Clause 42 - Plant and machinery allowances: anti-avoidance

Finance Bill – in a Public Bill Committee at 1:30 pm on 14th June 2012.

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Photo of Nigel Mills Nigel Mills Conservative, Amber Valley 1:30 pm, 14th June 2012

I beg to move amendment 34, in clause 42, page 27, line 2, at end add—

‘The Chancellor of the Exchequer shall instruct the Office of Tax Simplification to prepare a report considering whether reforming the capital allowances regime, including by switching to using accounts depreciation, would be a more effective method of tackling avoidance. The report shall be placed in the House of Commons Library.’.

Photo of Sir David Amess Sir David Amess Conservative, Southend West

With this it will be convenient to discuss the following:

Clause stand part.

That schedule 9 be the Ninth Schedule to the Bill.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

This is a repeat of what I tried to do a year ago: to persuade the Government to consider whether the Office of Tax Simplification should look at the whole capital allowances regime to see whether there is a better way of achieving the Government’s laudable aims. I have no objection to any of the anti-avoidance measures in schedule 9; they are eminently sensible and much needed. However, each year, we have to tinker with the capital allowances regime to add a few new anti-avoidance bits, and tweak a few bits to encourage the things we would like to encourage or to discourage the things we would like to discourage.

Fundamentally, the regime is intended to give businesses tax relief for the economic cost each year of the capital assets they invest in. Encouraging businesses to invest in factories, machinery, computers and whatever they need to grow their business is key to achieving growth in our economy. We should be trying to give them simplicity and certainty that they will get relief for that investment over the economic life of that asset. I am not sure that the capital allowances regime encourages that with the fixed 18% reducing balance deduction a year—that is not a lot of use if the asset has much shorter life or needs depreciating much quicker. In fact, to respond to that, we end up with a short-life asset, a long-life asset, an environmentally friendly asset and a car asset regime, all of which allow people to use a slightly different set of rules if the main 18% does not work for them anymore.

We have ended up with a complex scheme that does not encourage business to do what we want it to do. It does not make it easy for business. Instead, it opens up a load of avoidance potential because of the underlying complexity, with the result that we have to add more complexity each year to try to close down those things. It strikes me that if we want a modern corporate tax system that makes life easy for business and for the Revenue and that contributes to achieving our entirely sensible policy aims, this is one area where some reform could achieve all those things in a much less cost-intensive manner.

That is why I urge the Government to make use of the very successful Office of Tax Simplification, which is eminently qualified to do this work. I asked it to look at this area and to consider whether there is a better way to get the investment we want and avoid the avoidance. One suggestion in the amendment is that we should simply let some businesses have their accounts depreciation charge. That is covered by all the normal accounting standards and is quite hard to manipulate, so most businesses end up with a pretty sensible depreciation profile. It is quite hard to get double deductions and to try to claim the asset in two companies, or refresh the deductions and have them again; that would impact on the accounts profit. That is one modern, reliable way for us to end up in a far better position. I commend the idea to the Minister for the second time.

Photo of David Gauke David Gauke The Exchequer Secretary

In responding to my hon. Friend’s amendment, I will also deal with clause 42. As we have heard, amendment 34 would require the Office of Tax Simplification to prepare a report considering whether reforming the capital allowances regime, including by switching to accounts depreciation, would be a more effective method of tackling avoidance. As the Chancellor said in his Budget speech, we regard tax evasion and aggressive tax avoidance as morally repugnant. We are fully committed to the more efficient tackling of tax avoidance, which the amendment is designed to ensure.

Before I deal with the amendment, I will explain the purpose of clause 42, which is obviously key to the amendment as well. The Capital Allowances Act 2001 contains general anti-avoidance rules to counter transactions designed to achieve capital allowances in excess of the amount intended by the legislation. However, there is evidence that those rules are not always as effective as they could be. Robust legislation to prevent avoidance at the outset is one of the core elements of HMRC’s anti-avoidance strategy and it is also at the heart of the Government’s approach to tackling tax avoidance.

In Budget 2011, the Government therefore announced various proposals intended to make the general capital allowances anti-avoidance rules more robust and effective. A formal consultation on those proposals took place during summer 2011. In addition, HMRC convened a small working group to discuss the proposals in detail. Revised proposals, together with the Government’s response to the formal consultation, were published at the 2011 autumn statement. A draft of the proposed legislation was also published at that time for a further period of technical consultation, which closed on 10 February this year.

Broadly, the changes being made by the clause will affect transactions involving plant and machinery expenditure only where there is an avoidance purpose. Where there is such a transaction, the effect of the new rules will be to deny 100% capital allowances. Alternatively, they could restrict the amount of allowances the buyer of the plant or machinery can claim, so that the tax advantage sought is effectively cancelled out. The proposed changes will not affect capital allowances for real business costs. They will not apply to businesses investing in plant or machinery where there is no avoidance purpose. The changes are focused purely on preventing businesses from obtaining over-generous allowances through engaging in tax avoidance.

My hon. Friend the Member for Amber Valley reminded the Committee that he proposed a similar amendment to last year’s Finance Bill. I reminded him that the previous Government consulted at length, between 2001 and 2004, on options for reforming the corporation tax system, including switching from capital allowances to the use of accounts depreciation. The business response to that consultation was strongly in favour of retaining capital allowances: it was argued that they provide certainty and a level playing field, with the same rates of allowances applying to all. Businesses also said that they value the flexibility of the current system, which allows the pooling of expenditure and the ability to claim less than the full allowances, depending on the circumstances of the individual business.

In last year’s debate my hon. Friend reminded me that the previous review was some time ago and suggested that businesses’ views might have changed, given that the rates of capital allowances have been reduced since 2004. As we have already mentioned, the previous Government reduced the rates of writing-down allowances, and we also reduced rates to help to fund the reduction in corporation tax to 23%. Of course, a further reduction to 22% was announced in the last Budget, which is to take effect from April 2014. Those reductions in the main rate of corporation tax reaffirm the competitiveness of the UK’s tax system, and support enterprise and growth. However, the capital allowances rates continue to reflect average rates of economic depreciation, and the popular flexibilities of the current system are still in place.

My hon. Friend proposes that that the Office of Tax Simplification should prepare a report on capital allowances reform. He will no doubt be aware that the OTS considered the subject last year in its report on tax simplification, and returned to it in its small business report. In that report, after a discussion of the issues, the OTS expressed its considered view by saying that it does not think

“that a blanket move to tax-deductible depreciation should be taken forward.”

Of course, the Government keep all tax matters under review, but in light of what I have just said, I do not  think that much would be gained by instructing the OTS to look again at capital allowances now—although I dare say my hon. Friend, who always shows great persistence, will make the case in future.

The Government are committed to a fairer, simpler and more effective tax system, which has robust defences against avoidance, and the clause furthers that objective. I therefore ask my hon. Friend to withdraw his amendment, which I hope he feels has allowed effective probing of the Government’s position.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

I am grateful for those answers, if a little disappointed that little progress is being made.

I point out to the Minister that in its review of small business taxation, the Office of Tax Simplification is now allowing very small businesses, quite rightly, to tax just their effective cash increase each year, and not make any adjustments for tax purposes at all. That goes in the direction of a simpler regime.

There is an issue that will need to be looked at, at some point, because, as I understand it, our regime for investment in infrastructure is one of the least attractive in the EU because we do not give capital allowances for things such as industrial buildings and new factories. There is a general issue to watch, but the amendment was a probing one; therefore I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 42 ordered to stand part of the Bill.

Schedule 9 agreed to.