Only a few days to go: We’re raising £25,000 to keep TheyWorkForYou running and make sure people across the UK can hold their elected representatives to account.

Donate to our crowdfunder

Clause 24

Finance Bill – in a Public Bill Committee at 5:00 pm on 2nd June 2009.

Alert me about debates like this

First-year capital allowances for expenditure in 2009-2010

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

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I was not sure whether the Minister was going to speak to the clause—he has a text in his hand—but I will kick off the debate. Clause 24 amends the provisions of part 2 of the Capital Allowances Act 2001, which relates to plant and machinery allowances, to provide a one-off, first-year allowance of 40 per cent. on expenditure incurred on plant and machinery. The allowance is available for unincorporated businesses, such as that in which my hon. Friend the Member for Beverley and Holderness is a partner, during the 12 months from 6 April 2009, and is available for businesses that pay corporation tax, which again applies to a business in which my hon. Friend has an interest, during the 12 months from 1 April 2009. He will be noting the measures very carefully when looking at his capital expenditure plans for the year ahead.

Only a year ago, the rate of allowances was reduced from 25 to 20 per cent., but now we are doubling it in the context of the economic crisis. The timing of relief is central to capital allowances, and when the first-year  allowance is increased, relief for the expenditure is accelerated when it would otherwise be spread across later accounting periods.

One of our concerns about the issue takes us back to the debate about cost and the question of what benefit we can expect from the introduction of the first-year allowance. When the Chancellor announced the allowance in his Budget statement, he was very bullish about what it meant in practice. He said:

“I want other industries to invest, too. Businesses already benefit significantly from the annual £50,000 investment allowance, which was announced two years ago. I want to go further to promote investment now. So for this year, I will double the main capital allowance rate to 40 per cent. That will encourage firms to bring forward investment, in particular those companies in the growth sectors that will deliver the rewarding jobs of the future. It will mean enhanced tax relief to support investment of up to £50 billion this year. That includes £10 billion of investment in the vital communications sector.”—[Official Report, 22 April 2009; Vol. 491, c. 247.]

Will the Minister elaborate on where that additional investment is coming from? The Chancellor explicitly expects to bring in an extra £60 billion in total, £10 billion of which will be from the communications sector. How can the Government be so certain that that will be the case?

Page 206 of the Red Book, for example, notes a contraction from 11.5 to 11 per cent. in gross fixed capital formation for business in 2009, and a smaller contraction from 4.75 to 4.25 per cent. in 2010. The Minister has been probed this afternoon and his colleague, the Exchequer Secretary, was probed this morning on what models were used to estimate those figures. It would be interesting if the Minister could tell us what the figures for gross capital formation would have been if the temporary increase in the first year allowance from 20 to 40 per cent. had not happened.

There is some scepticism among outside bodies about this measure. PricewaterhouseCoopers said:

“The problems with this measure are first that it is ad hoc and temporary. This will only help a business that is able to react quickly as there is very little time to plan and incur the expenditure. A business needs to have sufficient one off, immediate expenditure requirement to make the allowance useful, and of course, sufficient profits available against which to set it off. How effective it will be must be problematic.”

I think that the Institute of Chartered Accountants in England and Wales made similar comments in their representations. If we are going to bring forward investment of that magnitude, in excess of the amount that will benefit from the annual investment allowance, we need to use what several Government Ministers have termed shovel-ready projects—things that are ready to go. Suddenly telling businesses in April this year, “You have a 40 per cent. capital allowance for the first year; use it now” actually makes it very hard for businesses to respond promptly. In reality, what I suspect will happen is that they will get enhanced relief for expenditure that has already been planned, but further allowances will not necessarily be brought forward in the future.

Businesses will have already sat down and worked out their plans. Businesses will have done cash flow budgets for this year some time ago. They will have already put those plans in place, and so will not be in a position to respond quickly to the Government’s pledge. Of course, businesses know that there is no point in trying to accelerate things too much, because we know that by  the end of March 2010, the first-year allowance will go back to 20 per cent. for incorporated business. So they know that it is a transitory allowance, and their willingness to respond quickly will be limited by that.

There have been some suggestions about how the Government could have responded and dealt with this better. They could have looked at the scope of excluded expenditure to identify investments that would not have otherwise qualified for capital expenditure, but which might have been brought forward this year. They could have looked at lengthening the period beyond one year to two years to give businesses time to bring forward that investment so that they could take advantage of the relief. Alternatively, given the expense of the measures—it costs £1.6 billion and in the previous debate the Financial Secretary was concerned about doubling the relief for losses carried back from £50,000 to £100,000 on grounds of cost—the Government could have found some way of capping the benefits arising from the introduction of the 40 per cent. rate for capital allowances and to use the money saved elsewhere in a more targeted way to help businesses.

So there is some concern about the effectiveness of the measure and what the Government are seeking to achieve. The point that the Chancellor made in the Budget statement was that the relief would stimulate additional investment. There was scepticism among accountants and business advisers as to whether that was actually going to happen. I would be grateful if the Minister could further explain the Government’s thinking on this and whether he is confident that it will bring forward additional investment, as outlined by the Chancellor in the Budget statement. Was it wishful thinking on his part, like so much of the economic forecasts that were announced in the Budget in April?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills) 5:15 pm, 2nd June 2009

The clause is part of our package of targeted support for business—temporary tax relief providing real support for businesses investing for the future. The cost is substantial, as the hon. Gentleman said, and its scale reflects our recognition that business investment is key to recovery. The measure will stimulate and bring forward business investment. It is time-limited because we recognise the exceptional nature of the current downturn and want to support and encourage businesses to invest now. My right hon. Friend the Chancellor of the Exchequer said in his Budget speech that we must grow rather than cut our way out of recession, and this measure is one building block we have in place to do that.

The hon. Member for Fareham queried the balance between the cost of the carry-back measure that we debated a few minutes ago and this first-year capital allowances measure. The balance reflects the importance of encouraging investment at this point in the downturn to move us into recovery as quickly as possible. At this critical time, it is absolutely right to support businesses and their cash flow, including through the loss carry-back measure, but it is perhaps more important to provide an incentive to invest, which this measure will do.

Photo of Graham Stuart Graham Stuart Conservative, Beverley and Holderness

All the outside experts tell us that it takes time, as my hon. Friend said, to plan capital investment. There seems to be no rationale for doubling the relief in  this financial year rather than the one following, when it would have a far more positive effect. Cynics outside view it as having more to do with the electoral cycle than the business cycle.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

Opposition Members may have slightly misunderstood what the Chancellor of the Exchequer said about the scale. The figure he used was £50 billion, not £60 billion: that is the amount of investment that will qualify for support from the allowances. I certainly do not wish to give the Committee the impression that there will be an additional £50 billion or £60 billion of investment. That will not be the case. However, I expect some increase because many businesses are likely to have some flexibility regarding the timing of their investment and will be able to bring it forward, compared with what they otherwise would have done.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

If the Financial Secretary looks back at the Budget speech, he will see a clear implicit message that the provisions would lead to additional investment of £50 billion. The right hon. Gentleman is absolutely right to say that I misquoted the number; it is £50 billion, which includes £10 billion of communications expenditure. The expenditure would have taken place and was already planned. There might be a slight increase at the margin, but it is simply already planned benefiting expenditure. The measure will not generate additional investment to bring us out of the downturn quicker.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

It will bring forward more investment than would otherwise have been the case, but only a modest share of the total investment, which is the £50 billion figure to which the hon. Gentleman and the Chancellor of the Exchequer referred.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

How much additional investment does the right hon. Gentleman think it will bring forward?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

My estimate is that it will be in the order of an additional couple of billion.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

So a couple of billion in additional investment for a cost of £1.6 billion in additional tax relief—is that good value for money?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

Yes, it is, because the cost will be recovered in future years due to the way that first-year allowances work. We are bringing forward investment and the cost will be defrayed in future years. Winning that additional investment at this time, given what is happening in the economy, is a very worth while prize, which is why we are taking it forward.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

My hon. Friend the Member for Fareham has very transparently expressed Opposition Members’ concerns. Can the Minister give us any other example in which a multiplier effect, which he thinks will emerge in the years to come, can be bought only by an up-front cost of as much as 80 per cent. of the first year’s expense? It seems almost incredible, from our perspective, that to invest, as he puts it, £1.6 billion now for the hope of getting £2 billion in year one is a satisfactory use of allowances.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I think it certainly is. As I said, much or perhaps all of the cost in the first year will be recovered in future years. The device enables us to achieve significant additional investment at this critical time, thereby speeding the recovery and the point at which the economy returns to growth. That is a valuable prize. That is the reason why clause 24 introduces the temporary 40 per cent. first-year capital allowances for most business investment between April 2009 and March 2010, in effect doubling the main rate of capital allowance for new business investment over that period. That is in addition to the significant benefit that the vast majority of businesses already receive from the £50,000 annual investment allowance introduced last year. The AIA provides about 95 per cent. of UK businesses with 100 per cent. tax relief against investment in qualifying plant and machinery.

The temporary first-year allowance will provide additional support to those businesses that invest the most and will encourage firms to bring forward investment. I have certainly spoken to businesses that think they can bring forward investment as a result. It will both improve cash flow in the short term, supporting businesses that invest, and encourage investment now by reducing the cost of investment in the current year relative to later years.

Photo of Graham Stuart Graham Stuart Conservative, Beverley and Holderness

The Minister is probably about to come on to this, but may I press him on the £10 billion from investment in the communications industry? Where did that number come from, and will he explain whether he expects any of the additional brought-forward expenditure to be in that particular area?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

The figure comes from an assessment of what is going on in the communications sector. Much is happening in that sector, and one development that we are keen to see is the development of next-generation broadband services—a roll-out of broadband into those parts of the UK where services are not provided. If those investments take place in the current year, there will certainly be benefits, but communications is quite a wide sector and one in which, I am pleased to say, an encouraging level of investment is going on now. If one looks at the historical pattern, one sees that about 20 per cent. of investment has been coming from the communications sector. That is the view that is reflected in the figure to which the hon. Gentleman refers.

The measure provides real help to businesses investing for the future at a time when they are most in need of support. I put it to the Committee that supporting business investment now is a very important step in ensuring economic recovery and I commend the clause to the Committee.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am disappointed by the Financial Secretary’s justification for the measure. The whole thrust of the Chancellor’s Budget statement when making the case for the measure was the increase in investment. We can look at the Red Book. The Minister said that he thought that the measure would bring forward additional investment of about £2 billion this year. That is about 1 per cent. of the total fixed investment projected in the Red Book for 2009 and it accounts for an increase in GDP of about 0.1 per cent., so we are seeing a relatively small benefit for quite a significant hit to the taxpayer. Given that the Government forecast borrowing to be £175 billion this year and £173 billion next year, they need to be careful about their rationale for a making big increase in the relief available to companies. If the  Chancellor had said at the time of the Budget that the measure was not about bringing additional investment but more about supporting businesses, it would have been a much more straightforward explanation of the increase than suggesting that it would bring forward a huge wave of additional investment.

My right hon. and learned Friend the Member for Rushcliffe was right when he said during the Budget debate that

“Doubling capital allowances for a year, however, is not likely to shift a lot, as it normally takes people more than 12 months to plan investments that they were not previously planning to make. Furthermore, at a time of falling consumer demand people will not be falling over themselves to go in for capital investment, regardless of allowances.”—[Official Report, 27 April 2009; Vol. 491, c. 612.]

That encapsulates the situation. When making the case for a significant increase in tax reliefs, we need to be much clearer about the benefits rather than suggesting that it would bring forward huge additional investment.

Photo of Graham Stuart Graham Stuart Conservative, Beverley and Holderness

Through my hon. Friend, I thank the Minister for being straightforward and honest, as he always is, in sharing the Government’s view. It is a shame that the Chancellor was not as straightforward in his Budget speech. Given the news of recent days, there may be a vacancy, and I hope that the Financial Secretary will be promoted to fill it.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Financial Secretary is always transparent on these occasions, and gives a good account of why the changes are necessary.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I wish to bring the conversation back to the matter in hand. I take the point about what the right hon. and learned Member for Rushcliffe said, but to be fair to the Government, one could envisage a company that intends to invest at some point in future—such investment already being programmed into its thinking—choosing to bring it forward slightly because of the extra inducements. It may not necessarily choose to make an investment that it had no plans to make, but if it had chosen to invest, it could decide to do so a little sooner.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed; the Financial Secretary made that point. However, the “little bit” sooner is not the £50 billion that the Chancellor implied; it is £2 billion. That is 1 per cent. of the gross capital formation expected for this year. The amount being brought forward at the margin is very marginal, but it is being done at a cost of £1.6 billion. It seems quite a large amount of tax relief to give for the relatively small return of bringing forward that additional investment.

The intention may have been to give further support to business to invest during a downturn in the knowledge that it would not trigger additional investment but was there simply to cushion the cost. That would be a different explanation. That is the one that the Financial Secretary has given this afternoon. I understand it, and I am content with it. It is a much clearer and more robust rationale than the one given by the Chancellor at the time of the Budget, when the measure was announced.

Question put and agreed to.

Clause 24 accordingly ordered to stand part of the Bill.