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Election For Certain Machinery Or Plant To Be Treated As Short-Life Assets

Volume 82: debated on Wednesday 10 July 1985

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I beg to move amendment No. 155, in page 53, line 4, leave out '1986' and insert '1984'.

This amendment is designed to bring forward the date on which the new capital allowance treatment for short-life assets comes into force from 1 April 1986. The Government have accepted that short-life assets require a special regime, and I applaud the measure they have brought forward. It will allow the taxpayer to elect within two years of the purchase of the asset for the asset to be treated as short life and he would therefore be entitled to receive a balance allowance or suffer a balancing charge if he disposed of his acquisition.

The amendment would apply this treatment to all assets from the time that the 100 per cent. first-year allowances for machinery and plant were withdrawn rather than waiting until only the 25 per cent. reducing balance annual allowances were available. It has to be remembered that depreciation starts when the asset is purchased.

The second effect of the amendment is that it would help ease the dip in capital allowances during the transitional period from the old 100 per cent. first-year allowance system. The bottom of the dip is in 1986–87. If the commencement of the short-life treatment is brought forward from 1 April 1986 to 1 April 1984, some balancing allowances will occur in 1986–87 and reduce the dip, making it less deep. Even if the balancing allowance occurs before 1986–87, it will improve the company's cash flow and help it cope with the dip that much better.

The amendment is an ameliorative measure and I hope that it will appeal to my hon. Friend.

The amendment makes me suspicious, but I am not entirely sure why. I want to make sure that I have understood exactly what is being proposed.

Clause 55 gives a certain exceptional treatment to short-life assets and in many ways the amendment results from what happened last year and the problems arising from the 1984 Budget taking away capital allowances.

The improvement in capital allowances for short-life assets applies at present to expenditure incurred after 1 April 1986, and that is when first-year allowances will be phased out. The amendment would bring forward the date to April 1984, and that would be the start of the phasing-out period and not its conclusion.

In a perfect world it would mean that the exemption of short-life assets from the provisions of last year's Budget would be given from the moment the first-year allowances started to be phased out rather than there being somewhat of a hiatus between April 1984 and April 1986. If the election for certain machinery to be treated as short-life assets and the preferential treatment given to them can only be given after 1 April 1986, there is the period between April 1984 and April 1986 when the first-year allowances are being phased out and the treatment of short-life assets will not be as good as it will after 1 April 1986.

I always approach amendments tabled by the hon. Member for Tatton (Mr. Hamilton) with an extremely open mind. I always assume that they will fairly distribute the burden between the taxpayer and the Revenue. But my hon. Friends behind me who have greater experience than I in these matters tell me to be more cautious. I should like to ask the Financial Secretary — it may be that the hon. Member for Tatton will deal with it when he comes to press or to withdraw his amendent — whether the difficulties of administration with this type of amendment would not be considerable. There would be every opportunity going back to 1 April 1984 for elections to be made in circumstances where perhaps there was a very much greater burden on the Revenue than might otherwise have been thought.

I cannot see that the amendment will be of much value. In the period from 1 April 1984 to 31 March 1985 a taxpayer could get an allowance of 75 per cent. on the asset which he acquired. Therefore, of what value will the amendment be?

Between now and 1986 the amount that could be claimed will not be 75 per cent. but less than that — 50 per cent. this year. If the date were put back to April 1984, a taxpayer could take full advantage of the relief under clause 55 back to April 1984. Therefore, the amendment would bring taxpayers an advantage.

The difficulty with the amendment is that it appears to be open to potential abuse, but the Financial Secretary will no doubt give us the answer to these conundrums.

I am a little suspicious, because we have already had a similar amendment from the hon. Member for Tatton (Mr. Hamilton). He is a charming man, but I am suspicious of him on financial matters. I do not trust him — I mean that in the kindest sense. I am not suggesting that he is dishonest, but I do not understand his motives.

It is precisely because we understand the hon. Gentleman's motives that we are suspicious. Conservative Members represent the rich and the idle rich. We know whom they represent and what their motives are.

I am a gentle person, and I am not prepared to go as far as my hon. Friend the Member for Wrexham (Dr. Marek).

We are discussing bringing forward the date when short-life assets can be paid. The hon. Member for Tatton suggested that that would apply to all assets where the 100 per cent. capital allowances have been withdrawn. He talked about the improvement in companies' cash flows, and clearly the amendment would achieve that. One can see why companies would like to claim their allowances earlier because of the obvious consequences in that respect.

I feel that there is something behind the amendment which the hon. Gentleman did not fully describe. Will the Minister explain fully the consequences of the amendment to business in terms of money from the Exchequer? Would the amendment be particularly beneficial? Finally, what scope exists for abuse?

I shall respond quickly to the question of cost. It is always the Treasury's unfortunate task to put cost on to the record. The cost would not begin until 1987–88, when it would be £10 million. In 1988–89 it would be £50 million, in 1989–90 £70 million, and thereafter there would be a saving on present costings.

Although I shall not go into the underlying strategy of the capital allowance changes — we may have an opportunity for that later — it may be useful to remind the House that from April 1986 the capital allowance system for machinery and plant will be based on a pool of expenditure, attracting an annual allowance of 25 per cent. on a reducing balance basis. That will enable most business equipment to be written off over a period, but on average it will more than fairly reflect its useful life. We recognise that, for those assets which depreciate much more quickly than the average, something more is needed, and the Chancellor of the Exchequer announced the new de-pooling arrangements which we now know as clause 55. According to advice from my Revenue officials, we do not see much problem in terms of additional administration. Despite the suspicions of Opposition Members, we do not see the problems of potential for abuse — as opposed to the cost, which is quite a different question — or excessive administrative difficulties.

10.30 pm

I think the hon. Gentleman will appreciate the point when I go through the arithmetic. It is clear that there is a modest advantage entailed.

My hon. Friend the Member for Tatton (Mr. Hamilton) talked about the dip — the point raised by the CBI. I refer to it in the context of the CBI's reference, as opposed to endorsing the concept of a dip. As my hon. Friend will know, there will always be difficulty in any period of transition where major change is enacted. The Government were very conscious of that in 1984, when framing the capital allowance proposals to give assistance specifically during that transitional period. Therefore, the Government advanced, first by one year, the pattern of reduction in corporation tax rate. Clearly, the reduction in rate will benefit the company sector. Those are factors which have to be taken to the other side of the ledger. Equally, we are making those changes at a time of greatly improving corporate profitability and liquidity, which is an important factor in relation to the proposal.

The option to de-pool assets is to be an integral part—this is the point that the hon. Member for Sedgefield (Mr. Blair) was making—of the new capital allowance system and not part of the old one, which does not come to its end until 31 March 1986. In the period from March 1984 to 1985, expenditure on business machinery and plant attracted a first-year allowance of 75 per cent., and in the period April 1985 to March 1986 it attracts a first-year allowance of 50 per cent. It is only from April next year that, for businesses generally, first-year allowances disappear altogether, and the new system, including the refinement for short-lived assets, is fully in place. As opposed to what my hon. Friend the Member for Beaconsfield (Mr. Smith) said, I know that my hon. Friend the Member for Tatton will appreciate the details of the impact on company investment during the transitional period.

In 1984–85, with a 75 per cent. first-year allowance, the company's investment is written down by 82 per cent. in just two years, almost to residual value. In 1985–86, the second transitional year, with a 50 per cent. first-year allowance, within three years nearly three-quarters of the initial cost will have been written off for tax. Against that background I do not see any case for bringing forward the starting date for just one element in the new system. The new system is an integral system. I hope that my hon. Friend the Member for Tatton, having probed the matter, will not press his amendment.

If there is any suspicion relating to my hon. Friend the Member for Tatton (Mr. Hamilton), that suspicion relates also to me, as I signed the amendment.

The Minister referred to the cost to the Exchequer. Will he agree that it is only a cash flow loss and nothing whatever to do with loss of revenue, and that my hon. Friend is only trying to give a cash flow advantage?

My hon. Friend is right. That was the whole nature of the debate, in which so many of us have been involved, on capital allowances. It is a debate relating to cash flow. The amendment, in the names of my hon. Friends the Members for Tatton and Croydon, South (Sir W. Clark) seeks to assist what they see as the particular problem of British industry. In the Government's judgment, we have covered the problems in the transitional arrangements.

As my hon. Friend has vindicated my character and allayed the suspicions of Opposition Members, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made:

No. 35, in page 54, line 23, at end insert—

'(5A) If, at a time before the notional trade would otherwise be permanently discontinued for the purposes of section 44, the short-life asset begins to be used otherwise than for a qualifying purpose, within the meaning of section 64 of the Finance Act 1980 (leased assets used for certain purposes) and the occasion of its beginning to be so used falls within the requisite period, within the meaning of that section, then at that time—
  • (a) the notional trade shall be treated as permanently discontinued but no balancing allowance or charge shall be made to or on the trader by reason thereof, and
  • (b) the amount which, apart from this subsection, would be the trader's qualifying expenditure for the chargeable period in which, or in the basis period for which, the asset began to be so used shall for the purposes of section 44 (as it has effect in accordance with section 65 of the Finance Act 1980) be added to the trader's qualifying expenditure for that chargeable period in respect of the separate trade referred to in subsection (2) of the said section 65.'.
  • No. 36, in page 54, line 24, leave out from 'if' to 'the' in line 25 and insert

    'at a time before the notional trade is permenantly discontinued for the purposes of section 44.'.

    No. 37, in page 54, line 43, leave out 'and this subsection'.— [Mr. John Moore.]