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Income Tax

Volume 662: debated on Wednesday 3 July 2019

I beg to move,

That the draft Capital Allowances (Structures and Buildings Allowances) Regulations 2019, which were laid before this House on 17 June, be approved.

The instrument before the House gives effect to the amendments to several tax Acts, principal among them the Capital Allowances Act 2001. The Government are determined to ensure that the UK tax system supports business investment and jobs. At 19%, the UK has already reduced its corporation tax rate to the lowest in the G20, and it is scheduled to fall still further to 17% in 2020. The Government recognise the importance of providing tax reliefs for genuine business costs, which is why we are taking steps to increase the overall competitiveness of the capital allowances regime.

At the autumn Budget, we announced an increase in the annual investment allowance for plant and machinery to £1 million per annum for two years, meaning that businesses will be able to deduct five times more qualifying plant and machinery expenditure in the year in which they make the investment. However, the UK is currently the only G7 economy that offers no capital allowances on investments in structures and buildings. That means there are no allowances on critical investments in bridges, roads or tunnels. It also means no allowances on investments in shops, offices or factories.

In the 2018 Budget, the Government set out to rectify the gap in the capital allowances regime by providing relief to businesses on qualifying expenditure on new non-residential structures and buildings. The Finance Act 2019 gave power to that effect, and I am now pleased to introduce the draft statutory instrument necessary to enact the change. It was important to follow the legislative process to provide taxpayers with certainty that the allowance will come into force as soon as possible, to minimise the risk of deferred investment and to allow the Government to consult extensively on this important measure, as we have done.

At the Budget, the Government published a detailed technical note for consultation that outlined the key features of the new allowance. Businesses that invest in new builds or renovations on or after 29 October 2018 will be able to claim tax relief at 2% a year on eligible costs, over a 50-year period. Following the first round of consultation, officials met scores of different companies, representative bodies and individuals from throughout the country. At the spring statement 2019, the Government published detailed draft legislation and invited further comments from stakeholders.

I am pleased to report that the vast majority of stakeholders welcomed the structures and buildings allowance. I extend my thanks to the many individuals and organisations that participated in both rounds of consultation, either in person or through written representations. Stakeholder responses have been a considerable help in the shaping of the new allowance, leading to amendments, including those relating to short-term leaseholds, eligible pre-trading costs and periods of disuse.

As I have said, the structures and buildings allowance has been designed to enable businesses to claim tax relief on the costs of new non-residential structures and buildings. This means that qualifying expenditure on new builds or renovations for which all the contracts for the physical construction works were entered into on or after 29 October 2018 will be eligible for relief. Relief will be available for any business that fulfils two conditions: first, that it owns a qualifying asset, either through direct building or by acquiring one from a developer; and secondly, that it uses the building for a qualifying activity for which the business is chargeable for UK tax.

Qualifying persons will be able to claim tax relief at 2% a year on eligible construction costs, including renovations. The allowance will apply across all sectors and sizes of UK trade, benefiting business owners, workers and the wider economy. The relief will be limited to the costs of the physical construction of the structure or building, and will not apply to the costs of acquiring the underlying land, rights over land, or planning permissions.

In summary, the regulations will enact important improvements to our capital allowances regime, in line with the power this House approved in the Finance Act 2019. Since 29 October 2018, business investments in new, and renovations of old, structures and buildings have been accompanied by an expectation of this allowance of 2% relief per annum against income or corporation tax bills. It is now important for the House to honour the commitment made in the Finance Act 2019 by enacting the regulations, thereby bringing them into force in line with their commencement provisions. I therefore commend the regulations to the House.

The Minister said that he got support from businesses for tax relief. Well, that is not a surprise: when people are offered tax reliefs, they will accept them because it is cash in their pocket.

In a document published on 5 March last year, the Institute for Fiscal Studies said that our current tax system

“does not consistently deduct the cost of investment meaning that some investments are discouraged, some are incentivised and some are unaffected by the tax system.”

It went on to say that there should be

“a clear policy justification”,

which should be focused, and that we should ensure

“that the benefits outweigh the costs.”

The document also said:

“Too many reliefs have weak or poorly articulated policy aims”,

and that

“digging into the details and evaluating how each relief stacks up against a clearly stated tax design”

is important. It continued:

“The bar for introducing any new relief should be high.”

On the very same night, the Chartered Institute of Taxation and the Institute for Fiscal Studies had a debate about business tax reliefs, which asked whether they were

“corporate welfare or essential elements of the tax system”.

The question is, do we think they are an essential element of the tax system? In the debate on the Finance Bill, we raised these matters, but we were not able in any way to amend the law, which is regrettable. However, we did raise, in a sense, the whole question of tax reliefs, and it is a desperate shame to find ourselves here again debating the introduction of what amounts to another corporate tax relief, when so little has been done to sort out the scope of the scores of tax reliefs already in operation.

At the last count, the Government were responsible for managing 115 principal tax reliefs totalling £430 billion, as well as 80 minor tax reliefs totalling an estimated £690 million. However, alongside those, there are up to 235 reliefs in operation for which we have no cost data at all. I repeat: we are forgoing revenue on 235 tax reliefs, but Her Majesty’s Revenue and Customs does not count the cost. I find that quite remarkable. I cannot think of a single other policy area where the Treasury would be uninterested in Government expenditure.

Ministers tell us that the cost of these reliefs is negligible so there is no point making efforts to manage them more effectively. I do not believe that that holds water, especially when we consider that the Government regularly deprive citizens of small but essential sums of social security for the crime of being perhaps five minutes late to the jobcentre. Perhaps the Minister can explain why the Government can give away millions to large companies without counting the cost, while stripping the poorest in our society of the pounds and pence they need to survive. I ask that especially in the light of an interesting article by the Minister in The Sunday Times some weeks ago about our being one nation. It would be interesting to hear him comment on that. I agree with him that we have to bring the nation back together again, and that is an important part of this issue. I would also like to know what efforts the Government have made to improve the management of tax reliefs at HMRC. Will the Minister now commit to a moratorium on introducing further tax reliefs, unless the annual cost data on them can be collected and published by HMRC?

Turning to the measure before the House, it will not surprise anyone here that the pile of opaque and unaccountable tax reliefs is being added to, with yet another tax relief for businesses that does not necessarily fit the robust criteria set by the Institute for Fiscal Studies—criteria that this House should set in relation to the introduction of tax reliefs.

The hon. Gentleman was talking about the cost of tax reliefs. Has he worked out the cost to UK business and investment of imposing a policy that would requisition 10% of businesses that have more than 250 employees? I understand that that is Labour party policy.

I do not think it is a question of requisitioning; it is about a different approach and taking a different look at engaging workers in our economy. That is it—it is as simple as that. I appreciate and completely accept that the hon. Gentleman does not accept the concept, but that does not mean that the concept is wrong.

The Government boast about their corporation tax giveaways, but it is clear that even those billions, stripped from our public services, are not enough to satisfy their intentions in relation to corporate welfare. Furthermore, it seems that, in their rush to hand out giveaways, they have given no consideration to how this measure will fit into the already complex and convoluted system of capital allowances. It is not necessarily a question of saying whether I agree or disagree with these things; it is a question of saying we have a convoluted system—and it is incredibly complex. We do not have any review mechanisms of these reliefs, and we do not have any sunset clauses on them—in fact, we have debated that in Committee in the past, but the Government seem to have no response.

This new measure on structures and buildings allowances will, as the Minister said, provide relief for qualifying expenditure on new non-residential structures and buildings incurred on or after 29 October 2018 on a 2% per annum, straight-line basis. At the Finance Bill earlier this year, the Government blocked our attempts to require Ministers to publish details of the likely take-up of this new allowance across different-sized businesses.

Despite those concerns, the secondary legislation before us remains vague, with important definitions that would assist in addressing areas of ambiguity delayed and deferred to guidance. We have had lots of this deferral to guidance, secondary legislation and other things—potentially even tertiary legislation in due course. It really is not good enough. We need transparency and openness; we do not need to be told, “This is going to happen, but the detail may come a little later on.” Similarly, the decision by Ministers to delay finalising the details of this new allowance until June, when the final stages of the Finance Bill took place in January, is yet further evidence of the continued environment of uncertainty that business is forced to operate in under this Government.

The Chartered Institute of Taxation rightly criticised the Government over these new regulations, stating at the time of the 2018 Budget that

“it is neither sensible nor responsible for the government to introduce reliefs into the tax system at a time before they have consulted upon the scope and application of the relief or fully considered, and are therefore able to legislate for, the details of the relief.”

It concluded that these regulations will only complicate matters, particularly given that plant and machinery are excluded. That means that taxpayers are still required to identify the plant and machinery in buildings, with the same grey area that currently exists between buildings, fixtures, plant and machinery. The administration of this new allowance will be substantial and burdensome for businesses, flying in the face of the Government’s initial promise to simplify the tax system.

The demotion of much of the detail of this allowance to secondary legislation remains of great concern to the Opposition, particularly given that capital allowances are yet another means of extending tax breaks to large businesses, many of which do not necessarily need the relief. The reality is that many small and medium-sized businesses that desperately need support from the Government will struggle to access this relief without incurring substantial costs as a result of hiring tax experts to guide them through its complexities.

Rather than continuing this piecemeal approach, which seems only to confuse and deter businesses in need, Labour remains committed to carrying out a review of tax reliefs once in government to evaluate individual reliefs against their effectiveness and value for money. It seems that, again, this opaque Government will not commit either to a proper review of the measure before us or to a wider review of the full plethora of their corporate relief giveaways.

This is no way to run the country. Once again, the devil will be in the detail of the guidance that HMRC publishes, particularly when it comes to what constitutes qualifying expenditure, the definitions of terms such as “dwelling-house” and “mixed-use building”, and clarification of the treatment of successive leases and the new flexible rules in instances where expenditure is incurred after a building comes into use.

Although the Opposition remain sceptical about the introduction of yet another poorly-considered allowance on top of the 1,200 allowances that already exist—many of which have existed for decades without review—we will not be voting against the secondary legislation today. Instead, we will wait to scrutinise the guidance when HMRC publishes it later this year. [Interruption.] I can hear Ministers sniggering. A responsible Opposition will vote against something when they disagree with it and will support something when they agree with it. When we want to consider the detail, implications and other information that comes from the Government, we will hold back. That is what a responsible Opposition should do—not automatically vote against or support things willy-nilly—and that is what we are trying to do, because we are being responsible. Ministers can snigger at that responsible approach if they want to, but we will continue to be responsible, and we will continue to oppose this Government as and when we feel it is necessary to do so.

Let me begin by thanking the Association of Taxation Technicians and the Chartered Institute of Taxation, which have provided me with some information so that I can help to scrutinise this incredibly technical piece of legislation.

I would first like to raise a couple of issues. The tax information and impact note on these regulations explicitly says that there is

“no impact on civil society”.

This is directly contradicted in the explanatory memorandum, paragraph 12.1 of which says that charitable organisations will be required to keep more documentation and to gather together that documentation, which they currently do not have to do. I would suggest that there is a direct impact on civil society, so the tax impact and information note should be updated to reflect that.

I have the same concerns as the shadow Minister, the hon. Member for Bootle (Peter Dowd), on the decision to implement the relief in this way. In June 2018, the Office of Tax Simplification published a report called, “Accounting depreciation or capital allowances? Simplifying tax relief for tangible fixed assets”. It is hugely riveting, I promise. The report said that the tax system should look to reduce, or at least not increase, the different types of expenditure in classes of assets that have to be identified solely for tax purposes. Unfortunately, the way in which the Government have chosen to do this increases the number of classes of assets that have to be identified purely for tax purposes. As this directly contradicts an OTS recommendation, it would be useful if the Minister explained why the Government have chosen to do it this way, and not to change the current system of capital allowances to include this measure, perhaps along with plant and machinery, as this is already a very difficult distinction for people to make. With the lack of published guidance, I fear that the distinction between plant and machinery, and fixed assets, meaning the building itself, will remain difficult to assess. I have concerns about that.

The other issue is about the timing of this legislation. It was announced as something that would happen immediately as part of the Budget on 29 October 2018. However, we are now considering these regulations in July, without the publication of the guidance. We do not have the guidance to be able to work out whether the way in which the measures are being implemented makes sense. And this is not just about parliamentarians’ scrutiny. Businesses and organisations that have operated under this new system since 29 October have had to keep all the relevant documentation since then without knowing what the relevant documentation is and without knowing the exact classes of assets they can claim against under this tax relief.

Given the huge amount of uncertainty businesses are already experiencing because of Brexit, it is incredibly concerning that they must deal with this additional uncertainty. I get what the Government are trying to do; they are trying to make it a more attractive proposition to create and renovate properties. I understand that logic, but they have actually implemented this measure in a cack-handed way that has increased uncertainty this year, and certainly until we get the guidance and see how things are beginning to work.

Concerns have been raised with me about the fact that the Government have chosen not to include prisons and student housing, for example, in this legislation because they fall under a residential remit, rather than under the remit of a commercial property. I understand why they have chosen to do this, but it seems to be a missed opportunity. We cannot class prisons and student accommodation in the same kind of residential category as we would class a dwelling-house, and there may have been an opportunity—particularly given the pressing need for changes in the prison system—to include some flexibility. I am not saying that this is what the Government definitely should have done, but I do not think they considered it enough; nor did they put forward an argument why they did not do it in the documentation that they have published.

The Treasury has said that this will cost £585 million in 2023-24—that that will be the Exchequer impact. Neither the tax information and impact notes, nor any of the other documentation that I can find—perhaps it was more explicitly mentioned in the Budget and I did not catch it—says what is the expected economic impact in terms of an increase in GDP as a result of these changes, which would presumably result in a commensurate increase in the tax that the Exchequer receives. It would be useful to know whether the Government think that this tax relief is value for money and whether it will generate more tax revenue for the economy than it will cost.

The Government have told us that it will cost £17.7 million for new HMRC systems to be put in to administrate this tax, but they have not been clear about the economic benefit that they see coming out of it. That is partly, I think, because of what HMRC said in the tax information document:

“Since Budget 2018, HMRC has attempted to gather further information on the number of those”


“likely to claim the SBA.”

However, it has not been able to do so. I do not understand how the Government can tell us that this tax relief will have a positive economic benefit if they cannot even tell us which types and numbers of businesses are likely to claim it. It would be useful to know whether the Government have any firmer details on that since the note was published and any information on whether they think that there will be an economic benefit.

My next point, which I am sure the Minister will get very used to me raising during our future deliberations on SIs and in finance debates, is on when the Government intend to review this tax relief. This is a massive tax relief in terms of the fiscal impact that it will have. The Government are saying, I assume, that it will have a positive benefit in terms of its economic impact. I would like to know when they will review it to see whether it is working as intended, because there is no point in having something that will not work as intended. I am sure the Minister will say that there will be a review in three to five years’ time that will be sent to the Treasury Committee and that I just have to look at the Government’s website at some unspecified point during that period. However, can he provide a bit more detail on the exact timescales for a review of this tax relief, given that it is so significant in nature, so that we parliamentarians can scrutinise whether the Government have actually achieved what they set out to do?

My last point is about the guidance, which I have already mentioned. When the guidance is published, will the Minister be sure to ask somebody in his team to ensure that Labour Front Benchers and I have access to it and are made aware of where it is, because it may be published in some place on the HMRC website that we, as people who do not run businesses that claim capital allowances, will not regularly check? It would be incredibly useful if he committed to fulfilling that small ask as well as answering many of my questions.

I am grateful to both Opposition Front Benchers for their comments, which were quite wide-ranging. I will try, if I may, to keep my responses reasonably short.

The hon. Member for Bootle (Peter Dowd) began with a very wide-ranging critique of reliefs as such. He then cited the Institute for Fiscal Studies on the reliefs in general that have built up in the tax system over the past several decades. However, in trying to criticise the Government on the grounds that the system is not consistently applied across different reliefs, he does not reflect on the fact that this measure is designed to correct an anomaly. We have an anomaly in our system in that we do not offer reliefs on structures and buildings. We are therefore removing a disincentive to investment and levelling the playing field in a way that has a clear policy justification.

The hon. Gentleman said that there is an absence of transparency, but there were 18 weeks of consultation in two phases on both the principle and detail, so it is hardly clear that that is true. He also implied that a Labour Government would remove tax reliefs. If that is true, I would welcome him indicating to the House which reliefs a Labour Government would propose to remove or abolish.

The Minister ought not to put words in my mouth. I exhort him to read what I said. Unlike the leadership candidates, who are spending money left, right and centre, the Opposition are responsible. The point I was trying to make is that it is important to review reliefs. There are 1,200 of them. Many other countries review reliefs—there is nothing particularly radical about that, and I exhort the Government to do so.

It is hard to make swingeing criticism of the idea of reliefs and then not indicate any that a Labour Government would propose to abolish. It raises the question whether the Labour party is serious about this. The hon. Gentleman described these reliefs as “corporate welfare” and giving away millions of pounds to large companies. All companies benefit that have qualifying investments and are subject to UK taxation in the way indicated; it is not just larger companies. Many of the reliefs he describes are negligible and therefore should not necessarily be the target of extensive review. He talks about the reduction in corporation tax as though it is a bad idea but neglects the fact that significantly more corporation tax has been raised following these reductions.

I am grateful to the Minister for being willing to give way. I am sure he is aware of the evidence repeated over and again by the bodies that have looked into this that the reason for increased corporation tax take was not the reduced rate of corporation tax—rather, it related to the return to profitability of banks and so forth. It was not related to the reduction in rate, and just about every authoritative study that has looked at this has suggested that.

Those companies’ return to profitability was the result of proper, prudent financial management. I remind the hon. Lady that in the specific case of the financial sector, the bank levy has taken billions of pounds a year more from the banks than the Labour tax that it replaced. I do not think her view has credibility.

The hon. Member for Bootle criticised the timetable, but it is designed specifically to keep uncertainty to a minimum. Far from the suggestion that it would create more uncertainty, the point of my saying that qualifying expenditure on new builds or renovations for which all contracts for the physical construction works were entered into on or before 29 October 2019 will be eligible for relief is precisely to give very clear direction to future investment. I do not agree with many of the points that he made.

Does the Minister think that the hon. Member for Bootle understands how reliefs work? He said that it was about giving away millions of pounds to corporations. Actually, if a corporation invests on the back of a relief, it still costs that corporation money; it just makes the investment slightly more attractive.

My hon. Friend is right. The point of the relief we are giving through the structures and buildings allowance is precisely to level the playing field and to enable and encourage more business investment.

The hon. Members for Bootle and for Aberdeen North (Kirsty Blackman) asked about reviewing or monitoring. As they will be aware, the Treasury and HMRC continuously monitor tax reliefs according to the level of risk they pose, and they publish annual statistics on tax reliefs, including cost estimates where they are available.

I will now turn to the other points made by the hon. Lady. She says charitable organisations will be heavily affected. The statement that the acquirers of structures or buildings are asked to fill out consists of four factual pieces of information: first, what is the asset; secondly, when was it built; thirdly, when did it come into use; and, lastly, how much did it originally cost? That is not a heavy burden on any institution.

To be fair, I did not say it was a “heavy” burden. The tax information and impact note says that there will be

“no impact on civil society”.

That is not true because there will be an effect on civil society. It may be a minor effect, but there will be one, and I was just asking for the tax information and impact note to be updated to reflect that.

I perfectly understand, and it is a verbal point. This is subject to a de minimis factor: any Government action will have some minuscule effect on many people, but that does not mean that it is significant enough to register.

The hon. Lady raised a question about process, which I have already addressed. She raised a point about the Office of Tax Simplification. The difficulty with the suggestion it has made is that, if the boundary were removed between buildings that get relief at 2% and plant, fixtures and so on that get relief at 6%, the result would have to be a combined rate of relief somewhere in-between. The effect for many businesses with long-term investments in plant would be that they lost out through reduced relief or delayed relief if the rate went down. There would be a significant number of losers and a negative impact on business investment, when we are trying to have the exact opposite effect.

The hon. Lady raises the issue of student housing. This measure is of course specifically aimed away from residential property and other buildings that function as dwellings and towards commercial properties. For that reason, student housing is not included, but hotels and care homes will qualify because the underlying businesses are service providers whose premises are being used in a trade.

Much of the student housing in my constituency works almost as serviced apartments. They are apartments with one shared kitchen and a number of flats, and they are much more like a hotel or care home in that they are run as businesses and students are there only for a short period. Are those kinds of serviced dwellings for students included or are they not included?

The answer is that they are not. The hon. Lady is welcome to write to me with specific details of the student housing in her constituency. Of course, many students live in housing that universities would regard as equivalent to hotel accommodation of years ago. However, the general rule is that it is not included, but that hotels and care homes—where there is such trade, as I have described—are included. I think that is a tolerably clear line.

The final point the hon. Lady raised was about the impact on GDP. The independent Office for Budget Responsibility has estimated that the capital allowances package announced at the Budget would increase business investment by 0.4%, so that number has been calculated and put into the public domain.

The Minister is talking about numbers and putting the record straight. He referred earlier to the bank levy and bank surcharging. In 2017-18, they raised £2.6 billion and £1.9 billion, totalling £4.5 billion, and in 2023-24, they will raise £1.1 billion and £2.1 billion, totalling £3.2 billion, so they will raise considerably less than they raise now, not the billions more that the Minister suggests they will raise.

If I may, I will just correct the record. I said that they have raised billions more—and they have raised billions more—than the pre-existing Labour tax. That is a fact of the financial environment that surrounds banks, just as this is a new fact for the financial environment that surrounds corporations more generally. And on that point, I will sit down.

Question put and agreed to.