioned in cases of joint ownership. A draft of the regulations has been provided for the Committee and I hope that all members will have seen it.

Will the Chief Secretary say when the regulations were sent to the Committee, as I have no recollection of receiving them? If he cannot answer my question now, perhaps he will do so in due course.

I do not have the date in front of me but I will check it. I hope to be able to respond to the hon. Gentleman in a moment.

Corporate landlords will be able to deduct the cost of acquiring and installing solid wall, cavity wall and loft, floor and hot water system insulation, and draught-proofing.

Extensions to LESA for non-corporate landlords, who already benefit from the original LESA, aremade for income tax in clause 18 to match those in clause 17 for corporation tax, and represent a further incentive for landlords to increase the energy efficiency of their properties. Clause 18 extends LESA by making the allowance that is currently set to end in 2009 available until 2015.

From 2008, energy performance certificates will be introduced in the private rented sector for every home bought, sold and let in the UK. Those certificates will highlight to landlords and tenants the existing energy efficiency of properties, as well as suggesting affordable ways to improve them. Setting 2015 as the date strikes a good balance between giving landlords enough time to take advantage of the allowance and encouraging them to take steps to improve the energy efficiency of their properties as soon as possible. The extension of the allowance by six years gives them time to take full advantage of the extended allowance and to benefit from the information provided by energy performance certificates.

Secondly, the clause ensures that the LESA is available for expenditure on increasing the energy efficiency of communal areas within properties, providing an incentive to improve the energy efficiency of the whole building. We have already, through secondary legislation, made the allowance available for expenditure on floor insulation, changing the maximum annual deduction available from £1,500 per building to £1,500 per property. That means that for a  landlord who owns and lets a block of 10 flats, the maximum deduction available per flat is increased from £150 to £1,500. I hope that the Committee has seen the draft of the regulations that we intend to lay afterthe Bill receives Royal Assent. They ensure that the maximum annual deduction of £1,500 will continue to operate correctly for expenditure on communal areas.

Let me respond to some of the points that have been raised in our brief debate. The hon. Member for Falmouth and Camborne asked a fair question about furnished holiday accommodation. We have thought carefully about that, and the evidence is that there is not the same market failure in the case of furnished holiday lettings that there is in the private rented sector more generally. For example, it is common for owners of furnished holiday accommodation to live in their properties for part of the year, so they will benefit directly from energy efficiency improvements.

In any case, the commercial letting of furnished holiday accommodation is treated more favourably for tax purposes from other rental businesses. That suggests that it would not be right to provide the LESA for furnished holiday accommodation. However, it is a fair point that we ought to keep under review arrangements to encourage the right level of energy efficiency in furnished holiday accommodation. If it is appropriate at some point to introduce fiscal incentives for that purpose, we will be open to doing so.

We expect the cost of the extensions to be up to£10 million per year. That is set out in table 1.2 of last week’s pre-Budget report documentation. The things that will count as energy-saving items in the regulations will be those that I have listed: floor insulation, loft insulation, cavity wall insulation, solid wall insulation, draught-proofing and hot water system insulation.

The hon. Member for Braintree asked why we did not make the incentive available for a dwelling under construction. The answer is that, as a result of recent changes, building regulations require new properties to be built to a high standard of energy efficiency. As a regulatory requirement already exists, making the LESA available would cost the taxpayer money but would not have a beneficial effect. The aim of the LESA is to target a market failure where there is no requirement, as in the case of existing privately rented properties, for energy efficiency measures to be taken.

Finally, the hon. Member for Braintree also asked why we needed separate regulations for income tax and corporation tax. It is because they are covered by two different Acts, so it is necessary for there to be two separate sets of regulations. Indeed, they will take effect on different dates. However, I can reassure him that the definition of energy saving items will be the same for both income tax and corporation tax. I hope that that will be of some comfort to him.

Question put and agreed to.

Clause 17 ordered to stand part of the Bill.

Clause 18 ordered to stand part of the Bill.