Clause 8 - Annual investment allowance

Finance Bill – in a Public Bill Committee at 3:00 pm on 17th September 2015.

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

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

Clause 8 increases the permanent level of qualifying expenditure eligible for the annual investment allowance to £200,000 from 1 January 2016. It provides a stable and long-term incentive for small and medium-sized businesses to invest in plant and machinery by allowing them to reduce their taxable profits by 100% of the value of their investment, up to the £200,000 threshold.

Encouraging long-term investment has been highlighted as a fundamental objective for achieving greater productivity, as outlined in the Chancellor’s productivity plan. The clause signals the Government’s intention to do just that, in order to support long-term business investment. Business groups such as the Confederation of British Industry, the Federation of Small Businesses and the British Chambers of Commerce have all welcomed a higher permanent level of the allowance.

The coalition Government temporarily increased the annual investment allowance to £250,000 and £500,000 in 2012 and 2014 respectively. Those temporary increases have provided valuable support to businesses as investment has recovered since the recession. The allowance was due to revert to a permanent level of £25,000 at the end of the calendar year, but the clause prevents that from happening. Instead, the annual investment allowance will be set at £200,000, its highest ever permanent level. That will provide certainty for businesses in the long term.

Business investment grew by 8% in 2014, its fastest rate since 2007, and it is forecast by the Office for Budget Responsibility to grow by 6% in 2015. The new annual investment allowance will ensure that we do not lose any momentum in the business investment recovery by removing support through the tax system too soon.

The change made by the clause enables companies and unincorporated businesses, regardless of size, to reduce their taxable profits by 100% of their expenditure on qualifying plant or machinery up to the £200,000 threshold in each year from January 2016. That change to the allowance provides a strong incentive for businesses  to invest. It will particularly benefit small and medium-sized enterprises, with an estimated 85% of the allowance going to SMEs.

The allowance supports businesses across the UK: 75% of the businesses of the businesses estimated to benefit are located outside London and the south-east. Businesses in sectors such as manufacturing and agriculture, which we want to do more to build up, will benefit in particular.

The change sits alongside other measures in the Bill to support business investment and productivity, including the reduction to the corporation tax rate. The OBR expects that the new allowance, alongside the proposed cuts to corporation tax rates, will increase business investment by £1.6 billion a year by 2020-21. We listened to industry’s recommendation for a permanent level of annual investment allowance to be set and we have acted to set that level at its highest ever amount, eight times higher than the level it was due to fall to.

We recognise the importance of long-term investment in driving productivity growth and the clause will facilitate that investment. The increase in the permanent level of the annual investment allowance will give businesses a stable and generous incentive to make that investment and grow.

Photo of Barbara Keeley Barbara Keeley Shadow Minister (Treasury) 3:15 pm, 17th September 2015

I think businesses might say, “About time,” given the history of the allowance. As the Minister said, the clause increases the maximum amount of the annual investment allowance from £25,000 to £200,000 for expenditure incurred on or after January 2016. In fact, that is a cut to the existing temporary level of £500,000.

The allowance ensures the immediate deduction of expenditure on most plant and machinery from taxable profits. The history of the allowance’s levels is entertaining. It was set at £50,000 between 2008 and 2010 and then it increased to £100,000. It was cut to £25,000 in 2012 but then increased to £250,000—supposedly temporarily—in 2013. In the 2014 Budget, as we just heard, it was raised again to £500,000 and, as was announced in the Budget, it is now being cut to £200,000 in 2016. The Institute for Fiscal Studies said:

“These changes and instability create costs and uncertainty and distort behaviour.”

In 2010, the Chancellor cut the main capital allowance rate and reduced the annual investment allowance to just a quarter of its previous level, from £100,000 down to £25,000. The Government then increased it, but on a temporary basis. Such unpredictability and complexity makes it difficult for businesses to plan the long-term investments that the allowances are intended to support—that is their whole purpose.

Photo of Huw Merriman Huw Merriman Conservative, Bexhill and Battle

That said, taking into account fluctuations over the years and the fact that it was a two-year stimulus, does the hon. Lady agree that the key part to the provision is that it is permanent, thus allowing businesses to plan in the way she advocates should be the way forward?

Photo of Barbara Keeley Barbara Keeley Shadow Minister (Treasury)

The hon. Gentleman says that, but, looking at what people say about this, it seems that they do not have confidence that the allowance is permanent because of the way it has chopped and changed. That  the Government acted in 2010 to reduce it to a quarter of its earlier value—it was £100,000—is part of the problem. One can see from what I just read out that it jumped around.

To answer the hon. Gentleman’s point, both the Institute of Directors and the British Chambers of Commerce have called for the annual investment allowance to be retained at £500,000. Crucially, the IFS also states that

“restricting the AIA to investment in plant and machinery only creates distortions through differential treatment of assets.”

The IFS has estimated that setting the annual investment allowance at £200,000 from January next year will cost £0.8 billion.

Will the Minister explain how the Chancellor reached the figure of £200,000? As I say, the allowance has jumped about: it was cut to just £25,000 and is now going to be £200,000. There were calls from some small and medium-sized businesses to set a level over £500,000. The IFS says that over the past few years there has been

“an absurd degree of inconsistency” in the setting of the allowance. As highlighted earlier, PricewaterhouseCoopers’ “Paying for Tomorrow” campaign put forward a strong argument for a need for a long-term view on tax, with a simple, focused approach to tax reliefs. The history of the allowance is anything but that.

The inconsistency has a damaging effect on businesses’ confidence to plan for the future. The move to make the annual investment allowance a permanent rate is welcome, and we support the move to encourage investment and productivity, but we question whether the measure goes far enough. As I said, a number of small and medium-sized businesses have called for the allowance to be set above the current level of £500,000. As with business rates, they feel that the Chancellor has not listened to them. There are calls for him to look again at how he helps businesses to continue to spend and grow.

Other reliefs should also be considered. Consultations are out on business rates—although the Minister did not seem keen to tell me more about that one—enterprise investment schemes and venture capital trusts. We encourage the Government to focus more than they have on the needs of small businesses. I have many questions about how the annual investment allowance has been handled by the Government to date, but of course we welcome some degree of permanence, as guaranteed in the summer Budget—if it is to be permanent. However, the overall system of tax reliefs for businesses must be considered if we are to have a competitive and fair system for businesses to invest and grow. I hope that the Minister will adopt Labour’s new clause and launch a public consultation on reforms to the system of tax reliefs for businesses. I hope also that Members will support the new clause when we vote on it later.

Photo of Michelle Thomson Michelle Thomson Shadow SNP Westminster Group Leader (Business, Innovation and Skills)

Much of what I say will be in support of the comments made by the hon. Member for Worsley and Eccles South. The Scottish National party also considers the allowance a vital investment tool, particularly for small businesses. The fact that it can be claimed during a year of investment rather than over a number of years is particularly beneficial for encouraging investment and therefore productivity, which we are also keen to see.

To reiterate what the hon. Lady said, yes, the allowance was increased to £500,000, and we are pleased that it will not fall off a cliff edge to £25,000 in January 2016; rather, it will just be decreased to £200,000. It is, however, a pity that it is a decrease of £300,000. My question for the Minister is, if it is good at £500,000, why not keep it there to encourage productivity? In his Mansion House speech, the Chancellor said that we do not export enough, train enough, save enough or invest enough. The key question stands: why not make the allowance permanent at £500,000?

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

I thank hon. Members for their questions. First, let me make it clear that £200,000 is the highest permanent level there has been for the allowance. If I recall correctly, it was £100,000 during the Labour party’s last year in office. We made some temporary increases in the AIA to support the recovery, and those increases were warmly welcomed by businesses, which believed that they allowed them to bring forward and realise their investment plans. We recognise the importance of providing certainty to businesses in the current economic climate, and we are committing to keeping the level of £200,000 for the entire Parliament. We believe that that will help to provide an environment of long-term support for businesses to invest.

The level of the allowance must be viewed in the context of cuts to corporation tax. We must remember that although the previous Government had an annual investment allowance of £100,000, the rate of corporation tax was 28%. The allowance of £200,000 when we have a corporation tax rate of 20%, falling to 18%, is significantly more generous.

On business reaction, let me read two quotations following the Budget announcement on 8 July. John Allan, the chairman of the Federation of Small Businesses, said:

“The Annual Investment Allowance has been an important incentive for people investing in the future growth and productivity of our small businesses. We have long called for the Allowance to be set permanently and at a reasonable level. Small firms will therefore welcome the move by the Chancellor to do just that by setting the Allowance permanently at £200,000.”

John Longworth, the director general of the British Chambers of Commerce, said on the same day:

The Chancellor has confirmed that Britain is open for business. Firms across the UK will cheer not just the new permanent Annual Investment Allowance, further Corporation Tax reductions, and lower National Insurance for small businesses, but also commitments to childcare and higher education that help them employ Britain’s best.”

We must bear that in mind.

Photo of Barbara Keeley Barbara Keeley Shadow Minister (Treasury)

The quotes give part of the message, and it is not surprising that those whom the Minister has quoted from business support permanence. As two Opposition Members have said, however, businesses have called for the allowance to be retained at £500,000. It is not surprising that they wanted permanence, but they also wanted a higher level.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

The reaction to the announcement was that businesses were pleased. That is what we got from the Federation of Small Businesses and the director general of the British Chambers of Commerce. Would they have liked it to be higher? Of course they would, but the claim that the measure has disappointed business is certainly not supported by those two quotations.

Photo of Michelle Thomson Michelle Thomson Shadow SNP Westminster Group Leader (Business, Innovation and Skills)

In that case, I would be interested to understand why it is not set at £500,000. Surely, if it was, businesses would be doubly delighted. What is the economic thinking behind not making it permanent at that level?

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

There is a question of cost. It is necessary to evaluate where the impact would lie and the benefit of going above £200,000. Yes, the allowance was once at a very high level, but that was because of particular temporary circumstances, given the uncertainty that existed towards the end of the previous Parliament.

Let us not forget that 99% of companies will receive 100% relief on their investment with an annual investment allowance of £200,000. It is a question of balancing the benefit to investment with the cost in tax that we will forgo if we go above £200,000. The judgment that we made was that, given that 99% of companies will get 100% relief, a level of £200,000 was a reasonable approach to take in the context of a set of policies that are undoubtedly pro-business and designed to attract investment in the UK.

Daniel Zeichner rose—

Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP) rose—

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

I was about to conclude, but I will quickly take the two inventions.

Photo of Daniel Zeichner Daniel Zeichner Labour, Cambridge

On a point of clarity, given that we are discussing permanence, I think I heard the Minister say that this would be the level for the remainder of the Parliament. Is that what he is saying?

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

That is our intention, yes; £200,000 will be the level for this Parliament.

Photo of Roger Mullin Roger Mullin Shadow SNP Spokesperson (Treasury)

I would be interested to hear the Financial Secretary’s reflections on the Chancellor’s speech, which my hon. Friend the Member for Edinburgh West has cited. Does the Minister accept that there is a fundamental problem of investment in the UK economy and that we need to do more to try to stimulate investment? One way of doing that would have been to retain the investment allowance at a higher level.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury 3:30 pm, 17th September 2015

Our view is that the most effective way is the balance of policies we have set out in the Budget, preceding Budgets and autumn statements. It has reduced corporation tax from 28% in 2010 to 18% by 2020, the end of this Parliament. That is important too, so we have a proud record.

I am glad that there is agreement that we need to attract business investment in the UK. I have already quoted the numbers and increases we have seen in recent years. It is important that we provide that pro-business environment, and that is precisely what the Government continue to do.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.