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Let me cite an example. A farmer in my constituency used to leave his cattle out for a large part of the winter because a disused quarry on his land was a particularly good place in which do so. Environmentalists discovered rare plants in that quarry and said that they would love him to move the cattle out of the quarry over the winter and put them in a building. Given that he was moving up to higher level stewardship, he invested some tens of thousands of pounds in new buildings. When he did so, he took account of the fact that he would receive the ABA, but now he will not. I urge the Chief Secretary to consider whether people who have made such investment should receive grandfather rights because the measure brings about unfair retrospective taxation.
Stewart Hosie: Hon. Members have made incredibly valid points. The hon. Member for Stroud (Mr. Drew) mentioned the dairy industry. We have heard about the situation facing tenant farmers who have no rights to their properties. We have also heard the key point that many structures covered by the allowance will depreciate in value from day one, even if a landowner has the rights to them. That point was glossed over in Committee. Hon. Members on both sides of the House have argued strongly that the matter should be considered again.
I want to make a point about the industrial buildings allowance, as I did in Committee. The change to that allowance will have an impact on the tourism sector. When we had a brief debate in Committee about investment in hotels, the Chief Secretary rightly said that things are not the same as they were in 1978, which was when the allowance was first introduced. It is worth reiterating that in the light of a conversation that I have had since that debate.
Things have changed since 1978 because the market for city breaks, long weekends and short breaks is now huge. There are places in the UK that were not tourist destinations even 10 years ago, let alone 20 or 30 years ago. Restaurateurs and hoteliers, especially, wish to invest in such areas so that they can provide the correct quality of offering to allow their businesses to compete in such a massive market. I raise that point because much of the tourism and hospitality sectors, as well as large parts of the farming sector, especially the dairy sector, are made up of businesses with incredibly low margins.
In Committee, the Chief Secretary cited alternative allowances that will be made available, especially for the tourism sector. I discussed that with friends in the hospitality sector, including an ambitious hotelier who is determined to drive up the quality of his establishment so that it becomes a destination for the city-break market. He requires the IBA to assist him to invest, given that margins are tight and the costs are high. When I told him about the other allowances that might be available to help him to deliver what he wants for his business and the area, he just laughed. The new allowances go no way towards taking the place of the IBA to assist the kind of projects that such ambitious hoteliers and business men wish to put in place.
I hope that the Chief Secretary takes on board all the comments made during the debate, especially about the removal of the IBA from those in the tourism sector. The measure will have an impact on my constituency. The removal of the ABA will have an especially large
impact on the dairy sector. As we know, that sector has been absolutely hammered due to the squeezing of margins. I am sure that the constituent of the hon. Member for Stroud thought long and hard about making his investment. I hope that his business manages to survive and that the Government will consider how to deal with the situation, whether through grandfather rights for existing investments, or a more fundamental rethink about changes to the IBA and ABA.
Mr. Mark Hoban (Fareham) (Con): I do not wish to go over all the ground of tonights debate and the quite extensive debate in Committee. The comments by my hon. Friends the Members for South-East Cambridgeshire (Mr. Paice) and for Hexham (Mr. Atkinson) and the hon. Member for Stroud (Mr. Drew) demonstrate the importance of Report stage on the Floor of the House, during which people with constituency experience can make powerful points on the impact on their constituents of changes announced in the Budget.
No one can argue that the system of capital allowances can remain unchanged for ever. When my hon. Friend the Member for Tatton (Mr. Osborne) announced before the Budget our plans to cut corporation by 3p, he said that some reform of the system was needed. However, I believe that where significant changes are made, there should be proper consultation with the people who are most closely affected. The reliefs that we have been discussing are valuable; the Red Book indicates that the saving to the Treasury from the 1p reduction in IBAs and ABAs in the 2008-09 financial year will amount to approximately £250 million. Only 13 per cent. of property qualifies for the two reliefs, so the benefit is concentrated on relatively small but important sectors of the economy. When such a significant change is made, it is important to consult, so that Ministers can understand the consequences more clearly.
In Committee, the Chief Secretary did not give me the impression that the changes had been fully thought through. Now that we are moving to a period of more open and consultative government, perhaps the Treasury should start thinking more carefully about such matters. In Committee, the right hon. Gentleman said:
it is not customary to consult on changes in rates of taxation or on the reduction or removal of tax reliefs. [Official Report, Finance Public Bill Committee, 22 May 2007; c. 292.]
In fact, the Government had launched a consultation on the future of corporation tax. In its representations on the changes, the British Property Federation referred to the consultation document on capital allowances that had been published, and to the conclusions of that process. The federation pointed out:
In fact, the consultation actually highlighted the lack of tax relief for most taxpayers expenditure on business premises which is regarded as putting the UK at a competitive disadvantage to its competitors.
There was general support for a commercial buildings allowance, incorporating the current Industrial, Hotel and Agricultural Buildings Allowances.
During the consultation that took place only a couple of years ago, strong support was expressed for the existing system of allowances. Given that support, it is even more important that the Government should have consulted properly, instead of rushing to cobble together a package in response to my hon. Friend the shadow Chancellors proposal of a cut in corporation tax.
Mr. Timms: Will the hon. Gentleman clarify that point? I do not think that there was support for the current system of allowances. There was support for a universal allowance for commercial buildings, but the present system, with its distortions and inconsistencies, did not attract wide support.
There was general support for a commercial buildings allowance, incorporating the current Industrial, Hotel and Agricultural Buildings Allowances.
There was therefore support for a wider allowance, but not for the abolition of the existing allowances. I am not sure what point the Chief Secretary is trying to make. There was support for a broader set of allowances.
My point is that, despite what the Chief Secretary said in Committee about it not being customary for the Government to consult on tax reductions and reliefs, they had already conducted a consultation on the future of corporation tax which indicated industrys views on particular allowances, so it seems strange that they did not consult before making changes that are significant to a number of sectors. In Committee, the right hon. Gentleman referred to the regulatory impact assessments produced for the annual investment allowance, saying that that might cover some of the same areas, but in a sense, the die had already been cast: the changes in the Finance Bill set in train a series of events that would lead to the abolition of these other allowances. Regardless of the rights and wrongs of particular allowances, there should have been consultation on the changes and it was wrong of the Government to proceed so quickly, without having thought through the points that had been made after the Budget was announced.
In Committee, the Chief Secretary argued that, despite the end of IBAs and ABAs, the tax system still contained recognition for those buildings, because repairs and maintenance could be offset against a companys profits in determining their tax charge. Of course that is truebut that also applies to other assets that qualify for capital allowances. That is therefore not an especially strong argument to deploy in connection with IBAs and ABAs. He also said that depreciation would be reflected through the capital gains tax calculation on disposal of the assets, but CGT also applies to the disposal of other assets that qualify for capital allowances.
Furthermore, as my hon. Friend the Member for South-East Cambridgeshire pointed out, holders of agricultural tenancies do not own the buildings, so if the buildings are sold, their investment will not be reflected in that process. The implicit relief that the
Chief Secretary referred to will not benefit them, because they do not own the buildings. They will gain no tax benefit other than in relation to the costs of repair and maintenance. In Committee, I mentioned representations that I had received from various people in the agricultural sector on the sums that had been locked up in unrelieved capital expenditure. Tenant farmers will find that particularly difficult now: they made the investment on the basis that the relief would continue, but it is being taken away from them.
The agriculture sector is not alone in being affected by the change. The hon. Member for Dundee, East (Stewart Hosie) talked about the hotel sector, and I know that Bob Cotton of the British Hospitality Association has gone to the Treasury to discuss the impact of the changes in capital allowances on the sector that he represents. Many hoteliers have invested heavily in new property in the expectation that the relief would continue.
Small businesses, too, are affected by the change. In Committee, it was argued that they will qualify for the annual investment allowance, but that applies to future investment; they will not benefit in respect of past investments. Small companies will be hit by the increase in the small business rate of corporation tax, and we know that the changes in IBAs, ABAs and other capital allowances have been used to fund the decrease in the mainstream rate of corporation tax, so many small companies face a double whammy: their corporation tax rate will increase, but they will lose the benefit of the industrial and agricultural buildings allowances.
The Government have got themselves into a real mess. They did not properly think through the impact on those sectors of the removal of the allowances and how it would affect those who had made investments. Tonight, the Chief Secretary must not just make the case again, but demonstrate that the Treasury thought the changes through and was aware of their effects on those important sectors. If he cannot make that case, many people will wonder how much thought goes into putting together a corporation tax reform package such as the one that the Chancellor announced in March. At the moment, the evidence suggests that the package was cobbled together rather hastily and was not well thought through.
Mr. Timms: Let me start by outlining the purpose of clause 35 and how it fits into the wider package of business tax reforms in this years Budget. The main feature of the package is the forthcoming reduction in the main rate of corporation tax from 30 to 28 per cent., giving the UK the lowest rate of corporation tax in the G7. The package of reforms to the business tax system is the most comprehensive for more than two decades, and it has three main objectives. The first is to maintain and strengthen the UKs internationally competitive position. The second is to encourage further growth in the UK economy through higher levels of investment, more efficient markets, and greater innovation. The third is to deliver a fairer result for the UK taxpayer, and a more efficient use of Exchequer resources.
I am grateful to the hon. Member for Falmouth and Camborne (Julia Goldsworthy) for quoting, I think correctly, what the Institute of Chartered Accountants
said about the measures being a balanced package. She also raised a number of concerns, which were repeated by other contributors to the debate, and I shall deal with them in turn. First, she asked about consultation. I want to emphasise that the allowances are not being withdrawn without prior warning, or without our giving people time to plan for the changes. The rate of writing-down allowances remains unchanged for this year, and it will be gradually reduced between 2008 and 2011.
The hon. Member for Fareham (Mr. Hoban) quoted me accurately on customary practice with regard to such changes: it is not customary to consult about changes in rates of taxation, or the reduction or removal of tax reliefs. There was consultation on corporation tax reform between 2002 and 2005, and that consultation explicitly recognised that limiting allowances to certain types of buildings, as currently happens, is a specific distortion affecting investment in property. The idea of a general commercial buildings allowance was mooted, but in all frankness I say to the hon. Gentleman that that would be prohibitively expensive. I am not sure whether he was arguing for such an allowance, but if every new building in the City, or in Canary Wharf, attracted a buildings allowance, even though buildings of that kind never have done so before, it would be hugely costly. One can understand why the property industry would favour a move of that kind, but it would be prohibitively expensive.
If one accepts the argument that it is a distortion for allowances to apply to some buildings and not others, the logical approach is to do what we have done, and to move, in a well managed and phased way, towards abolition. That is particularly the case given that most commercial and industrial property, and the land on which it stands, appreciates rather than depreciates in value, although we have heard about some exceptions. I think it is right to draw the conclusion that we drew: other reforms would be more beneficial to the UK economy than a commercial buildings allowance.
On manufacturing, I say to the hon. Member for Falmouth and Camborne that industrial buildings allowances account for only about 4 per cent. of the total capital allowances received by manufacturing, so I do not expect the withdrawal of the allowances to have widespread effects on the sector. Since the announcements, I have met representatives of the Engineering Employers Federation, who told me about the high degree of confidence in the manufacturing sector. Only about a third of all industrial buildings allowances are claimed by manufacturers, and on the whole those claims tend to be fairly small and are spread among a wider population. Of course, the cut in the main rate of corporation tax will stimulate domestic and foreign investment, and overall our analysis shows that there is a positive revenue impact on large manufacturers.
To pick up the question asked by the hon. Member for Fareham, a lot of careful analysis has gone into the judgments that lie behind the announcements in the Budget. The package is designed to promote investment and growth. Manufacturing firms which invest will continue to benefit from the new arrangements. The issue of small manufacturers was rightly raised separately, but they will be among the main beneficiaries of the new £50,000 annual
investment allowances. The increases in research and development tax credits for small and medium-sized enterprises, as well as for large companies, will also bring significant benefits for manufacturing.
The hon. Member for Dundee, East (Stewart Hosie) asked about hotels. We also had an exchange on the subject in Committee. He is right that it was in 1978 that the industrial buildings allowances regime was extended to qualifying hotels, in order to assist with the growth of UK tourism. I say to him today, as I did in Committee, that the position is now very different. It is difficult to claim that the situation for the tourism sector is such that exceptional allowances are required to support it. The sector is doing well and growth is strong, and I am delighted about that, but I really do not think that there is the case today that there was then for extending particular allowances to hotels.
Stewart Hosie: That is the same argument that the Chief Secretary to the Treasury made on the previous occasion. Not all towns and cities are established tourist destinations with high-margin, good-quality provision. Many locations, and cities in particular, are striving to get there. They still need investment in a market which is bigger than it was in 1978 but is highly competitive. The ability to fund the provision of quality services is key, and I ask him to consider that point.
Mr. Timms: The hon. Gentleman may well be correct that it is right that there should be geographically targeted regeneration help, not just in the hotel market but in other sectors, to assist the regeneration that all of us want. However, I suggest that there is no case for a generalised allowance for the tourism sector, although there was 30 years ago. In general, the sector enjoys high levels of profitability. The sector as a whole will derive significant benefits from the 2 per cent. cut in the headline rate of corporation tax. As I said to him in Committee, for smaller hoteliers, the annual investment allowance of £50,000 will be a significant incentive for investment.
My hon. Friend the Member for Stroud (Mr. Drew) and the hon. Members for Falmouth and Camborne, for South-East Cambridgeshire (Mr. Paice) and for Hexham (Mr. Atkinson) raised issues concerning agriculture. I say to them that the withdrawal of allowances is not an isolated measure. In the Budget, we announced cuts in the basic rate of income tax and the main rate of corporation tax. We also announced the new annual investment allowance, which is particularly important for small farmers. It is an allowance of £50,000 for business investment from 2008; that will be extremely helpful. It is possible that farmers who continue to invest will find that once the annual investment allowance is in place they will be better off as a result of the package as a whole, rather than worse off.
The Minister implies that a farmer who has already invested in a new building in the past few years and is unable to claim the 4 per cent. allowance can in future claim against the £50,000 allowance. That is not my understanding, and the Minister is indicating that I am correct. In that case, there is no succour for all those people who have investments on the ground now but cannot continue to claim the agricultural
buildings allowance. To be honest, to suggest that the £50,000 will help them is a distraction from reality, as they will be stuck with an investment for which they cannot claim any allowance.
Mr. Timms: The point that I want to underline is that farm businesses that have invested in the past and that continue to invest in future will benefit from the new annual investment allowance. In many cases, as a result of the package as a whole, they will find that they are better off, rather than worse off. I am not saying that that is the case for every farmer, but we are explicitly changing the system to provide additional incentives for investment.
The hon. Member for South-East Cambridgeshire made a particular point about tenant farmers. On the cessation of an agricultural tenancy, the tenant farmer, I am advised, is often compensated for building works on the land, although that depends on the terms of the tenancy agreement. In future, no doubt, agreements will be negotiated that reflect the tenants intended expenditure. We want to adopt a consistent approach that ensures fairness for taxpayers in all sectors. We have not adopted sector-specific measures: we have introduced arrangements that will apply across every sector, as that is the right approach.
Mr. Drew: May I make two observations? First, farming is different, as many farm buildings are specialised. With the best will in the world, a milking parlour cannot be converted into flatsit is a particular building on which a farmer makes an investment decision, considering the fact that it will depreciate in value over time. Secondly, to take up the point made by the hon. Member for South-East Cambridgeshire (Mr. Paice), the changes in tenancy law have resulted in more farm business tenancies. In some respects, tenant farmers are better able to get on to the land, but they may lose the advantage of not being subject to discrimination because they are unable, as a result of the shorter tenancies, to secure those benefits. We must consider the way in which we give those farmers incentives to invest in their business, otherwise they will never take it forward.
Mr. Timms: The point that I would make to my hon. Friend and to the House is that the new annual investment allowance will be an effective incentive. Farming and other businesses in his constituency, as he will know better than I, will continue to invest. I hope that as a result of the arrangements they will invest more than they would otherwise invest. If they continue to invest and benefit from the new allowance, they may find that they are better off as a result of the package as a whole.
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