Finance Bill (Second sitting)

Huw Merriman Excerpts

Thursday 17th September 2015 Public Bill Committees

[Barbara Keeley]

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.

[Huw Merriman (Bexhill and Battle) (Con)]

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?

[Barbara Keeley]

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.