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Session 2005 - 06 Publications on the internet Standing Committee Debates Finance (No. 2) Bill |
Finance (No. 2) Bill |
The Committee consisted of the following Members:Frank Cranmer, Emily
Commander, Committee Clerks †
attended the Committee Standing Committee ATuesday 16 May 2006(Afternoon)[Sir John Butterfill in the Chair]Finance (No. 2) Bill(Except clauses 13 to
15, 26, 61, 91 and 106, schedule 14, and new clauses relating to the
effect of provisions of the Bill on section 18 of the Inheritance Tax
Act
1984)
Clause 30Temporary
increase in amount of first-year allowances for small
enterprises Amendment
moved [this day]: No. 60, in page 28, line 20 [Vol 1], leave out
‘12' and insert ‘24'.—[Julia
Goldsworthy.] 4.30
pm
The
Chairman: I remind the Committee that with this we are
discussing amendment No. 61, in page 28, line 31 [Vol 1], leave out
from ‘in' to end of line 32 and
insert ‘2006-08
or financial year 2006 and
2007.”.'. Julia
Goldsworthy (Falmouth and Camborne) (LD): Amendments Nos.
60 and 61 are probing amendments dealing with the proposed changes to
the time scale to which the increase in the amount of allowance for
small enterprise applies. Clause 30 proposes to increase for one year
the first-year capital allowance for spending by small businesses from
40 per cent. to 50 per cent. The amendments propose to
increase that time to two years.
I seek the rationale behind the
Government’s decision to propose the increase for only one year.
I should be interested to know the Minister’s opinion on how
capable small businesses are of responding to relatively small and
rapid changes. If the changes proceed as proposed by the clause, that
will represent year-on-year change in the capital allowance for four
years. I have received many representations expressing concern that
that uncertainty will undermine business confidence about how the
allowances can be used. Has the Department assessed how such a small
temporary change will affect small businesses’
behaviour? Mr.
Brooks Newmark (Braintree) (Con): Does the hon. Lady share
my earlier concern that the Government are dealing with the issue
wrinkle by wrinkle? What the Government really need is a major facelift
in dealing with the issue of R and D tax credits. They should use a big
bang, rather than doing things slowly and one by
one.
Julia
Goldsworthy: The issue is whether the Treasury decided
that it wanted creases down the front or not. It seems to keep changing
every year.
I know that
the Minister does not particularly approve of the report referred to
earlier, which was undertaken for the Institute of Chartered
Accountants in England and Wales by the Manchester and Nottingham
business schools. The report examined the role of tax incentives in
capital investment and expenditure. Looking specifically at the capital
allowance issue, the report found
that “if
it is intended that the capital allowances regime should provide
positive incentives to increase or accelerate the level of investment
in capital, this is not being achieved. Capital allowances, with the
exception of some generous investment incentives such as those for
environmentally friendly investment, are too small to influence the
expected payoffs from the
investment.” The
Minister has already expressed his concerns about the small scale of
the study, and other hon. Members have referred to it as a focus group.
Does the Treasury know whether the businesses claiming such capital
allowances are aware of the fact that the capital allowance has
increased and select it, or do its figures showing take-up of the
scheme actually reflect small businesses that have already made a
business investment decision and then look to see what allowances are
available? It is
doubtful that capital allowances accelerate investment. Any further
uncertainty would undermine
it. Mr.
Mark Hoban (Fareham) (Con): I welcome you to the Chair for
our proceedings this afternoon,Sir John. Those of us on the
Conservative Benches look forward to serving under your chairmanship. I
am sure that you will ensure that the business of the day proceeds as
smoothly as it did this
morning.
Mr.
Hoban: The hon. Gentleman tempts me down a route of
metaphor that I do not wish to exploit further. We had too many ironing
metaphors this morning for me to risk continuing with that train of
thought. [Interruption.] I know that the Economic Secretary to
the Treasury is getting excited because he is on the next chapter of
the Bill, but it might be better for him if he can just control himself
for a moment and hold his firepower for that stage—I should like
to give him that advice from the Opposition side.
I want to
comment briefly on clause 30 and pick up on the point that the hon.
Member for Falmouth and Camborne (Julia Goldsworthy) made about the
fluctuating fortunes of the rate of first-year allowances. It is worth
remembering what has happened since 1998. From 1998 to the fiscal year
2003-04, first-year allowances were 40 per cent., and there was a nice
period of stability, but in 2004-05 they went up to 50 per cent., in
2005-06 they went down to 40 per cent., in 2006-07 they will be at 50
per cent., and in 2007-08 they will go down to 40 per
cent. The hon. Lady
suggested that the 50 per cent. rate should continue for two years.
However, if small businesses are to expand, invest capital and take on
some of the challenges that have been discussed in the debate, they
need some stability and predictability in the first-year allowance
rate. How can a business plan confidently for the future, taking into
account the incentives offered by the Government, if it is difficult to
predict the level of first-year allowances from year to
year? Will the Minister therefore give some indication of the
Government’s thoughts on how long the 50 per cent. rate will
continue and when there will be stability on first-year
allowances?
The
Financial Secretary to the Treasury (John Healey): I
welcome you to the chair, Sir John, and I look forward to serving under
your chairmanship again. The clause increases the rate of first-year
capital allowances for small businesses from 40 to 50 per cent., for
one year from April 2006. It is designed to assist the cash flow of
small businesses and to provide enhanced funding for new
investment. The
hon. Member for Falmouth and Camborne addressed the amendments that she
has tabled as probing amendments and she cited again the Manchester
business school survey that was commissioned by the institute. However,
although the study sample was larger than the one that we discussed
this morning, it was still based on interviews with only 20
respondents, which is not a terribly strong basis on which to determine
important policy. Its findings do not contradict the fact that
first-year allowances provide a valuable cash-flow boost to small
businesses. The
purpose of the hon. Lady’s amendments is to extend to the 2007
financial year the increase in the allowances that the Government are
introducing inthe Bill. I remind the Committee that it was in
the pre-Budget report that we announced the package of changes of which
the proposal in the Bill is a part, and there was a considerable
discussion on other elements of the package in a Committee of the whole
House. The package includes the one-year increase in first-year
allowances for small businesses—an element that was introduced
in response to submissions from a number of bodies that represent the
interests of small firms. It was warmly welcomed at the
time. The
hon. Lady and the hon. Member for Fareham (Mr. Hoban) asked for an
explanation of the thinking behind the decision. Although we recognise
the value of certainty and stability in the tax system, we have to
ensure that the system is responsive to increasingly flexible and
global business pressures. That was manifest in the package of
announcements of which this proposal is a part and which was set out in
the pre-Budget report. The Government are committed to supporting small
firms, and we shall keep the options that may be appropriate for the
future under close review. In doing so, we shall try to ensure that
small business support is provided in the most effective way, but in a
manner that is consistent with a set of principles that could be
summarised as simplicity for businesses that comply with their tax and
legal obligations, support for small businesses that have aspirations
to grow and determination to maintain the attractiveness of the United
Kingdom as a business location. The amendments would tie our hands
rather than enable us to continue to work with business interests on
these factors.
I emphasise
that the changes in clause 30 were not only requested by business
organisations; they were also welcomed when we announced them. On 5
December, the Federation of Small Businesses
said: “We
welcome the small business measures and the simplification they will
offer, especially the corresponding increase in the level of capital
allowances that can be claimed by small businesses.”
On the same day, the Institute of
Directors
said: “The
replacement of the zero rate corporation tax by increased capital
allowances for small businesses was
welcome.”
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