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Agricultural Building Allowance

Volume 497: debated on Tuesday 13 October 2009

As ever, Sir Nicholas, it is a very great pleasure to serve under your chairmanship today. It is also a great pleasure to have the opportunity to debate an issue that is important to many of my constituents—obviously, those working in agriculture in particular—and to the constituents of many other Members. It is perhaps not the sexiest issue. It is a matter of some technicality and detail, but for farming businesses, many of which operate on exceptionally tight margins, it is one of great significance and indeed one that raises some quite fundamental questions of basic fairness.

First, I should place on record my gratitude for the fairly comprehensive briefings that I have received from the National Farmers Union and NFU Scotland, and indeed from a number of my constituents who have spoken to me about the subject. I am also informed in my wider thinking by the fact that I am a farmer’s son, born and brought up on a hill farm on Islay. At a time when we talk about a rising average age for farmers, which is germane to a matter that I will come on to later, I reflect that my own father is still hale and hearty at the age of 78, running a hill farm on Islay, assisted—indeed, encouraged—by my mother, who is 76. The remarkable thing about that is that it is not really in any way remarkable: my parents are by no means unusual for the age profile of those engaged in the more financially marginal agricultural activity.

On the agricultural building allowance, I have two main issues that I want to explore with the Minister today. The first is that the phasing out and eventual abolition of ABA brings with it a disincentive to invest in the type of investment that will be very important to the future sustainability of agriculture. Indeed, such investment is important not just to agriculture but to many rural communities, especially those in what are considered to be geographically remote or peripheral communities, because in many of those rural communities, if not most of them, agriculture lies at the very heart of the economy.

The second concern that I want to explore today is that the manner in which the Government are seeking to make the change is, in effect, retrospective. The Minister will no doubt explain why the Government have chosen to act in that way. I shall explore the question of retrospectivity, but the fact is that buildings were constructed by people making business and investment decisions with a legitimate expectation that ABA would be available to them over a 25-year period, but those people are now finding that the rug is being pulled out from underneath their feet. If the Minister were to say that the change would apply to buildings that are constructed from tomorrow, clearly the same arguments would not apply, but the fact is that many farmers have made business decisions based on what I term a legitimate expectation of the availability of ABA.

I was given a very good example of that situation at a constituency surgery by a constituent of mine from Shetland, about whom I have been in correspondence with the Minister. That constituent is Mr. Martin Burgess, who farms at Quendale. In 2000, he put up a new dairy unit—a building that obviously qualified for ABA—whose construction he funded by some borrowing. Obviously, there is a cost attached to that borrowing, and that cost is not always predictable, as we know. A significant factor in the decision that he took was the availability of ABA. He has made a calculation about his dairy unit—it is worth considering that calculation about one dairy unit in the south end of Shetland—that over the remainder of the 25-year period that the building would otherwise have been eligible for ABA, he will be some £42,000 worse off. For an agricultural operation in Shetland, even if that sum is spread over that period of time it is still a significant and substantial loss.

I have some questions for the Minister. Does he not accept that my constituent had that legitimate expectation and what justification can there be now for removing the certainty that my constituent needs to make future business decisions? If Mr. Burgess were to anticipate making a further construction of that type in the future, what reliance can he have on the availability of any tax arrangements that the Government may choose to put in place?

I think that there is a fairly broad political consensus in this House and in the country that the agricultural industry should be encouraged to invest, to meet our increased food requirements and to achieve the improved environmental and animal welfare standards that we now ask of our farmers. I say that because the margins are exceptionally tight in all agriculture, but in communities such as mine, especially in Shetland where there are exceptionally challenging climate conditions and very often the land is of rather poor quality, the margins become even tighter than those that would be expected in other parts of the country.

In part of the correspondence that I have had with the Minister on this issue, he has referred to other tax changes being available and perhaps we will touch on them at the end of this debate, if time allows. However, I must say that for many of the farmers and crofters in my constituency the benefits of those tax changes are largely illusory, because they are not earning an income that allows them to benefit from the tax changes that the Minister will no doubt outline.

Of course, farmers, like everybody else, are dependent on the whims and notions of the banking sector. In the past year to 18 months, I have had a fairly steady stream of agricultural constituents beating a path to my door to explain the difficulties that they have had with the renewal of overdraft facilities or obtaining new borrowing, which would allow them to make the investment in their business and the changes to it that we as politicians are always encouraging them to make, so that they can improve environmental practice and animal welfare standards, market their product better and go for a higher-quality product that would be available to niche markets, and add value to the products that they already have.

ABA has been with us in one form or another since 1945. Given that context, what I called the “legitimate expectation” of my constituents and farmers in general that it would continue is, I think, fairly well founded. However, the changes to ABA also have to be seen as being part of a tax basket. There are other taxation changes that have had a significant impact on farmers, for example, the increase in fuel duty. Of course, for agricultural vehicles there is a reduced rate for so-called “red diesel”, but not all of the vehicles that are owned and operated in relation to a farm are eligible for red diesel because some of them are used on the public road. Many farmers need larger vehicles such as pickups and 4x4s simply because of the terrain on which they work, but those are the very vehicles being clobbered, in the interests of dealing with their unsuitability for urban areas.

There are other, more technical issues. The treatment of rental income from land as unearned income, for example, has an impact. It means that farmers who rent out land are not eligible for many of the allowances that relate to income tax, capital gains tax and inheritance tax. I mention this because of the ageing profile of those engaged in farming, to return to my earlier point. The capital costs of entering agriculture are very high, so the obvious option for a lot of young people who want to enter farming is to lease land. The treatment of rental income from land as unearned income acts as a disincentive for those who own land to lease it out.

The picture that I am trying to paint for the Minister is one in which the decision on ABA is seen in its proper context. Although we as politicians and the Government in particular all say that we want to encourage growth and development in agriculture, it seems that just about everything else works to militate against it.

Some of the examples given to me by the NFU are stark, and I will take a few moments to share them with the House. The NFU offers the example of the UK poultry industry—an industry with which I have little acquaintance, as I have never had to work in it and it is not a large feature of our agriculture industry. The NFU says:

“The UK poultry industry will need to continue to invest significantly in new or upgraded buildings: in order to improve efficiency; to increase the amount of meat produced in line with Freedom Foods criteria, for example, and other more stringent welfare standards; to increase the production of free-range eggs; and to meet the future requirement for caged laying hens to be re-housed.”

That is the context in which poultry farmers operate. Those are exactly the changes that we politicians want them to make, but making those changes will require significant capital investment in agricultural buildings, which the Treasury now says it does not consider important. The NFU continues:

“In the dairy industry, if a farmer puts a roof over a yard in order to separate clean and dirty water and so reduce the volume of slurry for storage”,

as many farmers in nitrate vulnerable zones are required to do,

“the cost will not be able to be relieved for tax purposes against the profits of the business.”

There is also a fairly significant lack of appreciation in the Treasury of the nature of agricultural buildings and how they are used. The 2007 Budget report mentioned

“ensuring all depreciating assets receive allowances at two clear rates: 20 per cent and 10 per cent. Assets that appreciate, such as land and buildings, will not receive depreciation allowances.”

However, most of the assets that we are talking about when we discuss agricultural buildings have a fixed life span. Building a cattle court is not like building a house. Once built, a cattle court will depreciate over time. To equate the treatment of such buildings with other buildings and heritable property indicates a certain lack of understanding.

It has also been argued that tax relief can be given under depreciation of a building at the point when it is sold, but again, given the continuity that exists within the agricultural industry, the majority of agricultural buildings are not sold, so no relief is ever obtained. That was presumably the calculation made in 1945, when the allowance was introduced, and it is presumably the calculation made every year since then. What do the Minister and his officials think has changed to merit the change in the treatment of agricultural buildings?

I think that the changes will have a significant impact on many farmers, both those caught by retrospectivity and those planning future investment. The impact on the industry will be severe, and I cannot see the benefit for the Treasury and Her Majesty’s Revenue and Customs. What increase in tax gains does the Minister anticipate as a result of the changes?

Finally, we must consider where the changes will leave us. It must be remembered that our farmers are part of a common market within the European Union. What will this do to our competitiveness with regard to other countries? The research that I have carried out indicates that in France, Spain, the Netherlands, Denmark and the Republic of Ireland, relief broadly similar to ABA already exists. It is worth bearing in mind that our main competitors in the pork industry, which relies the most obviously on large agricultural buildings, come from Denmark and the Netherlands. Their farmers will be getting advantages from tax allowances; why will not ours?

I congratulate the hon. Member for Orkney and Shetland (Mr. Carmichael) on securing the debate. He set out clearly for the House the depth of his and his family’s commitment to the well-being of agriculture in the UK. It is good to hear about his parents’ continuing commitment on their farm. I welcome this opportunity to explain the principles behind the business tax reforms of 2008, which included the phased withdrawal of agricultural buildings allowance, but first I will give a bit of background on the history of the allowance to put it in context.

The agricultural buildings allowance, together with the industrial buildings allowance, was introduced in 1945 as part of post-war reconstruction in order to rebuild key sectors of the British economy: industry, for production and employment, and agriculture, in particular, to feed the country after the damage of the second world war. The IBA replaced the old mills and factories allowance, and the ABA replaced a special and even older relief for agricultural landowners under the old income from property legislation. The system lasted until 1986, when it was replaced by the current system, which is now being phased out and will end in 2011. Relief is given at 4 per cent. a year and qualifying costs are written off for tax purposes over 25 years. The buildings that qualified included barns, cowsheds, stables, farmhouses and cottages.

The withdrawal of the agricultural buildings allowance was part of a wider business tax reform announced in 2007, recognising that the rationale behind its introduction no longer applied. The allowances had become a selective and outdated subsidy, as I hope I will be able to persuade the hon. Gentleman—at least, I will have a go. To take one example, the allowance created a beneficial tax treatment for farmhouses but not for commercial office space or science parks. That selectivity inevitably distorted commercial decisions in a way that was clearly unhelpful.

I am grateful to the Minister for giving way. He is always generous in engaging in debate. He has chosen a narrow aspect of the ABA in housing. The significant impact of the changes will be on agricultural buildings such as cattle courts, pig houses and hen houses. Before he compares agriculture to other businesses, does he accept that there are much tighter margins in agriculture than in most businesses?

The question is why it is sensible to subsidise one kind of building in rural areas. Why should we subsidise agricultural buildings rather than commercial buildings or science parks? We have done that in the past and the evidence is that it distorts investment decisions in a way that is not in the interests of rural areas or communities. There is no economic sense in providing a selective tax subsidy for some buildings but not for others. The majority of commercial buildings in rural areas did not and do not receive allowances. The existence of allowances has distorted property decisions by providing tax relief that is not available for other purposes.

The ABA has long been recognised as imposing a significant compliance burden because the system is complicated. It featured in responses to the corporation tax reform consultation of 2002-05 and in the administrative burdens advisory board’s list of priority irritants in the tax system. To leave ABAs in place would have meant retaining that complexity for up to 25 years. There were therefore strong simplification arguments in favour of withdrawal.

It is important to consider the withdrawal of the allowance and the Government’s treatment of the agriculture sector in the context of the other forms of tax relief and Government support that are available. The Government and the devolved Administrations provide a range of direct support for agriculture. For example, farming in Scotland receives about £500 million in support from the Scottish Executive every year. The single farm payment is worth over £400 million a year, the less favoured areas support scheme more than £60 million a year and the Scottish beef calf scheme about £20 million a year. In June, the Scottish Cabinet Secretary announced increases in less favoured areas support scheme payments for the “fragile” and “very fragile” land categories—which equate broadly to the highlands and islands—of 19 per cent. for 2009 and 38 per cent. from 2010. Over two years, that should deliver an additional £15 million to active farmers in those regions. More broadly, the Scotland rural development programme budget is more than £1.5 billion for 2008-13. Such support is more appropriate than the rather ill-targeted tax relief that the allowances provided.

Some tax reliefs still exist, such as lower duty on diesel, which the hon. Gentleman mentioned, the agricultural inheritance tax and capital gains tax reliefs, the special averaging entitlements for calculating taxable profits and loss relief.

I want to return to the Minister’s point that the ABA is distorting decisions. The Government actions that I outlined, such as those on improving animal welfare standards and environmental standards, are also distorting decisions. We are forcing farmers into capital investment to make those changes. Surely that is the distortion that should be recognised in the tax system.

The measures that I have set out reflect those requirements and obligations.

The ABA forms only one element of the business tax treatment of agriculture. We must consider the rate of corporation tax and other capital allowances. A consideration of the overall business tax picture led the Government to announce a big package of reforms to business tax in Budget 2007. The ABA was only one plank of that. We set out the principles behind that package, the main features of which were a reduction in the main rate of corporation tax from 30 to 28 per cent., thus establishing the lowest corporation tax rate in the G7; enhancements to research and development tax credits; and a set of reforms to modernise and simplify the capital allowances system, including the abolition of ABAs and IBAs. That strong package of reforms is pro-growth and pro-investment. It has been estimated that it will add 0.2 percentage points per annum to investment above the trend rate and so strengthen the UK’s global competitiveness.

We recognised in Budget 2007 that businesses would need time to plan for the changes to business tax. Therefore, IBAs and ABAs are being phased out not overnight, but over a four-year period. For each year from 2008, a business’s entitlement to the allowances will be progressively reduced by one quarter. The allowances will ultimately be withdrawn in April 2011.

I am happy to check that figure, but I do not have it in front of me.

As part of the package, we introduced a new £50,000 annual investment allowance, which allows 95 per cent. of businesses to write off their expenditure on plant and machinery, other than cars, in the year in which it is made. Plant and machinery used on farms and in agricultural buildings will qualify for that allowance. It will provide a direct tax benefit to farmers for the tax year in which the money is spent.

To ensure that the agriculture sector is able to benefit from the full range of tax assistance that is available following the withdrawal of the ABA, Her Majesty’s Revenue and Customs has engaged proactively to help the agriculture industry to maximise its claims to plant and machinery capital allowances, and to the £50,000 annual investment allowance in particular. Pig farming is particularly equipment intensive, so HMRC is working on specialised guidance for the pig industry to explain what allowances are due and what types of expenditure qualify. HMRC wants to engage with the agriculture industry to ensure that it can make the most of the new arrangements. The guidance has been received positively by the National Farmers Union, to which the hon. Gentleman paid tribute, and the National Pig Association. HMRC is awaiting wider feedback before considering whether to expand the initiative, possibly by giving additional guidance to the agriculture sector more generally.

That work and the package of spending and tax measures demonstrates the Government’s continued support for the agriculture sector. That is further underlined by the new measures that were introduced in response to the downturn, such as increased funding for farm diversification, the development of micro-businesses, targeted support for the dairy sector and rural community broadband, which is of particular interest to me as the Minister responsible for Digital Britain.

The real benefit of the business tax reform package will be felt through its impact on business investment. It will benefit all sectors of the economy and increase the investment that will be important for economic recovery and long-term growth. This year, we introduced a first-year allowance that doubles the rate of tax relief on new business investment in plant and machinery, which will support about £50 billion of investment when the need for extra help is at its greatest. I commend the Government’s reforms, such as the simplification of capital allowances—including the ABA and IBA—the reduction of the main rate of corporation tax to the lowest ever level and the introduction of the annual investment allowance, which will provide the platform to encourage investment in the UK this year and for the future.