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Time When Capital Expenditure Is Incurred

Volume 82: debated on Wednesday 10 July 1985

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I beg to move amendment No. 32, in page 51, line 38, leave out `(3) and' and insert `(2A) to'.

It will be convenient also to take Government amendments Nos. 33 and 34.

During our deliberations in Committee we had a full and useful debate about the clause. There was agreement that it dealt satisfactorily with the majority of capital expenditure contracts even if the agreement did not extend to the exact size of the majority. I undertook further to consider points that worried hon. Members and interested parties outside the House. My hon. Friend the Member for Kettering (Mr. Freeman) also mentioned the point. The amendments represent refinements of the basic rules in the clause and are the result of that further deliberation. Amendments No. 32 and 33 are directed at a kind of construction contract which provides for payment to be made throughout the contract as predetermined stages or milestones are reached. Often, payment for a stage becomes due when an engineer or architect has certified that the work has been completed satisfactorily. Another common feature of that type of work is that the asset becomes the property of the taxpayer as it is built and before any certificate is completed — before an unconditional obligation to pay for that part of the work arises.

In those circumstances, when the event which brings about that unconditional obligation to pay comes about early in the new year—we have specified one month—it seems to us entirely reasonable to ensure that the capital allowances treatment conforms with the balance sheet treatment and that is what amendments Nos. 32 and 33 seek to do.

On amendment No. 34, we said in Committee that if we had evidence that the present period of three months allowed in clause 54(3) was not right, we should consider the matter again and return to it on Report.

Since then, we have discussed the matter with the Institute of Taxation and the CBI, and several reasons have been put to us as to why we should support the case that some extension is warranted.

The point has been made that credit periods are often expressed in days rather than months, and in periods of up to 100 days. A 100-day credit period would fall outside the present three calendar month period. It is not unknown for a credit period to begin to run from the end of the month in which the invoice is delivered. Where a three-month credit is measured in this way it, too, would be outside clause 54 as it stands. While acknowledging that the three-month period in clause 54 should deal with the vast majority of cases, several bodies have said that four months would clear the bulk of the residue so that any additional compliance costs as a result of this part of the clause should become truly insignificant. We think that there is a case for a small extension of the credit period and we are proposing an extension of one month. This is the basis of this series of interlocking amendments.

Amendments Nos. 32 and 33 deal with a different situation from amendment No. 34. As I understand it, they deal with the situation where plant, machinery or buildings are being made for the taxpayer and payments are made in stages. The amendment deals with a situation where the work might be completed in one accounting year but the liability to pay crystallises within the first month of the next year. That is particularly so in circumstances where an architect's or engineer's certificate is issued and that is the crystallising event. It often happens in commercial contracts, particularly building contracts. If the certificate is signed in the first month of the new accounting year, that enables the taxpayer to claim relief in the old year. In other words, it is a framework for the time when expenditure is incurred.

The other Government amendment is No. 34.

I should like to ask my hon. Friend the Member for Sedgefield (Mr. Blair) whether the Minister's explanation was adequate. I listened carefully to the Minister, and although he described the problem very thoroughly, he did not say how the amendment overcame the problems involving certificates of completion. Will my hon. Friend be asking the Minister to explain how these amendments do the job because we had a detailed discussion on this in Committee?

I am delighted to give way to the Financial Secretary if he wishes to give an explanation.

The amendment seeks only to give a modicum of flexibility at a key point where we have the particular problem of the unconditionality relationship. It gives a modicum of flexibility which might be quite important at the year end. That is the essence of what it does.

To try to flesh out what the Financial Secretary has said for the benefit of my hon. Friend the Member for Kingston upon Hull, West (Mr. Randall), the time when capital expenditure is incurred is essential in deciding when a claim for capital allowances can arise. The question is, at what point is that capital expenditure incurred? There can be situations where it is easy to say that the capital expenditure is incurred because the obligation to pay has become unconditional, but there may be circumstances in which it is more difficult to say that the obligation to pay has become unconditional, for example, where there is a series of stage payments and a certificate is required to be issued by an architect or engineer saying that the work is up to a particular standard. This amendment gives a little bit of leeway. It is difficult to pluck a figure out of the air, but the amendment has taken a one-month date and is saying that in the circumstances, where the certificate is issued within one month of the new accounting period, a taxpayer can still make the claim in respect of the old accounting period. That flexibility has been introduced.

We debated amendment No. 34 at some length in Committee from two different angles — first, the circumstances where the credit period allowed by the Government, which was a three-month period, may be unnaturally short and, secondly, the circumstances where the normal payment time might be less than three months and there could be some prospect of avoidance there. The Under-Secretary has extended the period so that we are dealing now with a period of four months rather than the original period of three months. That means that when credit is given up to a four-month period it is still, when the obligation to pay becomes unconditional, crucial to determine when the capital allowance can be claimed.

The difficulties that I raised in relation to this in Committee still remain. We are assuming that the credit period may be unnaturally extended, say beyond the four-month period, to allow avoidance. There may be circumstances where the normal credit period might be less than four months and, by allowing a four-month period, there would be avoidance.

I appreciate that the Financial Secretary has decided, on consideration, that such avoidance is a small possibility, but I should be grateful if he would respond to this point. I repeat what I said in Committee. We are trying to ensure that the credit period given is in accordance with normal commercial usage. Those words are used in a different part of the clause and I am still not entirely convinced that they could not have done this in a better way. I appreciate that these are difficult matters to judge.

The Minister has obviously taken account of the representations that have been made to give some sort of leeway in introducing the amendments. I hope that it will not be thought churlish if I contrast the ease with which perfectly sensible amendments may be introduced and representations from several parts of industry can be listened to when we are discussing such things as capital allowance with the less than listening Government who dealt with some of the matters about which we were talking yesterday. I am thinking in particular of what my hon. Friend for Birmingham, Hodge Hill (Mr. Davis) said about work-place nurseries.

I appreciate that the Government have to pay attention to the representations that have been made, but one sometimes wonders whether the Government do not pay more attention to representations from certain quarters than they do to representations from other quarters. If the alacrity with which the difficulties relating to capital allowances for companies have been dealt with was transferred across the broad spectrum of taxation problems, we might have a much more efficient and equitable taxation system.

I am still not happy with the answer that the Financial Secretary gave. I am sure that he has attempted to do this in the best possible way. The answer to the tripartite discussion that we had is that the Government have introduced a modicum of flexibility. We are talking about completion dates for construction contracts, payments and so on. However, we should rise above that to see what this clause means in quantitive terms, for example, to the construction industry in terms of capital allowances.

What consultations has the Minister had with the industry, and what has it said about the modicum of flexibility? I have not looked up the word modicum in the dictionary, but it does not convey the idea of a huge change in capital allowances for the construction industry. I see it as a rather small change. Perhaps the Minister could give us some feel for the order of magnitude of the relief given to the construction industry through the capital allowances.

I was using "modicum" as the description of one month in relation to a year. I apologise if the word lacked a certain precision. The extent to which this is a complex sector was discussed in Committee, as the hon. Member for Sedgefield (Mr. Blair) said. We were trying to put into statutory form a complex new attempt to interpret a set of commitments to pay by purchasers at a point at which they became absolutely unconditional obligations. That was an entirely new concept and the basic purpose was to try to put on the statute book normal accountancy practice. As the hon. Member will remember from our debates upstairs, normal accountancy practice was a rather difficult thing to pursue, locate and establish. There seemed to be many different principles and it was an attempt to fit correctly into the pattern and practice of the majority of British industry.

10.15 pm

In Committee one of my hon. Friends and one of the hon. Gentleman's hon. Friends raised the matter of milestone contracts and the problems of the construction industry. To that extent, my officials continued, as I said they would, the whole process of attempting to make sure that our legislation got the issue right. Because of the nature of accountancy practice in putting these obligations unconditionally on to the accounting books of companies, my officials found that they differed somewhat from our attempt to get the unconditional obligation to pay. In an important part of British industry, we tried to find a modicum in terms of a month to allow flexibility. I cannot pretend that the industry is totally satisfied with that.

In the judgment of the Inland Revenue and the Government, that brings to bear a fair balance of judgment, and, as the hon. Member for Sedgefield said, it gives protection to the Revenue as well as helping the accounting systems of our major construction companies.

I would not suggest that the hon. Member for Sedgefield was being churlish, because he would find great difficulty in ever being churlish. In the debates in Standing Committee, we were trying to put into statutory form for the first time the normal accountancy practices, and it did not seem unwise to take account of the advice of industry about that. As he said, there was a dispute — both sides were displayed in Committee — about whether it was to be three or four months.

In Standing Committee, the hon. Gentleman rightly identified one of the problems of the Government. which was to try to ensure that one could find a solution — I accept his argument that it is a matter of judgment—that does not create a possibility or encourage the problems of avoidance. I understand the points he is making and I think there are two reasons why any worries are likely to be misplaced. Perhaps we did not elaborate sufficiently in Committee. Most buyers and sellers operate at arm's length, with one wanting to pay the lowest price possible — a long credit period would be likely to affect the price — and the other party to the transaction trying to obtain his money as soon as possible. We think it improbable that present practices in the market place would be much affected or would change because of clause 54, as amended.

I went on to describe upstairs the workings of the anti-avoidance feature. I listened very carefully to what the hon. Gentleman said. Obviously, we have come to a judgment on the three points I made earlier after further discussion with people outside. If, having established this, we judge that the clause is in any way being abused, we will come in very quickly to seek to tidy it up. We are trying to judge the right length of time. I will be happy to come back and inform the hon. Member if we think it merits further scrutiny.

Amendment agreed to.

Amendments made:

No. 33, in page 51, line 42, at end insert—

'(2A) If, under or by virtue of any agreement,—
  • (a) as a result of the issue of a certificate or some other event, an obligation to pay an amount of capital expenditure on the provision of an asset becomes unconditional, and
  • (b) at a time before that obligation becomes unconditional, the asset becomes the property of or is otherwise under the contract attributed to the person having that obligation,
  • then, in a case where the obligation referred to in paragraph (a) above becomes unconditional within the period of one month beginning at the end of a chargeable period or its basis period but the time referred to in paragraph (b) above falls at or before the end of that chargeable period or its basis period, subsection (2) above shall apply as if the obligation became unconditional immediately before the expiry of that period.'.
    No. 34, in page 52, line 4, leave out 'three' and insert 'four'. —[Mr. Moore.]