Nigel Mills
Main Page: Nigel Mills (Conservative - Amber Valley)Department Debates - View all Nigel Mills's debates with the HM Treasury
(13 years, 6 months ago)
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Mr Hanson
The hon. Gentleman will know that there are many challenges across the board, and manufacturing is always going to be a changing, moving field. In my area of north Wales, for example, manufacturing grew quite dramatically. In my constituency, we make the Airbus aeroplanes, which you will know very well from your constituency in Bristol, Ms Primarolo. That has been a major growth industry, in partnership with Government investment, Government backing for investment and Government loans and grants to help to grow the private sector and create jobs. The people who have those jobs then spend their wages in the local economy, creating further jobs in shops and in other manufacturing areas across the board. It is therefore an ever-changing field.
I have tried to make it clear to the Minister that we support the general direction of travel on cutting corporation tax, because we do not want the UK to be uncompetitive with our neighbours. In our discussion on clause 4, I was simply seeking an assessment of how the Minister will measure the success of the provision, because we will be forgoing a considerable amount of resource and we will need to measure a success that we do not yet know. The proposal on capital allowances goes hand in hand with the proposal on corporation tax. We will be paying for that cut in part with a major slashing of investment allowances by £2.6 billion under these proposals. Again, I am simply asking for an ongoing assessment of the impact of the measure, because it might work and it might not. I fear that cutting the allowances will lead to a lack of investment, a lack of growth and a further reduction in the manufacturing industry that the hon. Member for Finchley and Golders Green (Mike Freer) is seeking to protect and develop. I want to test the Minister on these issues so that he can justify to the Committee why he is making these cuts.
Nigel Mills (Amber Valley) (Con)
The right hon. Gentleman is making an interesting case. Would he care to comment on whether any work was done by the previous Government when the capital allowance rate was reduced from 25% to 20% to determine whether that cut had the kind of damaging consequences that he now envisages with the cut to 18%?
Nigel Mills
It is with a small amount of pleasure that I rise to speak about tax issues, having spent 13 years advising companies on them, mostly under a Labour Government. It was kind of the right hon. Member for Delyn (Mr Hanson) to mention my two former employers and the various comments that they have made, which I happily endorse.
I want to comment on the request for a review of the proposed reduction in capital allowances partly because I think that we are in a strange position overall. The purpose of capital allowances is to give businesses tax relief on their capital investment in order to encourage them to invest in plant and machinery. We used to try to encourage them to invest in industrial buildings and factories, but we have stopped doing that now.
The attraction of the capital allowance system used to be the ability to incentivise people by accelerating tax relief. Forty years ago someone who invested in a piece of equipment with a 10 or 15-year useful life could accelerate the tax relief on it quite far in advance of the overall spread of its useful life, but I am not sure that that is where we are now. How many businesses in our constituencies will invest in equipment when they are not certain that its useful life will be even 10 years? If they expect it to be five or six years, the present mechanism will not work at all.
A simple calculation will show that, given an 18% writing down rate, an investor will still not have received tax relief on 30% of his investment in a piece of equipment. After eight years, he will still have not have received 20%. He may anticipate a fairly large residual scrap value if he can sell the equipment on, but that is on the assumption that a good deal of its useful life remains, and I am not sure how realistic that assumption is.
If we are to have a review, let us review the whole capital allowance system to establish whether it is really giving businesses an incentive to invest. Perhaps we should have a look at what they are actually doing in their accounts. The right hon. Member for Delyn mentioned that. What is the useful life over which they are writing off assets? I think that we may be adding a huge amount of complexity to the system by preventing all the businesses in the country from employing actual accounts depreciation for this purpose, and requiring the creation of a capital allowance pool requiring all the assets to be tracked separately. In the past it was said that businesses were receiving a tax incentive, but this huge and unnecessarily complex system may have an adverse impact on them. Our review should ask whether the capital allowance regime is the right one.
Later—not today—we will come to clause 12. The Government have responded to some lobbying, and have recognised that it will cause huge problems for manufacturing business in particular. The clause proposes that the lives of short-life assets should end after eight years. Someone who invests in equipment whose life he expects to be less than eight years will have to make a separate election to treat it as a short-life asset rather than putting it in his main capital allowance pool. He can try to obtain the tax relief over the eight years; otherwise, as I have said, he will still have 20% unrelieved. We are building additional complexity into the system, and I am not sure that that is necessary.
The Bill contains various responses to businesses that are trying to find ways around the capital allowance rules. Clause 33, for instance, proposes anti-avoidance rules for long-funding finance leases. Year in year out, we see new and complex rules intended to prevent businesses from getting around the rules. Sometimes they are trying to obtain extra deductions to which they are not entitled, and sometimes they are trying to find ways of receiving a deduction over the period for which they think they should receive it.
If we are to be a tax-simplifying, tax-reforming Government, perhaps the Office of Tax Simplification could conduct a review of whether the capital allowance is still fit for purpose, and whether it is the right way to attract business investment over the next 10 or 15 years. Should we, in fact, try to find a way out of it, and adopt a system that allows businesses simply to look at their accounts to be eligible for some kind of tax relief, rather than having to adjust the depreciation for those assets? I know that that too will be complex, because there will be a huge hangover from the existing system, and there will be problems when people try to accelerate relief over far too short a period. However, I think that all those problems can be addressed, and that we shall be able to stop increasing the complexity of the system.
I cannot vote for the amendment, because I think that it is merely an excuse for a debate. If we are to have a review, let us have a proper one.
Nigel Mills
If we want a competitive corporate tax system, the tax rate is key. However, we probably need to examine four things, which include the tax base, as the hon. Gentleman said, and the complexity, stability and predictability of the system. We are in danger of just ticking the first box; I am not sure we are ticking the tax-base box well with this approach, and we are adding extra complexity. Many regimes around the world do not have capital allowances but do let businesses take the depreciation that they see in their accounts. That is a far more attractive, simple and predictable system, because businesses would not think, “I might invest in this piece of equipment, but they might reduce this to 15% in three years’ time and my relief suddenly starts to look different.” As the hon. Gentleman was trying to say, this involves a combination of things. We need to get not only the rate right, but the base and the underlying system right; we will not get all the advantages from simply reducing the rate.
However, for most businesses the first headline comparison is about the overall tax rate, so that is the main thing to focus on. I am not going to vote against this rate reduction. Paying for the reduced rate partly by reduced capital allowances is the right way to go in this financial situation, but we need to go in the direction of simplifying our incredibly complex corporate tax system. We can all work out the statistics by saying, “When I started work 13 years ago, my tax legislation was so big and when I left a year ago it was much bigger, and I have not even got the VAT and inheritance tax book.” We can look at how many schedules on income—actual capital—we have and consider how many of them we actually need. The capital allowance regime is part of that problem, because it was written 50 or 100 years ago, when it actually worked. A lot of these things are out of date, so we must look to simplify things if we want to ask businesses to invest. I am not sure that they are going to worry about whether something is at 18% or 20%, but they do want tax relief for their investment over the useful life of their asset provided in a way that is simple for them to manage. I am not sure that we are anywhere near providing that at the moment.
A lot of my clients use the capital allowances regime to add flexibility to how they get tax relief in the years when they have profits and in the right entities in which they have profits. They will not entirely welcome my idea of simplifying this system and taking all that away from them. However, if we are to get a modern, competitive corporate tax system, it must be simple and easy to understand. It must also do what we want it to do: incentivise the investment that we desperately need to have a growing economy.
John McDonnell
I have a fair amount of sympathy with the hon. Member for Amber Valley (Nigel Mills), because if he ever wants to return to his former profession he may well find that he has lost a number of clients as a result of that speech.
The linkage between clauses 4 and 10 is inevitable, as my right hon. Friend the Member for Delyn (Mr Hanson) said from the Front Bench, because the corporation tax reductions are being paid for by these cuts in capital allowances. I do not want to upset the consensus that has emerged on the cuts in corporation tax, but I do not support them and believe that they will be an error in the long run. I address the issue of capital allowances in that context.
I am unclear as to what the Government’s strategy is on stimulating the economy to tackle the recession in a way that rebalances the economy. I thought that this was not just going to be a rebalancing between the public and private sectors. I listened to some of the statements made by the Chancellor and the Secretary of State for Business, Innovation and Skills about rebalancing the economy as between the finance sector and the manufacturing sector, which gained support across the House. We heard about the development of a manufacturing strategy that would enable us to have a balanced economy between the finance, manufacturing and service sectors, so that if there was a crisis in one sector, the whole economy would not collapse as a result of overdependence on that sector. However, these Budget measures seem to fly in the face of that balanced approach.
A number of methods can be used to re-stimulate the economy, one of which is tax cuts, including corporation tax cuts, as have been introduced in this Bill. Another method is the more directional approach of considering a form of tax cuts through the capital allowances, whereby the Government try to influence economic behaviour in a way they believe to be beneficial. The other method is to invest in largely capital expenditure through public services—I am talking about public investment.
Mr Gauke
Amendment 6 would require the Chancellor to publish by 31 October 2012 an assessment of the impact of the proposed changes to capital allowances on the UK economy, as we have heard. The amendment was tabled to clause 10, which reduces the rates of writing-down allowance on the main rate pool of plant and machinery expenditure to 18% and on the special rate pool to 8%. Before I deal with the amendment, I will explain the purpose of clause 10, which is key to the amendment.
Capital allowances allow businesses to write off their expenditure on capital assets, such as plant and machinery, against their taxable income. They act as a simple, statutory system in place of commercial depreciation. Capital allowances are given at different rates, depending on the year of investment and the type of asset acquired. The principal year-on-year allowance for plant or machinery expenditure is the writing-down allowance. The main rate is currently 20% per annum, and the special rate is 10%.
Both are calculated on the reducing-balance basis. We are making changes also to the annual investment allowance, in clause 11, reducing it to £25,000, as we have heard, and extending the short-life assets regime from four to eight years, in clause 12.
The changes announced last year, which are given effect by clauses 10 and 11, enable a reduction in the main rate of corporation tax, which will reaffirm Britain’s competitive tax system and support enterprise and growth. The right hon. Member for Delyn (Mr Hanson) was right to highlight the fact that this is part of a package. In his earlier remarks, the hon. Member for Edmonton (Mr Love) pointed out that this was a partial contribution. There is none the less a gap, and further funding has been found—from the bank levy, for example—which has enabled us to reduce the corporation tax rate.
We have already debated the benefits of reducing the corporation tax rate and we have returned to that topic to some extent in the present debate. I note that it does not have the support of all hon. Members, although it is supported by the Opposition Front-Bench team. It is helpful to repeat what was said by John Cridland, the director general of the CBI:
“The extra 1p cut in corporation tax will help firms increase investment.”
The objective is not just to reduce the amount of tax that companies pay, but to enable them to invest and grow businesses in the United Kingdom. I am pleased that that is welcomed throughout much of the Chamber.
Our initial assessment of the package as a whole suggested that that would lead to an additional £13 billion of business investment by 2016 by making the cost of capital investment cheaper. The additional reductions in corporation tax rate and the extension of the short-life assets regime will help to increase further the levels of investment by business. We estimate that the overall effect of these measures will be to reduce the tax liabilities of the manufacturing sector by around £700 million by 2015. The changes to the rates of writing-down allowances do not mean that businesses will not continue to receive full tax relief for their investments in plant and machinery. Rather, the relief will be over a slightly extended time frame.
Let me give an example. Where it would have taken 11 years under the current rate to write off more than 90% of the cost of a machine, it will now take 12 years. Meanwhile, the rates will continue to align broadly with average rates of depreciation across the economy. This does not mean that we intend to remove capital allowances in favour of pure accounting depreciation.
On the issue raised by my hon. Friend the Member for Amber Valley (Nigel Mills), the previous Government did consult in some detail on their reform of corporation tax between 2002 and 2004. I am sure you remember it well, Ms Primarolo. The business response to that consultation was strongly in favour of retaining capital allowances. It was argued that capital allowances provide certainty and a level playing field, with the same rates of allowances applying to all. The flexibility of the system allows the pooling of expenditure and the ability to claim less than full allowances, depending on the individual’s business circumstances. My hon. Friend set out the case for a different approach to capital allowances. He brings great expertise on the matter and there is ongoing debate, but we do not intend to reopen discussion of that point.
Nigel Mills
I am grateful to my hon. Friend for reminding me of that study from almost a decade ago. I gently point out to him that the rate of capital allowances was quite a bit higher at the time of the study. If he did the same exercise now, he might get a slightly different answer.
Mr Gauke
Again, my hon. Friend raises an interesting point. We look forward to receiving any representations that he may wish to make on that. He is right to say that the rate of capital allowances has changed since 2004, and he highlighted in an intervention the fact that the previous Government—as I am sure you will recall well, Ms Primarolo—reduced writing-down allowances in 2007, a point that my hon. Friend made to the right hon. Member for Delyn.
In response to those Opposition Members who raised their concern about the approach that the Government have been taking, I point out the approach taken by their Government in the previous Parliament, when they were all Members of this place. Whereas we are reducing the writing-down allowance from 20% to 18%, the previous Government reduced it from 25% to 20%. In our case that is a contribution towards reducing the main rate of corporation tax from 28% to 23%. The previous Government reduced it from 30% to 28%. Ours is a much more generous package for business and as a consequence a much better package for manufacturing than that contained in the 2007 Budget, where essentially the entire reduction in corporation tax from 30% to 28% was paid for by the reduction in the writing-down allowance from 25% to 20%.
On amendment 6, the Government are fully committed to providing greater transparency on the impact of tax measures. I am sure Opposition Members have examined the tax information and impact notes that we published on 9 December relating to clauses 10 and 11, and the additional note that we published at Budget in relation to clause 12. It is clear that there is no need to publish a report into the impact of the capital allowances changes. We have provided a great deal of detail already, but for those hon. Members who have not had the opportunity to read the published notes, let me provide a brief summary.
The note states:
“The OBR assessment of the package was that the cuts in CT”—
that is, corporation tax—
“rates more than offset the reductions in investment allowances”,
and that the businesses affected
“will benefit from related reductions in the rates of CT.”
As I said earlier, we expect the overall effects of the cuts in corporation tax rates and capital allowances changes to lead to an additional £13 billion of investment, and the additional changes to increase that further.
Although this is not strictly in scope, as the amendment is to clause 10, I hope I may be allowed to make a few comments about the other changes to capital allowances in the Bill, to which we shall return in Committee upstairs. The reduction in the annual investment allowance to £25,000 is estimated to affect between 100,000 and 200,000 businesses. As the tax information and impact note clearly states, however:
“The CT reform package will promote higher levels of business investment than would otherwise have been the case.”
Further, more than 95% of businesses in the UK will be unaffected, as the qualifying capital expenditure will continue to be completely covered by the annual investment allowance, so companies, be they small, medium or large, will benefit from the CT cuts, including the cut in the small profits rate in clause 5, while most unincorporated businesses, which by their nature tend to be the smallest businesses in the economy, will still have their expenditure covered by the annual investment allowance.