Finance Bill

Let me start by outlining the purpose of clause 35 and how it fits into the wider package of business tax reforms in this year’s Budget. The main feature of the package is the forthcoming reduction in the main rate of corporation tax from 30 to 28 per cent., giving the UK the lowest rate of corporation tax in the G7. The package of reforms to the business tax system represents the most comprehensive for more than two decades, and it has three main objectives. The first is to maintain and strengthen the UK’s internationally competitive position. The second is to encourage further growth in the UK economy through higher levels of investment, more efficient markets, and greater innovation. The third is to deliver a fairer result for the UK taxpayer, and a more efficient use of Exchequer resources. I am grateful to the hon. Member for Falmouth and Camborne (Julia Goldsworthy) for quoting, I think correctly, what the Institute of Chartered Accountants said about the measures being a balanced package. She also raised a number of concerns, which were repeated by other contributors to the debate, and I shall deal with them in turn. First, she asked about consultation. I want to emphasise that the allowances are not being withdrawn without prior warning, or without our giving people time to plan for the changes. The rate of writing-down allowances remains unchanged for this year, and it will be gradually reduced between 2008 and 2011. The hon. Member for Fareham (Mr. Hoban) quoted me accurately on customary practice with regard to such changes: it is not customary to consult about changes in rates of taxation, or the reduction or removal of tax reliefs. There was consultation on corporation tax reform between 2002 and 2005, and that consultation explicitly recognised that limiting allowances to certain types of buildings, as currently happens, is a specific distortion affecting investment in property. The idea of a general commercial buildings allowance was mooted, but in all frankness I say to the hon. Gentleman that that would be prohibitively expensive. I am not sure whether he was arguing for such an allowance, but if every new building in the City, or in Canary Wharf, attracted a buildings allowance, even though buildings of that kind never have done so before, it would be hugely costly. One can understand why the property industry would favour a move of that kind, but it would be prohibitively expensive. If one accepts the argument that it is a distortion for allowances to apply to some buildings and not others, the logical approach is to do what we have done, and to move, in a well managed and phased way, towards abolition. That is particularly the case given that most commercial and industrial property, and the land on which it stands, appreciates rather than depreciates in value, although we have heard about some exceptions. I think it is right to draw the conclusion that we drew: other reforms would be more beneficial to the UK economy than a commercial buildings allowance. On manufacturing, I say to the hon. Member for Falmouth and Camborne that industrial buildings allowances account for only about 4 per cent. of the total capital allowances received by manufacturing, so I do not expect the withdrawal of the allowances to have widespread effects on the sector. Since the announcements, I have met representatives of the Engineering Employers Federation, who told me about the high degree of confidence in the manufacturing sector. Only about a third of all industrial buildings allowances are claimed by manufacturers, and on the whole those claims tend to be fairly small and are spread among a wider population. Of course, the cut in the main rate of corporation tax will stimulate domestic and foreign investment, and overall our analysis shows that there is a positive revenue impact on large manufacturers. To pick up the question asked by the hon. Member for Fareham, a lot of careful analysis has gone into the judgments that lie behind the announcements in the Budget. The package is designed to promote investment and growth. Manufacturing firms which invest will continue to benefit from the new arrangements. The issue of small manufacturers was rightly raised separately, but they will be among the main beneficiaries of the new £50,000 annual investment allowances. The increases in research and development tax credits for small and medium-sized enterprises, as well as for large companies, will also bring significant benefits for manufacturing. The hon. Member for Dundee, East (Stewart Hosie) asked about hotels. We also had an exchange on the subject in Committee. He is right that it was in 1978 that the industrial buildings allowances regime was extended to qualifying hotels, in order to assist with the growth of UK tourism. I say to him today, as I did in Committee, that the position is now very different. It is difficult to claim that the situation for the tourism sector is such that exceptional allowances are required to support it. The sector is doing well and growth is strong, and I am delighted about that, but I really do not think that there is the case today that there was then for extending particular allowances to hotels.