Clause 44 - Expenditure on plant and machinery for use in designated assisted areas

Finance Bill – in a Public Bill Committee at 1:45 pm on 14th June 2012.

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Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury 1:45 pm, 14th June 2012

I beg to move amendment 45, in clause 44, page 27, line 8, at end insert—

‘(2) The Chancellor of the Exchequer shall review the impact of his capital allowances policies on long-term investment, and will lay a report of his review 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 11 be the Eleventh schedule to the Bill.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

Clause 44 introduces 100% first-year allowances for investment in plant and machinery by companies in enterprise zones. The Government will point to enterprise zones as an example of their efforts to get growth on track, but the clause shows that their policy is inconsistent in some ways.

We all know about the enterprise zones championed under the previous Conservative Government. The Centre for Cities regarded them with scepticism, estimating in a report last year that the cost per additional job created in the zones was £17,000 over a 10-year period—the equivalent of £26,000 in today’s market. By contrast, an analysis by PricewaterhouseCoopers showed that regional development agencies did an excellent job in terms of value for money across the country, making a genuine difference to local economies, particularly in the north of England. Yet this Government chose to scrap the agencies, including the excellent Yorkshire Forward, which served my city of Leeds, and to replace them with a hotch-potch of enterprise zones and local enterprise partnerships, which have few, if any, powers or resources.

The clause relates specifically to capital allowances in enterprise zones. How many people does the Exchequer Secretary expect will take up the benefit presented by the clause? How many businesses will be persuaded by it to invest in the zones rather than elsewhere? Can he confirm whether the first-year allowances will be available to landlords? It is my understanding that they will not, and that no incentive, therefore, will be provided to landlords in an area that is part of an enterprise zone to invest in plant or machinery.

When we talk to people on their doorsteps and to local businesses in all our constituencies, we see the impact of the recession and the high rates of unemployment, and the difficulties that businesses, particularly small businesses, face in accessing finance, as well as the lack of demand in the economy, which is discouraging investment, employment and opportunities to grow. The Government need to strain every sinew to get growth back on track and unemployment down. They must ensure that the benefits and initiatives of schemes such as that under discussion are communicated clearly to those areas in which they are implemented, and that they have the maximum impact in those areas in which we most need those jobs and economic growth.

Our amendment refers to the Government’s policies on capital allowance. What will be the longer-term impact of those policies? If, as the clause suggests, the Government are keen to introduce more capital allowances for specific areas, why did they make a £2.6 billion cut in those allowances last year? As my hon. Friend the Member for Pontypridd (Owen Smith) said before the recess, when he was a member of the Committee, last year the Government were keen to trade capital allowances for a cut in corporation tax, even though the respected Institute for Fiscal Studies clearly said that the main beneficiaries would be high-profit, low-investment firms, rather than those firms and parts of the country that most need support with regard to rebalancing the economy and the recovery.

What will happen in this year’s autumn statement? What will happen in the 2013 Budget? How can businesses making high investments be sure about the consistency of these policies when we have seen such an about-turn? What effect does this uncertainty have on investment by  those businesses in our constituencies and communities, and what effect does it have on the high rates of unemployment, which are evident throughout the country, but particularly so in those areas in which there are enterprise zones?

This Government are not creating an environment or an economy in which businesses and individuals can be confident or certain about what will happen next, and it is that uncertainty that is discouraging investment and employment growth. Although we welcome the extra support, the inconsistency is playing havoc with investment decisions and employment growth, so we would appreciate answers to those questions about consistency for businesses throughout the country.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 44 and schedule 11 provide 100% first-year allowances for business investment within targeted designated parts of certain enterprise zones. The allowances will be made available in assisted areas where local authorities and devolved Administrations have demonstrated the potential for attracting businesses making large capital investments. The allowances are designed to attract new investment, jobs and economic growth to those parts of the country in most need and that are best placed to make the most of this additional Government support. They form part of a menu of enterprise zone options, including simplified planning and business rates discounts. These, in turn, are part of a wider package of measures aimed at stimulating growth and inward investment across the United Kingdom economy.

We announced at the Budget last year that we would establish a series of new enterprise zones in local enterprise partnership areas in England. Since then, 21 enterprise zones have been announced. Businesses investing in enterprise zones can benefit from substantial business rate discounts, radically simplified planning procedures and superfast broadband.

The Government also announced that we would consider introducing enhanced capital allowances to support enterprise zones in assisted areas. These targeted allowances will be made available in areas where local authorities and devolved Administrations have demonstrated the potential for attracting businesses making large capital investments. The autumn statement confirmed enhanced capital allowances for six sites in England, and the Budget chose two further sites in England, three in Scotland and one in Wales for full allowances.

The clause will provide 100% first-year allowances for capital investment in plant or machinery for businesses that invest in those sites for a five-year period from April 2012. The allowances will provide a significant incentive for new investment by business in the areas in which they are being offered. They will support additional investment, new jobs and economic growth in parts of the UK where they have not been forthcoming, and will further support the rebalancing of the UK economy. For example, the Greater London authority estimates that enhanced capital allowances within the Royal Docks enterprise zone could attract 7,500 additional jobs to a deprived part of the nation’s capital, and the Welsh and Scottish Governments estimate that their proposals could attract a further 9,000 jobs. The hon. Member for Leeds West asked how many businesses would benefit. It is difficult to assess exactly how many businesses would benefit, but to date these announcements have attracted  a lot of attention from potential investors. As I say, the evidence from the GLA and from the Welsh and Scottish Governments is very supportive of that.

Let me turn to amendment 45. It proposes that

‘The Chancellor of the Exchequer shall review the impact of his capital allowances policies on long-term investment, and will lay a report of his review in the House of Commons Library.’.

Let me set out why I do not support this amendment. The Government are committed to improving the UK’s tax competitiveness, with the ambition of having the most competitive tax system in the G20. That would help to create the right conditions for growth and encourage future investment in the UK. By 2014, the corporation tax rate will have fallen by 6% from its 2010 level of 28%, giving the UK the lowest tax rate in the G7 and the fourth lowest in the G20.

The Office for Budget Responsibility forecasts have estimated that those corporation tax reductions have more than offset reductions in capital allowances, such that the cost of capital for new investment is lower for all non-financial companies and the rate of return from the existing capital stock is higher. The OBR’s assessment is that the 1% reduction in the corporation tax rate that was announced in the 2012 Budget will increase the level of business investment by around 1% by the end of the forecast period. That is equivalent to an increase in the total amount of business investment of £3.4 billion between now and 2016, supporting growth in the medium term.

At the same time, the Government recognise the importance of capital allowances to businesses making investment decisions, and we have ensured that they remain broadly aligned with the rates of commercial depreciation, in accordance with their original policy intention. The Government also recognise that in certain situations carefully targeted accelerated allowances can be a useful policy lever to encourage investment and growth. Enhanced capital allowances and enterprise zones have been targeted at areas where the Government believe they will provide the strongest incentive for business investment, thereby ensuring value for money for taxpayers.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

The Minister is making a powerful case and I welcome this legislation, particularly as it affects my constituency significantly. However, I seek one point of clarification. There is an exclusion to do with the management of waste of other undertakings. Can the Minister say whether that will apply to industrial processes that use waste as a raw material but may produce, for example, chemicals or other useful products from that waste? If he cannot answer that question now, can he seek clarification, because there are many areas of new technology where waste might be a feedstock and investment in those areas should get this sort of support?

Photo of David Gauke David Gauke The Exchequer Secretary

As my hon. Friend has suggested, this is quite a complicated and technical area. To ensure that he gets the accurate and comprehensive response that he deserves, I will write to the Committee to provide clarification on that point.

Enhanced capital allowances are the right lever to attract investment, jobs and growth into these targeted areas, and to support the rebalancing of the UK economy. The Government routinely publish detailed information  on the corporation tax system. HMRC publishes detailed statistics on corporation tax receipts. The OBR publishes information on corporation tax forecasts in its “Economic and Fiscal Outlook”. At the Budget, HMRC publishes detailed information on proposed changes, particularly in the tax information and impact notes and the policy costings document. Those publications suggest that the corporate tax reforms introduced by the Government since 2010 have increased the level of investment by business. I welcome the chance to discuss the issues raised by the amendment, but I do not think there is a case for the Government to produce another report.

The hon. Member for Leeds West raised an issue about landlords. Under the UK capital allowances regime, it is standard to exclude lessors from 100% first-year allowances. That is a general exclusion under section 46 of the Capital Allowances Act 2001, and it will be continued by the provision. The Government want to incentivise actual business investors, such as manufacturing businesses, to invest in such areas; general investors were not the specific target.

On the management of waste, I can tell my hon. Friend the Member for Redcar that such matters are decided case by case, and each case depends on its details. As he said, that is a complex area, and HMRC will provide guidance on exactly how the exclusions will work. I hope that he is satisfied by my response.

In conclusion, enterprise zones are a key part of the Government’s economic strategy. Enhanced capital allowances will support enterprise zones to succeed in areas of the country where the additional support is most likely to attract new investment. It is vital to support investment across the UK. The changes made by the clause and the schedule are key to that, and I hope that they will be approved.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury 2:00 pm, 14th June 2012

I thank the Minister for his response to my questions and those of other hon. Members. Although I believe that regional development agencies offer a more appropriate way to rebalance the economy and help all parts of the UK, I support the local enterprise partnerships in my area and I hope that the enterprise zones will bring much-needed investment and jobs to some of the most deprived parts of the country and will support extra efforts to ensure that that happens. However, I hope that the Government will be more consistent in sending out a clear message that we are supporting businesses, particularly manufacturing businesses that are investing and trying to create the jobs that we all so desperately need, especially in the most deprived areas of the country.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 44 ordered to stand part of the Bill.

Schedule 11 agreed to.