Thank you very much, Mr. Hood. It is a real pleasure to be once again, if somewhat surprisingly, serving under your chairmanship in my third consecutive year on the Finance Bill. I have learnt one thing in the last 24 hours, which is that there are Finance Bill gods. It seems that they are slightly vengeful and playful gods, because roughly 24 hours ago I was, I confess, teasing one of my hon. Friends, who shall remain nameless, for saying that their entire life had, yet again, been taken over by the Finance Bill. I was glorying in the fact that, although I served on it in the last two years, I was not required to serve this year. So there are Finance Bill gods and they are vengefulonly one swift phone call later, I found myself here again. However, the pleasure is no less diminished for serving under your chairmanship, Mr. Hood.
I have risen to speak on clause 30, although there are no amendments to it, because it introduces schedule 11, and I thought it might be helpful to the Committee to have an explanation of what we are trying to achieve. We are comprehensively reforming the rules on tax relief for business expenditure on cars. There are two incentives for change. The first incentive is simplification, on which we have responded to lobbying from the industry. Secondly, we wish to ensure that the rules on tax relief for business expenditure on cars also help us to achieve our environmental objectives.
The current rules require capital expenditure on cars costing more than £12,000 to be accountable for in single asset poolsthat means one asset pool per car so that the writing-down allowances can be capped. Businesses that hire, rather than buy, cars costing more than £12,000 are also restricted in the amount of hire expenses that may be deducted from their profits. Businesses therefore need to track expenditure on those more expensive cars on an individual basis for the purposes of their tax computations, but for larger businesses, the number of such car pools can run into hundredsin some automotive sectors, thousands. Stakeholders consider that the rules are outdated and impose a disproportionate compliance burden, and we agree.
It is, however, important that any reform is consistent with our environmental objectives. Carbon dioxide is the most important greenhouse gas contributing to climate change, and road transport is one of its major producers. The reform aims to contribute towards our targeted reduction in CO2 emissions. Following extensive consultation, an outline of the reform was announced at Budget 2008; further detail was published in December 2008. The Government have considered stakeholders responses in designing a new regime that will not only reduce compliance costs, but help to meet the UKs targets for reduction in greenhouse gas emissions.
The generous 100 per cent. first year allowances for expenditure on cars with very low CO2 emissions are unchanged. They were made available for a further five years until 2013 in the Finance Act 2008. Consistent with that, under the new rules, the rate of writing down allowances that businesses can claim in respect of all cars will depend on the cars CO2 emissions. Expenditure on cars will generally be pooled in one of two plant and machinery pools. Where the cars emissions are 160 g/km or less, the expenditure will be allocated to the main capital allowances pool and will attract the same rate of 20 per cent. per annum of writing down allowances, as applies to most other plant and machinery. However, expenditure on cars with emissions above 160 g/km will be allocated to the special rate pool and attract a lower writing down allowance of 10 per cent. per annum. There will therefore be a clear incentive to buy a lower CO2-emitting car.
The rules restricting the deductions from profits that businesses may claim in respect of car hire costs are also being reformed to act as a disincentive to using high CO2emitting vehicles. For leases that commence after April 2009, there will be a restriction of allowable expenses only where the hired car has CO2 emissions exceeding 160 g/km. In addition, and as a simplification measure rather than an environmental one, the proposed rules ensure that only one lessee in a chain of leases for a car will be subject to the lease rental restrictions. Respondents have agreed that the reduction in the proportion of cars in a single asset capital allowance pool and the application of the lease rental restriction to a smaller population of leases will achieve a welcome reduction in compliance costs. As an additional simplification, motorcycles will no longer be treated as cars for capital allowances purposes. That change, too, has been welcomed by business.
We think that the move to a CO2 emissions basis for capital allowances will act as an additional fiscal measure to motivate business to redesign their car policies and actively select lower emitting cars. While the new rules deliver the reform that businesses pressed for, in order to ensure fairness, the provision introduces transitional rules to guarantee that there is no change to the treatment of cars owned before the date of introduction of the new rules. The old rules are being retained for those vehicles for five years.
As I said at the outset, these provisions have been the subject of considerable consultation and are broadly welcomed by stakeholders.