ALLISON PLAGER reports on the seventh and eighth sittings of the debate of the Finance Bill 2002 by Standing Committee F.
IT IS PERHAPS indicative of the less than excellent quality of the Finance Bill standing committee debates that allow a minister to be replaced part way through. This occurred in the eighth sitting of the debate when John Healey took over from Paul Boateng, on the latter being promoted to a Cabinet position.
ALLISON PLAGER reports on the seventh and eighth sittings of the debate of the Finance Bill 2002 by Standing Committee F.
IT IS PERHAPS indicative of the less than excellent quality of the Finance Bill standing committee debates that allow a minister to be replaced part way through. This occurred in the eighth sitting of the debate when John Healey took over from Paul Boateng, on the latter being promoted to a Cabinet position.
Without wishing to denigrate the new incumbent, is it unfair to assume that Mr Healey has not spent the time between his new appointment to the Treasury and the ninth sitting avidly reading and understanding everything there is to read and understand about the 2002 Budget, the Finance Bill and its explanatory notes, the various submissions by interested bodies, other official material and Finance Acts of recent years? I think not, and it really underlines the fact that the politicians are just trotting out the explanations given to them by the civil servants, and appear to have little idea about the effect that the legislative changes are going to have on real people doing real jobs in the real world. The £10,000 corporation tax allowance is a case in point.
Vaccine research
Clause 53 relates to tax relief for expenditure on vaccine research, etc. Howard Flight kicked off the debate on this clause, questioning why the Government was choosing to introduce 'a rather complex system of tax credits' for the relief, instead of a system of grants. Paul Boateng, Financial Secretary to the Treasury, replied that this had been to promote a 'market-based solution', since discussions with the United Kingdom pharmaceutical industry had shown that progress in this area of research was not flourishing.
Mr Boateng thought that it would have been more expensive to have used a grants system, and that it also would not have been so effective. The relief would work in the following way. Companies which undertook or sponsored relevant research would be able to deduct from their corporation tax profits an extra 50 per cent of their own expenditure or the cost of subcontracting that research. They would also get relief in full on contributions to independent research. Furthermore, the relief would be in addition to research and development tax credits.
There followed some debate about the diseases which would be qualifying, with Mr Boateng saying that to extend the relief to too many diseases could 'dilute the incentive for companies to concentrate additional resources on research and development into the key diseases'.
Clause 53 was ordered to stand part of the Bill.
In connection with Schedule 13 which also concerns tax relief for expenditure on vaccine research, Mr Flight asked for an amendment confirming that the relief would be available from 1 April 2002. Mr Boateng said that it was necessary to obtain European Union approval as the measure could affect competition between European Union countries, so he could not confirm a precise date.
Mr Flight withdrew his amendment and Schedules 13 and 14 were agreed to.
Community investment
After agreeing clauses 54 and 55 and Schedule 15, the debate moved to clause 56 and community investment tax relief. Mr Flight proposed an amendment to ensure that the relief would start on 17 April 2002, rather than on a day to be appointed in the future. However, Paul Boateng said that the Government was once again 'in discussions with the European Commission on state aid issues', and wanted to be sure that this had been sorted out before bringing into effect the legislation.
Mr Flight withdrew his amendment and clause 56 was ordered to stand part of the Bill.
The debate then moved to Schedule 16 which also concerned community investment tax relief. Mr Flight wanted to clarify certain issues arising in the Schedule. He said that the relief was 'more of a subsidy than a tax relief', and that 'delivering it through the tax system will create complexity for both the Revenue and investors'.
Several questions later
Michael Jack also asked a few questions. He noted that an individual who wanted to take advantage of the relief could only do so by investing through a community development financial institution. He thought it more likely that an individual would prefer to invest directly into the activity. In addition, Mr Jack asked about the definition of 'disadvantaged communities', saying that within affluent communities there could be 'extremely disadvantaged' ones which would benefit from investment. He also wanted confirmation that the relief applied to rural as well as urban areas. Turning to paragraph 7 which says that a project will be accredited for three years, he wondered what would happen were the project to last for five years. He felt that flexibility was required in this area.
Mr Jack then turned to paragraph 13 and pre-arranged protection against risks. He suggested that projects might attract investment from overseas, and that it would be likely that those providing the money would have a 'hedging arrangement to cover the financial risk involved in the currency transaction'. He asked if such risk cover would prevent a project from being agreed.
The final point made by Mr Jack concerned the exclusion of investment in residential accommodation. He said that he could 'hear business expansion scheme bells ringing loudly in the Treasury' when the Schedule was being drafted. He understood the 'understandable caution' of the Treasury, but felt that the proposed legislation was 'unnecessarily restrictive'.
Paul Boateng took the floor. He appeared not to respond to Howard Flight's comments regarding the complexities in the proposed relief, but said simply that the Government preferred to provide relief through the tax system rather than in the form of grants.
Place for institutions
He defended the channelling of investment through community development financial institutions on the grounds that these would, among other things, offer support to businesses in disadvantaged areas, and such institutions would be 'generally much better placed to deliver than individuals'. Mr Boateng went on to confirm that the relief would be available to rural and urban areas. Qualifying communities would be chosen using 'indices of multiple deprivation for England, Scotland, Wales and Northern Ireland', although these indices have not yet been finalised. Mr Boateng added that the 'pockets of deprivation' within 'wards of relative affluence' would be picked up.
Turning to the three-year accreditation period, Mr Boateng said that 'experience from the Phoenix fund that supports the community development financial institutions' showed that this was an appropriate time for fund-raising and loan-planning activities on community development financial institutions. The idea was to make it long enough to be effective, but too short for 'possible abuse of the credit'. He said that a genuine community development financial institution should be able to obtain further accreditation after the initial three years have expired. As to hedging and pre-arranged financial risks, Mr Boateng said that 'such risks are standard for commercial lending' and should not prevent accreditation.
In connection with the restriction on property investment, Mr Boateng said that there was a danger that if a community development financial institution made too great an investment in property, this would create a distortion, and make it 'difficult to raise money for anything but property'. He agreed that the Government had learnt lessons from the business expansion scheme.
More information
Rob Marris asked for more information on the relationship between the five-year loan period and the three-year accreditation period. He was concerned that, if after three years, accreditation was removed, then the investor would want his money back. Paul Boateng said that the Government wished to encourage investors, but said that the tax incentive 'recognises a number of risks and loss of accreditation is one of them'. Getting rather excited, he said that the 'thrust of the legislation is not to protect people from the consequences' of their decisions. This was what was 'so exciting' about the relief; 'it is motivated by the desire to make a profit'. Investors had to make a judgment and take into account the risk factors against the potential profit.
Howard Flight wished the community development financial institutions well, and Schedules 16 and 17 were agreed to.
Amateur sports clubs
Next before the committee was clause 57, relief for community amateur sports clubs. Howard Flight kicked off. He said that there had been an 'historic problem with sports not being deemed suitable activities for a charity'. The Charity Commission had refined that in November 2001 by ruling that sports activities 'whose ultimate objectives were health and fitness could be viewed as suitable activities'. This had allowed many sports clubs to qualify as charities, although some sports, such as angling, would not qualify. He understood clause 57 and Schedule 18 to 'provide a framework of tax relief' for amateur clubs which did not qualify as a charity, but wondered why the Government had not granted tax exemptions that were the same as those that would apply if the club qualified as a charity. Instead there were now two sets of rules: one falling into the Revenue's ambit, and the other into the Charity Commission's. While the differences were not great, surely it would have been simpler to give 'entirely parallel tax facilities to those available to charities'. Dr John Pugh, while praising the Government for trying to help sports clubs, agreed that the two parallel régimes would cause confusion. He questioned why the inclusion of an 'eligible sport' should be left to the discretion of the Treasury. He said that the proposals were not far-reaching enough for large-scale expansion and real development of sports facilities. Dr Pugh also wondered how clubs which offer activities on a commercial basis to subsidise their other activities would be affected. He also suggested that where, for instance, a professional football club, which 'contributed massively to the psychological well-being' of a community, could be linked to community sports projects, there should be scope for these community activities to be eligible.
Complimentary régime
Paul Boateng responded to these questions. He said that the tax régime would provide a safety net for clubs which did not achieve charitable status, and be an alternative for clubs which did not want charitable status. With regard to the Treasury having the power to define sport, the approach would be to use the list of Sport England, thus avoiding the need for the Treasury to make 'value judgments about particular sports'.
He confirmed that most clubs did not trade when carrying on their main activity, so did not normally pay tax on their income. This would not change, although it would be necessary to take into account the nature of the clubs. There would be tax incentives to 'help individuals to support their local clubs and boost fund-raising', but clubs would have the option of following the Charity Commission route or the Revenue route.
The clause was ordered to stand part of the Bill, and the committee was adjourned.
More on sports clubs
The committee reconvened for the eighth sitting, and resumed the discussion of relief for community amateur sports clubs with a debate on Schedule 18. Howard Flight served the first amendments of the meeting by suggesting that an addition should be made to paragraph 2 of the Schedule to ensure that clubs which are incorporated should be eligible for the special tax status. He also wanted confirmation that having certain rules of conduct would not prevent a club from being eligible. Mr Flight made a final point, asking what had become of the Treasury proposals in November 2001 permitting 80 per cent rates relief to eligible sports clubs.
Confusingly, because of the Government reshuffle that took place on 31 May 2002, the response was not made by Paul Boateng who has been elevated to Chief Secretary to the Treasury; instead his replacement, John Healey, responded. However, as Mr Healey pointed out, he inherited Mr Boateng's 'brief but, confusingly for some, not his title'. Entering the debate part way through could not have been easy, and he said it made him feel 'like a tag wrestler being introduced into the contest in the middle of a round'.
First, Mr Healey took the point on business rates. He said that this was a matter for the department in charge of local government policy and finance, and could not be dealt with by the Treasury. The new measure did not provide parity with charity, but he said that clubs had a choice over which régime they followed.
Dealing with Mr Flight's point regarding incorporated clubs, Mr Healey said that there was no need to include anything specific about this in the legislation, since any club could be eligible regardless of whether it was incorporated or not, provided it met the criteria. As to whether certain conduct rules could go against a club gaining eligibility, he said that the Government did 'not intend to prescribe... detailed rules for every registered community or amateur sports club', and that the Revenue would take a 'common-sense view' of a club's rules.
Mr Flight withdrew his amendments.
Another amendment, tabled by Mark Hoban concerning the restrictions on income limits to which relief will be granted, was also withdrawn. Schedule 18 was agreed to.
Clause 58 was ordered to stand part of the Bill.
Green matters
An amendment was put forward by Christopher Chope in respect of Schedule 19 Capital allowances: cars with low carbon dioxide emissions, to extend the special 100 per cent enhanced first year allowances to all road fuel gases including liquefied petroleum gas. John Healey said that this missed the point of the new measures. Clauses 58 and 59 aimed to 'encourage business investment in cars that emit the lowest amounts of carbon dioxide, to expand that market and further to encourage innovation in low carbon dioxide cars'. The aim was not to support all alternatively powered cars regardless of their carbon dioxide emissions.
The Government had already acknowledged the environmental savings offered by road gas fuels, and offered grants to people to convert their cars to run on such fuel. Liquefied petroleum gas already attracted a lower rate of duty than other fuels. Overall, he felt that no further tax incentives were required.
The amendment was put to a vote, but failed.
Mr Healey then assured the committee that the Bill would ensure that cars with low carbon dioxide emissions that are for hire to, or for carrying, members of the public are excluded from the rules that apply to cars costing more than £12,000. He said that 'all business cars with low carbon dioxide emissions' registered or purchased on or after Budget day would be so excluded.
Schedules 19 and 20 were agreed to, and clauses 59 and 60 were ordered to stand part of the Bill.
Moving to clause 61, Expenditure on green technologies: leasing, Christopher Chope said that many small and medium-sized enterprises were not very profitable and could not use the capital allowances available. It would provide cheaper finance to such companies if the allowances were also given to lessors, as the companies would be able to 'sell' their capital allowances to the leasing company.
Mr Healey could see no reason to extend the clause this way, but said that the matter was being discussed by the Revenue and representatives of the leasing industry. The clause was ordered to stand part of the Bill.
