Temporary increase in annual investment allowance

Finance (No. 3) Bill – in a Public Bill Committee at 3:45 pm on 29th November 2018.

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Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury) 3:45 pm, 29th November 2018

I beg to move amendment 66, in clause 31, page 18, line 4, at end insert—

‘(3) The Chancellor of the Exchequer must commission a review on the estimated impact of the provisions of this section and Schedule 12 on the level to which businesses claim annual investment allowance.

(4) The review shall in particular compare the estimated impacts of increasing the annual investment allowance for—

(a) the period specified in subsection (1), and

(b) the period of three years beginning with 1 January 2019.

(5) A report of the review under subsection (3) must be laid before the House of Commons within three months of the passing of this Act.’

This amendment would require the Chancellor of the Exchequer to report on the estimated impact of the provisions of this clause, and compare them to the estimated impact of extending the temporary AIA relief for an additional year.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss the following:

Amendment 67, in clause 31, page 18, line 4, at end insert—

‘(3) The Chancellor of the Exchequer must commission a review on the impact of the provisions of this section and Schedule 12 on businesses able to claim annual investment allowance.

(4) A report of the review under subsection (3) must be laid before the House of Commons by 1 April 2020.’

This amendment would require the Chancellor of the Exchequer to review the impact of the provisions of this section and report on that impact by the end of the tax year 2019-20.

Amendment 68, in clause 31, page 18, line 4, at end insert—

‘(3) The Chancellor of the Exchequer must commission a review on the costs and benefits of extending the increase in annual investment allowance beyond the period specified in subsection (1).

(4) A report of the review under subsection (3) must be laid before the House of Commons within 3 months of the passing of this Act.’

This amendment would require the Chancellor of the Exchequer to review the costs and benefits of extending the increase in AIA relief beyond two years.

Amendment 69, in clause 31, page 18, line 4, at end insert—

‘(3) The Chancellor of the Exchequer must lay before the House of Commons a report on any consultation undertaken on the provisions in this section and Schedule 12 within two months of the passing of this Act.’

This amendment would require the Chancellor of the Exchequer to report on any consultation undertaken on the provisions in this clause.

Amendment 70, in clause 31, page 18, line 4, at end insert—

‘(3) The Chancellor of the Exchequer must make a statement to the House of Commons within 2 months of the passing of this Act on the matters specified in subsection (4).

(4) Those matters are—

(a) the results of any analysis undertaken by the Treasury regarding the provisions of this section and Schedule 12,

(b) any evidence that he is aware of that supports the provisions of this section having a positive economic benefit, and

(c) any evidence that he is aware of that does not support the provisions of this section having a positive economic benefit.’

This amendment would require the Chancellor of the Exchequer to make a statement on the evidence base for the temporary AIA increase.

Amendment 71, in clause 31, page 18, line 4, at end insert—

‘(3) The Chancellor of the Exchequer must, within 3 months of the passing of this Act, lay before the House of Commons an analysis of the distributional and other effects of the provisions of this section and Schedule 12 on companies of different sizes.’

This amendment would require the Chancellor of the Exchequer to lay before the House of Commons an analysis of the distributional and other effects of the provisions of this section on companies of different sizes.

Clause stand part.

That schedule 12 be the Twelfth schedule to the Bill.

Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury)

I am pleased that we have got on to this clause, which is one of the most substantial in the Bill. As it stands, it will increase the annual investment allowance from a one-off £200,000 to a substantial £1 million for two years.

To be frank, it feels like the limit has been increased to try to lessen some of the damage that has been inflicted on the country by the Government’s Brexit negotiating approach, but the constant chopping and changing of such an allowance risks mitigating the benefits of the allowance entirely, because it presents a regime that is impossible for companies to plan around as it is constantly shifting. By my count, the allowance has now changed five times in the 10 years since it was introduced.

The measure is not cheap; it carries a significant up-front cost. The Red Book that accompanied the 2018 Budget estimates that the cost of the allowance will be up to £1.24 billion. Some of that is projected to be recouped in the three years after it is introduced, but there is still £760 million of lost revenue after six years.

The structure of the allowance favours bigger businesses to such an extent that it could penalise small businesses by making it impossible for them to spend even the lower £200,000 allowance. These businesses are unlikely to ever get near to the full £1 million allowance, but they face the ludicrous situation whereby their capacity to use even the pre-existing lower £200,000 allowance will be restricted. This is a complicated point but I will try to properly explain it.

The legislation has been quite poorly drafted, with a disregard for small companies. The Opposition believe that, with just a simple change via an amendment, it could be easily fixed. However, because of the Government’s undemocratic approach, which we have talked about and which has prevented us from tabling substantive amendments, it is actually not possible for us to propose anything other than a review. I will therefore use this speech to urge the Minister to consult the Treasury on implementing a quite simple change to the legislation to prevent it from having the opposite effect to that which was intended.

The annual investment allowance has been subject to numerous tweaks, which is often unhelpful in promoting a regime of certainty and stability. One particular problem posed here is that the allowance has been designated for a very specific period—1 January 2019 to 31 December 2020. However, many companies operate a different accounting period, typically in line with the tax year but in some cases with particular dates suited to their specific activities.

The problem that this poses is that the allowance period will not match up with the accounting period. If a company’s tax year does not match the fixed timescales of this allowance, there needs to be what is called a straddling calculation for the way the allowance is split over both timescales, because it will change. It will go from being an annual calculation to a daily one. The legislation makes specific provision for this straddling period.

I might need a whiteboard to explain this to the Committee, but I will try my best without one. I have kindly been supplied with a real-world example by a professional body. Imagine if a company with a tax year that ended in March had spent £60,000 just after the allowance period had ended. Owing to the straddling calculation, it would be entitled to relief on only £49,315 of that expenditure, even though the expenditure was well below the existing £200,000 allowance and clearly lower than the new higher limit. Had the company incurred that expenditure evenly throughout the year, or indeed before 1 January 2021, the full expenditure would have been relieved. I may have to put this in writing to the Minister to make it clear.

The simplest way to fix this issue would be to give small businesses the chance, if they wished, to opt out of the new limit, so that they did not get caught between the two periods. We know from HMRC’s own statistics that small businesses rarely ever get close to using the full allowance as it stands, let alone needing the new £1 million threshold. It makes no sense to penalise them with a higher rate that they will never be able to utilise.

What consultation was undertaken regarding this measure? This issue should surely have been caught at an earlier stage, or even pre-empted, given that it occurs every time the allowance threshold and periods shift. Given that the regime has been subject to many changes already, the Opposition have tabled amendments requesting a package of reviews that would oblige the Government to disclose the impact on businesses eligible to claim the allowance.

Our amendment 66 requests a review on the estimated impact of the provisions on the level to which businesses are claiming the allowance, assessing the take-up in the different periods to see whether the increase in the allowance is really worth while. Amendment 68 drills down further into the costs and benefits directly, which is essential given the substantial amount of revenue involved in this change. Amendment 69 asks the Government to put before the House a consultation on the provisions within two months of the Bill’s passage. This is essential so that we can hear directly from small businesses that will be affected by the point I just raised.

We need to understand, from a distribution perspective, who is taking up this relief and why. We need to know the details of who will use it and how it will benefit them, so that we can properly assess its impact. We also need to correct the change to the thresholds, which seems reasonable, given that businesses have been affected by previous changes and will certainly be affected by this one. I therefore urge all Members to vote for our package of amendments, which will give the Committee the information it needs to make the right call on this substantial and significant change.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I will deal with two points raised by the hon. Gentleman before I speak more broadly to the amendments under consideration and the clause itself. On the issue of consultation, where we have an additional relieving measure coming in, where one would consult on it well in advance, one would expect the market to see the change coming and, therefore, forestall on activity as a consequence, in order to ensure that it benefited from the reliefs being brought in. For that reason, these kind of measures in general, and this one specifically, would not be appropriate to the kind of consultation that the hon. Gentleman has in mind.

The hon. Gentleman raised the specific issue of the way the straddling arrangements operate. Even in the absence of a whiteboard, he did a pretty good job of explaining the conundrum that he referred to. His example is well made: one could end up in a situation with a relatively limited relief available, because of straddling. However, the answer to that is that one would know about it in advance and, therefore, adjust the arrangement of one’s affairs accordingly.

Clause 31 and schedule 12 will temporarily increase, as we know, the AIA limit to £1 million from its current level of £200,000 from 1 January 2019 for two years. The AIA allows businesses to deduct the full cost of qualifying expenditure up to a specified annual limit or cap, where anything above this will be relieved at 18% in successive years. Where businesses spend more than the annual limit, any additional qualifying expenditure will attract relief under the normal capital allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances at the main rate or special rate respectively. This change responds to a consistent ask from business groups such as the Confederation of British Industry, Institute of Directors and the British Chambers of Commerce. The increase will provide a timing benefit, giving businesses 100% first-year relief on qualifying plant and machinery investments up the value of £1 million.

The changes made by schedule 12 will increase the current AIA amount for two years. It is expected to cost £685 million over the scorecard, with positive returns to the Exchequer from 2021-24. This will provide an incentive for those businesses already spending up to the £200,000 threshold to increase or bring forward their capital expenditure on plant and machinery, by providing a cash flow benefit.

Amendments 66 to 68 and 71 seek a review of the impact of this temporary increase. These reviews would concern the number of businesses affected, the distributional impact, and the cost and impact of extending the increase to three years. By definition, this clause has a positive impact on businesses and business investment, enabling more firms with qualifying plant and machinery expenditure to claim 100% first-year relief. This also makes tax simpler for businesses making qualifying investments up to £1 million, which will not have to account for individual assets.

Much of that information is also available in the tax information and impact note, and policy costings note, published at Budget 2018. These notes include details on business impacts, including for companies of different sizes, and projected costs of the temporary increase. The change has been limited to two years given our continued need to consider the right balance between our fiscal, tax and spending objectives in order best to support the economy, while keeping debt falling and increasing fiscal resilience. This means maintaining fiscal discipline, which involves decisions such as keeping this higher level of AIA temporary rather than permanent. I therefore urge Opposition Members not to press the amendments.

Amendment 69 would commit the Government to publishing a report on consultation undertaken for this provision. No consultation was undertaken for this temporary change. It is important that this increase begins promptly following any announcement or engagement, in the way that I suggested in my earlier remarks.

Amendment 70 seeks a statement on the evidence base for the economic impact of this change. Prior to the Budget, the Government received representations from a range of businesses and business groups calling for this measure and outlining the positive impact an increase in the AIA amount would have on investment behaviour. Through this increase, the Government are giving even more businesses access to 100% first-year relief. I commend the clause and schedule to the Committee.

Question put, That the amendment be made.

The Committee divided:

Ayes 8, Noes 9.

Division number 17 Decision Time — Temporary increase in annual investment allowance

Aye: 8 MPs

No: 9 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Clause 31 ordered to stand part of the Bill.

Schedule 12 agreed to.

Ordered, That further consideration be now adjourned. —(Craig Whittaker.)

Adjourned till Tuesday 4 December at twenty-five minutes past Nine o’clock.

Written evidence reported to the House

FB02d Chartered Institute of Taxation (clauses 50 to 52 —VAT)