Clause 42 - Plant and machinery allowances: anti-avoidance

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

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Photo of David Gauke David Gauke The Exchequer Secretary 1:30, 14 June 2012

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.