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Clause 81

Finance Bill – in a Public Bill Committee at 6:15 pm on 3rd June 2008.

Alert me about debates like this

Abolition of allowances from 2011

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I beg to move amendment No. 217, in clause 81, page 44, line 15, leave out subsections (2) and (3).

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss amendment No. 184, in clause 81, page 44, line 16, leave out subsection (3).

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I shall make substantive comments in the clause stand part debate, but I just want to refer now to a narrow, drafting issue. Amendment No. 194 deals with the issue in a slightly different way. Amendment No. 217 would leave out subsections (3) and (4). The amendment tabled by the hon. Member for Taunton only seeks to leave out subsection (3), for some reason which he will no doubt explain.

It is a question of understanding the clause a little better. We believe that subsections (2) and (3) are redundant. Subsection (1) says that industrial buildings allowances and agricultural buildings allowances do not apply after the relevant date, which is provided in subsection (4) as a date in 2011. Having established that IBAs and ABAs will not apply after a date in 2011, why is there then a need in subsection (2) to abolish the provisions that introduced IBAs and ABAs—in other words, to make it as though they never existed? Why effect that abolition only from the relevant date in subsection (3)?

It seems to me to make no difference at all if subsections (2) and (3) are removed from the face of the Bill. This is just a drafting issue, but we already have the longest tax code in the world, and we do not want to make it unnecessarily longer—even by two subsections. We can deal with this matter perfectly adequately simply with subsections (1) and (4).

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 6:30 pm, 3rd June 2008

I think the ground has been covered by the hon. Member for Runnymede and Weybridge. I would like to speak to clause stand part, but I waive this opportunity to speak to the amendment.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

We are clearly going to have a debate of some substance on clause stand part, so I will reserve my more general comments for that. The amendments tabled by both Conservative and Liberal Democrat members of the Committee seek to apply the withdrawal of IBAs and ABAs only to expenditure incurred after the relevant date, which is to say 1 April or 6 April 2011. This means that anyone who incurred expenditure on industrial or agricultural buildings up to 31 March or 5 April 2011 would still be able to claim the full amount of IBAs or ABAs.

It is not clear to me why Conservative or Liberal Democrat Members would wish not to apply the withdrawal to expenditure entered into in the knowledge that IBAs and ABAs were being withdrawn—that is, any time after the announcement in 2007. The hon. Member for Runnymede and Weybridge asked me a specific question  about subsections (2) and (3) and suggested they were redundant. Subsection (1) applies to expenditure incurred after April 2011, and subsections (2) and (3) remove the allowances for existing expenditure. I am not sure whether that entirely answers his question.

With regard to expenditure before that point, just as corporation tax is an annual tax, so IBAs and ABAs provide an annual entitlement to claim relief. It is not therefore retrospective to repeal the entitlement to these allowances, as has been argued. I and other Ministers have made clear since the announcements in the 2007 Budget the reason for the withdrawal of these allowances, which is to remove the distortion they cause by giving tax relief selectively to certain sectors while leaving other sectors completely unable to enjoy relief of this nature.

That change was part of the wider package we debated earlier today. Just 200 claimants claim 95 per cent. of the value of IBAs: the vast majority of relief goes to companies, and only 6 per cent of the combined total is claimed by the unincorporated. I will not go into the more general points, which I wish to make in the clause stand part debate, but I hope that I have dealt with the specific question asked by the hon. Member for Runnymede and Weybridge.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I am not sure that the Financial Secretary has answered my question, to be honest. Let us run through the logic of this because she presents her argument in a reasonable way. Subsection (1) says:

“Parts 3 and 4 of CAA 2001...do not apply in relation to expenditure incurred on or after the relevant date.”

That date is in April 2011. Therefore, parts 3 and 4 do not apply to any expenditure incurred after April 2011. The Government want to ensure that any money spent after 2011 is not eligible for industrial and agricultural buildings allowances, so the job is done in subsection (1).

Why does subsection (2) need to say:

“Omit those Parts of that Act”?

Why does subsection (3) need to say not to omit those parts of the Act until after April 2011 because doing so would mess up the whole architecture? Why do we need to omit them at all when we have neutered them in subsection (1)? We were probing to suggest that subsections (2) and (3) were redundant.

There are worse things in tax law than redundancy. I was hoping that the Financial Secretary might just say, “Yeah, you’re right. This was pretty low-grade drafting. We don’t need them. We’ll take them out. Thanks very much.” She did not say that. I will not detain the Committee by pressing the point, but I hope that when she is sitting at home with a gin and tonic in her hand and nothing better to do, she will read the clause again and consider whether she needs an answer to this point. [Interruption.] Sorry, a tonic water. 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 Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The clause provides for abolition of industrial and agricultural buildings allowances. That decision was announced without any prior consultation  by the Government. Regardless of the merits of the substantive action, the Government’s precipitate action in relation to business taxation has once again undermined the UK’s reputation as a safe and secure place to do business. I have thought about this quite a bit and I do not believe that Ministers want to damage the UK’s business reputation. Therefore, I have to conclude that they simply do not understand the way that business thinks and the way that it reacts to this kind of surprise being sprung upon it.

The business mentality is simple and straightforward, as you know, Sir Nicholas. Businesses like certainty. Anything that undermines their sense of certainty and their understanding of the direction of travel in the environment in which they are operating is debilitating. In practical terms, it increases the premium and the return that businesses need to operate in that environment. Businesses operating in an uncertain and unstable environment need a higher rate of return than businesses operating in a stable and predictable environment.

The Opposition’s concerns relate not so much to the principle of the abolition of the allowances. Our preference is well known for a simplified system with fewer allowances and lower rates. Our concern is over the handling of this matter. A huge degree of retrospectivity is attached to the provisions of clause 81 and schedule 27. The abolition of the allowances as part of a general simplification and reduction in rates of taxation may be acceptable, but investment decisions have been made on the basis that industrial and agricultural buildings allowances are in place. The announcement of their abolition in the 2007 Budget was too late for people who had committed to investment decisions.

We will all have in our minds the image of terminal 5 nearing completion at the time of the 2007 Budget announcement. Frankly, that sudden change is yet another nail in the coffin of Britain’s reputation as a safe and predictable place in which to do business. I ask the Minister to imagine how she would feel if she had spent £5 billion of her savings constructing a building in anticipation of industrial buildings allowance being available, only to be told just as the roof was going on that this allowance was going to be scrapped. She would be pretty cheesed off with the regime and she would be thinking very hard about whether she wanted to make further investments on that basis.

It is very important that when Government do these things and when we in Parliament allow them to go through, we do so with our eyes wide open. The package of measures that we are considering in this Committee represents a significant shift in the burden of taxation between sectors. The abolition of IBAs will hit some sectors particularly hard. Airport operators are the most prominent example of losers, but the accelerated rate of depreciation on long-life assets will hugely benefit utility companies.

As Britain’s largest airport operator, BAA faces the withdrawal of tax relief on investment worth some £5 billion that the group has already made on infrastructure assets at its seven UK airports. The Minister will know that BAA is in the process of proposing to invest very substantial further sums in Heathrow, which in its current state, as everyone in this Committee would agree, is something of a national  disgrace and yet another impediment to promoting Britain’s attractiveness as a place in which to do business. The creation of the Heathrow east terminal complex very badly needs investment. The net present value of the reduced post-tax cash flow implied by the abolition of IBAs to BAA alone is around £500 million. Can the Minister tell us how such a move will impact on company balance sheets under generally accepted accounting practice? Will companies have to take a hit on their balance sheets to reflect the changed anticipation of future tax liability as a result of these changes to IBAs and ABAs? Will it show up on company balance sheets?

I fully recognise that there will be lots of members of this Committee—I will not say listening because they are probably not—who might not be that inclined to feel sympathetic towards BAA. I fear that such a view misses the point. This is not just about BAA. It is about the signal that we are sending to any potential large-scale infrastructure investor in the UK about the certainty of the tax depreciation regime that they face. Investment decisions are based on models using current and known tax regimes. Sudden and effectively retrospective changes alter the returns that have been predicted. That will impact on our ability to get private sector investment into infrastructure projects in the UK.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

I have been listening and have sympathy with some of the points that the hon. Gentleman makes. What would his optimum time scale be for planning the sort of tax changes that he talks about? He is not disputing the principle of simplification. He is arguing that it needs to be planned over a longer period of time. What would his recommended time scale be?

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

That is a sensible question, and I would like to answer it. I do not have a prepared answer, but I will answer it on the hoof. I will divide the question into two parts. In most cases, I would say that a three-year cycle of signalling to business the Government’s intentions for the tax regime and then fleshing it out a year or two in advance so that there can be a proper consultation period is probably the right regime. I have said that in other places and I will say it again today. Business would be hugely reassured by a commitment to a three-year rolling programme. In each year’s pre-Budget report, the Chancellor could set out the general direction in which he expects business taxation policy to travel over the coming two or three years. In the following PBR he perhaps sets out some more detailed proposals, which can then be consulted upon and brought into concrete form in the PBR after that. That would be a constant rolling process.

There is a different issue around large-scale, effectively Government-mandated infrastructure. The terminal 5 project has been going on for decades. Almost one of the first things that I did as a Member of Parliament was to appear at the terminal 5 planning inquiry. We have only got the thing open now. There is an issue about significantly impacted companies and pieces of infrastructure needing to be the subject of specific discussions between Government and the providers of those pieces of infrastructure, to ensure  not only that we do not have an unfair effect—with respect to BAA, it is tough out there—but that we do not have an unintended impact on future behaviour by that company or similar companies. We will need other airport facilities in this country in the future.

Photo of Mark Todd Mark Todd Labour, South Derbyshire 6:45 pm, 3rd June 2008

I do not want to prolong things with my colleagues, but it is an interesting line of discussion. The nearest example of something similar that I can think of at the moment is incentivising development of major investments in the North sea, to take a further phase—that is a quasi-Government initiative, or potentially so. That might raise some of the issues that the hon. Gentleman is talking about.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I think that the hon. Gentleman’s argument is a good one. One can envisage such situations with railway or new road infrastructure, if we are trying to encourage private companies, as the Government have done with the M6 toll motorway for investment in road infrastructure. Similar considerations would apply—very long payback periods for very durable pieces of investment.

However, I think it gets worse. With regard to the airport infrastructure in particular—let us use that as an example—it is going to be about price. It is all very well to talk about the matter as if it will be tough luck on BAA, but what happens when we withdraw an available tax relief or defer its benefits? Deferring a relief in time costs money. We will increase the cost of providing that infrastructure in future. It will be end users who have to pay more. The incidence of the tax change will ultimately fall on end users of publicly used infrastructure such as airports.

It is worse still, even with regard to existing, historic investment. BAA is a regulated operator. It has a restriction on the rate of return that it can earn on its capital base. I would like the Minister to confirm to the Committee whether the abolition of IBAs—thus, the reduction of the tax relief that BAA will earn—will have the effect of increasing its regulated asset base. It seems to me that it will, thus increasing the amount of income that the company is permitted to earn from its regulated activities. If that is the case, put in plain English, what that means in the case of a regulated operator is that the abolition of IBAs, even in respect of past capex, is not effectively a hit on the operator, but becomes a hit on its customers. When travellers are facing fuel surcharges and the effects of the currency markets’ verdict on the Government’s economic policies, that apparently non-consumer-related tax change will, in the end, be paid for by the users of those regulated infrastructure services. The users will have to pay higher charges in order to deliver BAA and others the return on their regulated capital base that is permitted under the terms of the operating licence. Would the Minister please confirm whether that is correct, and that it is, once again, the ordinary consumer—one might say, the ordinary voter—who is going to pay for the tax change?

Mr. Brownerose—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Before I call the hon. Member for Taunton, who speaks for the Liberal Democrats, let me say that I have now been in the Chair for two and a half  hours. I understand that the Government and Opposition are seeking to get to the end of clause 86. For my own good health, I would seek to adjourn the Committee for a dinner or refreshment break. I am prepared to go as late as 8 o’clock, but I would then seek to adjourn for three quarters of an hour. I merely offer that as advice to the Committee, whose interest and mine I am taking into account.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

This is my first opportunity to welcome you to the Chair, Sir Nicholas—just as you outline the timetable for vacating it. While I make a few brief comments, perhaps the Whips for the other parties could arrange a more civilised timetable for our departure.

I shall speak briefly to clause 81, on which I have received a number of representations from interested parties. The hon. Member for Runnymede and Weybridge has already outlined the principles underlying the difficulties that many people have with the Government’s proposal. To sum up my position, I think that there is a genuine point about a lack of consultation and, as a result, the retrospective nature of the changes being put in place. They were sprung on those affected, who could have had no reasonable expectation that they would be put in place. There is also an issue of certainty—or in this case, lack of certainty—about business planning decisions made over a quarter of a century. The expectations and time scale that people have in mind when making such investment decisions are long-term, and the Treasury is acting on a completely different time scale, which changes the approach that people would otherwise have taken had they known in advance.

Then, of course, there is the absolute effect of the withdrawal itself. For illustrative purposes, it is worth explaining to the Committee what the impact will be. A person who made an investment of £100,000 in 2006-07 would receive a £4,000 allowance in 2006-07 and 2007-08. After that, it would go down, on the graded scale put before us, to £3,000 in 2008-09, to £2,000 in 2009-10, to £1,000 in 2010-11, and that would be it—the guillotine would fall. They could claw back £14,000 of their £100,000, but £86,000—at the cut-off point in April 2011—would remain unrelieved for tax purposes. It is not hard to see why many people, who made that decision in good faith in the 2006-07 financial year, with no expectation of any changes in the foreseeable future, because no consultation took place, are aggrieved that 86 per cent. of the relief that in good faith they had anticipated receiving is no longer available to them.

A retrospective 25-year time scale could impact on investments going right back to the 1980s. People who invested in the 1980s will obviously have received most of the relief already, but they would still have qualified for some of the relief being tapered off, which consequently they might not receive. So we are talking about business decisions taken over a very long period. The Institute of Chartered Accountants made the point that in accountancy terms—it does not judge the politics of the proposal—the abolition would be neater and more reasonable if only expenditure incurred after the 2007 Budget statement was affected. It would be interesting to hear the Minister’s response to that specific point.

I shall conclude with a couple of questions. How much revenue will the abolition of the allowances be likely to raise for the Treasury? I sourced an estimate in the region of £15 million annually, but that sounds far too low, particularly taking into account the points made by the Conservative spokesperson. However, if there is scope for significant revenue to be clawed back, it would be interesting for the Minister to give a figure. Furthermore, given that it is being tapered out, what will that figure be on a rolling basis, through to the absolute abolition in 2011? It would also be interesting if she indicated how much impact the measures will have on businesses in the United Kingdom, which is a slightly different point from how much revenue will be raised for the Government. Finally, she would do the Committee a service if she outlined precisely what form of consultation the Treasury embarked upon in advance of making the changes, and what lessons it learned during that process.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The clause withdraws industrial and agricultural buildings allowances with effect from April 2011 and introduces a schedule containing various consequential amendments and savings, which we have been considering. The hon. Member for Runnymede and Weybridge, who is deep in the throes of negotiating his way through the proposition that you just made, Sir Nicholas, asked a number of questions, but other points have been made.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

We would be interested in hearing the answers.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

Exactly.

Our changes to capital allowances, which are associated with the abolition of IBAs and ABAs, are principled and reasoned. They are a necessary step forward. I have been listening to the concerns expressed from all parts of the Committee, and I have had representations on them, so I continue to look closely at how the whole change will work in the coming months and years.

The changes have sound reasons behind them. They refocus the incentives for investment in innovation by removing the inefficient and distortive features of the current system. One example that I was given when discussing the changes was that a company may gain industrial buildings allowance for a particular type of investment, but a similar set of companies, if they wanted to develop, for example, a bus station, would not be entitled to that allowance. There is a serious distortion in the way that the current system works, but our proposals are also part of a wider reform package that includes the 2 per cent. reduction in the main rate of corporation tax, which is effected to promote investment and growth. By realigning the rates of allowance more closely with the average rates of depreciation, the reforms remove the distortions between investment decisions and between sectors.

The Budget package is not intended to target particular sectors—one or two sectors have been mentioned this afternoon—but is intended to remove the distortions between the sectors that are currently inherent in the system. Our primary driver for the  withdrawal of the IBA and the other wider reforms is the desire to reduce the tax system’s distortive impact on commercial decisions.

One guiding objective was simplification. The IBAs have long been recognised as a significant compliance burden, and in responses to the 2002-05 corporation tax reform consultation, and in the independent administrative burden advisory board’s list of priority irritants of the tax system, the IBA features. To leave IBAs in place would mean retaining that burden and complexity in the system for up to 25 years. It would also continue to give a tax advantage to some sectors by providing that relief.

The hon. Member for Runnymede and Weybridge asked how we consulted on the measure. The allowances are not being withdrawn overnight. We announced in the 2007 Budget that they would be gradually withdrawn over four years, and we did so to give businesses time to plan and to adjust to the change, as I explained last year—

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

If I can just finish my sentence, I shall be happy to give way.

It is not our policy to consult on changes to rates of taxation or allowances, or on the removal of allowances, although we invite evidence. We consulted extensively on the new elements of the capital allowances reforms, such as the design of the AIA, and we received many useful comments that we reflect in the new relief for small pools of unrelieved expenditure introduced by clause 78 to name one example. We are giving business the certainty it demands by setting a clear direction and by consulting on the technical details.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 7:00 pm, 3rd June 2008

The Minister said that announcing the intention to withdraw IBAs four years in advance of the full withdrawal date should give business the opportunity to plan and prepare. How does she suggest that BAA plans and prepares for the withdrawal of the IBAs that they factored into their business model when they decided to invest £5 billion in terminal 5?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The hon. Gentleman asked me a question on a point that I will come to in a moment.

The Committee needs to be reassured that, if we left things as they were, the current system of capital allowances would not result in a fair outcome for all businesses. The reality is that industrial buildings allowances are a relatively small tax relief: they apply to only 30 per cent. of property value and only 5 per cent. of the value goes to small firms. There are a total of 25,000 to 30,000 claims per year, but as I have already said the top 200 claims account for more than half the cost. I do not want to get drawn into debating one company in isolation. I acknowledge that there are consequences not just for BAA, but for other businesses. However, it is important to remember that the top 200 claims out of up to 30,000 claims a year account for more than half of the cost. The true objective of the reforms is to leave the UK with a better, modernised tax system.

I was asked how the provision will impact on company balance sheets. The rules for deferred tax accounting are complex, as I have learned. The loss of industrial buildings allowances may need to be recognised, but it is important to note that BAA was also able to recognise a credit in this year’s accounts for the reduced rate of corporation tax. Any accounting impact is distinct from the tax impact.

The hon. Member for Taunton asked how much revenue would be raised by abolition. I direct him to the Red Book, which shows that in 2008-09 to 2010-11 the yield will be £75 million in the first year, £225 million in the second year and £375 million in the third.

I appreciate that hon. Members are conscious of the time and I do not want to detain the Committee, but I should like to take a moment to explain things a little bit further because this is a serious issue that is worth exploring in detail. Both my hon. Friend the Member for South Derbyshire and the hon. Member for Runnymede and Weybridge raised concerns about the impact of these changes. The latter said that the changes should be made in a three-year cycle. I understand that that is part of the recommendation from the CBI business tax taskforce. I am attracted to that idea. However, as I have said, the Government gave a four-year period of notice that the allowances would be gradually phased out. Those allowances will only begin to be reduced from this April and they will not finally be withdrawn until April 2011.

Clause 81 plays an integral part in the reforms that were advanced in 2007. The IBAs and the ABAs were introduced more than 60 years ago as an incentive for post-war reconstruction and agricultural recovery. They no longer reflect the reality of modern business. There is no good economic case for continuing to provide a selective subsidy to some buildings but not others. Indeed, the existence of those allowances has distorted commercial property investment decision making by providing a tax relief that reduces the costs of such buildings relative to shops and offices, for example, which do not receive relief. We have decided to withdraw those allowances on the basis that they have become a poorly focused subsidy that is selectively available on a disparate range of assets, some of which appreciate in value.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

Why did not all the arguments that the Minister has just made apply in the then Chancellor’s first Budget in 1997? Why did it take 10 years for him to find them compelling?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

My right hon. Friend the Prime Minister is on record as having expressed trenchant criticism of the idea. I shall not quote him without having his words to hand, but for some time he has been saying that the building allowances were poorly targeted and are in need of reform.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

Is the Minister implying that businesses that paid close attention to the Prime Minister’s words and indications when he was Chancellor would have had a sense that the allowance was to be abolished, and that it was not entirely retrospective for those who did pay close attention because, as Chancellor, he had a long track record of indicating that he was looking to bring the allowance to a close before finally doing so in 2007?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I can be flippant, but it certainly was not my intention to suggest that businesses should have known because the allowances had been criticised. The hon. Gentleman will know that the allowances have been criticised heavily for their lack of focus. Although the steps that we are taking raise questions of which I have been taking careful note, they will none the less bring about a better regime.

I said that the allowances have long been recognised as imposing a significant administrative burden on business. That was established in 2006 by a measuring exercise of compliance burdens. However, rather than withdrawing the allowances overnight, we decided to give businesses time to plan. In the 2007 Budget, we announced that the allowances would be phased out over four years. The large companies of which we have spoken—BAA has been singled out—will benefit from the reduction in the main rate of corporation tax. Retaining the allowances for expenditure incurred up to 2011 would continue the distortion for future investment. It will mean that until 2036 certain businesses will receive tax relief that other businesses do not. That is inefficient and inequitable.

Business property—buildings and land—can appreciate rather than depreciate in value. Giving depreciation relief therefore does not make sense. Buildings are also eligible for other tax relief—for example, on the interest payments if they are purchased through borrowing—

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I will when I reach the end of this sentence. Tax relief is available on the interest payments if the buildings are purchased through borrowing and on the maintenance and repair of the building, and relief is given through the corporate capital gains system when they are sold.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The Minister says that it does not make sense to give relief on buildings that may appreciate, but if that is her concern why—I think it was in the Finance Act 2006—did the Government abolish balancing charges and allowances in respect of IBAs?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The hon. Gentleman must forgive me once again. In the light of comments made in this debate, not least those of my hon. Friend the Member for South Derbyshire—I know that other Labour Members in Committee and in the House are concerned that certain businesses in their constituencies are affected—I want to take note of the representations being made about our proposals. I cannot answer the hon. Gentleman immediately, but I shall write to him on that and any other questions that he has raised that I have not been able to answer in detail.

Financing the phased withdrawal of the allowances will give business time to plan. We are taking an important step, as I have said, to improve the efficiency of the tax system and to reduce complexity, as well as undertaking a wider package of reforms. Clause 82, which we shall come to shortly, contains provisions for the phased reduction of the allowance. Our approach will allow business to calculate the amount of allowance to which they are entitled and then to restrict  the amount that can be set off by a quarter, a half, three quarters and then in full. That effectively gives an allowance rate of 3 per cent., 2 per cent., 1 per cent. and finally 0 per cent., at which point there will be no allowance to claim. Clause 81 is intended to repeal legislation that no longer provides relief from the relevant date. I hope that the Committee will give the clause a fair wind.

Photo of Bob Blizzard Bob Blizzard Assistant Whip

I beg to move that the debate be now adjourned.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

If the Government Whip wishes to do that, we may adjourn. I thought that we might complete this stand part debate.

Photo of Bob Blizzard Bob Blizzard Assistant Whip

On a point of order, Sir Nicholas, I understood that the hon. Member for Runnymede and Weybridge wished to get away.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Is that the position? I seek to work for the Committee. I thought that it would be sensible to conclude the clause stand part debate. Is there any opposition to that? I indicated that I was perfectly happy to go on for a little while yet.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Further to that point of order, Sir Nicholas, it was my understanding through the usual channels that the Committee intended to rise at 7 o’clock. I did have a pressing engagement that I wished to attend in my constituency. If we are not to rise at 7 o’clock, as it appears we are not, I no longer have such a pressing engagement and do not feel constrained in the questions that I want to ask the Minister in relation to clause 81. I am very happy to continue if that is the Committee’s wish.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Again, we do not want a major debate on this. It is helpful if a debate is concluded rather than being left over until Thursday.

Photo of Bob Blizzard Bob Blizzard Assistant Whip

Further to that, Sir Nicholas, my understanding is that it is not within the rules of the Committee to move an adjournment in the middle of a speech. I sought to wait until the Financial Secretary had finished her speech before moving the adjournment, so that it was as close to 7 o’clock as possible. My understanding is that it is not the done thing or that it is against the rules to leap up in the middle of a speech to move an adjournment. That is why I left it until after the Financial Secretary had finished her remarks.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

May I say that it is not appropriate that the Government Whip should seek to move that the debate be further considered on another occasion in the middle of a speech? However, if the Government Whip wishes to put the motion again, I am obliged to put it to the Committee. Is it the wish that the Committee should continue for a little while or does the Committee wish to adjourn now?

Photo of Bob Blizzard Bob Blizzard Assistant Whip

I am happy to carry on if the hon. Member for Runnymede and Weybridge wishes to do so.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

It is always up to the Government Whips to decide what tone the Committee operates under.

This is a very important clause and I do not feel that the Financial Secretary’s response displayed a clear understanding and appreciation of the significance of these changes. She talked about the Government’s announcement in 2007 that industrial and agricultural buildings allowances would not be phased out fully until 2011. She suggested that that has somehow given business the opportunity to plan and prepare. The issue of the businesses with which we are most concerned today—particularly the one that has been referred to—is not about future expenditure, but past expenditure. Whether there is two or five years’ notice, there is no opportunity for businesses in that situation to do anything differently. There is nothing that they can do to mitigate the effects of the decision that has been made.

The broader point is that this measure sends a message to businesses in general about the predictability of the UK tax regime. With respect to the Financial Secretary, I do not feel that she has addressed that point. That is disappointing because I would have thought June 2008 was a point when all Treasury Ministers would be acutely sensitive of the need to try to row back and repair some of the damage that has been done to the business community and to the UK’s once enviable reputation for being a stable, predictable and business-friendly tax regime. Indeed, one of the great claims of the Government of Mr. Tony Blair was that he made a Labour Government compatible with the business interest.

Yet, in just a year, all that work has been blown away—sometimes, frankly, in a careless manner. I do not believe that Ministers deliberately set out to send a different message to business, but the Financial Secretary should be aware that in practice that is what has happened.

We have so far talked pretty much exclusively about industrial buildings allowance and industrial companies. However, we should not forget the impact that these measures will have on agriculture, where many small and perhaps struggling agricultural businesses will now effectively have a retrospective change in the tax treatment of an investment that they made perhaps many years ago in respect of agricultural buildings. To use her phrase, how does the Minister expect them to use the four years between 2007 and 2011 to prepare for the abolition of agricultural buildings allowance? Certainly, what has happened will change their attitude to future investment, and that should be of concern to us at a time when the need to increase food production is on everyone’s agenda and is an urgent necessity not just in this country but across the globe, as I believe the Prime Minister said yesterday. There are constraints in food supply, rising food prices and the possibility of serious food shortages in some parts of the third world, coupled  with dramatic food price inflation in the UK and elsewhere. We need to think about the impact on agriculture of any measures that are announced.

In fairness, when the measure on ABA was announced in 2007, no one anticipated the surge in food prices or that there would be a problem on this scale. Have Ministers taken stock of the situation in the light of the new circumstances and begun to consider whether the abolition of ABAs at this time sends a damaging signal to potential investors in agriculture?

On the more substantial issue of industrial buildings allowance, the Minister needs to understand that because the life of an industrial building is likely to be very long, investment decisions made as long as 20 years ago will still be affected by the decision to withdraw ABAs. I sympathise with the overall intention of reducing allowances and exceptions to lower rates—although I would like to see rates lowered more—but I consistently come back to the fact that in the manner of doing such things the Government can inflict huge damage. Equally, they can mitigate much of that damage if they do things in the right way.

A few moments ago, the Minister said that it was not the Government’s practice to consult on or preannounce changes in rates. I am not sure that I understand the measure to be merely a change in the rate: it is the wholesale abolition of an allowance and has very significant consequences. Unfortunately, I do not have a specific example—although perhaps by Report I will have discovered one—but there will be people out there who made investment decisions in respect of industrial buildings in anticipation of receiving industrial buildings allowance. They might, for example, have made those decisions in the winter of 2006-07 when a preannounced intention would have been expected to be under consultation. Those people would rightly feel aggrieved; if they had had notice, they might have taken different decisions. Considerable costs are being inflicted on UK plc by the manner of carrying out this activity.

I shall now return to BAA. The Minister answered some of the questions on BAA and, in particular, acknowledged that it might be necessary for the changed tax treatment to be reflected in an adjustment to the balance sheet, but she did not deal with the question that will be on many Committee members’ minds about the ultimate incidence of the change. Who will bear the ultimate cost of it? In particular, unless I missed it—if I did, I apologise—she did not deal with the question of an infrastructure provider subject to IBAs who operates under a regulated rate of return regime, as BAA does.

I am not an accountant, although two of my Front-Bench colleagues are, but my understanding is that because of the lack of IBAs, the relevant capital employed in the business will effectively increase. Since BAA is allowed to earn a fixed rate of return on its relevant capital investments, that implies that first the airlines but, ultimately, the travelling public will pick up the tab for this. They will do so by facing higher charges as BAA seeks to achieve that permitted rate of return on what will now be a higher relevant capital base. The Minister has not answered that point and I think that Committee members would find it useful if she told us whether that analysis is correct. Will the return that a regulated operator is permitted to earn in that way go up as a consequence of the abolition of  IBAs, thus passing the burden back to the already hard-pressed travelling public?

I have a broad concern that the Government do not understand the significance of the signal that they are sending. They understand clearly the specifics of the revenue implications of the changes being made, and I deliberately have not disagreed with the principle behind the direction in which they are travelling. But I hope that Ministers will reflect on the damage being done when changes such as this are made without adequate forewarning, adequate signalling and proper consultation. I leave the Government with this thought: it is not just the UK’s reputation that is damaged when inadequate consultation and signalling occurs—it is the Government’s reputation. If the Minister is not worried about the UK’s reputation as a place to do business, she certainly will be worried about her own party’s reputation as a party that does have some recognition of the needs of business and perhaps even, in some respects, tries to understand it.

I hope also that the Minister may, by now, have the answer to my question about balancing charges and allowances in respect of IBAs, which I suggested to her would have been a solution to the problem that she set out of buildings possibly appreciating in value, which she seemed to think was a difficulty. That could be easily addressed by the imposition of balancing charges—something which her Government abolished, I think in the Finance Act 2006, although it may have been the Finance Act 2007.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 7:15 pm, 3rd June 2008

I believe that I gave a thorough reply to most points made in this short debate on this important clause. The hon. Gentleman knows that we do not sit at his convenience. Had I realised that he was under a particular difficulty, we would perhaps not have had the trouble that we have had. I answered his point on balancing charges when he was temporarily out of the room, and I will revisit Hansard to ensure that I picked up the point exactly. To reiterate, balancing charges were abolished to pave the way for the withdrawal of the allowances in the Finance Act 2007—that is, last year, not 2006.

The gradual withdrawal of industrial buildings allowances should not be seen as destabilising. It is part of a wider package to improve the UK tax system, and the package as a whole is designed to achieve a sensible rebalancing of the tax system.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Is the right hon. Lady saying that in advance of abolishing IBAs, balancing charges and balancing allowances were abolished, so that people who owned assets subject to IBAs could not plan for the intended abolition of IBAs by selling those assets on and realising the loss ahead of this measure coming into force?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The advice I have is that the change was designed to prevent forestalling and other behaviours that would otherwise have allowed some businesses to accelerate allowances in an unfair or unequal manner, compromising the Government’s intention to withdraw these allowances in a fair and orderly way.

By realigning the rates of allowances more closely with the average rates of depreciation, as this overall package does, the reforms remove the distortions between investment decisions and between sectors. The package is fiscally sustainable in the long term, and refocuses the regime on investment and growth. Very briefly, on agricultural buildings allowances, the withdrawal of ABAs was not an isolated measure. It is part of the package, which we have been discussing all afternoon, that saw the reduction in the main rate of corporation tax and the introduction of a £50,000 annual investment allowance, allowing 95 per cent. of businesses to write off all their expenditure on plant and machinery other than cars in the year in which they make it.

Our decision to withdraw IBAs and ABAs was based on an assessment of a number of issues common across industry sectors. We have not sought to target either the finance industry or the airport industry. I therefore reject the hon. Gentleman’s generalised dismissal of the approach we have taken, but I acknowledge that there are instances of impacts that are of concern; I know of one or two examples. I nevertheless believe that the overall package is a good package.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I ought not to. I have been far too generous, but on this occasion I will give way one more time

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The Minister is always very generous. Would she at least acknowledge that the impact of this is that the provision of infrastructure in future that involves buildings that would have qualified for IBA will become more expensive, and that where that is publicly used infrastructure—whether it be airports or privately provided train stations—it is bound to be more expensive? There will be a cost in doing this.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I do not immediately acknowledge that that will be an absolute consequence of these changes. The largest companies, such as BAA, benefit the most from the reduction in corporation tax. Overall, they will benefit from these changes and in making future decisions on investment they will benefit from the AIA. I know the hon. Gentleman’s concern, and it is right and proper for him to press that concern, but I believe that the package of changes that we are bringing forward as a result of these measures will, in the long term, enormously benefit the British economy.

Question put and agreed to.

Clause 81 ordered to stand part of the Bill.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

We have gone on, but I believe it was appropriate and helpful to the Committee to complete clause 81.

Further consideration adjourned.—[Mr. Blizzard.]

Adjourned accordingly at half-past Seven o’clock till Thursday 5 June at Nine o’clock.