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Investment Allowances

Volume 526: debated on Tuesday 6 April 1954

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I now wish to end, as I began, with our primary need: that is, to improve our competitive power. In my survey of last year I have already commented on the inadequate level of investment by private industry. Our rate of industrial modernisation is strikingly less than that of America, and it seems probable that the Germans are now moving ahead of us. We shall not long continue to compete successfully in the export field with these, our principal rivals, unless our plant and equipment is completely up-to-date.

In accordance with my pledge last year, I have reviewed the whole question of company taxation. I have tried to devise some fresh encouragement to industry to put money into productive investment. This is the more essential since the physical and financial resources at our disposal are now sufficient to allow a substantially higher rate of investment than we are undertaking. Last year I restored the initial allowances to 20 per cent. This was a step in the right direction, but a limited one, since its effect is essentially that of an interest-free loan. As the cash resources of companies increase, this incentive becomes of less importance.

After considerable reflection, therefore, I have decided to take a further step, and to replace, subject to a few exceptions, the present initial allowances by a new system, which I call investment allowances. At present, the cost of investment in plant, machinery, industrial building or mining works may be offset against gross profits during the life of the asset by means of depreciation allowances. The initial allowance merely anticipates a part of the annual allowances, so that tax liability is less in the year in which investment takes place, but may be larger later on.

The new investment allowance will do more. It will give a tax-free allowance equal to a part of the cost of investment in the assets which I shall describe as qualifying for it. It will be given in addition to the full annual depreciation allowances. Thus, the initial allowances gave some extra help in the year in which the investment was undertaken, but at a cost of smaller allowances for that investment in later years. In contrast, the new investment allowance gives similar help in the first year, but with no reduction in subsequent allowances.

In general, the field over which the new investment allowance will operate will be the same as that of the initial allowance, which applies to plant and machinery generally and to new industrial buildings and mining works. But in view of the purpose of the new allowance, which is to encourage fresh investment, and of its nature, which is to give a tax-free allowance over and above the cost of the qualifying assets, there must be both additions to, and deletions from, the initial allowance list.

I propose that agricultural buildings and also plant and buildings used for scientific research, neither of which attracts initial allowances, shall rank for the new investment allowance. Investment in up-to-date buildings can assist farm production no less than industrial production, and the importance of scientific research to our economy can hardly be over-estimated. The new allowance should also help the shipping industry to carry out the big replacements which are necessary in the years ahead, and thus to maintain its vital contribution to our economy.

On the other hand, I do not think that this tax-free benefit should be available either for secondhand plant or machinery which does not represent new investment, or for ordinary motor cars which can and often do serve both business and private purposes. These assets will, however, continue to rank for the existing initial allowance at 20 per cent.

I propose that the new investment allowances shall apply, in the case of qualifying assets, to capital expenditure which is incurred—that is, which becomes due and payable—after today. In respect of expenditure on such assets, the initial allowance will in general cease from today. The rates of investment allowance will be 20 per cent, for expenditure on new plant and machinery and new mining works and new scientific and research work, and 10 per cent, for new industrial and agricultural buildings.

For plant, machinery and industrial buildings, these are the same as the existing rates of initial allowance, but they will be more favourable in the long run. The 20 per cent, investment allowance for mining works is not immediately so favourable as the existing initial allowance of 40 per cent. But since it will be given over and above allowances up to the cost of the works, it will practically always be better in the long run. However, I will allow any mining undertaking to choose between the new investment allowance and initial allowances at the 40 per cent. rate. There will have to be provisions safeguarding the new allowance from abuse. But these and other details must wait for the Finance Bill.

The cost of changing from initial allowances to investment allowances will be negligible in 1954–55, and about £4 million in 1955–56. Thereafter, the cost will increase year by year, and although the actual amount will, of course, depend on the level of new investment, I expect it to reach a considerable figure in the future. But in so far as this new allowance succeeds in its object of creating additional assets, those assets will, of course, be yielding additional revenue for the country, for their owners and for me.